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.
Whatever other long-term issues continue to preoccupy airline IT departments, there is little doubt about the theme which dominates this year's Airline IT Trends Survey. Everywhere the emphasis is on the need to save cost. Budgets are under severe pressure, with many projects being shelved or postponed, and attention, for the time being at least, is focused on short-term payback. Looking ahead it seems that there may be some hard choices to make as to which projects now survive.
Until last year, there had been a small but steady rise in IT spending across the industry. When Airline Business first joined with SITA to launch the Airline IT Trends Survey in 1999, the average investment in IT was running at just under 2.5% of industry revenues. By the start of last year the level appeared to be nearer 3% encouraged by what still then looked like robust industry growth. The latest survey, conducted over the first half of this year, now suggests that IT spending has slipped back under 2.5%. Like much else in the industry, it appears that the expenditure that was loosened up two years ago has been brought back firmly to pre-2000 levels.
John Watson, SITA director general, believes that the falling investment was already evident before 11 September and sent everyone reaching for the panic button. "There was a lot of optimism around in 2000, but we were already picking up some very different attitudes towards IT investment by mid-2001. Everyone was starting to reduce," says Watson. By the time that crisis struck spending was already coming down. In the event the investment figure emerges as 2.3% of revenues, a level which Watson concedes is understandable but may represent something of an over-reaction.
However, despite the headline fall in total investment, nearly half of the carriers in the survey reckon that their current IT investment is up on 2001. This, perhaps, is as much a reflection of sentiment as hard fact, reflecting a degree of recovery this year. Certainly it needs to be read in the context of the dramatic adjustments in spending levels which had already taken place in 2001.There are also some broad geographical differences too in current budget levels. Those from the Asia-Pacific and Africa/Middle-East regions remain the most upbeat. By contrast, the majority of American and European carriers report a decline this year.
However, there is cautious optimism that budgets will stabilise again next year. Over 60% of carriers are banking on a rise in investment levels for 2003 and another quarter expect to see no change. Watson wonders if such predictions are made more in hope than expectation. "It's encouraging if it's true, although it looks optimistic. But you have to be an optimist to be in the airline business," he says. The gloomiest outlook comes from Europe where less than half of carriers expect to see an increase next year.
The usual cautions apply to extrapolating too much from a single set of market research results. However, over the past four years the Airline IT Trends Survey has remained more consistent than most and achieves a highly representative spread of carriers. The research is carried out among the top 200 scheduled passenger airlines, together with a handful of key players from cargo and charter markets. This year, responses have again come from almost half of that sample, a group which controls nearly two-thirds of revenues in the world airline industry.
Although the survey remains confidential, the responses are also monitored to ensure that the sample represents a good spread in terms of airline size and geography. If there is a caution, then it is that the US industry is under-represented in terms of numbers. In part, that is simply a reflection of the degree of US consolidation, which has left less than a dozen major carriers controlling the bulk of the market. But the response this year was further influenced by the uncertainty that continues to hang over US air transport. However, it has also been possible to weight the responses based on the revenues of the respondent airlines. This allows the research to get closer to establishing some hard industry benchmarks on areas such as spending. For example, the industry's IT investment on a weighted basis is 2.6% of revenues, reflecting marginally stronger spending among the largest groups. Translated into hard cash that would be an annual spend of almost $10 billion.
This year carriers were asked about specific actions taken in the wake of the crisis. It is hardly surprising that the first action taken by the majority was to renegotiate contracts with suppliers. "Every airline after 11 September talked to every supplier they had. All of the major airlines called suppliers into the office and told them to reduce costs," says Watson, adding that there are particular expectations of SITA as a not-for-profit air transport organisation. "People expect us to help with cost reduction and we do," he says.
Despite continued growth in volume use of the network, SITA expects revenues to be "fairly flat" this year on top of a rise of only 3% last year. Watson adds that 2001 produced the highest level of bad debts in SITA's long history, as well as a new high in the number of stressed carriers asking to defer payments.
