Airlines tap IT to cut costs, boost efficiency

With the need to cut operating costs, pressure on yields and the growth of low-fare carriers, airlines are being forced to boost the efficiency of every aspect of their business to remain competitive. IT companies are offering the sector innovative products to help them

1st Jul 2010

The pace of change in the airline IT sector “seems to be getting faster and faster”, according to John Chapman, Amadeus’ vice-president of airlines for the Asia-Pacific region.“Today’s technology requirements are far more complex and greater than 20 years ago,” Chapman says.

The biggest development, clearly, has been the advent of the internet, bringing with it new ways for customers to interact with airlines and a corresponding surge in the volume of transactions, placing far higher demands placed on an airline’s ‘back-end’ systems. At the same time, the trauma of the 11 September 2001 terrorist attacks have forced the industry to adopt much tighter security standards, while the International Air Transport Association (IATA) then forced further change with its campaign to eliminate paper tickets from the industry by May 2008, shifting to electronic ticketing only.

IATA says e-ticketing has helped airlines simplify their business, offering “significant opportunities to reduce costs and improve passenger convenience”. E-ticketing “reduces ticket processing charges, eliminates the need for paper and allows greater flexibility to the passenger and the travel agent to make changes to the itinerary,” the association says.

The arrival of global airline alliances, such as the Star Alliance, Oneworld and SkyTeam, on the scene has added further challenges, introducing the need for IT compatibility between the members of each group, while also making it harder for non-members to compete.

Chapman says that airlines over the past decade have responded with an increasing tendency to outsource their IT needs to companies such as Amadeus.

Reservation system

When Air France, Lufthansa and Iberia founded Amadeus in 1987, the carriers wanted the Madrid-based company to create a cutting-edge reservation system.
The platform Amadeus eventually delivered incorporated a radical new idea for the times: it could be shared by airlines and travel agencies, pioneering the concept of seamless reservation services across all channels. Today, about 135 airlines use the reservation platform on its own.
The company has since broadened its product range significantly. In 2000, British Airways and Qantas asked Amadeus to develop a new-generation customer-management system (CMS), covering reservations, inventory and departure control. The result, after five years’ work and 300 million euros (US$406 million) investment, was the Altea CMS suite.

The company also offers elements of the Altea system as stand-alone solutions, covering such functions as e-ticketing, fare quote systems and inventory control.
To date, Chapman says Amadeus has signed contracts with about 70 airlines for the full Altea suite. In the Asia-Pacific region, Amadeus’ main customer for a long time has been Qantas, while deals have also been signed with V Australia, Singapore Airlines (SIA) and Cathay Pacific Airways. According to Chapman, Cathay will implement the system in 2011, followed in 2012 by SIA.

The company is also involved in exclusive contracts to evaluate the Altea system – so-called ‘scoping’ contracts – with Thai Airways, South Korea’s Asiana Airlines and “several other large carriers” in the Asia-Pacific region. Chapman explains that scoping contracts give potential customers the chance to evaluate the system in detail, matching the airline’s requirements with the system’s functionality.

“At the end of the scoping, we give a detailed report on implementation, customisation requirements and so on,” Chapman says.

Cost comparison

He adds that part of the scoping process involves a comparison of the operating costs of the Altea system with the cost of running an in-house system. One crucial factor here is that the fixed cost of an in-house solution is replaced with a variable cost structure, where the airline pays less if there is a slump in travel demand – such as that triggered by last year’s global recession.

In September last year, the IT company also signed a ground-breaking partnership deal with Malaysia-based low-cost carrier AirAsia. The deal allowed, for the first time, Amadeus-subscribing travel agencies around the world (numbering more than 101,000) to book AirAsia flights – as well as those on the carrier’s Indonesia AirAsia, Thai AirAsia and AirAsia X units – in the same way they would book a full-service carrier.

The deal uses a unique Amadeus technology designed especially for low-cost, ‘ticketless’ airlines, called Amadeus Ticketless Access. “This technology enables travel agents to find flight options to suit a broader range of needs, especially for travellers who are particularly budget conscious,” Amadeus says.

Chapman says that the AirAsia deal illustrates the “evolution” now being seen in the low-cost sector, where LCCs are adopting some elements of the full-service business model. “The concept of hybrid carriers is a new trend,” the executive says.

“The low-cost model works very well in the market you serve directly, but with more international customers, you need alternative distribution strategies,” he says.
Norbert Mueller, senior vice-president of Asia-Pacific sales for Lufthansa Systems, agrees that the airline IT landscape has changed drastically in recent years. The Lufthansa Group subsidiary, based near Frankfurt, Germany, offers an entire range of IT services, including consulting, development and implementation of industry solutions and operation.

“Airlines used to have large IT departments which developed and maintained their own solutions. This required an enormous amount of resources,” Mueller says. “With competition intensifying in the industry, carriers are now focusing on their key business and increasingly rely on external providers. These develop, maintain and further enhance IT solutions and also host them in centralised data centres.”

Airlines can access the solutions remotely while keeping their IT organization small. “Lufthansa Systems is ideally positioned here as we provide a unique combination of airline know-how and IT expertise,” Mueller says.

According to the Lufthansa Systems executive, the company sees an increasing trend towards IT platforms beyond individual solutions. Combining products for related tasks offers customers substantial financial and functional advantages, Mueller says.

As an example, Lufthansa Systems’ Integrated Operations Control Centre (IOCC) Platform covers all key processes related to operations control: schedule management, operations control, crew management, flight planning and weight and balance.

