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e-Stuffe-StuffAmit Khandelwal

AGIFORS 2000, New York

2PROS Revenue Management, Inc.

Two PartsTwo Parts

e-Commerce Evolution and Revenue Management

O&D fares, POS Control, and Internet bookings

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e-Commerce Evolution and Revenue Management

e-Commerce Evolution and Revenue Management

4PROS Revenue Management, Inc.

Internet Bookings in the Airline IndustryInternet Bookings in the Airline Industry Airline Industry percentage bookings online

1999 – 3% 2000 – 8% (forecast)

More than 50% of online travel sales are directly done on travel company websites compared to 20-25% on conventional channels

Bookings on Online travel sites are less fragmented compared to booking through off-line travel agencies The top 3 travel sites account for 75% of indirect online

traffic compared to 35% for top three off-line agencies

Source: The PhoCusWright Yearbook 1999Analysis, Assumptions And Assessments For The Online Travel Marketplace

5PROS Revenue Management, Inc.

Internet Bookings in the Airline IndustryInternet Bookings in the Airline Industry Commissions for online travel agencies

are average 3-4% compared to 7% for offline.

69% of online users “look” but do not “book” online

Southwest Airlines on target to generate $1B. in online revenues in 2000 – amounting to 25% of its total sales

Source: Internet Usage by Travelers Continues to Soar Travel Industry Association of America Press Release 8 February 2000Source: Southwest Airlines on Pace to Exceed $1 Billion in Internet Revenue for 2000Southwest Airlines Press Release 28 February 2000Source: “Now or Never…..”, Mary Modahl, Forrester Research Inc.

6PROS Revenue Management, Inc.

The Online Travel PieThe Online Travel PieTotal Online Travel

Market Revenue

$276 million

$827 million

$1.9 billion

$3.2 billion

$4.7 billion

$6.5 billion

$8.9 billion

1996

1997

1998

1999

2000

2001

2002

Total Number of Online Travel Buyers in the U.S.

25.3 million people

32.2 million people

41.0 million people

48.1 million people

54.2 million people

60.5 million people

71.9 million people

Source: Fast Facts – Travel and the InternetTravel Industry Association of America website

7PROS Revenue Management, Inc.

Why Are Internet Bookings Still a Small Fraction of the Total?

Why Are Internet Bookings Still a Small Fraction of the Total? Three reasons

Airlines struggle with pricing internet offerings to avoid revenue dilution and channel conflict with the conventional channels

Manual/Ad hoc process in distributing the inventory to alternate e-channels

Overall consumer penetration for buying travel online is still low

Other practical difficulties with e-ticket, website usability, fear of fraud, etc.

8PROS Revenue Management, Inc.

Conventional RMConventional RM

RM System

PricingSystem

ReservationsSystem

GDS

GDS

GDS

9PROS Revenue Management, Inc.

Birth of e-CommerceBirth of e-Commerce

RM System

PricingSystem

ReservationsSystem

GDS

GDS Internet BookingEngines e.g.,Expedia

Airline Website

10PROS Revenue Management, Inc.

Distressed Inventory and the Rise of the Infomediaries

Distressed Inventory and the Rise of the Infomediaries

RM System

PricingSystem

ReservationsSystem

GDS Internet BookingEngines e.g., Expedia

Airline Website

Distressed Inventory

Finder

Auction Websites e.g., LMT, Priceline

GDS

11PROS Revenue Management, Inc.

e-Commerce RM Suitee-Commerce RM Suite

RM System PricingSystem

ReservationsSystem

GDS

Internet BookingEngines e.g. Expedia

Airline Website

Auction Websites e.g. LMT, Priceline

e-CommerceRM Suite

AuctionDatabases

eOffers

Shop bots

GDS

12PROS Revenue Management, Inc.

What is Required?What is Required?

Enabling technologies to automate distribution of inventory to multiple websites and maximize the revenue of e-Commerce transactions Distressed inventory, special offers, preferred

member deals Business-to-business inventory distribution

Regain control of sales of inventory on Internet

13PROS Revenue Management, Inc.

What is Required?What is Required?

Provide support for web-based auctions Utilize multiple auction methodologies Allow airline to monitor and report on success of

auctions

Manage Internet inventory exposure Business rules Prevent “spiral-down” pricing Increase load factor, reduce spoilage

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O&D Fares, POS Control,and Internet Bookings

O&D Fares, POS Control,and Internet Bookings

15PROS Revenue Management, Inc.

