A Recipe for Airline Success Using Technology to Capture Essential Gains in Airline Productivity
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Perspective Stefan Stroh
Michael Kaib
Volkmar Koch
Daniel Röska
A Recipe for
Airline Success
Using Technology to
Capture Essential Gains
in Airline ProductivityContact Information
Beijing Mumbai
Jeffrey MacCorkle Suvojoy Sengupta
Partner Partner
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Andrew Tipping Partner
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San Francisco
Düsseldorf Dan Lewis
Dr. Jürgen Ringbeck Senior Partner
Senior Partner +1-415-627-4230
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Sydney
Frankfurt Chris Manning
Stefan Stroh Partner
Partner +61-2-9321-1924
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stefan.stroh@booz.com
Tokyo
Hong Kong Shigeo Kizaki
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Booz & CompanyEXECUTIVE Over the past 30 years, profitability in the airline industry
has rarely exceeded the average cost of capital employed
SUMMARY
despite steady increases in passenger traffic and destinations.
In the coming years, it is likely that airline profits will be
throttled further by the global economic downturn, high fuel
costs, and the prospect of ever more stringent environmental
regulations.
In order to survive and prosper in these conditions, airlines
must rationalize their processes and increase asset utiliza-
tion to a greater degree than ever before. This will require
business-driven IT transformation—that is, the fundamental
redesign and integration of business systems and processes
within and across airline functions.
Accomplishing this task will not be easy. Airlines will have to
carefully manage the internal demand for IT services, imple-
ment project delivery methodologies that focus on business
process design and change management, and adopt a sourcing
strategy that enables them to match suppliers to project goals
on the basis of the capabilities and degree of collaboration
required. Those that do will be able to significantly raise their
business performance and earn improved returns on their IT
investments.
Booz & Company 1Airlines’ have deployed to radically streamline
and integrate their processes. Instead,
The price will get higher yet as the
coming wave of airline mergers
Complexity airlines have mostly custom-built exacerbates the costs of inefficient
Challenge their applications to conform to their
processes and have not changed this
processes and legacy systems. As
airlines seek the cost savings and other
approach with new applications (see synergies that these mergers promise,
Exhibit 1). their CIOs and IT organizations will
need to integrate disparate legacy IT
The typical airline pays a steep price systems. This is a costly and high-risk
Typically, airlines feature highly for maintaining its process complexity undertaking, which explains why
complex business processes, supported and IT legacy systems. For example, many merged airlines are still saddled
by specialized IT systems that reside an airline that has not renovated with a portfolio of business models
in functional silos and lack cross- its processes and systems for flight and IT systems operating in paral-
functional integration. In fact, more planning and dispatching requires lel, while the synergies they targeted
than 60 percent of airlines’ software is up to five times as much staff time remain only partially realized.
custom-built, versus less than 40 per- to dispatch its fleet as an airline that
cent in other industries. By and large, has redesigned and automated these
airlines have not adopted the ERP processes using state-of-the-art IT
systems that other industries, such as systems.
automotive and consumer products,
Exhibit 1
Airlines Can Capture Productivity Gains by Using IT to Standardize and Integrate
Processes
Productivity Process Innovation by IT
High
Chemical
Automotive Industry
Industry
Consumer
Products
Financial
Services
Airlines
Industry
Logistics
Industry
Construction
Industry
Low Mode of
Semi-Manual Information Fully Standardized Production
Silos Automated and Integrated
Source: Booz & Company
2 Booz & CompanyHighlights:
The ily biased toward the current way
of doing things and don’t include
- Airlines can no longer afford the
steep price they have been paying
Opportunity: changes in processes and organization
to maintain process complexity and Business-Driven to improve business performance.
The effects of this approach include
legacy IT systems.
