Air Canada Stops Res Test

<B> Air Canada Stops Res Test</B>

By Jay Campbell

<I>New York</I> - In yet another indication that the business of supplying corporate booking systems may not be for airlines, Air Canada has "suspended for now" its beta test with Canadian Broadcasting Corp. of a Galileo corporate reservations product.

The news was revealed by Air Canada's general manager of product distribution, Ron LeRadza, following a speech on airline distribution at last month's International Air Transport Association financial management conference.

The 50-traveler beta test, hailed last year as the first of its kind in Canada (<I>BTN</I>, Jan. 27, 1997), paralleled tests by other Galileo-owning airlines United and US Airways. But neither United nor US Airways is sure what direction their corporate products will take, since the process is much more complicated than they originally had anticipated. Now, Galileo is finalizing a partnership with Internet Travel Network and the direction of airline branded corporate products is unclear, though one Galileo source said, "there's still some interest."

LeRadza said of the suspended CBC test, "I don't know whether we'll continue the test. Maybe when electronic ticketing is mature."

On other distribution issues, LeRadza expects the percentage of Air Canada tickets issued by travel agents to drop from 77 percent in 1995 to 69 percent in 2001. The 8 percent will be picked up by electronic reservations, while the number of tickets issued directly or by other airlines will stay flat over that period.

"If it was nine months ago, I would have said the 8 percent is 20 percent, but the hype was too much," said LeRadza.

In terms of electronic ticketing, LeRadza said Air Canada has seen 40 percent penetration when passengers book directly with the carrier. "We're all now adjusting our systems and gravitating toward IATA's standards," he said. "By first quarter 1999, we anticipate the beginning of interlining."

In total, distribution in 1995 cost C$530.3 million for Air Canada. The airline identified commission expenses at C$272.3 million, call centers at C$72 million, res systems at C$66.1 million, credit and debit cards at C$53 million, sales force infrastructure at C$29.3 million, finance allocation at C$22.3 million and city ticket and airport offices at C$15.3 million. In total, it was the second highest cost pool item, after labor and before fuel.

"We haven't updated this after 1995 because it's a very painful process in the legacy system," LeRadza said. "The systems are set up functionally, but you have to look at it horizontally. No airline can track the real total cost of distribution--you have to pick your benchmark and work from there."

Air Canada set up goals that drop distribution costs as a percentage of revenue from about 20 percent in 1995 to 16 percent in 2001 and distribution as a percentage of total operating expenses from 15 percent to about 12 percent in 2001. As such, distribution by 2001 will eclipse 25 percent of the airline's total unit cost reduction. "We're on track because the commission cuts happened faster than we anticipated," he said. "But CRS costs are not going down."

Addressing a question about Microsoft's role in travel, LeRadza said, "At the end of the day, if one interprets what Microsoft could do, they could reach beyond distribution into the airline's scheduling activity so you have to move around your schedule to get a desirable display. That's the interpretive nightmare."

Also noting the importance of distribution costs in airline management philosophy was airline analyst Julius Maldutis of Salomon Smith Barney. Along with bottom line-oriented management, capacity shortages and the development of alliances, Maldutis said the Internet represents the fourth fundamental factor in airline profitability in that it allows for both a reduction in some traditional distribution expenses and a revenue opportunity.

"There have been three revolutionary developments in the airline industry," said Maldutis. "Jet aircraft, deregulation and the Internet. It enables airlines to cut down the 18 percent expense of distribution, which is second only to labor. Obviously the business traveler will not abandon his agency system, but the revolution to me lies on the revenue side."

Maldutis elaborated on the possibilities of distressed inventory e-mails and auctions in allowing airlines to increase their load factors beyond the traditional average of 65 percent. "I challenge you to find another industry that throws away 35 percent of its revenue," he said.

Further distribution talk at the IATA meeting came from Kevin Haskins, formerly of Northwest Airlines, now vice president of strategy for Andersen Consulting's PRA Solutions. PRA helps airlines manage revenue flow through audits and the debit memos sent to travel agencies. Among PRA's five major North American airline customers are Delta and Northwest. For those five, PRA issued over $1 billion in debit memos over the past five years.

Haskins said audited agency-issued ticket violations were as follows: 44 percent on unpublished fares where the incorrect fare was used; 29 percent on published fares where the fare was undercollected; 20 percent on commissions where a promotion was not eligible; and 7 percent on incorrect tax allocation. Among unpublished fares, one-third are collectable, one-third are forgiven and one-third are disputed then not resolved. Airlines' loss exposure is 0.5 percent of passenger revenues.