The technological innovations of the 1990s are fast becoming industry standards, and although the threat of a divide between the have and have-nots is still real in areas such as e-ticketing, established carriers are far from holding all the aces when it comes to IT
With IATA’s “simplifying the business” campaign now in full swing, this year’s IT Trends survey compiled by Airline Business and SITA provides a timely window into the extent to which airlines are willing and able to take advantage of new technology.
Trends that have been apparent in recent surveys, such as the move from legacy to internet protocol (IP) based systems, increased outsourcing and automated check-in, are fast becoming standard business practice.
When the survey was first launched back in 1999, many of these technologies were relatively new concepts. As British Airways chief information officer and SITA chairman Paul Coby puts it: “These used to be nice to have, theoretical things. Now they are mainstream.” As new generation technology becomes standard issue, the question arises, is a divide developing within the industry between the have and have-nots?
E-ticketing is one concern, as paperless interlining becomes the norm, driven by the cost-savings on offer and the need of mainline carriers to compete with low-cost airlines. IATA is trying to prevent industry fragmentation, setting a target date of 2007 for the elimination of paper tickets. This is aimed at concentrating minds rather than setting deadlines but even so, there are clear signs that there will be a number of laggards, though it is too soon to say how many. By the end of 2007, just over half of respondents expect to be selling mostly e-tickets and around a fifth will either take more than five years, don’t know or didn’t answer.
All to play for
Shane Batt, consulting partner at IT provider Sabre Airline Solutions, says that it is not purely a cost issue for carriers in the developing world, pointing out that there are cost-effective systems available to smaller carriers for e-ticketing as well as many other areas of IT. Community systems have been developed for e-ticketing, for example.
“Technological solutions are there and they are reasonably priced. The primary hurdle is the ability to assimilate process and business changes,” Batt says, pointing out that for developing-world carriers which issue a relatively small amount of interline tickets, the imperative to implement such a radical change in the way they do business simply doesn’t exist. There are also issues about power outages in regions such as Africa and other parts of the world.
With two-and-half years still to run before the year-end 2007 target, most observers do not see any need to panic yet. “It’s really still all to be played for. There is still time to do it,” says Coby.
Shadowing this steep adoption curve on e-ticketing lies the soaring volume of online sales, which has tracked up from just above 5% five years ago to reach above 20% in the latest survey. Some 12% already sell a majority of tickets over the web, rising to half within three years. Notably, many of the rest are more than five years away from following the leaders. Also worth noting is the speed with which the volume of tickets sold over airline websites, always highlighted as the most important channel, has grown over the past few years. Some 17% of tickets are now sold through an airline’s own site, as opposed to another online travel provider, up from only 11% a year ago.
Steady progress is being made on other projects, highlighted in the IATA initiative. The move towards radio frequency identification (RFID) baggage tags will gradually start in 2006-7, by the end of which just over a third of the industry will have begun using this technology. Just under a quarter of the survey sample, which covers nearly half of the world’s top 200 carriers, have begun to pioneer barcoded boarding passe, although this is far more prevalent in the Americas than the rest of the world. In three years, the majority of the industry will have followed suit.
Self-service check-in kiosks also continue to make steady progress. Nearly a third of carriers have dedicated kiosk, largely in their home markets, but due to rise to half within the next couple of years. Common user kiosks are also catching up fast. Within three years, just over half of survey respondents expect the majority of their passengers to use self-service kiosks, at least in their home markets.
It is clear too that legacy systems are finally giving way to new open IP-based systems. “The old systems have served the industry very well. Now is the time to change,” says Hans Jorgensen, vice president of the airline business group at Amadeus. “The cost of these legacy systems is still there. Carriers are still paying licence fees.” However, Wolfgang Gohde, chief executive of Lufthansa Systems, cautions: “The end of the legacy system has been forecast quite often. However, we believe that this will actually happen within the next five-to-ten years.”