IT Transfor- inflated project costs (because new
- Business-driven IT transformation
delivers outsized performance gains
mation systems must be reprogrammed to
fit existing processes), poorly defined
because it redesigns and integrates system integration requirements,
processes and systems. and a notable lack of enthusiasm for
- Demand management, process- project ownership among business
oriented and change-focused managers. The result is poor imple-
project management, and savvy Simply cutting IT costs will not save mentations and project failures.
sourcing practices are the three an airline. Instead, airlines need to It is not until airlines use new technol-
key ingredients of successful consider how to use IT to improve ogy to dramatically restructure their
transformation. their business performance. A simple current processes and streamline the
example illustrates why this is so: complexity of their overall systems,
Using IT systems to improve flight as well as complete their integration
planning and scheduling can achieve a effort, that system transformations
2 percent reduction in fuel consump- can significantly improve business
tion—which has the same bottom-line performance and contribute more to
impact as a 20 percent reduction in the airline’s bottom line than pure IT
IT spending. Further, the net present cost reduction. But business-driven
value of the reduction in fuel con- technology transformation programs
sumption is much higher because the require a diligent planning and mobi-
reduction requires far less effort to lization phase, in which the business
implement than does the 20 percent makes the most of IT’s ability to
cut in IT costs. improve and simplify its operating
model. Such programs also require
A focus on business performance critical skills that are often missing in
should be a given in IT initiatives— IT departments, including the capac-
but it is not. Many airlines are ity to engage in an effective dialogue
currently pursuing major systems- with the business to ensure a focus on
replacement initiatives. Too often, business improvement. These discus-
however, the business cases for these sions should focus on the priorities
initiatives rely heavily on IT cost and options available, project-delivery
reductions and ignore opportuni- capabilities, and mechanisms for
ties to create tangible business value. demand management (e.g., prioriti-
Further, the functional specifica- zation processes, rewards for joint
tions for the new systems are heav- business/IT success).
Booz & Company 3Significant Pricing and Revenue Management:
In quest of fast revenue gains, many
for planning, execution, and deci-
sion making. This leads to inefficien-
Productivity airlines have implemented pricing and cies caused by numerous handoffs
Gains through revenue management (RM) systems
that are either managed poorly or not
and poorly integrated aircraft, crew,
slot, and MRO scheduling. Today,
Better IT supported by properly tailored busi- advanced planning tools and inte-
ness processes and data. The result is grated processes can be used to
inaccurate forecasting and incorrect combine network planning, flight and
decision parameters. In extreme cases, crew scheduling, operations control,
such RM systems can actually reduce and flight dispatch. The resulting
margins and seat load factors. improvements in asset utilization,
The reward for airlines that can Conversely, the successful introduc- fuel consumption, and overall process
muster the will and skill needed to tion or improvement of a revenue cost, as well as the faster, smoother
successfully undertake business-driven management system can generate reactions to service disruptions, yield
IT restructurings is a substantial additional revenues of 2 to 4 percent. significant operating cost reductions.
reduction in operating cost, as well To capture these gains, airlines must
as enhanced asset utilization in fleet, first develop their RM capabilities and Flight Planning:
crew, and slots. There are also revenue align their RM processes and tools. Modern flight planning and dispatch
gains to be found along the entire Only then can they evaluate and get systems can help airlines capture fuel
value chain of an airline, includ- full value from more sophisticated savings of as much as 2 percent of
ing pricing, sales, and distribution; optimization models (e.g., O&D, total fuel costs and improve staff pro-
planning, scheduling, and operations; O&D/PNR, Hybrid) and more com- ductivity. These sophisticated systems
passenger services; maintenance; and plex steering methods (e.g., intraday allow the automatic recalculation
the back office (see Exhibit 2). price steering vectors), which enable of the optimal route and fuel intake
more granular approaches to revenue for individual flights prior to their
Initiatives in certain areas of the value management. departure. A number of airlines have
chain, however, offer more potential already introduced the tools featured
than others. These include pricing Network Planning, Scheduling, and in these systems to improve their
and revenue management; network Operations Control: flight planning and create a platform
planning, scheduling, and operations Typically, airlines manage these that can support interactive paperless
control; flight planning; and passenger functions separately, using different flight plans. But again, leveraging the
services. processes, databases, and IT systems benefits of new flight planning and
Exhibit 2
Key Improvement Areas and Potential Areas for Advanced IT Solutions
Planning, Pricing, Planning and Passenger Maintenance Back Office
and Distribution Scheduling, Ops Services
Potential - Better demand - Advanced flight planning - Automated proactive - Align maintenance - Automation and
Improvement forecasting - Integrated planning disruption handling forecasting with replacement of legacy
Areas - Optimal revenue processes (fleet, crew, - Customer-centric view scheduling and ops systems by standard
management MRO) - Advanced CRM and - Reduce rotational solutions
- Integrated fares - Automated schedule loyalty inefficiency through - Advanced revenue
management recovery - Integrated e-ticketing integrated maintenance accounting (e.g., first
- Multi-channel distribution - Real-time synchronization scheduling and final billing)
- Easy interlining and
- Dynamic pricing/product with partners codesharing - Real-time optimization in - Tracking/monitoring of
unbundling - Route/fuel optimization reacting to daily ops CO2 emissions
- Advanced revenue
- Dynamic packaging/non- - Electronic flight bags integrity functions
air products (revalidation, reissue,
- Key account refund)
management
Added
Value
More revenues and Improved utilization Process efficiency and Better integration, Cost reduction based
up-sell of fleet and staff increased customer forecasting, and MRO on automation and
satisfaction planning standardization
Source: Booz & Company
4 Booz & Companydispatch systems requires more than
the technology. It requires a wealth of
near-real-time information, including
aeronautical data, aircraft perfor-
mance data, and current weather
reports, as well as changes in the
behaviors of users, particularly pilots.
