smarter planet: airlines

© 2010 IBM Corporation

Let’s Build a Smarter Planet: Airlines

George Mattathil -


Let’s build a smarter planet: Airlines

Headwinds, horizons and hope—competing on a smarter planet.

HEADWINDS

There are significant business environment factors and trends

that will likely change the airline industry forever.

HORIZONS

There are now, and will continue to be, growing opportunities to capture and

transform data and to use the resulting information in new and powerful ways.

HOPE

For airlines, those horizons can be leveraged to create new strategies,

capabilities and insights to drive competitiveness and long-term viability.



Strong headwinds are setting global airline industry profitability back.

AT THE TOP LINE

Current predictions are for 2009 passenger revenues to be off by nearly 16%, with cargo

revenues off nearly 18%. By midyear, average international ticket prices had fallen 19% YTY,

while 21% fewer premium passengers were flying.

AT THE COST LINE

While some have benefited positively from hedging positions, fuel price increases of 56% from

their YTD low, airline service costs growth to over US$54B worldwide, imbalances in capacity

and pending environmental regulation all promise even more cost line concerns.

AT THE BOTTOM LINE

Average yields have cratered by over -12% for passengers and -15% for freight; and despite a

reduction in capacity, ever-growing break-even load factors are not being met. The industry

has already lost US$6B (1st half estimate) and is positioned to nearly double that by year-end.



Asia-Pacific are enjoying robust demand growth.

10%

5%

0%

-5%

-10%

-15%

-20%

-25%

-30%

40%

AU

G 0

7

SE

P 0

7

OC

T 0

7

NO

V 0

7

DE

C 0

7

JA

N 0

8

FE

B 0

8

MA

R 0

8

AP

R 0

8

MA

Y 0

8

JU

N 0

8

JU

L 0

8

AU

G 0

8

SE

P 0

8

OC

T 0

8

NO

V 0

8

DE

C 0

8

JA

N 0

9

FE

B 0

9

MA

R 0

9

AP

R 0

9

MA

Y 0

9

JU

N 0

9

JU

L 0

9

RPK GROWTH FTK GROWTH

RP

K A

ND

FT

K %

CH

AN

GE

ASIA-PACIFIC INTERNATIONAL PASSENGER

AND CARGO GROWTH

AU

G 0

9

SE

P 0

9

OC

T 0

9

NO

V 0

9

DE

C 0

9

JA

N 1

10

FE

B 1

0

MA

R 1

0

AP

R 1

0

MA

Y 1

0

JU

N 1

0

20%

15%

25%

35%

30%



Top-line performance is also being bolstered by the gradual return of business 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



One important threat to business travel is the emergence of virtual alternatives 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.‖



Air travel is also under threat from high-speed rail which is perceived as more convenient, greener and competitively priced.

70%

80%

50%

Share of Madrid-Seville market – AVE

Estimated share of UK 3-hour domestic market – SNCF

46%

63%

60% Decline in inter-city

flights – THSR

Share of Tokyo-Akita

market – JR East

Share of Madrid-Barcelona

market – AVE

Share of Korea market – KTX

―An airplane on wheels‖ Air France-KLM Chairman, Jean-Cyril Spinetta on the TGV.



From a cost-line perspective, the new unknown will be environmental costs for greenhouse gas emissions, which will have a further impact on premium demand as costs are passed on to passengers.

15% Anticipated shortfall (77M tons of CO2)

in allowances for airlines from EU Carbon

Trading Scheme in 2012 (estimated to

cost US$1.4 – $1.6B to the industry and

adding an average cost per ticket of

US$13+ to a short-haul flight and US$60

for a long-haul flight).

US$7B Expected annual cost to airlines to

meet global IATA commitment for

carbon neutral growth in 2020.

DELTA

UNITED

BRITISH

RYANAIR

QANTAS

CONTINENTAL

EASYJET

THAI

AMERICAN

AIR FRANCE/KLM

$0 $10 $20 $30 $40 $50 $60 $70 $80

US$ MILLIONS

ADDITIONAL COSTS FROM ETS ALONE 2012 COST FOR CARBON CREDIT PURCHASES



160

GLOBAL LANDING FEES QUARTERLY CHARGES TO AIRLINES

150

140

130

120

110

100

4Q

06

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2000 = 100

Airport service charges

collectively accounted

for nearly 8% of AP

airlines operating costs.

Meanwhile, higher fuel and airport services costs may compound the issue and increase average costs or cost volatility.

JET FUEL PRICE TREND

Singapore Kerosene-Type Jet Fuel

Spot Price (Cents per Gallon)

0

50

100

150

200

250

300

350

2005 2006 2007 2008 2009 2010

On a global basis, Jet Fuel is

down almost 30% from 2008

and up 25% from 2009 to 2010



These headwinds make it difficult to predict future performance.

