Geoff Dixon, CEO, Qantas Airways James Hogan, President and CEO

A MAGAZINE FOR AIRLINE EXECUTIVES 2004 Issue No. 21

T a k i n g y o u r a i r l i n e t o n e w h e i g h t s

ANON ALLIEDTHE ROUTE FRON TOT RECOVE R Y A conversation wAi tconversationh … with … Geoff DixoJamesn, CEO, Qantas AirwaysHogan, President and CEO, Gulf Air

INSID E

Industry Showing 19 Signs of INSIDRecoveryE

Low-CostAir France Carrier and KLM Mode forlm 384 ContinuesEurope’s Largest to Evolv Airline e

Recent Breakthroughs 1879 Thein Revenue Evolution Managemen of Alliancets

A Conversation with oneworld, SkyTeam 26 and Star Alliance

Although CRM and frequent flyer customers’ issues and to differentiate itself by CRM initiatives and to justify their expense. programs are interrelated, CRM with its person- implementing better services that offer a new Given the scope of most CRM investments, alized and holistic approach can do much more level of personalized service, especially com- an airline should take a holistic approach and for an airline than a loyalty program by itself. pared with low-cost carriers. consolidate results in various areas to deter- The Long Night’s Journey into Day That’s not to say that low-cost carriers mine the effectiveness of the CRM program. In a Time of Cost Cutting, does don’t have a need for a CRM strategy. Rather than focusing narrowly on specific Investment in CRM Make Sense? Southwest Airlines, for example, a low-cost areas such as revenue optimization or pricing The current challenging economic environ- carrier with few extra amenities, justifiably where there doesn’t appear to be a direct ben- With traffic, profits and demand on the rise, the world’s airline ment and the continued growth of low-cost views itself as customer-service focused. efit from CRM, but instead looking at the over- industry appears to be on its way to brighter days. carriers has put competitive pressure on the Southwest Airlines has repeatedly finished at all performance of the airline, the effective- traditional network airlines, which have the top of airline customer satisfaction ratings. ness of the program can be gauged. responded by focusing almost exclusively on Its strategy is based on a customer-service Customer focus holds the key to cost-cutting measures in order it remain com- approach, maximizing the “people aspect” increased profitability but also presents chal- By B. Scott Hunt and Stephani Hawkins | Ascend Editors petitive. And in a challenging economy, many and making sure issues with travelers are lenges. The promise is clear — better treat- strategic initiatives such as CRM get pushed solved quickly. Southwest is also working to ment of customers will lead to higher prof- f it is truly darkest before the dawn, then acutely, there are rays of hope. According to of course. It’s not like everything is perfect. to the side, and some airlines question collect more customer data and share it itability. A McKinsey investigation of 17 airlines the airline industry certainly stands on the the Air Transport Association of America, an But there’s improvement.” whether the time is right for a CRM initiative. among touch points, creating a single view of in 2003 indicated CRM can improve revenues I cusp of a spectacular sunrise. industry trade group, the U.S. industry’s loss- The improving global economy and Even in the current climate, a CRM the customer in order to offer better service. by between 0.9 percent and 2.4 percent. After After a prolonged period of darkness in es decreased from US$11.3 billion in 2002 to pent-up demand for travel have helped airlines strategy is critical to recovery and future “Customer service causes loyalty that deducting the costs, this still leaves large airlines the industry, many industry experts say that US$5 billion last year. around the world regain their footing. The low- growth because it helps set an airline apart can’t be explained by low prices alone,” said with an annual improvement of US$100 million to they see the first rays of the recovery dawn on “We’re heading in the right direction,” cost segment, which was not impacted to the from its competition. An airline’s price structure, Donna Conover, vice president of customer US$250 million or, for smaller airlines, a US$15 the horizon, with increases in metrics such as said James C. May, chief executive of the ATA degree of some of the network carriers, contin- schedule and product can be duplicated by service at Southwest Airlines. million to US$50 million annual improvement. passenger traffic, load factors and revenue per earlier this year. ues to grow and stim- competitors, but customer data and customer Airlines have struggled with how to However, achieving those results kilometer. In January, the ulate traffic with low insight will allow an airline to understand its effectively measure the returns from their requires more than just additional data and “Positive growth is expected in 2004, ATA reported that rev- Market growth rates are back on fares and by tapping analysis. It requires that the information be with a bounce back of 7 percent to 8 percent enue from passengers “track, load factors are recovering, underserved markets. used to change the way of selling, marketing in international RPKs,” said Giovanni Bisignani, carried was up 5.4 per- and there’s general improvement. Although the recov- Keeping Passengers Happy and serving customers as well as the way the director general and chief executive officer of cent year-over-year, ery appears to be We still need to be cautious, of Reasons for customers’ airline interacts with the customer. The prima- the International Air Transport Association. exceeding analysts’ worldwide, it is pro- downward migration1 (percent) ry reason some CRM efforts don’t deliver the “Our agenda for 2004 is designed to turn this expectations. Most of course. It’s not like everything is gressing at different expected benefits is that the customer-facing positive trend into sustained growth and to the gains came from rates in the three 60–70 30–40 perfect. But there’s improvement. employee is overlooked during the CRM help the industry repair damaged balance international travel, ” regions most dramati- implementation. Having more customer data by sheets.” the ATA said. cally affected by the itself achieves nothing. To be successful, an The International Civil Aviation “We see improvements across the events of the past three years. airline must have an effective strategy and imple- Organization also predicts that traffic, after board comparatively speaking against the pre- Structural Nonstructural factors factors ment the strategy throughout the enterprise. two flat years, will grow this year. The ICAO vious two years,” said Emre Serpen, a senior Asia/Pacific projects traffic will reach 3.1 billion passenger partner with Sabre Airline Solutions As the region least impacted by the industry’s such as change in: Related to Possible issues CRM2 actions A Comprehensive Strategy kilometers performed in 2004, surpassing Consulting. “I would say the recovery hap- downturn, Asia/Pacific has also been the CRM is more than IT or a frequent flyer pro- 2000 levels of 3.017 billion PKPs. The ICAO pened faster than expected. In terms of prof- quickest to begin recovering. • Job • Service • Delays, lost • Identify and proactively luggage apologize to high-value gram. It is a strategy that enables airlines to projects traffic will further increase to 3.3 bil- itability, European and Asian carriers are doing Because the low-cost carrier segment is • Location customers remain competitive today and in the future. lion passenger kilometers performed in 2005. well. Market growth rates are back on track, less developed in Asia/Pacific, the industry is •Personal •Frequent-flyer • Failure to redeem •Provide high-priority Many carriers have already experienced the Even in North America, where impacts load factors are recovering, and there’s gener- more regulated, the region’s economy is doing circumstance program frequent-flyer frequent-flyer points redemption certificates benefits of their CRM initiatives and have of the industry downturn have been felt most al improvement. We still need to be cautious, relatively well and the carriers receive more received a return, understanding that CRM •Product • Dissatisfaction • Initiate changes in with seat design future product design should be considered an investment with •Competitors’ • Sales promotion in •Predict which customers short- and long-term results that follow the offers specific market may defect; offer overall corporate strategic plan. THE HIGH LEVEL appropriate discount The CRM trend will continue to evolve. • Flight •Availability of high- • Ensure sufficient timing, The later airlines start CRM initiatives, the big- demand routes frequency of scheduled News Briefs from Around the Globe flights preferred by ger the gap will be with their competition. 1 high-value customers vıew Choosing fewer or less expensive products or discontinuing use of products. Addressing CRM issues today positions carri- 2 Customer relationship management Source: 2001 McKinsey survey of nine European, five North American and three ers to capitalize on the ongoing recovery and Asia-pacific airlines Who Web. Through the agreement, Why will help airlines manage customers effectively in the future. a American Airlines, Northwest Airlines, Travelocity provides links to By driving people who book their Several issues, according to the McKinsey Quarterly, lead customers to downgrade their Alaska Airlines and Midwest Airlines online check-in from its Web travel on Travelocity to check in via use of an airline’s products. Such downgrading — choosing fewer or less expensive prod- Nadja Killisly manages airline CRM What site as well as in an e-mail the Web, airlines help reduce their ucts or discontinuing using the carrier altogether — can be addressed through an effective strategy and customer relations at customer relationship management program. Sabre Holdings. She can be reached at Partnered with Travelocity to drive message sent to travelers shortly staffing needs at the airport as well as [email protected]. more passengers to check in via the before the day of departure. provide a popular customer service. a

