Airline IT Trends: Mission critical

As the Airline Business/SITA Airline IT Trends survey celebrates its 10th anniversary, the findings show that now more than ever IT is critical to reducing costs and improving revenues

Research for the 2008 Airline IT Trends survey, conducted by Airline Business in association with SITA and now in its 10th year, was carried out in the first few months of 2008 when many airlines were basking in the warmth of a relatively healthy 2007. Since then, however, the industry has been feeling the pressure of skyrocketing oil prices and, in a more sombre mood, airlines are concentrating their IT and telecommunications investment on those projects crucial to weathering the storm.

With technology absolutely mission critical to airlines, IT bosses are at the heart of strategies to respond to the current challenge, helping reduce costs and drive up revenues through improving customer service and ­enabling new revenue opportunities.

The current economic pressures are also proving to be an incentive for environmental initiatives and while a small number of airline IT departments have projects underway already, this will undoubtedly increase as IT provides some of the tools to reduce fuel burn and maximise aircraft efficiency, delivering the double win of cost reduction and increased green credentials.

A record 121 airline responses were received for this year's survey. It is a measure of how far IT has come in the last decade that it is not only impossible to run an airline effectively without IT, it is increasingly integral to business strategies to deliver change.

IT has gone from being a commodity to a fundamental for the airline industry, says Paul Coby, chief information officer at British Airways and chairman of SITA, pointing out that industry boardrooms now face an interesting question on IT investment: "Do you cut back? Or if you believe it's about 100% of cost and 100% of revenue, maybe smart IT ­investment will be an essential part of how people weather high oil prices etc."

After a decade of fast-paced change in ­airline IT, there will be no let-up in the next few years. "Change will get faster and more challenging. There's tons of technology change coming at us and if you buy the first argument that technology is at the heart of the air transport industry, you have got to recognise the need to be able to pick and respond to these technologies coming," says Coby.

Next-generation aircraft such as the Airbus A380 and Boeing 787, which have a larger electronic footprint than the previous generation of aircraft, will grow the mission-critical role of IT even further, according to Qantas chief information officer Jamila Gordon. But the big opportunity lies beyond operations: "At Qantas we see IT taking an increasingly strategic role in the next few years, with ­technology initiatives designed to enhance the customer's experience and hence drive our bottom line."

"Change will get faster and more challenging. There's tons of technology change coming at us" Paul Coby Chief Information Officer, British Airways

Trusted Partner

WestJet director of IT governance James ­Callaghan adds: "The IT function is evolving from being an operator of discrete airline ­applications to the trusted business partner that provides an end-to-end service that is able to adapt and change quickly to meet the evolving business requirements."

The IT and telecoms investment trend over much of the decade has seen a broad downward pressure, with occasional upward spikes knocked back in line with global crises impacting on the airline industry. For example, generous budgets averaging 3.4% weighted to airline revenues in 2001 reduced dramatically in 2002 to 2.6% (revenue weighted) following the terrorist attacks of September 2001.

It looks like 2008 and 2009 may be in line with this trend. At the beginning of this year the mood among survey respondents was buoyant, with an industry average of 2.18% (revenue weighted) of revenue set to be pumped into IT and telecoms - up from 2.07% in 2007. On an unweighted basis, the investment increase was more marked - up to an average of 2.20% from 1.95% last year.

Over two thirds of respondents were saying spend would be up on 2007 and 47% (60% unweighted) predicted that spend would be even higher next year.

Spending Priorities

But a few months down the line and the ­industry is feeling more gloomy: "My belief is unless the fuel price comes down very rapidly, very quickly, this will not turn out to be the money that's spent. IT projects will get cut," says Edward Nicol, director of information management and chief information officer at Cathay Pacific Airways.

Others such as Bill Miller, managing ­director of IT services at Continental Airlines, suggest any investment increases will be ­modest: "I do believe that airlines will have to maintain their current levels or even slightly increase them to meet the challenges now ­facing the industry, but while continuing to invest in new technology, they should also look at their cost structure and improve their contracting and cost controls."

Spending priorities will be reassessed across all sectors. "Going forward everyone will be looking to any form of non-mandatory spend. Any spend, whether in new aircraft or technology, will have to wash its face. Whether it continues will be a function of overall health," says Coby.

The return to the business will be the decider, as TUI Airlines chief information officer Gregor Deubert explains: "All projects will be prioritised: first is the return on ­investment/biggest impact on the business. The most important will be done and the rest will compete with other projects."