Passenger Services:
Most airlines are still working with
reservations, inventory, and departure
control systems that were designed
during the 1960s and ’70s. In addition
to incurring operational costs that are
rising as much as 10 percent per year,
these outdated legacy systems do not
meet their airlines’ present-day needs
or their future aspirations. Taking on the Scheduling Conundrum
Modern passenger service system Network planning, scheduling, and operations control are the cornerstones of
(PSS) solutions provide true customer- an airline’s on-time performance and major determinants of its cost efficiency.
centricity and enable increased But airlines typically experience major problems in this area that stem from
business benefits, including cost inefficiencies in schedule design and the difficulties of irregular operations (bad
reductions, thanks to leaner, zero- weather, unplanned maintenance, aircraft-on-ground, etc.).
touch processes and automated Schedule designs for critical processes such as rotation/slot planning,
disruption handling. They also maintenance, and crew planning are often inherently flawed because long- and
protect and enhance revenue thanks medium-term planning mechanisms are based on data that is too high-level
to improved revenue integrity, sales or is inaccurate. This creates the need to replan operations in the short term,
channel integration, and inventory typically three days before departure. (At some airlines, more than 70 percent of
functionality. operations require short-term replanning.)
An increasing number of airlines— These unaligned short-term plans make operations control extremely difficult,
large and small—are starting to especially when the daily challenge of schedule disruptions is added to the mix.
replace their old PSS solutions with During disruptions, operations control staff must pull together information from
newer software. And some alliance multiple sources and systems and make fast decisions in order to deliver on the
carriers are jointly implementing such airline’s promise of service quality and punctuality. Each of these decisions has
systems to capture the additional a direct impact on the airline’s efficiency, effectiveness, and resilience, as well as
benefits inherent in the provision of the overall performance and profits of the airline and its network.
seamless service across airlines.
Modern IT systems, featuring decision support and other tools, allow airlines
to integrate dispersed planning processes, ensuring that all departments work
The most important lesson gleaned
from consistent planning data and automating operations control processes
from these recent PSS replacement ini-
and decision making. These systems enable airlines to find the most efficient
tiatives is that IT-led programs often
scheduling solutions, improve performance, and significantly lower process
fail. New passenger service systems
costs.
are not “technology replacements”
as much as “technological revolu- Capturing these benefits requires more than a new IT system—it also requires
tions.” They require a shift from a radical process change and strong change management. And it demands the
transaction-based design built on pas- involvement, experience, and support of staff in all business functions from
senger name records (a “PNR-centric” long-term planning to flight-event control. When all of these conditions are met,
design) to a more flexible, customer- then integrated, centralized planning data can be combined with decentralized
centered design. Such a shift requires decision making to solve scheduling problems in ways that provide optimal
a great deal of insight into the core of benefits locally and to the business as a whole.
an airline’s everyday business. Thus,
PSS replacement programs need to be
jointly managed by IT and business
managers.
