01 Dynamic Packaging

Key Trend: Dynamic Packaging

The impact of technology on the sale of commodity products,

both online and offline

by Chicke Fitzgerald CEO, The Solutionz Group International, Inc.

SOLUTIONZ PUBLICATIONS, INC. 6115 Galleon Way Tampa, FL 33615 +1.813.925.0789

fax +1.813.925.0790 [email protected]

www.solutionz.com

First in theFirst in the PapersPapers Series Series

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2 Copyright 2004, The Solutionz Group International, Inc. 6115 Galleon Way, Tampa, FL 33615, USA, +1.813.925.0789, www.solutionz.com. All rights reserved. If this document is used as a resource or quoted, credit must be given to The Solutionz Group International, Inc. Please contact Chicke Fitzgerald at [email protected] for details.

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Table of Contents

SETTING THE STAGE ............................................................................... 3

INDUSTRY CHANGES & DRIVERS........................................................... 4

Consumers Behavior Change is Needed ......................................................................................4

Suppliers See the Light..................................................................................................................4

Travel Distributors Forced to React — Culture Shift is Required ...........................................6

THE MECHANICS ...................................................................................... 8

KEY SUCCESS FACTORS ...................................................................... 10

BEHIND THE SCENES............................................................................. 12

SEVERAL KEY ONLINE PLAYERS & THEIR APPROACH.................... 14

Online Retailers ...........................................................................................................................14

Examples of Dynamic Packaging on Online Supplier Sites .....................................................14

HOW DO I GET STARTED?..................................................................... 15

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Setting the Stage

Dynamic Packaging can clearly be considered one of the key topics of the year, as it has been dominating the podium at nearly all industry events. It is not, however, a new phenomenon. It has just come front and center as a new solution due to the growing popularity, and some may say controversy, of the merchant model and the overall homogenization that has occurred with the sale of travel online.

Dynamic Packaging has been cited as the cure for the commoditization of travel, for erosion of margins and brands and everything short of the common cold. Some see it just as technology, and others as an overall merchandising solution.

Historically, leisure travel had been purchased either on a component-by-component basis or in a pre-packaged way (e.g., group tours and independent tour packages). Consumers didn’t typically play a role in choosing elements of a package, unless they knew the component price, such as in the case of adding on a post-cruise tour or upgrading to a different class of hotel on a group tour.

Several of the top online players have been pioneering the move to Dynamic Packaging on the direct consumer front. But even that is now in danger of becoming commonplace, particularly since most Dynamic Packaging engines only offer what we normally think of as “commodity products” — air, car and hotel. At a recent industry conference one panelist representing the tour division of an airline said online players are trying to “commoditize a dream”, defending somewhat the role of the traditional tour operator.

In addition, tour operators are now exploring ways to move from the static approach of building tours to more sophisticated, real-time technology by deploying solutions for agency distribution partners and consumers alike. Brick and mortar retailers are being forced into the game as well. And, the lines between each of these traditional roles are blurring, as mega-retailers like Expedia morph between online retailer and wholesaler.

Although agreement on the definition of Dynamic Packaging is not universal, our take on the meaning for this discussion is as follows:

Common Definition

Dynamic Packaging:

Is based on an individual consumer search request;

The technology includes the ability to combine multiple travel components (typically air, car and hotel) in real time and;

provides a single, fully priced package (hiding the pricing of individual components) within 5-15 seconds.

This Key Trend Series report will provide a high-level overview of Dynamic Packaging, highlighting the drivers, opportunities, challenges and key success factors for deployment of a solution.

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Industry Changes & Drivers

Consumers Behavior Change is Needed

In Europe, the concept of selling travel as a package is the norm, with air often provided by charter operators or vertically integrated tour operators. Moreover, several tour operators have been successful in building strong brand recognition, as well as clear segmentation, with each brand servicing specific parts of the market.

The US is almost the mirror opposite. Consumers have been trained to buy a là carte travel products with air provided by scheduled service providers.

