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Orf 401 Discussion April 2, 2003

Orf 401 Discussion April 2, 2003. US Airways Is The Largest Carrier On The East Coast. Share Of Intra-East Coast Revenue. BOS. LGA. PIT. PHL. DCA. CLT. Source: Databank 1A/Superset Year Ended 2Q02. PQI. BGR. BHB. AUG. RKD. MSS. BTV. PWM. OGS. LEB. RUT. ART. MHT. ALB. SYR.

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Orf 401 Discussion April 2, 2003

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  1. Orf 401 Discussion April 2, 2003

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

  3. PQI BGR BHB AUG RKD MSS BTV PWM OGS LEB RUT ART MHT ALB SYR BOS ROC ORH HYA MBS PVD BUF ITH BDL ACK ACK MVY MKE BGM ELM SWF GON MSN LAN GRR JHW HVN DTW HPN BFD IPT AVP ERI LGA ISP AZO FKL ABE ABE EWR DUJ TOL CLE SCE ORD RDG MDT SBN CAK AOO PHL PIT FWA JST LNS LBE ACY HGR CMH BWI MGW DAY DCA CKB IAD PKB SHD SBY CHO CVG PHF CRW LWB RIC HTS LYH BKW ORF EVV LEX ROA SDF BLF PGV TRI BNA GSO RDU TYS EWN CLT FAY OAJ AVL FLO CHA GSP ILM MEM HSV AHN CAE MYR ATL BHM AGS CHS HHH CSG SAV JAN MGM JAX MOB TLH VPS PNS PFN GNV MCO TPA SRQ RSW PBI APF FLL MIA EYW 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 TTN …With Over 4.5M Active Frequent Fliers Note: Airports Served by US to Domestic US, Canada, and SJU/STT/STX Source: Databank 1A/Superset Year Ended 2Q’02

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

  5. The Airline Planning andRevenue Model

  6. The Airline Planning Process Capital Investment Strategy

  7. The Airline Planning Process Capital Investment Strategy Build Network

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

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

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

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

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

  13. Airline Pricing and Distribution

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

  15. A Fundamental Law Of The Universe TIME = $

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

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

  18. 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

  19. Price Level LOW HIGH LOOSE Pricing Rules RESTRICTIVE

  20. Price Levels • Stimulate Demand • (low) • or • Extract an Economic Premium (high) Price Level LOW HIGH LOOSE Pricing Rules RESTRICTIVE

  21. 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 Price Level LOW HIGH LOOSE Pricing Rules RESTRICTIVE

  22. The Prices are Then Offered Through Various Distribution Outlets

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

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

  25. Traditional Airline Distribution Cost Components

  26. Airline Distribution is Shifting Due to E-Commerce

  27. 22% Airline Distribution is Shifting Due to E-Commerce

  28. Costs per Channel Vary Greatly $ 26 * $ 21.15 $18.75 US Airways Traditional Direct (ATO, CTO, Reservations) Internet Agencies Travel Agencies $ 11.19 usairways.com Note: Projected 2003 marginal cost of a $300 ticket * Estimated traditional direct costs for 2003

  29. 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

  30. 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

  31. 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

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