IT unit costs have fallen in recent years with the introduction of new technology, but investment remains strong in areas where IT is a critical business differentiator
This year's Airline IT Trends survey comes at a rare time when the wider industry is enjoying a relatively prolonged period of good fortune, in contrast to many of the early years of the survey's history. The survey, produced by Airline Business and SITA, achieved 100 respondents this year and continues to offer the most comprehensive industry research of its kind.
Since it was launched nine years ago, the survey has tracked how IT has moved closer to the centre stage in airline strategic thinking. "Technology is increasingly a differentiator," says Paul Coby, chief information officer at British Airways and chairman of SITA.
Ed Nicol, director of information management at Cathay Pacific, echoes this point: "I do think its fair to say that IT is occupying a greater role in people's minds than previously."
Despite this, the percentage of revenues spent on IT by carriers on a weighted basis that takes account of an airline's size continues to fall, standing at 2.1%, having been steadily nudging downwards from around 2.5% ever since 2003.
Coby says the spending pattern reflects a pattern of reduced unit costs and investment in new technology. "At BA, we have reduced our cash spend by 50% over the last five years. Everyone else is trying to do the same - unit costs of networks are going down, the cost of storage is going down. Linux [an IT operating system] is relatively cheap."
While airlines are investing to run legacy systems more cheaply, they are also investing in new areas to try and transform the business, Coby says. These areas, such as self-service technology, aren't quite so cheap.
Nicol says that self-service is one of the key drivers behind IT strategy at the moment. "It is right up there because volumes of people and flights mean that self-service is the best way to go. Banks went there quite some time ago with ATMs. People like self-service. With mobile technology, people can serve themselves and get through congested airports."
Another key consideration is the amount of data that needs to be handled and the need to get it around faster, and to give advance passenger and cargo information to governments. "Network costs are down and bandwidth is, relatively speaking, freely available," explains Nicol. "Why do we do so much with data these days? Because we can. We can collect and manipulate data more effectively."
Looking at the figures in more detail, on an unweighted basis, carriers are spending slightly more than last year at just under 2% of revenue. This suggests some of the smaller carriers, including low-cost and start-up carriers, are increasing the resources they dedicate to IT. "And so they should," argues Ian Tunnacliffe, principal analyst at Travel Technology Research.
Tunnacliffe says low-cost and start-up carriers are finding that there is only so much they can get away with without investing seriously in IT. "They've learned that as you go beyond a certain size, you have got to invest in some decent IT. This goes for quite a few start-up carriers. They haven't needed to invest, but as they grow, they have to spend more," he says.
The report suggests that low-cost carriers still have some way to go, however. Some 55% of the world's top 25 carriers by passenger rank spent 2.6% or more of their revenue on IT, compared with 10% of low-cost carriers. And 60% of low-cost carriers spent less than 2% of revenue on IT.
One noticeable feature is that North American carriers are the highest spenders, allocating 2.2% of revenues to IT, up from 1.95% last year. This is something of a turnaround story as during the downturn they had been the lowest spenders - unsurprisingly perhaps given what the North American industry went through at that time.
In contrast, Europe saw a year-on-year decline from 2.5% to 2.1%. The Asia-Pacific region came in at 2%, compared with 2.1% last year, while the Middle East and Africa saw a drop to 2.1% from 2.7%. Latin America was also slightly down, from 1.6% to 1.4%. With the exception of North America, all regions saw an overall decline. This suggests that if the "catch-up" taking place in that region was taken away, the decline may well have been steeper.
Nicol comments: "All airlines that I talk to are under cost pressures. And those that are increasing spend are basically airlines that had to really cut back because they were losing money or in Chapter 11."
He emphasises, however, that this should not be seen as a negative thing. "Most airlines are facing reductions in their budgets, but underlying costs are coming down. You can do more with less. The ambition to do more is there."
This ambition seems to be reflected in budget increases, albeit against a background of rising traffic. More than half of IT departments (58%) received a budget increase for 2007, while only 19% received a cut. The expectation for next year is almost identical, with 59% expecting an increase and 19% expecting a cut. Latin America, something of a laggard in terms of IT spend this year, is the most optimistic region in terms of receiving budget increases - 91% of carriers in the region expect a budget upgrade.
One factor that remains unchanged, and may be getting even stronger, is the emphasis of the importance of cost savings and proven payback for IT investments - 92% of carriers rate this as either their top or second priority, up from 83% last year.
Investments to simplify passenger processes or improve customer service are also top priorities, in line with IATA's Simplifying the Business campaign.
