Harnessing the Power of AnalyticallyDriven Pricing Strategies A

A Win Wi for f Airlines Ai li & Th Their i Customers C t Michael Bentley Partner Revenue Analytics, Inc.

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Agenda • A Brief History of Airline Pricing • The Airline Pricing Problem • Case Study: Hospitality Price Optimization

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A Brief History of Airline Pricing

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Pre-Deregulation: Airline Pricing was Easy Prior to the Airline Deregulation Act of 1978, pricing wasn’t a problem…… The Regulated Industry • Fares set by y CAB • Guaranteed Rate of Return • Route access controlled • Startup airlines prevented ……at least for the airlines.

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However, Paying for a Ticket was Not For travelers, the cost of an airplane seat was prohibitively expensive.

1960 United Airlines Des Moines – C l Columbus b ticket. i k P Price: i $98 In 2012 dollars, that’s $765.

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With Deregulation, Came Challenges The change to the industry created a number of challenges for the airlines.

A Wave of New Entrants to HighDemand Air Markets

Increased Competition on Previously Profitable Routes

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The Impact to the Industry was Immediate and Lasting – Prices Fell. $350 $340 $330

Change in Average Price 1974 - 2011

$320

Average Price Absolute Price

$3 0 $310 $300 $290 $280 $270

Airline De-Regulation Act of 1978

$260 $250

Source: Supreme Court Justice Stephen Breyer, 2011 7 © 2013 Revenue Analytics, Inc. All Rights Reserved.

In Constant Dollars, Prices have Fallen Catastrophically. $1,450

$1,250

Change in Average Price (Adjusted for Inflation) 1974 - 2011 Average Price Absolute Price

$1,050

Inflation Adjusted Price $850

$650

$450

$250

Source: Supreme Court Justice Stephen Breyer, 2011 8 © 2013 Revenue Analytics, Inc. All Rights Reserved.

……And Airlines Failed

In the last 25 years, bankruptcy among airlines has been 10 times higher than the general business community

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The Rise of PeopleExpress PeopleExpress sought to democratize air travel, putting it within reach of those typically taking buses and cars. “Flying That Costs Less Than Driving” • 1985 – Fastest growing company in US history • Operating at ½ the cost of major carriers • Prices 50%-70% lower than majors, and the same price for every seat on the plane • 75% load factors compared with high 50-percentiles of other carriers

Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross 10 © 2013 Revenue Analytics, Inc. All Rights Reserved.

American Airlines Adopts Yield Management American and the other majors had to find a way to offer low prices the consumer was demanding, while remaining profitable. Inventory Controls were the answer. The Birth of Revenue Management • Accurately forecast passenger demand at different fares • Save seats for late-booking high fare passengers • Allocate leftover seats to a variety of fares with advanced purchase restrictions • Ultimate Ulti t S Super S Saver fares f

Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross 11 © 2013 Revenue Analytics, Inc. All Rights Reserved.

Ultimate Super Saver Fares Change the Industry Forever American was able to satisfy consumer demand for discounted airfare and incrementally improve their revenues, all by offering discounts with laser-precision. A New Kind of Price War • American’s American s discounted fares undercut PeopleExpress everywhere • Discounts were made available and unavailable based on the latest booking data • PeopleExpress were unable to respond and bookings fell • Load factors at PeopleExpress dropped from averaging 85% to 30%

Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross 12 © 2013 Revenue Analytics, Inc. All Rights Reserved.

The Fall of PeopleExpress “We went from being a healthy, profitable company……to losing $50M a month.” – Donald Burr, PeopleExpress PEOPLExpress Annual Profit 100,000,000 $70M 50 000 000 50,000,000 $40M $20M

0

(50 000 000) (50,000,000)

(100,000,000) -$130M (150,000,000) -$170M (200,000,000) 1980

1981

1982

1983

1984

1985

1986

Source: Revenue Management – Hardcore Tactics for Market Domination, Robert G. Cross 13 © 2013 Revenue Analytics, Inc. All Rights Reserved.

Today, the Practice of Revenue Management is the Cornerstone of Airline Pricing Airline pricing still relies on the same data and core concepts American used in the development and execution of Ultimate Super Saver Fares in the 1980s.

Market Segmentation

D Demand dF Forecasting ti

C Competitive titi D Data t

But, lack of innovation and the application of advanced mathematical modeling has resulted in a significant pricing problem. 14 © 2013 Revenue Analytics, Inc. All Rights Reserved.

The Airline Pricing Problem And its Impact on Customers

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Returning to Historical Airline Prices, it is Evident there is a Pricing Problem $350 $340 $330

Change in Average Price 1974 - 2011

$320

Average Price Absolute Price

$3 0 $310 $300 $290 $280 $270

Airline De-Regulation Act of 1978

$260 $250

Source: Supreme Court Justice Stephen Breyer, 2011 16 © 2013 Revenue Analytics, Inc. All Rights Reserved.

