Report by Kevin O'Toole
Earlier this year, Airline Business and SITA again set out to track trends and benchmark industry progress in facing the strategic challenge of a radically changing IT environmentA year, it seems, can be a very long time indeed in the new age of information technology (IT). Twelve months ago the issues facing airline IT departments were clear enough. The Y2K bug was still high on the agenda, while the dot.com frenzy threatened to sweep the "old economy" before it.
A year later and some, at least, of those concerns now look like ancient history. The world sailed into the new millennium with barely a hitch and the new wave of Internet start-ups lost a good deal of their lustre as the dot.com market shamelessly overheated and began to deflate. What has not changed, however, is that IT continues to take centre stage as a key strategic business issue as airlines adapt to the unfolding Internet age.
It was to set down some progress markers in that transition that Airline Business and SITA joined forces a year ago to conduct the first annual IT Trends Survey. This year's research tracks many of the same themes, but this time recognising the growing importance of business-to-business (b2b) e-commerce and looking in greater depth at business-to-consumer (b2c) as the industry's online presence develops.
The survey was conducted by an independent research agency during May and June among senior IT and board members from a sample of the 150 or so largest airlines. Although the usual warnings apply about extrapolating too much from a single set of survey findings, this airline sample represents the bulk of world flying and care has been taken to ensure an even spread of replies across sectors and geographical regions. Just short of half the sample completed this year's more detailed questionnaire, providing a sound snapshot of where the airline industry now stands in developing its IT strategy.
To underline the strategic theme, initial findings were revealed at the Airline IT Strategy Summit, a high-level conference hosted in Brussels at the end of June. More than 200 airline executives, IT professionals and analysts were there to debate the industry's response to the challenges thrown up by the new world of IT. Five key action points emerged from that debate, to be considered by airline boardrooms and IT departments alike:
Bring IT into the boardroom: ensure that IT is represented at board level with a chief information officer (CIO) or equivalent. Create a corporate IT strategy: link-in all parts of the business and those of your partners. Raise industry investment in IT: aim for levels of at least 4% of company revenues. Work together on fundamentals: avoid industry duplication of investment in b2b and b2c portals. Remove unnecessary paper: aim for industry-wide e-ticketing.As this year's survey results confirm, progress to such goals remains patchy, with further worrying indications of a gap between IT leaders and laggards.
IT management
The heartening news is that overall investment levels appear to have held up in 2000. A year ago, with Y2K spending at its peak, there had been concerns that IT investment would stagnate or even fall. Those fears appear not to have been realised. Over half of airlines report a real growth in budgets this year and a similar proportion expect IT spending to grow again in 2001. Only a tiny proportion are facing a decrease in either year, which more or less mirrors a similar level of optimism as reported in 1999.
However, if the spend is growing, then it is doing so from a relatively modest base. Overall investment levels average out at no more than 2.5% of company revenues, marking almost no improvement from the figure recorded a year ago. IT managers are not alone in wondering whether that is sufficient. John Watson, SITA director general, warns that investment at these levels remains "lower than those of a decade ago". A figure of closer to 4% would help recover the lost ground and start to bring air transport closer to the spend now taking place in other industries.
Neither are investment levels evenly spread across the industry. North American carriers continue to lead, with the highest spend in 2000 and Asia-Pacific continued to trail. The better news, however, is that two-thirds of Asia's carriers expect spending to rise both this year and next as they catch up with Western counterparts.
Hugh Pride, IT director at the Emirates Group, believes that second-tier carriers looking to stay in touch with their larger competitors may need to raise their game substantially. "Expenditure of 2% just isn't going to do it. The gap is going to get bigger and it's going to show," he warns, arguing that the spend needs to rise by one or two percentage points. "IT will enable or constrain growth. It will mean the difference between success and failure."
Indeed, lack of investment stands out in the survey as a major obstacle to delivering on IT strategies - second only to the perennial problems surrounding shortages of skilled staff.
A more fundamental question remains over how far the industry has gone in incorporating IT into strategic business planning, rather than simply treating it as a cost centre. Just over a quarter of carriers in the survey still cite lack of board level support or vision as a major obstacle, while diverting time and energy to maintaining creaking legacy systems is not far behind. IT planning horizons, too, tend to be short - set at around three years.
As the verbatim quotes on successes and failures would seem to show, selling the IT message within the company can prove to be just as crucial as getting the technology right. Watson goes further in warning that this IT leadership needs to start at board level and run throughout the airline. "The competitive edge will go to those companies that embrace and integrate IT into their whole operation," he says. Watson, himself a former CIO at British Airways, is fervent in his belief that the task requires a dedicated IT board member to bridge the gap between business strategy and technology.
