PAST, PRESENT AND FUTURE OF E-TICKET AND SETTLEMENT

TECHNOLOGIES PAST, PRESENT AND FUTURE OF E-TICKET AND SETTLEMENT CURRENTLY, GLOBAL AIRLINES EXTENSIVELY EMPLOY SELLING TECHNOLOGIES FOR THEIR PASSENGER TRANSPORTATION AND ANCILLARY SERVICES VIA GLOBAL SETTLEMENT SYSTEMS, NAMELY ARC IN THE USA, AND IATA BSP COVERING MOST OF WORLD COUNTRIES (EXCEPT USA). IN EARLY 90S, RUSSIAN AIR TRANSPORT SETTLEMENT SYSTEM (ATSS) JOINED THE TWO. ALL SAID SYSTEMS ISSUE STANDARD (NEUTRAL) TRAFFIC DOCUMENTS ACKNOWLEDGED BY THEIR MEMBERS. Airlines, accredited agencies and executive administrative bodies are the players of present-day settlement systems. However, their community tends to expand thanks to carriers of other modes of transport and providers of ancillary services engaged in air transportation indirectly (e.g. railways, bus/cruise companies, charter consolidators, rent-a-car companies, hotels, attractions, theme parks, etc.). The brand-name service of each system is financial settlement among its members with respect to sold passenger air travel and incidental services. Normally, reservation and sales of services issued on standard traffic documents (STD) are performed via Global Distribution Systems (GDS). As compared to ARC and BSP IATA, ATSS holds a relatively modest position in terms of global performance; however it completely matches the needs of air transport in Russia and some other countries. Participants and/or providers of ATSS services are as follows: - Ca. 100 airlines of Russia and CIS/non-CIS countries operating scheduled flights (Aeroflot, Transaero, UTair, S7, El AL, Emirates, Germania Air, Air Berlin, etc.); - Russian Railways PLC (via Universal Financial System), Aeroexpress, etc.; - Over 330 accredited agencies of Russia, most of CIS countries, a number of EU, USA and Canada with 7100 accredited sales locations and over 20,800 ticket sales agents; - 15 accredited owners/operators of Computerized Reservation Systems (CRS): national Sirena Travel, Sirena 2.3 and major international CRSs - Amadeus, Galileo, Sabre, etc; - 28 accredited training centers with their affiliates and - 6 accredited practice centers. The GDS terminal network within Russia ensuring reservation and issuance of air travel is the largest manifold civil network in this country. For example, over 17 thousand Sirena-Travel terminals are now accredited with ATSS. 1

Annually, around 15 million essential services passenger travel as such and millions of ancillary services associated/not-associated with these services - are issued on ATSS traffic documents (CCS-TCH STD). Worth noting that unlike ARC or BSP IATA, national settlement system is free from revenue losses, i.e. carriers receive their monies in full. E-ticket and EMD (Electronic Miscellaneous Document) are essential instruments used in the settlement system environment. The first is designated to certify the contract for passenger and baggage carriage, the second to certify the contract for related carrier s services and ancillary/tourism services. Both electronic documents are issued, endorsed or stored under requirements prescribed by the Federal Law with the same legal force and effect as paper documents. Electronic air tickets mean tickets enabling reservation and sale of air travel without its issuance on paper. In physical terms, this is just an e-record. An e-ticket contains electronic flight coupons, electronic audit coupon, electronic agent coupon and itinerary/receipt. Itinerary/receipt is issued to passenger to confirm the purchase and payment of ticket. Moreover, itinerary/receipt serves as a reference record from the CRS with complete information related to the itinerary, form/details of payment similar to those in paper tickets and additional PNR data printed on regular sheet of letter paper. For the first time, air e-tickets were introduced by United Airlines in 1994. Under IATA resolution, the official transfer to BSP e-ticket was scheduled for June 1, 2008 however in practice the process dragged till the year end. A lot has been said and written about the advantages of e-ticket, which simplifies the business and helps to cut carriers costs. According to IATA estimates, up to USD 2 are spent for an e- ticket versus USD 9 for a paper ticket (covering print-run, transportation, reporting, processing, etc.). Thanks to e-ticket copy stored in the computer, the processing of data in terms of revenue and transportation is accelerated, protection against losses or theft of tickets becomes more effective and higher quality of travel reservation and sale is ensured. Users with Internet access enjoy hefty opportunities for travel reservation in any point of the globe either for themselves or for their friends or relatives in other cities. The first e-ticket in the Russian Federation was introduced through the order of the RF Ministry of Transport «On the Form of Electronic Passenger Ticket and Baggage Check for Civil Aviation» in November 2006. In May 2010, the next Ministry s regulation formalized the itinerary/receipt as an accountable document for cash settlement. Later on, some amendments were introduced so as to universalize the requirements to itinerary/receipt and electronic audit/flight/agent 2

