Cooperating in Competition

31 August 2005 (Last Updated August 31st, 2005 18:30)

Though passenger numbers are picking up, the airline industry is in a state of financial crisis. In order to prevent airlines haemorrhaging more cash in the coming years, IATA has stepped in to provide a template for efficiency. Its success in coordinating the efforts of competing stakeholders could define the industry's future.

Cooperating in Competition

After another year of major losses, the fiercely competitive airline industry is finding some consensus around at least one issue. Every major stakeholder realises that somehow their businesses must be more efficient, less expensive to deliver and yet also of a higher quality.

The call to cut costs and improve efficiency is heard everywhere in today’s business world, and airlines – albeit individually – have made major efforts to streamline their businesses. There have been some successes, but not enough to prevent losses in the global commercial aviation sector totalling almost $5bn in 2005, according to estimates from the International Air Transport Association (IATA).

More specifically, figures from the US Department of Trade show that losses of $9.1bn were seen in the USA during 2004, with Europe and Asia- Pacific cutting the global deficit. Currently, the forecast for 2005 from IATA, the trade association that brings together all the major airlines, predicts that, worldwide, the industry will see losses of $6bn.

Meanwhile, passenger numbers are rising rapidly again, as is cargo volume. The need to cut costs to curb losses is, therefore, compounded by the greater demand for services.

Much of the loss is accounted for by rising fuel prices, with oil costing an average of £38 per barrel in 2004. This led to a total industry fuel bill of $61bn. Prices are expected to rise still further this year and next. The last three years have seen the industry's fuel bill double, and a similar rise in the next few years cannot be ruled out.

So, airlines will have to look elsewhere for savings to accommodate rising fuel costs. It appears now that the potential for success is limited if airlines act individually, so a new approach is being taken.

The industry is now coming together through IATA to examine broader, systematic change that can be implemented across the entire sector and deliver efficiency to all parties involved.

A GUIDING HAND

"The industry is in serious financial crisis," says Tom Murphy, senior vice president at IATA. "So, it has asked IATA to see what it could do to take costs out of the business. From my perspective, it is natural for the industry to turn to us, as we set the standards. Initially, the project is about bringing the industry together and we have the relationships with the stakeholders to do that."

"The call to cut costs and improve efficiency is heard everywhere in today’s business world."

Given the task of identifying methods to strip out costs from the industry, IATA has come up with a strategy – Simplifying the Business – the name of which hints at the major problem airlines face.

"A very cooperative system has developed over the last 60 years, for both cargo and passengers," notes Murphy. "That is a tremendous benefit, but that system has evolved with complexity over the years. So we have identified five key projects that could deliver a cost benefit of around $6bn when fully implemented."

If successful, that would put the industry back in the black, according to IATA's estimates. This could take the industry into a new dimension, and IATA's
contribution will be crucial in making the Simplifying the Business strategy work, particularly as the lean times have made the airline sector even more competitive than before.

"We act as a matchmaker between systems providers and airlines," says Murphy. "We engage and mobilise those stakeholders, making sure that they understand the benefits and the risks."

E-TICKETS

IATA's new initiative was the result of extensive examination of pain points in the industry's systems and processes. Initially it found many areas where improvements could be made, but in light of the short timeframe in which change needs to take place, the organisation pared this down to five key projects that it believes could reduce costs in the sector by as much as $6bn.

"We will focus effort on specific areas to bring real progress. The next two-and-a-half years may seem like a long time, but the clock is ticking. Furthermore, there is a high number of stakeholders that have to go through implementation, and few companies that can support them in that process," says Philippe Bruyere, interim programme director for IATA's Simplifying The Business initiative.

Fundamental to the strategy is the move towards paperless travel and cargo shipping. E-ticketing is seen as the greatest opportunity to improve efficiency in the industry, and although some airlines have already made moves towards implementing it, IATA is targeting much higher penetration.

By the end of this year, it hopes that 70% of tickets will be issued electronically, rising to 100% by the end of 2007. In 2004, only 18.8% of all tickets handled by IATA's billing settlement plans (BSPs) were electronic.

"The value proposition is to offer everyone the chance to buy a neutral ticket to fly on any airline, anywhere in the world. But airlines need to be in the black, having lost around $6bn in the last year. So, we need to decrease unit cost, and share our value proposition with the customer. E-ticketing is one of the elements that impacts directly on customer experience," says Bruyere.

For passengers, e-ticketing has certain advantages, principally the convenience of making itinerary changes, and increased security, as there is no risk of losing a ticket. The greatest benefit, however, accrues to the airlines. An e-ticket costs $1, whereas a paper ticket costs $10. IATA believes that a move to 100% e-ticketing will save the industry $3bn per year.

Memoranda of Understanding (MOU) are already in place with Amadeus, China TravelSky, Lufthansa systems, Sabre and SITA, as the industry looks for a solution for interline e-ticketing.

