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Asia-Pacific Symposium. Reducing Distribution Costs. Macao, 16-17 September 2004. Michael Randall VP Worldwide Business Development ITA Software, Inc. Overview. Reducing distribution costs With modern pricing systems Growing direct sales online

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Asia-Pacific Symposium

Reducing Distribution Costs

Macao, 16-17 September 2004

Michael Randall

VP Worldwide Business Development

ITA Software, Inc.

overview
Overview
  • Reducing distribution costs
    • With modern pricing systems
    • Growing direct sales online
    • Building customer loyalty & leveraging carrier’s brand
  • How different is the Asian experience?
airfare pricing
Airfare Pricing
  • Many airlines have outsourced airfare pricing to GDSs
  • Pricing is complicated
    • Networks dramatically increase the number of ways of going from A ↔ B + the number of pricing options
    • Private fares / code shares / alliances / interlining / dramatically increase the number of pricing options
    • Revenue Management seeks to optimize pricing across the network & points of sale
    • Pricing logic is different in USA / Canada vs ROW
    • Industry standards overridden by carrier exceptions
airfare pricing cont
Airfare Pricing (cont)
  • ATPCO / SITA rule structures are complicated
    • Pricing system needs to process a hierarchy of records, footnotes and tables, linked with stringing logic
  • Pricing is integrated with other systems
    • Fare creation & distribution through ATPCO / SITA
    • Distribution through travel agents and GDSs
    • Revenue Management & Revenue Accounting
    • Reservation systems
    • Customer Relationship Management systems
    • +++
airfare pricing cont1
Airfare Pricing (cont.)
  • GDS pricing systems based on legacy software running on mainframe hardware
    • TPF; IBM / Unisys
    • Systems were originally designed for flag carriers serving regulated markets
    • Systems are costly to maintain & difficult to integrate
  • Some airlines maintain their own proprietary pricing systems
    • Pricing just simple itineraries only
    • Support simple, non-ATPCO standard rule structures
    • High maintenance & support costs
    • Primarily support res centers
airfare pricing in asia
Airfare Pricing in Asia
  • Same legacy technology issues
  • Carrier’s frequently maintain proprietary pricing systems
  • Fare creation and distribution is fractured: filing through ATPCO, SITA as well as into private fare databases
  • Greater emphasis on private fares than published fares
  • Less complicated networks but with strong RM emphasis & many POS customizations
airfare distribution
Airfare Distribution
  • Traditionally, airlines have sold through travel agents & other third party channels
  • Travel agents depend on GDS pricing systems and other IT services
  • Traditional distribution channels are costly
      • average ticket price $374
      • segment fees $16.00
      • commissions $10.82
      • agency fee to pax $26.55
      • total fees: $53.37

Source: US DOT, 2003

growth channel the internet
Growth Channel: The Internet
  • Online sales have tripled since 2000 as total sales have declined
  • 20-30% of tickets purchased online, increasing 5 points each year
  • Most travelers get their information online
  • Corporates/travel agents shopping online, then booking offline
  • Online sales split 50/50 between airline web sites & online travel agents
growth channel the internet cont
Growth Channel: The Internet (cont.)
  • Some carriers are more successful than others
    • Some carriers with almost 100% Internet distribution
    • Some carriers have growth rates of 200 / 300% per annum
    • Leisure sales greater than corporate sales
  • Asia has the Internet penetration but air distribution trails North America
    • Cross shopping sites (Orbitz, Expedia, Travelocity) not as established yet
    • Impact of Low Cost Carriers more recent
    • Carrier’s have invested less in Internet distribution
low cost carriers lccs
Low Cost Carriers (LCCs)
  • LCCs tend to distribute primarily through the Internet
    • Avoid travel agency distribution costs
    • Avoid GDS pricing systems
    • Asian model the same
  • LCCs avoids airfare pricing complexity
    • Traffic is point to point
    • Pricing is simplified (refundability; one way x 2 = return)
    • Leg based market pricing; no O&D, Revenue Management fences, etc.
    • No interlining / code shares / alliances
    • Limited use of private fares
importance of distribution cost reduction
Importance of Distribution Cost Reduction

