1. Loyalty Communities: The hidden Value for Airlines? Benno Iten, Chief Delivery Officer, Loylogic Ltd. IATA Loyalty Management Conference 2007 Athens, 28. November 2007

2. 2Agenda Why do Investors look at FFPs? What drives the Value in FFPs? How to successfully unlock FFP Value? confidential Loylogic Inc., November 2007 3. 3Question Nr.1How much time does your CEO spend in understanding and developing the airlines FFP business? confidential Loylogic Inc., November 2007 4. 4Question Nr. 2 -2.56 -0.66 -3.13 -1.25-4.82 -2.07 -2.98 -1.10 confidential Loylogic Inc., November 2007 5. 5Airline Investors have a Issue In 2007 the traditional airlines lost one third of their market cap. Market Cap*) Company Lost Value*) In % 1. Jan. 07 20. Nov. 07 -34% American Airlines 7.53 4.97-2.56-13% United5.10 4.44-0.66 US Airways -64% 4.89 1.76-3.13 Delta Airlines -23% 5.45 4.20-1.25 British Airways-38%12.68 7.86-4.82 Air France-KLM -18%11.51 9.44-2.07 Lufthansa-20%14.91 11.93 -2.98-28% Air Canada (H)3.922.82 -1.10 Billion USD*) confidential Loylogic Inc., November 2007 6. 6Air Canada made a bold Step with Aeroplan Aeroplan is the first stock-quoted FFP. It has doubled its value since the IPO.Aeroplan +27% Air Canada -28% Company In % 1. Jan. 0720. Nov. 07 Lost Value confidential Loylogic Inc., November 2007 7. 7Investors see a big Opportunity Applying Aeroplan figures, FFPs represent a multi billion USD opportunity.Loyalty Program ValueMarket Cap in % ofAirlineMio Value perProgram Airline20. Nov. 07 Members MemberValueValueCompanyAir Canada (H) 2.82 8 5304.35154% American Airlines4.9756 20011.2225%9.2200United 207% 4.4446US Airways6.4200364% 1.7632Delta Airlines7.2200171% 4.2036British Airways 1.620020% 7.86 8Air France-KLM2.420025% 9.4412Lufthansa 2.820023% 11.93 14 Billion USD *) confidential Loylogic Inc., November 2007 8. 8Investors push Airlines Executives In recent times investors have publicly pushed airlines to spin-off their FFP.Bloomberg, Nov. 15, 2007American Airs Hidden Assest May TopCarriers Value Carriers are responding to pressure as airlineshares have underperformed the Standard &Poor's 500 Index by 22 percent this year.Reykjavik-based FL Group hf, AMR's third-biggest shareholder, urged American to sell itsfrequent-flier program in an open letter to AMR'sboard in September.``This has the potential to become a sustainablesource of value creation if it's done in the rightway,'' FL Group CEO Hannes Smarason said inan interview confidential Loylogic Inc., November 2007 9. 9Airline Executives start to act FFP spin-offs a considered around the globe.Chicaco Tribune, Sep. 26, 2007 ATW, July 19, 2007UAL board looking at asset Qantas considers holding companysales and spin-offs United Chief Executive Glenn It also is looking at spin-offs of its loyaltyTilton told analysts during an program. Management has flagged aearnings call in July that the airline large dividend payout, but it is expectedwas looking into strategic options to be only half the A$4 billion ($3.49for Mileage Plus, United's 45 billion) that APA planned to take if its bidmillion-member frequent-flier was successful.program. ATW Oct 30 2007Market Watch, Oct 25, 2007 NWA posts $244 m profit, frequent-US Airways may spin off frequent flier flier sale?plan President and CEO Doug SteenlandUS Airways joined the swelling ranks of hailed the quot;remarkable turnaroundquot; andsenior airline executives considering said one possible way of growingspinning off their frequent flier programs, shareholder value, is to spin off theCEO Doug Parker said on a discussing WorldPerks frequent-flier program.US Airways' (LCC) third-quarter profit. confidential Loylogic Inc., November 2007 10. 10 What is the Magic behind? confidential Loylogic Inc., November 2007 11. 11 Frequent Flyer Program ValueOver time airlines have developed a very profitable community business. Internal FFP Value Company revenue as is 1000 Loyalty Marketing Loyalty effect on sales (8-18%) 1180 Increase airline sales, offering+ Margin on sales (e.g., 30%) 54 miles to frequent flyers- Cost of operation (0.1-2%)20= Net Profit34 External FFP Value Community Business Miles sold to partners1000 Sell miles/points to program - Cost of operations 100 partners - Cost of rewards700= Net Profit 200 confidential Loylogic Inc., November 2007 12. 12 Mechanism in advanced ProgramsPoints and money flows between four program roles.MoneyMoney(USD 0.01/Point) (USD 0.015-0.050/Point) Program SponsorPointsPoints (8000 Points) (10000 Points)Reward PartnersProgram Partners PointsPoints (8000 Points) (10000 Points) Reward Transactions Program Members confidential Loylogic Inc., November 2007 13. 