This year's survey of IT trends continues to benchmark the rapid uptake of Internet technologies within the industry. The question now is how that technology is being applied. Airline Business discusses the survey findings with SITA director general John Watson
Airlines may not always have been in the vanguard of the Internet age, but the industry has surely now arrived. The brave new world of Internet Protocols (IP) and open systems, which only a few years ago seemed dangerously radical, is today accepted technology. Now comes the issue of how to use it. That journey appears to have only just begun. This year's Airline IT Trends Survey, conducted jointly by Airline Business and SITA, demonstrates the extent to which IP has asserted itself. John Watson, director general of SITA argues that the technical argument has been won. "IP and open systems are becoming the prevailing technology," he says. "The question is what we're going to do with it."
At present the evidence is that carriers have two main strategic preoccupations: to get closer to their customers and to reduce costs. And they are looking to IP to deliver both. Many are already forging ahead into-business applications and experimenting with the next big advances coming over the horizon in the shape of mobile and wireless.
However, Watson cautions that no-one should overlook the dramatic impact that the technology is due to have internally within their organisations. He prefers to use the phrase "e-enable" rather than e-business to help capture the potential to connect and integrate. "It is an enabler, a facilitator," he says, not necessarily simply means of doing business more cheaply.
Such trends have indeed begun to feed through in this year's survey. Now in its third year, the survey is based on replies from senior IT executives at over 100 leading airlines. That represents roughly half of the target group, composed of the world's top 200 scheduled passenger carriers, together with a few key players from charter and cargo markets. In terms of revenues the respondent airlines control nearly two thirds of the industry worldwide. And although the usual cautions apply about reading too much into a single set of figures, this survey arguably provides the best available guide as to the trends at play within air transport.
It is also now possible to identify trends running across the three surveys, which have been carried out since the original launch in 1999. Admittedly the samples are not identical, but they do come from the same pool and in similar numbers. The changing preoccupations are perhaps clearest in the verbatim comments on IT successes and failures over the past year - a representative sample of which are given over the following pages. Back in the launch survey in 1999 the concerns understandably centred on the millennium bug and early steps in the migration to IP. Today the concentration is firmly on e-business applications - mentioned most in terms of IT successes as well as an occasional failure. Not all issues have changed. Skills and investment shortages continue to be a concern, as do a few persistent grumbles about lack of a corporate IT vision and board support. Also spare a thought for the IT executive who cited success as: "Survival, just keeping it going!" He is surely not alone.
Management & environment
An encouraging highlight is how well budgets have held up over the past three years. Well over half the carriers report a real rise in the planned IT spend this year and even more believe that budgets will grow again in 2002. That steady rise has been consistent across the surveys.
Less certain is whether the optimism will hold in the face of what now appears to be the start of an economic downturn. The latest survey was carried out in May and June before the worst of the financial news had hit the headlines. "Airlines want more for less," argues Watson. "They don't want less technology. They want to improve their competitiveness. But I think they're looking at their budgets in the light of the industry's overall financial results." He adds that static spending does not necessarily mean a freeze on progress. "You have to recognise how much more technology you can now buy for your dollar," he says, citing a double digit decrease in unit costs on the network as well as falling prices for hardware and standard software.
The shadow of recession notwithstanding, the survey suggests a steady upward trend in IT investment across the industry. Back in 1999, the average stood at just under 2.4% as a proportion of company revenues. This year the average has risen to just over 2.8%, although the rise has been far from uniform.
While the US majors continue to lead in the volume of spending, they also appear to be the first to feel budgets tighten - half report no rise in investment this year or next. By contrast, carriers in Asia-Pacific, which have lagged behind in spending levels, are running to catch up and this year are not far off the world average. Leading carriers in Africa and the Middle East too appear to have continued to invest at increased levels.
That evidence tends to suggest that, barring the effects of downturn, the industry may be converging on an IT investment figure of just over 3% of revenues. On present standings that would translate into an annual industry investment of somewhere above $10 billion each year. Even at that level, the spend is a couple of points below the 5% mark set as a goal by many IT professionals.
