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The Cloud

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Jim LaPota

on 30 July 2013

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Transcript of The Cloud

In the world of Direct Marketing, frequent flyer lists command a sizable premium. They are a highly desirable demographic for retail goods and services.

Previous efforts to reach frequent flyers with retail offerings involved catalogs, mail inserts and other traditional efforts.

Currently in the marketplace, brick and mortar stores are slowly yielding share to the internet.
Currently there is activity and discussion about a variety of business functions moving to "the cloud"

The airlines are in position to capitalize in this new environment, holding an established relationship with millions of frequent flyers.

The skies are crowded, but very lucrative for a well executed retail approach
Another challenge - airport terminal retail space is among the most expensive in the marketplace.
Now let's consider FF miles redemption. There is a long running discussion online about the inventory of unredeemed miles. The marketplace is highly focused on this issue.
There is an excellent shopping environment available...
And the ability to connect customers with retail offerings

The driving force - travelers love to shop.

At its core, retailing connects products with consumers. It is a distinct advantage to know your customers and merchandise well.

Airlines are experts in travel related merchandise

They have an extraordinary long term customer base

Those same logo items could be made available in the employee store.
Other uses for logo items:
performance awards
safety milestones
employee recognition
health/wellness initiatives
The merged airline employee store could generate:
Retail sales - $6 million annual
Cost of goods - $4.5 million
Operating profit - $1.5 million
With 100k employees and millions of FF, there is a strong likelihood of success with an effective retail effort.

The virtual store could effectively connect customers with merchandise anywhere in the world

This presentation will outline several ways the merged airlines can effectively include retail activity directed at both frequent flyers and employees, using traditional ground based approaches and virtual activity in "the cloud".

A traditional retail enterprise needs 10-30k customers to ensure success.

In addition to frequent flyers, there is an opportunity to establish an airline employee store serving 100,000 customers and their families

Aviation memorabilia would be a strong category
the AWA Company Store generated $1 million in annual sales from an employee base of 10,000.
There are a number of choices available to handle outsourced retail activity for the airline

Some hold the belief that if we treat our employees better than anyone else, they will treat our customers better than anyone else.

Airline employees appreciate the non-rev travel benefits, some having traveled over 100k miles in their first year. They may need luggage, travel gear and accessories to fully enjoy this benefit with family and friends.

Products offered to frequent fliers would be carefully reviewed.

Current airline redemption offerings are not well regarded, well thought out, or valued effectively. It is critical to select the right merchandise at the correct value
With a value measured in the billions, some treat them like a world currency. With the actual unit cost embedded in the ticket price, the value of FF miles is hard to determine

If FF miles balances are growing faster than airlines are redeeming them, there could be an adjustment needed.

Sales and marketing efforts require corporate logo merchandise. Significant savings are available if we coordinate purchases that are effectively sourced in the marketplace.
Currently, more miles are earned on the ground than in the air.
Miles are available to purchase for .02/.03 cents/mile

When using miles, customers try to obtain better than .02 cents/mile in value

Redeeming 50,000 miles for a round trip ticket valued at $1000 would be one example

With RASM and CASM near identical, the profit margin available is small, using 5-10% of available revenue seats to redeem miles. The actual loss of revenue is difficult to determine

What would be the result of offering products with a retail value of $1000
(costing $500)
in exchange for 50,000 miles?

An approach targeted at long term elite customers could improve brand loyalty at minimal cost
We benefit when the marketplace values our miles higher than the competition
The end result should enhance the value of our membership, driving more customers to us, and retaining those we have
Critical to the employee store success:
Directed at what the employees want and need
Best value in the marketplace
Best quality available
Coordinated purchasing on logo items
Retail approaches could focus on :
Reducing miles liabilities
Improving customer satisfaction
Brand distinction
Status enhancement for elite FF
Adding revenue seat miles
There is also a large, dedicated group of consumers interested in airline merchandise

Items specific to the merger would be instant collectibles
There are a number of firms created solely to help manage and advise individuals on acquiring, tracking and redeeming miles

Various rating services frequently survey and rank frequent flyer programs
The merged airline will have the size and scale to deal directly with manufacturers, obtaining the lowest unit costs on logo items
With this proposed sales forecast, if operating costs are held under $500,000 there would be one million available for an employee fund, foundation use, or other purpose
Purchases of logo items from promotional products companies may result in higher unit costs. Sourcing logo items direct to the manufacturer could save 10%-50%

Outsourcing this activity is an option.
Unlike other internal functions
(payroll, maintenance, etc.)
there is a revenue stream that should be part of the discussion.
There are strong drivers to improve ROI by eliminating functions by outsourcing

Sourcing these items at the factory, rather than a marketing incentive company, could reduce the cost by half or more

Some outsourcing issues to determine:
What do we save by outsourcing?
What is the impact on merchandise unit costs?
What is the quality of the merchandise?
How will the retail prices be determined?
What is the cost for current reward programs?
What revenue will return to the airline?
The world's largest airline has an iconic brand. Licensing revenue could help offset the cost of the retail operations.

Consumers are influenced by miles when making decisions about where and how to shop

Why consider retail?

The future looks inviting and lucrative. I look forward to continuing to explore this extraordinary opportunity.
There is a wide variety of travel merchandise that the employee store could provide

The creation of the world's largest airline is a remarkable milestone. My hope is that this presentation helps to outline the potential available
Originating as a communication network, the internet is rapidly incorporating commerce.

Data storage, server functions, communications and retail activity are already in this virtual space, and growing quickly

Regardless of the decision reached, it's nice to see the good guys win one.

All the best
Jim LaPota

The final format does not have to be one or the other. A hybrid blend of outsourced functions and in-house activity could be the most effective structure
Outsource the functions that make sense, and retain control of the overall activity
An item to consider is the impact on sales/marketing use of logo merchandise. Will outsourcing improve cost and quality?

The budget for merchandise used in marketing activities could influence this proposal
Merchandise may play a role in brand awareness
What is the potential from an airline employee store?

There is a basis to examine a retail approach targeted at frequent fliers
There may be multiple benefits to creating a process that redeems FF miles for merchandise.
With a merged airline, the employee store could serve as an expanded benefit, help to lower incentive costs, and assist in establishing a new culture with rewards and personal recognition.
Considering several formats, the discussion focused on outsourcing retail activity should consider the potential revenue and benefits from an in-house solution.
the cloud
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