coupon of e-ticket. In general terms, e-tickets in national settlement system are applied on the basis of the aforementioned instruments of the RF Ministry of Transport, relevant Resolutions of IATA and decisions taken at the 4 th Conference of ATSS members in 2006. The first e-ticket of national settlement system was booked and issued for the UTair flight on December 1, 2006. In the furtherance, all key e-ticketing technologies were polished on the basis of this airline s experience; therefore, UTair can be reasonably nicknamed the ET pioneering airline in the ATSS. The transfer of settlement system to large-scale implementation of e-technologies was initiated in 2010, including e-tickets and «safe» e-commerce technology (3D-Secure), payment for travel against plastic cards via the Internet and electronic data interchange among ATSS members. Sales of ancillary services are seen as an efficient tool to raise airlines profitability and in general can be subdivided into two groups: - Chargeable ancillary services (normally detached from the core service, i.e. travel, and charged by virtue of fare basis «unbundling») directly associated with passenger carriage or corporate activities of the airlines and - Intermediary services for resale of goods/services of other suppliers. Depending on specific service in the first group for which an EMD is issued, there might be two types of EMD: an EMD associated with e-ticket (EMD-A) or EMD not associated with e-ticket standalone EMD (EMD-S). At the time of issuance, passenger is served an EMD (receipt) showing information related to the service for which it is issued. For example, EMD-A is used for such charges as excess baggage surcharge / surcharge for baggage carriage or declared value of baggage. Services issued on EMD-S include prepaid ticket advice (РТА), carrier s charge for rerouting/cancellation, travel services not associated with air travel, etc. EMD is used as an e-ticket, i.e. standard IATA document to be issued at the time of service sale and implemented on the basis of relevant Resolutions adopted by IATA Passenger Services Conferences of 26 (2005) and 27 (2007). IATA e-ticketing project contemplated a 100% EMD implementation for payment of services associated with travel and ancillary services of airlines and GDSs in 2013. ARC gave the green light to EMD processing on 05.11.2010. In BSP Europe the EMD technology was launched in February 2011 providing ticketing via Amadeus GDS. The first overseas ancillary service offered by American Airlines was issued on EMD ARC on 25.08.2011. 3

Worth noting that Russian settlement system introduced EMD back in 2008, whereby the first service was issued on EMD late of that year. The EMD was implemented in pursuance of regulations of the RF Ministry of Transport reading that the EMD: - «Shall be an accountable document to be applied for cash settlement by legal entities or individual businessmen and/or for settlement against payment cards without cash register equipment»; - «Shall be used for passenger services (including ancillary services), collection of charges/fees and to reflect information on service, fee or charge in electronic-digital form». Attachment to the Order of the RF Ministry of Transport set forth the format of EMD, including electronic coupons: value coupon (up to 4 coupons of carriers/service providers), audit and agency coupons and passenger receipt. From the angle of global practice, the ATSS electronic technology used to document transportation and ancillary services is tailor-made. The solution is that the numbers of e-tickets and EMDs are assigned and maintained by the E-ticketing Centre of TCH, whereby relevant CRS fishes them out to book transportation or ancillary services. To this effect, the resources of inventories of airline reservation systems and service providers are used as well. The technology enables to select e-ticket numbers from airlines databases stored in the inventory of CRSs when transportation is booked in airline session. E-ticketing Centre with its hard/software facilities is the backbone of e-ticketing technology and documentation of services. On top of assigning numbers to e-tickets/emds, it controls the stocks of ETs/EMDs allocated to accredited agencies, authorizes plastic cards for sales and settlement via TCH and administers the access rights of accredited agencies operating within ATSS. Please note that this tool is used for passenger air travel, for transportation performed by other modes of transport and for ancillary services. In terms of technology, ARC and BSP settlement systems differ from ATSS because the numbers of e-documents are assigned in GDS, accredited with ARC or BSP. This feature would not simplify the process of settlement for sold passenger transportation/ancillary services. PAX Carried number is a key indicator of civil aviation performance representing the number of sold segments of travel (including refunded tickets). 4