GLOBAL INDUSTRY PROFITABILITY TOTAL INDUSTRY PROFIT/LOSS PAST 20 YEARS

$15

1989

$10

$5

$0

-$5

-$15

-$20

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010F

US

$ B

ILL

ION

S

-$10

2010 forecasts

are positive



Bigger is NOT always better. Smarter is better

INVERSE RELATIONSHIP BETWEEN RELATIVE SIZE AND PROFITABILITY Relative size and profit performance in 2008-09 for 163 global airlines 1,2,3

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

Inverse Relationship Between Size and Profitability

COPA AirlinesRepublic Airlines

Allegiant Air

Air Arabia

Air Asia

Air Wisconsin

Emirates Airline

Qantas

Lufthansa

Southwest Airlines

ANA - All Nippon AirwaysCathay Pacific

Air CanadaBritish Airways

American AirlinesJapan Airlines Int’l

US Airways

United AirlinesAustrian

China Eastern Airlines

Delta Air Lines

-20.00%

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

15.00%

20.00%

0.00 5.00 10.00 15.00 20.00

Relative Size

Pro

fita

bil

ity

in

20

08

-20

09

Smaller carriers tend to

limit complexity and

maintain higher prices in

less contested regional

markets

Large carrier performance is

limited to relatively modest

profitability large

performance variations year

to year



The world is becoming smaller and flatter,

but also smarter.

Looking ahead, the horizon is increasingly clear…



The 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.



The need for progress is clear.

Projected global airline industry losses

in 2008 and 2009 combined.

US$27.8 billion 60% and -19% 60% of consumer sentiment around

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.

Airlines generate 3% of all greenhouse gas

emissions. Some say that because aircraft

operate in the upper atmosphere, the impact is

equivalent to 13% of emissions from all sources.

3% or 13% Estimated cost to airlines

of mishandled baggage.

US$3 billion



The 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.



DRIVERS OF CHANGE CHALLENGES

Population explosion World population is growing and transportation providers will need to expand capacity to keep up.

Urbanization As the number and size of cities grows, pressure on transportation systems to move people and materials between and within those cities grows.

Globalization The growing interconnectedness of the world is driving inter-city and international growth in demand, with an expectation of improved service.

Capacity and congestion How to meet the growing, changing demand efficiently, consistently and profitably?

Empowered customers Deliver transportation choices in the way that end customers value.

Efficient, green operations How to reduce dependency on scarce resources while reducing environmental impact?

Safety and security How to unobtrusively reduce exposure to security risks and increase the safety of operations?

Technology Technology now enables the capture and analysis of real-time information about the status, location and condition of everything.

STRATEGIC IMPERATIVES

Predict demand and optimize capacity and assets.

Dramatically improve the end-to-end customer experience.

Improve operational efficiency while reducing environmental impact.

Assure safety and security.

Demands on airlines will increase over time, driving the need for new intelligence and insight, greater connectivity and transparency, and improved customer service.



Success on the new horizon depends on deeper, more holistic and informed planning, collaboration and execution. Airlines will need to become smarter.

IMPROVE THE END-TO-END

CUSTOMER EXPERIENCE

Understand customer needs

and provide information and

services to meet those needs

in the manner preferred.

ASSURE SAFETY

AND SECURITY

Leverage new sources of

information and new ways

of using that information to

improve security and safety.

AIRLINE

IMPROVE OPERATIONAL

EFFICIENCY WHILE REDUCING

ENVIRONMENTAL IMPACT

Continuously balance cost and

environmental impact of scarce

resource use while exploring new

operational alternatives.

PREDICT DEMAND AND

OPTIMIZE CAPACITY AND ASSETS

Predict demand, align transportation

asset and infrastructure deployment

and continuously adapt operations.



An opportunity for airlines

to think and act in new ways.

Assure safety

and security.

Improve the end-to-end

customer experience.

+ + =

Improve operational

efficiency while reducing

environmental impact.

Predict demand

and optimize

capacity and assets.



Hope: Making airlines smarter

SMART IS: Optimizing capacity and assets

Predict demand and optimize assets and

infrastructure both long-term (e.g. aircraft) and

short-term (e.g. dynamically aligning routes,

schedules and maintenance).

SMART IS: Improving the customer experience

Know your customer, interact with that customer in

their preferred style and manner, and differentiate

your services to exceed their expectations—

profitably.

SMART IS: Efficient and environmentally sound

Improve operational efficiency while reducing negative

environmental impacts by monitoring resource use and

impact in real time, collaborating with partners and

operators both vertically and horizontally.

SMART IS: Assuring safety and security

Assure and continuously enhance safety

and security through non-invasive continual

monitoring of journeys, assets and

infrastructure with real-time notification of

risks, issues and safety/security events.

SMART IS: Innovation

Establish a culture of continuous innovation in each of these dimensions to drive competitive advantage.



Improve efficiency while

reducing environmental impact.

Atlas Air Worldwide Holdings used SOA and a

Business Process Management solution to improve

their ability to choreograph the complex movement

of crews, aircraft and cargo, increasing operational

efficiency. They expect an 80% reduction in the cost

of integrating operations with strategic delivery

partners, a 50% time savings and a 30% application

development cost savings.

COSCO, a global shipping firm, engaged IBM to

help optimize their supply chain using the Supply

Chain Network Optimization Workbench (SNOW).

