Just utter the words 'Internet Protocol' or IP and you have the main challenge facing Sita and every other leading telecommunications provider on the tip of your tongue.
Sita's task? First, it must retain its position as the airline industry's main telecoms provider despite deregulation and IP - which provides the common standards needed for the operation of open, community networks - potentially giving any one of its competitors the ability to eat into its traditional market. Second, Sita must grow outside the airline industry and acquire the vital economies of scale needed to reduce its circuit costs and remain competitive. Third, Sita needs to enter new, less traditional areas, such as providing and managing desktop IT, which airlines are increasingly looking to outsource, and offering voice over its data network. And last but not least, the company must continue to market developing products, such as call centres, intranets or common user facilities, on the back of its global network.
Fortunately, none of this is news to Sita. The company has restructured its ownership to achieve these objectives, separating the 100 per cent owned airline company specifically targeted at developing products and services for the airline industry from Sita Telecommications Holdings (STH). STH owns the fledgling non-airline company Equant, as well as hardware company ITS and software company Novus. Under the careful guidance of Sita's director general, John Watson, Sita has begun to shed its old public service mentality and is fighting to survive in the tough new deregulated world.
In doing so Sita has some trump cards up its sleeve. On the plus side, its long-established global network is second to none, though independent sources dispute its claims of being cheaper. 'The fact that they had to set up Equant actually denies that they have a cost advantage,' says Nick Insley, senior manager with Arthur D Little. Also on the plus side are Sita's dominant airline market share and established relationships with the airlines which are now being put on a more commercial footing.
But IP is both an opportunity and a threat. Sita has been forced to recognise that IP standards will replace the airline specific standards which have long allowed it a cosy monopoly in airline telecommunications. The airlines want to transform their dumb 'legacy' terminals into smart terminals that can communicate with all their major systems, and switching over to IP is enabling them to do this. 'The moment that happens the network becomes a complete commodity and Sita may become marginalised because of the costs of maintaining a relatively low bandwidth network,' says Carlos de Pommes, a consultant with Cap Gemini. The answer for Sita lies in a change from essentially the provision of the network to a value-added service, adds de Pommes.
For the airlines all this is good news. Call centres, corporate intranets and private telephone networks are all being developed on the back of IP, while IP can link all an airline's systems to its airport distribution points, sales teams and desktop computers. More competition means they will be able to chose the most competitive package offered by Sita, AT&T or consortia like Concert, Global One and Unisource. All these providers can provide secure, dedicated IP networks across the Internet.
The result will be far greater efficiency, a greater ability to sell direct to the customer, and substantial cost savings as the cost of telecoms dwindles to 'virtually zero', says David Guillebaud, director at Arthur D Little.
Airline Business: How has the deregulation of telecommunications affected Sita?
With deregulation the airlines that owned and created Sita were very worried that Sita would not remain competitive. It was run as a non-profit making user group and therefore they could get telecoms for which they controlled the product, the level of service and the costs. A lot of big airlines towards the end of the '80s and the early '90s were getting good offers from British Telecom, AT&T and various other consortia, say, across the Atlantic. Sita was coming into a new era and had to become commercial in order to compete, and rethink where it was going.
The airlines were big users of telecoms but they were still, as an industry, quite a small user. Data communications in particular, with the advent of PCs and the Internet, is growing at about 200-300 per cent a year in terms of activity - voice communications is growing at about 15-20 per cent - and that's been happening for a while.
Sita needed a mechanism to get more capacity. It had grown its network by selling it outside the airline industry but the airlines wanted to keep control of the network. In the post Gulf war period the airlines didn't want to invest any more money in Sita. They wanted their telecommunications to be even cheaper and Sita to be more competitive.
So they created a new structure for Sita to grow outside the airline business, become more commercial, and yield a return. They effectively split Sita into two. Sita, which they controlled 100 per cent, was very focused on the air transport industry, including all the major CRSs and aerospace, and was aimed at developing products and services for the industry at the lowest possible price and in the most commercial way. Sita Telecommunications Holdings (STH) was really a mechanism to trade outside the air transport industry as a normal commercial company. Probably within the next year or so, that company should be IPO'd. The new entity would create more traffic for the network and expand Sita's capabilities to achieve economies of scale.
These two entities then shared the network which became jointly owned. The air transport community today owns 60 per cent of STH and 100 per cent of Sita. So the Sita airlines are shareholders in STH. Of the other 40 per cent, 30 per cent was sold to Morgan Stanley Capital Partners (MSCP) and 10 per cent to the staff of Sita and STH.
The airlines were pioneers in the use of IT and had suffered from having to have technology provided by one supplier or another and things never linking together properly. Two of the greatest IT developments in the airline industry were the reservations systems and, secondly, yield and revenue management systems. But both those systems needed links to all parts of the airline and all parts of the world and sorts of systems.
The Internet and associated developments of the Internet provided an easier way of getting systems to relate to one another and interconnect - the so-called enterprise network. The airlines needed to develop their own internal networks and common standards. All the standards that have been brought by the Internet are making that a lot easier.
But it had standards which were very specific to the airlines and the language which is used by the airline reservations systems. What the Internet has done is brought a whole set of general standards for the world. Sita has recognised that the Internet and the Internet standards are the future and we are ensuring that all our products and services provide for the airline world and our other customers the ability to use the Internet standards.
Those standards are what we see as shaping the future of Sita, all commerce and particularly telecommunications in the air transport business. It cleans up the ability for the airlines to move data about, to share applications both within the head office of the airline and between the various offices around the world.
