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Smarter Planet: Airlines


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Success on the new horizon depends on deeper, more holistic and informed planning, collaboration and execution: (1) Predict demand and optimize capacity and assets, (2) Improve operational efficiency while reducing environmental impact, (3) Improve end-to-end customer experience, (4) Assure safety and security.

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Smarter Planet: Airlines

  1. 1. George Mattathil -Let’s Build aSmarter Planet:Airlines © 2010 IBM Corporation
  2. 2. Let’s build a smarter planet: AirlinesHeadwinds, horizons and hope—competing on a smarter planet.HEADWINDSThere are significant business environment factors and trendsthat will likely change the airline industry forever.HORIZONSThere are now, and will continue to be, growing opportunities to capture andtransform data and to use the resulting information in new and powerful ways.HOPEFor airlines, those horizons can be leveraged to create new strategies,capabilities and insights to drive competitiveness and long-term viability. © 2010 IBM Corporation
  3. 3. Let’s build a smarter planet: AirlinesStrong headwinds are setting global airline industry profitability back.AT THE TOP LINECurrent predictions are for 2009 passenger revenues to be off by nearly 16%, with cargorevenues off nearly 18%. By midyear, average international ticket prices had fallen 19% YTY,while 21% fewer premium passengers were flying.AT THE COST LINEWhile some have benefited positively from hedging positions, fuel price increases of 56% fromtheir YTD low, airline service costs growth to over US$54B worldwide, imbalances in capacityand pending environmental regulation all promise even more cost line concerns.AT THE BOTTOM LINEAverage yields have cratered by over -12% for passengers and -15% for freight; and despite areduction in capacity, ever-growing break-even load factors are not being met. The industryhas already lost US$6B (1st half estimate) and is positioned to nearly double that by year-end. © 2010 IBM Corporation
  4. 4. RPK AND FTK % CHANGE 30% 35% 15% 20% 25% -30% -25% -20% -10% -5% 0% 5% 10% 40% -15% AUG 07 SEP 07 OCT 07 NOV 07 DEC 07 Let’s build a smarter planet: Airlines JAN 08 FEB 08 MAR 08 APR 08 MAY 08 AND CARGO GROWTH JUN 08 JUL 08 AUG 08 SEP 08 OCT 08 NOV 08 DEC 08 JAN 09 FEB 09 ASIA-PACIFIC INTERNATIONAL PASSENGER MAR 09 APR 09 MAY 09 JUN 09 JUL 09 Asia-Pacific are enjoying robust demand growth. AUG 09 SEP 09 OCT 09 RPK GROWTH NOV 09 DEC 09 JAN 110 FEB 10 MAR 10 APR 10 MAY 10 JUN 10 FTK GROWTH© 2010 IBM Corporation
  5. 5. Let’s build a smarter planet: AirlinesTop-line performance is also being bolstered by the gradual return ofbusiness and premium travel categories. Globally, companies that cut back on business travel are spending once again: In 2009, 93% reported a reduction in their companies’ travel spending (ACTE Survey, March 2009) 1 in 3 managers expect spending to increase in the next 12 months (AirPlus Business Travel Index, August, 2010) 69% reported reductions in overall travel budget (HBR Survey, July 2009) 6.2% increase in global business travel spending expected in 2010 (NBTA Foundation , August 2010) And companies are also spending more on premium class air travel: 65% of travel managers stated that they had made changes to their existing travel policy to reflect specific spending limitations (ACTE Survey, March 2009) 10% of business travelers fly Business Class, compared to 8% in 2009 (AirPlus Business Travel Index , August 2010) 47% reported use of less expensive class of travel (HBR Survey, July 2009) 33% of travel managers expect an increase in spending in 2010 (AirPlus Business Travel Index , August 2010) But not all markets are expected to enjoy uniformly robust corporate travel recovery:  Japanese manufacturing sector continued to slow in 2H10, putting downward pressure on corporate travel  Industrial growth in India slowed to in June to just 7.1% which may dampen business travel demand  Despite output growth from several countries in Western Europe, uncertainty about the speed and shape of the economic recovery in the rest of Europe will depress demand, including demand for business travel © 2010 IBM Corporation
