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					Perspective




IT Integration of Airline Alliances
Pankaj Narayan Pandit




Abstract
Network airlines today are facing serious business challenges due to volatility of
fuel costs, global economic slowdown and increasing competition from LCCs (low
cost carriers). Large legacy airlines now have a compelling reason to consolidate,
to reduce their non fuel operating costs, and improve yields. Cost reductions and
schedule optimization can both be achieved through closer integration within their
respective alliances in human as well as other resources such as CRS (Computerized
Reservation Systems), MRO (Maintenance, Repair, Overhaul)and other IT
infrastructure, as well as non core business areas like post flight accounting work.
This is an easier option than full scale mergers.
The airline industry is a highly regulated one. Airlines are prevented from taking
controlling stakes in foreign airlines, bilateral agreements still govern international
airline routes, and airline mergers are often resisted by governments in the name
of competition. In addition, employee unions in and of themselves can present
considerable obstacles to consummating mergers and realizing their full benefits.
As a result, these barriers to economically rational consolidation have led to a more
fragmented industry with higher costs and inefficiencies. As a partial response,
airlines have formed global alliances to alliances to achieve the de facto benefits
of cross-border consolidation. However airline alliances were initiated mainly as
marketing alliances, centered around incremental traffic gains Hence their role so
far has been limited to integration of elite customer recognition and frequent flyer
programs (FFP) within the alliances, with only limited integration on the reservations
and inventory side and operations. Much work remains to be done to realize the full
benefits of alliances.
Abstract (Contd.)
To achieve such operational synergies, airline alliances will need to integrate their core operational areas. Synchronization
of schedules, developing joint airline websites, sharing of airport terminals, common interline e-ticketing servers, common
platforms for after-market spares, are few such areas. Such sharing of resources will pose IT challenges due to disparate
main frame based legacy IT systems. Common GDS (Global Distribution System) platform is touted as a possible solution.
However it is costly as well time consuming option that airlines cannot afford.
Infosys proposes use of open source technologies, middle ware platforms to transform key IT segments of legacy airline
into catalytic IT. Such agile IT will lead airline alliances to drive strategies to reduce costs and face competitive challenges in
today’s airline industry.

Alliance capacity shares (ASK)Summer 2008
(Source: Airline Business, September 2008)


                                               (Source: Airline Business, September 2008)

                                                                                            Sky Team ,
                                                                                             18.70%

                                                          Oneworld ,
                                                           15.40%




                                                                                                         Others, 42.70%
                                                       Star Allaince,
                                                         23.20%




     Airline alliances have total US$ 143.60 billion revenue @ 57.3% share of world capacity. All but one of the top 25
     mainline airlines is now aligned with one of the three alliances.*



Mergers have the potential to improve profitability
Two recent examples illustrate that the financial benefits of merger can indeed begin to accrue, even in the absence of fully
merged operations. Air France KLM as well as Lufthansa-Swiss maintained separate operations even after merger. Financial
benefits of such “half mergers” are in the form of onetime gains, realized from selling assets like office spaces, savings on
headcount reductions etc. Nonetheless, the real synergies of merger begin to pay off only in second and third year of merger
when flight schedules are synchronized, operations fully merged, and infrastructure, back office and head office functions
are rationalized. Operating margins improve from reduced costs through elimination of redundancies, and increased revenue
accrues from more comprehensive market coverage. The as yet uncompleted Delta –Northwest and British Airways -Iberia
mergers have the potential to achieve such improvement in operating margins. For those carriers not willing to undertake
the financial and operating risks associated with mergers, similar synergies can be achieved through closer alignment with
alliance partners in all areas of common interests. This will challenge many to go beyond the front office alignments of
inventory and frequent flier programs.




*Emirates is the only mega airline, from top 25 airlines, that is not aligned to any airline group.



2 | Infosys – Perspective
                                          Source: Airline Business-Aug-2003-2007




   AF-KLM’s operating margin improved to 5.8% in 2007 from 1.1% in 2003, Lufthansa’s operating margin went up
   from 4.5% to 7.1% in 2007 after its merger with Swiss.



Airline industry consolidation is compelling despite the obstacles
Despite the compelling and demonstrated benefits of consolidation the global airline industry is constrained in its ability
to execute such deals. The airline industry is highly regulated one. Civil aviation authorities have laws that prevent foreign
airlines from taking ownership stake, and much international air service remains governed by bilateral agreements on
routes, capacity and frequency. In addition, governments investigate merger and alliances activity for potential harm to
consumer, labor and competitive issues. Numerous national carriers are still majority owned by the governments of their
home countries, thus further complicating decision making on purely rational commercial grounds. Organized labor unions
in airlines can be another hurdle to be overcome as disparate work rules, pay grades and seniority lists must be combined so
that the merged airline can realize the operational, marketing and financial benefits on which the merger was based.

