TRENDS AND OUTLOOK

Latin American Carrier

Opportunities
Presented
Presented by:
by:
Emre
Emre Serpen
Serpen
Senior
Senior Vice
Vice President,
President, SH&E
SH&E

Airline Business Distribution Conference April 2007

 Presentation Agenda

TRENDS
TRENDS AND
AND OUTLOOK
OUTLOOK
Latin
Latin American
American Carrier
Carrier Opportunities
Opportunities

Industry Developments

Distribution in Latin America

Opportunities

1
 US carriers have been successful in reducing their distribution
costs over the last six years

US
US Airline
Airline Distribution
Distribution Costs
Costs as
as aa
Share
Share ofof Operating
Operating Revenue
Revenue
1999
1999 vs.
vs. YE2Q06
YE2Q06 Continental increased internet sales
16%
from 5% of total to nearly 50% of
total between 2000 and 2005
13.3% 1999 YE2Q06
14%
– Hawaiian went from around
12% 11.2% 11.0% 3% to 50% as well
10% – Nearly 60% of Southwest’s sales
were on-line (by revenue) in 2005
8% 7.1% 7.4% 7.1%

6% Airlines have introduced charges

(generally $3.50) for bookings
4%
through GDSs to encourage use
2% of other channels
0%
Legacy LCC Hawaiian
e-ticketing savings estimated at
$9 per e-ticket (IATA)

Source: Form 41 Database, company reports

2 Note: “Legacy Carriers” are AA, CO, DL, NW, US; LCCs are HP, TZ, FL, B6, WN. Domestic Sectors Only.
 Among the US network carriers, the greatest cost reduction has
been in distribution

Percent
Percent Change
Change 2001
2001 to
to 2004
2004
Cost
Cost per
per ASK
ASK (Cents)
(Cents)

Between 2001 and 2004 US

carriers reduced their costs
by 48% in CASK terms

Between 2001 and 2004

European carriers reduced
their costs by 0.77 Euro
cents

Source: IATA Economic Briefing Report no. 5

3
 There is pressure on CRS to reduce costs

2006
2006 IATA
IATA Value
Value Chain
Chain Profitability
Profitability Study
Study

Avg. ROIC, 1996-2004 Upturn ROIC Divided

(Percent) by Downturn ROIC

4 Source: Value Chain Profitability (2006), IATA

 Carriers have been taking action to limit their exposure to
GDS fees…

AA’s $3.50 charge TAM ‘ eportal’

– Intent was to shift bookings to direct – Emergence of Products that put GDS
channels, and reduce the costs of and non-GDS content to travel agencies
indirect channels side-by-side
– AA reduced their distribution costs by
10.2% in commissions, booking fees Direct connect
and credit card expenses – Expedia, Travelocity, Orbitz) – on line
agencies receive incentive payments
Northwest from GDS companies
– last year Northwest struck a deal with
Sabre (further to 2004 attempt to
charge $7.5 per ticket charge on agent
bookings per GDS)
– Own website

Air Canada ‘Unbundled Fare

Options’
– e.g. lounge access for upper class
customers (C$25), seat selection
(C$15etc), flight options availability by
fare class is limited by GDS

5
 …which has led to GDS responses
GDS driven responses,
– e.g Sabre’s Opt –in, Worldspan’s
‘Efficient Access System’ , Amadeus’
pay-for-content program
Cost cutting
– To enable the change, Sabre has
reduced the airlines’ costs by $400
million since 2000
Sabre and Amadeus agreement
– If a current participating carriers drops
out of a GDS, that GDS can request the
content from the other systems
6
GDS / Alliance cooperation
– Star Alliance / Amadeus deal common IT
platform reduced reservations , distribution
nd airport customer services costs,
Travel Agency driven responses
– Expedia charges a $2 GDS fee per
transaction
– Amex Travelbahn, source all relevant non-
GDS content
GNE’s still developing
– Net ticket pricing model instead of
traditional segment fee transaction, one
time transaction for all PNR changes until
customer flies
 Further to reduction in distribution costs use of direct channels
enabling carriers to have direct relationship

Case
Case Example
Example ::

By moving close to 50% of sales to its own website, Hawaiian has

developed an electronic database of its frequent and infrequent
customers.
– The airline sends frequent e-mails to its customers, including colorful
mailings during cold and wintry weather on the US Mainland.

