KEVIN O'TOOLE CHICAGO The advent of the Internet has begun to change the way that the world does business, but for the airline industry many of the issues that it brings are already familiar.

While businesses anxiously puzzle out what implications the Internet will have for their sales, it seems that consumers are racked with no such doubts. To them the benefits of buying on-line are simple: the ability to find the best possible deal at the best price and with the minimum delay. Already, the e-business evangelists are charting out a brave new future in which fast, dynamic market-based pricing will count for everything and where product differentiation will be a scarce luxury. For the airline industry that may well sound depressingly like business as usual.

Indeed, yield management gurus are holding up the travel industry in general, and airlines in particular, as the model for how all businesses will one day have to think and behave as sales go on-line. That may be of little comfort for revenue managers already battling in the familiar fight to maintain segmentation and what product differentiation they can muster. As managers from across the travel industry gathered in Chicago at the start of November for the IATA Revenue Management Conference, the talk was as much about the dangers of being in the vanguard of this high-velocity new market as of the promised rewards.

Not least among those dangers is the risk of further losing control of pricing discipline and customer segmentation in an environment where information runs like water.

"The Internet is fundamentally about information. Consumers have almost overnight been individually empowered with information," says Sam Buttrick, airline equities analyst at Paine Webber, adding that they are using this new-found information to go out and find low fares. For the US industry as a whole, he believes the Internet is already proving "modestly revenue dilutive" and warns that its impact is not going to go away.

Consumer thirst for low-cost flights has already fuelled an explosion of Internet intermediaries. What started with Travelocity and Expedia only a few years ago has since spawned a new generation of discount sites. The exponential growth of the travel "name-your-price" auction site is a case in point. From a standing start a little over a year ago, the company is selling over 50,000 tickets a month, with revenues of over $150 million a quarter and rising fast.

For what it is worth, market watchers estimate that 54% of on-line travel bookings, running at somewhere around $2.5 billion a year, are going through intermediaries. Only 46% are being booked direct - a proportion that is expected to remain roughly stable as the market continues to take off.

Bidding down revenues

For airline managers seeking to earn incremental revenue, the attractions of offloading distressed inventory to an eager Internet audience is clear enough. The problem, argues Buttrick, is that while consolidators like Priceline may well yield incremental bookings there are no guarantees as to where those bookings have come from. "One airline's incremental passenger is probably someone else's bread and butter," he points out. If that is the case, then industry would simply be bidding down its revenues.

Buttrick estimates you would have to show that around half of the passengers booking on the discount auction sites would not otherwise have travelled to prove beyond doubt that they are having a positive effect on revenues for the industry as a whole. The same logic applies elsewhere. "Publishing an unpublished fare is a contradiction in terms," he says, and probably a dangerous one at that in the battle to ring-fence premium passengers.

Business traffic in the US domestic market is already trailing well below the levels that underlying economic growth would traditionally predict - not helped by a rising vogue for booking low-cost flights. As if to illustrate the point, Buttrick himself ran the gauntlet of the PaineWebber corporate travel policy to make an on-line booking with low-cost American Trans Air for his flight to the Chicago conference.

Buttrick believes that the airline business would perhaps do well to get more sophisticated at answering the fundamental questions about who is flying and why; how the trends are changing; and where their product differentiation lies. He sets out a challenge to any US chief executive to name five things which differentiate their airlines from their competitors. Clear answers to those questions may become more important still in an e-pricing environment where all products start to look more alike.

Yet while the Internet may be putting negative pressure on revenues, there is little doubt about the positive impact on distribution costs as commissions are whittled away. The 15% or more of ticket price that it has traditionally cost to sell through travel agencies have already been brought down to perhaps 6% via the web. Buttrick, for one, believes that those cost gains will ultimately outweigh the revenue losses.

There could be further savings to come. Alongside the established on-line consolidators, a host of new hopefuls continue to appear, competing for a slice of the booming Internet travel market. Making a splash at the Chicago conference came, styling itself as the next generation of web travel vendor and with an interesting twist to the auction business model (see page 71).

The major USairlines themselves appear to be ready to weigh into the arena. Continental, Delta, Northwest and United have announced plans to join forces to create their own web site where customers can browse and compare Internet rates as well as book a range of other travel products..

What has probably not changed with e-commerce are the basic pricing strategies that the airline business has been practicing for years. If consultants have any advice it is to stay true to those virtues as business moves onto the web.

"The pricing strategy isn't that much different from what's already been out there. What has changed is the speed," says Jim Barnes a partner with KPMG Consulting. He gives as an example Expedia's ability to confirm bookings in real time, which has given it, at least for the time being, a significant edge over the delay offered by priceline. One UScompany is now pledging to sign up credit deals on new computers in 30 seconds. He goes on to urge companies hoping to succeed in e-commerce to integrate pricing strategy into "everything they do", breaking down the barriers and building bridges with other departments in the process. The Holy Grail of linking revenue management with customer relationship management is a constant theme.

Managers also need to ensure that they maintain integrity across all the new sales channels, to avoid pricing disagreements and confused promotions. "Inconsistencies can destroy you,"warns Dr Bob Phillips, a senior vice president at Talus Solutions, echoing many of the same themes.

The story of e-commerce, he says, is "largely going to be the story of pricing innovation". In that race, the airline industry has a clear "leg up" on others, he adds, with at least a couple of decades of experience in handling electronic pricing through the computer reservation systems.

Airline experience

"I believe that the experience we've developed in revenue management is directly transferable to new fields,"he says. Talus itself is one of the systems houses now starting to reap the rewards of its travel experience as the rest of the world catches on to yield management.

Among the greatest assets in the e-commerce arena will be the market data locked up in the rapid customer responses to offerings and prices, adds Phillips. "With the Internet you can change your price, then look and see what the customers did and make a response if necessary," he says, adding that "sales per look" as a function of price is a critical driver of e-commerce pricing decisions. Talus itself is working on new systems that specifically target such intelligence-gathering from across the web.

His view, shared by others, that the airline industry may have more to teach than learn from the e-commerce world, holds one implication of which senior executives might like to take note. "Those of us who work in travel management have a tremendous head start and career opportunities on the new frontiers," says Jeffries. Perhaps good revenue managers themselves could soon be a high-priced commodity.

Source: Airline Business