IT trends survey 2006

By Colin Baker in Edinburgh

This year’s Airline Business/SITA IT Trends Survey should give both chief executives and chief information officers something to smile about. There are clear signs that the industry has grasped the opportunities offered by new technology – something perhaps best demonstrated by the fact that two-fifths of the industry offers web check-in, with nearly three quarters expected to offer this service within the next one to two years. It was only a year or so ago that this was seen as cutting-edge technology.

Just as importantly, there are clear signs that many airline IT departments are using their budgets more effectively. IT spend as a percentage of revenue has declined from 3.5% in 2001 to 2.2% on a revenue- weighted basis. Airline chief information officers emphasise that they see this as a healthy sign.

But budget falls are by no means universal. Fifty-six per cent of carriers on a revenue-weighted basis say they have seen IT budgets increase, compared with 29% seeing a decrease. More importantly perhaps, airlines say they are making more efficient use of IT and benefiting from lower prices. Against this background, Bill Miller, chief information officer at Continental Airlines disagrees with the argument that the industry should be aiming to spend 4% of revenue on IT as some suggest. “At Continental, we don’t bust 2% – and don’t tell me we’re not innovative.”

Paul Coby, chief information officer at British Airways and chairman of the SITA Group, also says that airlines are learning to do more for less. “My IT spend at BA has been going down for five years, ever since I became chief information officer.” But, he notes, there has been a 40% drop in running costs over this period, while investment in IT has actually increased, also by around 40%.

“The overall figure may be going down, but IT is much more efficient,” he says, noting that the unit cost of IT, including the SITA network, is coming down. “You should be doing it for less. You should be making your chief executive happy.”

Jaap Favier, research director at Forrester Research, notes that IT costs in general are going down. “IT is getting cheaper, the hardware is getting cheaper, and there is more choice.” He adds that outsourcing is also helping to bring down costs, and that although it is happening at a slow pace, industry consolidation, such as that seen at Air France-KLM, is enabling carriers to combine IT resources and leverage synergies.

Third-party providers

A note of warning, however, is sounded by Richard Clarke, director of consultancy Travel Technology Research. “Airlines are not spending enough,” he states, arguing that the industry is too reliant on third-party providers. “Airlines are relying on the market to make investments for them and they are relying on the market for innovation.” Clarke warns that although outsourcing may bring costs down, the benefits of innovation will ultimately go to the shareholders of the IT vendors rather than the airlines. “The danger is that airlines may lose the ability to modify their business processes fast enough,” he warns.

There is no doubt, however, that cost savings and payback are the key drivers when it comes to IT projects, with chief executives demanding rather than asking for IT departments to deliver on the bottom line. This is reflected in the fact that 73% of airlines cite projects with proven payback and cost savings as the priority when it comes to investments – up from 50% in 2005.

“This is a reflection of the fact that the world is a tough place. IT is just like everything else. It has to take its place in the queue,” notes Coby, who sits on BA’s capital investment committee. “If you look at everything from lounges, the relaunch of Club World [BA’s business class] and self-service baggage, they are all judged on payback.”

A regional breakdown of the figures reveals that Europe and the Middle East/Africa are the leading spenders at 2.6-2.7%, with North American carriers spending 1.8% and the Asia-Pacific region just over 2%. Capital spending as a percentage of IT spending appears to be just under 29%, with carriers in the top 25 in terms of passenger ranking spending 31%, compared with 21% for carriers outside the top 100 and cargo airlines. The Middle East appears to be lagging the rest of the world at 22%.

While differences within the industry remain when it comes to IT investment, it appears the vast majority are adopting Internet Protocol (IP). Some 78% of systems are IP-enabled, with the proportion by the end of 2008 expected to be not far off nine out of 10. “This is quite encouraging,” says Coby.

