gds trends latin america

8/14/2019 GDS Trends Latin America

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TRENDS AND OUTLOOKTRENDS AND OUTLOOKLatin American CarrierOpportunities

Latin American CarrierOpportunities

Presented by:

Emre SerpenSenior Vice President, SH&E

Presented by:

Emre SerpenSenior Vice President, SH&E

Airline Business Distribution Conference April 2007


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Presentation Agenda

Industry Developments

Distribution in Latin America

Opportunities

TRENDS AND OUTLOOKTRENDS AND OUTLOOK

Latin American Carrier OpportunitiesLatin American Carrier Opportunities


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US carriers have been successful in reducing their distributioncosts over the last six years

11.2%

13.3%

11.0%

7.1% 7.4% 7.1%

0%

2%

4%

6%

8%

10%

12%

14%

16%

Legacy LCC Hawaiian

1999 YE2Q06

Source: Form 41 Database, company reportsNote: Legacy Carriers are AA, CO, DL, NW, US; LCCs are HP, TZ, FL, B6, WN. Domestic Sectors Only.

US Airline Distribution Costs as aShare of Operating Revenue

1999 vs. YE2Q06

US Airline Distribution Costs as aShare of Operating Revenue

1999 vs. YE2Q06 Continental increased internet sales

from 5% of total to nearly 50% oftotal between 2000 and 2005

Hawaiian went from around3% to 50% as well

Nearly 60% of Southwests sales

were on-line (by revenue) in 2005

Airlines have introduced charges(generally $3.50) for bookingsthrough GDSs to encourage useof other channels

e-ticketing savings estimated at$9 per e-ticket (IATA)


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Among the US network carriers, the greatest cost reduction hasbeen in distribution

Between 2001 and 2004 UScarriers reduced their costsby 48% in CASK terms

Between 2001 and 2004

European carriers reducedtheir costs by 0.77 Eurocents

Source: IATA Economic Briefing Report no. 5

Percent Change 2001 to 2004

Cost per ASK (Cents)

Percent Change 2001 to 2004

Cost per ASK (Cents)


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There is pressure on CRS to reduce costs

Source: Value Chain Profitability (2006), IATA

2006 IATA Value Chain Profitability Study2006 IATA Value Chain Profitability Study

Avg. ROIC, 1996-2004

(Percent)

Upturn ROIC Divided

by Downturn ROIC


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Carriers have been taking action to limit their exposure toGDS fees

AAs $3.50 charge

Intent was to shift bookings to direct

channels, and reduce the costs ofindirect channels

AA reduced their distribution costs by10.2% in commissions, booking feesand credit card expenses

Northwest last year Northwest struck a deal withSabre (further to 2004 attempt tocharge $7.5 per ticket charge on agentbookings per GDS)

Own website

Air Canada Unbundled FareOptions

e.g. lounge access for upper classcustomers (C$25), seat selection(C$15etc), flight options availability by

fare class is limited by GDS

TAM eportal

Emergence of Products that put GDS

and non-GDS content to travel agenciesside-by-side

Direct connect

Expedia, Travelocity, Orbitz) on lineagencies receive incentive payments

from GDS companies


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which has led to GDS responses

GDS driven responses,

e.g Sabres Opt in, WorldspansEfficient Access System , Amadeus

pay-for-content program

Cost cutting

To enable the change, Sabre hasreduced the airlines costs by $400million since 2000

Sabre and Amadeus agreement

If a current participating carriers dropsout of a GDS, that GDS can request thecontent from the other systems

GDS / Alliance cooperation

Star Alliance / Amadeus deal common ITplatform reduced reservations , distribution

nd airport customer services costs,

Travel Agency driven responses

Expedia charges a $2 GDS fee pertransaction

Amex Travelbahn, source all relevant non-GDS content

GNEs still developing

Net ticket pricing model instead oftraditional segment fee transaction, onetime transaction for all PNR changes until

customer flies


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Further to reduction in distribution costs use of direct channelsenabling carriers to have direct relationship

By moving close to 50% of sales to its own website, Hawaiian hasdeveloped an electronic database of its frequent and infrequentcustomers.

The airline sends frequent e-mails to its customers, including colorfulmailings during cold and wintry weather on the US Mainland.

Using the database, Hawaiian has launched surgical sales that includee-coupons, and special fares on specific, weak flights.

The CRM initiative has supported repeat customer purchase behavior,loyalty and positive word-of-mouth advertising.

