The Future of Distribution

1
The Future of Distribution

• Presented by
• Lambros Andréasson, Travelogica AB

Stockholm 5th April 2005
2
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

3
Causes of poor profitability

• Legacy of poor management and business complexity
  
• Over capacity- too many airlines chasing too few
  passengers
• The growth of low cost airlines has exacerbated
  the situation
• Regulatory obstacles to rationalisation and
  consolidation
• Lack of balance of power in value chain
• High fuel prices
• External shocks

4
ICAO World Airline Financial Results
The industry is likely to lose 4-6 billion in
2004
5
No frills carriers take lead in shorthaul
share of passengers on board all UK shorthaul
inbound, outbound and domestic scheduled flights
Ryanair, Buzz, Easyjet, Go Source British
Airways Total Market Share 25.08.04
6
Low Cost Carriers Growth
The LCC model is adopted by about forty of the
worlds airlines

• Europe
• 16 of intra-European and domestic market share,
  predicted to grow to 33 by 2010
• Sweden
• 20 market share to and from Europe (2004)
• 5 domestic (2004), forecast 10 2005
• USA
• 10 of domestic market share in 1998, compared to
  25 in 2003, forecast, predicted to grow to 40
  by 2006
• Asia
• Virgin Blue has 30 of the Australian domestic
  market
• Air Asia has become an important player in the
  Malaysian domestic market

7
Cost Reduction

• Cutting routes
• Reducing capacity
• Reducing labour costs
• Reducing distribution costs
• Establishing low cost subsidiary or applying
  features of their business model

8
aerlingusCost reductions achieved in 2003 - 340
Million
2003 vs 2001
2003 Versus 2001 Fuel -31 Airport
charges -28 En route 6 Aircraft
hire -51 Maintenance -12 Distribution -56 Misc
DOCS -49 Staff costs -21 Overheads -36 Deprecia
tion -21 Total -30
Source aerlingus, 2004
9
British Airways, Cost reductions achieved
10
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

11
Distribution Industry at a Glance

• Airlines drive to reduce distribution costs
• Large travel management companies were the first
  target
• That has led to changes in their business model
• GDS deregulation is introducing further changes
• GDSs are the target now
• GDS deregulation is creating pressure for changes
  
• Large corporates are concerned about the on going
  changes
• TMC fees, GDS deregulation, access to content,
  costs, biased display
• Technology providers promising to sort all these
  problems
• providing less costly and efficient channel of
  distribution
• Distribution is just not management to allocate
  the right price on the right product through the
  the most comprehensive channel at the right
  moment!
• Distribution management is a wide range of
  complex transactions and information management
  and payment/administration must go hand in hand!

12
GDS regulation/deregulationKey principles

• Regulation (since 1984)
• GDSs should treat all airlines fairly and offer
  equal functionality
• Airlines owning a GDS should participate equally
  in other GDSs
• GDSs should provide an un-biased display of
  airline information
• Deregulation (January-July 2004 in the US, under
  consideration in EU)
• Airlines can participate in the GDS of their
  choice
• GDSs and airlines can negotiate fees
• No prohibition on display bias

13
Economic Theory of Competition
Elimination of regulations (Free competition)
Service competition innovation
Price competition
Elimination of weak / inefficient producer-
continuation of operation by efficient ones
Threat of new entry Low cost GDSs technology
providers Supplier links ..
Lower prices
Better service
14
Key differences between US and European

• Amadeus ownership by European airlines
• US carriers do not have an ownership in any GDSs
• Also
• Opodos ownership by Amadeus
• Level of on-line ticket sales penetration in
  Europe is lower than in the US
• Therefore
• Less opportunity for bypassing GDSs in Europe at
  the moment

Source Airline Business 2004
15
Online Ticket Sales by Region 2004
Source Airline Business, July 2004
16
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

17
Corporates -1

• Under pressure to reduce cost of travel
• Becoming more price sensitive and less service
  sensitive, especially on short haul routes
• Do not appreciate the ticket flexibility as such
• Want value for money
• Want transparency
• Are concerned about distribution channels
• Cost, direct and indirect costs
• Comprehensiveness
• Control and security
• Reliability
• Flexibility
• Impartiality (towards owners, sponsors,
  incentives,)
• Suffer from information overload