In qualitative research, consumers have voiced continuing concern about the benefits of buying travel as a package versus a là carte. They are concerned that the retailers may try to take advantage of the pricing opacity and gouge the consumer. They are also concerned that the component pieces may not be of equal quality – this particularly applies to hotels and location.

For Dynamic Packaging to take off consumers need to be convinced of the real benefits – this is a great branding/marketing opportunity for Expedia. If IAC can convince consumers that they will get what they want at a lower price through packaging, this product will no doubt take off.

Suppliers See the Light

To date, online travel has been two-dimensional with a singular focus on price, causing blurring of brand value and significantly eroding supplier margins. Price was a primary driver in initial consumer adoption of the online travel channel, with air leading the way. Yet with the growth of the top online players, the online channel cannot be ignored as a key source of demand aggregation.

Through their affiliations with sites such as Priceline and Hotwire, suppliers have recognized the benefits of selling inventory opaquely. There is tremendous appeal in the ability to move distressed inventory without disclosing pricing to the market.

In contrast to the Priceline/Hotwire models, with Dynamic Packaging the consumer is not restricted in viewing any information — other than component pricing — when making a purchase decision.

Today suppliers are seeking new ways to move inventory and gain share without competing one-to-one on price. They are also looking for ways to shift market share away from online retailers back to their own sites. Dynamic packaging introduces a new world of hidden discounts and enhanced marketing-and merchandising to communicate consumer benefit of purchasing in this new way.

The primary benefit of Dynamic Packaging for suppliers is to limit, if not eliminate, pricing transparency for individual travel components. It can also be a tool to re-

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establish brand as a decision factor for consumers. With the recent web fare GDS deals and multiple most-favored-nation agreements, suppliers will undoubtedly turn more and more to Dynamic Packaging as part of their online distribution strategy.

The airline industry is facing the most challenging time in its history. A decline in corporate demand, unrelenting union problems, high jet fuel prices and the continuing threat of terrorism have resulted in record losses for most major carriers.

Eroding margins and the threat of bankruptcy are forcing airlines globally to look at ways to build demand. Efforts to increase short-term airline load factors by introducing low fares only available through the web have negatively affected market pricing through all channels.

And worse, these actions have readjusted consumers’ expectations to a near-total orientation on price as the key purchasing criteria for air tickets. Ironically Orbitz’s air price matrix, introduced by this airline-founded site, is the most dramatic example of the commoditization of airline pricing. The growing popularity of low cost carriers was also a significant factor in this downward pricing spiral.

While airlines have been reluctant to embrace the sale of non-air components, primarily due to concerns about customer service, the ability to mask distressed inventory pricing may prove too attractive to avoid long term. Airlines, in light of their GDS web fares and MFN agreements, are moving to re-establish pricing freedom and undoubtedly will embrace Dynamic Packaging as a solution. In the interim, they will work with the major online sites to move inventory opaquely.

Hoteliers are very well positioned to exploit the benefits of Dynamic Packaging. As they push forward their respective programs to regain control of market pricing, Dynamic Packaging may prove to be an excellent tool to maintain the chain’s brand positioning while at the same time help the franchisees to move distressed inventory. It also increases their ability to compete with the online players and to appeal to their frequent travelers by providing a one-stop shopping experience, particularly for business travel.

The car rental business is less likely to be a beneficiary of Dynamic Packaging as a merchandising model, simply due to the fact that the trip does not usually begin with the car company being the driver. This is in part due to the fact that Car Rental firms have not positioned their own frequent traveler programs front and center, but instead have allowed travelers to accrue points/mileage to their favorite airline program.

The cruise sector could be a significant beneficiary of Dynamic Packaging to facilitate booking of pre- and post- trip packages, as well as the inclusion of on-board options (such as spa and internet packages) and shore excursions.

Airlines

Hotels

Car rental

Cruise sector

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Travel Distributors Forced to React — Culture Shift is Required

The airline shift to zero commissions has put significant pressure on travel agents. Many have shifted the burden to the consumer by adding service fees. This becomes increasingly challenging given the lower service fees online and the free service plus frequent traveler credits available via supplier direct.

