1

e-Commerce Challenges to Traditional Revenue Management

Brenda BarnesVice President, Revenue Management

Delta Air Lines

2

What Will the Future Hold?

More information and control in the hands of consumers– Customer driven interaction– Expanded reach and research capabilities– Transparent pricing/inventory

Proliferation of channels– More products, more complex segmentation– Dynamic pricing… products on demand…targeted offerings– More “under the radar” activities

Shortened product life cycles– Faster development time required– Adaptability of systems critical

3

Expected Growth in e-Commerce

12.8

23.9

39.7

55

67.5

0

20

40

60

80

1999 2000 2001 2002 2003

US

on

-lin

e sa

les

($B

)

Source: Forrester Research

Projected Industry On-Line Travel Sales

On-line travel is projected to represent over 30% of total industry sales by 2003

4

Distribution Economics

Distribution Costs Today:•Agency Commissions•CRS fees•Credit Card Fees•Res/Sales Costs

Total Revenue

If managed properly, e-Commerce will reduce distribution costs

as a percentage of total revenue, while simultaneously increasing total revenues

Good Future

Bad Future

5

e-Commerce Creates Challenges and Opportunities For RM

Revenue Fragmentation Channel Management Complexity Data Aggregation/Richness/Availability Systems Integration Passenger Valuation Issues Managing the Transition Attracting and Retaining Talent

6

Revenue Fragmentation

RM strategic and operational complexity increases dramaticallyas revenue fragments across multiple channels

CRSRES T2 xyz.com abc.com tpb.com etcDelta-air Priceline

TRADITIONAL CHANNELS 92% of Revenue - 200070% of Revenue - 2003

DELTA CUSTOMERS

EMERGING CHANNELS8% of Revenue - 2000

30% of Revenue - 2003

7

Fragmentation Challenge

Proliferation of channels and fragmentation of revenue increases RM complexity– Filing/managing fares/inventory in new channels– Integration of strategies across channels– Managing constrained resources – Balancing new vs. traditional channel focus

8

Traditional Segmentation Techniques Are Becoming Inadequate/Obsolete

Advance Purchase?Minimum Stay?

Flexible on flight time?Flexible on airline?

No way! OK

Yesterday ... Today ...

Delta-air Priceline Small biz T2

Extremely price sensitive, non brand loyal

Price sensitive, last minutetraveler

Price sensitive, brand loyal

Price sensitive business traveler

Traditional business traveler

Pricing Segmentation

9

Channel Management Risks / Opportunities

RM must play a critical role in designing/managing internet programs in order to maximize benefits/minimize risks

Risks of inadequate RM support and involvement are substantial with potential long term implications

Internet activities must be integrated with overall strategy to manage transition risks and capture opportunities

RM Resources

Leaders

Followers

- Significant incremental revenue- Minimum revenue dilution - Optimal cost savings- Limited impact on primary business

- Limited/missed opportunities- Major revenue dilution potential- Dilution of cost savings benefits- Major distraction from primary business

The Priceline.com Model

- Significant operating revenue- Minimal dilution- Share shift/traffic capture- Billions of $ warrant value

- Missed participation opportunity ($)- Huge dilution potential- Non-optimizing/destabilizing pricing structure (manual/costly)

10

Dilution Potential Is Great

Revenue dilution can result from several sources:– Insufficient attention to protecting core revenue during

transition– Core revenue reduced as a result of transparency of on-line

channels– Dilution of internet revenue through “under-the-radar” activity– Creation of destructive terms, rules, restrictions for internet

participants– New intermediaries gain leverage reducing traditional supplier

control over pricing, inventory, etc.

11

The Situation:

Less Timely Data from Traditional Sources

Limited Data RE: Customer Choice/Behavior

Aggregation of Data from CRS systems

Disaggregated and Inconsistent Data from new channels

Data which is:

Seamless

Rich

Precise

Dynamic

Responsive

Integrated

Fast

Flexible

CURRENT CURRENT FUTURFUTUREE

HOHOWW

Rework Data FoundationRework Data Foundation

Re-engineer Business Re-engineer Business ProcessesProcesses

Develop New Models & Develop New Models & SystemsSystems

Integrate traditional and new Integrate traditional and new data sourcesdata sources

Continue to OptimizeContinue to Optimize& Evaluate& Evaluate

Data in the e-Commerce World

12

Past

Future

Customer Competition Delta

Are there new ways we can stimulate demand ?

What will customers’ lifetime value be?

Where will they buy?

What published fares were offered?

What unpublished fares were offered?

OAL bookings in O&D markets?

What can new sources of competitive info tell us?

How much are they selling through various channels?

How many bookings sold through each channel? At what fares?

Type of customers are buying particular fares?

What products can we target to discrete customersegments?

What fares and inventory did we offer?

How much revenue did we generate per segment/O&D?

How many people flew?

How much did they pay? What fare class?

How much did each Trvl Agency generate?

Integrated systems and data are critical in the e-Commerce world

13

Passenger Valuation Issues

New dimensions impact passenger valuation -New channels and costs associated with each must be considered

-More detailed customer information may allow for

more differentiated customer valuation-Stock warrant agreements with .com firms may

cloud traditional valuation systems

14

Transition Challenges

e-Commerce will represent less than 30% of typical carriers’ revenue through 2003

Balance of priorities to traditional vs e-Commerce strategies will be difficult

Decisions made now will determine airline industry economics of the future

Risk of a future model which is disadvantageous to airlines

15

Attracting and Retaining Talent

Difficult to attract e-Commerce experienced talent given traditional airline salary structures

Traditional airline benefits (travel/medical/dental etc.) unimportant to many candidates

Traditional airline work environment not attractive to new workforce

Retention difficult given high demand for experienced e-Commerce professionals by both competitors and .com firms

16

Conclusions

e-Commerce creates tremendous opportunities and risks for Revenue Management

Active involvement by RM is critical to maximize opportunities and reduce risk

Precedent set today will determine industry economics for the future

Transition period will be challenging