The new commercial realities of reduced budgets and the drive for further cost savings are in clear evidence in this year's Airline IT Trends Survey. But such pressures are also helping to emphasise the central strategic role that IT has to play in helping to transform the business
Airline IT departments could be forgiven for feeling hard pressed over the last couple of years. Budgets have been under intense pressure, while at the same time, the pressure to deliver cost-saving projects for the rest of the business has, if anything, grown. Yet beleaguered IT directors may take heart from the fact that, perhaps ironically, the current crisis may have done more than the boom to underline the importance of IT as a key part of airline strategy - not least as a driver of business transformation. That is a theme that took centre stage at the Airline IT Summit, a gathering of more than 200 industry executives hosted by Airline Business and SITA in Brussels towards the end of June after the SITA annual general meeting (AGM). As more than one chief information officer (CIO) remarked, IT is ready to make its presence felt as a key plank of business strategy, and not simply as an unavoidable cost centre.
John Watson, a long-time champion of IT as a boardroom issue, underlined the point in a parting shot before stepping down as SITA director general just after what was his last agm. "Airline recovery rests on IT helping to cut costs," he said. "IT must be recognised as a strategic boardroom issue, critical to the future success and profitability of companies and the industry."
Bill Miller, managing director of IT services at Continental Airlines, is typical in recalling that only a few years ago IT was indeed a cost centre. "Today IT is an opportunity centre, an enabler for change," he says, adding that the end goal is not so much to save cost but to help create an efficient, competitive airline. The mood is echoed by Paul Coby at British Airways another of the CIOs confidently helping to direct strategy at the top table. "There are no IT projects - there are only business projects," he says, quoting his own chief executive's insistence that IT be an integral part of the business.
Budget squeeze
However, such an upbeat tone is not to deny the extent of the squeeze on IT budgets since the industry crisis at the end of 2001. That again shows through clearly in the results from the latest Airline IT Trends Survey. When Airline Business and SITA first set out to lay down benchmarks for the IT sector five years ago, the average airline spend on IT stood at just 2.4% of revenues. However, the levels rose close to the 3% mark as markets boomed, before inevitably losing all its gains as the industry ran into crisis after 2001. This year the level appears to have done little more than stabilise.
It is true, that the higher levels of spending are loaded towards the larger groups, so that on a weighted basis overall industry IT expenditure comes in at close to 2.9% of revenues this year, a figure which should translate into a hard spend of some $9-10 billion. That is certainly up from the weighted average of under 2.6% as the cash crunch hit budgets in 2002, but well below the weighted levels of 3.4% recorded at the peak.
The usual cautions apply about the vagaries of budget predictions. For example, around a quarter of IT budgets include charges from the global distribution systems (GDS), but the remainder do not. Nevertheless, the IT Trends Survey is just about the most comprehensive and consistent piece of research of its kind. The survey sample centres on the top 200 passenger airlines - including regionals and low-cost players - together with key leisure and cargo operators. This year there was a record level of response covering senior executives at more than 100 carriers - a group that represents an estimated two-thirds of industry revenues.
Certainly it is clear that few expect an easing in budget pressures in the year ahead. Over half of carriers believe budgets are likely to stay the same or decrease in 2004, reflecting a similar spread to the outlook for the current year. It is noticeable that those optimists who are among the 40% who see an increase in budgets in both this year and next are largely in the Asia-Pacific.
For a second year running lack of investment again stood out as the single largest obstacle to achieving IT strategy. It is worth noting, though, that skill shortages are still cited as a problem by around a third of carriers, although largely in the less developed markets outside of North America and Europe.
Perhaps some of the most striking evidence of budget pressure, however, come from the responses to the open questions about the IT successes and failures of the past year. In both, the issue of battling with reduced budgets, successfully or otherwise, is a recurring theme. Close to a third of respondents also identify dealing with budget constraints as the major challenge in the year ahead.
In a new question this year, over half of carriers conceded that a major project had been put on hold as a result of budget cuts over the last 12 months. And of those, the majority appear to centre on areas such as customer relationship management (CRM), sales and distribution. As shown in the survey over the past five years, the driver of new projects has shifted markedly from enhancing revenues and customer service to an overwhelming focus on reducing airline costs.