18
So many ways to buy a ticket!
ITMCs Travelocity Expedia Get There
Airline sites BA.com UA.com
?
Airline call centres
TMCs American Express BTI
Customers
Airline offices/ airports
Leisure on-line agencies Lastminute.com Priceline
Airline portals Orbitz Opodo Zuji
Flight scanner sites Traveljungle Skyscanner Agent
Ware
19
Corporates -2

• Downgrading
• European business class trips from the UK 65
  in 1991, 25 in 2003, 15 by 2006 (BA, 2003) 
• Greater use of low cost airlines
• 53 of SMEs are using these airlines (Amex,
  2003)
• Greater use of non-refundable tickets
•  from 51 in 2000 to 58 in 2003 in the USA (BTC)
• Selection of airlines based on price not FFPs
• Comparing negotiated rates v. spot prices
• 73 of companies believe airline contracts are
  less beneficial than in previous years (BTC,
  2004)
• Greater use of different distribution channels
• Tend to book simple point-to-point trips directly
  with the airline, more complex itineraries via an
  agent
• Self-booking tools are increasingly embraced
• the Travel Managers are frustrated at the
  technology shortfalls including the absence of
  low cost airlines on the GDSs that power these
  online agency booking tools.

20
Shifting pattern of business travel
of business travellers in premium cabins, 4
quarter average
Source British Airways, 25.08.04
21
Cost of access to content

• Very complex!
• So many different channels Airlines, ITMCs,
  TMCs, OTA, ..
• So many different sub-channels, on-line, call
  centre, office, .
• Each charging different transaction fee depending
  on their relationship with the customers and the
  suppliers
• E-ticket vs paper ticket (around 25 if e-ticket
  is available)
• Dealing with each channel takes different amount
  of time
• None can provide comprehensive and impartial fare
  content yet

22
Cost to corporates by sales channel
500 Ticket
23
Cost to corporates by sales channel
500 Ticket
Time cost assumptions Employee hourly value of
50
24
Additional costs will apply depending on the
values that are added per sales channel

• Fee structure based on complexity of travel, time
  spent and added services related to corporate
  interests, eg.
• Policy control
• Supplier programme
• Security
• Profile management
• Data management
• Debiting and administration management, eg. Lodge
  Card administration, e-invoicing, travel order
  information etc

25

• ACTE Stockholm Stakeholder Roundtables
• Strategic Issues for Corporates

26

• ACTE Stockholm Stakeholder Roundtables
• Strategic Issues for Corporates

27

• ACTE Stockholm Stakeholder Roundtables
• Strategic Issues for Corporates

28
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

29
Airlines - 1

• Need to reduce costs
• Aim to increase selling on-line directly
• Carrying on with channel based transaction fee
• Developing lowest price guarantee on their
  website
• Use internet fare as a key weapon to put pressure
  on intermediaries to reduce costs

30
Airlines - 2

• Most large US airlines are locked into GDSs
  current pricing structure until 2006 in exchange
  for 12 fee discount
• Other airlines believe12 reduction is not enough
• Participation in GDSs
• Will bypass GDS at any opportunity
• will display on all GDSs and pass the GDS fee to
  customers
• Object to incentive fee paid by GDSs to agents
• LCCs does not participate in GDSs, few exeptions
  only
• LCCs are introducing corporate booking tools

31

• ACTE Stockholm Stakeholder Roundtables
• Strategic issues for airlines

32

• ACTE Stockholm Stakeholder Roundtables
• Implications of GDS deregulation for airlines

33
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

34
TMCs

• Some have built direct connections to airlines to
  bypass GDSs
• Some on-line agencies (ITMCs) are developing
  products aimed at the corporate travel market
• TMCs believe that online entrants do not have the
  technology to manage very large accounts (eg
  fulfillment, complex debiting structure etc)
• See a role as content integrator
• Trying to address corporate concern- negotiated
  rate vs spot prices
• Developing lowest fare guarantee
• Technology to compare fares

