Shared it Keeps Airlines Aloft

Intensely competitive" best describes the airline industry where shakeouts are an ever-present threat. Airport capacity, route structures, technology and costs of leasing or buying aircraft significantly impact carriers of all sizes. Adding to the torment of airline executives are the weather, labor relations and the spiraling cost of fuel. This is an industry that has gotten used to an average 5% margin.

On average, fuel accounts for 14%-16% of an airline's total cost, with short haul flights costing more than long-haul ones because take-offs and landings consume high amounts of jet fuel. The cost of labor, including pilots, flight attendants, baggage handlers, dispatchers and customer service staff accounts for up to 40% of an airline's expense.

These forces converge to create an industry in turmoil, constantly looking for ways to cut cost, improve efficiency and maintain customer satisfaction. The arrival of competition from low-cost carriers has added further to this complexity.

Historically, an airline's operation is largely controlled by its government. The US market is viewed as one big homogeneous region and its IT infrastructure is equally homogeneous by design. European carriers are set up around traditional borders with flag carriers dominating their local turf. Because the airline business is capital intensive, governments have traditionally been owners of these national carriers.

Deregulation has helped change this approach to ownership and allowed for introduction of new players. Privately-owned regional carriers have successfully ended the dominance of national carriers. While very large carriers such as British Airways and Alitalia can afford to build and sustain their own IT infrastructure, smaller carriers have banded together and introduced the concept of shared resources - a community that shares common infrastructure.

Unlike Europe, Asia has no single dominant carrier. And because of fragmentation that is complicated by deregulation, many smaller carriers that dominate their local market suffer in other places. Like their European counterparts, large airlines like Cathay Pacific and Singapore Airlines can afford to build their own infrastructure. Everyone else has to learn to share.

"Smaller carriers depend on third parties to meet their infrastructure needs. The result is a proliferation of different technologies and environments, some sharing among themselves while others signing up outsourcing contracts with providers such as Amadeus, Sabre and SITA," said Damian Hickey, vice president of the Airline Business Group at Amadeus.

Pressures of business

Many of Asia's national carriers are state-owned, with little competition. However, this has begun to change with deregulation.

"China's upcoming 22 million middle class travelers are putting pressure on the government to modernize its fleet and enhance airport facilities. The challenge now becomes one of managing the expected growth even as operators are saddled with high operating costs, brought about by inadequate infrastructure and lack of experience in building and managing a modern airline business," notes Mark Abe, vice president of Global Transportation Group at EDS.

The rising cost of fuel and growing competition are forcing most airlines to look at ways to cut cost with information technology expected to contribute significantly to cost reduction. About 80% of the IT infrastructure is common to all carriers.

Younger airlines have the benefit of having fewer legacy systems and processes to manage. That said, they share the same problem as their larger counterparts trying to enhance their IT operational capability in the face of growth prospects - access to technology and skilled resources.

This brings to the fore the concept of a community platform where resources are shared among members of the community. The airline network industry pioneered this concept with the successful launch of SITA, a dedicated network. It was acquired by French telco Equant (now Orange Business Services) and is still used by 640 airlines today.

Outsourcing

While airlines are used to the idea of outsourcing, some still display concerns about which parts make sense to outsource and which elements should best be kept in-house.

"If you look at outsourcing, you need to understand the different types available out there. Traditional outsourcing engagements defer the operation of airline-owned assets to a third party.

A new model is slowly gaining acceptance whereby airlines lease the required IT operations from a third party who owns, operates and manages the physical asset," notes Hickey. Participating airlines are encouraged to take ownership in the community business.

With the exception of the very large carriers, few airlines can afford to build, operate and maintain their own IT infrastructure. The community model allows smaller airlines to have available at their beck and call the requisite infrastructure and services needed, and still allows them to focus on their reason for being - the business of transportation.

"We believe that the future of the airline industry is the leveraging of a common infrastructure. Between 60%-70% of the technology used in airlines is non-strategic. When you look at the economics and business issues, outsourcing starts to make economic sense," concludes Abe.

Significant variations

According to Matthew Davis, director of Consulting at American Express, "Corporate clients are traveling more, and increased globalization is leading to strong demand for long-haul air travel and hotel space at their traveler's destination. Whilst global fares are rising across the board, there are significant variations by region and event the countries within these regions."

The airline industry pioneered the concept of sharing to survive and grow. Despite being competitors, airlines have set aside their competitive egos to pool together resources to build a common platform from which everyone benefits.

The concept of community sharing lends itself beautifully to other industries like financial services, transportation, governments, and education among others. But to achieve the same success as that in the airline industry requires the creation of common standards, the agreement on a unified set of processes, and the willingness to move with the times.

The Flight Biz

There are currently 1.6 billion business and leisure travelers today, estimated to reach 2.3 billion by 2010.

Business travelers are important to airlines because they are more likely to travel several times in a year. These also tend to purchase the upgraded services that have higher margins for airlines.

Leisure travelers, on the other hand, are very price-sensitive and during periods of uncertainty will forgo their travel plans.

Although there are more travelers today than at the beginning of 2000, bottom-line growth has remained relatively modest if not flat.

The cost differential between low-cost carriers and network carriers is as high as 2 to 1, even after adjustments for pay scales, fuel prices and seat density.



Keeping Costs On The Ground

Cost control measures are now extending to outside the internal operations of an organization. Airlines are working with partners to streamline operations and reduce the cost of doing business. Among the process changes and technologies being considered are:

The full migration to electronic ticketing, mandated by the International Air Transport Association (IATA) by end of 2007.

Introduction of self-service check-in kiosks, currently hindered by lack of standards among solution vendors.

RFID technology to process baggage handling at airports.

Simplifying the creation, processing, handling and management of customer information.

All of the above changes require not just simple introduction of new technology but a change in the way partner organizations operate. But to most carriers, these are easier said than done.