– Using the database, Hawaiian has launched surgical sales that include
e-coupons, and special fares on specific, weak flights.

– The CRM initiative has supported repeat customer purchase behavior,

loyalty and positive word-of-mouth advertising.

Leverage potential of emarketing and increase revenues

7
 In Europe, travel agents still represent a significant share for
AEA airlines

Travel Agents are important revenue generators compared to

direct channels, however additional channel costs (GDS,
commissions) usually offset this

AEA has few LCC members, who have a much higher

proportion of direct sales

95% of sales on airline websites

were economy tickets

85% of sales on airline websites

Other Internet
were point-to-point 1% 8%
Ticket Offices
7%
Call Centers
4%
Travel Agents
(on and off line)
80%

8 Source: European Commission Consultation Paper, Association of European Airlines

 Successful examples of legacy airlines significantly changing
their distribution strategy

Case Example:

Pricing:
– Pricing action, remove restrictions to
stimulate traffic (e.g. business fare
reduced 60%)
Distribution:
– Renewed distribution strategy:
commission reduced, lowest fares
available on website only,
e-ticketing (ticketless at 80% of direct
sales), website re-launched (45% of
sales online)
Marketing:
– Renewed focus on brand
– New advertising strategy: marketing
focus on website, development of
distinctive platform & style for future
communications
– Communication of differentiation from
LCC (tactical advertising with service
message): punctuality, customer service,
product differentiation (seat allocation,
city airports, network, FFP, lounges etc.)

Other examples BMI and works well for airlines with focus
leisure markets and relatively simpler schedules

9
 In Latin America, travel agency sales typically account for five
times as much revenue and sales as the next largest channel

Travel agencies still account for

Sales
Sales by
by Channel
Channel many sales in all regions
TAM
TAM
Other
– 90% in Asia/Pacific
Ticket Office
1%
9% Call Center – 70% in Latin America overall
3% (approximately), 80% in Brazil
Website
4%
– 46% in the US in 2002 (!)

Agencies in the US are booking

on-line more: 78% of agencies
booked some tickets online in
Indirect
2005, vs. 64% in 2001
83%

Source:
Source: Airline
Airline Business,
Business, March 2007, GAO,
March 2007, GAO, 2006
2006 Travel
Travel Weekly
Weekly Travel
Travel Industry
Industry Survey,
Survey, LAN
LAN Chile
Chile Annual
Annual Report,
Report,
10 2005, Travel World News, January 2007, TAM Annual Report 2006, page
2005, Travel World News, January 2007, TAM Annual Report 2006, page 23 23
 Latin American distribution costs are approximately equivalent
to US distribution costs in 2000

Distribution
Distribution Costs
Costs as
as aa Share
Share of
of Operating
Operating Revenue
Revenue
Selected
Selected Major
Major US
US Carriers,
Carriers, 1995-2006
1995-2006

18%

16%

14%
Latin
America:
12%
10-14%

10%

8%

6%

4%

2%

0%

'95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06

11 Source:
Source: US
US DOT
DOT Form
Form 41
41 Database.
Database. Includes
Includes AA,
AA, CO,
CO, DL,
DL, NW,
NW, US
US
 The global trend in distribution is towards lower-cost on-line
and direct channels

The goal is to switch sales from expensive

distribution channels…
– Travel agents
– Ticket offices Decreasing distribution costs