It is the sheer speed of the move towards web check-in that perhaps best demonstrates the pace of change in the industry. Tony Barsham, travel and transport lead partner at IBM Business Consulting Services, notes that the airlines operating at congested airports gain particular benefits from self-service. “Printing your own boarding pass has taken off like a rocket,“ says Coby at BA, which has recently made self-service mandatory for domestic flights. “This effectively eliminates check-in desks for domestic flights,” he says. BA is also pushing its excess baggage processing online, offering passengers who use this service a 20% discount on the charge if they use the web.

There is general agreement that the growth of web-check does not signal the demise of kiosks, however. “You will always need trouble shooters,” says Miller at Continental, who also points to some limits on further speedy adoption of web check-in. “Some countries and locations simply don’t allow it,” he explains.

“Kiosks will have more of a role to play in the future,” argues Clarke. “They will enable airlines to manage peak processing much more effectively. They will enable separate queues for baggage lines, ski check-ins and the like. They will help automate airports.” He adds that as a result, the bottlenecks will move from check-in to the security area.

Miller notes that there is even talk about checking in passengers when they are in their seat at some point in the future. “I don’t know how we get there, but one thing is for sure – the boarding process will change. When and how is down to regulations and culture.”

In the meantime, the steady move towards common user self-service kiosks (CUSS) continues, with 38% of kiosks deployed on a common-user basis, which will rise to 45% by the end of next year. Over a quarter of passengers are now using kiosks, with 38% expecting to be using this service by the end of 2007.

Regional differences

There are some stark regional differences, however. Fewer than one in 10 African passengers will be using kiosks by the end of 2008, compared with three-quarters of North American travellers.

The issue of regional disparity is still evident when it comes to e-tickets – and, of course, IATA will stop supporting paper tickets at the end of next year. The IT Trends Survey suggests that 78% of passengers will be using e-tickets by this date, with a further 12% doing so by the end of 2008 – leaving 10% of the industry that will effectively not be able to interline.

More than four out of every five North American passengers are using e-tickets, as are over half of European and Asia-Pacific passengers. In contrast, just 7% of passengers in the Middle East and Africa are doing so. By the end of 2007, when IATA support disappears, this will have leapt to 60%, and 82% by the end of 2008, suggesting that carriers in the Middle East and Africa may be leaving it late in the day, but they are getting there.

Coby points out that the end-2007 adoption date was always a target that was meant to motivate the industry. “It wasn’t meant to be easy,” he says. “But it was necessary. It has moved the whole industry into a much lower cost-base model.” Apart from the missing 10% of course. “Those that haven’t adopted it are going to be faced with higher costs,” warns Miller. “Some airlines seem reluctant. I have a hard time understanding why.”

Barcoded boarding passes are also being rapidly deployed – just under 80% of airlines will be using this technology in two years time. “It is rugged, reliable technology that works,” says Coby.

Baggage tracking

In contrast, radio frequency identification device (RFID) bag tags are struggling to win acceptance – it is perhaps telling that BAA’s new Heathrow Terminal 5 will not have them. Barsham at IBM, which worked with BAA on T5, comments: “I do think for a number of carriers the business case is yet to be proven.” Coby puts it more bluntly: “It is an answer looking for a question.” He points out that, for BA at least, tracking down the bag within the airport is not the main issue. The real problem is missed connections. “I know where the bag is. It’s at the wrong airport.”

A major sticking point at the moment is that the tags themselves simply cost too much money for airlines to contemplate. “We keep looking at it, it has it uses, but it is too expensive,” says Miller.

The question is, when will this change? Favier predicts the price of tags, which can be anything from around 20¢ to $2 depending on the sophistication of the device, will be 10% of today’s prices in five years time. Barsham says it remains to be seen whether these price falls materialise, however. “We are cautious,” he says. There is general agreement that the industry will have to move as one if the technology is going to work. “If you have RFID in the hubs, what about the connecting traffic?” asks Miller.

Clarke says that RFID may be overtaken by other technologies before the business case can be made. “Will we have Bluetooth?” he asks.