Around 40% of carriers have already migrated the majority of their systems to IP and this figure is expected to be nearer 80% over the next two years. “The question is what will happen with the rest?” asks Peter Buecking, SITA president. Not all airlines have IP as priority, he notes, pointing to the example of the new Indian low-cost start-ups whose customers tend to have little if any access to a PC. The survey also shows that cost remains a major issue, with over 40% of the surveyed carriers citing cost-justification as the major obstacle to making the switch to IP.
Nearly three-quarters of carriers currently run the majority of applications on Windows-based client servers, while just over a third use mainframes. Interestingly, 29% of carriers plan to install service orientated architecture over the next two years, compared with just 7% who do so now. Service-orientated architecture offers more flexibility in areas such as seat allocation and dynamic packaging.
What is clear is that IP is not simply a developing-world issue. While markets such as Africa may have their fair share of laggards, the survey results suggest there are still carriers in North America and Europe that are not expecting to become IP-enabled in the near future. At the same time, Murray Smythe, vice president for Europe, Africa and the Middle East at Sabre Airline Solutions, says that carriers in emerging markets that do not have legacy systems are effectively “skipping” a generation and moving straight to the new generation IT systems.
Europe catches up
Smythe says that North America, which was at the forefront of the technological revolution when the survey was launched, is no longer the clear leader when it comes to IT. “North American carriers do not have the cash,” he says, pointing to the fact that the region has piled on billions of dollars of losses since the industry downturn that followed 9/11. “What you see is that North American carriers are not retiring their legacy systems as fast as European carriers, for instance, and carriers in countries such as China are also catching up fast,” says Smythe.
This is reflected in the fact that North American carriers report spending just 1.2% of their total revenue on IT, compared with the global average of 2.3%, weighted by industry revenues. That global average is down slightly for the second successive year. However, nearly half of respondents say they see an increase in investment levels this year and 45% expect to see a rise next year too, although even this optimism is less than in previous surveys. Notably 23% expect to see budgets decrease next year – evidence perhaps that there is still plenty of cost pressure on the industry.
Some see signs that the recovery in IT budgets will appear sooner rather than later. Eero Ahola, chief information officer at Finnair, predicts that the slightly improved financial performance within the industry, the importance of IT in cutting down process costs and the competitive advantages available in terms of customer loyalty and convenience will drive IT budgets higher.
Gohde at Lufthansa Systems also sees signs of a recovery. “After years of reduced IT budgets, a trend towards increased IT investment can now be recognised,” he says. In part, this is due to the fact that many carriers are being forced to increase budgets because their infrastructure and core systems are outdated, he believes. Even so, expenditure levels have some way to go before they again reach the heights prior to 9/11 when industry IT investment stood at 3.4% of revenues.
Another effect of the downturn still in evidence is the tendency for boardrooms to favour projects that can deliver clear cost benefits in the short-term. Some 49% of respondents cited this as a high priority. “The spending focus still seems pretty much the same” says Buecking. “People want to take costs out quickly.”
Jorgensen at Amadeus agrees that short-term cost-savings are still the main focus. “Chief executives say to me, it’s all very well talking about cost-savings in years to come but I need to survive this year.” Increased IT spend is not the first item to rise up the agenda in a recovery, Jorgensen says. “The primary focus is towards profitability.”
Again, some see tentative signs of a change in outlook. “I see a balance moving from short-term costs savings towards a more longer term view,” says Finnair’s Ahola. “This is reflected in the interest of some prime carriers to move from a rigid focus on cost-cutting to more sophisticated business process analysis. Instead of questioning the rational of individual cost items we should be questioning the whole logic of our existing business models and their respective cost structures.”
Ahola is referring, of course, to the move within the industry towards outsourcing. This is gradually increasing, with the majority of airlines now outsourcing front office airline specific applications and network management, and half outsourcing web hosting. These are also the areas where carriers tend to be most satisfied. Application and desk-top management are the areas where there is most dissatisfaction.
Finnair has gone much further than most through an agreement that has seen virtually the entire IT department outsourced to IBM. Ahola admits there have been some challenges along the way but says, overall, the project has been a success. “There are certain details we could have done differently, but in retrospect I would not have reversed the decision we made,” says Ahola. “That is why I think the next stage in outsourcing will be to outsource business processes. This, for example, could cover areas such as online sales, check-in and gate procedures.”