Legacy airlines need to lower non fuel operating costs to stay competitive

                                                 Network Airlines' "Non Fuel Operat
                                               Expences/ ASM" are much higher(Q3
                                                          (Source: BTS, USA )


                                     20
                                     15
                                                           6.2
                                     10                                                3.
                                      5                   10.4
                                                                                       6.
                                      0


   Non fuel operating expenses per Available Seat Miles (ASM) of USA’s network airlines are 55% higher than LCCs.
   Alliances should focus on integrating complex functions to help close this gap such costs.


                                                                                                       Infosys – Perspective | 3
The airline industry can achieve some of the benefits of consolidation by further leveraging the alliances. However for
alliances to reap these benefits they have to tackle complex business functions, hitherto avoided. This can be achieved not
only through negotiating as a group with their suppliers to cut costs and improve terms and conditions. Areas for joint
alliance based decisions are around the outsourcing of infrastructure, MRO, a common GDS platform, common fleet types,
and fuel purchasing.
Alliances will increasingly need to share disparate IT systems by establishing a road map to liberate their airline members
from legacy IT systems and migrate towards new applications based on open source technologies. One of the most critical
and elusive common systems is the GDS platform. While the rewards of tighter integration and coordination around
inventory, schedule and sharing of PNR data are compelling, the barriers to achieve a common platform are great: a re-
engineering of processes across the enterprise, integration with a range of peripheral but often mission critical systems, long
gestation period and of course the sizeable hard and soft dollar costs associated with GDS migration.
In addition to a common GDS platform, alliances also give carriers the opportunity to formulate common strategies around:
    •	 Outsourcing of operational or back office processes and systems
    •	 E-commerce strategies by setting up joint airline websites
    •	 Exchange of passenger information, PNR data
    •	 Common airport check in terminals
    •	 E-ticketing , and interlining solutions
    •	 Baggage tracing and transfer applications
In addition to IT oriented decisions, airlines in alliances have the opportunity to make other decisions on long-term
infrastructure upgrade programs such as fleet composition, and renewal, grounding inefficient aircraft, lease aircraft from each
other and the potential to jointly raise the capital necessary for such programs. Alliances can then provide a more powerful
competitive tool for airlines against competing alliances and network carriers and the LCCs, in their respective home markets.

Airline alliances and their members
(Source: Airline Business, September 2008)

 Star                                        Oneworld                                 SkyTeam
 Airline                    Revenue (US$     Airline             Revenue(US$          Airline               Revenue (US $
                            MM)                                  MM)                                        MM)
 Air Canada                 10.157           American Airlines   22.935                Aeroflot Russian     3.025
 Air China                  6.779            British Airways     17.602                Aeromexico           1.628
 Air New Zealand            2.965            Cathay Pacific      9.661                 Air France-KLM       34.434
 All Nippon                 13.102           Finnair             3.001                 China Southern       7.188
 Airways
 Asiana Airlines            3.934            Iberia              7.617                 Continental          14.232
 Austrian Airlines          3.510            Japan Airlines      19.641                CSA Czech            1.202
 bmi                        2.049            LAN Airlines        3.525                 Delta Air lines      19.154
 Egyptair                   1.218            Malev               0.850                 Korean Air           9.496
 LOT Polish                 1.086            Qantas Airways      11.975                Northwest Airlines 12.528
 Airlines
 Lufthansa                  30.849           Royal Jordanian     0.768                 Air Europa           1.572
 Scandinavian               8.044            Iberia-Regional     0.931                 Copa Airlines        1.027
 Shanghai Airlines          1.546                                                      Kenya Airways        0.916
 Singapore Airlines         10.872
 South African              3.149
 Airways
 Spanair                    NA
 Swiss                      NA

4 | Infosys – Perspective
Star                                       Oneworld                                   SkyTeam
TAP Portugal          2.642
 Thai Airways         5.669
 Turkish Airlines     3.681
 United Airlines      20.143
 US Airways           11.700
 Adria Airways        0.249
 Blue1                NA
 Croatia Airlines     0.274
 Total                143.6                Total                 98.506               Total                113.071