"By 2007, we want to eliminate the 340 million paper tickets that are currently issued each year," says Bruyere. "The majority of our members have a plan or have already launched e-ticketing. There is growing mobilisation on this front, but we much get more. E-ticketing is a very attractive proposition."

COMMON-USE SELF-SERVICE KIOSKS

The implementation of e-ticketing also acts as a catalyst for other projects that form part of the Simplifying the Business initiative. Recognising this, the implementation of e-ticketing is planned in such a way as to accommodate various customer behaviours. For instance, some passengers may prefer to print out their e-tickets at home, while other may prefer to use the new common-use self-service (CUSS) kiosks at the airport terminal.

"E-ticketing is seen as the greatest opportunity to improve efficiency in the industry"

CUSS is the second strand of IATA's initiative, and was launched at five key airports – Geneva, San Francisco, Singapore Changi and Toronto airports and with ground handling firm Swissport – at the end of 2005.

Offering faster passenger throughput, CUSS also offers the advantage of taking some elements of processing away from the main terminal, as customers can check in at the car park, train station or car rental depot, for instance. Airlines benefit from economies of scale from shared systems, enhanced security and reduced counter requirements in terminals.

With passenger numbers rising and airports facing constraints on capacity, CUSS is also seen as vital to the future of the industry. Even if it only achieves 40% penetration, it could relieve airlines of $1bn in annual costs.

"CUSS is not new, but we need to work with airports and airlines to share the technology. CUSS is all about sharing, and as it could save around $2.50 per passenger, it is also very attractive. There is a lot of momentum around CUSS, but the challenge is that it must be implemented worldwide," says Bruyere.

HARMONISING STANDARDS AND PROCESS

The three other projects under the banner of Simplifying the Business hinge largely on implementing mature – or maturing – technologies and coordinating the industry’s approach to the exchange of data. Moving towards bar-coded boarding passes, for instance, is a simple question of replacing magnetic strips with an alternative technology that is simple, cost-effective, and which does not require special printing methods.

"Simulations show that there could be savings of up to $1bn a year," says Bruyere. "A number of passengers will print them at home. Also, this project is relatively easy to implement. Common standards needed to store information on barcodes have already been set up, so we just need to promote barcodes among the airlines and find the right way to implement, which is what we are doing now."

Similarly, the use of radio frequency identification (RFID) tags, which IATA is targeting for implementation at five airports this year, involves examining the potential of a technology that has already made its mark in the retail industry – notably with large chains such as WalMart.

The tags, which emit a radio signal that can be remotely read, should enable faster baggage handling, fewer losses and better recovery times.

"This is a more complex project, more future orientated," says Bruyere. "The technology must still be proven and we need to review processes to get the maximum benefit. It is about upping reading rates. About 70% of baggage tags are successfully read automatically at the moment. We want to increase that to 90% with RFID."

CUTTING SHIPPING COSTS

The only non-passenger project being pursued by IATA is e-freight, which is similar to e-ticketing in that it aims to eliminate paper from the shipping process.

"With passenger numbers rising and airports facing constraints on capacity, CUSS is also seen as vital to the future of the industry."

"Paper can still be printed if needed, but the process should not be dependent on paper," believes Bruyere. "The goal is to just exchange data. Now, we need time to build up the necessary data and protocols."

Implementing standardised data exchange may, however, prove challenging. There are a greater number of players in the freight market, each of which has its own specific needs in terms of data content and formats. When achieved, though, it is expected that e-freight could deliver savings of up to $1.2bn.

"When you get rid of the paper, efficiency improves, and the value proposition increases as it takes a shorter time to send freight," continues Bruyere.

"Driving it forward depends on customs authorities and on the forwarders," adds Murphy. "We reckon that each shipment generates as many as 25 pieces of paper, and that is a lot of waste in terms of paper and money."

E-freight could be the biggest shake-up in cargo transit in many years. After all, IATA notes that 20 years ago it took, on average, six-and-a-half days to send an international shipment, and now, in the twenty first century, it still takes six days – one day to fly and the remaining five days waiting for paper documents to be processed.

British Airways, Cargolux, Emirates, Fedex, Lufthansa Cargo and Singapore Airlines have already signed up to IATA's action group for e-freight, having recognised its value to the customer offering as well as for the cost savings it will deliver.

BRINGING DOWN THE BARRIERS

Needless to say, there are some hurdles to overcome before wholesale change can be brought about and the industry can derive the efficiency savings that are possible from standardisation and the deployment of mature technologies. Bringing such systems into widespread use in Africa and Asia, for example, may be more challenging than in Europe and the USA. There is also some latent resistance to change in the industry, which shows some caution over major changes, as the need for quick returns is great indeed.

Nevertheless, interest in IATA's Simplifying the Business initiative is increasing. This growing urgency is partly due to the sheer scale of the losses the industry must bear each year. However, it is also due to the recognition that IATA has the coverage, the contacts and the expertise to successfully coordinate cooperation between competing airlines on broader issues that affect the entire sector.

The future of the airline business hinges on how well rivals can work together.