Thank you and good morning. It is a great pleasure to be making a return engagement to address this very important event for the air transport industry. It is a pleasure both because SITA has for decades been an invaluable partner for IATA and our airline members, and because it must mean that you found what I said the first time worthwhile. I will try not to wear out my welcome.
When I spoke at the SITA Air Transport IT Summit in 2010, I provided a perspective on information technology as seen through the eyes of an airline CEO. Today, I hope to provide a broader industry-wide point-of-view. That starts with understanding the current financial situation of airlines.
In the past, I’ve described the natural state of the airline industry as being in crisis, interrupted by brief moments of calm. Nothing I have seen since taking up my current job has caused me to change that view. We are in a moment of relative calm, although quite possibly it is only the lull before the storm. The industry is fragile.
Last week at the IATA Annual General Meeting in Beijing, I presented our revised industry outlook for 2012. We expect an aggregate profit of just $3.0 billion on revenues of $631 billion this year. That’s a 0.5% net margin. Results will vary widely by region.
We see European carriers posting losses of $1.1 billion—nearly double the losses that we had expected in March. Asian carriers will post the largest profits—some $2.0 billion—followed by North American airlines who are expected to post profits of $1.4 billion. Middle East and Latin American airlines will have small profits of $400 million and African carriers will lose $100 million.
The high price of oil is the main reason for our anemic global profitability. Although prices have softened recently, we still expect an average for the year of $110 per barrel of Brent. And of course political tensions in the Gulf region could quickly push prices back even higher. A bigger and more immediate concern is the deteriorating situation in the Eurozone.
The outcome of the Greek elections has brought some relief. But the European economy remains fragile. And there is as yet no clear policy direction to eliminate the downside risk of a continent-wide recession.
Even if fuel prices do not worsen, and Europe avoids a worst-case scenario, airlines will be left with another in a series of unsatisfactory bottom line results. Between 2002 and 2011 aggregate airline revenues totaled $4.6 trillion. And we lost $16 billion. Our best annual net profit margin of this century was just 2.9%. A business that cannot generate a satisfactory return on capital is not sustainable over the long term and that is the position in which the air transport industry finds itself.
This is odd, because aviation creates so much value for the world. A recent study conducted by Oxford Economics shows that aviation supports 56.6 million jobs and $2.2 trillion of economic activity. That’s about 3.5% of global GDP.
It is also peculiar, because many of our partners in the aviation supply chain—Original Equipment Manufacturers (OEMs) and suppliers, airports and global distribution systems (GDSs)--do much better on average, than airlines. There is natural tension because their revenues are our costs and while there is significant concentration among our supplier base, there are literally hundreds and hundreds of airlines.
Perhaps that is why I find the theme of this session, “Together We Can Manage Change,” particularly pertinent. We are an industry which is highly dependent on the interactions of a host of government and private sector participants. To make big changes there has to be recognition and alignment among a sufficient number of stakeholders that there is value to be gained by doing things differently.
Often change is painfully slow even when there is an acknowledgement that it is needed. We see that being played out in Europe, where two decades after the concept was developed, the Single European Sky (SES) still remains largely a theoretical construct.
Everybody accepts that the existing system is hugely inefficient and ill-equipped to cope with today’s traffic numbers, much less tomorrow’s. Certainly that it is the view of EC Vice President and Transport Commissioner Siim Kallas, but the European states and their air navigation service providers (ANSPs) are not delivering. It is clear to me that we need a top-down approach from the Commission, with some painful penalties to force change among ANSPs and states.
When change is focused on industry, we have a better track record of delivering quickly. Especially the monumental leap forward represented by 100% e-ticketing. It was a central component of IATA’s Simplifying the Business (StB) program. And it would not have occurred if we hadn’t achieved a common vision across the value chain of the benefits it would bring.
It seems to me that the key to success in managing change successfully must begin with an understanding that change is not a zero sum game. It is not about one group winning and another losing. The focus should be on achieving benefits for everybody. That is as true about the SES as it was for e-ticketing. The difference is the mindset of the stakeholders. We must be open to deriving benefits for all by working together.
That is particularly relevant to our industry’s approach to IT. So in the time remaining I will focus on three areas where I believe that we have an enormous opportunity to shape tomorrow by managing IT change together:
- Decision Support
- Operational Efficiency
Those who were here in 2010 know that airline distribution is a subject in which I take a great deal of interest—and have experienced a fair amount of frustration. When they were developed, beginning in the 1960s, the computer reservations systems—forerunners of today’s GDSs—represented a step change in airline efficiency and customer convenience, making possible a sales system that put airlines decades ahead of other consumer-facing industries.