A common GDS platform is an attractive but elusive option
As the alliances mature, some are now making concerted efforts to move member airlines onto a common CRS platform.
However such transitions are both arduous as well as expensive. It may be difficult to establish the business case for such
migration in a climate of diminished premium traffic and the potential for spikes in fuel costs. The typical price charged for a
hosted CRS solution is in the range of US$ 0.80–1.20 per passenger boarded. Assuming carriage of 25 million passengers, the
annual cost of a hosted CRS solution will be US$ 20-25 million, taking major chunk of IT spend of the airline. While even
these pricing levels may be competitive with owning an in-house reservation system, the considerable costs for migration in
both hard and soft dollar costs usually presents a final hurdle to CRS migration. An average sized carrier can spend anywhere
between US$25-$50 million in one-time costs to change systems for such items as training, process reengineering and
integration.
Most of the CRS platforms available today in the marketplace have roots with legacy carriers with whom they remain tied.
Sabre was previously owned by American Airlines, while Worldspan was at one time owned by TWA, Delta and Northwest.
Galileo had United Airlines as one of its founding owners while Amadeus is still jointly owned by Lufthansa, Air France, and
Iberia. It has been the norm that founding airlines preferred to host their CRS (Computerized Reservation Systems) on the
GDS with whom they had historic commercial ties. However, such historic allegiance can pose problems for integrating the
alliances. CRSs developed around the processes of one airline or airlines and may have difficulty adapting to the needs of
carriers with disparate or evolving business models.
Examples of carriers within the same alliance who are hosted on separate platforms include American Airlines and British
Airways which belong to Oneworld, yet are hosted Sabre and Amadeus. United and Lufthansa belong to Star but are hosted
on Apollo and Amadeus respectively. Air France and Delta belong to SkyTeam yet are hosted on Amadeus, Worldspan
respectively.

Alliance integration has been largely limited to less complex and low value areas
Integration of frequent flier programs is among the first steps in alliance integration as alliances were primarily formed to
increase market coverage. As FFP data is not hosted on real time CRS platforms it is much easier to integrate on the back end.
A joint FFP platform for a given alliance would be a logical second step towards realizing full value of alliance activity. Few
airline alliances are working towards automated processing of redemption requests of mileage points on member airlines.
Integration of booking data and departure control systems for check in are more complex areas requiring greater alignment
of systems, processes and procedures. Even though individual airlines from alliance group continue to be hosted on different
legacy systems, the high level of connectivity between systems enable increasingly close levels of coordination, cooperation
and customer service.
Integration of more complex tasks such as revenue management, aircraft scheduling, joint purchasing of fuel, ground
services, and aircraft looks infeasible until airlines take up equity stakes in each other, as in a full scale merger.




                                                                                                       Infosys – Perspective | 5
       Less
       Complex/Low
       Value realized




       More
       Complex/High
       Value realized




                                                              Ref: SITA Airline IT Trends




Key challenges for alliance integration
   •	 Cost efficiencies: The leaders of each major alliance are seeking to reduce costs through optimal use of all resources, IT
      systems and third parties. The alliances will focus on reducing distribution costs and use efficient channel of internet
      for specific segment groups like corporate as well as leisure travelers.
   •	 Seamless customer services: The members of the loyalty programs of alliances are already demanding more cohesion,
      online approvals of redemption requests, and common elite privileges across all member airlines, etc. This level of
      seamless service needs to be delivered for all alliance customers, not just elite level members of loyalty programs.
   •	 Synchronization of schedules: Scheduling and network planning among alliance has the highest complexity and also
      the highest value delivered as demonstrated by KLM-Northwest example.
   •	 Fleet alignment: Extent of fleet heterogeneity makes alliance integration more difficult.
   •	 HR challenges: Integrating human resources by establishing seniority, aligning work rules, brining parity in pay scales
      can prove to be biggest obstacles in alliance integration
   •	 Regulatory approvals: Proposed mergers between Northwest and Continental in 1998 and United and US Airways
      in 2001 were blocked by the US regulatory authorities for competitive reasons. Despite open skies, the desire for
      funerican and British Airways to more closely coordinate capacity and code shares in and out of London Heathrow is
      still resisted by European regulators. However in 2008, interest in airline industry consolidation is high as airlines are
      compelled to reduce and streamline operations on purely economic reasons, such a potential spike in fuel prices, a
      global economic slowdown and additional capacities in USA due open skies with the European Union and Australia.
   •	 Partner collaboration: Through code shares, airlines can reduce costs of maintaining frequencies during lean periods.