Table 1 reflects the behavior of passenger traffic of the RF airlines since 2004, according to Federal Statistical Survey # 12-CA, "Data on passenger/cargo transportation". This statistics is officially generated by the Transport Clearing House, based on data delivered by regional administrations and airlines. Worth noting that these figures do not take into account transportation of passengers performed for the needs of national economy. TABLE 1 - PAX CARRIED BY RUSSIAN AIRLINES & ATSS PERFORMANCE PAX carried (mln.) 2004 2005 2006 2007 2008 2009 2010 2011 PAX total (scheduled/non-scheduled)* 33.8 35.1 38.0 45.1 49.8 45.1 56.9 64.1 Inclusive: domestic transportation 18.9 19.2 20.7 24.2 26.2 23.8 29.2 32.7 international transportation 14.9 15.9 17.3 20.9 23.6 21.3 27.7 31.4 scheduled transportation in domestic/international 25.9 26.5 28.9 34.3 37.9 34.6 43.9 50.6 traffic Transportation issued on CCS-TCH STDs (mln.) 9.12 10.11 11.5 13.17 14.30 11.74 13.27 14.95 Including CCS-TCH e-tickets - - - 0.06 0.52 3.9 7.5 11.2 Ancillary services (mln.), issued on CCS-TCH STDs. 0.0.. 0.02 0.2 0.8 2.1 * Forecast / Actual The number of sold passenger transportation (segments of travel) issued on STDs (both paper and electronic) of the national settlement system serves as a similar indicator to give a picture of ATSS operations (refer to Table 1). Predominantly, scheduled services are issued on these forms. Traffic volumes issued on ATSS forms for passengers carried to foreign countries are modest; however generally they have been in the black in recent years. The number of passengers ticketed on CCS-TCH stock is positive, despite traffic decrease in 2009-2010 caused by 2008 global financial recession. Let s analyze dynamics of national settlement system in relation to the general performance of Russian civil aviation. In 2010/11, it overcame the downturn caused by the global financial crisis, and now the volume of passenger traffic is growing. In 2011, 64.1 million passengers were carried by scheduled/non-scheduled flights of Russian airlines. Of them - 32.7 million passengers were carried over domestic routes and 50.6 million passengers by scheduled domestic and international flights. The index of transportation sold on standard ATSS traffic documents is well-correlated with the last two indices (i.e. transportation over domestic lines and scheduled international/domestic services), since non-scheduled passenger air services are very seldom ticketed on STDs. The ratio of passengers whose tickets were issued on STDs in 2011 for Russian airlines equals to ca. 0.46 and 0.3 of the above figures. The share of transportation sold on STDs 5