Booz & Company 5Three Because state-of-the-art software plays the most important link between an
Ingredients of a critical role in airline productiv- airline’s business managers and their
ity improvement, unlocking its full IT department. It is a two-way link:
Business-Driven value requires expert IT departments Airline business managers must under-
IT Transfor- capable of collaborating with busi- stand that they have to play a strong
ness managers to shape technologi- role in ensuring that the future IT
mation cal transformations. To successfully application’s landscape and processes
implement business-driven IT trans- are suitable for their business needs,
formation, three elements are needed: just as they take care of, for example,
effective demand management, a new selecting aircraft types; at the same
project delivery approach and skill set, time, IT needs to develop a stronger
and advanced supplier management business understanding and become
(see Exhibit 3). a partner in both process innovation
and standardization.
Building a Strong Demand
Management Capability: It is essential that demand manage-
Demand management, as the central ment be properly regulated. When it
process for managing internal demand is unregulated, IT projects are funded
for IT services and capabilities, is whether or not they have a clearly
Exhibit 3
Improvement Levers of Business-Driven Transformation
FROM IT-DRIVEN TRANSFORMATION TO BUSINESS-DRIVEN TRANSFORMATION
Demand - IT reacting to short- and medium-term business needs - Long-term IT architecture vision closely aligned with business
Management - Project pipeline driven by availability of budget goals
and affordability - Business and IT collaboration at project screening, prioritization,
- Frequent escalations regarding resource allocation and delivery
and service quality - Transparency in projects, service levels, cost, and resource
consumption
- Custom development of software against business - Retooling toward a package implementation approach (leverage best
Project
requirements practices embedded in COTS software)
Delivery
- Focus on functional specification and programming of specific - Focus on process redesign, systems integration, and change
Approach
business requirements as add-ons to existing systems management capabilties
- Development within functional silos - Use of IT to break down silos and implement cross-functional
processes
Strategic - In-house resources dominated by technical skills, - Strategic sourcing capability being built
Sourcing often with outdated skill set - Ensuring strong internal core, but leveraging external supplier
- Selective sourcing, trying to cut best deals driven by market to gain access to critical skills
procurement (or directly by the business departments) - Use of incentive-based, performance-driven model to capture
ongoing value, recognizing that external suppliers need to be
strategic partners
Source: Booz & Company
6 Booz & Companydefined business case and scope— ments is fed into a software develop- were based mainly on its current
with the result that priorities are ment engine, which must deliver the processes, rather than taking a fresh
scrambled, high-potential projects software exactly to specification. This new look and considering a change
are delayed, and IT is perceived as approach is not only costly and geared in its processes in order to take full
slow and misaligned. When demand toward serving existing processes; it is advantage of the new software. The
is poorly regulated, multiple gover- also inadequate in light of the growing outcome was a huge budget overrun
nance forums and steering commit- number of commercial off-the-shelf caused by the reprogramming needed
tees impede IT decision making, and (COTS) solutions for nearly all airline to make the software conform to exis-
the function is perceived as overly processes. ting processes and less-than-optimal
bureaucratic. results from the new system.
Mature COTS systems come with
A strong demand management capa- efficient standard processes that Implementing this new project deliv-
bility is supported by four pillars: largely eliminate the need to build ery approach requires a different skill
(1) a long-term, business-driven IT core systems from scratch. In non- mix in both the IT and the business
application architecture vision; (2) differentiating processes—those used departments. The focus must be much
alignment processes that allow the by almost all non-customer-facing more on business process redesign and
business and IT functions to effec- functions in airlines—these standard- change management than on func-
tively collaborate during project ized processes are more efficient tional specification and programming.
screening, prioritization, and delivery; and cost-effective than customized Also, the selection of the preferred
(3) performance measures that create processes. Airlines need to retool systems provider becomes a strategic
transparency in projects, service levels, their project delivery methodologies decision requiring careful elabora-
costs, and resource consumption; and toward a package implementation tion, because the choice of the product
(4) the ability to effectively make dif- approach that takes full advantage of defines, to a large degree, the viability
ficult trade-offs. these systems. Rather than defining of the future processes of the airline.
detailed business requirements from
Deploying a New Project Delivery scratch and expecting the IT system to Leveraging the External Supplier
Approach and Skill Set: deliver them one-to-one, project teams Market through Strategic Sourcing:
At the core of any systems renewal should focus on the management of There are three reasons that strategic
project, the project delivery meth- the required change and, whenever sourcing capabilities have become so
odology plays a critical but often feasible, adapt legacy business pro- important in airline IT. First, because
unheralded role. In airlines, this meth- cesses to standard processes embedded the choice of a software system defines
odology too often focuses on func- in COTS solutions. the viability of the future processes
tional specifications and programming of the airline to such a large degree,
instead of business process redesign Not following this approach can have the selection of the system’s pro-
and change management. dire consequences, as one large carrier vider becomes a strategic decision
discovered after it selected a standard that requires careful consideration.