Case Example :Case Example :

Leverage potential of emarketing and increase revenues


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In Europe, travel agents still represent a significant share forAEA airlines

Source: European Commission Consultation Paper, Association of European Airlines

Other

1%

Internet

8%Ticket Offices

7%

Call Centers4%

Travel Agents(on and off line)

80%

Travel Agents are important revenue generators compared todirect channels, however additional channel costs (GDS,commissions) usually offset this

AEA has few LCC members, who have a much higherproportion of direct sales

95% of sales on airline websites

were economy tickets

85% of sales on airline websiteswere point-to-point


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Successful examples of legacy airlines significantly changingtheir distribution strategy

Pricing:

Pricing action, remove restrictions tostimulate traffic (e.g. business farereduced 60%)

Distribution:

Renewed distribution strategy:commission reduced, lowest faresavailable on website only,e-ticketing (ticketless at 80% of direct

sales), website re-launched (45% ofsales online)

Case Example:

Other examples BMI and works well for airlines with focusleisure markets and relatively simpler schedules

Marketing:

Renewed focus on brand

New advertising strategy: marketingfocus on website, development ofdistinctive platform & style for futurecommunications

Communication of differentiation fromLCC (tactical advertising with servicemessage): punctuality, customer service,product differentiation (seat allocation,city airports, network, FFP, lounges etc.)


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In Latin America, travel agency sales typically account for fivetimes as much revenue and sales as the next largest channel

Other

1%

Indirect

83%

Ticket Office

9% Call Center

3%Website

4%

Sales by ChannelTAM

Sales by ChannelTAM

Travel agencies still account for

many sales in all regions

90% in Asia/Pacific

70% in Latin America overall(approximately), 80% in Brazil

46% in the US in 2002 (!)

Agencies in the US are bookingon-line more: 78% of agenciesbooked some tickets online in

2005, vs. 64% in 2001

Source: Airline Business, March 2007, GAO, 2006 Travel Weekly Travel Industry Survey, LAN Chile Annual Report,2005, Travel World News, January 2007, TAM Annual Report 2006, page 23

Source: Airline Business, March 2007, GAO, 2006 Travel Weekly Travel Industry Survey, LAN Chile Annual Report,2005, Travel World News, January 2007, TAM Annual Report 2006, page 23


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Latin American distribution costs are approximately equivalentto US distribution costs in 2000

Distribution Costs as a Share of Operating RevenueSelected Major US Carriers, 1995-2006

Distribution Costs as a Share of Operating RevenueSelected Major US Carriers, 1995-2006

Source: US DOT Form 41 Database. Includes AA, CO, DL, NW, USSource: US DOT Form 41 Database. Includes AA, CO, DL, NW, US

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

LatinAmerica:10-14%


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The global trend in distribution is towards lower-cost on-lineand direct channels

Retail Travel Agents

Wholesale Travel Agents

Corporate Travel Agents

Internet travel agents such as

Expedia, Travelocity

Portals linked via GDS such asOpodo and Orbitz (other)

Indirect

Call Centres

ATO/CTO

Corporate Implants

GSAs

Airlines own websites

Airlines websites for corporate

bookings

Orbitz Supplier Link

Direct

Off-LineOn-Line

Business

Leisure

Decreasing distribution costs

Decreasing

distribution

costs

Retail Travel Agents

Wholesale Travel Agents

Corporate Travel Agents

Internet travel agents such as

Expedia, Travelocity

Portals linked via GDS such asOpodo and Orbitz (other)

Indirect

Call Centres

ATO/CTO

Corporate Implants

GSAs

Airlines own websites

Airlines websites for corporate

bookings

Orbitz Supplier Link

Direct

Off-LineOn-Line

Business

Leisure

Decreasing distribution costs

Decreasing

distribution

costs

The goal is to switch sales from expensivedistribution channels

Travel agents

Ticket offices

to cheaper channels

Call centres,

Web sites and

On-line agencies.

New, cheaper alternativeforms of GDS systems(GNEs) are also

becoming available


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The share of tickets in the US bypassing GDS increased from 29% to 37%between 1999 and 2002

Average payments by GDS companies to US travel agents increased from $75Million to $234 million

GDS is consolidating their power by creating travel agency communities in different areas

The impact of internet and directconnect has been primarily on

small to medium size travelagencies

Fewer than 1% of the agenciesbook almost 60% of total travelagency sales

Smaller agencies haveconsolidated as theGDS environment has changed

GDS remains an important force, even in the U.S.

Source: Lufthansa Systems market research 2004 (figures are approximate)

Bookings through GDS

Bookings bypassing GDS


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60% of Mexican airline sales are still through travel agenciesand GDS

The majority of sales are throughagencies, with another thirdthrough airline call centers

The airlines have effectively shiftedcustomers from 80% agency just fiveyears ago, but the movement has beentoward call center rather than internet

Although the volume of airline

tickets purchased through internethas increased, the share remainssmall

GDS tends to cover many high-yieldbusiness passengers, so airlinesmust be careful when changingtheir distribution strategies

Internet

3%

Ticket

Offices

7%Call Center

30%

Agency

60%

Source: CINTRA website, Financial Statements Report 2005.

