AGIFORS REVENUE MANAGEMENT SYMPOSIUM CANCUN 2006

ECRM The New Frontier

May 14-17, 2006

Work Hard. Fly Right.

SM

ECRM The New Frontier

RANTINGS OF A PRM AND E-COMMERCE MINDSET

Executive Summary
The power of the web based channel has changed the air travel purchase process.

Air travel purchases now driven by low touch simple transactions via the web.

Pricing parity in all channels has created partial commoditization of air fares.

Attaining the customers right fare is still too random and highly unpredictable.

Must consistently achieve the customers optimal willingness level to pay.

Current selling models based on lowest fare/available fare search guarantees.

Executive Summary
RM process is not interactive with the consumer transaction and purchase path and the current algorithms lack the power to predict the true attainable customer spend.

The future is to create a new robust RM system that can deliver 2-5% in additional incremental revenues incorporating e-commerce and brand power using the web

Segmenting marketable, tradable, and brandable demand within fare class demand and monetizing the opportunities in the purchase path is the driving model.

BASIS FOR CHANGE

What RM Depends On Today

Forecasting based on Demand Types
Tradable: Price sensitive and mostly elastic demand Marketable: Somewhat sensitive and elastic but values brand based on FFPs, flexibility and affiliation (ex. unmanaged corporate travel) Brandable: inelastic due to loyalty, strong brand preference, hub affinity, and strong affiliations (corporate travel)

Flight based management focuses on

Tradable and Marketable demand to drive LFs Brandable demand to drive yields to achieve high RASMs Segmenting Brandable demand

What is Wrong With Todays RM Algorithms

RM systems today capitalize on the following data ingredient:
historical fare class demand behavior ODF flow/local mix and displacement values A fare class definition of content demand as tradable, marketable, and brandable High math aggregate non-segmented demand predictor functions which could be probabilistic, deterministic, linear based or exponentially smoothed. Utilizing future and historical data is still a challenge

The operating environment of interactions are based on the following assumptions:

Purchase decisions primarily driven by GDS and travel agents Understanding unconstrained demand is guess work and difficult to predict Revenue impact comes from managing constrained flights with promised gains being no better than 1-3%. Fare fences exist to gate demand but we all know these have been almost obliterated in the last 4 years

What is Wrong With Todays RM Algorithms

With customers now in control of the purchase, how do you pitch the right fare, right add-on revenues, up-sell/trade-up, and reduce defection? What is this worth?

Truthfully, there are no RM systems to help manage this and the fact is that it takes at least 24 months to develop a system that can adapt to evolving environments

The low fare no fences environment that LCCs drove in the last 48 months is now being addressed after $bils of losses and confusion amongst airline PRM groups

The web purchase phenomena is still in the early growth stage so the need to refine PRM and E-commerce methodologies is still below the corporate radar

Global Shifts in Distribution Channels

Traditional Travel Agency sales have declined since the emergence of LCCs

35% 30% 25% % Total Revenue 20% 15% 10% 5% 0% Agencies Airline sites
Q4 2004
20% 17% 15% 13% 10% 16% 30% 30% 26% 24%

OTAs
Q4 2005

Other

TMCs

Trends in RM Philosophy
RM Practice and Theories have evolved over time so it is appropriate to anticipate the future and have the right solutions
1996-1999 Develop bid price forecasts/displacements in an O/D world Optimize revenues by managing OD/POS flow/local itins Re-educate organization about RASM/RASK benefits

Improving of the leg based forecasts Measuring effectiveness given capacity Educate organization to maximize benefits 1990-1995

2000-2002 Predict allocation of future fare demand Use historical fare data and EMSRa/b Managing low fares and no fences in an O&D based world Re-educate RM organization/system given the following: How do we improve yields and revenues with what we have got? High loads and high unconstrained low fare demand Industry Over capacity and a collapsed fare structure 2003-2005 Record oil prices drive capacity reductions Web drives transparent fare environment Lowest fare guarantee is the selling model How to increase spend per seat. 2006-2007 Airlines focus on costs and direct sales like LCCs Fixes applied to manage no fences and trade down Fixes to improve OD/POS/local/flow revenue mix Oil prices trigger minor capacity reductions
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Trends in Web Sales and Philosophy

Web-Commerce, Loyalty, Brand Marketing, and PRM have to evolve and converge to extract the revenue power being created
1996-1999 Here come Priceline and Hotwire using the opaque model. Expedia, Travelocity, and Orbitz just getting off the ground 2000-2003 1990-1995 Follow the internet and provide information $$$$$$$$$$ - Profit Margins from Customer driven revenue improvements and ancillary revenues above current RM capability RM must become a more robust function that leverages The new selling medium and growing direct channel Marketing power to capitalize on loyalty/brand preference Lowest fare guarantee model to drive up-sells & trade-ups Dynamic merchandising and packaging to drive spend/seat Airlines web sites become more robust for direct sales This creates balance in distribution costs and channel power. Focus now on revenue displacement, leakage, and trade-up 2007 and beyond OTAs add dynamic packaging and services to retain customers Web becomes the dominant selling medium fare transparency Distribution systems/channels look for parity with this medium
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Build a website to manage this unknown Auction and distressed inventory models RM Organization still skeptical

9/11 and internet crash change the access landscape Expedia and Travelocity gain momentum. Search engines overpower RM defense mechanisms LCCs adopt this power going 97-100% direct to consumer RM and airline revenue dynamics change forever 2004-2006

Revenue Improvement Generators

In the future the ability to utilize Brand and Loyalty data with RM techniques in the back end processes and customer purchase path will be crucial in delivering needed incremental revenue

100 90
Revenue Improvement Impact Percentage (%)

80 70 60 50 40 30 20 10 0 Pre 1995 1995-2000 2001-2004 2005-2007 2008-2010 Network Impact Brand Impact Sales Impact Pricing Impact RM Impact

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Global Shifts in Distribution Channels

What happens when sales become primarily web-based

40% 35% 30% % Total Revenue 25% 20% 15% 10% 5% 0% Agencies Airline sites
Q4 2004
5% 20% 15% 24% 20% 16% 15% 25% 34% 30%

OTAs
Q4 2009

Other

TMCs

Source: Revenue Datamart 2003/2005 (005 ticket stock only)

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A WAY FORWARD

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What is the answer?

