Is the airline industry keeping step with information technology? Less than a decade ago the question hardly needed to be asked. Few could begin to doubt the industry's sophistication or global reach. But since then the irresistible rise of the Internet and a new generation of open systems has swept away many of the old certainties - not to mention a few of the legacy mainframes.
What will emerge in its place is still something of an open question. It is perhaps reassuring that even the Internet's founding fathers are unclear as to where their offspring is headed. What is already clear, however, is that IT is no longer simply a toy for technologists but a core strategic issue for the boardroom. Which again begs the issue of just how far has the airline industry moved in making that psychological shift?
Airline Business joined with SITA earlier this year to conduct a survey of the state of IT among the world's leading carriers. The aim was not so much to gaze into a cloudy middle distance, but to set out a progress report on the state of IT within air transport.
The work was carried out by an independent research agency in May and June among senior ITand board executives from a sample of the largest 150 or so airlines - a group which together accounts for the bulk of world flying and gives a representative geographical spread. The usual warnings apply about research findings, but with more than 90 responses, the survey represents a significant benchmarking exercise.
Appropriately, the headline results were unveiled at SITA's Celebrating the Future conference, held at the end of June in Geneva before an audience of nearly 600 senior airline and IT professionals. That was to mark not only to mark the organisation's 50th anniversary but also an opportunity to glimpse into the unfolding future. However, this supplement represents the first full airing for the survey findings.
The research falls into two parts. The first looks at how IT is being managed and supported within the airline environment, including the themes of investment and strategy. The second focuses on how far and fast the industry is travelling down the road to the brave new world of the Internet and e-commerce. In both cases the aim was to set down some broad benchmarks against which individuals and the industry as a whole can judge its progress.
The findings displayed in this supplement are inevitably a mix of the good, the bad and occasionally the ugly. Equally revealing are the verbatim comments about the biggest IT successes and failures over the past year. And if the same projects are heavily represented in both camps, then perhaps that is the most eloquent testimony that this is an industry still finding its feet in the new world of IT.
Part One: The IT Environment
If adapting to the new IT has become a core strategic issue, then the crucial is whether airline boardrooms are now, in practice, treating it as such. On the surface the results are encouraging.
More than half of the survey have a board member with responsibility for IT. But digging deeper it is apparent that perhaps only a third have taken the next step and appointed a specific IT director or chief information officer (CIO). SITA director general John Watson argues that such a role could be crucial in forging a link between the company's long-term strategy and its IT department. Already, in other industries, the position of CIO is beginning to make its way onto executive boards, just as marketing, communications and logistics have over the past decade.
"My belief is that there needs to be a dialogue between the top management and their IT department. And that dialogue has to be about the future of the company," says Watson, who himself had such a relationship in a former life leading IT at British Airways. He stresses the need for that dialogue to be market-orientated: "On the sales and marketing side, you can't have a strategy which doesn't have a plan for IT. It just cannot happen."
Over 90% of airlines do appear to be signed up to the concept of a central IT strategy. But again, the devil is in the detail. On average, that strategy looked just over three years into the future. Watson cautions that such a time frame gives more the impression of practical forward planning, rather than of true long-term thinking incorporating ITinto the overall corporate vision. "You have to make sure that there's a driving force and an integrated vision among the people who are running the airline," he says.
But the acid test of commitment comes, as ever, with the levels of investment. On average the IT spend came to only 2.4% of group revenues, putting it well down the pecking order of airline expenditures. Most within the industry admit that the figure is perhaps no more than half of where it would have to be if the aviation industry is not only to keep pace with change but to achieve the strategic goals being set at the centre. Watson concedes that the level is "incredible" given the cost and competitive advantages at stake.
It is worth noting that the North American majors are already stealing a march, with IT spending at over 4% of sales - nearly twice that of European counterparts and with Asia-Pacific's carriers trailing with less than 1.7%. Analysis of the results also suggests that an investment gap has opened between the major airline groups (defined as those with revenues over $1 billion) and their smaller flag-carrier competitors.
Equally significant is the finding that 45% of airlines expected spending to fall or remain flat next year. As Watson points out, this is from a base that is already woefully low. At 2% of revenues, he says, the industry is spending less than it was a decade ago.
Low investment, together with the related difficulty of finding and keeping skilled IT personnel, clearly show up as the major barriers to achieving the corporate IT strategy. Overall 60% of carriers identified one of these two causes as their biggest single obstacle. Notably, both topics were a recurring theme among the verbatim comments about major IT failures over the last year.