… to cheaper channels Leisure

Business
– Call centres,
Decreasing distribution costs
On-Line Off-Line
– Web sites and
Call Centres
Airlines’ own websites
– On-line agencies.
ATO/CTO
Airlines’ websites for corporate
Direct bookings
Corporate Implants
New, cheaper alternative
Orbitz “Supplier Link”
GSA’s
forms of GDS systems
Internet travel agents such as Retail Travel Agents
(GNEs) are also Expedia, Travelocity
becoming available Indirect Wholesale Travel Agents
Portals linked via GDS such as
Opodo and Orbitz (other) Corporate Travel Agents

12
 GDS remains an important force, even in the U.S.

The share of tickets in the US bypassing GDS increased from 29% to 37%
between 1999 and 2002

Average payments by GDS companies to US travel agents increased from $75

Million to $234 million
– GDS is consolidating their power by creating travel agency communities in different areas

The impact of internet and direct

connect has been primarily on
small to medium size travel
agencies
– Fewer than 1% of the agencies
book almost 60% of total travel
agency sales

Smaller agencies have

consolidated as the
GDS environment has changed

Bookings through GDS

Bookings bypassing GDS

13 Source: Lufthansa Systems market research – 2004 (figures are approximate)

 60% of Mexican airline sales are still through travel agencies
and GDS

The majority of sales are through

agencies, with another third
Mexican Airline Ticket Sales by Channel
through airline call centers
2005
– The airlines have effectively shifted
Ticket customers from 80% agency just five
Offices Internet years ago, but the movement has been
7% 3% toward call center rather than internet
Call Center
30%
Although the volume of airline
tickets purchased through internet
Agency has increased, the share remains
60% small

GDS tends to cover many high-yield

business passengers, so airlines
must be careful when changing
their distribution strategies

14 Source: CINTRA website, Financial Statements Report 2005.

 Airlines have the ability to save money, at least in the
medium-term, by negotiating with the GDS providers

GDS segment fees vary by airline, point of sale, and GDS

Airlines have been able to save around 15% by agreeing to full-content deals

Airlines are in a stronger

position to negotiate when: Approximate
Approximate GDS
GDS Fees
Fees byby Ticket
Ticket Volume
Volume
– They command a large share 000s
000s of
of tickets
tickets
of the sales in the countries 3,500

concerned. 3,000

– They have realistic, cheaper 2,500

options for distribution which
2,000
they could choose to expand,
e.g. portals or own-websites 1,500

– They can convince the GDS 1,000

companies that agents can be
500
persuaded to use these
alternative channels. 0

$6 $8 $10 $12 $16 $18

15
 There is opportunity for Latin American carriers to leverage their
influence and reduce their distribution costs

TAM, GOL, and ALMA already book many of their tickets

through web portals

TAM: 1,800 agencies in Brazil signed up for ‘eTAM’ portal by 2005 (Oracle)
– 2006: 85.6% of indirect sales went through the eTAM travel agency portal, compared to
14.4% through GDS (TAM Annual Report)

GOL: 86% of all sales are conducted over the Internet

– Just 3% of sales use GDS systems
– We estimate that at least 60% of total sales using the GOL
Openskies/Navitaire system are through travel agents
– GOL has signed a GDS agreement with Worldspan as of April 2, 2007

ALMA: 80% of tickets booked on-line, including travel agency sales

16 Source:
Source: Oracle,
Oracle, 2006
2006 GOL
GOL Day
Day presentation,
presentation, GOL
GOL press
press release,
release, TAM
TAM Annual
Annual Report
Report 2006
2006
 Similar GDS responses in Latin America

Full Content Deals

– Proved that airlines own the GDS content Market
Market Share
Share by
by GDS
GDS
– The GDSs could have saved some money Latin America
Latin America
by not providing full content, but travel
agencies insisted on it Galileo Worldspan
6% 6%

GDS providers have developed

“Opt-in” programs to handle carrier
service fees Amadeus
38%
– Agencies pay the GDS companies and Sabre
charge passengers a fee for their service, 50%
or accept a lower incentive (e.g., Sabre
EAS and Galileo’s “Content Continuity”
programs)
– Opt-in has lead to consolidation in the
travel industry