Today, GDSs help us sell 60% of our tickets. They are among the most important partners for airlines in the distribution value chain. And they will continue to be so for the foreseeable future.
But the airline industry of today is very different from the industry of the 1970’s. Fares and schedule displays on green screens were all that was needed or expected in those days.
That is no longer the case. The product offering is much wider with growing options through unbundling. And the GDS model is holding us back from shaping the customer focus of tomorrow. New models, more retail-based, are facilitating customer-friendly interactions in almost every other consumer online activity. But the decades old GDS model is too clunky to adapt easily to the emergence of trends such as fare unbundling and merchandizing.
IATA, with the full support of our Board of Governors, is working on a new distribution standard that could revolutionize distribution capabilities by bringing us up to date with online retailers. We will complete the foundation standard definition later this year. The new distribution capability will be an open standard that can be used by any party, including GDSs. The intent is to enable product differentiation through all distribution channels.
Beyond setting the standards, IATA will support the implementation, in collaboration with the entire value chain, through a roadmap and an industry business case. IATA will also provide the infrastructure, in terms of data models and messaging format, enabling the adoption of the standards in the industry.
I believe that the GDSs and system providers, including SITA, have an important role to play in working with us to optimize this New Distribution Capability (NDC) and to take advantage of the opportunities it will offer them. Progress cannot wait. There are lots of business opportunities that the entire value chain—and even some new entrants—could be tapping into. We cannot shape tomorrow with the models and technology of yesterday.
Decision support is another area in which we have an opportunity to work together to shape tomorrow. Every minute of every day, airlines are faced with a multitude of operational and commercial decisions for which they rely on IT to help arrive at the correct answer. Crew-pairing and scheduling, managing irregular operations, finding the most fuel-efficient routings, allocating the scarce resource of airport gates—all of these tasks have been rendered far more manageable through the application of IT by our partners.
Putting on my former CEO hat, I can tell you that the development of true origin and destination revenue management has been vitally important in helping the industry navigate the roller-coaster of passenger demand that characterizes this business. It enables airlines to make the smartest decisions for overall network profitability. When times are good, revenue management helps us to do even better. And when times are bad and bookings are disappearing, it can be a lifesaver.
Perhaps surprisingly, given the value that is attached to it, we have not been as wise as we should have been in understanding how important it is for an industry to manage the information it has about its customers’ travel patterns. Instead, we have allowed much of that information to reside with the middlemen distributors of our product, who have made a healthy profit aggregating and selling back to airlines their own booking data.
One of the things I am very excited about is IATA’s Direct Data Service (DDS) which we have launched in partnership with ARC in North America.
DDS is a more powerful evolution of IATA’s PaxIS business intelligence tool. The understanding of travel patterns facilitated by PaxIS, which uses actual airline tickets captured through the IATA Billing and Settlement Plan and ARC, is already helping airlines, airports, governments, and tourism businesses among other customers.
In order to move beyond the relentless legal challenges by GDSs to PaxIS over the last two years IATA worked to obtain airline data directly from the airlines themselves. In addition to what is provided in the PaxIS product, DDS will also offer direct sales data for airlines that have chosen to provide this.
DDS will bring fresh competition into the market for passenger data. Competition is good for everyone. For customers, it results in increased quality and pricing. For suppliers, competition drives innovation and a relentless focus on cost control, as we have seen in everything from airport kiosks to aero engines.
The third area where we have a tremendous opportunity to shape the future is using IT to boost operational efficiency.
I cannot think of a better example of what we can achieve together than e-ticketing. E-ticketing was about far more than eliminating paper from the process, although of course that has been very important. Beyond that, e-ticketing opened the door to multiple benefits across the supply chain:
- For passengers it has meant more effective use of internet capabilities for booking travel and check-in and no more lost tickets
- For airlines, in addition to the upfront cost savings, it opened the door to the world of online sales, ancillary products and tie-ins.
- Some airlines have monetized the benefits of home shopping by charging a fee to purchase tickets online, although I am not suggesting this model is aligned with every carrier’s selling proposition
- Travel agents, meanwhile, no longer have to maintain ticket printers, and watch over millions of dollars of ticket stock
On top of this, without e-ticketing, the benefits offered by bar-coded boarding passes (BCBP) would have been far less. BCBPs can be printed at home—or anywhere a customer has access to the internet and a printer – or even more conveniently, sent directly to your mobile phone. Apple has just announced that their next iPhone will automatically display the mobile boarding pass on the home screen of the phone when it is time to board. Compared to the magnetic strips of yesterday, airlines have enjoyed a 40% reduction in equipment replacement costs and reduced airport facility requirements.