  6. 6. Let’s build a smarter planet: AirlinesOne important threat to business travel is the emergence of virtualalternatives to physical travel, such as telepresence.Surveys show the current economic environment is driving higher use: 60% of respondents had cut travel through remote conferencing use (BTN Survey, July 2009) 79% reported greater use of conference calls, WebEx, and telepresence (ACTE Survey, June 2009) 44% surveyed believed that video conferencing would increase in use, and 71% felt that telepresence was more time-efficient than face-to-face meetings (HBR Survey, July 2009)And some analysts are spelling out the direct impact to airlines: Gartner: telepresence will replace 2.1 million airline seats per year by 2012 (Gartner, Feb 2009) Haddock Research: 35% – 40% of airline seats for American business travel are threatened by telepresence (Haddock Research & Branding, May 2009)And business travel suppliers are getting on board! American Express Corporate Travel’s Virtual Meetings eXpert ―Based upon criteria such as price, duration of trip, purpose, environmental impact and more, the solution will alert travelers at the time of booking on available telepresence and high-end virtual meeting options, and guides them through scenarios that determine if it makes sense to take the trip virtually.‖ © 2010 IBM Corporation
  7. 7. Let’s build a smarter planet: AirlinesAir travel is also under threat from high-speed rail which is perceivedas more convenient, greener and competitively priced. Share of Madrid-Seville80% market – AVE Estimated share of UK 3-hour70% domestic market – SNCF Share of Korea63% market – KTX Share of Tokyo-Akita60% market – JR East Decline in inter-city50% flights – THSR Share of Madrid-Barcelona46% market – AVE―An airplane on wheels‖ Air France-KLM Chairman, Jean-Cyril Spinetta on the TGV. © 2010 IBM Corporation
  8. 8. Let’s build a smarter planet: AirlinesFrom a cost-line perspective, the new unknown will beenvironmental costs for greenhouse gas emissions, which will havea further impact on premium demand as costs are passed on topassengers. ADDITIONAL COSTS FROM ETS ALONE15% 2012 COST FOR CARBON CREDIT PURCHASESAnticipated shortfall (77M tons of CO2) DELTAin allowances for airlines from EU Carbon UNITEDTrading Scheme in 2012 (estimated to BRITISHcost US$1.4 – $1.6B to the industry and RYANAIRadding an average cost per ticket of QANTASUS$13+ to a short-haul flight and US$60for a long-haul flight). CONTINENTAL EASYJETUS$7B THAI AMERICANExpected annual cost to airlines to AIR FRANCE/KLMmeet global IATA commitment forcarbon neutral growth in 2020. $0 $10 $20 $30 $40 $50 $60 $70 $80 US$ MILLIONS © 2010 IBM Corporation
  9. 9. Let’s build a smarter planet: AirlinesMeanwhile, higher fuel and airport services costs may compoundthe issue and increase average costs or cost volatility. JET FUEL PRICE TREND GLOBAL LANDING FEES Singapore Kerosene-Type Jet Fuel QUARTERLY CHARGES TO AIRLINES Spot Price (Cents per Gallon) 350 Airport service charges 160 collectively accounted for nearly 8% of AP 300 airlines operating costs. 150 250 140 200 130 150 On a global basis, Jet Fuel is 120 100 down almost 30% from 2008 and up 25% from 2009 to 2010 110 50 100 0 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2005 2006 2007 2008 2009 2010 2000 = 100 © 2010 IBM Corporation
  10. 10. Let’s build a smarter planet: AirlinesThese headwinds make it difficult to predict future performance. GLOBAL INDUSTRY PROFITABILITY TOTAL INDUSTRY PROFIT/LOSS PAST 20 YEARS $15 $10 $5 2010 forecasts US$ BILLIONS are positive $0 -$5 -$10 -$15 -$20 2010F 2008 2009 2003 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2004 2005 2006 2007 © 2010 IBM Corporation
  11. 11. Let’s build a smarter planet: AirlinesBigger is NOT always better. Smarter is better Inverse Relationship Between Size PROFITABILITY INVERSE RELATIONSHIP BETWEEN RELATIVE SIZE ANDand Profitability Relative size and profit performance in 2008-09 for 163 global airlines 1,2,3 20.00% COPA Airlines Republic Airlines Smaller carriers tend to Allegiant Air limit complexity and 15.00% Air Arabia maintain higher prices in Large carrier performance is Air Wisconsin Air Asia less contested regional limited to relatively modest Profitability in 2008-2009 10.00% markets profitability large Emirates Airline Qantas performance variations year 5.00% Southwest Airlines to year Lufthansa Cathay Pacific ANA - All Nippon Airways 0.00% 0.00 5.00 Air Canada 10.00 15.00 20.00 British Airways -5.00% American Airlines Japan Airlines Int’l US Airways -10.00% United Airlines Austrian -15.00% Delta Air Lines China Eastern Airlines -20.00% Relative Size 1 Data collected from airline annual reports and industry fleet data from IATA, IBM Analysis 2 Relative size is a composite measure of 08/09 Revenue and total current seat capacity 3 Trend line is a 5th degree polynomial function that accounts for only a portion of the variation in the data © 2010 IBM Corporation
  12. 12. Let’s build a smarter planet: AirlinesLooking ahead, the horizon is increasingly clear… The world is becoming smaller and flatter, but also smarter. © 2010 IBM Corporation
  13. 13. Let’s build a smarter planet: AirlinesThe reality of living in a globally integrated world is upon us. Frozen credit markets and limited access to capital. Economic downturn and future uncertainty of economic growth. Environmental sustainability challenges and looming global regulation. Oil and fuel volatility and long-term cost escalation. Information explosion, channel proliferation and loss of market-making power. Emergence of indirect substitutes and alternatives to travel. Changing travel demand and shifts in buying behaviors. Consolidation and contraction of capacity. New customer demands and business models.The world is connected:economically, socially and technically. © 2010 IBM Corporation