Carriers have also been busy deferring IT projects in the wake of the crisis. Just over 40% report that the bulk of new projects have had to be deferred, with nearly 30% of carriers also suspending work on upgrades. Only a minority of 14% have abandoned existing projects, most of them in Europe. The question remains open as to how fast such projects will be revived if and when the outlook improves. "It's difficult to get a clear impression of whether these will return," says Watson. "Our impression is that some of the deferrals will now be permanent."
The projects that do succeed will have to be which offer cost-savings or efficiency improvements. More clearly than ever this emerges as the key driver of future IT initiatives. "Cost reduction projects go to the top of the pile, especially if they can pay back in 12 months," says Watson. In the past, even in the downturn, projects might have been given two to three years to make a return, but in the current cycle it seems that cash is indeed king.
Time horizons
Planning horizons everywhere have continued their steady down drift. The days of the five-year plan have largely disappeared with an emerging consensus of three years as a more realistic timeframe over which to set strategy. This would be broadly in line with the product lifecycles set by the ITgiants such as Microsoft. However, this year's average falls just below the three- year mark for the first time. "People are thinking short- term and I'm surprised that it hasn't dropped further," says Watson. In fact, nearly a third of carriers now set strategy over two years or less. Although perhaps just as telling are the three airlines who confessed that they have yet to develop an IT strategy at all.
The four years of the survey illustrate the challenge facing airlines as they attempt to frame long-range strategy amidst the ever-shifting sands of IT. When the survey was first launched in 1999, the millennium bug was right at the top of the agenda - yet Y2K now seems like a distant historical footnote. Other key themes have also waxed and waned. There was a flurry of activity around e-commerce exchanges until the dot.com revolution imploded. The initial wave of excitement around auction bid sites or WAP mobile technology have also peaked and dipped. Now the emphasis is back to basics and to short-term cost-savings. Watson adds that although SITA itself retains a three-year plan, its own board looks most closely at the next 18 months.
"Airlines don't have the budgets and to a certain extent strategy may be easier to formulate now. They know what needs to be done," says Watson. "For example, carriers know that they will have to move to an infrastructure based on Internet Protocols (IP). They know that in five years' time few airlines will run their own reservation systems."
The main obstacle that emerges from the survey is lack of investment. The availability of technology is no longer seen as a key issue and, although lack of skilled IT people remains a concern it has clearly slipped into second place. The verbatim survey comments about the failures of the past year and the challenges ahead (see selected quotes) reveal the preoccupation with lack of budgets and the delays in implementing new projects. It is especially hard not to sympathise with the IT executive who cites as a key failure the fact that "cost-saving strategies delayed cost-saving projects". Also worth noting that the issue of security has begun to appear on the agenda as a challenge for the year ahead, potentially adding yet another front on which stretched IT departments will be tested.
Outsource spur
Watson believes, however, that the drive for cost efficiencies could actually help carriers to take some overdue decisions on outsourcing. "We're talking to airlines that we would never have expected to outsource," he says, adding that outsourcing is now moving up from the smallest carriers to the second tier and potentially to tier one majors.
The survey shows that almost 90% of carriers have now outsourced some part of their IT function. Management of the network and specific business applications take the lead with close to half of carriers outsourcing. Web hosting is not far behind, apparently with the industry rapidly deciding that this is a function best left to others. The biggest potential comes from desktop management and data-centre operations. Both will also reach the 50% outsource mark if current plans materialise over the next couple of years.
Watson adds that smaller carriers are looking seriously at the options for shifting the IT burden to outside providers including SITA. "We're seeing that a lot of tier three and four airlines are asking us to take over the whole of their IT departments and we're looking at whether we should expand our portfolio in that direction," he says.
Watson concedes it would be a major investment for SITA to run whole outsourced data centres, although it does already act as an application service provider (ASP) in areas such as reservations. Its shared Gabriel computer reservation system (CRS) helped to create the ASP model in the 1970s, and has a claim to be the largest shared ASP with over 200 users.
