1. 1 Changing Channels of Product Distribution - The Implications for Airlines and Regulators Prepared for: Aviation in Transition: Challenges & Opportunities of Liberalization ICAO Headquarters, Montreal, 23 March 2003

2. 2 The Airline Environment is Changing Low Cost Airlines –‘Simple’ product requiring innovative distribution –Facilitated by ‘Leapfrogging’ IT –Passengers adoption of internet and e-tix has surpassed expectations Full Service Airlines –Complex product offering –Desire to target multiple market segments –Focus on FFP, CRM –But increasingly determined to fight LCC GDS –Largely ‘disinvested’ from airlines –However, airlines retain a commercial relationship as marketing partners –GDS have recognised the power of internet and are buying into on-line travel agencies and servicing airline portals

3. 3 Sales Channel Sophistication Airlines are determined to reduce costs, monitor channel performance and match channels to market segments Full service complexity: online booking, intranet, call centres, syndicated portals Low cost simplicity: 90%+ online booking Full service airlines responding with portals…but do they match the costs of online booking?

4. 4 Agent Productivity and Corporate Sales Driven by New Developments in IT Airline Agent IT Products - –agent differentiation –incentive schemes –decision support system –use of detailed data Airline Corporate Accounts IT –booking tools –monitor budgets and compliance –market knowledge systems –ultimately airlines seek integrated direct connectivity with corporates

5. 5 ‘Pull Factors’ Driving End Traveler Appeal Airlines are using IT to optimise commercial activities including networks, FFP, CRM and Pricing Pricing sophistication driven by prevalence of channels aimed at price sensitive segments: –Airlines enter into favored deals with preferred/owned channels –Opaque and NYOP used to sell ‘excess’ capacity –Potential downside of internet booking may be a general decline in yield due to ‘perfect competition’ Pricing is likely to attract the increasing attention of the regulators

6. 6 The Regulatory Challenge The main regulatory focus is on GDS and the internet Distribution regulation previously focused on GDS. –Disinvestment of GDS potentially reduces market power –Opportunity to increase airlines’ negotiating power –GDS still have substantial power and are buying into internet Need for internet distribution rules –Desire not to stifle internet sales channel ‘in its infancy’ –Initial issues for regulatory consideration focusing on: –Consumer protection –Airline ownership –Protecting on-line agencies –Availability of fares –Degree of airline control over sales

7. 7 Other Less Crucial Areas That May Require Regulatory Review MIDT: Contention that access to data and systems benefits major airlines Corporate Connections: Extent of control required over in-house agencies Pricing: –Issue of ‘opaque’ vs. ‘NYOP’ –‘GDS-type’ control over availability of fares

8. 8 Overall Conclusions IT created an exciting array of distribution tools Airlines’ behaviour is increasingly complex Possible reduction in need for ‘traditional’ regulation However great unknown is potential market power of internet booking tools Equally, increasing passenger and airline maturity may obviate need for regulation and allow ‘the market to decide’

9. 9 NEW YORK Tel:+1.212.682.8455 Fax:+1.212.986.1825 E-mail:newyork@sh-e.com BOSTON Tel:+1.617.225.2800 Fax:+1.617.225.0328 E-mail:boston@sh-e.com LONDON Tel:+44.20.7242.9333 Fax:+44.20.7242.9334 E-mail:london@sh-e.com WASHINGTON, DC Tel:+1.202.342.1691 Fax:+1.202.337.6741 E-mail:washington@sh-e.com www.sh-e.com