Date: 19 June 2008
SITA Air Transport IT Summit, Brussels
- Ladies and Gentlemen, it is a pleasure to be at the SITA Air Transport IT Summit. SITA and IATA share many things. Both of our histories span six decades. Congratulations in advance for your 60th anniversary in 2009. Geneva is a common home base. Our mission gives us both a responsibility to serve the industry and our AGMs have a similar timing. So, at the beginning of the month, I met with many of your CEOs in Istanbul.
Annual General Meeting Report: Celebration
The AGM was meant to be a celebration of two things. First, 2007 was our first year of profit since 2000. We made US$5.6 billion and a 1.1% margin but this was an amazing achievement with oil at US$73. It was made possible by a lot of hard work - much of it related to IT: dropping sales and distribution unit costs 25%, reducing non-fuel unit costs by 18% and improving fuel efficiency by 19%. Second, on 31 May we achieved 100% e-ticketing - another amazing achievement. With four years of hard work, we will realise US$3 billion in cost savings. We did celebrate, but it was a short party.
AGM Report: Crisis
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.
Our Istanbul declaration made it 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.
Labour must understand that jobs disappear if costs don’t come down. And to our partners, a simple message: we are in this together. Don’t bite the hand that feeds you. I was pleased to note that our air traffic management colleagues at CANSO have responded. At their AGM, they agreed to their own programme to accelerate efficiency.
Crisis Intensifies Need for Effective IT Support
IT also has an important role in battling this perfect storm. In fact, the work that you do is more important than ever - to deliver results that make the business stronger.
Airlines were the first industry to fully automate all parts of their business. Nothing happens without IT. This comes at a cost. Internally we spend about US$10 billion on IT and an additional US$10 billion with GDSs. Like all aspects of the business, you can expect pressure to drive down costs and support revenues. That’s a polite way of saying, “Deliver more for less!”
IT Strategy 2010
I am not an IT expert, but I have been involved closely with your part of the business 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% ET. 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% ET and US$3 billion in cost savings.
Progress on the other Simplifying the Business projects is also strong. 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 6 locations with 8 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% of travellers who experienced Self-service check-in, 54% liked it - and wanted more options. The next stage of Simplifying the Business is Fast Travel. 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, ULDs 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 in this room 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.
Let’s focus on GDSs for a minute. It’s no secret that airlines are held hostage to GDSs. We sold them and were quickly taken hostage. The GDSs 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 GDSs charge over US$4 dollars? The industry is in crisis with US$130 oil. It’s time for the GDSs come to the table with efficiency gains and cost savings or we will find ways to further globalise the market.
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 you, the CIOs, suffer constant demands for reprogramming to deliver the same 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 as I said in Istanbul, its time to say BASTA! 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!
IATA is serious about progressing the security agenda. To drive this forward, we have recruited John Hedley as our Global Head of Security. John’s background is as a diplomat focused on intelligence and counter-terrorism. He will lead a strong IATA team in sending a clear message to governments to focus on risk management, use available technology effectively, take better advantage of intelligence, harmonise global standards and take responsibility for the bill.
As we call for change externally, the oil crisis will change the scope of the CIO’s role.
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 SITA and other 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 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 that you will make to build more efficient businesses must also help build green businesses. Fortunately, the two are aligned. Look at your data centres. On average only 15% of capacity is used but ventilation, cooling and power is supplied for 100% - all the time.
You will need to look much more closely at virtualisation to optimise your operations and achieve cost and environmental benefits. The same is true for management of your networks of personal computers, automatic power-off at night, and extending the life and recycling of equipment. These must also be factored into your 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 your role as a result of the fuel crisis will be much broader than environment. You 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 mores cost-efficient BSP generated data than the GDSs will sell you as MIDT. And this is only the beginning.
As we look towards 2010, here are some questions you should be asking to maximise the value of every available seat:
- How are you doing with universal distribution including all web channels, establishing flexible fares that respond to demand and using your new ET database for revenue integrity?
- How good is your cost analysis?
- If labour groups respond to the need for concessions, can you assess the value of different options or produce rosters that use any new productivity?
- With increased utilisation of your more fuel efficient planes, can you reallocate flights to aircraft based on costs, capacity and demand or manage carefully your slot portfolio with winter cancellations?
- Have you looked at your back-office functions to improve effectiveness?
- Are ERPs delivering efficiency gains as systems get integrated?
- Are you making the most of the intranet for staff self-service like you use internet for customer service?
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. You 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.
Thank you very much.
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