Orf 401 Discussion April 2, 2003

CLT PIT PHL LGA BOS DCA US Airways Is The Largest Carrier On The East Coast Source: Databank 1A/Superset Year Ended 2Q02 Share Of Intra-East Coast Revenue

We Are #1 or #2 In 72% of The 148 Airports Served By US In This Region US Airways Passenger Share To All Destinations #1 in 71 Cities (48%) #2 in 36 Cities (24%) #1 or #2 in 72% of Cities Served Note: Airports Served by US to Domestic US, Canada, and SJU/STT/STX Source: Databank 1A/Superset Year Ended 2Q’02 TTN …With Over 4.5M Active Frequent Fliers

DL CO US OA AA The Company Serves 10 European Destinations And Is The 2nd Largest Carrier To The Caribbean Source: OAG, Spring 2002 PIT CLT PHL Madrid Rome Paris Frankfurt Munich Amsterdam Manchester London Caribbean Capacity Share Transatlantic Route Network Dublin Shannon

The Airline Planning and Revenue Model

The Airline Planning Process Capital Investment Strategy

The Airline Planning Process Capital Investment Strategy Build Network

The Airline Planning Process Capital Investment Strategy Build Network Find and Exploit Demand

The Airline Planning Process Capital Investment Strategy Build Network Find and Exploit Demand Filter Demand

The Airline Planning Process Capital Investment Strategy Build Network Find and Exploit Demand Filter Demand Refine Demand Forecast Short-Term

The Airline Planning Process Capital Investment Strategy Build Network Find and Exploit Demand Filter Demand Refine Demand Forecast Long-Term Short-Term

The Airline Planning Process Capital Investment Strategy Build Network Find and Exploit Demand Filter Demand Refine Demand Forecast Long-Term Short-Term Two Goals: Optimize RASM, Optimize ROA

Airline Pricing and Distribution

Airline Pricing Actually Makes Sense! (Well, Mostly….Sorta)

A Fundamental Law Of The Universe TIME = $

How Airline Pricing Uses That Law Avoid this square! Lots of Demand, No Profit! Some People will Pay a Lot For Flexibility (Time = $ Crowd) Some People will Suffer Inconvenience to Save a Buck (Time  $ Crowd) No Market For This - Folks Are Too Rational! LOWHIGH Price Level LOOSE RESTRICTIVE Pricing Rules Airline Pricing Rules Segment the Market Based on “Elasticity of Demand”

Why Is This Important?  High Price Traffic = 20% of Bodies 60% of Revenue  Low Price Traffic = 80% of Bodies 40% of Revenue

The Airline Quandary  There Aren’t Enough High Fare Payers to Fill Airplanes  If You Sell Every Seat at Low Fares, You’ll Lose Your ASSets  A Mix of High and Low Fare Traffic is Required to Succeed

LOWHIGH Price Level LOOSE RESTRICTIVE Pricing Rules

LOWHIGH Price Level LOOSE RESTRICTIVE Pricing Rules Price Levels Stimulate Demand (low) or Extract an Economic Premium (high)

LOWHIGH Price Level LOOSE RESTRICTIVE Pricing Rules Price Levels Stimulate Demand (low) or Extract an Economic Premium (high) Pricing Rules Designed to Segregate the Market Based on “Time Elasticity of Demand” Example: The Infamous Saturday Night Stay

The Prices are Then Offered Through Various Distribution Outlets

Traditional Airline Distribution Flow Travel Agencies Airlines GDS (Sabre, Galileo, Worldspan) Customers $$

Evolving Airline Distribution Flow Travel Agencies Airlines GDS (Sabre, Galileo, Worldspan) Customers Websites $$

Traditional Airline Distribution Cost Components

Airline Distribution is Shifting Due to E-Commerce

22%

Costs per Channel Vary Greatly usairways.com US Airways Traditional Direct (ATO, CTO, Reservations) Travel Agencies Internet Agencies $18.75 $ $ $ 26 * Note: Projected 2003 marginal cost of a $300 ticket * Estimated traditional direct costs for 2003

E-Commerce Benefits For Airlines Today  Distribution Cost Savings  Targeted Distribution Vehicles  “Stealth” Pricing Options  New Market Segmentations (Opaque, for example)  Servicing Improvements and Cost Savings

E-Commerce Challenges for Airlines Today  Price Transparency Causes “Reference Price” Problem -The Web is Too Big… -The Web is Too Small…  “Commoditization” of the Industry

Major E-Commerce Airline Opportunites  “Direct to Corporation” Sales  Major Servicing Vehicle, Independent of Purchase Channel  Personalized or “One to One” Marketing  Development of Value-Added Chargeable Services  Single-view of the Customer