While hoteliers and car rental companies are still playing by the old book, they have traditionally been a much smaller part of the agents business and can’t fill the gap left by the erosion of the airline commission revenue stream.

Many agents today are focusing on the high-involvement, higher-margin products such as tours and cruises, and are looking to Dynamic Packaging as a possible solution to increasing margins even further.

The “holy grail” in a zero airline commission environment is to move to merchant rates and sell packages. The challenge in this approach is both technology investment and more importantly convincing suppliers to provide the type of net/merchant rates that make packages attractive.

The larger players have a distinct advantage in getting this inventory. GDS deregulation and the anticipated segment fee compression from volume discounts will further weaken the power of smaller players. This is being mitigated somewhat by new GDS programs that extend the negotiating power and even the brand of the GDS to smaller agencies by creating a GDS franchise, such as Sabre’s Jurni and Amadeus’ Agenta.

Tour operators are struggling to keep up with the rapid changes in the industry. Until recently this part of the business continued to function well on a traditional model based on static pricing models, blocked inventory, and extensive agent and res-center support. We expect to see Dynamic Packaging adopted by major tour operators in 2004/2005.

Only recently have tour operators viewed Expedia and Travelocity as potential serious competition for their businesses. Perhaps the greatest challenge for tour operators is culture. The rules of engagement that made them successful over the last 20-50 years are now changing rapidly with the advent of the super travel retailers.

The industry is changing rapidly, and with the appearance of the major online players and the blurring of roles where wholesalers are becoming retailers, the industry is moving in the direction of the standard retail model. Owning the consumer relationship is critical and having the ability to move large volumes and influence share shift is critical in negotiations with suppliers.

The corporate market will rapidly follow the leisure market in purchasing travel as a

Travel agents

Tour Operators

Corporate Market

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package, especially if there are real savings to be had. In many ways, corporate travel is as well or better positioned for Dynamic Packaging. Each traveler needs the air and hotel components and may be more price-sensitive than brand-focused. If individual business travelers aren’t influenced by savings, corporate travel managers will be. Expect to see increasing plays by Expedia, Travelocity and Orbitz in this arena.

Low-cost carriers are putting great pressure on traditional tour operators. Consumers are moving to more a là carte leisure purchase as a result. This has helped the online business overall since the low cost carriers are selling primarily online.

Expedia UK and others have seen a dramatic surge in demand. Consumers are already receptive to the package concept, and dynamic solutions ensure they can get the “best” price.

As the technology evolves and inventory becomes easier to search, Dynamic Packaging could become the norm in Europe.

Europe

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The Mechanics

Demand aggregation is key to the success of any new sales methodology. As mentioned, consumers in the US are still not completely sold on buying travel in packages. There is a lingering stigma associated with group tours and consumers have been trained to think a là carte, looking for the lowest price on a per component basis.

To embrace packages, consumers need to be convinced of real savings, convenience and the quality of each component, as well as the sellers' ability to service the entire trip. Outside of the US, this last issue is the one that will inhibit the success of Dynamic Packaging, as there is still a tremendous reliance on traditional tour operators.

Dynamic packaging is very inefficient from the perspective of system searches versus component product booking searches. Approximately 2% of air searches on major online sites result in a booking. The average for packages is far worse due to the number of searches required across a broad spectrum of product offerings and the need to tee up alternatives in a number of categories. To be successful in this field, it is critical to provide real-time data for consumer search at a low cost and within response times that are tolerable.

There are three primary staffing areas that require attention for success in Dynamic Packaging.

First is in the technology area. Ideally, the IS team can bring in new technologies to integrate with legacy systems and avoid building out the solution on a lowest common denominator approach. Consulting firms and systems integrators can be brought in to assist with these efforts, should you not have an internal team that can manage this function.

Second is staff to manage supplier negotiations to ensure competitive pricing. Traditional tour operators are already very well positioned in this area and have long-term relationships with suppliers and destinations.