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Tunnacliffe said after the collapse, the Airlines are also beginning to change Global Passenger Forecast Summary region’s airlines lowered their pricing to entice their focus, Tunnacliffe said. Comparison of IATA Total Passenger Forecasts passengers back onto their aircraft. “It has appeared that market share has Annual Passenger Growth Rate (percent) 2003 2004 2005 2006 2007 AAGR “They made some very attractive been more important to many airlines than 8% ------Total International -1.1% 6.9% 7.2% 5.6% 5.1% 4.7% fares,” he said. “They got the cabin factors profitability,” he said. “Where I think we’re 6% ------North Atlantic -0.5% 4.7% 6.0% 4.2% 3.9% 3.6% back fairly quickly. The real struggle has been seeing that change is in the new generation 4% ------Trans-Pacific -6.3% 9.4% 8.9% 5.9% 5.3% 4.5% to get the yields back.” of airlines. Those airlines have been resolute 2% ------Europe-Asia/Pacific -3.5% 8.9% 7.9% 6.6% 5.8% 5.0% Tunnacliffe pointed to British Airways on profit; they don’t do stuff unless it’s 0% ------Europe-Middle East -3.1% 7.0% 6.5% 5.8% 5.0% 4.2% reporting in January a 1.1 percent year-over- profitable. That’s the mindset that ought to -2% ------Europe-Africa -0.6% 4.8% 7.0% 5.0% 4.7% 4.1% year increase in traffic in its first and business be spreading.” -4% ------North America-Latin classes as evidence that yields are improving. -6% ------America Caribbean 2.7% 5.7% 7.5% 5.5% 4.9% 5.3% 2000 2001 2002 2003 2004 2005 2006 2007 January 2003 was the last month before the North America Within Asia/Pacific -10.9% 14.0% 10.6% 7.8% 7.2% 5.4% 2000 – 2004 2001 – 2005 (Original) 2001 – 2005 (Revised) Iraq war threat started to affect airline results, The region most impacted has finally begun to Within Europe 3.2% 4.6% 5.7% 4.7% 4.4% 4.5% 2002 – 2006 2003 – 2007 Tunnacliffe said, so to be ahead of that pace show some positive signs of a comeback. Source: IATA Within Latin America/ Caribbean 0.8% 5.3% 6.7% 5.5% 5.2% 4.7% represents a significant achievement. Late last “I don’t know if the dark times have year, BA’s premium traffic was growing by 2.5 passed, but somebody turned up the dimmer Total Domestic 0.4% 3.9% 4.9% 4.4% 3.7% 3.4% Forecast Total Scheduled Passengers percent to 3.5 percent per month. switch a little bit,” said Steve Hendrickson, Total -0.1% 4.9% 5.7% 4.8% 4.2% 3.9% Forecast Growth Rates and Passenger Numbers “Their load factors were up in the pre- senior partner with Sabre Airline Solutions mium classes,” Tunnacliffe said. “BA histori- Consulting. “We’re looking better than we 2002 1,071 545 cally has tended not to discount its premium used to, that’s for sure.” ‘02 to ‘03: -0.1% + Beginning this year and continuing through 2007, passenger traffic is expected to classes very much. When the load factors are The sun began to shine again in the 2003 1,075 538 increase, according to IATA forecasts. The average annual growth rate through 2007, going up in the premium cabin, it’s interpreted North American airline industry during the lat- ‘03 to ‘04: 4.9% + 2004 1,117 575 including the declines in passenger traffic in 2003, shows positive growth worldwide as a very good sign. ter part of 2003, he said. ‘04 to ‘05: 5.7% + of 3.9 percent, led by the intra-Asia/Pacific region. “Obviously that sort of growth rate is “A lot of things caused people to take 2005 1,171 617 unsustainable in the long term, but it illus- their travel dollars and put them on the shelf ‘05 to ‘06: 4.8% + 2006 1,223 651 AAGR revenue from international travel, they have The Centre for Asia Pacific Aviation is trates that the market is coming back quite for a while,” Hendrickson said. “It would ‘06 to ‘07: 4.2% = 3.9% been recovering more rapidly. also optimistic about the region’s recovery. quickly,” he said. appear in the third quarter, people said, ‘hey, 2007 1,268 685 “In terms of profitability, the Asia/Pacific The Centre said 2003 was a “surprisingly A general economic recovery, led by the you know, SARS is gone, the war is over, the 0 500 1,000 1,500 2,000 carriers are in a good position,” said Serpen. “As good” year with traffic levels close to the pre- United States, has fueled traffic on North economy is back, interest rates are low, job Passengers (millions) far as passenger growth, China is very strong, vious year levels despite the impact of severe Atlantic routes, where many of the major losses are tapering — let’s go out there and do Domestic International Southeast Asia is very strong. I think Asia is very acute respiratory syndrome. If the current European carriers generate a significant what we used to do as a family, as a business, Source: IATA optimistic. The mindset is on growth.” momentum is maintained, the Centre said, amount of their profits, said Tunnacliffe, who as an economy.’” Analysts in the region are also optimistic “double-digit traffic growth (is) assured.” projects the regional industry, with a “fair wind One of the brightest spots for North According to global passenger projections from IATA, recovery is expected this year with about the continuing recovery. For 2004, a “year of massive