Sometimes it's hard to tell that a business model is broken. Then events startle you to clarity. For instance: the same week in 2007 that Airbus delivered the largest passenger plane ever built (four jet engines, 471 seats), the trade magazine Airfinance Journal, citing the industry's cry for fuel efficiency, hailed the "return of the turboprop," an airplane invented in the 1930s that uses a gas turbine to turn a propeller. Other times, the revelation comes in numbers. Ten years ago, a barrel of oil was about $16 (about Rs 880) and flying planes was lucrative. US airlines together made $5.3 billion (about Rs 29,150 crore) in 1999, which would be the industry's most successful year ever. Collective net earnings dropped by nearly half to $2.5 billion (about Rs 13,750 crore) the following year, leading to five years of losses that began as the dotcom economy burst.
“$10 billion. What the American airline industry is expected to lose when they close 2008's books”
Then came the 9/11 terrorist attacks, which grounded planes for three days and scared customers away from the skies for months, even years. Oil, meanwhile, climbed to all-time highs, eviscerating any hope of airline profits. The industry was profitable in 2006 and 2007, but now we're in an economic death spiral that touches virtually all industries in many countries around the world. When the airlines close the books on 2008, they are expected to lose up to $10 billion (about 55,000 crore) - twice as much as they made ten years ago. "You just kind of shake your head," says Carter Stewart, managing director at Trans World Consulting, an airline consulting firm in London. After nine years, several shotgun mergers and a $15 billion (about Rs 82,500 crore) federal bailout in 2001, the industry is no better off, he says.
There are too many planes flying too many places, producing high demand for expensive jet fuel and, some say, an unwinnable competition. Customers routinely complain that they can't get the flights they want when and where they want them.
So the airlines are trying new tactics, such as cutting flights, hedging fuel costs and offering passengers amenities such as in-flight Wi-Fi. Plus, the so-called 'unbundled services model' has some airlines selling everything from pillows to luggage space to meal deals. But these tactics require technology support - and in few industries is the business model as baked into the IT as in the airlines, says Stewart, who formerly directed project management offices at American Airlines, TWA and London-based Silverjet.
Who hasn't stood in front of an agent at the airport, listened to her clack on an unseen keyboard for several minutes - no mouse, no touch screen - only to hear, "I'm sorry, the system won't let me do that"? Most legacy proprietary reservations systems can't do everything a Web-based booking system can do, such as pre-sell an onboard snack to one customer and - at Air Canada anyway - subtract the cost of that snack for another customer who wants to bring his own. "Technology is lagging where airlines want to be right now," says Darin Lee, a consultant who specializes in the economics of the airline industry at LECG, an economics consulting firm. How some airline CIOs are grappling with the crisis brings lessons to other IT leaders facing near-crippling economics, where major new systems development is being deferred, layoffs appear likely and budgets are being starved to conserve cash.
Airline Profits and Airline Passengers
For example, Southwest Airlines, which used to be known as a no-frills cattle-caller, now uses technology to provide darn-near luxury services to its customers, such as the ability to change flights with no fee. Sabre Holdings, which provides reservation systems and other software and services to Southwest and American Airlines, among hundreds of others, is using deft, money-saving ways of handling IT labor issues. And Pinnacle, a low-cost regional carrier based in Memphis, Tennessee, is finding success by approaching IT as neither a cost center nor a source of innovation but as a risk to be managed. All you hear about the alignment of people, process and technology with business strategy is playing out - quite painfully - in the airline industry. "A lot of people questioned my sanity, coming to an airline," says Jeff Dato, who joined Pinnacle as vice president of risk management and IT in 2006. "We're all one bad day from having our doors close," he says of the turbulent industry. Then again, he adds, this challenging time "is a wonderful opportunity to make an impact."
Designing IT for Customers
As much as consumers may perceive 'the airlines' as a monolithic business - created, it sometimes seems, to make travel as hellish as possible - each carrier deals with different IT problems and business problems. At US Airways, the CIO spot has been vacant since Joe Beery left late last year to become SVP and CIO at pharmaceutical company Invitrogen. At Continental Airlines, work recently started to integrate its reservations, ticketing and other systems with those of the Star Alliance, a network of 21 airlines that share customers. Any difficulties that may arise from the technology integration present a "significant" financial risk to Continental, according to documents the airline filed with the Securities and Exchange Commission.
