Looking out his window, OzJet CEO Hans Van Pelt has a chilling daily reminder of the formidable challenges in launching a new airline on to the Australian domestic market. His offices overlook an abandoned warehouse, which once housed Ansett’s data centre.
While probably the highest profile collapse, Ansett was only one of 73 domestic airlines which have gone to the wall in Australia in the last two decades. In 1985, Australia had two major domestic airlines, five regional carriers, and 36 commuter services. Of these only four remain, and the pressures that forced their counterparts out of business are getting more intense.
Government deregulation, changes in communications technology, rising costs of insurance and fuel, increased security requirements and terrorism are some the issues working together to create a perfect storm, which has seen the airline industry globally go from crisis to crisis without respite.
In the US this perfect storm has taken a similar toll, with over 100 airlines declaring Chapter 11 in just 20 years. United and American Airlines are currently operating under Chapter 11, the nation’s third and fourth largest carriers, Delta Air Lines and Northwest Airlines, were also forced to file for bankruptcy.
In Europe, politics has kept many a moribund carrier afloat, as governments repeatedly come to the rescue of failing national airlines. But such tactics provide only temporary respite, especially in the region that brought us the low-cost airline model.
In 1990, Swissair bought a 70 per cent stake in Crossair, which had grown from a charter flight company to a low-cost carrier throughout the 1980s. Thanks largely to internet distribution, the low-cost model boomed and Irish upstart Ryanair soon surpassed Aer Lingus in terms of ticket sales. Using a similar business model, Crossair grew its passenger base and expanded its routes, as Swissair, operating at the other end of the spectrum, fell into debt. The first half of 2001 saw the parent company selling off business units in an attempt to stay afloat.
Eventually, shedding its remaining business units, 2,600 staff and 25 per cent of its international routes, Swissair merged with Crossair, adopting the smaller airline’s business model and infrastructure. Its operations as a separate entity were wound up and in March 2002, its flight code “SR” disappeared from global registers.
Watch the skies
With three low-cost carriers now operating in the Australian market, and Qantas still defending its share of domestic flights, air travel has never been cheaper. This new model has yet to prove itself in a notoriously competitive market, and while Qantas is facing serious challenges, the young guns will have their work cut out managing growth and scaling their minimalist operational infrastructures.
According to Van Pelt, the lessons of Swissair and Crossair have not been lost on Australian carriers. Van Pelt headed up Ansett’s e-commerce division prior to the company’s collapse in 2001 and he, more than most, appreciates the need to streamline operations and maintain competitiveness in the Australian market.
“Low-cost is an attitude, not a product. Traditional carriers are stuck with legacy systems that they have to maintain themselves, but there’s no need for anyone starting out to actually purchase that kind of infrastructure,” says Van Pelt. “There is no need to make investments that are non-core to your business. This means treating IT costs as a variable, which can be bought as a service where possible.”
Leaving Jetstar and Virgin Blue to squabble over the low end of the market, Van Pelt plans to apply the low-cost structure to the provision of premium business seats for the popular Sydney to Melbourne route.
The OzJet variation on the low-cost model will see the airline rely on third parties, like travel agents, to fill its ample business-class seats, cutting costs on internal IT systems rather than focusing on internet-based distribution to cut agents’ fees.
“Because we are going for the business market we still need travel agents to sell our tickets, but we will be able to make savings in other areas, and offer lower business-class fares as a result,” Van Pelt says. “We still rely on our website for the bulk of our transactions, even orders coming in from travel agents, which means we need a highly-available hosting solution with redundancy. But you just don’t pay for that kind of thing upfront anymore.”
Drawing its software from Sabre and its hosting and telecommunications services from Macquarie Telecom, Van Pelt is confident of running a heavily IT-reliant business model with minimal internal IT operations.
While his focus at this stage is getting the airline off the ground, he says the model is more stable and more readily sustainable in the mid to long-term.
“I’m confident that we’ve selected the right structure initially and won’t need an overhaul in order to expand,” Van Pelt says. “That’s the beauty of an outsourced solution. It’s not something you have to add to or restructure you just expand based on your needs. In our model you don’t pay for any technology until you turn it on.”
With its web-based distribution, scalability and flexibility, the low-cost business model is proving a significant challenge to traditional carriers. Not least because low-cost carriers are able to take advantage of technology that remains out of reach for their traditional counterparts, mainly due to their legacy infrastructures.
As aviation was one of the first industries to take up computer-based processing back in the 1960s, most of the older airlines are still saddled with systems which, while stable, are proving costly and challenging to maintain in the modern era.
While her counterparts can call for competitive tenders on the latest hosting and web-based solutions, Qantas CIO Fiona Balfour is left with the challenge of finding flexible, innovative staff, fluent in languages which have not featured on university syllabi for over a decade. At the same time she is looking to either overhaul or maintain systems which have been in operation, in some cases, since the 1960s.
Since her appointment as CIO in 2001, Balfour has adopted flexible management models throughout much of the airline’s IT infrastructure. Having already outsourced the company’s data centre management and mainframe operations to IBM, and its desktop maintenance and telecommunications services to Telstra, she is still left with 700 internal IT staff, running anywhere up to 120 IT projects simultaneously.
However, with the bulk of these staff now firmly focused on maintaining internal legacy systems, her attempts to adopt the more flexible IT operations models open to low-cost start-ups, may have hit the wall.
While the average airline spend on IT and communications across the Asia-Pacific region comes in at around two per cent of revenues, Qantas’ spend hovers around four per cent. And with extraneous costs rising, the pressure is on for Balfour to cut back where she can. Theoretically, if Qantas were able to reduce its IT spend to regional levels, and put the difference back into company revenues, it could increase its profitability by a third.