ERM Electronic Customer Centric Revenue Management The science of driving revenue improvements utilizing revenue management tactics from a customer centric approach via web sites

This area drives the imagination of consumer marketing, RM algorithms, and webbased purchasing behavior.

Refocuses the imagination on what unconstrained demand is defined as

Refocuses the imagination on what a customers level of willingness to pay is

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What is the answer?

ERM Electronic Customer Centric Revenue Management Challenges the commodity myth that the cheapest fare is the compelling customer value proposition

Focuses on the web driven customer channel purchase as opposed to the traditional agency driven purchase algorithms which may be critically outdated in the next 5 years

Leverages the combination of brand, utility, and commodity driven consumer marketing/merchandising as opposed to time utility driven pricing and availability

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What Are The Tools

For once airlines have to borrow the book from online retailers: 1. 2. 3. 4. 5. 6. 7. 8. CRM databases have vital information and DNA of customer behavior data RM databases have the aggregate non-personal customer behavior data Airlines have the vital touch points of the customer experience to utilize Website behavior information is real time and scalable Channel behavior is attainable and can enrich the RM process Affinity and Partner Marketing synergies can be harnessed into value Ancillary revenue generation opportunities can be aggressively harvested Predictive and Forecasting algorithms must be customer centric

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ECRM Basic Function

The new revenue opportunity is defined in terms of new and old RM values Old RM Value = Base Revenue/pax Base = Func (LFA or LBA, TOB, PFPlf, ODF, Freq, RM Forecast)
Where LFA = Lowest fare available or lowest bucket available TOB = Time of booking PFPlf = Preferred flight path LFs ODF = O and D fare class Freq = flight frequency RMF = RM forecast

New RM Value = Func( (UTProb, CUT, HOT, PPB) + Base Value)

Where UTProb = Up-sell/Trade-Up Probability CUT = Customer Type (Marketable, Tradable, brand able) HOT = Historical offer type purchased and probability PPB = Past purchase behavior New variables obtained from CRM and Website data Website Analytics aggregated based on Customer type and individual history

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ECRM ALGORITHM AND METHODOLOGY

Merchandising and Web-Commerce Power Applied Here Refined RM Power Applied Here

HOT, UTProb

Brand-able Marketable Tradable Y Class

LFA/LBA, HOT, UTProb

LFA/LBA, HOT

RM Customer Offer Optimizer

HOT, UTProb

ECRM DB

Brand-able

Marketable Tradable

B Class

LFA/LBA, HOT, UTProb

LFA/LBA, HOT, UTProb

Brand-able Marketable Tradable

LFA/LBA, HOT, UTProb

V Class

LFA/LBA, HOT

RM Forecaster

LFA, HOT

RM OPTIMER

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ECRM ALGORITHM AND METHODOLOGY

Current Customer Path Interaction Recognition of FFP Member RM Impact on Customer Show alternate low fare dates Show Fare Brands Customer Purchase Path Log in and/or Query fares & Availability Pick lowest available fare or Find Alternate Dates or Exit Seat Assignment Pitch a Hotel and/or car Confirm chosen option Future ECRM Customer Path Interaction Recognize customer segment and offer history Recognize customer and historical behavior Traditional RM Impact on Customer Show lowest fare date alternatives Prompt trade-up options based on history Prompt Up-sell options Provide service info Prompt services add-ons Prompt Up-sell options Prompt Hotel/Car/Cruise add-ons Pick form of payment Prompt service add-ons Prompt insurance add-ons Prompt destination options Prompt Credit Card sign-on Prompt Hotel/Car/Cruise add-ons Prompt next trip purchase Prompt service add-ons Prompt insurance add-ons Prompt destination options Prompt Hotel/Car/Cruise add-ons

Complete Purchase

Pitch Ancillary Options like Hotel/Car/Insurance/Limo/Parking

Exit or New transaction

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ECRM Revenue Opportunities

Given a hypothetical 3 bucket scenario on a $1bil web sales base and trade-up and up-sell probability in the 2-5% range: Expect $21mil revenue contribution to the bottom-line % Traffic 5 15 80 100 Avg. Lowest Average Fare Sold Add-on Rev $300 $200 $140 $157 $30 $50 $75 Add-on Prob. 2% 3% 5% Realized Add-on Fare $0.03 $0.23 $3.00 $3.26

Bucket Y B Q All

2.1% Opportunity

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Probable Promise Land

Improved Basic Flight and Network PRM System
Forecast based on Future and Historical Segmented Demand Data Flexible and Adaptable Drivers based on Capacity, Pricing, and Distribution channel environment evolutions Adjustable Drivers based on customer centric values

Robust Customer Path RM System

Forecast trade-up and up-sell targets based on demand type, individual customer, and life of the flight Forecast ancillary add-on revenues based on demand type metrics and flight/market data Design sales pitch process that gives consumers a positive experience Design sales close process that satisfies consumers willingness to pay level Design retention pitch process that capitalizes on consumers experience and satisfaction

Engaging and Winning in a Customer Choice Driven Environment

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ECRM The New Frontier

E-QUESTIONS AND THOUGHTS

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