6 | Infosys – Perspective
Middleware Plays a key role in IT integration among airline alliances
Lack of standardization among legacy platforms can be overcome by middleware web services, which are loosely coupled
software components delivered over internet standard technologies.
A web service represents a business function or business service and can be accessed by another application ... over public
networks using generally available protocols .... The web services, based on standards such as XML, SOAP, WSDL, UDDI,
ebXML can address all fhe following reasons, as they are not dependent at all on the technology platforms.
At fhe moment, airlines communicate in MATIP (Mapping of Airline Traffic over Internet Protocol) protocol, with each
others’ host systems. This structured communication is about day to day affairs, such as fheir schedules, changes in
flights, availability of seats in RBDs, waitlist confirmations, fares, PTMs, Baggage transfer functions, and update airline
host reservations using fhe web services, without using the GDS. There are three types of MATIP traffic flows Type a
(conversational), Type a (transactional, also referred to as “host-to-host”) and Type B (secured messaging).The Type A
communication is characterized by relatively high processing speed while Type B communication is characterized by its
relatively high data security.
Airlines plan to use web services for transmission of Type A messages only, ignoring the type B for later stage. The web
services technology has caught up wifh fhe business vision, making it possible for business to business e- commerce
applications.
Thus airlines will achieve not only more integration with their partners, but also lower distribution costs with elimination of
GDS fees and travel agency commissions.

Airlines, like businesses in other industries, are trending towards IP based open
systems
Airlines are now seeking to move applications towards open IP systems as the Internet connectivity makes such systems cost
effective. At the same time this enables closer integration among alliances members.




                    R o le o f E A I in w e b s e r v ic e s
                                             W e b s e r v ic e s a r c h ite c tu r e
                                                                          A llia n c e
                            S u p p lie r s                                                                       E m p lo y e e s
                                                                          p a rtn e rs



          N e w s y s te m s                                                                                                                 P a s s e n g e rs
                                                                                 v i
                                                                    W eebb sseer r vi cceess
                                                                    W
                                                                    O pen SO AP based
                                                                    in te r fa c e
                    C o n n e c tio n s e r v ic e s a r e
                   L e g a c y p ro to c o l a d a p to rs
                   P r o v id i n g c o n n e c tiv i t y t o
                             H o s t p r o to c o l
                                                                                EA I
                                                                                                      M e s s a g e s e r v ic e s a r e ,d a ta m a p p in g a n d
                                                                1 .C o n n e c tio n S e r v ic e s   p a r s in g p r o d u c i n g s t r u c tu r e d X M L f r o m
                                                                2 .M e s s a g e S e r v ic e s       L e g a c y h o s t d a ta




                                                                       Legacy host
                                                                        A i r lin e s y s t e m s
                                                                        T P F ,U n is y s ,A L C S




The airline alliances are increasingly moving towards developing joint websites to further establish the alliance brand, as well
as to improve sales and reduce distribution costs. Alliance partners already have interlining, code shares, and special prorate
agreements in place. However, they now need to develop a common database for common electronic ticketing capabilities.
Online redemption, uniform benefits across partner airlines, and accrual of mileage among loyalty programs of partner
airlines have already become an industry standard. The next wave of integration will tackle back office tasks such as fleet
management and aircraft scheduling. These offer the ability to pool each other’s resources like aircraft, maintenance facilities,
spare parts, and even manpower, leading to huge labor and cost savings.


                                                                                                                                          Infosys – Perspective | 7
Conclusion
  •	 Airline consolidation is desirable but faces several important hurdles due to regulatory issues. However, the benefits of
     consolidation can also be achieved through closer integration of airline alliances.
  •	 The first phase of alliance integration was characterized by first level integration among airline alliances members in
     the form of frequent flier programs, code shares and interlining. The second phase can see them emerge as deeper and
     more closely integrated business entities, with back office integration.
  •	 Restoring profitable operating margins will get precedence over market share calculations. In 2007/08, the average
     operating margin of airline industry is likely to turn negative. Thus alliances have compelling reasons to consolidate
     and achieve both reduction in costs and increase in revenues.

Name of Alliance                         Revenues ($ Bill)                          Average Operating Margin
Star                                     143.60                                     5.82%
SkyTeam                                   113.07                                    5.32%
Oneworld                                  98.50                                     6.70%

  •	 The online web booking and reservations websites, frequent flier programs, B2C interfaces with joint airline websites,
     baggage transfer services using RFID, electronic ticketing, Interlining settlements, revenue accounting, nemork
     planning and scheduling are some areas where alliance can reap quick benefits of IT integration. As the capital
     costs of new developments get spread over more users, establishing a business case for allocation resources for such
     implementation becomes easier for alliances.
  •	 Web services and other middle ware technologies standardization are powerful enablers of IT system integration.
     They are fast becoming a primary requirement for building solutions to integrate alliances in core operational areas
     and across different geographical locations. Infosys is well positioned for partnering with alliances in developing such
     solutions.



  About the Authors
  Pankaj Narayan Pandit is Principal Consultant, Airlines Practice, with Infosys Ltd.
  His email is pankaj_pandit@infosys.com

				
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