Airlines also seem to be taking the longer view when it comes to strategic decision making. On a revenue weighted basis, airlines are looking 3.9 years into the future (see chart 5). This trend was also seen last year, and contrasts with the period from 2001 to 2005 when airlines were looking around three years ahead.
Coby says this reflects the more healthy industry outlook: "People now can look beyond their noses. The game three to five years ago was all about survival. Industry can contemplate strategic investments, as they are doing with aircraft, for instance." He adds that the longer-term outlook may also reflect increased consciousness of the fact that when carriers sign IT contracts they are making substantial long-term commitments. "A new reservation system, for instance, is a big strategic decision. If you cut over to a new system, you are going to be there for the long-term."
Tunnacliffe says this trend towards longer-term thinking also reflects the type of contracts being drafted for outsourcing. "A few years ago, for a standard reservations system you were looking at a five year contract. Now you are talking 10 years or even 20 years," he explains. "Airlines are looking quite a long way into the future. They recognise that some of these commitments are very long-term and involve their business processes." While this is generally healthy, Tunnacliffe says airlines do need to take into account that their industry is likely entering a period of consolidation.
It seems to be that North American carriers are most inclined to take a longer-term view. On an unweighted basis, airlines in this region look 4.4 years ahead, compared with three years in Europe, and 3.6 years in the Asia-Pacific region.
Outsourcing continues to be a firmly established trend, and airlines are now in a position to have learned the lessons of recent experiences. Cathay Pacific's Nicol believes the way in which airlines view outsourcing is evolving into a second generation of IT outsourcing. "The trend is for restructuring outsource agreements into smaller units," he explains. "If you are outsourcing large contracts, the main contractor will subcontract a lot of the work out. But we can't just be neutral parties in this. You can write what you want into the contract, but it comes back to us."
The solution to this issue, Nicol says, is to have a series of smaller outsourcing contracts: "The scope is smaller, so there is a better chance of having an accurate scope. It is more manageable and better controlled." He notes that other industries are going the same way.
"Some vendors are still pushing one-stop-shop solutions. If an airline has complex requirements, it may not be the best option. But if you are a small start-up operation, it does have its attractions."
Mixed outsourcing approach
Coby points out that for most airlines a mixed approach is the norm. "At BA, we run our own data centres, but 75% of spend is with third parties."
Rarely now do you see all-inclusive long-term deals, he adds. "No one can tell me what the technology will be in five years time, let alone 10 years. It's hard to write that into a contract. And, on top of that, no one can be best at everything."
Against this background, Coby says airlines want to keep closer control of outsourcing. "Airlines are saying 'this is so important, we don't want to wash our hands completely of this'." Smaller deals with a number of suppliers keep some amount of competition going, and safeguard against technology movement.
"Most airlines have a mixed economy approach. They are keeping control of their IT destiny on the grounds that they will need to be able to have sufficient control over technology suppliers to deal with change," he says.
Desktop management comes top of the dissatisfaction list for outsourcing. Tunnacliffe notes that this probably reflects attitudes to this particular role. "Desktop management is a thankless task. It is not seen as cutting edge - lots can go wrong and there is not much kudos for getting it right," he says.
In terms of the types of operation that are being outsourced, check-in has seen a large jump since last year's survey, rising to 57% from 49% to become the most outsourced function. Another 10% of carriers plan to outsource check-in in the future.
One factor that may well be making outsourcing look more attractive is the difficulty airlines are having in finding skilled IT personnel. This was cited by 18% of carriers as the main reason for not achieving their IT strategic goals, compared with 12% last year. Having relevant airline IT skills also seems to be an issue.
Coby says the skills set required in the industry tends to be hard to come by. "Good technical people are in short supply around the world. You also need to understand airline IT, which involves a lot of legacy and inter-connectivity, and you need to be able to apply technology to business. Again, there is a shortage of these people."
Overall, IT fell to 1.7% of all employees from 1.85% last year. The survey also shows that 13% of IT departments expect to employ fewer people over the next three years, while 56% expect to increase headcount.
Verbatim survey remarks on the major IT successes of the past year
"Outsourcing of core activities"
"E-ticketing and web check-in"
"Improving business processes"
"Deployment of our own e-commerce system"
"Three-year IT master plan"
Verbatim survey remarks on the major IT failures of the past year
"Trying to do too much"
"Still too much legacy IT and still too much complexity"
"Lack of funding to upgrade IT infrastructure"
"E-ticket interlining difficult to implement for small airlines"
"Unable to support the business in a structured way"
"Delivery pace by suppliers"
"High number of failures with outsourced reservations system"