Many airlines use a custom software package system to replace the old Second, airline IT departments have
development approach to implement legacy systems in the areas of opera- lost many critically skilled employees
and renovate their IT infrastructures. tions management. The airline insisted in the turbulence and cost cutting that
In this approach, a long list of detailed that the software provider comply have occurred since 9/11. As a result,
and carrier-specific business require- with a long list of requirements that airlines need to leverage external
Booz & Company 7Optimize
Productivity
and Profit-
ability for
Airline Success
The airline industry was one of the
first to adopt and benefit from the
promise of IT, and IT remains a criti-
cal business enabler for optimizing
airline productivity and profitability.
Achieving this optimization requires
sources to gain access to critical skills term view in mind. Effective depart- business-driven IT transformation,
at competitive rates. Third, by gaining ments recognize that external service which depends on a combination
access to vendor expertise, IT depart- providers need to be strategic part- of process redesign and technology.
ments can concentrate their focus ners, not just body shops, and use an Although business-driven IT trans-
on the core competencies of demand incentive-based, performance-driven formations are not easy to achieve, a
management and project delivery and model to capture ongoing value. clear focus on the fundamentals—a
better drive improvements in quality close dialogue between business and
and efficiency. These IT organizations are adroit IT, the leveraging of standard solu-
when it comes to changes in the tions for non-differentiating processes,
One size does not fit all in sourcing overall business environment. They an understanding of the capabilities
strategies. The right strategy mixes can effectively dial down (by plugging required, and savvy supply man-
strong internal talent with the capa- in a vendor for low-cost commod- agement—will greatly increase the
bilities of providers. And although the ity services, for example), dial up chances for airline success.
strategic sourcing of IT services is a (by partnering opportunistically for
proven cost-reduction and capability- access to innovation or global talent),
building play, understanding which or just say “no” when prudent. This
service providers to use and for what, finesse provides tremendous flexibility,
where to drive for value, and how to but also requires strong capabilities
manage the relationship is a necessity in demand management and vendor
if the play is going to pay. IT organi- governance in order to both oversee
zations have a tendency to miss these the pipeline of work and match it to
nuances. They outsource in order to the appropriate supply resources.
cut costs quickly, but struggle to find
value beyond the initial deal. Worse, Building a strategic sourcing capabil-
if they find themselves locked into ity requires a different type of vendor
an inflexible sourcing contract, they manager. Such a manager realizes the
can lose the agility needed to react to strategic nature of selection decisions
changing business requirements and and the importance of collaboration
economic conditions. with business managers. The vendor
manager also must understand how
Airline IT departments seeking to to utilize service providers to attain
improve their application portfolios, the right balance of cost and capabil-
build new business capabilities, and ity, and how to see the big picture in
reduce costs need to structure their order to leverage innovation when
sourcing relationships with the long- and where it counts.
8 Booz & CompanyAbout the Authors
Stefan Stroh is a partner in Daniel Röska is a senior
Booz & Company’s Frankfurt associate in Booz & Company’s
office. He leads the global Frankfurt office. He specializes
transportation technology in business strategies
practice and works for leading and strategy implementation
players in the international programs, including process
railway, mass transit, aviation, and IT programs, for global
travel, and logistics sector. aviation, tourism, and transpor-
(stefan.stroh@booz.com) tation organizations.
(daniel.roeska@booz.com)
Dr. Michael Kaib is a principal
in Booz & Company’s Frankfurt
office. He is part of the global
transportation technology
practice and has led major
assignments for international
airlines, railways, and logistics
clients. He also leads Booz
& Company’s ERP Center of
Excellence.
(michael.kaib@booz.com)
Volkmar Koch is a principal in
Booz & Company’s Frankfurt
office. He consults with play-
ers in the transport/aviation
sector—primarily tour opera-
tors, airlines, and GDSs in the
European region. His recent
projects have been in strategy-
based/IT-enabled transforma-
tion, improving operational
efficiency, IT strategy, control-
ling, and PMI.
(volkmar.koch@booz.com)
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