  14. 14. Let’s build a smarter planet: AirlinesThe need for progress is clear.US$27.8 billion 60% and -19%Projected global airline industry losses 60% of consumer sentiment aroundin 2008 and 2009 combined. the U.S. airline industry is negative, and there are 19% fewer brand-loyal travelers in 2008 than in 2006. This is a recipe for commoditization.3% or 13% US$3 billionAirlines generate 3% of all greenhouse gas Estimated cost to airlinesemissions. Some say that because aircraft of mishandled baggage.operate in the upper atmosphere, the impact isequivalent to 13% of emissions from all sources. © 2010 IBM Corporation
  15. 15. Let’s build a smarter planet: AirlinesThe mandate for change is a mandate for smart. The infrastructures, systems and processes that underpin how business and society function are becoming digitally aware, interconnected and infused with intelligence.The new intelligence applies to how services are delivered, to the movement of people, freight, money, information and electricity, and more. Each represents a chance to do something better, faster and more productively. This is a new frame of reference with enormous promise for economic growth, with opportunities to think and act in new ways. © 2010 IBM Corporation
  16. 16. Let’s build a smarter planet: AirlinesDemands on airlines will increase over time, driving the need for newintelligence and insight, greater connectivity and transparency, andimproved customer service. DRIVERS OF CHANGE CHALLENGES STRATEGIC IMPERATIVES Population explosion Capacity and congestion World population is growing and How to meet the growing, Predict demand and transportation providers will need changing demand efficiently, optimize capacity and to expand capacity to keep up. consistently and profitably? assets. Urbanization As the number and size of cities grows, pressure on transportation Empowered customers Dramatically improve systems to move people and Deliver transportation choices in the end-to-end customer materials between and within the way that end customers value. experience. those cities grows. Globalization The growing interconnectedness Improve operational of the world is driving inter-city Efficient, green operations efficiency while reducing and international growth in How to reduce dependency on scarce resources while reducing environmental impact. demand, with an expectation of improved service. environmental impact? Technology Technology now enables the Safety and security Assure safety and security. capture and analysis of real-time How to unobtrusively reduce information about the status, exposure to security risks and location and condition increase the safety of operations? of everything. © 2010 IBM Corporation
  17. 17. Let’s build a smarter planet: AirlinesSuccess on the new horizon depends on deeper, more holistic andinformed planning, collaboration and execution. Airlines will need tobecome smarter. PREDICT DEMAND AND IMPROVE THE END-TO-ENDOPTIMIZE CAPACITY AND ASSETS CUSTOMER EXPERIENCE Predict demand, align transportation Understand customer needs asset and infrastructure deployment and provide information and and continuously adapt operations. services to meet those needs in the manner preferred. AIRLINE IMPROVE OPERATIONAL ASSURE SAFETY EFFICIENCY WHILE REDUCING AND SECURITY ENVIRONMENTAL IMPACT Leverage new sources of Continuously balance cost and information and new ways environmental impact of scarce of using that information to resource use while exploring new improve security and safety. operational alternatives. © 2010 IBM Corporation
  18. 18. Let’s build a smarter planet: Airlines + + = An opportunity for airlines to think and act in new ways. Predict demand Improve operational Improve the end-to-end Assure safety and optimize efficiency while reducing customer experience. and security. capacity and assets. environmental impact. © 2010 IBM Corporation
  19. 19. Let’s build a smarter planet: AirlinesHope: Making airlines smarterSMART IS: Optimizing capacity and assets SMART IS: Improving the customer experiencePredict demand and optimize assets and Know your customer, interact with that customer ininfrastructure both long-term (e.g. aircraft) and their preferred style and manner, and differentiateshort-term (e.g. dynamically aligning routes, your services to exceed their expectations—schedules and maintenance). profitably.SMART IS: Efficient and environmentally sound SMART IS: Assuring safety and securityImprove operational efficiency while reducing negative Assure and continuously enhance safetyenvironmental impacts by monitoring resource use and and security through non-invasive continualimpact in real time, collaborating with partners and monitoring of journeys, assets andoperators both vertically and horizontally. infrastructure with real-time notification of risks, issues and safety/security events.SMART IS: InnovationEstablish a culture of continuous innovation in each of these dimensions to drive competitive advantage. © 2010 IBM Corporation