Here the survey findings are less than encouraging. Close to half of carriers now have a CIO or senior director leading the IT effort - an improvement on the results a year ago. However, only 35% actually have an IT director sitting on the main board.
The theme was taken up by Georges Schorderet, chief financial officer of the SAirGroup, lending a finance standpoint at the Strategy Summit. "I think it would be wrong from a board perspective today to treat IT as a cost factor. It is an enabler for the company to achieve our corporate goals and cost objectives," he says. Regardless of how much of the technology remains in-house or is outsourced, he argues that there is a clear requirement for a CIO to handle planning. At the core, there needs to be a small team with a "strong leader" capable of "driving the process" and setting crystal clear goals for the company, he says.
Hugh Pride at Emirates also stresses the need for a CIO able to "influence business goals and strategy". He also points to airline alliances and outsourcing as two of the strategic issues that the CIO will have to address. Nearly half of carriers in the survey are now part of a global alliance and 59% of those share systems and applications with partners - led by check-in and reservation systems. This level of sharing has grown markedly since 1999 and is set to grow further over the next couple of years.
Outsourcing is also on the rise, with over 80% of airlines having outsourced at least part of their IT, a noticeable increase on the 67% reported a year ago. Pride warns that no carrier can attempt to keep all IT in-house. "We have to give up trying to do everything and go out to specialists," he says, recommending that airlines should be selective, looking to form strategic deals with longer-term IT partners.
And if IT is ready to take a seat on the board, then it is the explosion of Internet technologies that is helping to drive its new strategic significance. Michael Malley, from IBM Global Services, stresses that advent of e-business is already radically changing the way that IT is viewed throughout the business world. "IT can no longer be looked at as a cost centre but as a transformation artist," he says, urging IT leaders to "paint a vision" of how that transformation can take place and to link IT to "specific key corporate business objectives" - a constantly repeated theme at the Strategy Summit.
Internet technologies
This year's survey suggests that the move towards Internet technologies is continuing apace, despite the drag of maintaining legacy systems in tandem. A total of 87% of carriers have begun the move to Internet Protocols (IP). A handful have already largely completed that migration, with the majority planning to join them within the next two to three years. The charge is once again led by the major carriers of Europe and North America.
However, the portion of the IT budget devoted to making the IP transition remains modest at below 10% - a figure that has not changed substantially since last year. Given the shifting sands that the Internet has created within IT, Graham Howarth, a senior consultant with Gemini Ernst &Young, questions whether the industry needs to revise the way that it handles investment decisions. Typically, airline boards have been presented with a shopping list of projects. Those that make it through the horse trading of the budget process are then set off to achieve their goals.
He believes that the sheer pace of IT change now requires a more flexible process. "The increasing reality of e-business is that we don't know what the it's going to look like," he says. Instead of "betting the farm" on a single winning project, he suggests creating a portfolio of initiatives and applications to be pursued in parallel. Alongside there would be a continuous process of review, adjustment and decision-making over which projects to pursue and which to abandon.
Howarth also underlines the danger of overselling project benefits in order to help a favoured programme through. He detects signs that some board members have become "somewhat jaundiced" by a history of IT projects where the claimed benefits have been overstated and ultimately not delivered. "You need to take a cautious view and think carefully about the likely revenue benefits."
The latest survey results suggest that the introduction of Internet technologies are indeed being driven by the promise of revenue rather than cost gains. Almost twice as many carriers identified competitive advantage as the single key driver for IP, with reservation and frequent flyer systems taking priority in the migration. A more detailed analysis of the survey results gives a few ominous indications of the rate at which some carriers are moving faster than others in adopting e-business. All of the major groups have begun the move to IP and are generally most bullish about a quick transition.
An undercurrent at the Strategy Summit hinted that the end-game for IP could come quicker than most have predicted, as the more proactive majors, led from the USA, push for the cost savings to be had from wholesale e-ticketing. Timothy O'Neil-Dunne, who heads the travel group at VEO, a transatlantic Internet consultancy, is unashamed in his demand that it is time to bury the old ALC/TPF protocols and the "monolithic structures" which have been built around it within the airline and travel industry.
"Let's put TPF out to pasture. It is a dead art and the reality is that it should be ended," he says, adding that it is keeping travel in the dark ages of "accountable" paper. "It's time to change the time-honoured addiction to paper. We need to attack ticketing with paper as our default," he says, rejecting out of hand the notion that the need to interline must necessarily hold back the whole industry to the pace of the slowest. For good measure, he adds that interlining itself is an "unjustifiable" throwback and should be abandoned.