There is also a feeling that generous IT and telecoms budgets do not guarantee success. "To do IT well you may not need to spend 2.2% of revenue on IT," says Nicol. Continental's Miller is of the same mind: "Our spend has always been down with the second tier airlines and yet we have some of the leading technology in the industry."

Investment as a percentage of revenue in the low-cost sector, as in previous years, runs well below the industry mean - averaging 1.1% (1.2% unweighted) - but this is indicative of efficiency, says Callaghan at WestJet. "Low-costs may not spend as much as legacies, but with a simpler business model that is more efficient, IT can in itself be more efficient and effective without unnecessary waste."

EasyJet IT director Tim Newling agrees: "We're looking at good value IT, not necessarily investment cost-based, best-value-based and business ownership."

With technology underpinning so much of the business, what does the broader IT ­investment picture look like? For the eighth year in a row reducing costs is the highest-rated driver in investment decisions, with 62% rating it high priority (down from 73% last year), followed by improving customer service cited as high priority by 54% (up from 48% in 2007). Passenger processing and ­services is the most important investment area, rated high priority by 63%.

Cost reduction and efficiency go hand-in-hand with improving customer service for Miller. "You don't do things in isolation. Our goal is always to provide more for less cost, more service for less cost," he says. For Coby it is about "customers, colleagues and cost". He says BA will be investing to maintain its website BA.com as a key touch point for ­customers, as well as giving staff the IT tools to do their jobs. "There are virtuous circles to be had here enabling customers and ­colleagues and reducing costs as well."

At Air France investment will be pumped into common systems with KLM to create a double benefit. "One, it will decrease IT costs," says Edouard Odier, executive vice-president of information technology at Air France. "Two, common IT systems such as revenue management will help our business to make savings. Common IT systems that are key to passenger services will help Air France-KLM offer better service for customers."

However, revenue generation is also a critical driver for IT investment, with 45% of airlines rating enabling new market offerings and revenue opportunities as high priority. Richard Clarke, director and co-founder of advisory firm Travel Technology Research, observes: "There's now a focus on revenue and new revenue streams that IT can develop on. IT has the ability to help increase revenue and change business models and there is real promise in that."

For SITA chief executive Francesco Violante, airline boards are now recognising that IT does not have to be a "sunk cost" and that "IT departments can now be viewed as profit centres, generating new revenue streams. This is resulting in CIOs receiving a larger slice of the investment budget."

Increasing value for customers will be a key element of generating new revenues. Cathay's Nicol says: "The focus going forward will be for IT to help the passenger experience. If you can improve the product you can help on the revenue side because you can charge more." Over at WestJet, Callaghan concurs: "Value-added services to guests, increased product differentiation and new product directions are all new areas of focus in the IT budget. Increased leverage of services via the web is also an IT focal point."

Green Issues

For the first time the 2008 survey asked about the role IT departments play in airline environmental strategies. Just 15% of respondents say supporting environmental strategy or new regulations is a high priority investment area and while only 12% have developed IT solutions to address new aircraft emission regulations, another 31% plan to do so by 2010. Under half - 44% - have no plans.

Some IT departmental initiatives are already underway. WestJet, for example, is installing a hot aisle data centre, which ­provides air conditioning only where needed, halving air conditioning costs and cutting the CO2 footprint by 25%.

At BA Coby has set a target of reducing IT's carbon footprint by 25% over the next three years and the department is working hard at tracking this. Coby has also introduced environmental questions into supplier contracts and the ability for passengers to offset their flying has been integrated into the sales dialogue on BA.com. "[BA chief executive] Willie Walsh has been keen that it's not just about the new aircraft we are planning, it's about all environmental impacts," says Coby.

On a wider business operations level Air France is using IT to improve load factors and flight planning, while easyJet is working on IT initiatives to reduce fuel burn. Newling explains: "We are seeing a whole lot more initiatives than there used to be on what our fuel burn is and what we can do about it. We are seeing a lot of demand for analysis on aircraft telemetry. We are putting a lot of work in that area and to update some of our systems."

So are airlines starting to make more demands on their IT departments when it comes to tackling environmental responsibilities? Violante predicts the environment will be one of the key strategic areas that will be the focus of change in the years ahead.

"IT and communications will play a critical role in our industry's response to the environment - offering advanced tools for more fuel efficient flight planning making sure airlines, airports and air traffic management organisations interact in the most efficient way and giving us global measuring and verification systems for complex monitoring of emissions trading schemes," he says.

To order the 2008 Airline IT Trends Survey on CD contact Laura Wood at: laura.wood@flightglobal.com

Source: Airline Business