Balancing priorities
However, Jean-Paul Hamon, Air France CIO, set the scene for the IT Summit with a warning that the fundamentals should not be abandoned in the drive for short-term cost-cutting. "IT strategy should not be changed because of a crisis or a boom," he says "In crisis times we have to find the right balance between decisions over the quick win projects and restructuring of the core projects." He adds that Air France has attempted not to slow the big projects where they are in full flow simply because the benefits are delayed too. "For a CRM project, the last 30% of the cost may give 70% of the benefits," he points out. "It's not only cost reduction but cost optimisation. It's about investing in the right things."
Massimo Bendoni, the outgoing head of IT at Alitalia, reinforces the point. "If cost-cutting is distributed in an indiscriminate manner without understanding the impact on long-term objectives then it is out of line with strategy," he says, adding a plea for airlines to retain the ability to innovate. "It is important to devote even limited resources to innovation. You must keep your innovation capability," he says.
Taking up the cost theme, Bill Miller at Continental is far from alone in arguing that the issue is no longer about how much or little IT departments spend, but how that spending translates into a more efficient, competitive business. For its part, Continental has consistently underspent the industry average, with the 2003 budget coming in at 2.2% of revenues. However, Miller argues that this has been achieved through operational efficiencies, trimming costs on network and reservations costs while leaving capital investment still largely untouched.
Unlike other divisions in Continental, IT was not told what budget cuts to submit, nor was it asked to take the otherwise universal 12% headcount reduction after 11 September. But, says Miller, the department made the reduction anyway: "If we had not done that we would not have been part of the team."
Miller is passionate about the need for a strong central IT department with a single management budget. The department's main job, he argues, is to keep a grip on what other divisions spend. "We never stop reducing foolish spend," he argues. "We're the ones who can see how to save money." Miller points to a host of recent projects have helped trimmed costs across the business, ranging from a drive to take control of the number of pagers used in departments across the business (half of which were rarely used), through to expansion of the CALNet internal telecoms network which links over 45,000 users worldwide.
Richard Clarke, vice-president travel and transportation at Forrester Research, points out that the IT spend on existing infrastructure and applications makes up around 80% of budgets compared with a modest investment in new projects. He also highlights recent Forrester research on 900 large companies across a range of sectors which correlated IT spend in 2002 with financial success - there was no apparent relationship, at least in the short term. It is interesting to note that the spread of IT spending ranged from more than 7% of revenues in the financial service sector to half that in manufacturing. All were above the 2-3% spent by the airline sector.
Saleh Al-Askar, director of IT at Kuwait Airways, agrees that a gradual transformation has been taking place in the role of the IT department. "We've become a cost prevention centre or even better a cost-optimisation centre," he says, although adding that CIOs can still face that uneasy feeling as management colleagues eye up cuts in what they see as the IT cost centre. What is key, he argues, is to cut the fat and "not the muscle" leaving core infrastructure projects still in place. He adds that IT directors themselves have not always taken the lead in making the business case for such core investments. "CIOs often sell the technology not the business aspects of the investment," he says.
Hamon warns that new technology on its own offers no "magic" solutions and that business analysts and IT managers need to understand that they are working towards the same commercial goals. "It is important at the top of the company they are always speaking the same language," he says.
Despite such talk of aligning business and IT objectives, the IT Trends Survey continues to hold warnings. Ever since the survey began, lack of board level support has been cited by a sizeable minority as an obstacle to achieving IT strategy and that has persisted since the survey first began. As many as a third of carriers, spread pretty evenly across the sample, identify lack of top level support and vision as a problem, and a handful see it as their biggest single obstacle.
Business alignment
While some still struggle to gain boardroom attention, others have taken a far more radical approach to transforming the IT business model. Finnair is among the more extreme, effectively handing its whole technology function to IBM under a strategic partnership agreement.
The decision is not because Finnair lacks ambition in IT, but quite the opposite, says Eero Ahola, senior vice-president of strategy. He paints the corporate vision of achieving a digital company by 2006, with employees, suppliers and customers connected online. The partnership was rather a strategic business decision.
