Technology to the rescue

Giovanni Bisignani, CEO of the International Air Transport Association (IATA), explains why IT is crucial to the future of the aviation industry.

“CIOs will be stretched as never before to direct effective cost reduction and identify new revenue opportunities”
-Giovanni Bisignani, Internatioanl Air Transport Association

The industry is in crisis. With oil at US$130 a barrel, fuel is now 34% of costs. In 2007, the bill was US$136 billion. And if oil averages US$107 – the consensus forecast – the 2008 bill will be US$176 billion and losses will be US$2.3 billion. And that’s the optimistic forecast. If oil stays at US$135, losses will be US$6.1 billion. Over the next 12 months, that would be an added fuel burden of US$99 billion. Alone this is a staggering number. But we cannot forget the US credit crunch. Traffic is slowing in all parts of the world. Last year growth was 6%. This year we may achieve 4%.

Difficult decisions on capacity and aircraft deliveries are being made. It’s a perfect storm of increasing costs and falling demand. IATA’s US$315 billion settlement system gives us a unique view on what is happening. In the last six months, 24 airlines went bust. The industry sent a very strong message: we are in constant crisis and change needs to happen.

It is clear what must happen. Governments must stop crazy taxation, regulate monopolies effectively, ensure that the cost of energy reflects its true value, fix the infrastructure and change the rules of the game so that airlines have the commercial tools to fight crises.

Crisis intensifies need for effective IT support

IT has an important role in battling this perfect storm. Airlines were the first industry to fully automate all parts of their business. Nothing happens without IT. But this comes at a cost. Internally we spend about US$10 billion on IT and an additional US$10 billion with global distribution systems (GDS). Like all aspects of the business, IT can expect pressure to drive down costs and support revenues. That’s a polite way of saying, “Deliver more for less!”

I am not an IT expert, but I have been involved closely with information technology as a Chairman facilitating the merger of Galileo and Covia, and as a CEO who launched OPODO, the European travel portal of Lufthansa, BA and Air France. So I am pleased to be able to share some thoughts on IT priorities to 2010. I will start with what is on IATA’s agenda: simplifying the business; what action we need from our partners, governments and GDSs; and finally, the challenges that I see for CIOs.

Simplifying the business

Four years ago, in the wake of SARS, September 11, war crises and the start of high oil prices, the industry’s CEOs mandated IATA to lead an industry IT revolution. We took up the challenge, defined a vision, developed a strategy and set targets. This became our Simplifying the Business programme with goals to cut US$6.5 billion in costs and improve convenience.

The headline project was 100% e-ticketing. When we started, many thought it an impossible dream. We put 150 experts on the case, we changed national legislation (the last in CIS) and we worked alongside our members. On 1 June, with a great global team effort and your strong support, we achieved an important milestone – 100 percent e-ticketing and US$3 billion in cost savings.

Progress on our other projects is also strong. Common use self-service (CUSS) is available at 94 airports around the world, 135 airlines are using 2D bar codes for their boarding passes and e-freight is operational at six locations with eight more by year-end.

What have we learned? The first lesson is that an industry-wide approach to IT systems can deliver enormous value. The second lesson is that our customers don’t care about process. They value convenience. An IATA survey showed that of the 70 percent of travellers who experienced self-service check-in, 54% liked it – and wanted more options. By the end of this year, IATA will build business cases for self-service options in baggage self-tagging, automated document checks, kiosks to handle irregular operations, self-boarding and mishandled baggage reporting. The goal is to make technology work even harder, to create an even more convenient travel experience and cut costs.

RFID and baggage

RFID was part of the Simplifying the Business programme. Airlines handle 2.25 billion bags a year – a number that is growing quickly as security hassles force more bags into the hold. We are 98% accurate, but 2% of bags are mishandled and 48 million customers disappointed each year. The service recovery cost is US$3.8 billion. We thought RFID was the solution. Research showed it would only solve 20% of the problem. The potential savings did not justify an industry mandate. But don’t write off RFID completely.

The next generation of aircraft will be built with RFID tagged parts to make maintenance safer and cheaper. And IATA continues to look at RFID applications for catering equipment, unit loading devices and service items. Our target is to be ready to take advantage of RFID as soon as the business case justifies it.

In the meantime, we are taking a broader approach to the baggage problem. IATA is developing a toolkit of solutions including passenger education on packing and labelling, more effective hub management and stronger labels that survive humid conditions. We will work directly with airports around the world to implement the best solutions locally.

To build an effective toolkit we need data. Delta, Emirates, LAN and Lufthansa are helping us launch the programme, and I encourage all airlines to share their data, so we all can benefit. Our goal is to launch this by year-end so quick decisions and action are needed. As we are looking ahead to 2010, change in external elements of IT is also critical.

