Predictions that air travel could become the world's first web-enabled industry are starting to look like a realistic prospect as online sales, e-tickets and a range of new technologies gain ground with increasing speed. The extent of the gains show through in this year's Airline IT Trends Survey, albeit despite continuing budget concerns
In technology circles it is voguish to talk about tipping points - that finely balanced moment at which a pioneering new technology is poised to tip over into the mainstream. The airline industry appears to be at just such a point. There is now confident talk that air travel, which already provides the web with its highest value business, could become the first sector to have a majority of sales online. And behind this move, the airline industry's wholesale conversion to new open systems throughout the business, too seems now only a matter of time.
At the same time, the role of IT as a centrepiece of boardroom strategy seems now to be an idea whose time has come. Both themes shine through in the latest Airline IT Trends Survey, the benchmark research carried out for the past six years by Airline Business and SITA. The themes too echoed through the accompanying Airline IT Summit, the strategic forum for airline IT executives hosted in Brussels after the SITA annual general meeting in mid-June.
Paul Coby, chief information officer (CIO) at British Airways and current chairman of the SITA Group, opened the debate repeating his conviction that there should be no IT projects, but only business projects. "I believe that technology is changing the face of the airlines. In this, IT is fundamental and it is frontline," he says. And today he is far from alone in seeing IT as an enabler of business transformation rather than an internal service department.
Just two weeks before, that view had been reinforced at the IATA annual general meeting as it reeled off a list of priorities designed to offer the most immediate and significant cost savings to the industry. The headline measures set by airline chief executives all fall within IT departments to deliver: e-ticketing, common use self-service kiosks, radio frequency identification tags and barcode standards for tickets. A host of other projects that did not make the final cut also have IT at their core, ranging from paperless cargo and advanced passenger information through to helping to co-ordinate XML standards for common data exchange.
Budget constraints
However, while IT departments may take pride in taking a central role in transforming the business, the harsh reality is that they will have to do more for less. As the Airline IT Trends Survey 2004 clearly shows, budgets have still to recover from their collapse after 2001. Back then the industry reached an investment peak with carriers, on average, reporting that 2.8% of revenues were being devoted to IT. This time the average stands at 2.1%, slightly down on the previous year and also on a lower revenue base. Weighting the responses by airline size gives a slightly higher score of 2.5% reflecting a larger spend by the major carriers.
The results come with the usual cautions about reading too much into a single result, but the Survey is the most comprehensive benchmarking project of its kind with six years of data behind it. The research is conducted among the leading 200 passenger carriers together with key players in the low cost, cargo, regional and leisure sectors. This year responses came back from 112 airlines - itself a record.
The fall in headline investment numbers is clearly a concern, showing through in the verbatim responses to the IT successes, failures and challenges ahead. Lack of budget is still cited as the single largest obstacle to achieving IT strategy, although significantly down on a year ago. However, IT managers remain an optimistic lot. SITA president Peter Buecking points out that well over 80% expect spending to increase or at least stay the same in next year's budget round.
Buecking adds that it is not simply a question of how much airlines spend but how effectively. The low-cost carriers, for example, without the deadweight of legacy systems to support, spend around 1.2% of revenues on their IT, but clearly hit the highest numbers on online sales and e-ticketing. "It's not how much we spend, it's how smart that matters," adds Coby. "The way to secure board support for IT is to demonstrate that it does benefit the bottom line."
Significantly, short-term projects with proven cost savings topped the list of investment priorities for new projects, with longer term strategic infrastructure projects slipping down the agenda. Buecking points to a mismatch between this priority list and the clear message elsewhere that IT is embedded in long term Airline Business strategy. More worrying is that lack of board support is still seen as a nagging obstacle for over 40% of IT departments.
Transforming the business
However, beneath the need to deliver immediate cost benefits, CIOs clearly see their role in terms of pursuing business goals rather than serving up set-piece technical solutions. The language throughout the Summit was that of business strategy. "Gone are the days when the discussion is over whether we should bring in ERP [enterprise resource planning] or not, now it is more about how to solve the business process solution," explains Marzida Noor, CIO of Malaysia Airlines.
Herself from a corporate planning background, Noor describes her airline's IT transformation as work-in-progress, starting with reinvesting in the department but now looking to make real gains for the business. "The ability for Malaysia Airlines to be competitive was partly constrained by ineffective IT delivery capability," she says. The airline was significantly lagging the industry in investment levels, it had a lack of key skill sets and a lot of broken processes. "The IT department was focused on fire-fighting and stabilising operations."
Key to turning this around was a major outsourcing deal which effectively handed IT operations to IBM. "Out-sourcing is a relatively new concept in Malaysia Airlines and I am quite infamous in the airline for that," she says. The move to IBM began last September in a phase Noor describes as "stabilisation" and getting control of the airline's IT with the partnership being bedded down over a 6-18 month timeframe. The second phase is to build a IT platform from which the airline can start to reap real benefits.