GDS still commands high-yield business traffic, so focus on cost per

segment per channel must be complemented with revenue per segment per
channel
17 Source:
Source: GAO,
GAO, m-travel,
m-travel, Star
Star Alliance
Alliance
 GDS renegotiations bring the potential for loss as well as gain,
and must be approached cautiously

Determination of risks and potential impact to the bottom line

must be pre-determined
GDSs face this pressure virtually from all airlines and have developed
sophisticated negotiation strategies. Hence all airlines must be very
clear in net value negotiation elements to drive an overall net gain

Though it is essential to have a plan to change the distribution mix in

order to create negotiating leverage with GDSs, this may create GDS
counteraction if the losses are too large
– Strategies to shift traffic away from retail agencies towards call center and website
may encourage the engagement of retail agencies with GDS as has happened in
other countries
– To compensate for their losses in domestic markets where an airline commands
influence and control, GDSs may overcharge in other markets, such as US or
worldwide, to minimise their loss

Airlines may be able to handle GDS pressure more effectively

in groups
– Although they have to be able to influence the agents in their markets,
be careful to agree on their goals in advance, avoid anti-trust action,
and establish a credible alternative to the GDS systems
18
 Careful preparation is needed for GDS negotiation

Analysis of net gains and losses during the negotiation process, and
pre-determination of realistic courses of action to alter distribution mix

Establish current distribution mix, including

– Use of channels
– Volumes (segments per channel)
– Unit cost and revenue by channel

Benchmark current distribution mix and costs with peers

Analyze spend to establish effective negotiation strategy with GDS

at the market/country level

Establish realistic changes to distribution mix to reduce distribution

costs without compromising yield and revenue quality

Quantify risks associated with potential GDS counteraction

Tools to support negotiations process

19
 Globally, an airline’s own website is the most common channel
for online sales

Usage of alliance websites is Proportion of Airlines Using

Each Online Channel
very low
– Opportunity for interline sales
– Opportunity to access much
larger market
– Perhaps ignored due to Opodo, 51%
Orbitz, etc., which are seen as
fulfilling the same purpose
42%
As we saw earlier, the use
of airline websites does not 23%
translate to their production
of a high proportion of revenue 16%

Source: SITA 2006 Airline IT Survey

20
 Latin America and Mexico have been relatively slow to adopt
broadband services and to embrace e-business

Economist Intelligence Unit

2005 e-Readiness Rankings

e-readiness e-readiness Mexico Ranks 36th in

2005 score (of 10) 2005 score (of 10) the world in terms of
Rank Country 2005 Rank Country 2005
1 Denmark 8.7 21 Japan 7.4 e-business readiness
2 US 8.7 22 Taiwan 7.1
3 Sweden 8.6 23 Spain 7.1 – Highest ranking country in
4 Switzerland 8.6 24 Italy 7.0 South and Central America
5 UK 8.5 25 Portugal 6.9
6 Hong Kong 8.3 26 Estonia 6.3
6 Finland 8.3 27 Slovenia 6.2 The Mexican Government
8 Netherlands 8.3 28 Greece 6.2
9 Norway 8.3 29 Czech Republic 6.1 has made efforts to
10 Australia 8.2 30 Hungary 6.1 develop Mexico’s IT
11 Singapore 8.2 31 Chile 6.0
12 Canada 8.0 32 Poland 5.5 infrastructure
12 Germany 8.0 32 South Africa 5.5
14 Austria 8.0 34 Slovakia 5.5 – e-Mexico project opened
15 Ireland 8.0 35 Malaysia 5.4 3,200 internet kiosks
16 New Zealand 7.8 36 Mexico 5.2 throughout the country
17 Belgium 7.7 37 Latvia 5.1
18 S. Korea 7.7 38 Brazil 5.1
19 France 7.6 39 Argentina 5.1
20 Israel 7.5 40 Lithuania 5.0