Third is marketing. Many sites discount the importance of turning lookers into bookers. The major online players continue to raise the bar. Marketing needs to ensure a competitive product display.

All major online players have come out with some form of packaging technology over the last 12-18 months. These tools are also being used to improve cross-selling, as well as to support opaque pricing and expanded discounts.

Expedia has reported that up to 28% of their current sales are in the form of packages. The vast majority of Expedia’s package sales are a result of cross selling. This new functionality creates a barrier to entry of new players that do not have such capabilities

Consumer Adoption

Resource Challenges

Staff

Price of Entry

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in their online system. Companies also need to invest in ways to attract consumers to the site and keep them coming back, which can increase the price of entry to get into the Dynamic Packaging game and remain competitive

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Key Success Factors

When you consider Dynamic Packaging it is critical to deploy technology that is flexible and scalable enough to support multiple, real-time connectivity mechanisms that provide pricing and availability searches at low cost.

Discount, negotiated or merchant rates and availability of the associated inventory are the most critical element to any Dynamic Packaging solution.

Carriers are interested in retailers that can provide significant market share and special deals are limited to the largest players.

Hoteliers have traditionally worked on a deep-discount, net rate model for major distributors, now known as the merchant model.

With the rapid growth of online wholesalers such as hotels.com, the opportunity to negotiate additional wholesale agreements is limited to the specific objectives of the hotel chains.

Most retailers have negotiated deals with suppliers that allow them to release inventory if they cannot move the space.

Taking on inventory risk presents both significant risk and opportunity, and requires good market data as well as sufficient access to consumers to minimize risk.

Caching is a key component for data that resides outside of the retailers' control. Caching improves search response time and dramatically lowers the search cost, particularly if a GDS is providing the back-end inventory source.

The downside to caching is that it requires major infrastructure to create and maintain and if the data gets stale it will generate consumer frustration when the booking process fails.

Mark-up management is also of primary importance. Ideally, the system has access to sufficient market information to manage product mark-up ensuring competitiveness while also maximizing profit for the retailer.

It is critical to understand who will have responsibility as the merchant of record. To ensure pricing opacity, retailers using Dynamic Packaging typically become the merchant of record for all travel components. However, some technology providers that

Inventory

Low -cost search technology

Markup & competitive market data

Merchant of record responsibility

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also provide access to their own content often retain the responsibility as the merchant of record.

The upside of taking that responsibility is that this allows the retailer to hide its margin to the suppliers.

The downside is that the retailer takes on the merchant credit card charges as well as charge back risk. In addition, the retailer needs to develop a system for managing settlement with suppliers.

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Behind the Scenes

There are a number of technology companies that are getting into the Dynamic Packaging game. Following are some of the primary providers of the technology driving the top online sites. There are two different types of providers. First are those that provide just the technology (either on an ASP basis or with the technology integrated into the client’s IT platform) and those that operate solely as an ASP, providing both technology and merchant model content as a packaged deal. The downside to the latter approach is that in most cases, the provider accrues all the benefit of the sales with the suppliers to support future negotiations. The upside is that they are generally the merchant of record and take the credit card and service provision risk.

Trisept Solutions has perhaps the longest history in the provision of Dynamic Packaging technology to the industry. Originally a part of Mark Travel, Trisept drives a number of airline, tour operator, retailer, hotel and GDS solutions, including powering Southwest Vacations and Sabre’s tour solution.

Worldwide Travel Exchange is the private label solution offered by Expedia. WWTE is gaining market share in the Dynamic Packaging arena by distancing itself somewhat from Expedia from a branding perspective. This allows them to sell to hotel companies and tour operators alike that compete head to head with the various IAC Travel brands, while still taking advantage of the investment made by Expedia in its packaging technology and merchant model content. Carlson hotels (Radisson, Regent Int'l, Park Plaza, Country Inns & Suites, and Park Inn), the Caribbean Hotel Association and Hyatt are key hospitality clients for WWTE.