Not all are as forthright at O'Neil-Dunne, but he is far from alone among Internet evangelists in predicting a brave new world of empowered customers and the demolition of old industry structures. "Anyone who believes that control of the customer is still possible is going to be roadkill," he warns.
Business-to-consumer
This year's survey provides further evidence that the industry is making steady progress towards online ticket sales. Over two-thirds of carriers are selling tickets over a web-based service, with close to half making those sales over the airline's own web site. Most currently sell less than 10% of tickets online, but a small minority are working towards making it their main sales channel within the next two or three years. Significantly the North American carriers average three times the volume of online ticket sales being reported by European and Asian competitors.
At the same time, around a third of carriers have yet to make any online sales and appear to have no clear idea of when they will start. A similar gap has opened up between leaders and laggards over the introduction of web-based services for frequent fliers. For over 20% of the survey, such services are still years away.
The Internet economy is bringing issues of customer loyalty to the fore, believes David Quantrell, European vice-president of e-business applications at Nortel. He concedes that the world is older and wiser since the first wave of dot.com start-ups rushed on to the market. Unreliable systems and poor service quality were part of the problem, but he believes a preoccupation with transaction volumes rather than loyalty also contributed. As dot.coms have found to their cost, online shoppers are a sadly disloyal breed and the volumes can soon evapourate when lower-priced competitors set up shop on the web.
Quantrell argues that a second wave of e-business is emerging, focused on building lasting customer relationships. In pursuit of that goal, companies are realising that they need a "bricks and mortar" business as well as a dot.com presence, providing an integrated customer service. He points out that even the mighty Amazon.com online book retailer has set up a traditional customer call centre and even gone as far as opening a book shop.
Paul Shreve, a senior consultant at Cisco, takes up the theme, arguing that today's big idea is to create a unified system, incorporating call centres, databases, online services and more. "The key to success is in linking all of these systems together," he argues. "That's where the IT industry is going."
To date, he observes "pockets of progress" within different airline departments, but the vision for a unified system still appears to be lacking.
Such unification is already starting to happen for the customer with the arrival of Wireless Application Protocols (WAP), he says, painting a picture of a world in which mobile Internet access breaks down the difference between voice and e-mail. Forecasters predict that by 2003 there could be 1.2 billion mobile WAP phones around the world. "IP will be everywhere you have to break away from PC Internet thinking," says Shreve.
The survey results show some that airlines are now in the foothills of introducing WAP. A tiny 4% have started and around a third hope to follow within the next couple of years. But perhaps the clearest finding came from the 34% who do not yet know if or when their airline will take on WAP.
Business-to-business
The final part of this year's survey is devoted to the rising tide of e-commerce applications with suppliers and partners. E-business pioneers have long preached that the potential cost saving potential here may eventually dwarf that of the higher-profile savings to be made from b2c online ticket sales. Airlines appear ready to agree, albeit cautiously.
Only 30% of airlines have yet created b2b e-commerce applications with suppliers and the bulk of those are in traditional engineering areas led by links to aerospace manufacturers, spares and maintenance providers. However, over half of carriers plan to forge b2b links in the future. Engineering is again strongly represented but with airline partners, fuel and general procurement also high on the list of future b2b candidates.
Andrew Light, airline analyst with Schroder Salomon Smith Barney (SSSB), agrees that in practise these b2b opportunities may prove "more exciting" than b2c. It is not that online distribution is short on potential cost savings. SSSB calculates that carriers have a realistic opportunity of trimming distribution costs by 30% over the next decade as the emphasis switches from traditional travel agencies to online channels.
But, as Light points out, history would suggest that airlines will "compete away" much of the benefit. Neither is the industry yet in a position to dispense with the services of the existing intermediaries. SSSB estimates that only 30% of global travel sales are likely to be online within the next five years. With b2b, both the online penetration and the value retained by the airlines are expected to be far higher. SSSB reckons that by 2005, the industry could, on a cautious estimate, expect to see a $20 billion cost gain on the b2b side. The same calculation produces a gain of only half that amount for b2c in the travel market.
Carriers in the survey also appear cautiously optimistic about the potential near-term gains to be made from b2b, estimating cost savings in the 5-20% range - averaging out at 13%. If even half of that figure could actually be delivered to the bottom line, then IT departments would indeed have just cause to demand a little more attention and investment from airline boards.
Full survey results available on disk
A presentation of the complete research results for the Airline IT Trends Survey 2000 is being made available on disk, including results to over 40 questions asked and with breakdowns by geographic region. A free copy will be e-mailed to those airlines which participated in the survey or the IT Strategy Summit. Disks will be priced at $245.
Source: Airline Business
