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Infosys-IT Integration of Airline Alliances Industries

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					IT Integration of Airline Alliances
Pankaj Narayan Pandit,
Principal Consultant,
Infosys Technologies Ltd.
pankaj_pandit@infosys.com




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.

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.



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

                                             Sky Team ,
                                                                                                Airline alliances have
                                              18.70%                                            total US$ 143.60 billion
           Oneworld ,
                                                                                                revenue @ 57.3%
            15.40%                                                                              share of world capacity.
                                                                                                All but one of the top
                                                                                                25 mainline airlines is
                                                                                                now aligned with one
                                                                                                of the three alliances. *


                                                            Others, 42.70%
       Star Allaince,
         23.20%




     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.




                                             IT Integration of Airline Alliances- Infosys POV
                                                                                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.
               Source: Airline Business-Aug-2003-2007




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.




                        IT Integration of Airline Alliances- Infosys POV
   Legacy airlines need to lower non fuel operating costs to stay competitive

               Network Airlines' "Non Fuel Operat
             Expences/ ASM" are much higher(Q3                               Non fuel operating
                        (Source: BTS, USA )                                  expenses per Available
                                                                             Seat Miles (ASM) of
                                                                             USA’s network airlines
      20                                                                     are 55% higher than
                                                                             LCCs. Alliances should
      15                                                                     focus on integrating
                       6.2                                                   complex functions to
      10                                                                     help close this gap such
                                                     3.                      costs.
        5              10.4
                                                     6.
        0

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


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




                            IT Integration of Airline Alliances- Infosys POV
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.




                         IT Integration of Airline Alliances- Infosys POV
    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.



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



                           IT Integration of Airline Alliances- Infosys POV
    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 American 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.

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 the following reasons, as they are not dependent at all on the technology
platforms.
At the 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 their schedules, changes in flights, availability of seats in RBDs,
waitlist confirmations, fares, PTMs, Baggage transfer functions, and update airline host
reservations using the 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 with the business vision,
making it possible for business to business e- commerce applications.


                          IT Integration of Airline Alliances- Infosys POV
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 in g c o n n e c tiv it 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 in 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 ir 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.
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

                                          IT Integration of Airline Alliances- Infosys POV
    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.


                                       Revenues($ Bill)         Average Operating
                 Name of                                        Margin
                 Alliance
                 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, network 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.




    -----------------------------------------------------------------------------------------------------------------

Pankaj Narayan Pandit is Principal Consultant, Airlines Practice, with Infosys Technologies Ltd.      His e mail is
pankaj_pandit@infosys.com




                            IT Integration of Airline Alliances- Infosys POV

				
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