"We buy the systems as a service, because that way there is no issue in respect to scalability, as the likes of Ryanair, easyJet and so forth have demonstrated."
- Simon Westaway, corporate relations manager, Jetstar
However, with the costs associated with the streamlining and replacement of legacy systems running into hundreds of millions of dollars, Qantas, like many traditional operators, will have to spend a lot more before it can spend less, and is opting to bear higher operating costs in the short-term.
A case in point is Qantas’ engineering and maintenance software, which Balfour has been attempting to upgrade since joining Qantas a decade ago. Earlier this year Balfour told the 2005 Information and Communications Technology Outlook Forum in Sydney the present system has between five and eight years of useful life left and could take as long as four years to replace.
However, as it adds no additional revenue to the airline, the $100 million project is a hard sell at any stage, let alone when oil prices are heading north and Balfour is yet to create a viable business case.
Notwithstanding these challenges, Qantas continues to operate profitably, as Australia’s tyranny of distance works in its favour. Moreover, nothing actually precludes Qantas Group from playing in the low-cost space, as the launch of low-cost short-haul carrier Jetstar shows.
Having taken to the skies in May 2004, Jetstar has a very different IT cost structure to its more traditional parent.
Jetstar IT manager Steve Tame runs a team of just five, and manages supplier relationships with Telstra and Optus, as well as Accenture’s airline technology arm, Navitaire.
The airline’s reservations management system and its Jetstar.com online booking platform are entirely managed and hosted by Navitaire and Jetstar pays per booking rather than for the service overall.
This structure enables Tame to keep costs to around 1.6 per cent of revenues, a figure he is hoping to reduce to one per cent in the mid-term.
“Our spend on IT is extremely low, but at the same time we’re very IT reliant,” explains Jetstar corporate relations manager, Simon Westaway. “Nine out of every 10 of our bookings are made online, either through the Jetstar.com website or through a number of trade sites offered to our partners, and travel agents.”
With a focus on minimising complexity and organisational infrastructure, Westaway is looking to emulate the success of European low-cost airlines like Ryanair and easyJet.
Like OzJet’s Van Pelt, Westaway believes technology outsourcing provides far greater scalability than internal IT departments, because it enables the airline to sidestep headaches associated with staff recruitment and project management.
“Jetstar has three foundation systems: Navitaire in respect to our reservations and website, Trax − a US-developed system for our engineering department, and Aims − which runs our airline operations including flight operations,” Westaway says. “We buy the systems as a service, because that way there is no issue in respect to scalability, as the likes of Ryanair and easyJet and so forth have demonstrated.”
Neither burdened by legacy systems, nor operating under an entirely outsourced model, Virgin Blue faces the challenge of managing growth while maintaining a low-cost infrastructure.
“Having a legacy environment is not necessarily bad, it just gets more and more difficult and expensive to maintain as time goes on,” says Virgin Blue CIO, Nick Brant.
“The airline industry was an early adopter of technology through the use of global distribution, online reservation and automated departure control systems, and in some cases these systems haven’t kept pace with technology. Being newer, Virgin Blue does have flexibility to integrate new systems and applications into our core infrastructure, as the underlying data, systems and database layers are open and more modern.”
Brant was hit by scalability issues when the sudden collapse of Ansett saw the fledgling airline grow rapidly beyond initial expectations. Without even enough time to recruit new staff, the initial IT team of 12 worked long hours in an attempt to provide the necessary infrastructure to underpin the company’s sudden leap to 30 per cent of the domestic market.
During the past 18 months the company has had to increase its IT spend significantly as it implements a new Oracle ERP system.
Although the company’s annual report does not specify IT spend, its IT assets more than doubled from $8.8m to $17.2m as its ERP overhaul went ahead.
“Virgin Blue has only been flying for a little more than five years and we have undertaken very significant growth in this time, increasing to more than 50 aircraft and more than 3,500 staff,” Brant says.
“As a result, many of our core systems and communications networks are relatively new, and are more easily able to provide the levels of security, scalability and flexibility that we require to react to the requirements of the business. Our core infrastructure enables us to integrate ‘plug and play’ strategic initiatives, and we are able to extend our infrastructure to integrate additional core solutions.”
With 50-odd staff, Brant operates an integrated series of IP data networks across domestic ports, which link in with airport-provided common user environments.
As 90 per cent of Virgin Blue tickets are sold online, the airline relies on Navitaire’s Open Skies software as its core reservation system, while Sabre provides flight planning, crew scheduling and rostering, and Trax handles airline maintenance.
"The airline industry was an early adopter of technology through the use of global distribution, online reservation and automated departure control systems, and in some cases these systems haven’t kept pace with technology."
- Nick Brant, CIO, Virgin Blue
If they are to succeed in bringing real competition back into the Australian market, Brant, Balfour, Tame and Van Pelt, will need to exact as much as possible from their various vendor partners and internal IT teams.
However, even their best efforts may not be enough to win success for the airline overall. Ansett CIO Ron Chambers was known for driving hard bargains and extracting high service levels from suppliers and partners. Prior to its collapse the airline was busily embracing internet distribution, and investigating cutting-edge IT strategy.
If anything, the external factors which sped Ansett’s collapse have only become worse since 2001. Airlines worldwide will be looking to their IT divisions to reign in costs while enhancing the passenger experience. So long as it does not drive the new carriers out of business altogether, competition will provide cheaper and more flexible ticket purchases, and enhanced in-flight communications and entertainment options.
But three to four airline collapses per year during the past 20 years is a chilling legacy for enthusiastic start-ups and traditional carriers alike. And the airways are looking no less turbulent.