"This means we have a high planned IT investment in the next 3-5 years," says Noor. Malaysia will go from a legacy network to IP, from dumb terminals to desktops. The impetus for change came from the fact that lack of IT delivery was hampering the whole business. For example, the need to move towards online sales had been a key target for five years, she says, and was finally introduced for domestic sectors in January.
Malaysia joins a small but growing trend towards full outsourcing. Some 11% of this year's survey say that they have outsourced most IT functions and that number could rise to close to a quarter over the next two years if stated plans come to fruition. A range of functions such as web hosting, network management and data centres are close to being outsourced by around half of the industry.
Fiona Balfour, CIO at Qantas Airways, argues that much infrastructure is now available as a "commodity" and her carrier is now progressively buying it in. IBM has been handed the data centre and Australian telecoms company Telstra is handling global desktop management and the domestic network. Qantas, alongside BA, is in the process of moving its whole inventory system to Amadeus in a pioneering piece of outsourcing, while its revenue accounting is with Navitaire. "Fourteen years ago we did everything ourselves," says Balfour. "In some parts of the organisation we were even building our own PCs."
That culture has been ditched as the airline transforms its IT and moves to an "acquire and manage model", says Balfour. "The most remarkable thing is that I will be the first CIO in Qantas' history where every server, mainframe and desktop gets turned over every five years as a term of a contract." Outsourcing has already seen the Qantas "IT shop" fall from its peak of 1,350 staff in 2001 to around 700 today. "The main game is getting out of our fossilised business practices and moving to modern business processes." Noor says that Malaysian Airlines too has taken staffing in the IT division down from 320 to only 37.
Pace of change
The speed with which the transformation can occur, even at a relatively small flag-carrier, is well illustrated by the case study related by Nigel O'Shea, head of ITat SriLankan Airlines. He arrived when the Emirates Group took a 40% stake in the carrier in 1998, together with a 10 year management contract. "Little had been invested in IT for many years," says O'Shea. "It had horrible outdated hardware and lots of legacy systems. There was no orientation towards the user, no IT culture and staff were generally IT illiterate. In 1998 there were just 53 PCs in the whole company."
O'Shea led a drive to radically modernise SriLankan's IT and presented the vision to the board. The transition required considerable investment. "They all needed oxygen when they read that," he recalls. But the plan was backed, and today the airline has a fully integrated IT division. "There are no legacy systems, everything is on IP," says O'Shea. "From 53 we now have 2,800 PCs, automated business processes and we focus staff on delivering a customer oriented culture."
Another important focus at SriLankan has been on the relationship between the business and IT. "In many organisations there is a chasm between IT and the business units," says O'Shea. SriLankan is overcoming this by appointing business system managers for all major departments. These report to IT, but are physically located in the business units.
Balfour at Qantas admits to being envious of SriLankan's fast adoption of IP. "We're still not end-to-end IP - that's a huge admission," she confesses, with some 15-20% of the Qantas network still on legacy protocols. However, the move to IPdoes appear to have reached a tipping point. This year's survey suggests that close to half of the world's carriers have already IP-enabled the majority of their systems and another third should join them over the next couple of years. Only three years ago just 20% of carriers had made the move.
Although the legacy systems still cast a long shadow over the industry, those that have taken bold first steps to overhaul their infrastructure are now beginning to glimpse some of the glittering prizes that the new levels of connectivity can bring.
Brian Leinback, senior vice-president development, describes how Delta Air Lines took back its IT from a failed outsource deal with AT&T in the late 1990s and decided to take the opportunity to "be bold and make a major difference to the business". It built what it calls the Delta Nervous System (DNS), connecting the whole airline operation to a real time information flow. Leinbach describes a level of connectivity that ranges from real-time flight status monitoring through to plasma screens for gate agents and wireless devices on baggage tugs. Leinbach concedes that it can be tough to put hard dollar numbers against some of the gains, but that information is now flowing at the speed of the business, allowing for better and smarter decisions.
Air France CIO Edouard Odier also outlines how the merger with KLM is being used as a "unique opportunity to implement structural change". The two carriers have created the IT Synergy Programme to rationalise the IT infrastructure of both, with the plan emerging in the autumn. The target is to achieve synergies worth €70 million annually after five years, although Odier admits that there will be an upfront net cost as the carriers invest in new joint structures en route to eventually drawing together as a single IT department.
New technologies
But what is really driving the excitement around IT is the dramatic growth of simple new web and self-service technologies that allow customers and airlines alike the opportunity to bypass the complexity and cost of old legacy systems. Online sales, e-ticketing and self-service kiosks all appear to be close to the crucial tipping point.
