Emma Kelly and Laura Hailstone/LONDON
E-commerce fever is dominating airline strategic thinking "somewhat excessively", Pierre Jeanniot, director general of the International Air Transport Association (IATA) said at the body's recent annual general meeting.
E-commerce offers great promise for airlines - the potential to improve relations with customers and suppliers while raising service standards and reducing costs.
Airlines have thrown themselves into the internet, with activities ranging from, at the bottom of the scale, updating their websites and offering online flight booking through to the more internet-savvy carriers establishing dedicated e-commerce divisions, turning their websites into virtual travel agencies, combining with other carriers to form "mega" online travel agencies and establishing internet-based airline-led exchanges for the purchase/sale of goods and services.
Internet-based investments are not small. British Airways, for example, plans to spend £100 million ($151.5 million) on online ventures over the next two years, with the airline's dedicated eCommerce unit heading these activities. The airline's investment could exceed this figure as new opportunities present themselves, says Pat Gaffey, BA's head of e-commerce.
Airlines have initially focused their attention on increasing ticket sales online. Less than 3% of BA's tickets are sold online today, but the carrier aims to increase this to 50% by the end of financial year 2003, says Gaffey - pushing online revenues from today's £45 million a year to £700 million a year within just two years. Meanwhile, more than 4% of all of United Airlines' tickets are issued online through its website and other online booking services, with the US carrier expecting this source to account for at least 20% by 2003.
Other carriers, particularly low-cost operators, have always favoured online sales. Southwest Airlines expects internet revenues of $1 billion this year, while the UK's easyJet would like all of its tickets to be sold online. Its highest rate of internet sales in a single week is 74.5%.
Online advantages
The attraction of online sales is obvious - its ability to slash distribution costs and cut out travel agency commissions. It is four times cheaper to sell tickets via the internet than through a travel agent, says Bill Reeves, Delta's general manager of e-commerce.
Travel is the largest online revenue sector in Europe and is expected to grow from $8 billion last year to $29 billion in 2003, while 26 million households in North America will use the internet to book travel by 2003, according to Forrester Research.
But airlines have realised the greatest benefits will come from having as many online initiatives with as many partners as possible. In Europe, the internet has brought together BA, Air France, Lufthansa, Alitalia, KLM, Iberia, SAS, Aer Lingus, Austrian Airlines Group, British Midland and Finnair. The as-yet unnamed travel site is expected to attract "a significant proportion" of European online travel sales.
BA's Gaffey says the more mature US online market is a good indication of how much business the European airline portal will claim. In the USA, direct airline online sales account for 25-35% of the total online market, full-service intermediaries account for 40-45%, while discount brokers such as Priceline.com take the rest, he says. Gaffey believes half of the online market will go through full service operators and the European airline partners are targeting 15-20% of the total. The site, due to be operational by year-end, will be a virtual travel agency, and is expected to cut sales and distribution costs "significantly". The partners aim to appoint a management team this quarter, while talks are ongoing with potential technology partners, says Gaffey.
The largest multi-airline travel portal combines United Airlines, Delta Air Lines, Northwest and Continental Airlines with over 25 carriers. Negotiations with additional airlines continue, says Delta's Reeves. The Orbitz travel services site - previously referred to as T2 - is on target for a "late summer launch".
Orbitz has not been welcomed by all, however, with the US Department of Justice investigating the site after anti-trust accusations by travel agents, which are seeing their traditional business eroded by the online initiatives and fear price fixing from the airline-led sites. Reeves says Delta and its partners looked closely at possible anti-trust implications and says Orbitz will not be a threat to traditional agents, but instead will offer "more choice for the consumer".
The European partners also think their travel site will survive the scrutiny of any anti-trust investigation. "Frankly we don't believe there are any competition issues involved," says BA's Gaffey, adding that the venture will be managed by a team independent of the airline members.
Airlines are not content with taking part in just one online ticket sale initiative, but are spreading themselves out to maximise online revenues. Delta, for example, is a founder member of Orbitz, but continues to promote ticket sales via its own website and has an alliance with e-Travel, aimed at corporate customers. Ten per cent of Delta's total ticket sales today come via the internet, with half from the airline's own delta-air.com website. By 2003 Delta wants to boost this to 30% of total sales. But the push online is not just about cost savings. "We are striving for a one-on-one relationship with our customers. The cost saving is a by-product. Our customers are demanding that we are on the web," says Reeves.
BA concedes that the internet has forced it to re-position and it too is getting involved in numerous online initiatives as its "customer base is demanding it". The only problem with this is "management bandwidth" and how many online programmes one airline can participate in, says Gaffey. "The impact of this technology is quite transformational," he adds.
Asian carriers have been slightly trailing their European and US counterparts in launching internet-based offerings, but late last month nine of the region's carriers announced that they were joining forces to launch an online travel exchange. The unnamed exchange combines Air New Zealand, Ansett Australia, Asiana, Cathay Pacific, China Airlines, MalaysiaAirlines, Qantas, Royal Brunei Airlines and Singapore Airlines. The partners are talking to technology and distribution systems providers.
