Japan Block Management Challenges and Solutions Chris Amenechi & Charles Duncan March 22, 2000 New York, NY

1. Japan Block Management Challenges and SolutionsChris Amenechi & Charles DuncanMarch 22, 2000New York, NY

2. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT The Japan Environment • Japan’s air travel market is the 2nd largest in the world • Distribution system is controlled / driven by wholesalers • Fares are regulated • Both airline and travel agency are penalized for oversales (!) • Airlines resort to block seats to capture demand • Consumer travel is largely driven by “inclusive tour” package sales • GDSs from US and Europe are just now addressing Asian needs.

3. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT The Japan Environment • Wholesalers and consumers are slow to change • Behavior modification becomes a full-time job • Transition toward limited use of published fares. • Japan international fares partially liberalized April 1999 • Japan domestic fares completely liberalized April 2000 • New start-up carriers • Question • How does CO gain control of its inventory and influence consumer choice?

4. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT CO’s Pacific Routes Sapporo Newark Sendai Niigata Nagoya Tokyo Osaka Okayama Los Angeles Fukuoka Houston Taipei Honolulu Hong Kong Johnston Island Saipan Kwajalein Truk Manila Majuro Pohnpei GUAM Kosrae Yap Koror Cairns (Australia) Denpasar (Bali)

5. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT Japan Distribution Flow

6. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT Where Do Bookings Come From? • Retail agents book directly into wholesalers’ private CRSs • These systems are then linked to a GDS or directly into CO’s host • Block requests appear at predetermined dates in the booking cycle • Waitlisting / Name Change are primary functional tools to claim the blocks. • Block processing poses challenges for GDSs and CO’s headcount budget. • True booking curves can be found in an agency’s host system

7. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT In-house CRS System Process Flow Wholesaler TA Revenue Group TA Purchasing Group CO Agency Desk Block Management CO Sales CO Revenue Management Analysts • CO Pricing

8. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT Wholesaler to Airline Relationship • Regressive wholesaler contracts determine CO’s LF and revenue • Contracts are based on a 6 month volume-incentive driven agreement • Market Prices are based on net-net fares inclusive of incentives • Price fluctuations drive commission expenses and admin costs • The exposure Dilemma: • How do we go after “good” revenue when LFs are leveraged? • High volume, high incentive vs. low volume, low incentive • How do we allocate for the little published fare business out there? • How do we introduce overbooking tactics to an apprehensive Japan org.?

9. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT What Are the Management Challenges? • Eliminating manual processes that are non-value added • Communicating blocks 6-8 months in advance • Distributing pricing on paper • Confirming allocated block space manually • Managing blocks based on marginal contract fares on an OD basis • Optimizing agency booking demand mix based on marginal fares • Demand forecasts depend on different variables: • Agency auctioning of pax volume, final tour package price, schedule, etc • OD control when free sale and block allotment legs are combined • Managing mix of published and unpublished traffic • Point of Sale control in RM decisions

10. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT What Are the Management Challenges? • Segmenting the published and unpublished travel markets • Enforcing fare rules (AP, TTL, changes) in both markets. • Enforcing block utilization policies • Block cancellation / no-show penalties • Eliminating corporate / group PNR’s • Use POS information for tracking purposes • Winning the Sales team over to champion overbooking, pricing fences, and lower incentives to the distribution system while maintaining volume.

11. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT What Are the Management Challenges? • Reinventing CO Sales’ Revenue Objectives and Focus • Reducing the reliance on the major wholesalers • Unleashing the power of smaller producers and underdeveloped markets • Agency Purchasing Group • Negotiate contract terms and block seats with escalating AP fares • Negotiate a new no-risk strategy for published fare customers • Agency Booking / Ticketing Group • Encourage use of RM strategies--especially “smart” overbooking • Introduce multiple fare classes and manage “bid up / bid down” as needed • Engage stricter booking restrictions and ticketing guidelines over time

12. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT What is the Holy Grail for Managing Block Bookings?

13. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT What is the Holy Grail to Manage Bookings? Answer - The Group Booking System • What is it? A system that will optimize block allocations based on the following : • Decrement Profile by Agency by DOW • Show Factor by Agency by DOW • Contract Marginal Fares by channel, OD, DOW, Season, etc • Historical Agency demand by channel, OD, DOW, Season, etc • Why does this make sense?

14. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT Current Manual Booking Process CO Inventory A Class B Class J Class Wholesaler Bucket M Class F Class T Class G Class Agency 1 Agency 2 CO Block Control Agents CRS/GDS Booking from Japan wholesaler Agency 3

15. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT Group Booking System CO Inventory Y Class H Class K Class Wholesaler Bucket V Class Q Class T Class M/G Class Group System Agency 1 Agency 2 Agency 3 Agency 4 Agency 5 Agency 6 etc. Agency 1 Agency 2 CRS/GDS Booking from Japan wholesaler Agency 3

16. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT A Real Life Example Goal: 100% LF on a 100 seat JFKNRT cabin • Agencies X , Y, and Z negotiate blocks at 75% utilization for 180 days • This is the equivalent of 133 seats / flight • Incentives trigger at 80% and max out at 120% • X, the market leader, gets $500 net fare, $100 incentive, and 50 seats • Y, an average player, gets $500 net fare, $75 incentive, and 50 seats • Z, a large retailer, gets $500 net price, $50 incentive, and 33 seats 150 Days Later… • Agency X: 100% block utilization and 133% of pax target • Agency Y: 50% block utilization and 67% of pax target • Agency Z: 70% block utilization and 83% of pax target

17. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT A Real Life Example • From which Agency would you take the next incremental booking? • Agency X (assume its run-rate incentive at 120% + is $120) options: • May stop selling you given its commitments to other carriers • May still have more demand it cannibalized from Y • Negotiates for more incentives (assume $133 back to pax 1) • Marginal revenue is negative for CO • Agency Y (no incentives at 66% achievement) options: • Will stop selling because market price is below its $500 net • Will sell only peak days where it can get a premium to recoup losses • Will re-negotiate contract terms

18. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT A Real Life Example • Agency Z (assume its incentive at 83% is $41.50) options: • Will continue to book you so they can hit a higher incentive level • May be satisfied with current position but cherry pick peak days Answer: • We need the support of all three • We would cherry pick the peak dates with Y and Z and open all others to X • Re-negotiate with all to get volume but discount manage X on the peak days • Overbook the blocks based on decrement and no-show history

19. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT A Real Life Example The operative equations for the system are as follows: • Total Block AUL =  Agency (X…Z) AUL • Agency AUL = (volume target/utilization) + decrement + no-show • Total Block Revenue = ƒ(marginal fare, volume achievement, block util.) • Marginal fare = ƒ(net fare, incentive, volume achievement, agency strength) • Agency Strength = ƒ(market share, brand, brochure position, distribution) • Volume Achievement = ƒ(technology, agency strength/focus, sales, schedule)

20. CONTINENTAL AIRLINESJAPAN REVENUE MANAGEMENT Where We Are • Developing a system to adjust allocations in response to the Market • Integrating block allocation data into RM systems • Displaying OD availability to each agency host system • Generating non-group PNR’s for agency bookings less than 10 pax • Integrating E-commerce into pricing and RM processes • Working with GDSs to address technical difficulties • Aggressively pursuing all fare segments • Managing schedule to demand within 30 days of departure