New IT technologies to become airline companies best assets for cost reduction and efficiency a lesson from industry leaders
With oil prices forecasted to keep dropping, airline companies are seizing this opportunity to further increase investments in new technologies. While modernizing a fleet with new generation planes or fuel efficient engines can be difficult for companies with limited investment capabilities, cheaper options exist and can result in both optimizing operational efficiency and satisfying customer expectations with attractive services. This tendency is encompassed in a strategy to reduce costs and increase margin in order to maintain profitability in an industry growing more competitive every day.
As I've discussed in other articles (The Aeronautical Industry: ready for take-off!) the aeronautical market is experiencing booming growth due to an increasing number of passengers. Recent studies from the International Air Transport Association (IATA) show that the global airline industry has doubled its revenue over the past decade from $369 billion in 2004 to $717 billion expected in 2016. While the industry met shareholders expectations for the first time over the past decade, (return on capital is set to reach 8.6%, exceeding the industry's weighted average cost of 7%), this financial performance remains fragile as the profitability outlook for the year 2016 is fairly low with a forecasted net profit margin of 5.1%.
To maintain and reinforce such performance, airline companies have to define competitive strategy to ensure a steady growth. This can be achieved by optimizing operational efficiency, resulting in induced costs reduction, or by developing new services to attract more customers, and therefore increase profits. Airline companies have multiple options available when it comes to managing their spend and increasing profits, other than outsourcing their MRO services or modernizing their fleet.
Sourcing enhanced IT tools, better designed to answer specific needs, can be the solution to cut costs by streamlining processes and operating models. Take for example Flydubai. The airline recently equipped ground personnel with Windows 8 tablets using a customized application connecting to the back-end services of the company. These tablets, equipped with passport scanners and ticket printers, facilitate the customer check-in process. The use of tablets is a perfect example of an affordable solution that not only optimizes processes, but also improves business-customer interaction. Beyond tablets, other IT technologies exist to help achieve such goals. Sourcing new IT platforms, better designed to gather greater data and provide analytics reports aiming at better understanding customers needs, fit in a competitive strategy to increase sales and therefore profits!
Enhanced MRO software and new resources planning and allocation platforms are also available in the market, providing cheaper, less complex solutions than the ones developed over decades, using outdated processes and technologies. Zagros Airlines, for example, recently updated its existing Maintenance IT system with Alkym, an aircraft maintenance software developed by Seabury MRO solutions. Transitioning to this new IT software supports not only cost reduction strategies while driving operational efficiency, but also establishes a solid IT base prior to engaging in a fleet renewal program. Indeed, this type of MRO software system manages the flow of information across the entire airline companies organization, providing support in services such as maintenance planning and control, warehousing, or quality control. MRO operation services are thus managed more efficiently, facilitating the arrival of a new fleet while improving the maintenance operations of existing planes. This example perfectly highlights how IT projects can drive short term savings and be the base of long-term cost reduction projects.
Airline companies recent financial performance, coupled with new technologies designed to better answer organizational, operating and customer needs, offer real opportunities to engage in modernizing projects on multiple fronts. While IT projects appear to be an affordable solution for short term positive results, transitioning to such solutions is not an easy task for airline companies who's core business is not IT. This is where external resources, such as strategic sourcing firms with extended IT software migration experience, can be of help. Recognizing the need for new IT infrastructure and systems is the first step. From there, sourcing subject matter experts can work to identify your IT requirements and translate those needs into finding a best suited services provider.
About the Author: Matt Chabanon is a Project Analyst at Source One Management Services- the exclusive sponsor of ISM2016's Exec IN forum, developing and executing sourcing events to help companies manage spend and optimize value in their supply chains. Prior to joining Source One, Chabanon was a Project Manager for ThyssenKrupp, specializing in inventory and maintenance planning and contract management.