Cendant purchased the Neat Group in 2003 and has deployed the system on the CheapTickets and Lodging.com websites. The engine currently makes extensive search requests to the GDS and Pegasus for each individual consumer query. Neat does not have the same breadth of merchant agreements as the major online retailers, however Neat does offer their entire inventory to their affiliates, taking the burden of negotiating content deals off of the partner. Based on this model Neat maintains the relationship as merchant of record.

NLG recently deployed its own Dynamic Packaging solution. NLG has acted as an online tour aggregator for several years. NLG currently powers Orbitz and Yahoo’s tour solutions. The package content comes from the major tour operators such as Mark and GoGo. NLG’s solution allows consumers to search on multiple variables and presents reasonably fresh information. With the introduction of its own solution, NLG has entered the space of the tour operator and now serves up its own content dynamically in

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addition to tour operator packages. NLG uses its own hotel database and ITA for air searching.

Accovia, formerly Logibro, has many years of experience providing technology to the tour business. Accovia has partnered with ITA to provide a powerful low-fare searching tool with low cost searching. Accovia also provides access to multiple hotel databases, some of which are proprietary. When using blocked hotel inventory, the Accovia Dynamic Packaging engine provides prompt replies to searches. Current executions are limited in merchandising content and are more reflective of the agent package searching.

Accovia is making a major investment in providing alternative connectivity to suppliers and is leading the way in establishing standardization with the OTA in how retailers communicate with tour wholesalers. If successful, Accovia may emerge as a viable alternative to GDS and provide supplier with greater control over their inventory with lower distribution costs.

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Several Key Online Players & their Approach

Online Retailers

Expedia built its Dynamic Packaging internally and now markets it as WWTE, Worldwide Travel Exchange. One major advantage for Expedia is its hotel database. Based on Expedia’s and now hotels.com’s merchant agreements, Expedia has an expansive range of blocked hotel inventory to include in its packages. With this database Expedia can quickly perform hotel searches at very low cost. In addition, with its ESP air search technology, Expedia can execute air searches at very low cost. Car is usually free sell and therefore doesn’t require real-time content information. Expedia’s major differentiator today is the broad content outside of the traditional air, car and hotel arena, including entertainment and a broad range of activities.

Travelocity has built out two versions of Dynamic Packaging, originally working with outside vendors such as Fourth Dimension. More recently, Travelocity has built a new version using internal resources. Travelocity is also drawing on its own merchant hotel database and is using Sabre’s new air search engine, thus lowering the cost of search.

Orbitz uses the ITA air availability cache to support its extensive searching for packages. In addition, Orbitz has created its own hotel cache by polling the travelweb hoteliers. Orbitz uses NLG to power its tour solution.

Examples of Dynamic Packaging on Online Supplier Sites

Hyatt has deployed the WWTE engine as the power behind its Dynamic Packaging tool. The tool is accessible on its Hyatt Vacations site, noted as air/car packages on the www.hyatt.com home page.

The product allows you to select certain Hyatt destinations (up to two in one trip selection). It defaults to the Hyatt properties located there, and then it allows you to add air and car reservations, all for one inclusive price. See www.hyattvacations.com.

United Escapes uses Galileo’s Neat Group technology to power its Dynamic Packaging function.

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Conversely, United Vacations uses Trisept’s engine to power its vacation packaging function.

How Do I Get Started?

If you are in the early stages of evaluating a solution, we recommend that you first put together a cross-functional team within your organization and involve them in the requirements definition and vendor selection phases of your efforts. This will ensure that you have considered not only the technical issues, but the operational and marketing issues as well.

The Solutionz Group has a full set of services that can assist you in determining whether Dynamic Packaging is right for you, or whether you simply need to first tackle the fundamental issues of supply (the right content and inventory at the right price) and demand (how to attract and retain customers) or whether you are ready to implement a Dynamic Packaging solution.

For more information, see www.solutionz.com or contact:

Chicke Fitzgerald, CEO The Solutionz Group +1.813.925.0789 [email protected]

Technology

01 Dynamic Packaging