But, Just How Serious is this Problem? Viewing historical airline pricing compared to other industries, the severity of the problem is apparent. Airline Ai li A Average Price P i 1970 - 2011

Hotel H t l Average A P i Price 1970 - 2011

$360.00

$120.00

$340.00

$100.00

$320.00

$325

$300.00 $280.00 $268

$260.00 $ 1970

2011

R t l Car Rental C Average A Price 1970 - 2011 $110

$50.00

$80.00 $80 00

$40.00 $

$60.00

$30.00

$40.00

$20.00

$20.00

$10.00

$20

$0.00 $

$0.00 $ 1970

$45

2011

$4 1970

2011

Another way to think about it – If the th Corvette C tt Stingray Sti shared h d the th same pricing i i history hi t with ith the airline industry, you’d be paying less than $6,000 for a brand new one……instead of the $52,000 they actually cost.

Sources: Airline - Supreme Court Justice Stephen Breyer, 2011; Hotel – American Hotel & Lodging Association; Rental Car – USA Today © 2013 Revenue Analytics, Inc. All Rights Reserved.

17

The Airline Pricing Model is Broken Airlines have continued to improve and advance their Inventory Control capabilities, but have neglected advances in the field of Pricing.

The airlines have a pricing problem, but are only treating the symptom

The solutions airlines have sought are only creating additional problems

Other industries have pursued further advances in pricing, with great success

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Airlines are Treating the Apparent Revenue Problem, but are Ignoring the Root Issue Airlines are currently battling their revenue problem with a variety of initiatives. However, these “solutions” are only treating the symptoms and not the underlying pricing issues. Pricing Issues • Reliance R li on ““price i matching” t hi ” • Overly-simplistic segmentation • Lacking measurement and use of price sensitivity • Failure to reflect brand preference pp rather than • Rules-based approach true optimization • Irrational First Class pricing differentials

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Current Solutions to Close the Revenue Gap Long-Term have Long Term Negative Consequences Airlines are combating higher costs and revenue shortfalls by charging fees for services previously considered “included” ……and angering customers in the process. New Airline Revenue Streams • Checked Ch k d baggage b • Carry-on baggage • Flight changes • Priority boarding • Award Mile Ticket processing • Mileage-based upgrades

Airline ticket prices account for just 70% of airline revenues, do n from down f om 80% in 2000 2000. Source: Wall Street Journal – July 4, 2013 20 © 2013 Revenue Analytics, Inc. All Rights Reserved.

While Airline Advancement in Pricing has Stalled, Other Industries are Pushing the State of the Art Airlines have continued to improve their core Inventory Control capabilities (forecasting, overbooking, etc.), but have fallen behind other industries in the science and sophistication supporting their pricing decisions. Pricing Advances in Other Industries • Advanced Customer Segmentation in Retail • Market Response Modeling in Telecom and Services • Analytically-Driven Pricing Strategies in Automotive • Price Optimization in Hospitality d Cruise C i Industries I d t i and 21 © 2013 Revenue Analytics, Inc. All Rights Reserved.

Hospitality Case Study: Using Advanced Analytics to Drive Pricing A Win for Hotels and Customers

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The Hospitality Industry Solution Takes a “Customer-Centric” Customer Centric View of Pricing Hospitality Price Optimization is working because it’s aligned with the way customers think. Advances of Hospitality Price Optimization

• Considers same key factors hotel

Price Sensitivity

revenue managers consider when setting prices manually

• Gathers and compares competitive rates t much h as a customer t would ld shop for a room

Optimal Prices Demand & Availability

Competitive Prices

Key Inputs to Hospitality p Price Optimization

• Understands the trade-offs

g g location,, customers make regarding quality, brand, and price

• Analyzes over 8 million alternatives daily to recommend 350,000 optimal rates per day

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The Fundamental Basis of RM: More Accurate Forecasting Drives Better Decisions Improved forecast accuracy leads to better pricing and inventory decisions.

Roadmap to Improved Forecast Accuracy 9 Segment customers by statistically significant characteristics 9 Leverage meaningful macroeconomic, socioeconomic, and weather data 9 Understand how demand forecast might be impacted by own price and competitor’s price position 9 Allow for user adjustment, but keep it simple 24 © 2013 Revenue Analytics, Inc. All Rights Reserved.

Market Response Modeling Provides Critical Insight into the Price Sensitivity of Specific Customer Segments

De emand

How does demand respond to changes in pricing?

Pickup = 55

Lost Demand = -15

Low p price sensitivity y

High price sensitivity

$215

$250

$295

Price Accurate modeling of price sensitivity gets the right offers to the right customers. 25 © 2013 Revenue Analytics, Inc. All Rights Reserved.

Realized Benefits of Price Optimization Deployment within Hospitality RE EVPAR

Raise the Top Line Measurable Revenue Uplift

• Major hotel companies have stated a 3% revenue uplift TIME

attributable to price optimization in their annual reports

Price with Confidence Competitive Advantage in RM Sophistication

• Proactive pricing moves • Revenue impact even with excess capacity • Knowing when a competitive response is necessary Ensure Tactical Actions Align with Strategy System Recommendations Support Strategic Objectives

• Quantification of the right brand premium • More time for revenue managers g to think strategically g y

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Following the Same Approach, Airlines Can Begin Addressing the Pricing Problem This proven approach will drive revenue directly to the bottom line for the airlines, making them less dependent on ancillary fees that are damaging customer satisfaction.

Inventory Controls are essential for airlines. But, they fail to capture the full revenue potential if the price is wrong to begin with.

Statistically-based segmentation and market response modeling ensure rational market pricing that meets customers’ needs.

Price Optimization can be a game-changer for the industry in the same way Ultimate Super Saver Fares were for American Airlines.

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