PETER CONWAY IN LONDON
After last year's fanfare, online exchanges are getting down to the hard grind of winning customers and integrating systems. Customers, on the other hand, appear to be unconvinced
There was revolution in the air at last year's Farn-borough air show. A slew of online exchanges promised radical change in the way airlines and aerospace companies dealt with their suppliers. At this year's Paris air show, the surviving exchanges were equally evident, still making the same promises, but facing a more critical audience. The tone too had changed, from a promise of rapid cost savings to an admission that Internet-enabled procurement and supply chain improvements will be a long haul for the aviation industry.
"This is a marathon, not a sprint," says Tony Amato, vice president for sales at Cordiem. "There is a lot of hard work to do." A marathon it may be. In Paris, exchanges like Cordiem and Aeroxchange were anxious to point to the progress they had made, the milestones passed, services launched and promises kept. But ask how many transactions they are handling, and exchange managers become distinctly uncomfortable. All can point to one or two auctions carried out for top of the range airlines such as British Airways or American Airlines, and, of course, the carriers in such cases were always "extremely impressed by the results" - but all the leading exchanges are reluctant to release more concrete figures.
"To say how many thousand transactions we are doing at this stage is probably premature," says Edjuan Bailey, director of marketing for Aeroxchange. He adds that a lot of transactions have been taking place, but, because of a lack of system integration, they are being completed outside the site.
"At the moment we are in the pilot stage," says Saleem Javaid, Cordiem senior director for maintenance and engineering (M&E) product development. "The objective is to focus this year on testing the applications in a live environment."
A more blunt assessment comes from Duncan Alexander, chief executive of SITA-owned Aerospan. "Transaction levels are not what they should be," he says. "The airline industry is still sitting on the fence, waiting to see what happens. We are not worried about this because we are in for the long haul, but we would rather airlines had a good go at it rather than sit back and see what happens."
This reticence may be because airlines have more pressing worries. "The industry is in a big financial slump and airlines want savings they can see in three to six months," says one aviation consultant. "With the best will in the world, and whatever the leader of the company says, most of the exchanges are three-year propositions, and we are in year one. When I talk to executives who actually buy these services, there is no-one who does not believe that these exchanges will deliver major benefits in the long run. But these sites are not high on their priority lists at the present."
Integration issues
It does not help that the sites themselves are far from ready to deliver the promised benefits. "The biggest potential benefits are in the M&E supply chain, and that is a complicated one," says the consultant. "You need software, IT integration and a change of practices and processes. Exchanges can talk about the changes that need to be made, but they don't yet have the influence with airlines and suppliers."
Systems integration is a particular headache and one highlighted by Oracle senior director for travel and transportation Terry Tooley. In June this year he was quoted in the press as saying that Aeroxchange was its most challenging project to date. Of some billion lines of inventory from airlines and suppliers around the world, the article said, so far only a million lines had been loaded.
Bailey does not refute those figures, but says the implication drawn is unfair. "It is not uploading inventory that is difficult, but integrating with airline systems. We completed the integration with our first airline, Cathay Pacific, on 19 June and others will follow. That will form the model for integrating the others." He declines to predict how long that will take. "It's a complex business and not something you can take a cookie-cutter approach to," he insists, but adds: "We learned a lot from Cathay and it will not be a long process from here on in."
Aeroxchange is not the only site struggling with integration. Javaid at Cordiem agrees that it is one of the key challenges, and even Aerospan, which benefits from SITA's 50-year experience with airline systems, says it is difficult, particularly with suppliers. "It is surprising how many repair stations don't have the right PCs and browsers," says Alexander. "We can use the SITA infrastructure to provide the right desktops and technology, but there is still the question of getting more suppliers integrated. Our inventory is growing at 70-100% a month, but we still have a long way to go."