Investment levels
"With flat investment levels and a lack of skilled staff, questions deserve to be asked about the quality of the IT strategy and the degree of commitment it receives at board level," says Watson.
One potential solution to the funding issue has been to outsource parts of the IT function. All but a handful of carriers have gone down this route, although vendors of outsourced services may like to note that experiences have not been universally positive as demonstrated by the verbatim remarks on IT failures.
Tackling the millennium bug has also made a significant call on scarce resources this year, with September shaping up as the deadline when the bulk of the industry will have completed compliance.
The need to link systems within the emerging global alliances could provide a more enduring diversion of IT resources. Some 45% of the airlines surveyed were part of an alliance and of those the majority shared systems with their partners or plan to shortly. However, Watson highlights the danger of becoming immersed in the politically complex task of communicating relatively basic data between alliance partners to the detriment of more fundamental infrastructure projects.
The overall picture that emerges from the survey is of an industry still feeling its way towards an overall vision of where IT fits in the strategic mix. But as some of the analysis shows, there are early signs that some carriers could be beginning to pull away from the pack as they invest more heavily, backed by a clearer vision of where they are headed.
"You have to be looking out more than three years to understand the things that are going to affect your business," in the words of Darell Jennings, group vice president and general manager of Unisys, speaking at the SITA conference in Geneva. Commenting on the survey findings about investment and strategic planning, he adds: "There's a great opportunity to change these numbers and if you don't there's a danger that your competitors will."
Part Two: Internet protocols
The current soul-searching over how air transport should handle the advent of the Internet is not without its ironies. The airline industry, after all, can claim to have laid the foundations for global communications and commerce, long before the Internet was even a gleam in the eye of its academic pioneers.
SITA itself was set up in 1949 precisely because the airline industry needed a global telecommunications network that did not otherwise exist. It still has claim as the world's largest private network and arguably the most truly global - serving more nations than the United Nations. Such core technologies as packet switching were being pioneered over the SITA network back in the late 1960s.
More than one speaker at the SITA conference in Geneva paid tribute to air transport's pioneering of global networks. "This industry created the business model for e-business and there should be absolutely, positively no excuse for it not to lead e-business now," says Greg Conley, global general manager for IBM's travel and transportation unit. But the encouragement comes with a warning: "Airlines have masses of data but it's in many different places and it's under-used, if it's used at all."
That lack of connectivity has begun to seem decidedly dated. Already the powerful mainframe computers and proprietary codes that helped the industry take a lead in the 1970s are starting to look like lumbering dinosaurs in an age of open systems, desktop computing and, of course, the Internet itself.
As computer gurus like to warn, companies that fail to change risk losing touch, not only with modern systems technology but with their customers too.
The Internet's phenomenal growth rates are legend. Forecasts which seemed outrageously optimistic a year ago now look woefully conservative. US Internet usage is already growing at 50% a year and the size of the Internet worldwide is expected to double within the next couple of years at the latest. Take your pick of the predictions, but the underlying message is that the Internet is exploding.
"The question for airlines in this whole area of IT, especially around the Internet, is how can you be strategic, how can you develop a plan?" says SITA's John Watson.
At least a couple of messages came through at the conference. First, is to seek out competitive advantage, whether that is through improved customer care, tighter control of the business or the cost advantages to be had from e-commerce.
Second and potentially more significant, is to be warned of the radical shift that the Internet is starting to create among customers, potentially giving every home home, office or even mobile phone user, access to a truly global sales distribution network. The web has already shown itself to be a great leveller, breaking down barriers of geography and scale, to allow the smallest of companies access to a world audience. It is also threatening to blur the line between industry sectors, as banking, travel, entertainment and other services begin to merge - becoming defined by who they reach rather than what they sell.
"My prediction is that in 10 years we'll find it difficult to tell the difference between travel and financial services," says Don Listwin, executive vice president of Cisco Systems, a company whose own growth has been as dramatic as the Internet its routers serve.
Likewise, John Roth, chief executive of Nortel Networks: "Every sales and marketing director today should be challenged as to how they are going to use these new technologies..... They will reshape business and probably society".
Planning for the Internet
There have been plenty of opinions, predictions and the occasional dire warning over the speed with which air transport is embracing this new world vision. Hard statistics have been something of a rarity. That was the aim of the second part of the Airline Business/SITA research.