"We asked what will we need as a flag-carrier in the future? We asked the question about what was a core asset and what was not?" says Ahola. Competing in the world of information technology was not among the core. Ahola adds that Finnair judged its ability, not against other airline IT departments, but against specialist providers such as Unisys and IBM. "It is not about airline against airline but business against business," he says.
The old model of a self-sufficient, operationally driven IT department has instead been replaced by a more dynamic partnership, driven by the airline's corporate strategic goals. Crucially, the old fixed costs are now variable, explains Ahola. Of a team of 200 staff in the IT department only six have been retained.
Outsource experience
Looking across this year's IT Trends Survey, it is clear that outsourcing is continuing to gain ground, albeit more slowly and often more painfully than anticipated. A small handful of carriers have already outsourced their entire IT function. In areas such as network management and web hosting more than half of airlines are already, or will shortly be, outsourcing at least some functions, while desktop management is not too far behind. Around half of carriers have also moved their inventory and departure control system (DCS) to an application service provider, with more ready to follow suit.
However, at the same time, a poor outsourcing experience continues to rankle among the IT failures. Watson believes that part of the issue stems from lack of experience in creating outsource contracts, in particular, understanding the cost of making changes once the agreement is inked.
The mounting cost of infrastructure expenditure may in any case promote the case for looking beyond the IT department. The need to tackle an ageing architecture helped focus Finnair's mind on the question of whether the airline should be investing in IT assets. Ahola points to the time and expense of maintaining the tangle of in-house systems. He gives the example of some 128 different applications in CRM alone of which Finnair reckoned it only actually needed a third.
Watson predicts that the in-house computer reservation system (CRS)is destined to disappear. "Within the next five years and certainly the next 10, I can't imagine there will be a single airline that runs its own CRS system," he says. "Those legacy systems will be outsourced so that the people inside can concentrate on the value added, not the utility services."
Both BA and Qantas are currently in the middle of a ground-breaking deal, which will see their entire passenger services system move over to Amadeus. Sales and distribution were transferred last year; inventory is in progress and the departure control system should follow within the next 18 months.
Paul Coby has no apologies for letting go of BA's ageing booking engine in order to free the airline to focus on delivering on its strategic goal of fighting back through a Customer Enabled BA (ceBA).The central theme has been what Coby calls "radical" self service for customers across the travel experience - a strategy also being adopted for employees. By way of headline results, already the ceBA programme has seen online ticket sales rise five-fold since the crisis of 11 September changed the world. "Transformational" targets are in place calling for, among other things, 100%e-ticketing and 50% self-service check-in.
Such targets are beginning to look distinctly more like being achieved than previous promises made in the white heat of the dotcom boom. This year's survey results show that on average carriers are selling somewhere around 16%of their tickets online. Most impressive is the speed at which North American carriers are driving online sales. They report close to 40%of bookings made online and over half of sales made in the form of e-tickets. Weighting the averages by revenues suggests the industry as a whole is now selling around 19%of tickets online, with e-ticketing at 24%.
Led by the low-cost carriers, some 10%of airlines already report that the majority of their sales will be made via the web this year. If others achieve their ambition to follow suit then within the next four or five years online selling could become the norm for around half of the world's major airlines.
On present standings, much of that selling looks likely to be channeled over airline websites, although there has been a steady growth in online travel agency sales. Maurice Coleman, head of network management at Aer Lingus, is among those suspicious of this rising trend. The Irish carrier has been busy reinventing itself along low-cost lines since the dark days of 2001. Fares have been slashed in all cabins and online sales pushed up from only 2%to 40%in the space of a year. Coleman says that a central objective of its aggressive cost-cutting has been to cut out the traditional middlemen in the form of the agencies and CRS. He is not alone in warning that the airline industry should learn from its past mistakes as it goes online. "We need to avoid dependency on third party online sales or we'll just end up in hock to those people as we did with the travel agents," he warns.
Just as blunt and perhaps a little familiar to IT directors over the last year, is Coleman's take on the new realities of IT investment at Aer Lingus: "It's not a question of core or non-core, in- or outsourcing. It it doesn't pay in a year then it doesn't get done."
REPORT BY KEVIN O'TOOLE IN BRUSSELS
Full survey results
The complete research results of the Airline IT Trends Survey 2003 will shortly be made available on CD, priced $250, 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
Source: Airline Business
