1. 1 e-Commerce Challenges to Traditional Revenue Management Brenda Barnes Vice President, Revenue Management Delta Air Lines

2. 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. 3 Expected Growth in e-Commerce 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. 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. 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. 6 Revenue Fragmentation RM strategic and operational complexity increases dramatically as revenue fragments across multiple channels CRSRES T2xyz.comabc.comtpb.cometc Delta-airPriceline TRADITIONAL CHANNELS 92% of Revenue - 2000 70% of Revenue - 2003 DELTA CUSTOMERS EMERGING CHANNELS 8% of Revenue - 2000 30% of Revenue - 2003

7. 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. 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-airPricelineSmall biz T2 Extremely price sensitive, non brand loyal Price sensitive, last minute traveler Price sensitive, brand loyal Price sensitive business traveler Traditional business traveler Pricing Segmentation

9. 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. 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. 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 FlexibleCURRENT FUTUR E HOW Rework Data Foundation Re-engineer Business Processes Develop New Models & Systems Integrate traditional and new data sources Continue to Optimize & Evaluate Data in the e-Commerce World

12. 12 Past Future CustomerCompetition 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 customer segments? 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. 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. 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. 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. 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