21 Source:
Source: Economist
Economist Intelligence
Intelligence Unit,
Unit, 2005
2005
 One result of the lower rate internet penetration is fewer on-line
sales in Latin America relative to US LCCs and majors

Steps
Steps to
to On-Line
On-Line Success
Success
Share of Tickets Booked on the Internet
Own-Website Direct Bookings Provide attractive fares and customer choice
– Simple fare structure
Ryanair 98%

– Special fares to promote the channel

JetBlue 78% (if this can be done under GDS agreements)

Southwest 65%
Develop a reliable website – customers can’t
buy tickets if they can’t use the site, and they
58%
won’t buy tickets if it isn’t secure
AirTran
– Secure connections
GOL (2005) 40% – Plenty of bandwidth
– Responsive customer support
Delta 24%

Consider a variety of payment options – credit

Northwest 23%
cards are great, but not everyone has one
– Many of the remaining ticket office sales in the
TAM 4%
U.S. are cash and check purchases of international
tickets
0% 20% 40% 60% 80% 100% 120%
– GOL’s Voe Facil program is another example

Source: US carrier press releases, CNN, GOL, TAM Annual Report 2006 GOL figure is approximate –
22 80% of GOL tickets are sold on-line, but the direct proportion is uncertain
 Though the channel as a whole has been slow to take off,
air travel represents 29% of internet purchases in Mexico

Internet
Internet Sales
Sales in
in Mexico
Mexico
Despegar.com
Despegar.com
Currently there are 17.1 million internet
users in Mexico 35,000 daily
– 74% of the users are above 19 years of age website visits to
despegar.com

9% of the users have purchased 1,800 actually call

something through internet (5% of the visits)
(around 1.5 million buyers)
540 actually make
From all the purchases through a reservation
(1.5% of the visits)
internet, travel services represent
39% and airlines tickets represent 29%
– Despegar.com represents less than 5% of
the total purchases
through internet
Despegar
Despegar accounts
accounts forfor only
only around
around
Airline ticket sales have grown faster 1%
1% of
of travel
travel sales
sales in
in Mexico
Mexico –– there
there
than any other category is
is still
still aa lot
lot of
of room
room for
for growth
growth
of internet sales in Mexico

Source: Asociación Mexicana de Internet (AMPCI), 2005, AMIPCI Study Executive Summary
PriceWaterhouse Coopers for AMPCI, 2005, AMIPCI E-Commerce Study Executive Summary based on 26 corporations selling through internet
23 Despegar.com
 The internet distribution opportunity is significant for
Latin American carriers

Internet User Penetration Rate as a

Percent of Total Population
Airlines yet to leverage the full benefits
of internet distribution 80%
69.1%
70%

60%
Lower cost per booking
50%
Like the call center, airlines have a
40%
captive audience – once on the site,
the customer is more likely to book 30%

with airline 20% 15.4%

10.2%
10%
Ability to use tactical price/promotions
via the web 0%
Columbia South America North America
Opportunity to capture more complete
customer information

Opportunity to integrate with rest of

customer process (change of booking,
queries, check-in, etc)

Tremendous growth potential

24 Source: Internet World Statistics

 Some carriers who tried to exclusively rely on this channel
suffered consequences…

Case
Case Example:
Example: Independence Air was a U.S. regional
operator that flew 50-seat RJs under its
own brand in 2004 and 2005

As part of Independence’s low-cost

business plan, management decided not to
Independence
Independence Air
Air Historic
Historic Load
Load Factors
Factors
vs.
place content with GDSs
vs. U.S.
U.S. Industry
Industry
– “We will have no GDS participation at all and a
85%
high percentage of reservations will be made on-
80%
80% 78% 79% 79% line.” (Founder Kerry Skeen in Airline Business,
74% 75% June 2004)
75%
73% 75% 75%
70% Due to its low yields and load factors, along
65%
with narrowbody competition from major
carriers at Washington-Dulles,
60% 61%
Independence had to exit the market
55%