Mexican Airline Ticket Sales by Channel2005


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There is opportunity for Latin American carriers to leverage theirinfluence and reduce their distribution costs

TAM: 1,800 agencies in Brazil signed up for eTAM portal by 2005 (Oracle)

2006: 85.6% of indirect sales went through the eTAM travel agency portal, compared to14.4% through GDS (TAM Annual Report)

GOL: 86% of all sales are conducted over the Internet

Just 3% of sales use GDS systems

We estimate that at least 60% of total sales using the GOL

Openskies/Navitaire system are through travel agents

GOL has signed a GDS agreement with Worldspan as of April 2, 2007

ALMA: 80% of tickets booked on-line, including travel agency sales

Source: Oracle, 2006 GOL Day presentation, GOL press release, TAM Annual Report 2006Source: Oracle, 2006 GOL Day presentation, GOL press release, TAM Annual Report 2006

TAM, GOL, and ALMA already book many of their tickets

through web portals


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Similar GDS responses in Latin America

Full Content Deals

Proved that airlines own the GDS content

The GDSs could have saved some moneyby not providing full content, but travelagencies insisted on it

GDS providers have developedOpt-in programs to handle carrierservice fees

Agencies pay the GDS companies andcharge passengers a fee for their service,or accept a lower incentive (e.g., SabreEAS and Galileos Content Continuity

programs) Opt-in has lead to consolidation in the

travel industry

Worldspan

6%

Amadeus

38%Sabre

50%

Galileo

6%

Market Share by GDSLatin America

Market Share by GDS

Latin America

Source: GAO, m-travel, Star AllianceSource: GAO, m-travel, Star Alliance

GDS still commands high-yield business traffic, so focus on cost per

segment per channel must be complemented with revenue per segment per

channel


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GDS renegotiations bring the potential for loss as well as gain,and must be approached cautiously

GDSs face this pressure virtually from all airlines and have developed

sophisticated negotiation strategies. Hence all airlines must be veryclear in net value negotiation elements to drive an overall net gain

Though it is essential to have a plan to change the distribution mix inorder to create negotiating leverage with GDSs, this may create GDScounteraction if the losses are too large

Strategies to shift traffic away from retail agencies towards call center and websitemay encourage the engagement of retail agencies with GDS as has happened inother countries

To compensate for their losses in domestic markets where an airline commandsinfluence and control, GDSs may overcharge in other markets, such as US or

worldwide, to minimise their loss

Airlines may be able to handle GDS pressure more effectivelyin groups

Although they have to be able to influence the agents in their markets,

be careful to agree on their goals in advance, avoid anti-trust action,and establish a crediblealternative to the GDS systems

Determination of risks and potential impact to the bottom linemust be pre-determined


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Careful preparation is needed for GDS negotiation

Establish current distribution mix, including Use of channels

Volumes (segments per channel)

Unit cost and revenue by channel

Benchmark current distribution mix and costs with peers

Analyze spend to establish effective negotiation strategy with GDSat the market/country level

Establish realistic changes to distribution mix to reduce distributioncosts without compromising yield and revenue quality

Quantify risks associated with potential GDS counteraction

Tools to support negotiations process

Analysis of net gains and losses during the negotiation process, and

pre-determination of realistic courses of action to alter distribution mix


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Globally, an airlines own website is the most common channelfor online sales

Source: SITA 2006 Airline IT Survey

Proportion of Airlines UsingEach Online Channel

Usage of alliance websites isvery low

Opportunity for interline sales Opportunity to access much

larger market

Perhaps ignored due to Opodo,Orbitz, etc., which are seen asfulfilling the same purpose

As we saw earlier, the useof airline websites does nottranslate to their productionof a high proportion of revenue

51%

42%

23%

16%


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One result of the lower rate internet penetration is fewer on-linesales in Latin America relative to US LCCs and majors

4%

23%

24%

40%

58%

65%

78%

98%

0% 20% 40% 60% 80% 100% 120%

TAM

Northwest

Delta

GOL (2005)

AirTran

Southwest

JetBlue

Ryanair

Share of Tickets Booked on the InternetOwn-Website Direct Bookings

Source: US carrier press releases, CNN, GOL, TAM Annual Report 2006 GOL figure is approximate 80% of GOL tickets are sold on-line, but the direct proportion is uncertain

Provide attractive fares and customer choice

Simple fare structure Special fares to promote the channel

(if this can be done under GDS agreements)

Develop a reliable website customers cantbuy tickets if they cant use the site, and theywontbuy tickets if it isnt secure

Secure connections

Plenty of bandwidth

Responsive customer support

Consider a variety of payment options credit

cards are great, but not everyone has one Many of the remaining ticket office sales in the