35
ACTE Stockholm Stakeholder Roundtables Strategic
issues for TMCs
36

• ACTE Stockholm Stakeholder Roundtables
• Implications of GDS deregulation on TMCs

37

• ACTE Stockholm Stakeholder Roundtables
• TMCs future relationship with Corporates

38
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

39
Global Distribution Systems - 1

• GDS deregulation is putting further pressure to
  reduce fees
• Introduced new fee structure
• Direct Connect Availability Three year Option
  DCA-3 by Sabre
• Preferred Fare Select by Galileo
• - Claim to reduce participants segment fees by
  about 12 in exchange for all content including
  the internet only fares
• Price segments according to its value to the
  airline by Amadeus
• This is seen by all other players as gaining time
  to restructure properly
• Large majority have ownership interest in OTAs

40
Global Distribution Systems - 2

• Changing agency incentive fee structure
• Object to the idea of airline charging TAs for
  using GDSs
• Seems concerned about TMCs moving into GDS space
• Investing in technology to make LCCs bookable
  through their systems- focusing on content
• New low cost entrants G2, ITA ,.
• Engaged in soul searching to restructure and
  increase efficiency

41
ACTE Stockholm Stakeholder Roundtables Strategic
issues for GDSs
42

• ACTE Stockholm Stakeholder Roundtables
• GDSs view of airline strategy

43

• ACTE Stockholm Stakeholder Roundtables
• GDS relationships with TMCs

44
Outline

• An Overview of the Airline Industry
• An Overview of the Distribution Industry
• Corporates
• Airlines
• TMCs
• GDSs
• Future Developments

45
Future Developments - 1

• Airlines will continue to exert pressure on
  intermediaries to reduce fees
• Airlines will increase direct on-line sales,
  especially in home market
• Large LCCs will increasingly launch corporate
  booking tools
• Small new entrant airlines will need 3rd party
  distributors to ensure survival
• TMCs will increasingly act as content aggregator
• TMCs can play a role in elimination of biased
  display, should that become an issue
• There will be further concentration of online
  agencies in Europe

46
Future Developments - 2

• Direct bookings will be the biggest threat to
  GDSs followed by low costs GDSs
• GDSs will be deregulated in Europe but not the
  same as in the USA
• Amadeus ownership requires a compromised version
  of deregulation
• This is more likely to happen in 2006 /07
• This should lead to more innovation and
  efficiency in GDS community
• GDSs will become more market facing and will
  change their business model, corporates new key
  customer
• GDS deregulation can potentially lead to further
  fragmentation of contents and biased displays
• Corporates will continue putting pressure on the
  industry to get its act together and offer cost
  efficient and simple channels of distribution

47
Future Developments - 3

• Nordic perspective
• Agressive competition on all supplier areas, air,
  hotel, car, rail etc.
• For how long???
• Most intermediators are/where depenpdent on one
  GDS
• New comprehensive, smart and cost efficient
  techonlogy is slowly introduced into the market
• Fragmentation on payment and administration
  related processes
• Increasing degree of awareness of hidden costs
• Administrative work load is increasing, costs are
  pushed forward over to the customer of course..
• Segmentation between large and small/medium
  enterprises in behaviour and needs
• Increasing focus on intergration and streamlining
  on order-to-invoice process

48
Travellers dream

• Imagine if there were one website where you
  could find out all the flight information that
  you needed, with the best value fares listed for
  each option. Simple to use and trustworthy, the
  website would trawl through all the available
  options between your two destinations, offer you
  a choice of low cost carriers and traditional
  airlines, tell you about connection times and
  then give you the option to reserve or pay for
  your ticket with a few clicks of a mouse.
  Business traveller, July-August 2004

49

• Could this dream become true?

50
Price of Crude Oil
US per barrel of crude oil
In real term- 2004 prices
In current prices
Source International Energy Agency
51
ICAO Index of Yield per RTK, Cost per ATK and
Inflation
US cents, current prices
Source IATA WATS, 2004