Simon Riha, M.Sc., MBAHead of Business Development, Hahn Air Lines, GermanyGraduate, Emirates Aviation University, UAE

Airfares Global DistributionStrategy for HigherIncremental Revenuesfrom Non -Core and Distant Markets

©2013 Emirates Group. All Rights Reserved.

Agenda

1. Introduction: Airline Profitability2. Incremental Revenues: Non-Core and Distant Markets3. Explanation: Airline Distribution and NCDM4. Research: Airfare Distribution in NCDM5. Literature Review (Airfares)6. Research: Methodology and Analysis7. Results of the Research8. Conclusions and Recommendations

1. A Problem: Airlines’ Profitability

Key Issue: Airlines’ Profitability

Tony Tyler (IATA) in his state of the industry for the AGM 2014:

“… But the brutal economic reality is that on revenues of USD

746 billion we will earn an average net margin

of just 2.4% … Every day is still a struggle

to keep revenues ahead of costs. …”

Key Issue: Airline Profitability

� Airline revenues totaled $4.6 trillion in last decade

� Among the world’s fastest growing industries

� However, industry’s best annual profit margin of the century was 2.9%

� Overall result: $16 billion net loss

(Source: IATA, 2012)

2. Incremental Revenues fromNon-Core and Distant Markets

Idea: Incremental Revenues from Non -Core and Distant Markets

Definition of the Non-Core and Distant Markets (NCDM)

NCDM is a country, where a particular airline:

1) Does not operate any flight2) Does not offer any marketing code share flights3) Does not have any sales offices nor other representatives4) Did not make its tickets available to local travel agencies

through the local IATA BSP ticketing system

Idea: Incremental Revenues from Non -Core and Distant Markets

What if there were a simple and efficient method how to generate new incremental revenues at negligible cost?

What if, for example, Air Malta could be selling additional one or two million Euros p.a. outside of Europe, in the countries,

where Air Malta does not fly, does not have any sales offices nor conduct any particular

sales activities?

… This would have reduced its 2012 annual loss by 4-8% from € 25 M down to € 23-24 M.

3. Explanation: Airline Distribution forNon-Core and Distant Markets

Explanation:How to Best Reach the NCDM?

Explanation:Global Distribution Systems (GDS)

� Global Distribution Systems (GDS) – the heart of indirect airline distribution since 1960s

� Amadeus, Sabre and Travelport� 83% of travel agents in the world, 75% of all

airlines’ bookings

(Source: PhoCusWright, 2009)

Explanation:GDS Booking Work Flow

Explanation:Air Tariff Publishing Company

Explanation:Ticket Issuance to Finish Sale

� As per the NCDM definition:Airlines do not make their own tickets available to local travel agencies in NCDM(costs, distance, maintenance, money collection, repatriation, exchange rates…)

� Travel agencies in NCDM can possibly sell the airline on other airlines’ tickets to conclude the GDS sales transaction� Interline e-ticketing agreements� Alliance partner airlines

4. Research: Airfares and NCDM

Research: Airfare DistributionThere may be a problem…

� Though airlines may think that they distribute worldwide and can reach basically all agents thanks to GDS, they may actually not , for

� Airlines tend to neglect the NCDM countries (they are non-core, distant)

� In particular, airlines tend to omit setting their airfaresproperly for issuance on other airlines’ tickets in NCDM

5. Literature Review (Airfares)

Literature Review:Brief Exempt

Conclusions from Holloway (2008) – Straight and Level: Practical Airline Economics, related to the airfare distribution:

� Fares must be set for all markets (= including NCDM)� Fares must be competitive and minimally restricted to successfully

compete in today’s market place

In contrast with the past, when the airline environment used to be:

� More regulated and restrictive (Governments)� Much less global

6. Research:Methodology and Analysis

Research: Methodology and Analysis

What was subject to research?Whether airlines really restrict their airfares and thus cut their sales in NCDM.

� Data for 270 airlines collected to analyze underperformance in NCDM� Finding: Airlines normally sell 0.65% tickets in NCDM measured by

arithmetic mean and 0.26% measured by median� Selling less than 0.1% tickets is sure underperformance (25th

percentile)� 10 NCDM underperforming ‘finalists’ selected (judgmental sample,

airline distribution experts)� The routes best representing their networks were analyzed for

compatibility of fare structures for sales in NCDM

Research: Methodology and AnalysisExample – Air Austral

Research: Methodology and AnalysisExample – Air Austral

If this condition is coded in the fare rule, fare can’t be sold in NCDM

Research: Methodology and AnalysisExample – Air Austral

Research: Methodology and AnalysisExample – Air Austral

7. Research Results

Research Results

Riha (2014): Commercial Impacts of Accessibility of Competitive Fares on Airlines’ Global GDS Distribution in Non-Core and Distant Markets

� 60% of analyzed fare structures were adverse for sales in NCDM� It can be deemed as a pattern, not as a coincidence� Thus, restrictive fare structures certainly have a negative impact on

sales in NCDM� The rest 40% may be caused by other various “soft” factors, such as

brand awareness, safety reputation, etc. (It’s not always just the price what matters.)

Research Results:A Fresh ExampleA traditional well established full service carrierApprox. 25 narrow body, 5 wide body aircrafts, 30 destinations

Fares opened for NCDM as a result of consulting

8. Conclusions and Recommendations

Conclusions and Recommendations

Bearing in mind the airline’s overall strategy and competitive environment

� Airlines can create new incremental revenue streams from NCDM by simply adjusting fare structures

� Costs are negligible, because the airlines already have all the tools (GDS, ATPCO, interline e-ticketing agreements)

Conclusions and Recommendations

Airlines should

� Identify their NCDM countries and analyze them� Find out which partner airlines’ e-tickets are suitable there� Adjust the fare structures to optimize their fares (in

general, or per market) for NCDM

in order to generate more new revenues.

Questions?

Thank you for your attention.