Airline Industry Taking Off With Digitization
Kiran Koteshwar, Chief Financial Officer, Spicejet, writes about leveraging digitization in the airline industry and attaining competitive advantage through operational efficiency.
Aviation or air-travel is witnessing a continuous growth of passengers and for a variety of their needs ranging across business meetings, corporate offsites, family vacations, adventure, nature exploration, education, health care, friends/family visits. Each of these travelers have their unique requirements which makes service delivery complex in so far that it warrants a great deal of attention by airlines; and the scale of operations in terms of the humungous number of flight services and air passengers pose challenges to various aspects of the airline industry.
A quick glimpse of the activities that are executed every day:
24,000 operating aircraft
11.2 million passengers carried
0.17 million tonnes of goods carried,
4.8 aircraft coming out of production,
$ 2 million revenue and almost the same levels of expenses.
(Based on 2017 data from IATA, CAPA, Aircraft manufacturer’s Market Outlook)
This is expected to grow by 4-5% every year, and it is clear that matters like efficient data collection and storage, simplification of transaction management, ease of information dissemination and retrieval, currency of compliance and audits, predicting customer behavior and understanding preferences, seamless integration of travel value-chain elements, dynamic and market driven pricing, optimizing costs, and funds, and cash management will continue to remain a challenge, and this brings to the fore need for continuous evolution in digitization.
Digitization, in my mind, is effected through electronic data collection, automation of processes, connectivity and seamless integration of services, systems, information & transactions. Digital transformation has been witnessed over years and is not a new term & in that it is also evolving. We have seen – for the want of a term - “digital” traveler, airports, airlines, marketing, sales & collections, transactions; and these are in a state of continuous improvement.
The questions still in our minds being,
Are we seeing a competitive advantage that is starting to surface for airlines in this big digitization drive?
Is this making airlines profitable, that should be viewed in the back drop of the enormity of the scale which can tilt the scale towards profitability or doom?
Is there a certain ROI that can be attributed to the digitization process? AND
What needs to be done more to stay in the race, especially when the airline business is viewed as a significant financially risky one?
For a finance professional in the airline space to start evaluating her/his future course of action, I have been particularly encouraged by my boss’s attitude of looking into the future and not wasting time on reflecting on what was done, but using its learnings. This in itself, brings the need for structured data systems that are required, as a foundation for the topic of discussion here, for gaining competitive advantage in terms of product offering and underlying cost structures through operational efficiencies, dynamic business models, disruptive ideation and implementation. Equally critical is the CFO’s role which needs to be cemented as that of a catalyst for business transformation, enabler of technology driven process & decisions and of course willing to invest in process of digitization.
There is no doubt that the airline industry has many factors that affect its very survival. Dependence on macro-economic parameters drives cost behavior and affect demand. Airlines need to be able to create digital networks, drive business transformation through digitization in areas of revenue management, enhancing ancillary revenues by enriched customer experience, reducing cost through data analytics, reduce overheads, increase efficacy of marketing spends & increase transactional accuracy by process automation and effective financial reporting.
Application of digital technology in airlines:
A brief note of each of the few technologies that are being deployed.
There is little doubt that airlines will gain through artificial intelligence (AI) owing to information that can be culled out from travel & booking information in addition to other sources of data. This creates opportunities for synthesis of real time data & historical data.
Access to travel information of passengers and things like “must do” at destinations coupled with digital virtual assistants has enabled passengers to converse while they are researching destinations, travel itineraries and things to do. The recent applications of this are chatbots and voice-based tools (Alexa, Siri,), etc.
However, machine learning & predictive analytics have more to offer than merely travel conveniences. Data scientists have made large inroads using the passenger data to forecast demand, size, capacity based on the underlying demand, effective revenue management into pricing tickets to maximize revenue. Further, backed with data on preferences, targeted sales campaigns are increasing ancillary revenues. This transformative technology have made it possible for airlines to start using its traveler base for integration with hotels, transport, and other service providers. Airlines have to find ways to leverage their mobile apps for collaborating with travel related service providers. Statistics have revealed that a passengers once having booked their tickets, spend a lot of time on mobile apps and as the date of travel draws closer the affinity to buy ancillary services and firming up travel activities are quite high.
On the cost side, AI can contribute substantially. Aircrafts are getting more reliable, efficient and technologically advanced. Fuel and aircraft maintenance form a substantial part of airline costs.
It is a well-known fact that there are various parameters for arriving at fuel performance on flights. Mostly, these parameters ranging across weights of revenue payload components (passenger, baggage, cargo), seating of passengers, weather, alternate destinations, specific gravity of fuel, air traffic constraints, flight levels, pilot skill sets, etc. are mostly on average assumptions and not ‘really’ real time. Many airlines have started using AI to get as close to the real time values for efficient fuel management for generating computerized flight plans. Connectivity has played a great role in pushing & receiving information from the aircraft ‘in flight’ that helps in altering or optimizing flight plan parameters. Dynamic fuel dashboard, flight analysis are widely used by successful airlines for continuous improvement.