Most of the advanced systems in the airline world today are using data. They are developing bigger and better revenue management systems that link and analyse all the information from their reservations systems, their sales management systems worldwide. Their sales forces, with very sophisticated laptops, can access the big central systems. They are on a worldwide basis - they are all developing finance systems which provide the ability to aggregate, move and analyse data across the world. Therefore the development of modern methods of data communication are becoming more and more important to them. Those sorts of fundamental changes, and the technology provided by companies like Sita, are enabling the airlines to rethink and make greater use of the information and computing technology that is becoming available to them.
Two examples are the development of international call centres and remoting functions like revenue accountancy. Airlines always had reservations centres but a call centre - such as the one we have provided to JAL in London - [enables them to] employ people with different languages, including Japanese, and identify where the call is coming from and in which language the call should be answered. And that enables them to consolidate their reservations centres in central London.
Sita is looking to build on this concept of seamlessness and managed network services, handling everything. We believe that, as the airlines are putting more and more emphasis on distributing their systems around the world and having them linked with, for instance, call centres, they want a feeling of security, one person they can go to to get that support. One of our major objectives is to put more and more effort into that element of customer service.
The second point is how many of them can operate in 225 countries? There is a Sita employee everywhere and we take total responsibility; we don't say it's somebody else. And third, we believe we have a cost advantage because our investments have been tailored very specifically to the airline industry. We have our biggest pipes where there is a big number of passengers between two points .
Also with the growth of our sister company STH and its data communications company Equant, we are able to invest where we need the really big pipes. The customers that Equant are picking up are international customers which tend to have locations around the world. It's not surprising that one of their biggest accounts is Shell, which wants to communicate between places which are big centres for the airline industry.
So those sorts of systems are using the technology - the new concept of the enterprise network - and the advanced airlines are putting a lot of effort into those.
A lot of airlines took their eye off the ball. The cost of IT was rising very, very fast - in the early 1990s, the Gulf crisis hit them, the economic downturn hit them; they had also gone through the whole CRS experience and they cut their budgets back and deferred new developments. For a few years airlines lost their way at the time when this whole concept of distributed and network computing was becoming real.
The financial sector, the investment sector, moved ahead and around 1993-5 some airlines realised they had missed out. But the big airlines are catching up and most have major developments now to move a lot of the historical systems into this new technological environment. They are never going to be able to replace all of their legacy systems overnight - and their big central reservations systems are going to be with them for many years - but [they are moving] their business-management systems.
In sales management they really have developed systems which enable them to arm their sales forces with the ability to do deals. I think the next stage of revenue management will be 'deal management'. The sales forces in different parts of the world are trying to put together a package that sends traffic flows through a hub or an alliance or codesharing partner. The ability to construct those sorts of arrangements, although it is orchestrated by yield management, capacity management and revenue management, has also got to be distributed to the sales force.
On the operational side, they increasingly need realtime information about the technical state of the aircraft or to enable them to manage the logistics of catering. We are working with a major airline in Europe to give them a real-time catering logistics system worldwide.
Because of the nature of the technology, more and more we are becoming a total telecommunications supplier. We are getting into providing more domestic networks and total networks and into helping them think through how they are going to migrate from some of the older, historical systems to the new ones.
One area we are looking at is the 'desktop'. The desktop environment within offices has not been a traditional area of Sita - it has been more an area for the IBMs, the computer manufacturers. But as airlines cost-cut they are outsourcing more IT and a lot more of their telecommunications - and that's why Sita is growing. We are still growing at about 15 per cent a year in revenue terms. In activity terms we are still growing about 50 per cent a year. Some airlines are outsourcing data centres - and we don't really provide that sort of service - and more of them are looking at [outsourcing] this desktop environment which is getting so complex and costly.
Sita, in conjunction with STH, is looking at developing capability in this area. We are planning to expand our activity in terms of desktop quite dramatically.
We are working with airlines which are thinking of outsourcing everything and want to give part of it to Sita and part to somebody else. Varig is a classic - it chose a partnership between IBM and Sita.
More airlines are looking at outsourcing but the big airlines don't want to lose the intellectual property bit and the bit they feel gives some sort of competitive edge. What they like about Sita is that it's a friendly outsource - they have got some sort of control. They are saying to Sita, would you be part of the consortium? Cathay picked Sabre Computer Services as principal adviser on applications, IBM to run its data centres and Sita to do all the telecommunications. But the answer is to work very closely with the other two.
We are currently looking at the move into self-service and smart cards. We work closely with IATA, which is a key to encourage the airlines to stop duplicating investments. And also, we work with the immigration and customs services on all forms of pre-arrival information. We are developing concepts of an airport net that will create an Internet infrastructure for airports.
We are also linking the aerospace industry with the airlines through Aeronet and working with the freight forwarding industry to create Freightnet.
Internationally, we are aiming to work with Equant to get the economies of scale so that we can make sure that between two points we are able to use the biggest pipe available. Circuit costs are about a third of our total costs so it's extremely important that we manage our circuit costs very competitively. Today we do not own any of our own circuits, we lease the circuits from other people and then we integrate them into a single network. But the boards have approved the principle of acquiring our own capacity across the Atlantic and eventually in other parts of the world. I suppose it's really a long-term lease but it gives you the opportunity to buy units at the maximum size and so nobody's circuit costs should be cheaper than ours.
The number of those circuits, the size and how we string them together as a network, is so important. The thing is to make sure that you construct the network so you are getting the maximum amount of traffic through the biggest pipe. On the backbone network we have the highest availability of any network supplier in the world, because it's an integrated, seamless network with many alternative paths.
We've got customers everywhere and we can put the whole network together. Our strength is that we've got a bigger network [than the competition] and as we buy bigger pipes across the Atlantic we should be competitive. We can lease in bulk.
Source: Airline Business