Cost per passenger (£), 2000

Source: Cranfield Air Transport Group

carrier on line direct sales
Carrier On-line = Direct Sales
  • For a carrier, the Internet means selling direct
    • No travel agents or intermediaries
    • Booking created directly in the carrier’s inventory system
    • Maintain & build direct relationship with customer
      • No third party intermediation
      • Leverage brand & customer proposition
      • “One of the web sites I need to check”
    • Requires modern technology and ease of use
      • End users do not have travel agent skills
      • End users have expectations about what is a good site
selling on the internet
Selling on the Internet
  • Quality of customer experience is important
    • “Make it easy to find and buy what you are looking for”
    • Tailor experience to match individual customer requirements / preferences
    • Show available prices for every flight
    • Fewest possible steps from query to purchase
    • Quick response times
    • What is shown, can be bought
selling on the internet cont
Selling on the Internet (cont)
  • Ensure the carrier’s web site is the best place to find & purchase fares
    • Provide a more extensive or better range of product than available through online sites or travel agents
    • Capability to shop & price all trips, all passenger types, all classes of services, etc.
    • Private fare support for special events, promotions, etc.
    • Automated support for ancillary transactions such as refund/reissue, frequent flier shopping, etc.
  • Asia channel issue: best fares through travel agents?
legacy technology the internet
Legacy Technology & the Internet
  • Legacy pricing systems not suited to Internet demands
    • “Shopping” is difficult: receive price at a time, not all relevant prices at once
    • Process is not customer friendly: pick outbound, then return, check availability, price, iterate …
    • Systems are very difficult to customize for different market requirements and demands
    • Numerous bottlenecks restrict scalability
    • GDS costs for availability & other transaction charges quickly add up
  • Short cuts developed using pre-constructed tables for routings, fares, etc.
airfare shopping the challenge
Airfare Shopping: The Challenge
  • Look at all the schedules
  • Evaluate all faring solutions
  • Provide all the “best” answers at once
  • Carrier determines what is “best”
enabling technology
Enabling Technology
  • Modern pricing systems have enabled Internet distribution
network carriers the internet
Network Carriers & the Internet
  • Modern pricing systems have enabled Internet distribution by network carriers
    • Capable of quickly and accurately pricing any itinerary across the network
    • Enables airfare shopping where carrier determines what are best solutions
    • Low maintenance, high performance, high quality systems
      • Airfare pricing complexity is transparent to user
      • Cost effectively support Internet look to book ratios
      • Deliver a user experience that builds customer loyalty
delivers bottom line results
Delivers Bottom Line Results
  • Continental: “Other sales channels cost 3 times more than continental.com.”
delivers bottom line results cont
Delivers Bottom Line Results (cont.)
  • America West: “Online is America West’s lowest cost distribution channel and we want to shift as much of our volume there as possible.”
strong market demand
Strong Market Demand
  • Continental’s results with a modern pricing system, QPX by ITA Software
    • Started project September 2002; launched January 2003
    • In first 90 days, more than 50 days where sales exceed $3 million per day
    • In previous five years, daily sales exceed $3 million only once before
    • October 2003 YTD sales exceed $1 billion
    • Daily sales now regularly exceed $10 million
    • 200%+ annual growth rate continuing to trend upwards
quality delivers results quickly
Quality Delivers Results Quickly
  • Alitalia’s immediate results:
    • improved sales conversions
    • drop in help desk calls
    • 90 day implementation
driving sales
Driving Sales
  • “Isn’t it better to keep prices non-transparent?”
    • Internet is here & growing
    • Impact of LCCs, cross shopping sites & network competitors that are Internet-enabled
  • Objective is to make it easy to purchase travel
    • Deliver a range of prices to enable trade-offs, not just the lowest fare
  • Direct internet sales deliver cost, customer loyalty & customer relationship advantages
  • Need to segment customers & markets
driving sales cont
Driving Sales (cont.)
  • Modern pricing & shopping systems enable direct selling
    • quickly provide all the “best” answers, priced & checked for availability
    • customize solutions for markets, travelers, events, etc.
  • Modern pricing & shopping systems enable upselling
    • In a single response: restricted / unrestricted, refundable / non-refundable, private / published across all classes, all passengers, all passenger types …
    • Search on specials, promotions, etc.
    • Automatically build suggested add-on itineraries from a destination
    • And much more …
powerful shopping technology

Query:

Japan to DEN, GA only,

6/7/8 nights, departing Sept.

Powerful Shopping Technology
what s next
What’s Next?
  • Direct sales is being re-defined
    • Carriers are starting to sell direct to travel agents, corporations and other Closed User Groups
what s next cont
What’s Next? (cont.)
  • 1U – ITA Software’s IATA designator code
  • Soon to launch a modern res system: sales, pricing & shopping, CRM, inventory, check-in, departure control
  • A cost-effective, portable modern res system on a small farm of PCs
  • Low risk, progressive migration strategy
    • Copy booking and ticket records from 1U to a carrier’s existing inventory system and/or any GDS
    • Progressively move volume off legacy onto new system
    • Clean interfaces to other IT & industry systems