Meanwhile, American and United, which have been around for decades, use some technology that is also decades old. Changing these systems can take a lot of time and requires programmers to know the proprietary software well, says Raphael Bejar, CEO of Airsavings SA, an airline IT provider. Even former scrappers like Southwest and JetBlue now have legacy technology that can limit the services they offer and the ways they can spark revenue, Bejar says. While each carrier has its own problems, some issues stretch across companies. Namely, at every airline, everyone from the CEO down must fight to win customers, while at the same time getting as much revenue as possible from each one.
Several airlines, such as US Airways and United, now charge for pillows, headsets or other niceties aboard the plane, as well as for services such as checking bags. These items used to be folded into the cost of a ticket. The idea now is to let customers choose which products to buy, thereby generating new revenue. Flight attendants and gate agents conduct the transactions in various ways. US Airways, for example, is testing handheld devices from Guest Logix to process credit card payments onboard its planes. The goal is to eliminate cash in flight this year, says Lisa LeCarre, the president of the union for US Airways Phoenix-based flight attendants. Selling items on the plane rather than at the time of ticketing means that these transactions don't go through US Airways' reservation systems - minimizing the IT work necessary to process the purchases. Air Canada, however, goes further with unbundling, offering a buffet of options for fliers to buy or reject when booking a ticket. Air Canada built the Web-based system in 2006, separate from its traditional reservation service provided by Galileo. A year later, Galileo built a desktop version to roll out to travel agents so they, too, could access the à-la-carte products that Air Canada now offers.
Customers at the airline's website can choose from four levels of options, with goods and services ranging in price. For example, passengers can add extra services to their fare, such as pre-buying a meal and a snack at a discount. Sometimes, customers can opt for ticket discounts, too. The strategy seems to be working for Air Canada. As of last September, ancillary revenue per passenger totaled $210 million (about Rs 1,155 crore), up $71 million (about Rs 390 crore) since 2005, according to a company presentation to investors. And 49 percent of customers choose a ticket fare other than the lowest available. Trans World's Stewart predicts that unbundling will be short-lived. The revenue gained from selling add-on products can't fully compensate for volatile fuel prices raising flight costs and too many available seats pushing ticket prices down, he says.
Plus, modifying legacy reservation systems across the industry, such as Galileo, Sabre and others, to track all the products available from the airlines and the hundreds of sales combinations will take too long and cost too much, he says. An airline bringing the idea to a reservation systems supplier, he says, would probably hear a response that asked for a feasibility study, requirements documentation, a change request and time for testing. Then the reservation vendor would develop a quote for the job. "All of this would take four or five months and nothing's been done yet," he says. "These types of things are very slow." Southwest, meanwhile, is using IT in a different way to target customers. Business and IT strategists with the company maintain that charging extra for such items as snacks bothers customers. "We don't expect our customers to have to pay for every little service we offer," says Jan Marshall, Southwest's CIO. "It's part of flying." Instead, Southwest is trying to attract passengers by making flying more pleasant. In 2006, Southwest executives, seeing the strain the airline industry was enduring, discussed ways to maintain market share by improving their customers' experience. One simple question, Marshall says, set off hot debate and ultimately spawned a major IT project: should Southwest assign seats?
Should Southwest assign Seats?
The airline had historically asked customers to wait at the gate and be seated on a first come, first served basis - kind of like lining up for concert tickets. Then it switched to group boarding. For a while, agents handed out colored boarding cards to each waiting passenger. Then management wondered whether to refine seat assignments further. Marketers, technologists and operations specialists alike fanned out at various airports to test theories on live customers, then watch their behavior. Such customer anthropology can mean the difference between wasted and well-spent IT dollars, Marshall says. "What we discovered was that our customers didn't want assigned seats. They wanted to pick their seats but didn't want to stand in line," she says. "Our people saw that right away without building a prototype system back in headquarters that might have made the wrong assumptions."
However, from this research grew an eight-month project that, at its height, involved more than 500 employees across the company as well as outside contractors.
Southwest defined three objectives: to assign boarding classes to all ticket holders; to let customers choose to pay $10 or $20 (between Rs 550 to Rs 1,100) to board early; and to single out Business Select members (Southwest's elite frequent flyers) to board first. To accomplish these goals Southwest is replacing many of its back-end systems with a service-oriented architecture built on SAP financial and HR applications, among other investments. The company divided IT workers into about 15 teams to work on the various platforms on which Southwest does business.
These include its website, the frequent flyer and airport systems, revenue reporting, as well as the reservation engine and booking system. "When we roll something out, we roll it out to all our customer touch points," Marshall says. Marshall declines to say what the project cost. But working many changes to legacy systems is a burden airlines must shoulder, says Bejar of Airsavings.