Lack of investment continues to rank high with the survey as a barrier to accomplishing IT goals. Over half of executives cite it as a major hurdle and a third as the one of the main obstacle to achieving their IT strategy. Significantly, perhaps, for the first time lack of investment overtakes lack of skilled people as the main obstacle. Watson adds that the skills shortage should now be easing due to the cut-backs among the big IT companies which had been sucking up all available talent. Now, especially in North America, many of the big companies are laying off staff.
A potentially more entrenched problem is the continuing perception that IT lacks support in the airline boardroom. On the face of it, IT appears to be growing in stature as a board function. Around 60% of IT leaders sit on the airline's main board and close to a third of all carriers now have a chief information office (CIO). That is a long way from even a couple of years ago. However, the survey also reveals that close to a third of IT executives from right across the industry still see lack of board level support and corporate vision as one of the obstacles to achieving strategy.
While the CIO role has traditionally been there to provide just such a bridge between board strategy and technology, Watson detects that some carriers are beginning to wonder whether the role should be divided into two jobs. The CIO could concentrate on strategy and new e-business applications, almost as a straight alternative for an external management consultant. "The CIO becomes more of an internal adviser, rather than running the data centre," he says. Meanwhile, the task of handling the IT "engine room" reverts to being a largely technical function. However, Watson, himself a former CIO at British Airways, cautions against such a split, arguing that the two sides of the role have to remain tied if IT strategy is to hang together.
It is clear that strategy planning horizons have been falling as the speed of technology change increases. In the latest survey the average edges down closer to the three year mark. "I'm surprised that its not lower than that," says Watson. He points out that the old five-year plan is outdated and fast being abandoned in favour of three. SITA itself did just that a few years ago and has even thought out loud about whether three-year plans are worthwhile, beyond the obvious need for good corporate housekeeping.
Internet technologies
Arguably the clearest trend to emerge from the survey work is the extent to which the industry is committed to Internet technologies. Over 90% of carriers report that they have now started the migration to IP. A fifth of those have already largely completed the transition with another third expecting to join them over the next couple of years. "The industry is really beginning to use IP more effectively and we're starting to see the potential of that technology. Its what we've been predicting over the past five years," says Watson.
Airlines are in little doubt of what they want from their investment in IP, or for that matter from IT in general. Highest on the list is competitive advantage, followed not too far behind by cost reduction. "There isn't a carrier out there who isn't saying that they have to understand their customers more and talk with them more, and also to do things for less cost," says Watson.
He points to SITA's experience. Activity on its network has risen by more than 50% over the last year, driven by the "technology shift" to IP. Yet network revenues have risen by perhaps only 5% thanks to the lower unit costs that IP brings.
Behind the soaring usage figures are two drivers. First carriers have been able to add more functionality, especially in customer service areas ranging from check-in desks upwards. "That's driven by the richness of the systems functionality and the levels of integration which an IP network allows," says Watson. Second, airlines have also been able to integrate internal systems. Watson believes that this second and relatively underdeveloped area may have the strongest potential for future growth.
At present around 70% of connections on the SITA network currently relate to the journey -typically between airlines and airports. Another 20% come from sales and distribution with only the remaining 10% accounted for by internal communications. "That last 10% is definitely going to grow," says Watson. He outlines a vision of "knowledge workers" with desktop access to a broad range of data from across the business and the ability to use it in taking decisions, especially in areas such as revenue management.
However, Watson has a caution for those looking to migrate to an IP network. "The unit cost comes down and the ability to run your business improves but the complexity of managing the network increases enormously." Instead of dealing with a handful of network switches the airline has to consider thousands of connections between IP routers - both its own and those of the network provider. And while there are fewer outages, they also take longer to resolve. The gains are clearly there to be had, not least through 15-20% unit cost reductions, but Watson believes that carriers will have to be prepared to look at outsourcing as a real option. Network management already tops the list of outsourced functions, with over 40% of airlines currently outsourcing and more planning to join.