Due to be operational in the fourth quarter, the exchange will offer an online travel agency for consumers and will "provide opportunities for the travel trade and other travel distribution companies to enhance their ability to meet their customers' needs online in a cost-effective manner", say the partners.
While the airlines' first internet target was online sales, they are now following aerospace manufacturers and suppliers into marketplaces for the purchase/sale of aircraft parts, services and general business supplies. An airline-led buyer-driven exchange would better serve carriers' e-commerce needs than a manufacturer-led one, many airlines believe.
Buyer-driven exchange
The Star Alliance carriers were the first to announce plans for a buyer-driven exchange, in April. "We expect to achieve a wide range of benefits for the airlines participating in this system, including higher transparency of purchasing activity, lower prices and administrative efficiency," Robert Milton, Air Canada chief executive, who is spearheading the Star Alliance initiative, said at its launch. The exchange, which is due to be operational this year, is intended to serve the whole industry and is open to non-Star Alliance carriers. The alliance has been quiet on its progress since then, however, and declines to comment, saying only that partners are initiating its development.
Just weeks after the Star carriers signalled their business-to-business (B2B) move, American Airlines, Air France, BA, Continental, Delta and United announced their own exchange plans. The new internet-based airline groupings are cutting across the airline alliances, with Star Alliance, SkyTeam and oneworld members all taking new partners. United broke alliance ranks and opted for this exchange - project name AirNewco - rather than the competing Star portal. "United feels this alliance [AirNewco] best supports our strategic interest. All of the members of the Star Alliance can pursue their own goals," says United. AirNewco has since added Iberia to its membership.
The AirNewco partners are much more forthcoming on their plans than their Star Alliance counterparts. The exchange is expected to be operational in the fourth quarter and is in "a strategy phase and [the partners] are exploring various technology options", says Pat Wildenburg, Delta's acting vice-president of purchasing. A technology partner is expected to be appointed imminently. Delta is convinced that it has the right partners. "These airlines represent some of the largest in the world, both in size and leadership. They also cut across regional and alliance considerations. We believe these airlines are key to the success of any marketplace," he says.
The airline exchanges will be used to buy and sell goods and services ranging from fuel, catering and airport services to logistics, parts, indirect materials and value added services. The AirNewco partners will put their $30-plus billion in annual procurement through the exchange and in return are expecting big cost savings. "We are currently identifying these [cost-savings]. Studies show that transaction cost savings could reach 5-10% of process costs; product acquisition cost savings could also reach 5-10%; and we certainly see significant opportunities around supply chain and inventory management," says Wildenburg. Inventory savings are being estimated at 20%.
AirNewco member BA hopes the venture will allow it to increase its online purchasing from 25% to 80% by March 2002 - a move that will save the carrier more than £175 million on its £3.7 billion a year purchasing spend. The use of an exchange is also expected to cut the supplier base. Then of course, there is the revenue from any flotation. "As with any other exchange, if the opportunity arises and market conditions are appropriate, we will consider this option," says Wildenburg.
The internet is also leading to airlines partnering companies they have not traditionally been involved with. Early this month, for example, Qantas announced plans to launch a B2B exchange with 13 other Australian companies. The corProcure site, which will bring together companies as diverse as communication provider Telstra, banks and Australia's Coca-Cola division, will track goods and services including office supplies, fuel, communications and advertising.
The airline move into marketplaces is exactly what the aerospace manufacturers/suppliers running their own exchanges did not want. Preceding the airline stampede to launch their own exchanges, the manufacturers and their technology partners stressed the desire to get the airlines using their own portals. "The airlines may get together to do their own thing and then we won't get any benefit at all. The objective is to get carriers in as soon as possible," Simon Jeacock, vice-president aerospace and defence at i2 Technologies (technology provider for myAircraft.com), said at First Conferences' E-Commerce for Aerospace conference, earlier this year.
Neutrality the key
Neutrality is key for airlines in B2B e-commerce, and many perceive the current manufacturer/supplier-led exchanges as not offering this. "We want this [AirNewco] to be a neutral site for buyers and sellers. This must be open to be successful," says Wildenburg. "Many of the other exchanges have been supplier-led with limited focus. We believe that our marketplace addresses the needs of buyers in the airline business. We will of course have the ability to expand to other areas, such as general aviation, and will work closely with supplier-led sites," he adds.
But supplier-led marketplaces argue they are neutral. One executive from a supplier marketplace says: "Airlines are doing their own thing in an effort to have something on the table. A lot of these moves are tactical rather than strategic." With B2B exchanges requiring an investment of $50-$60 million to get operational, aerospace marketplace executives hope some of the airline-led initiatives will not come to fruition and that airlines will join forces with a ready-made aerospace industry-led one instead.
Source: Flight International