Text-based technology such as internet access and e-mail appears to be winning more wider acceptance than voice-based technology such as mobile phone connectivity, although some speculate that this may be a reflection of the relative maturity of the former, not to mention the fact that there are still regulatory hurdles when it comes to onboard mobile phone usage, although these are expected to be overcome next year.

“Voice-based technology is an ongoing debate,” says Miller, pointing to a survey in the USA that suggests that passengers would rather not have phone calls during in flights. On the other hand, he notes that in China it is not uncommon for many passengers to be on their phones before the aircraft has even landed.

Forrester has recently carried out research in the USA that suggests half of North American passengers want live TV on flights of four hours or longer, which is good news for JetBlue Airways, which helped popularise this technology. This compares with just under a quarter who want mobile connectivity and access to broadband, and a fifth who want video games. Just 11% are interested in text messaging, although Favier notes that this may be because that SMS has not caught on in North America to the extent it has in other parts of the world – again demonstrating the complex cultural issues involved with onboard technology.

Text messaging may benefit from the fact that it is much cheaper to offer than standard voice technology as it requires far less bandwidth, Favier notes.

Overall, however, there is a feeling that better use of telecommunications will be one of the things to watch over the next year or two. “At last, the industry is getting it right,” says Coby, who points to the possibility of texting passengers to let them know that there flight has been delayed or cancelled, and that they should come to the airport in, for example, two hours time.

Some were pointing to this type of scenario at the beginning of this decade, but the technology has taken longer to evolve than was envisaged. There is a real confidence, however, that this will begin to catch on.

Outsourcing

When it comes to outsourcing, most airlines seem to be satisfied, rather than very satisfied, with the service levels they are getting, although the percentage of dissatisfied airlines appears to be in the very low single digits. However, about one in five of carriers that have outsourced desk-top management are dissatisfied.

Barsham at IBM, one of the larger outsourcing partners, says there is a clear trend towards larger carriers moving towards vertical outsourcing, using the economies of scale that vendors can provide but retaining control of operations.

Horizontal outsourcing tends to be reserved for smaller carriers that do not have the same critical mass or skill base, he says, adding that the skill base can be hard to maintain in some parts of the world. “When we talk to airlines in Africa, they tell us it is nearly impossible to retain skilled staff,” he says.

When it comes to the lessons that have been learned so far, Barsham emphasises the importance of getting a structure that is innovation-friendly. “Some agreements have delivered on cost saving, but the problem has been: has it really enabled airlines to innovate and technology to grow? Has the structure been around to enable innovation?” He adds: “This is something we will be more focused on in future. It is something we have been doing a lot of thinking about.”

Will the pace of change slacken off? Favier argues it might. “I think, if we look back three years ago, the industry was still at the development stage of their e-business capability, websites and self-service kiosks. Most carriers in Europe and North America have now finished that. Most of the base projects are kind of finalised. Right now, we don’t see the development of similar high-impact projects. It is more a case of optimising and improving existing technology.”

Favier says that airline IT may be subject to the 80/20 rule, whereby 20% of the effort achieves 80% of the required functionality – so effectively it become more difficult to leverage cost savings.

Chief information officers insist, however, that there will be no let-up, pointing to telecommunications as one area to watch, particularly as the type of information that passengers have become accustomed to using on the internet becomes adapted to mobile technology.

One aspect of the airline business that seems to support the case for continued change is the desire for airlines to differentiate themselves from their competitors. Clarke argues that web check-in, for instance, “could be more important than selling online”. Not only will it take some costs out, but it provides carriers with a customer service point. “It will become a differentiator.”

Similarly, when airlines talk of mobile phone technology, it is clear that customer service is very much at the forefront of their minds – as long as they also deliver on the dotted line.

Coby calls this the ability to differentiate “smart IT for airlines”. With the need to differentiate the product becoming ever more crucial at a time when all carriers are facing high fuel costs, it seems likely that IT departments will play an ever more crucial role in developing airline strategy and products, and playing a central role at airline boardroom level. ■

Source: Airline Business