As a result of the three month engagement, COSCO

consolidated from 100 to 40 distribution centers,

lowered logistics cost by 23% and reduced CO2

emissions by 15%.

A major European airport, in partnership with an

international airline, reduced mishandled baggage

by 60% by implementing an RFID-based baggage

handling system. They have reduced transfer time

by 22% and operational cost by 40%.

Air Canada introduced an innovative application

for the Apple iPhone and iPod Touch, allowing

passengers to book flights, download electronic

boarding passes, check-in, receive flight status

updates and book rental cars and other services.

There were over 30,000 downloads of the

application from 47 countries in the first six days.

Improve the end-to-end customer experience.



Using biometrically enabled access to collect and

verify traveler identity information as early as

possible, a collaborative cross-industry pilot was

successfully conducted to re-use the information

throughout the remainder of the airport journey,

facilitating easier air travel while maintaining high

standards of security and identity management.

Through the use of RFID tags on parts and containers,

IBM has helped a major aircraft manufacturer intelligently

track aircraft parts throughout the product’s entire life

cycle including all maintenance conducted on it and the

plane in which it is used. The solution has allowed them

to be more responsive to customers, and reduce fleet

maintenance down-time without compromising safety.

A U.S. hub airport implemented a digital video

surveillance solution and a security command and

control center. The system also uses information

from biometric handprints and badge readers. The

system is more effective at recognizing risks and

alerting the command center. The effective labor

cost savings is US$2.2m per year.

A major Asian airline implemented an enterprise-wide

maintenance and parts management solution to

replace approximately 40 systems. The primary

objective was to improve maintenance quality and

cross-department collaboration through the use of

standard processes, real-time data availability and

reduced opportunity for human error.

Assure safety and security.



The 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

Location and

condition of assets

Usage patterns

Technology

Information

Processes

Airports

Regulators

Governments

Freight and logistics

service providers

Travel service providers Influencers:

Associations and

universities

Passengers

Airlines

Freight customers

OEMs and suppliers



The value they can realize through collaboration extends across the entire air transportation ecosystem.

Predict demand and optimize




Assure safety

and security.

Improve operational






Improved control and oversight,

flow management, verification

and flexibility

Quicker, more informed risk

assessment and decisions

Increased capacity, asset

and resource utilization

More effective supply chain

management

Increased cost effectiveness,

aircraft turns, process

efficiency and quality

Lower operational costs, fuel

consumption and noise pollution

Reduced fuel use and emissions

Regulatory compliance

Increased customer satisfaction,

loyalty and safety

Fewer delays and disruptions

More effective marketing,

promotion and loyalty programs

Predict demand and optimize




Assure safety

and security.

Improve operational





Let's work together to drive real progress.

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.

We’ve only just begun to uncover what is possible on a smarter planet.




Fewer delays and disruptions Increased cost effectiveness, aircraft

turns, process efficiency and quality

Improved control and

oversight, flow management,

verification and flexibility

Increased capacity, asset and

resource utilization

Lower operational costs, fuel

consumption and noise pollution

More effective supply

chain management

Regulatory compliance

Quicker, more informed

operational decisions

Increased customer

satisfaction, loyalty and safety

Reduced environmental impact



Travel service providers

Airports

Airlines

Airlines and airports play a unique and critical role: together, they are the point of connection between end users and the broader ecosystem.

Regulators

Governments

Freight and logistics

service providers

Influencers:

Associations and

universities

Passengers

Freight customers

OEMs and suppliers



To fill this role effectively, smart airlines and airports will apply intelligence to a spectrum of functions which they perform.

Facilitate multi-modal travel

and transport options

Track flows of passengers,

baggage, freight in real time

Boost security while removing

friction points

Provide comprehensive, integrated

planning, routes and schedules

Offer access to continually updated

travel and shipment options

Monitor plane and cargo condition

and location in real time

Analyze historic and real-time data to

predict demand and terminal traffic

Plan investments and operations

to optimize efficiency, service and

environmental impact

Provide immediate notification

of disruptions and delays

Monitor resource use and

environmental impact in real time

Airports

Airlines



IBM IS INVESTING IN… AIRLINES ARE FOCUSED ON…

IBM’s solution strategy is aligned with the needs of airlines

Assuring safety and

security

Predicting demand and

optimizing capacity

Delivering customer-driven

products and services

Operating efficiently and profitably

while minimizing environmental

impact

Digital video surveillance, biometric identification,

identify and access mgmt, risk analytics, condition

based monitoring using wireless sensors

Reservation system modernization, Multi-channel

self service, one view of the customer, customer

analytics, CRM, loyalty management, cargo mgmt

Demand and revenue management, irregular

operations management, enterprise asset

management and MRO, business intelligence

dashboards, crew scheduling

Enterprise asset management, enterprise

infrastructure management, green supply chain

optimization, carbon management



Trademarks and notes

IBM Corporation 2011

IBM, the IBM logo and ibm.com 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

www.ibm.com/legal/copytrade.shtml

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: http://www.ibm.com/legal/copytrade.shtml#section-special

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.

smarter planet: airlines

Business

greenhouse

reducing environmental

improve operational

end customer

end customer

assets predict

environmental

predict demand