50% 53% 53% Independence The airline lost $392 million in a year and a
Industry half
45%

40% Another airline that had given up on GDS –

2Q '04 3Q '04 4Q '04 1Q '05 2Q '05 3Q '05
JetBlue – has recently (August/September
2006) signed full-content deals with Sabre
Joins and Galileo
Galileo
25
 …Hence in US, few carriers rely exclusively on the Internet
for sales

Percentage
Percentage of
of Flights
Flights Purchased
Purchased on
on the
the Airline’s
Airline’s Website
Website
U.S. carriers average just
90%
30% of ticket booked on
78%
80% their websites
70% 65%
58%
60% of all airline bookings
60%
are still conducted through
50% the GDS
40% 35%
Total web penetration is
30%
28%
24% 23% greater when including
20% sales by third-party
websites and online travel
10%
agencies
0%
Delta Northwest America Alaska AirTran Southwest* JetBlue
West
This model can be taken
even farther -- 98% of
Legacy LCC
Ryanair tickets were sold
on-line in 2006
** Percent
Percent of
of revenue
revenue generated
generated by
by www.swa.com
www.swa.com in
in CY
CY 2005.
2005.
26 Source:
Source: The
The airlines,
airlines, USA
USA Today
Today
 Calculation should include increased advertising spending

Advertising
Advertising
Advertising
Advertising Spend
Spend per
per City
City Pair
Pair Served
Served Spend
Spend as
as aa %
% of
of
Revenue
Revenue

Southwest $2,883 2.3%

EasyJet $1,411 2.4%

Jet Blue $1,015 2.2%

Mexicana/Aeromexico 1.1%
$535

U.S. Major Average 0.9%

$531

2.0%
Volaris* $400

1.5%
Ryanair $291

0 500 1,000 1,500 2,000 2,500 3,000

* Volaris Advertising Expense is based on the Investment, not the revenue, because they just began in March 2006
Source: U.S. Airlines:2003, Unisys Transportation by R2A Management Consulting, Ryanair and easyJet from 2005 Airlines Website, CINTRA
27 from 2004 shareholder website, OAG Schedules
 Call centers are typically less than 10% of distribution volume
and provide an opportunity to increase use of direct channels

Call centers, which are considered a Share

Share of
of Total
Total Sales
Sales
relatively high-cost channel in TAM
TAM 2006 (Blue), US 2002 (Green)
2006 (Blue), US 2002 (Green)
North America and Europe, provide 30%

an opportunity to reduce costs in

24%
Latin America due to lower labor costs 25%

– The total cost of a segment booked 20%

through the channel is around half of

the cost for agency segments (including 15%

commissions)
10%
– Average cost of a call center employee
in the U.S. was estimated at $58,000 5%
3%
per year in 2004
0%
– Northwest is opening a call center in TAM 2006 US 2002
Iowa, where it is paying $9 per hour
for labor

Continental’s call center handles 200,000 calls per day (Cisco)

– If the success rate is just 5%, that would still be 3.6 million tickets per year
– China Eastern handles 10,000 at peak volumes (Aspect Contact Center Solutions)

28 Source: Cisco, Aspect Contact Center Solutions, GAO, TAM Annual Report
 There will be opportunities to save cost by shifting some of the
travel agency sales to call centres

Improving call center productivity will

encourage passengers to book through
the channel
– Short waiting time for an operator
The call center channel distribution – Well-trained staff to assist in itinerary
costs are less than two third creation
of retail agency costs – Low percentage dropped calls

JetBlue uses sales staff working from

home to save money and maintain
morale
%10 shift of traffic from retail agency
Regionalized or shared call centers
to call center could represent 3%
would allow carriers to gain economies
reduction of overall distribution costs
of scale in this enterprise
– It would have to be a business, though, to
ensure that larger carriers did not get a
substantially better deal; a fee-per-ticket or
similar arrangement could work to the
benefit of all carriers

29
Thank you.
Emre Serpen

Eserpen@sh-e.com

+447788420835