in the total amount of scheduled/non-scheduled transportation performed by Russian airlines averages to approx. 0.23. The evolution of national settlement system e-ticketing deserves special attention. As seen from Table 1, in 2011, approximately 75% of all tickets were issued on STD e-forms climbing to 92% in 1Q 2012. The 100% e-ticketing is hampered by insufficient resources of some ATSS-member airlines rather than the ATSS potential. The bottom line of Table 1 reflects the dynamics of growth for ancillary services issued on EMD within ATSS. Let s turn to the future of ATSS and its "weight" in passenger transportation sales in the Russian Federation. Table 2 below features the forecast of passenger traffic calculated in 2008 and incorporated in the Transport Strategy of Russia up to 2030. Notably, the evolution of passenger traffic in terms of services rendered in 2010 stays behind the benchmark figures due to unaccounted recession caused by financial crisis. TABLE 2 - OUTLOOK FOR PASSENGER TRAFFIC OF RUSSIAN AIRLINES AND TRANSPORTATION ISSUED ON CCS-TCH E-TICKETS Index 2010* 2015 2020 2030 1 Forecast of PAX carried by Russian airlines 59.5 86.1 126.5 240.0 (mln.) /56.9* 2 Estimate indicator of PAX carried by Russian airlines ticketed on CCS-TCH STDs (mln.) 11.9* 17,2 25.3 48.0 Moreover, Table 2 shows the approximate forecast of passenger transportation performed by Russian airlines and ticketed on CCS-TCH stock, whose share, according to our estimates, equals to 0.9 (to date, we don t have more accurate data). Overall, over the forecast years its share will stay around one-fifth of the indexes shown in the first row of Table 2. A more reliable forecast can be done in the framework of more extensive research. Will the share of passenger transportation issued on national STDs shrink, remain the same or go up? Let s think it over. This share may decrease by reason of two factors only, namely, higher pace of growth of passenger transportation issued on BSP STDs performed by Russian airlines or the upturn of "direct" sales issued on airlines own stock. 6

The first factor is unlikely. BSP Russia has practically exhausted its potential, capturing sales for international flights from the BSPs in other regions of the world, where Russian airlines fly. We presume that sales in BSP Russia will grow in correlation with the advance of international transportation performed by Russian airlines, but no more. It seems unlikely that BSP Russia would expand sales issued on its stock for Russian domestic routes. In our opinion, BSP Russia is much more difficult to customize to ever-changing Russian realities as compared to national ATSS. The second factor is decisive for traffic volumes issued on electronic STDs. Legacy sales of air transportation on airline s own stock are outdated. The use of electronic technology sales directly from the airline inventory system via the Internet and the widespread use of various "Internet search engines" by agents or passengers are seen as a crucial factor stipulating the upturn of "direct" sales and downturn of STD sales. In our view, the positive drivers affecting the share of passenger transportation issued on national system s STDs are as follows: - Accreditation with ATSS of global GDSs Galileo, Sabre and Amadeus, prompting that the providers of these GDSs have recognized the need to partner with our settlement system caused by their natural urge to develop business in Russia. Therefore, Russian airlines become more interested to perform their international sales via ATSS. - Large-scale implementation of up-to-date IT-technologies in ATSS over the past few years. These include not only aforementioned e-ticketing or electronic documentation of ancillary services, but streamline tools for agency interactive reporting, data interchange with airlines, etc. A distinctive feature of these technologies is flexible customization in response to Russian legislation and instruments regulating various aspects of payment, taxes, issuance of privileged/business trips, etc. In this respect, the team-working with national computerized reservation systems is essential, in particular, with Sirena-Travel GDS in terms of local specific features. These intelligent opportunities are particularly attractive for small and medium-sized airlines, as well as for all accredited agencies enabling to apply modern marketing methods and sales control without significant expenditures from their in-house financial resources; - Launching of large-scale passenger rail, long-haul travel and shuttle services to airports enabling booking tickets on EMD alongside with EMD for ancillary services will command close attention of both traditional airlines and low-cost carriers; 7

- Completion of ATSS multimodal transportation project, whose large-scale implementation is constrained by persisting organizational and legal problems only; - Slow but steady increase of services rendered by foreign airlines in the national settlement system whose number is escalating year by year. The above story is just a snapshot of current and future state of national settlement system where the e-ticket has already gained a strong foothold. Contributed by: Edward Makharev Victor Mogilin Roman Surinov 8