  20. 20. Let’s build a smarter planet: AirlinesImprove the end-to-end Improve efficiency whilecustomer experience. reducing environmental impact.A major European airport, in partnership with an COSCO, a global shipping firm, engaged IBM tointernational airline, reduced mishandled baggage help optimize their supply chain using the Supplyby 60% by implementing an RFID-based baggage Chain Network Optimization Workbench (SNOW).handling system. They have reduced transfer time As a result of the three month engagement, COSCOby 22% and operational cost by 40%. consolidated from 100 to 40 distribution centers, lowered logistics cost by 23% and reduced CO2 emissions by 15%.Air Canada introduced an innovative application Atlas Air Worldwide Holdings used SOA and afor the Apple iPhone and iPod Touch, allowing Business Process Management solution to improvepassengers to book flights, download electronic their ability to choreograph the complex movementboarding passes, check-in, receive flight status of crews, aircraft and cargo, increasing operationalupdates and book rental cars and other services. efficiency. They expect an 80% reduction in the costThere were over 30,000 downloads of the of integrating operations with strategic deliveryapplication from 47 countries in the first six days. partners, a 50% time savings and a 30% application development cost savings. © 2010 IBM Corporation
  21. 21. Let’s build a smarter planet: AirlinesAssure safety and security.A U.S. hub airport implemented a digital video Through the use of RFID tags on parts and containers,surveillance solution and a security command and IBM has helped a major aircraft manufacturer intelligentlycontrol center. The system also uses information track aircraft parts throughout the product’s entire lifefrom biometric handprints and badge readers. The cycle including all maintenance conducted on it and thesystem is more effective at recognizing risks and plane in which it is used. The solution has allowed themalerting the command center. The effective labor to be more responsive to customers, and reduce fleetcost savings is US$2.2m per year. maintenance down-time without compromising safety.A major Asian airline implemented an enterprise-wide Using biometrically enabled access to collect andmaintenance and parts management solution to verify traveler identity information as early asreplace approximately 40 systems. The primary possible, a collaborative cross-industry pilot wasobjective was to improve maintenance quality and successfully conducted to re-use the informationcross-department collaboration through the use of throughout the remainder of the airport journey,standard processes, real-time data availability and facilitating easier air travel while maintaining highreduced opportunity for human error. standards of security and identity management. © 2010 IBM Corporation
  22. 22. Let’s build a smarter planet: AirlinesThe smart air transportation system is, in fact, an ecosystem—integrated around a set of information, processes and technology.Participants collect, share and analyze information to generate new insights: Passenger journeys Freight shipments Airlines Location and Governments OEMs and suppliers condition of assets Usage patterns Freight and logistics Passengers service providers Freight customers Regulators Information Processes Influencers: Travel service providers Associations and universities Airports Technology © 2010 IBM Corporation
  23. 23. Let’s build a smarter planet: AirlinesThe value they can realize through collaboration extends acrossthe entire air transportation ecosystem. Predict demand and optimize Improve the end-to-end capacity and assets. customer experience. Improve operational Assure safety efficiency while reducing and security. environmental impact. © 2010 IBM Corporation
  24. 24. Let’s build a smarter planet: AirlinesThe value they can realize through collaboration extends acrossthe entire air transportation ecosystem. Predict demand and optimize Improve the end-to-end capacity and assets. customer experience.  Increased capacity, asset  Increased customer satisfaction, and resource utilization loyalty and safety  More effective supply chain  Fewer delays and disruptions management  More effective marketing,  Increased cost effectiveness, promotion and loyalty programs aircraft turns, process efficiency and quality Improve operational Assure safety efficiency while reducing and security. environmental impact.  Improved control and oversight,  Lower operational costs, fuel flow management, verification consumption and noise pollution and flexibility  Reduced fuel use and emissions  Quicker, more informed risk  Regulatory compliance assessment and decisions © 2010 IBM Corporation
