When Robert Crandall, AMR Corp chairman, noted at the last Iata annual general meeting that 'there is no reason to believe that technology will make airlines more profitable,' there had to have been a few sets of raised eyebrows in the audience. Crandall, after all, is the one credited for coming up with yield management technology, which certainly helped airlines make at least a tad more money.
And, of course, there is the question of Sabre, the computer reservation system, and Decision Technologies, that part of the AMR panoply that, besides having the word 'technologies' in it, is renowned for selling information technology strategy and equipment around the world. If Crandall is saying that technological advancement has only limited utility, one could fairly guess that he is making a slick attempt to dissuade others from following his path - unless, of course, he just does not understand. Crandall being Crandall, the latter possibility is remote at best. There is of course, a third option. Crandall could have been candid and, to the future chagrin of the industry, correct.
It is too early to tell on an industry-wide level if the IT revolution amongst US carriers has been a resounding success. But it is incontestable that IT has had an effect: from Delta's (truncated) IT partnership with AT&T subsidiary NCR to every carrier's Web site and E-Ticketing services, airlines have been at the forefront of the business technology explosion. The applause from industry observers accompanying the bandwagon has been deafening: though Dr Julius Maldutis' touting of the airline industry's 'third revolution' was simply about the use of the Internet and airline auctions of unsold seats, it quickly became a liturgical presence in speeches and airline marketing division handbooks.
The claim was that carriers are now at the theoretical point of completely selling all their inventory, almost all of the time. The ensuing rush of cashflow would be enormous compared to the other two revolutions, deregulation and the introduction of the jet aircraft.
Maldutis, and fans of his postulation, could be entirely correct. But one of Crandall's gifts has been to step back from an industry slaughter of a trendy concept, instead assuming that conventional wisdom, like market wisdom, is almost always wrong. In this regard, Crandall involuntarily joins the ranks of one of the most contrary economists on Wall Street, Stephen Roach, chief economist and director of Morgan Stanley's Global Economic Analysis group in New York.
Over the past two years, Roach has become known, unfairly, as the anti-capitalist capitalist. His renown comes from stern warnings - as he formalised in a recent Harvard Business Review article - that corporate myopia on the short-termism of shareholder reward is, after downsizing upon downsizing, going to produce 'some degree of worker backlash'. Such a backlash 'does not amount to a socialist revolution, as some great defenders of capitalism are insisting. . . (Rather,) business runs the risk of being subjected to new regulatory initiatives that will raise the cost of doing business in the United States and quickly erode the nation's recent competitive revival.'
IT, according to Roach, is the latest corporate manifestation of a 30-year trend in the US of wage and wealth inequality. During the 1980s and 1990s, corporate efficiency has became the currency of the executive ranks. Cut costs via efficiency gains; breed efficiency through streamlining; streamline with the help of IT.
According to Roach, that 'help' has not come cheaply, with the average white-collar worker today having more than $16,000 worth of IT hardware for their daily use. Spending for IT now amounts to 3.4 per cent of the US total GDP - more than the airline industry's contribution. Corporate America has made a 'staggering bet' on the long-term productivity gains it hopes to achieve through IT. Says Roach: 'IT accounts for 41 per cent of total business expenditures on capital equipment, making it easily the largest line item in US corporations' budgets for capital spending'.
It will be argued, of course, that the 41 per cent line item is going to provide at least a partial benefit for airlines via increased electronic bookings. This is a point well taken, but the truth, as Crandall intoned, is that there is scant evidence at this point to suggest that airlines are getting anything but a negligible gain from Internet bookings and similar scant returns in terms of extra efficiency from the use of electronic ticketing, especially in relation to the financial outlays going into the technology.
United Airlines, for example, did not expect to earn revenues of more than $25 million from its United Connection booking software in 1996, against a total turnover of some $16 billion.
For airlines, the argument that has been forwarded to explain the large outlays for getting online is one of control. That is, who will control the distribution channel, control the inventory, and control the revenues? We are at the early stages of the struggle for that, and Crandall's dour message does little to encourage continued investment in new marketing technologies. His statement's tone was bolstered by the announcement that Microsoft will launch an Internet reservation system, allowing people to book flights themselves via Worldspan. This is potentially good news for bookings - the program, called Expedian, will most likely come installed as a component of the MS operating system on almost every computer produced. The downside is that the reservation process will still not come under airlines' control; for travel agents read Mircrosoft.
Indeed, in the world of Microsoft (is there any other?), Crandall's comments can only be taken at face value. Making airlines more profitable does not mean switching commission from a group of people to a bunch of microchips.
Source: Airline Business
