Date: 16 November 2004
Simplifying the Business conference, Geneva
A special welcome to all of our partners, suppliers and airline colleagues. And thank you to our sponsors as well. It is great to see you all here at our home in Geneva. Today we kick off one of our most relevant initiatives—Simplifying the Business. With over US$30 billion in losses since 2001, change is essential. After fighting fires for the last three years, it is time to start rebuilding. Simplifying the business is a great opportunity for us all. I am pleased to be here with top representatives of our industry's many important partners and suppliers, Bob Aaronson of ACI and Olivier Houri from Unisys Working together is critical.
The Case for Change
The case for change is urgent. Look around the room. Robert Milton of Air Canada: We need a new business model and a new culture. Ralph Norris of Air New Zealand: The complexity of our business does not give our customers value. And David Bronczek of FedEx: Our priority must be to reduce the cost of industry processes.
What does Simplifying the Business mean?
As businesses grow, they become complex. Complex processes take time and cost money. But they do not enhance the value of the product. Internet savvy travelers appreciate the convenience. But they are not interested in paying for complexity. Our mission is to keep the value and eliminate the cost. Look at the success of the low fare sector. Starting with a clean sheet of paper, they have designed business processes that are streamlined. Passengers benefited with low fares. Importantly, the airlines and their shareholders are realising profits. Simplifying the Business is part of our evolution to a "low cost industry."
In 2000 the top three European network carriers' unit costs were more than twice EasyJet's. By 2003 the cost gap was almost cut in half. Airlines have done a great job of reducing costs—2.5% in 2003 and another 3% this year. The high price of fuel is consuming these gains. But even if fuel was US$30 per barrel, simplifying the business makes sense.
At the 2004 AGM, your chief executives challenged IATA to simplify the business at an industry interline level. Many network airlines developed their own systems for ET, kiosks and the like. It is now time for an industry solution that can only be lead by IATA. IATA is 270 airlines making up over 98% of scheduled international air traffic. With our members, we built systems that made a globally networked industry possible.
IATA settlement systems which handle over $180 billion
Interline standards that facilitate 1.6 billion travelers per year
and so on….
Now, we must re-build our industry's processes. Using existing technology, the goal is to reduce cost and increase passenger convenience. We will begin with four very relevant projects:
Bar coded boarding passes
Common use of self service kiosks for check-in and
Radio frequency identification for interline baggage
I stress this is only the beginning. Next month we will present the board with a proposal for paperless cargo. Today our target is to discuss the first four.
100% e-ticketing by 2007 is the most immediate. Ambitious? Absolutely. This is not the time to be timid. The cost benefit case for ET is obvious and large. Each ET saves at least US$9 in processing costs over paper tickets. IATA prints 300 million interline tickets used each year. Savings of US$3 billion per year are achievable. To remind you, industry losses are predicted at US$3-4 billion this year. For some of you, ET is not new. For others it's a revolution. The industry will not wait beyond 2007 for those who are not prepared.
If we are less than 100% successful, the unit cost of maintaining the paper system will be enormous. Already airlines are canceling interline agreements with partners who are not ET capable. What airline can afford to lose 10-15% of their revenue? We scoped the challenge in a survey of member and non-member airlines. 85 IATA airlines, carrying over 80% of passengers, are prepared or getting prepared for interline ET. This leaves about 200 other members who need to catch up—not to mention non-member airlines. The critical issues we face are:
Simplifying interline implementation
Finding airline resources to support less advanced carriers
Finding sufficient resources in GDSs and other system providers
Dealing with airline IT solutions that are not integrated
Bringing ground handlers up-to-speed and
Moving those carriers behind the curve along quickly
None of these are impossible to solve. The first step is to create awareness. The strong attendance here is a great start. And work has already begun. The October Passenger Conference was focused on ET. They agreed to stop adjustments to paper tickets. IATA offices will be fully ET ready by 2005. Already 85% of our offices can handle interline ET. A program to help airlines make the transition is being rolled-out. These are important developments, but there is still much to achieve by airlines and their partners if we are to be successful.
Common Use Self-Service Kiosks (CUSS)
The technology is here and standards exist. Several major airlines are experiencing the benefits. Each traveler processed by CUSS saves 50 cents. With 1.6 billion people traveling, the potential cost savings are enormous. Our survey showed that airlines are less advanced on CUSS than ET. 20% of airlines responded they had or planned to implement CUSS. The other 80% are not evening thinking about it. Some major issues must be addressed:
Management and control of the platforms
Acceptance procedures for baggage
Facilitation for international travelers
Off airport deployment
Airport cooperation is a must. I am pleased that we are working closely with ACI. And we are looking for quick-wins to demonstrate the benefits of CUSS. Airlines identified Heathrow, Gatwick, Frankfurt, Charles De Gaulle and Los Angeles as likely candidates for CUSS introduction. Before implementation, these will be further tested for cost benefits. In cooperation with our partners I am confident that we will achieve a workable solution.
Bar Coded Boarding Passes
We have already made significant progress. In October the Passenger Services Conference agreed to a standard for interline bar coded boarding passes which can be issued by kiosks. Bar coding equipment will save up to 40% on magnetic stripe technology. And by getting passengers to print their boarding passes at home, paper costs and airport facility fees will be reduced. And the convenience of moving the check-in procedure back to the passenger's home is sure to be popular. There are some issues:
Government and airport regulations
Human factor issues in airport handling
But they are minor compared to the convenience and cost savings.
RFID for Interline Baggage Management
Today, for General Motors, WalMart, Tesco, and many other organizations RFID is a critical tool for supply chain management. Unit costs have dropped as volumes increased. There are benefits to be gained from their application to baggage management:
Lower operating costs for baggage management systems
Reduced service recovery costs
Mishandled bags inconvenience customers and cost airlines money—US$100 per bag. Fortunately, less than 1% of bags are mishandled. But let's remember that is 1% of 1.5 billion bags. Pilot projects at major airports like Las Vegas and Atlanta resulted in an improvement of 15% in accuracy. Potential cost savings are significant. Developing and proving an industry standard are the next steps. We are looking to identify 5 key airports for implementation in 2005. Implementation in partnership with airports pilot projects will facilitate gradual change. But the future is clear and RFID is a part of it.
Where do we go from here?
We have to implement a revolution in an orderly and effective way. Bill Diffenderfer is our newly appointed Project Director for Simplifying the Business. He is a pro at implementing industry change. To help him in his task, Bill will manage a new dedicated IATA team for Simplifying the Business. Aviation has never been afraid of new ideas. Everyday we do what was long thought impossible—flying 1.6 billion passengers per year. Simplifying the business is also possible. It is great opportunity to build a more cost-effective way of doing business that will please our customers. The key to success will be working as a united team: airlines, airports, and suppliers. Today is a great start. I appreciate your support. And I am confident of our success!
Simplifying the Business