Some FactsSome Facts

Most Pricing is based on Point of Origin (POO) not Point of Sale (POS)

Most O&D-based RM systems and RES systems: Use average O&D fares by booking class ignoring

fare rules Use POS as a proxy for POO This is done for two reasons

Booking process on RES is typically one-directional Limited capabilities of RES lookup logic

TPF programming costs a lot

16PROS Revenue Management, Inc.

Some FactsSome Facts

Most websites seek the following information before displaying availability Customer information

Frequent Flyer Complete itinerary Search criteria

Booking requests on websites are typically routed through GDS or RES systems

17PROS Revenue Management, Inc.

ConsequenceConsequence

“Airlines are struggling to value and control their bookings through the internet!”

18PROS Revenue Management, Inc.

Opportunities with Enriched Data AvailabilityOpportunities with Enriched Data Availability Internet bookings can provide the following

information for more accurate evaluation Itinerary POO Min/max stay, Saturday night stay, advanced

purchase, etc. Frequent flyer information

Status Life-time value Buying habits

19PROS Revenue Management, Inc.

Opportunities with Enriched Data AvailabilityOpportunities with Enriched Data Availability Conventional booking channels can

also use more accurate evaluation through Agent ID/Location for

net/market fare deals commissions

Alliance/Codeshare value adjustments Group or volume pricing

20PROS Revenue Management, Inc.

ChallengesChallenges

Radical change to competitive-based pricing prevalent in the airline industry

Minimize Channel conflict and revenue dilution Consumers will find ways analogous to “back-to-back

ticketing” or “marriage breaks” or “hidden cities”

Additional lookup and response times GDSs need to consider relaxing the two-second time

limit on seamless availability

New interfaces and alternate paths for information flow

21PROS Revenue Management, Inc.

“Think Outside the Box”“Think Outside the Box”

ReservationsSystem

Internet BookingEngines

eDynamicPricing

GDS

22PROS Revenue Management, Inc.

The Crystal BallThe Crystal Ball

GOODBYE BYZANTIUM

“The good news for consumers is that the byzantine system of airline ticket pricing will begin to crumble as the Internet becomes an essential travel planning tool. The Web will exert incredible pressure on airlines to offer discounts and highly competitive fares to an increasingly informed public, especially one that can choose another carrier with the click of a mouse. Discounted tickets also mean slimmer margins for carriers, who'll be forced to find new sources of revenue, most likely by offering travel packages and premium services, and by catering to business travelers.”

Excerpt from “Shop Talk: United Air flying on the Web”Ken YamadaRedherring.com, 16 February 2000

23PROS Revenue Management, Inc.

The Crystal BallThe Crystal Ball

“Another way in which dynamic trade can affect inventory stocks is by making prices for certain products much more flexible. Bid-ask auction markets will proliferate, enabling commodities in oversupply to be sold efficiently at the market-clearing prices instead of either clogging channels or being dumped. Perishable or time-sensitive goods such as unused space in lorries or unsold media advertising can be sold economically, allowing intelligent yield management across industries in even highly fragmented markets. Indeed, Forrester predicts that yield-management pricing will become the norm in automated purchasing.”

Excerpt from “The Net Imperative”Survey of Business and the InternetThe Economist, 26 June 1999

24PROS Revenue Management, Inc.

In Closing In Closing

Why are internet bookings still a small fraction of the total? Airlines struggle with pricing internet offerings to avoid

revenue dilution and channel conflict with the conventional channels

A holistic dynamic pricing engine will address this Manual/Ad hoc process in distributing the inventory to e-

channels Tools to automate inventory distribution and manage online

auctions will address this Overall consumer penetration for buying travel online is low Not a RM problem since Microsoft, AOL, Yahoo, CISCO, HP,

IBM, numerous travel portals, and others are already addressing that in large numbers

25PROS Revenue Management, Inc.

In ClosingIn Closing

e-Commerce is going to grow and exert downward pressure on price and distribution costs

The RM tools for pricing and distributing inventory over the e-channels have to be developed as a logical extension of the conventional RM systems to have a coordinated distribution strategy

Speed will be a key to success