“Because of the synergies it generates, the IOCC Platform offers airlines much greater economic benefits than standalone systems, and it increases the speed and quality of decision making,” Mueller says. “Our Integrated Commercial Platform works in a similar way for all commercial processes. The goal is always to look for an optimum overall result for the airline.”

Lufthansa Systems also supports developments in other areas by offering solutions such as mobile check-in, while maintaining close contact with its customers, to allow it to anticipate trends and tailor products to airlines’ evolving needs.

Focusing investment

With the global recession and its devastating impact on travel demand, airlines have focused their investment on solutions that directly reduce their costs and increase revenues.

“Our products meet this requirement, and they provide a fast return on investment,” Mueller says. “Besides, we offered flexibility in terms of the project schedule and the pricing of our solutions, which are important factors for the carriers. Airline executives quickly understood that rather than freezing all investments, it makes more sense to invest moderately in projects that have a considerable impact on the balance sheet.” Those that did so have now developed a competitive advantage as demand picks up once again.Lufthansa Systems says its solutions address “the general operational and commercial requirements of all airlines”. “Hence, they are in use with network, regional, low-cost and cargo carriers alike,” Mueller says.

Since the systems are modular in design, they are readily customisable. Airlines can choose extra functionalities in addition to the basic solution to further enhance their results. In addition, the company offers some products aimed specifically at low-cost, regional and start-up airlines, such as its operational planning and control solution NetLine SP and the revenue management system ProfitLine/Yield Rembrandt. Jetstar Asia, Ryanair and EasyJet are among the customers for these systems.

Mueller says Lufthansa Systems IT products cover all airline business processes. The company offers its Lido/Flight solution for flight planning, which the company says can reduce fuel consumption by up to 5 percent. Similarly, the products from its NetLine resource-management suite can reduce crew costs by up to US$10 million per year, while ProfitLine – for revenue management and pricing – can boost revenue by up to 10 percent.

The company says its NetLine Fleet Assigner can increase profitability by up to 600,000 euros (US$753,000) per month, through precise capacity allocation.

Integrated platforms

Lufthansa Systems also offers integrated platforms that combine applications into a seamless solution. These include the Integrated Operations Control Centre (IOCC), for airline operations, and the Integrated Commercial Platform (ICP), for network and revenue management, among others.
“The products directly contribute to an airline’s profitability by enhancing process efficiency, reducing costs and generating additional revenues,” Mueller says. “With the IOCC Platform, for instance, an airline can save up to US$31.8 million per year.”

Lufthansa Systems has more than 200 international airline customers for its IT solutions. “With many airlines moving forward from using in-house and legacy solutions to choosing products offered on the market, we see a strong potential to further develop our market position,” Mueller says.
In the Asia-Pacific region, the German company already works with many of the leading carriers, including Cathay Pacific, China Southern Airlines, SIA, Thai Airways and Virgin Blue.

Boosting booking

Colombo, Sri Lanka-based John Keells Computer Services (JKCS) is also developing IT solutions for the aviation industry. The software developer’s list of clients includes major carriers such as Emirates Airline, Sri Lankan Airlines, Air Arabia and Qatar Airways among its customers.

The company offers airlines a range of products tailored either for full-service or low-cost airline business models, alongside software used in airport operations.
One major recent contract the company was involved with was the introduction by India’s Kingfisher Airlines of JKCS’s new Evinta Internet Booking Engine (IBE), which the IT company says doubled the airlines ‘look-to-book’ ratio with 24 hours of its introduction.

Kingfisher, India’s largest privately owned airline, today operates into about 69 cities in India and serves several long-haul destinations with its fleet of 74 aircraft. The carrier operates more than 400 flights a day.
To maintain its growth rate, the carrier needed an IBE that would stimulate sales. The airline’s previous engine was recording just a 4 percent ‘look-to-book’ ratio, hampering growth.

According to JKCS, the low figure was a result of the old IBE’s “limited facilities that failed to capture reservations”. Many customers were put off by the complexity of the engine, abandoning their on-line ‘shopping carts’ before completing an order.

Transaction costs with the old engine were also high, and the airline wanted to find a booking engine with multiple sales channels, catering to all web users, travel agents, corporate and other customers. The existing engine furthermore lacked adaptability to industry changes.

Kingfisher chose the Evinta IBE to meet its needs in the most cost-effective and reliable manner. The system recorded almost 3,000 on-line bookings within its first 24 hours of operation.

Proving its worth

“The engine proved its worth on usability, rich shopping experience and flexibility,” JKCS says.

Evinta proved itself much more user-friendly than Kingfisher’s former booking engine. A three-step booking process cut the online booking procedure in half, while an off-line payment option allowed customers to buy tickets on-line without having to pay on-line. Customers could also choose their seat using a graphical seat map.
Since the JKCS system catered to all kinds of users on a single booking platform, it slashed Kingfisher’s operating costs. “This solution brought down the number of sessions by all applicants with the host reservation system – thus lowering the booking cost per passenger,” JKCS says.

The IT company says Evinta was designed to entice customers to spend more, bringing in higher revenue. Many ancillary services are on offer and various up-sell options were included. ‘Dynamic packaging’ gives customers the chance to book cars, hotels and insurance services with their flight – bringing in further revenue – and ‘fare flexibility’ options allow higher-paying passengers to change their flights.

With its new IBE, Kingfisher saw increased on-line sales, while gaining the ability to handle a higher transaction load and reducing operating costs. A good result by anybody’s standards, but especially for airlines just emerging from a global recession and determined to lessen the impact of future downturns.

Asian Aviation at a glance