Getting suppliers and airlines integrated is important because, above all else, exchanges fear being charged with failing to gain critical mass. An indication of the scale of the challenge is found when comparing either Aerospan or Aeroxchange's claims to some 110 suppliers connected to their system, with Exostar's roster. Exostar, a procurement exchange set up by Boeing, BAE Systems, Lockheed Martin and Raytheon (and recently joined by Rolls-Royce), says it now has 4,000 out of 40,000 suppliers connected, and is working its way through 250 systems run by its founding companies. It boasts around 20,000 transactions a month, says vice-president for communications Ludo van Vooren.
Though Exostar is in a different business from Cordiem, Aerospan and Aeroxchange - it sources parts for manufacturing rather than for airline operations - it still gives an idea as to the scale of the numbers of suppliers needed to reach a critical mass through an exchange. Aeroxchange and the others have their work cut out.
Of the exchanges focused on airline procurement, Aeroxchange, Aerospan and Cordiem have emerged as the leading contenders. Each offers a slightly different model, and each claims different advantages. Aeroxchange's trump card is the way it is aggressively signing up airlines. Its 10 founders and 3 subsequent equity partners have been joined by 17 other carriers (see box on page 64). Membership like this should give it significant pulling power when signing up suppliers.
Ownership question
Cordiem counters Aeroxchange by claiming the latter is handicapped by being only airline-owned. Formed by the merger of airline-led AirNewco and manufacturer-led MyAircraft, Cordiem flaunts its ability to understand both sides of the buying process. Aeroxchange responds by saying that the presence of manufacturers as owners of Cordiem will put off other suppliers. "We are neutral," insists Charlie Childers, Aeroxchange's director of sales. "We have no supplier bias and we offer a level playing field for carriers since any airline can join."
That said, Cordiem's three founder members on the supplier side are all heavyweights - BF Goodrich, United Technologies and Honeywell. Amato says that Cordiem also has a "good cross section" in its "supplier advisory group" - its associate members list - though he declines to give names. On the airline side, nine carriers are equity partners, and 11 more serve on the advisory council.
How meaningful these affiliations are is unclear. Javaid at Cordiem admits that "most airlines we work with, even though they are testing with us, are also looking at other options." John Seeliger, vice-president and aviation expert at Mercer Management Consulting in Dallas, doubts that even equity partners in an exchange will be bound to the product if another exchange offers better functionality. Aerospan must hope so, because, rather than signing up members, it is relying for its success on developing superior functionality, neutrality from both airlines and suppliers and the fact that "all airlines in the industry already own a share in us through SITA".
All three exchanges have started with a general procurement auction or two (indirect items such as office supplies) and then more recently launched M&E-related applications. Each plans to focus on those functions for a while, but promise to eventually include fuel, catering, airport services - in fact everything an airline could want.
Quite why the exchanges have this ambition to be all-encompassing is not clear. "It would make more sense for them to get one thing absolutely right," says one observer, who blames the ego of airline chiefs and the fact that "they think like airline bosses, not like managers of start-up companies". In fact, the commitment to doing everything is already going fuzzy at the edges. Exchanges are edging towards the concept of being portals, directing users to other specialist services as required.
Fuel interest
One example is the interest both Aeroxchange and Cordiem have taken in Jet-A, a jet fuel portal whose ownership is split between airline members of both exchanges and the major oil companies. The exchanges are effectively admitting that there is no point in copying what Jet-A does, and are content to integrate its functions into their respective service portfolios. Another field where this may well happen is catering and other above-the-wing services. Web-based platforms - not exactly B2B marketplaces in the conventional sense of the word - in this area include e-gatematrix, which is owned by GateGourment, independently-owned Supplyair.com and i2.
E-gatematrix was launched in March 2000 with a 12-year commitment from Delta which handed over the management of its $650 million above-the-wing contracts to the outfit. The company is now focusing on integrating the Delta suppliers into its system, says e-gatematrix executive vice-president and chief financial officer Torben Carlsen. However, he says that in due course it also aims to get other customers on board, such as Gate-Gourment itself and, maybe, Swissair.