Today the survey reveals that almost half of the industry, led by the smaller carriers, already runs or soon plans to run reservation, inventory and departure control on an ASP model. And there are signs of a small but growing trend towards ASPs to run cargo, loyalty programmes and airline operational planning. As they build new generation systems, many airlines will begin to realise that they do not need to keep such applications in-house, says Watson.
Open systems
Meanwhile, the long-running transition towards new open systems continues. Almost all carriers have begun the move to IP. Around a fifth have already largely completed the transition although in the present climate few expect to join them this year. In fact the numbers have changed little since the 2001 survey, suggesting that ambitions to make the switch to IP have been delayed or deferred. A quarter of airlines still expect to move but not for a couple of years. Notably, the tally of those who do not now know when the transition will happen has grown. "Moving to open systems means you have to make an investment and many may have decided that this is not the year to move," says Watson.
Although the introduction of IP is being driven by the prizes of business efficiencies and replacing expensive legacy systems, Watson cautions that there are pitfalls too. Not least is the risk that while unit network costs are cheaper, the saving can soon be bid away by an explosion in usage as people exploit the connectivity of open systems. "You have to manage the internal use of information and connectivity, otherwise costs can rise rather than fall," he says, adding that some of the larger airlines are now monitoring IP usage, particularly of the internal intranet.
A similar caution applies to the use of online sales channels. Traditional carriers, especially those under assault from low-cost competitors, have put more flexible distribution systems at the top of their IT shopping list. Yet giving consumers the ability to search for low fares soon ramps up the number of transactions needed to complete a ticket sale, and arguably more so for budget than business fares. Although IP is not costed per transaction a with the legacy systems, the need for increased bandwidth could prove expensive. "Although the overall cost of sale is going down, the operational IT cost per passenger may be rising because of the ability of travellers to shop around," says Watson.
SITA also notes a trend among travel agencies to move to cheaper Internet connections because they can no longer afford a fully managed connection. "Whether that's a reaction to the economic situation with small travel agencies being hit or whether it's a structural change, we don't know," says Watson.
In terms of online ticket sales, the latest survey again continues along the trend lines set in previous years. The proportion of tickets sold over the web has grown to just over 10% for the typical carrier based on a crude average. But this disguises a growing gap between the major carriers, especially those in North America, and the rest. Using a weighted average to take into account airline size suggests that more than 16% of tickets are now being sold over online channels. Similarly the level of e-ticketing has reached 11% on a straight average but above 20% once weighted. For the top 25 passenger carriers, the level of e-ticketing may be higher still at close to 30%.
The airlines continue to focus on their own web sites as, by far, the most important channel of online distribution, although only a little more than half of the sales are actually made on such sites.
Around six carriers now claim to be selling over half their tickets over the web, marking a small increase over last time and with another 20% hoping to join them over the next two or three years. A similar picture is true of e-ticketing. Again it is significant that in neither case does any airline expect to make the leap this year, suggesting that the ambition is there but is not an immediate priority.
e-commerce progress
Finally, there is steady progress towards the use of e-commerce sites, even if it has not quite shown the explosive growth promised in the glory days before the dot.com meltdown. Over half of this year's respondents have made a purchase online against 35% a year ago. Spares, engineering and IT/office supplies remain the leading applications as before.
Especially in the present climate, it is interesting to note how the estimates of potential savings from e-commerce have slipped. From the early promises of savings of 20% or more the industry quickly settled on an average closer to 12% and in the latest survey this has come down to 7%. However, given that the major carriers remain more optimistic than their smaller counterparts, the overall anticipated saving on a weighted basis may be closer to 12% for the industry overall. IT departments everywhere must be hoping that such cost savings do indeed materialise. Looking at the challenges ahead, budget concerns remain top of the list. But there is still plenty of unfinished business with legacy systems and e-ticketing quite apart from the new challenge of tackling the security issue.
Source: Airline Business