For example, the survey shows that within two years, carriers expect over half of their customers to be checking in using kiosks in their home markets and within four years everywhere else. Led by the North American majors, 10% already have over 50 kiosks in service and rising. The progress confirms findings from the sister Airport IT Trends Survey conducted earlier this year by Airline Business, ACI and SITA. Over a third of airports already deploy dedicated use kiosks, with more to come, while common use kiosks should soon leapfrog that with nearly 70% of airports planning to install them over the next two years.
Moving a step further, home check-in is starting to gain traction around the world and should be supported by IATA's initiative on bar-code standards that will enable travellers to print out boarding passes. Experiments in the USA and Europe are already coming on line, while Han Tian Phua, vice-president of IT infrastructure at Singapore Airlines says that his carrier too will introduce internet and mobile check-in by the end of this year.
E-ticketing, meanwhile, continues its steady upward progress with carriers averaging 19% e-tickets as a proportion of all tickets issued. That rises to a third on a weighted basis driven by a major push among the major US carriers. Overall, the survey suggests that e-tickets will be in the majority within three or four years. However, progress will have to accelerate much faster, especially in the Middle East and Africa, if the world is to meet IATA's 2007 deadline for the end of the paper ticket.
Web based sales too could be only four years away from becoming the industry's major channel. On a weighted basis, the survey shows that more than 20% of tickets are already being sold online, again with a gulf between the laggards and leaders. "Don't waste time arguing if you should or you shouldn't do it," urges Simon Parks-Smith, head of e-commerce at BA, arguing that once customers have tried self-service they never look back. "Its a one-way street," he says. Balfour of Qantas agrees: "It's a game we've got to get onto very quickly. The low-cost carriers are already there. We're in catch up mode."
BA took the plunge two years ago, enthusiastically embracing online selling as part of its company-wide customer enabled BA vision. This envisages not only driving more customers to the airline's own website to buy tickets, but sets goals for 100% e-ticketing, 50% self-service check-ins and 80% of BA Executive Club transactions being conducted online. Already over half of BA's short-haul point-to-point tickets are being sold over the web and systemwide it is closing on 20% online sales and over 60% e-ticketing.
"We are a little bit more than half way through customer enabled BA," says Parks-Smith. The target is to achieve £100 million ($180 million) worth of benefit to the company within a couple of years. It began with a simplified fares structure made transparent to the customer online. "It has helped achieve a turnaround of our short-haul business getting us back in the game," says Coby. He goes on to ask whether indeed aviation could be "the first genuinely web-enabled industry in the world?" If the current trends continue the answer would seem to be that it is indeed ready to tip.
Full survey results on CD
The complete research results of the Airline IT Trends Survey 2004 will shortly be made available on CD, priced $450, providing the responses to all of the survey questions together with a commentary. Although individual replies remain strictly confidential, results are broken down by geography and airline size, also with results weighted by revenue. For further details please e-mail us at airline.business@rbi.co.uk or visit our website: www.airlinebusiness.com
Successes
Verbatim survey remarks on the major IT successes of the last year
"Shortening internal administrative processes for IT projects"
"Overall reliability of IT infrastructure and IT cost containment"
"Cost reductions on network and infrastructure"
"A strong desire to master IT strategy"
"Laying the foundations for enterprise architecture and reskilling IT staff"
"Synergies studied within our global alliance and partners"
"Implementing a fully outsourced IT model"
"Projects implemented on time and budget" Failures
Verbatim survey remarks on the major IT failures over the last year
"Continuing investment in legacy systems"
"Costs of IT remain too high"
"Kiosks business case not resolved"
"Lack of strategy to divest legacy systems"
"Lack of investment in technology and obsolescence of current infrastructure"
"Slow migration to web-based services"
"Over-optimistic"
"Protracted management decisions for systems upgrades"
"Resolving the IP migration plan" Successes
Verbatim survey remarks on the major IT successes of the last year
"Enhancing our e-business channels"
"e-ticket implementation"
"Migration of our major systems to an IP environment completed successfully"
"Internet booking, self check-in, global intranet and e-business architecture"
"Improving e-ticketing, use of kiosks and CRM"
"Led the organisation to implement a total system revamp in all key business functions"
"Migration to PC based systems and TCP/IP" Challenges
Verbatim survey remarks on the major IT challenges over the year ahead
"Real use of IT as a strategic tool"
"Continued alignment with business strategy"
"The pace of change and the increasing reliance on systems to automate processes"
"Developing and implementing open systems applications"
"Helping to simplify airline processes"
"Lack of coherent business analysis skills"
"Meeting new business needs with a reduced budget"
"IT projects funding getting squeezed"
REPORT BY KEVIN O'TOOLE AND MARK PILLING IN BRUSSELS
Source: Airline Business