13 The Virtuous CircleAn attractive value proposition for members builds the core of the community business Earn Concept Reward ConceptMember Value PropositionEarn Concept Reward ConceptStatus ConceptStatus ConceptEase of useEase of use Program Effect Attractive Attractive ProgramProgram(Communication)(Communication) More AccrualMore ProgramMore Accrual More ProgramPartners MembersPartners Members (Transactions)(Actives) (Transactions) (Actives)Program Value Higher HigherHigher Higher Miles SalesCompany Sales Miles Sales Company Sales (Volume & Price) (Volume & Price) (Volume & Price) (Volume & Price) confidential Loylogic Inc., November 2007 14. 14The current Situation in most FFPs confidential Loylogic Inc., November 2007 15. 15 The current Situation in most FFPsThe current FPP setup gives wrong incentives and limits the value creation dramatically.No visibility of FFP true profit and cost - Accrual partner revenue not reported in financial statement - Miles cost unknown to airline marketing & sales organization - Reward cost unknown to FFP (free seat) - Required investments in capabilities and technologies could not be justifiedLack of reward availability - Declining customer satisfaction as loyalty currency looses its value - Declining accrual partner satisfaction - Accounting policies prevent attractive non-flight offeringsLack of analytical marketing service skills - Critical CRM capabilities to optimize FFP value not established confidential Loylogic Inc., November 2007 16. 16Steps to unlock FFP Value confidential Loylogic Inc., November 2007 17. 17 Steps to unlock the ValueUnlocking FFP value costs far less than a new aircraft!1. Separate the airline and FFP business Create a FFP business unit with own P&L Establish an arms-length relation with the airline (sell your miles and buy the reward seats at market price)2. Improve the Member value proposition Improve reward proposition Improve accrual opportunities Personalized member communication3. Improve the Accrual Partner value proposition Improve member insight and analytics Improve marketing R.O.I measurement and reporting Improve your non airline industry knowledge4. Improve your operational excellence Improve reward management Improve liability management Improve operating management confidential Loylogic Inc., November 2007 18. 18 Improve Reward PropositionAvailable rewards make a member more loyal to you and your accrual partners.Reward Value(Points-plus-cash; Attractive reward pricing)RewardReward Availability Reward Fun!& Choice(Auctions, Raffles, Gaming)Proposition(Available Rewards for anymember profile)Ease of Use (One-stop access; Highly personalized) confidential Loylogic Inc., November 2007 19. 19 Does it pay for the Airline?Frequent buyers can be very profitable for the airline.Reward Partners Accrual Partners Reward Partners Accrual Partners (Sell Rewards (Buy Miles(Sell Rewards (Buy Milesfor USD 120 )) for USD 650)for USD 120for USD 650)FFP (Sell Miles (Sell Milesfor USD 1000 for USD 1000buys Rewardsbuys Rewards For USD 800)For USD 800)Airline Airline Airline Airline (Buy Miles (Sells Reward Seat(Buy Miles(Sells Reward Seat for USD 350)for USD 680)for USD 350)for USD 680)Balance for the Airline: + USD 330 confidential Loylogic Inc., November 2007 20. 20 Additional Benefits for the AirlineAn attractive loyalty community offers the airlineMore effective Marketing Tools- Improved customer insight- Improved direct communication towards members- Lots of opportunities for positive communication messages- More (more) loyal customersAttractive distribution channel- To push distressed inventory- Less price sensitive- Incremental passenger revenue from reward seats- Attracts new customer segmentsReduced complexity in Revenue Management- Commercial demand and reward demand managed as on demand confidential Loylogic Inc., November 2007 21. 21 Question Nr.1: CEO CommitmentAirline top management should dedicate its time to where most value is created.Top Management99% 1%Time InvestmentAirline Management FFP Management Capacity deployment Relationship management Network optimizationAirline management Revenue managementPartner marketing (coalition) Reservation systems CRM analytics Cost management Program design Debt financingCampaign management Labor relations Media effectiveness Safety & MaintenanceReward management Customer serviceChannel optimization Product designLiability management Marketing communication Breakage management Airline Potential 40%60%Value Generation confidential Loylogic Inc., November 2007 22. 22 Wrap-upThere is tremendous value potential in FFP programs.The key value driver in a FFP are happy members.Key success factors to successfully unlock the value are1. An organizational set-up that provides a value oriented reporting and steering environment.2. A member value proposition based on recognition, rich accrual opportunities and relevant rewards.3. An accrual partner value proposition that helps the partner to access new customers, retain and intensify existing relationships and give them a better customer insight.4. Top Management support confidential Loylogic Inc., November 2007 23. 23 and dont forgetLoylogic makes miles & points morevaluable than money!Thank you! confidential Loylogic Inc., November 2007