GDSs

Let’s focus on GDS for a minute. It’s no secret that airlines are held hostage to GDS. We sold them and were quickly taken hostage. The GDS took advantage of their position to charge enormous fees supported by government regulation. Deregulation helped but even while airlines struggle for profitability, double-digit margins are the norm. The Internet was a golden opportunity for airlines giving us a direct contact with our customers. Combined with a revolution in yield management and distribution tools and the benefits of ET, sales and marketing unit costs dropped 25%.

But still there is need for change. Why can China TravelSky charge $0.50 for a transaction while the western GDS charge over US$4 dollars? The industry is in crisis with US$130 oil. It’s time for the GDS come to the table with efficiency gains and cost savings or we will find ways to further globalise the market.

Security

IT can also have an impact on process solutions beyond our control. Look at the uncoordinated security mess. We are more secure than in 2001, but at what cost? Since 2001, airlines and their customers paid at least US$30 billion in security. We get more frustration than value. Why? Because fear drives decisions, the infrastructure cannot cope, governments are not cooperating and nobody is taking leadership.

Passengers suffer a maze of duplication, bureaucracy and hassle. And CIOs suffer constant demands for reprogramming to deliver the same advanced passenger information (API) data in different formats to government agencies often within the same department. It costs US$50,000 for each data element changed in an API message. In total, API costs the industry over US$100 million every year. The irresponsible US exit proposals will outsource more data collection to airlines. This time it’s fingerprints and the potential cost is in the billions.

We are aligned with governments in wanting an even more secure industry, but we need some common sense. The IATA-led Simplifying Passenger Travel project is a solution to make security effective, efficient and convenient. The technologies are not science fiction. Millimetre wave, backscatter and biometrics are available today. Already many governments issue biometric passports. Now they need to start using them.

Environment

US$130 oil makes fuel saving critical to survival and gives airlines the biggest incentive of any industry to improve environmental performance. Even before the crisis, our vision set a benchmark for other industries to achieve carbon neutral growth on the way to a carbon-free future. To achieve this, we have mapped out a four pillar strategy: invest in new technology, operate efficient infrastructure, fly planes effectively and apply positive economic measures such as fair, global and effective emissions trading, investment in bio-fuel research, tax credits for re-fleeting and so on.

In April, IATA led a group of top industry CEOs, Boeing, Airbus, Embraer, Bombardier, Rolls Royce, GE, Pratt & Whitney and CFM to make this strategy an industry commitment. IT has a big role to play.

First the big picture. In 2007, IATA saved 10.5 million tonnes of CO2. Our Green Teams worked with airlines on best practice, and we shortened 395 routes and the fuel saved went straight to the bottom line – US$2.1 billion. But we must do much more. First, more effective flight planning systems are needed. To manage and make the most of these developments, we expect system providers to ensure their software optimises fuel use and takes advantage of every improved routing.

Second, we need to push governments much harder to move forward with a Single European Sky and NextGen so that we can take advantage of the technology already on the aircraft. And third, we need global harmonisation. The patchwork of air traffic management (ATM) requirements around the world means that we do not always fly with optimum conditions and we carry extra IT kit to cope with the differences. We are a global industry. The infrastructure must be globally harmonised, in line with the Global ATM roadmap.

The IT investments to build more efficient businesses must also help build green businesses. Fortunately, the two are aligned. Look at data centres. On average only 15% of capacity is used but ventilation, cooling and power is supplied for 100% – all the time.

CIOs will need to look much more closely at virtualisation to optimise operations and achieve cost and environmental benefits. The same is true for the management of networks of personal computers, automatic power-off at night, and extending the life and recycling of equipment. These must also be factored into the decision-making parameters. As part of the next stage of our environment work, IATA will develop guidance on Green Business best practices.

The role of the CIO

The changes in the role of the CIO as a result of the fuel crisis will be much broader than environment. CIOs will be asked to provide data to support very difficult decisions. Look at the announcements we have seen in recent weeks: American Airlines reduces domestic capacity 12%, United by 17% and Continental by 11%. Internationally, US carriers are pushing more capacity on international routes, the Europeans are being more cautious about growth and Gulf State carriers are moving full-steam ahead with high-speed growth.

We won’t know the right answer. But clearly the decisions are strategic and the risks are high. So it must be supported by the best available decision-making tools, which means state-of-the art route-planning systems fed with the best market data. IATA can help with more cost-efficient billing and settlement plan (BSP) generated data than the GDSs will sell you as marketing information data tapes (MIDT). And this is only the beginning.

The years since 2001 have challenged and re-shaped the industry. The oil crisis we face today with the potential of US$99 billion added to our fuel over the next year will bring even more massive change. Airline industry CIOs will be stretched as never before to direct effective cost reduction and identify new revenue opportunities. The determining factor of those airlines who survive to 2010 and those who don’t could be the strength of their IT capabilities.