Can we find these types of big ticket situations with other IT solutions? I believe the answer is yes. StB has fundamentally changed how people travel and it has created value for stakeholders through more cost-efficient processes.
Replacing rows and rows of ticket counters with check-in kiosks, for example, has freed up valuable space for other purposes, or enabled carriers to develop a more cost-efficient terminal footprint. On top of that, the success of the StB projects has shown that we can move beyond a zero-sum mentality and create win-win solutions across the value chain.
I am sure many of you are aware of our Fast Travel initiative, which aims to respond to consumer demands for greater convenience and industry requirements for greater efficiency. The six Fast Travel projects cover: self-check in; self-bag tag; self-scanning of travel documents such as passports; flight rebooking; self-boarding and the ability to report a missing bag online.
As of 19 June 2012, 35 airport/airline pairs have implemented the three mandatory Fast Travel projects. We have shown Fast Travel works, but to move forward we are focused on bringing benefits to as many passengers as quickly as possible. So the target for 2012 is for 100 airline/airport pairs using at least three Fast Travel solutions. Our 2020 vision is for 80% of global passengers to be offered a complete self-service suite.
We are only at the beginning of the journey. For example, we can send a boarding pass to a traveler’s mobile phone, but passengers cannot access real time operational information on flight status, wait times, or baggage delivered on any device in any location.
Putting these pieces together is part of the next phase of StB. That is being guided by a white paper produced by the StB think tank last year—an updated version of which will be ready for the World Passenger Symposium to be held in Abu Dhabi this October.
Another IATA initiative to use technology to make life easier for our customers involves the security process. Our Checkpoint of the Future project will combine information about our passengers already provided for immigration purposes and advanced detection technology to enable passengers to enjoy a seamless journey through the checkpoint without unpacking or removing clothes.
And we will improve security at the same time, because the use of passenger data will enable us to focus our resources where they are most required.
We are also focused on using IT to take paper out of the cargo process through our e-freight initiative. Despite what we expect will be a 24-hour reduction in shipping time with e-freight, our success in making the business case to our partners in the airfreight supply chain has been difficult.
After seven years of work, e-freight penetration was just 11% at the beginning of the year. We are now focused on working through the Global Air Cargo Advisory Group, which brings together groups representing airlines, shippers and forwarders, to focus on 100% e-freight by 2015. We are determined to show that e-freight is not a zero sum game and will bring benefits to all.
The opportunities before us extend to safety. IT plays a critical and growing role in making aviation safer, through the collection and sharing of massive amounts of safety data that allow us to identify potential issues before they emerge as threats to safety.
An example is our collaboration with the International Civil Aviation Organization, the US Department of Transportation and the European Commission to create the Global Safety Information Exchange. Within the past year we have achieved a number of important agreements covering such things as a harmonized accident rate between ICAO and IATA that will ensure that our risk analysis is aligned towards the most important safety concerns.
Industry collaboration in the area of safety is a template for how we need to shape our IT partnerships for the future. Now I am not suggesting that we can achieve 100% agreement on IT priorities and the best way to achieve them. But I would argue that for the good of the industry, we need far more experiences like safety and e-ticketing and fewer like the SES.
In the end, it is all about value delivered. We need to have a common vision across the value chain of what needs to be achieved and the value that it will bring to the industry and to its customers. Once we have that, good ideas can become a business objective upon which we can cooperate. In other words, when people and companies see the value that is to be gained, they are ready to work together.
I have spent almost my entire career in aviation. Over three decades I have personally witnessed the enormous improvements in safety, sustainability, efficiency, operations and passenger convenience that IT has facilitated. IT has changed aviation for the better. Aviation today is a global mass transit system for nearly 3 billion people and 50 million tonnes of cargo. This is a critical component at the foundation of our global community. We could not deliver this enormous value at an ever expanding scale without the support of IT partners.
Aviation is an important force for good in our world, enabling journeys of discovery, bringing goods to market and reuniting friends and families. In its first hundred years, commercial aviation has changed the way that the world lives and works together. And we have only just begun. Working together, we can drive change to deliver even greater value in the next century of commercial air transport.