Carlsen sees no reason why it should not go on to link with Cordiem or Aeroxchange as their catering arm - indeed he says talks with Cordiem are already taking place. Like Jet-A he can also envisage having relationships with more than one exchange. "We want this to be an open marketplace, because the more people you have linked, the better the benefits," he says.
Carlsen pitches e-gatematrix as more of a supply chain solution than a marketplace. Supplair's twist is that it does physical distribution, as well as online supply chain management, auctions and sourcing. Initially this is only on offer in Europe, but will extend to the USA and will eventually be offered in Asia, says chief executive Jan-Willem Dankelman.
Supplair's customers include City-Flier, LTU, KLM, Northwest, Swissair and United Airlines on the airline side. On the supplier side, it has vendors such as BestFoods, Coca Cola, Heineken, Heinz, Nestle and Unilever. Like Carlsen, Dank-elman is happy to envisage offering services to Cordiem or Aeroxchange, or even to catering companies such as LSG, which has also announced it will set up an online solution.
This indeed might prove to be the future model for all the exchanges. Van Vooren at Exostar says it already has links to 14 suppliers on Commerce One for non-technical goods such as office supplies.
He believes that eventually all surviving exchanges will become interconnected, much as telecom companies are today. "You don't need to worry that the person at the other end of the telephone is connected to a different telephone company: one exchange just connects to all the others," he says. "The rational model is that everyone will connect to an exchange, and then each exchange will connect to the others."
Thus, in the future, Van Vooren can see the Cordiems and Aerospans of the world linking through Exostar to all the Boeing or Raytheon suppliers he is enlisting. "A lot of the suppliers with whom they want to work in the aftermarket are the same ones we are linking up with," he says. "It is quite hard for airline-led exchanges to sign up with enough suppliers to get a critical mass, whereas all we have to do is say 'Do you work with Boeing?'"
Killer application
Seeliger at Mercer Consulting has an alternative vision of the future. He says that eventually the functionality on one or two exchanges will prove superior and all the airlines will flock to these sites. The exchanges themselves agree with this view, and are searching for the killer application that will win airlines over. Javaid at Cordiem reckons one formula would be to get all the parts inventories of airlines, suppliers and maintenance shops online and visible. "This is something not currently available, but [is something] which airlines would rely on. Whoever develops this first will win," he says.
Seeliger, however, cautions sites against exclusively pursuing the big goals. While he thinks, in the end, that sophisticated supply chain functionality will win, he suggests that, in the short term, exchanges need to demonstrate some smaller-scale concrete benefits to win airline confidence and get doubters off the fence and into the marketplace. He points to possible demand forecasting tools and systems that would allow airlines to pool their orders for enhanced buying power as examples. "If they want to survive, they should identify some pain points where they could produce a relatively quick value proposition," he says. "That is essential if they are to build credibility with airlines."
| Aeroxchange |
| Founders and subsequent equity partners: |
| Air Canada, ANA, Air New Zealand, America West, Austrian, Cathay Pacific, FedEx, Japan Airlines, KLM, Lufthansa, Northwest, SAS and Singapore Airlines |
| Subsequent members: |
| Air India, bmi british midland, Eqypt Air, Gulf Air, Icelandair, Kuwait Airlines, MEA, Mexicana, Qatar Airways, Saudi Arabian, Royal Jordanian, Syrian Air, Thai Airways, Varig and Virgin Atlantic |
| Codriem |
| Supplier members: |
| BF Goodrich, United Technologies and Honeywell |
| Airline equity partners: |
| Air France, American Airlines, British Airways, Continental, Delta, Iberia, Swissair, United Airlines and UPS |
| Airline advisory council: |
| Aer Lingus, Airbourne Express, Asiana, Aeromexico, Britannia, Finnair, LanChile and South African Airways. |
Source: Airline Business