Business-to-consumer
The drive to gain market advantage shows clearly in the rush towards online ticket sales. Over 80% of carriers now sell tickets over the web, even if in relatively modest numbers. Watson remarks that the volume of ticket sales may be less than the headlines suggest. On a rough estimate perhaps no more than 5-6%of tickets are currently being sold over the web.
However, there is continuing evidence of a gap opening up between the regions. The North American majors remain significantly ahead of the pack with others in regions such as the Middle East and South America trailing in their wake. It is notable that a small band of carriers (12%) already sell over half their tickets via the Internet or plan to within the next couple of years.
It is also interesting to see where the tickets are being sold, or rather where the airlines would like to see them sold. The bulk of carriers still see their own website as the key to Internet sales, followed at a distance by the Global Distribution Systems (GDSs) and sites that the carriers share with airline partners or alliances. In short, it seems that carriers are increasingly wary of losing control to the new online players such as the auction sites. However, Watson points out that the online travel agencies are difficult to ignore and that they are trusted by the customer.
The uptake of e-ticketing shows a similar picture. Just under half of carriers are now using the technology, but it is worth noting that this group is heavily biased to the majors. Virtually all of the North American carriers already provide e-tickets - most of them in fact are now selling most of their tickets this way. However, there is a good deal more uncertainty elsewhere around the world and it still looks as though it could take another five years before e-ticketing becomes the norm.
The lack of an interlining standard has no doubt hampered the uptake of e-ticketing in the international market, but that should now be eased as new standards emerge. The US majors have been tackling the issue on their domestic services as have the global alliances. The initiative from SITA and the International Air Transport Association (IATA) too is now coming on line.
The lack of such industry standards remains a key issue hanging over online ticket sales, but the most serious concerns continue to hinge on security. "We've put a lot of emphasis on security and firewalling," says Watson of SITA's own work. If anything, he believes that the issue of hacking is one of those rare areas where the professionals are more alarmed than the public, given that the issue has tended to be played down by press and politicians.
Watson detects similar nervousness over security in providing frequent flier applications via airline websites. Besides, such applications are not easy to build and have, to date, not been user friendly. "There's a levering curve about how to present information to the customer which is useful and easy to use," says Watson.
But no sooner has the Internet arrived than the next technology challenge appears on the horizon in the shape of Wireless Application Protocols (WAP), moving the game towards mobile communications. Around 29% of carriers have already introduced some form of WAP service for customers, with close to the same number planning to follow in the next couple of years.
How far such trials have got is less clear. "Everyone has a few programmes going but a lot is experimentation rather than real systems," says Watson, adding that while it is right that people are experimenting with WAP, the technology and the standards have further to develop. It is a view shared by more than one frustrated IT executive in the survey.
"Wireless today is where IP was in the early 1990s," says Watson. It looks set to grow just as fast once the technology comes right. "We believe that our biggest new technology over the next 3-5 years will be wireless and mobile."
Business-to-business
Last but not least comes the issue of business-to-business. The dot.com meltdown has knocked some of the shine off the promise of the new b2b exchanges. Worth noting too is that only 35% of carriers have yet completed a commercial transaction on a b2b marketplace. That marks only a modest rise from a year ago. "The bubble of enthusiasm has deflated a little, but it will come back," says Watson, conceding that the advantages were somewhat oversold.
In fact the airline estimate of likely cost savings through e-commerce is, if anything, falling. It averages around 12% this year, but is below 10% among those major carriers who have been in the forefront of using the technology. Watson concedes that 10% is probably realistic, but returns to his argument that the biggest cost reductions flowing from the IP-enabled network could well come from inside the business rather than from online links with customers or suppliers. The opportunity is to re-engineer the business, cutting across the old departmental divides and questioning the need for the backroom job functions built around those divisions. "Airlines need to look at the number of non-frontline staff that they employ. Where they aren't adding value then why aren't those functions being automated?" asks Watson.
Source: Airline Business