  25. 25. Let’s build a smarter planet: Airlines We’ve only just begun to uncover what is possible on a smarter planet. The infrastructures, systems and processes that underpin how business and society function are becoming digitally aware, interconnected and infused with intelligence. The new intelligence applies to how services are delivered, to the movement of people, freight, money, information, electricity, and to how billions of people live and work. Each represents a chance to do something better, faster and more productively. This is a new frame of reference with enormous promise for economic growth, with opportunities to think and act in new ways. Lets work together to drive real progress. © 2010 IBM Corporation
  26. 26. Let’s build a smarter planet: AirlinesThe value they can realize through collaboration extendsacross the entire air transportation ecosystem. Increased customer Lower operational costs, fuel satisfaction, loyalty and safety consumption and noise pollution Fewer delays and disruptions Increased cost effectiveness, aircraft turns, process efficiency and quality Improved control and More effective supply oversight, flow management, chain management verification and flexibility Regulatory compliance Increased capacity, asset and resource utilization Quicker, more informed Reduced environmental impact operational decisions © 2010 IBM Corporation
  27. 27. Let’s build a smarter planet: AirlinesAirlines and airports play a unique and critical role: together,they are the point of connection between end users andthe broader ecosystem. Governments OEMs and suppliers Airlines Freight and logistics Passengers service providers Freight customers Regulators Airports Travel service providers Influencers: Associations and universities © 2010 IBM Corporation
  28. 28. Let’s build a smarter planet: AirlinesTo fill this role effectively, smart airlines and airports will applyintelligence to a spectrum of functions which they perform. Airlines  Provide comprehensive, integrated planning, routes and schedules  Offer access to continually updated  Analyze historic and real-time data to travel and shipment options predict demand and terminal traffic  Monitor plane and cargo condition  Plan investments and operations and location in real time to optimize efficiency, service and environmental impact  Provide immediate notification  Facilitate multi-modal travel of disruptions and delays and transport options  Monitor resource use and  Track flows of passengers, environmental impact in real time baggage, freight in real time  Boost security while removing friction points Airports © 2010 IBM Corporation
  29. 29. Let’s build a smarter planet: AirlinesIBM’s solution strategy is aligned with the needs of airlines AIRLINES ARE FOCUSED ON… IBM IS INVESTING IN… Predicting demand and Demand and revenue management, irregular optimizing capacity operations management, enterprise asset management and MRO, business intelligence dashboards, crew scheduling Delivering customer-driven Reservation system modernization, Multi-channel products and services self service, one view of the customer, customer analytics, CRM, loyalty management, cargo mgmt Operating efficiently and profitably Enterprise asset management, enterprise while minimizing environmental infrastructure management, green supply chain impact optimization, carbon management Assuring safety and Digital video surveillance, biometric identification, security identify and access mgmt, risk analytics, condition based monitoring using wireless sensors © 2010 IBM Corporation
  30. 30. Let’s build a smarter planet: AirlinesTrademarks and notes IBM Corporation 2011  IBM, the IBM logo and are registered trademarks, and other company, product or service names may be trademarks or service marks of International Business Machines Corporation in the United States, other countries, or both. A current list of IBM trademarks is available on the Web at ―Copyright and trademark information‖ at  Adobe, the Adobe logo, PostScript, the PostScript logo, Cell Broadband Engine, Intel, the Intel logo, Intel Inside, the Intel Inside logo, Intel Centrino, the Intel Centrino logo, Celeron, Intel Xeon, Intel SpeedStep, Itanium, IT Infrastructure Library, ITIL, Java and all Java-based trademarks, Linux, Microsoft, Windows, Windows NT, the Windows logo, and UNIX are trademarks or service marks of others as described under ―Special attributions‖ at:  Other company, product and service names may be trademarks or service marks of others.  References in this publication to IBM products or services do not imply that IBM intends to make them available in all countries in which IBM operates. © 2010 IBM Corporation