The move towards outsourcing is also being bolstered by the drive within the industry to reduce variable costs. Coby says this was one of the main reasons BA decided to outsource booking, departure control and inventory to Amadeus. This was also a factor at Finnair, which has highly seasonal traffic flows.
Also boosting the outsource argument is the continued problems that airlines face in recruiting staff with the required IT and airline experience. After lack of budget, a dearth of IT people with airline experience is cited as the biggest obstacle to achieving strategic objectives, with nearly half of respondents citing this as a problem.
Lack of people with IT skills in general is not far behind. Buecking points out that this struggle to hire experienced personnel very much supports the case for outsourcing activities to companies that have the relevant expertise.
Airlines appear to be expecting the number of IT employees to increase over the next few years, although much of this will be through outsourced departments. Nearly half expect an increase in the IT payroll, while only a fifth expect a decrease. Despite the shedding of labour that has occurred through much of the industry since a downturn earlier this decade, and the move towards outsourcing, there is a roughly equal split between those carriers who employ more staff than they did five years ago and those who employ more.
Paul Brook, manager industry and government affairs at SITA, points out that this suggests airline managers are increasingly turning to IT departments to take up the burden previously carried by front-end staff. Check-in is one example, given the move towards self-service kiosks.
As regards on-board passenger services, including SMS messaging, Internet access, mobile phones and e-mail, around half of carriers appear to have no plans to introduce these at the moment, while for all of these except mobile phones, around half of carriers will offer these in two-to-three years time. Around a quarter will offer mobile phones.
On alliances, the figures demonstrate the extent to which carriers are willing to share activities with their partners, and the extent to which they are not. The majority of airlines that are part of an alliance cooperate on frequent flyer programmes (FFPs), check-in systems and passenger number records (PNRs).
However, the survey results demonstrate pretty clearly the limitations of alliances. Only 14% of respondents cooperate on revenue management, and none currently have plans to do so in the future. “Alliances will only go so far,” notes Brook. “They are prepared to cooperate on FFPs, check-in and PNRs and that is about it.”
Since the early years of the survey, expectations of the potential and extent of alliance IT cooperation have gradually dwindled, leading to some disappointment within the industry.
“It is unfortunate for the passengers that the alliances have been unable to cooperate in promoting seamless e-travel covering the whole service chain from online sales to gate procedures,” says Finnair’s Ahola. “Now, in order to reach this we have to backtrack.” Ahola doesn’t see that much chance of this changing. “There is a saying that it is never too late. I am a bit sceptical because the track record is so poor – which is amazing because the benefits in costs and competitive advantage are so evident.”
Batt at Sabre says that some carriers have given up waiting for alliance-wide IT solutions to evolve and have approached the IT vendor to purchase IT solutions on their own. The imminent go-ahead of the Star Alliance common IT platform (see related feature on page 46) is designed to change all this, although it will initially just involve the alliance’s largest carriers, United Airlines and Lufthansa.
This project has been the best part of three years in the making, however, showing the difficulties of carriers with no shared equity making common decisions. “Having experience of many projects within airline alliances, we know how difficult it is to get a single solution in place,” says Gohde at Lufthansa Systems.
For merged carriers, the decision is of course less fraught, and Air France and KLM, which merged last year, expect to have a shared IT system within the next four to five years.
The reluctance of carriers to commit to alliance projects reflects many of the issues that have held back IT over the last two to three years – a lack of resources, a focus on survival and boardroom suspicion of the ability to produce results (given the inherently unstable nature of alliances).
Even so, the fact that areas such as e-ticketing, IP and self-service check-in are becoming the industry standard demonstrate that where the cost-savings can be clearly demonstrated, airlines are willing to invest. And although the threat of a technology gap opening up still persists in some areas, there are also carriers in the developed world who are feeling the pace.
COLIN BAKER LONDON