Aviation digitisation costs and risks

Costs and risks of aviation digitisation

01-11-22

The post-pandemic mantra has been that the airline industry must work together to modernise its technology and sales processes.

And there seems to be a recognition that the inability of airlines to sell products and services in a digital world should not be addressed by individual companies.

Speaking at last month's World Aviation Festival, Willie Walsh, director general of the International Air Transport Association (IATA), agreed that this is an "industry-wide problem".

"Our systems are very complex, most of them are very old, and the transition from where we are to where we need to be is going to be very complex and very expensive, especially if it is done at the individual airline level. I think transition as an industry is the way to do it," he says.

In another WAF session, executives from Lufthansa and Air France-KLM also stressed the need for a "coalition of the willing" to move forward collectively.

Walsh, a former CEO of British Airways' parent company IAG, is optimistic about the industry's ability to transform, but stresses that it is risky.

"I know all airline CEOs are worried about tinkering with their legacy systems, because they are so interconnected and in many cases we don't fully understand how they work," he says. "We are dismantling parts of the system all the time, slowly, and at the same time trying to move forward."

Asked about IATA's role in the industry's digital transformation, Walsh says the organisation is looking for solutions.

"If every individual airline tries to do it they will get it wrong. That's what's happened, we've seen a lot of airlines try to make this leap, spend a lot of money and not succeed. I think there is room for IATA and we are working on it.

He cites as an example IATA's New Distribution Capability, which he describes as an "industry initiative through IATA".

"It has been successful, but nowhere near where it could have been, mainly because the transition costs money," Walsh says.

"Once you get there, costs are significantly reduced, but airlines are always looking at how we can reduce our costs. Nobody likes to see how they're going to spend more money to come up with a solution."

However, from a commercial point of view, airlines are likely to always go their own way. In the past, while some have opted for distribution surcharges, others have sought to incentivise retailers to book through newer channels, such as NDC.

Commercial complexity

In recent months, airlines such as American Airlines and Lufthansa and SAS have unveiled their latest distribution initiatives.

Lufthansa Group said in July that, from September, it would change its distribution fee - the levy imposed on bookings made through global distribution systems - depending on whether the booking was made on Amadeus, Sabre or Travelport.

For bookings made through its airlines' websites or NDC connections, no surcharge applies.

SAS says it is introducing a staggered commission on sales in Denmark, Norway and Sweden from next March, but will also recover the distribution costs, which are likely to be higher than the commission, related to GDS bookings.

More recently, American Airlines has announced that it has signed agreements with all three GDSs, stating that the agreements will provide it with "content flexibility" that will allow it to offer its products and services to agents and corporate customers through NDC connections.

At the WAF, Qantas CEO Alan Joyce says that while NDC put the framework in place, not everything is under the airline's control.

"With NDC, for example, we have to work with the GDSs and the travel agents, who also have to make significant investments," he says.

"There is a massive movement of the whole chain, and that doesn't happen overnight and some are quicker than others. You want to bring everyone with you, but that's also an obstacle to making a lot of progress in something that is well defined like the NDC, and you can imagine the complexity in some of the other systems."

Risky business

IATA's Walsh was also asked whether it could be a "big bang" solution or whether it should be done in stages because of the risks.

"Personally, as a former director general, I would say do it gradually. As an IATA I would say: 'You guys are crazy, take this and make a leap'. But I know that if I tried to convince the IATA board to do it, it's too big a risk, but we'll get there. We have fantastic technology, it's a matter of adopting it at the right time and at the right speed," he says.

As for how transformative the move to digital could be if the legacy technology issues were resolved, Joyce says: "I think it's one of the biggest transformations that any airline would have on their list for the next while. At the moment we are coming out of operational problems across the board. During COVID we moved a lot of systems - we didn't change them - to the cloud. We've had technical problems with that, which has caused us long delays at times when systems haven't worked at all.

"So, coming out of this, we're all going to be cautious as CEOs. We don't want to add pressure to the operational side of the business, we don't want to take risks on the commercial side. We don't want to find ourselves in a situation where our website or our distribution goes offline for a period of time; that's millions of dollars," he says.

And then, especially now, you have to make sure that any move is done with cyber security and safety in mind and minimising the risks. Airlines are good at identifying and managing risk. We will get there, but we have to be careful not to do it too quickly, not to create unintended consequences that set the industry back."

As to whether airlines should outsource development to third-party technology companies or keep it as a core competency, Marjan Rintel, CEO of KLM, believes it may not be possible to outsource.

"If you look at the operational processes and legacy systems of airlines, they are all connected, so it is not so easy to say whether it is possible to outsource. I don't think so, I think it's at the core of their processes and at the core of their customer service," he says.

"We agreed, within KLM at least, for the next five to ten years to really get rid of the legacy systems and accelerate what needs to be done."

Working together may be the mantra, but the reality has been different so far. In the past, airlines have taken different approaches to initiatives such as NDC, often for commercial reasons. The big question is whether that can change in the future.

Author: Jorge Coromina

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