Similarly, aircraft maintenance – line and major – are based on information derived from the aircraft systems. Most of the maintenance procedures are “on-condition” while the remaining are time bound. Obtaining information from the aircraft in advance and planning tasks ahead fosters quicker turnaround of the aircraft thereby increasing utilization potential. This also reduces costs, as maintenance planning is a resource driven activity.
AI can help in analyzing parameters for performing predictive analysis on engines, airframe & components. A lots of work needs to be done on development of software tools that can help operators preserve engine life and also suggest critical operational procedures; since engine maintenance costs account for 90% of the total aircraft maintenance costs.
Have come across a couple of airlines that are looking at robots for facilitating check-in and baggage handling. Some airlines have reportedly introduced their own robot customer service agents. In the years to come, ROI on these applications will determine the extent of deployment but definitely a thing to watch out for.
On accounting front, robotic applications have made it possible to capture invoice data, posting entries into enterprise financial systems, create backups, send notifications/ invoices through emails, etc. This has led to elimination of errors, integration with emails, effective audit trails and contract administration.
We have seen a good use of this in receivables management.
Airlines need to start incorporating use of biometrics which could revolutionise the way passengers are processed. Biometrics will be critical for quick, seamless and secure travel process. Some airlines in part or full have introduced or are testing biometric enabled solutions, viz. biometric enabled bag drop, biometric boarding passes. Facial recognition technology has been the biometric of choice in many trials to date. While solutions could vary across airlines, there is little doubt that biometrics will have plenty low cost applications in future.
Blockchain technology that we are aware of has been synonymous with the Bitcoin, but it has far reaching potential. Blockchain is essentially a secure digital ledger of transactions and agreements, and the fundamental of this technology is data security & high level encryption where once information has been entered into the blockchain, it cannot be modified. It is going to change the way we view cloud computing in business and finance and below are a few areas and how airlines can benefit from this.
A blockchain is a secure, transparent transaction ledger that can never be manipulated and an incredibly intelligent ERP tool.
Use of transactional data to better understand the flow of capital within the organization and identify opportunities for greater efficiency. Tracking the flow of funds normally requires monitoring multiple bank accounts. Blockchain allows for easy tracking from one transaction ‘block’ to another and can reconcile intercompany accounts in real time.
Managing contracts: Ensuring the transfer of funds between two parties, but only when certain conditions are met. For example, a specific contract definition can have all the conditions under the agreement between multiple parties. Once those specific conditions are met an exchange of funds can be initiated based on secure data of intended recipients.
Record-keeping: Blockchain offers business finance solutions beyond crypto-currencies, such as record-keeping. Blockchain technology can be used for secure record-keeping of all previous transactions on the network and not just transactions that only involve currency.
Internet of Things
The Internet of Things (IoT) is the network of physical devices, vehicles, assets, appliances, and other items embedded with electronics, software, sensors, actuators, and connectivity which enables them to connect and exchange data creating opportunities for more direct integration of the physical world into computer-based systems, resulting in efficiency improvements, economic benefits, and reduced human exertions. IoT involves extending internet connectivity beyond standard devices, such as desktops, laptops, smartphones and tablets, to any range of traditionally non-internet-enabled physical devices and everyday objects. Embedded with technology, these devices can communicate and interact over the internet, and they can be remotely monitored and controlled.
Airlines have been working on creation of a fully connected ecosystem, both on the ground and inflight, and is an ongoing task. Asset & staff tracking at airports will help drive operational efficiency. It doesn’t sound too far where passengers will be ushered to the gates through messages.
Another development is the creation and use of ‘digital twin’ as an asset. While we are yet to see its applicability to the airline industry, engine OEMs have started to work on digital twins of aircraft engines and through AI, IoT these can be equipped with real-time data which can throw results or simulate flights to better understand performance drivers, etc. and for forecasting maintenance schedule and costs.
Over next few years, we should be able to see applications on connected devices, aircraft, components & engine condition monitoring systems, and even faults on seats/IFE to relay information in real-time through sensors, etc. to its ground offices, removing the need for crew to manually report faults. Below is the road map on IoT reach versus time.
There are other numerous ways where digitization can transform the airline business in addition to the above. So CFOs’ need to carefully evaluate investments into digitization projects with respect to their ROIs; while remaining cautious on ‘need to have’ technologies & those which may restrict in gaining competitive advantage. Many airlines have the tendency to over-engineer their technological capabilities and face huge cost overruns without appreciable returns.
The future for any airline is to stay ‘tech-enabled’, and core to this is the creation of a digital enterprise architecture that allows integration of digital technology as it evolves and is cost effective.
Opinions expressed in the article are the author’s own.