U.S. are cash and check purchases of internationaltickets

GOLs Voe Facilprogram is another example

Steps to On-Line SuccessSteps to On-Line Success


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Though the channel as a whole has been slow to take off,air travel represents 29% of internet purchases in Mexico

Currently there are 17.1 million internetusers in Mexico

74% of the users are above 19 years of age

9% of the users have purchasedsomething through internet(around 1.5 million buyers)

From all the purchases throughinternet, travel services represent39% and airlines tickets represent 29%

Despegar.com represents less than 5% ofthe total purchases

through internet

Airline ticket sales have grown fasterthan any other categoryof internet sales in Mexico

Source: Asociacin Mexicana de Internet (AMPCI), 2005, AMIPCI Study Executive SummaryPriceWaterhouse Coopers for AMPCI, 2005, AMIPCI E-Commerce Study Executive Summary based on 26 corporations selling through internetDespegar.com

Internet Sales in MexicoInternet Sales in Mexico

35,000 dailywebsite visits todespegar.com

540 actually makea reservation(1.5% of the visits)

1,800 actually call(5% of the visits)

Despegar.comDespegar.com

Despegar accounts for only around

1% of travel sales in Mexico thereis still a lot of room for growth

Despegar accounts for only around1% of travel sales in Mexico there

is still a lot of room for growth


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Some carriers who tried to exclusively rely on this channelsuffered consequences

73% 75% 75%

61%

53%53%

78% 79%

74%75%

79%80%

40%

45%

50%

55%

60%

65%

70%

75%

80%

85%

2Q '04 3Q '04 4Q '04 1Q '05 2Q '05 3Q '05

Independence

Industry

Case Example:Case Example:

Independence Air Historic Load Factorsvs. U.S. Industry

Independence Air Historic Load Factorsvs. U.S. Industry

JoinsGalileo

Independence Air was a U.S. regionaloperator that flew 50-seat RJs under itsown brand in 2004 and 2005

As part of Independences low-costbusiness plan, management decided not toplace content with GDSs

We will have no GDS participation at all and ahigh percentage of reservations will be made on-line. (Founder Kerry Skeen in Airline Business,

June 2004)

Due to its low yields and load factors, alongwith narrowbody competition from majorcarriers at Washington-Dulles,Independence had to exit the market

The airline lost $392 million in a year and ahalf

Another airline that had given up on GDS JetBlue has recently (August/September2006) signed full-content deals with Sabreand Galileo


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Hence in US, few carriers rely exclusively on the Internetfor sales

U.S. carriers average just

30% of ticket booked ontheir websites

60% of all airline bookingsare still conducted through

the GDS

Total web penetration isgreater when includingsales by third-partywebsites and online travel

agencies

This model can be takeneven farther -- 98% ofRyanair tickets were soldon-line in 2006

24% 23%28%

35%

58%

78%

65%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Delta Northwest America

West

Alaska AirTran Southwest* JetBlue

Percentage of Flights Purchased on the Airlines WebsitePercentage of Flights Purchased on the Airlines Website

* Percent of revenue generated by www.swa.com in CY 2005.

Source: The airlines, USA Today

* Percent of revenue generated by www.swa.com in CY 2005.

Source: The airlines, USA Today

LCCLegacy


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Calculation should include increased advertising spending

Advertising Spend per City Pair ServedAdvertising Spend per City Pair Served

* Volaris Advertising Expense is based on the Investment, not the revenue, because they just began in March 2006Source: U.S. Airlines:2003, Unisys Transportation by R2A Management Consulting, Ryanair and easyJet from 2005 Airlines Website, CINTRAfrom 2004 shareholder website, OAG Schedules

$291

$400

$531

$1,015

$2,883

$1,411

$535

0 500 1,000 1,500 2,000 2,500 3,000

Ryanair

Volaris*

U.S. Major Average

Mexicana/Aeromexico

Jet Blue

EasyJet

Southwest

AdvertisingSpend as a % of

Revenue

AdvertisingSpend as a % of

Revenue

2.3%

2.4%

2.2%

1.1%

0.9%

2.0%

1.5%


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There will be opportunities to save cost by shifting some of thetravel agency sales to call centres

Improving call center productivity willencourage passengers to book throughthe channel

Short waiting time for an operator

Well-trained staff to assist in itinerarycreation

Low percentage dropped calls

JetBlue uses sales staff working from

home to save money and maintainmorale

Regionalized or shared call centerswould allow carriers to gain economiesof scale in this enterprise

It would have to be a business, though, toensure that larger carriers did not get asubstantially better deal; a fee-per-ticket orsimilar arrangement could work to thebenefit of all carriers

The call center channel distribution

costs are less than two thirdof retail agency costs

%10 shift of traffic from retail agency

to call center could represent 3%reduction of overall distribution costs


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Thank you.

Emre Serpen

[email protected]

+447788420835

gds trends latin america

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