Smarter Planet: Airlines

George Mattathil -

Let’s Build a
Smarter Planet:
Airlines

© 2010 IBM Corporation

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.


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

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



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.

Share of Madrid-Seville
80% market – AVE

Estimated share of UK 3-hour
70% domestic market – SNCF

Share of Korea
63% market – KTX

Share of Tokyo-Akita
60% market – JR East
Decline in inter-city
50% flights – THSR
Share of Madrid-Barcelona
46% market – AVE

―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.
ADDITIONAL COSTS FROM ETS ALONE
15% 2012 COST FOR CARBON CREDIT PURCHASES

Anticipated shortfall (77M tons of CO2) DELTA
in allowances for airlines from EU Carbon UNITED
Trading Scheme in 2012 (estimated to
BRITISH
cost US$1.4 – $1.6B to the industry and
RYANAIR
adding an average cost per ticket of
QANTAS
US$13+ to a short-haul flight and US$60
for a long-haul flight). CONTINENTAL

EASYJET

US$7B THAI

AMERICAN
Expected annual cost to airlines to AIR FRANCE/KLM
meet global IATA commitment for
carbon neutral growth in 2020. $0 $10 $20 $30 $40 $50 $60 $70 $80

US$ MILLIONS



Meanwhile, higher fuel and airport services costs may compound
the 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



These 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


Bigger 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


Looking ahead, the horizon is increasingly clear…

The world is becoming smaller and flatter,
but also smarter.



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.

US$27.8 billion 60% and -19%
Projected global airline industry losses 60% of consumer sentiment around
in 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 billion
Airlines generate 3% of all greenhouse gas Estimated cost to airlines
emissions. Some say that because aircraft of mishandled baggage.
operate in the upper atmosphere, the impact is
equivalent to 13% of emissions from all sources.



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.



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



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

PREDICT DEMAND AND IMPROVE THE END-TO-END
OPTIMIZE 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.



+ + =
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.



Hope: Making airlines smarter

SMART IS: Optimizing capacity and assets SMART IS: Improving the customer experience
Predict demand and optimize assets and Know your customer, interact with that customer in
infrastructure both long-term (e.g. aircraft) and their preferred style and manner, and differentiate
short-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 security
Improve operational efficiency while reducing negative Assure and continuously enhance safety
environmental impacts by monitoring resource use and and security through non-invasive continual
impact in real time, collaborating with partners and monitoring of journeys, assets and
operators both vertically and horizontally. 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 the end-to-end Improve efficiency while
customer experience. reducing environmental impact.

A major European airport, in partnership with an COSCO, a global shipping firm, engaged IBM to
international airline, reduced mishandled baggage help optimize their supply chain using the Supply
by 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, COSCO
by 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 a
for the Apple iPhone and iPod Touch, allowing Business Process Management solution to improve
passengers to book flights, download electronic their ability to choreograph the complex movement
boarding passes, check-in, receive flight status of crews, aircraft and cargo, increasing operational
updates and book rental cars and other services. efficiency. They expect an 80% reduction in the cost
There were over 30,000 downloads of the of integrating operations with strategic delivery
application from 47 countries in the first six days. partners, a 50% time savings and a 30% application
development cost savings.


Assure 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 intelligently
control center. The system also uses information track aircraft parts throughout the product’s entire life
from biometric handprints and badge readers. The cycle including all maintenance conducted on it and the
system is more effective at recognizing risks and plane in which it is used. The solution has allowed them
alerting the command center. The effective labor to be more responsive to customers, and reduce fleet
cost 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 and
maintenance and parts management solution to verify traveler identity information as early as
replace approximately 40 systems. The primary possible, a collaborative cross-industry pilot was
objective was to improve maintenance quality and successfully conducted to re-use the information
cross-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 high
reduced opportunity for human error. standards of security and identity management.



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 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



The value they can realize through collaboration extends across
the 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.



The value they can realize through collaboration extends across
the 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



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.

Let's work together to drive real progress.



The value they can realize through collaboration extends
across 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



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

Governments

OEMs and suppliers
Airlines
Freight and logistics
Passengers
service providers

Freight customers Regulators
Airports
Travel service providers

Influencers:
Associations and
universities



To fill this role effectively, smart airlines and airports will apply
intelligence 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



IBM’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



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
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 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,
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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.


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