The starting point is the transition towards the Internet Protocols (IP) which dominate the new IT. The encouraging finding is that 85% of the airlines have indeed begun to move to IP and all but a handful expect to follow within the next two years. However, the levels of investment tempers the good intention. The majority of those carriers that were prepared to make an estimate (and there were a surprising number of "don't knows"), confessed that less than 5% of their IT budget was directed at the IP transition.
Notably all of the North American carriers had begun the transition and were on average spending close to 10% of their budget on the task. In Europe and Asia the spend is still at around 7%.
The priorities for IP were predictable enough, focussing first on areas such as reservations and ticketing. That concentration on customer-facing parts of the business was born by questions on what was driving the move to IP. Competitive advantage came out as the overall key driver, closely followed by cost efficiencies.
The cost of legacy systems scored low, but perhaps because not even the greatest Internet evangelist expects to see them disappear any time soon regardless of the migration to IP. More notable is the apparent lack of focus on the ability to integrate with suppliers and partners. That came as a relatively poor third alongside integration of internal systems.
It emerges that only 70% of carriers have an Intranet within their organisation and most use it for staff communications - presumably e-mail. Overall, only 40% of carriers had developed e-commerce applications of any kind. Once again it is the North American carriers who are leading the charge, followed by Europe's majors.
The apparent lack of airline focus on such applications comes despite evidence that such applications can be a serious source of cost reduction. The systems vendors themselves already practise what they preach - or in Cisco's inimitable phrase: "We don't just talk the talk - we walk the walk." In its case that means handling up to 80% of orders on-line and 70% of customer care over the web, allowing the company to grow above $12 billion with only 17,000 employees, while at the same time raising customer satisfaction levels. Listwin says that five years ago, IT was viewed as another cost centre in Cisco, but that a quarter of the company's marketing budget is now directed at IT. Cisco is reputed to have handled one $100 million on-line order from a customer that no-one in the company had ever met.
IBM has a similar message. Its e-business model is netting cost savings of close to $1 billion a year. More than half of that of that comes through handling customer care on-line, reducing the burden on the help desk. On-line sales and distance training also play a significant part. SITA's Watson agrees that links with suppliers should not be overlooked: "Internet technologies are introducing new ways of sourcing suppliers, handling logistics and managing information. And in the advancing world of e-commerce, the balance of power is shifting from supplier to buyers all the way up the value chain."
On-line ticket sales take off
What has more clearly caught the air transport industry's imagination is the prospect of ticket sales over the web. The research results show that 41% of airlines already sell tickets through a web site, with most of the remainder planning to join them within the next couple of years. As yet, the volume of those sales remain small. None of the carriers in the survey was yet selling more than 10% of its tickets on-line, although evidence so far this year suggests that this could already be in the process of changing.
A further question asked how soon carriers expected on-line sales to reach 50% of their business, a level at which the web would have won the battle to become the industry's normal distribution channel.
The honest answer for a quarter of the sample was that they simply do not know, reflecting the uncertainties that still surround the Internet. Caution was also reflected by over 20% who thought that it would be more than five years before web sales dominated and another 11% who felt it would never happen. But the largest slice of respondents, 27% of the sample, believe that it will happen in the next five years. Perhaps surprisingly, the European majors show most optimism.
Internet forecasters have already suggested that on-line travel sales will hit $30 billion within the next four years and that airline ticket sales will make up around a third of that total. But such forecasts are already being revised upward as the Internet continues to grow. Of course, there is no guarantee that bookings will be through airline web sites, or alternative travel arrangers such as easySABRE, Travelocity or priceline.com, which is said to be clocking up sales of 7,000 tickets a day with its bid and offer concept.
Neither should the Internet simply be seen as a way to lower distribution charges, cautions IBM's Conley. "The web is about brand, it's about customer loyalty. It's not just about cost," he says.
The survey findings suggest that this message is being taken up. Of those airlines which have a web site, over a third currently run applications for frequent flyers or corporate customers. Close to another 45% are due to join them over the next two or three years.
If the Internet visionaries are right, the industry will have much further and faster to move yet if it is to keep pace. Michael Nelson, a former White House IT adviser, and now leading IBM's Internet technology programme, believes that digital revolution is still in its infancy, perhaps less than 3% complete: "The Internet is on the way to becoming just part of our lives. It will be as easy to use as a refrigerator and as pervasive as electricity." And while getting there may be less smooth than the gurus make it sound, it could be closer than the doubter had planned.
Source: Airline Business