opportuni- and no major incidents” will return to some American carriers has been on international a large bounce back in 2004 and 2005, followed by a return to more traditional levels of ty,” economic conditions are favorable across level of normalcy in two years. routes. growth through 2007. IATA also projects the average annual growth rate for scheduled the region with consumer confidence high and “To have that market recover is very “In North America to some of the inter- international passenger traffic to be 4.3 percent from 2008 to 2017 and an AAGR of 3.4 I don’t know if the dark times have strong gross domestic product growth antici- important to them,” he said. national regions, not only do the second half of percent in domestic passenger traffic during the same time period. “passed, but somebody turned up pated throughout the region, the Centre said. And, Serpen said, because the major ’03 numbers beat out the ’02 numbers, but the dimmer switch a little bit. We’re With effective capacity management growth, European carriers rely more on long-haul inter- the region’s recovery should stay on track. continental traffic, which is less susceptible to looking better than we used to, Srom projected that it will take 12 to 24 low-cost competition, they have been able to that’s for sure. months for the region to make a full recovery, rebound more quickly than their North American THE HIGH LEVEL ” provided that there are no additional setbacks. counterparts, which depend more heavily on He said the carriers are “becoming leaner and revenues from their domestic market. News Briefs from Around the Globe “If you look at traffic statistics that have meaner” taking steps to succeed in a new Some positives have even come out of vıew been released by different companies, industry environment such as restructuring the last few years, analysts said. Carriers are lead directly to increased revenue. our reservations efficiency and the whether they are Qantas, Cathay or Singapore labor deals, revamping fare structures and opening their minds to new ways of doing Who Airlines, you are seeing volume coming back,” thoroughly examining their product. business, embracing ideas many have resisted Phuket Air The airline will also implement the level of services offered to our cus- said Anthony Srom, Melbourne, Australia- He also said the region is “seeing a nice for a long time such as outsourcing some of Sabre ® AirOps ™ Load Manager and tomers with this implementation,” based transport analyst for Goldman Sachs little rebound in business traffic at this point,” their processes to specialty providers who can What the Sabre ® Qik ® business processing said Kanin Phuvastien, senior vice JBWere. “Load factors are beginning to which bodes well for the yields of major carriers. do them more efficiently and cost effectively. Selected the SabreSonic ™ passenger improve. Generally, you are seeing those signs “I think probably every airline CIO in the solutions. president of Phuket Air. “Sabre solution for its reservations and pointing that recovery is underway. If you look Europe western world now is moving very strongly to Why Airline Solutions is also allowing at the investment community, analysts that “It is slow and painful, but the recovery is get rid of proprietary technologies and move departure control. The solution will more extensive distribution options actually cover the Asia/Pacific airline stocks underway,” said Ian Tunnacliffe, U.K.-based to standard technologies,” Tunnacliffe said. help the airline improve distribution “Phuket Air has experienced excep- are saying they’ve upgraded their forecasts for vice president, industry services at META “It is good news because it will ultimately by our participation in a number to travel agencies, create greater effi- tional growth in the first two years profits, so there’s a bit of an anticipation that Group Inc. “Not everyone is recovering at the lead to lowering of cost and improvement of global distribution systems.” a the recovery should continue.” same rate as everyone else.” of efficiency.” ciency in booking capabilities and of operations, and we aim to improve

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Regional Outlook 2003—2007: Broad Factors Affecting Passenger Growth Trends they also, in some cases, eclipse the 2000 Industry experts say there are several announced plans for their own low-cost carrier numbers, so it’s pretty encouraging,” factors that could send the industry back into within a carrier. Others such as Air New Hendrickson said. the dark. Zealand have revamped their pricing structure Trans-Pacific North Atlantic Within Europe Europe-Asia/Pacific In the U.S. to Latin America sector, rev- “In the last few years, you could call it to offer reduced fares. enues are up about 11 percent. In the U.S. to the ‘constant shock syndrome’ where there According to Srom, to compete with Impact of SARS in 2003 Slow recovery from Continued low-cost Poor outlook for the Japanese Sept. 11 event carrier expansion economy Europe market, the revenue per available seat always seems to be an ‘X’ factor you have to low-cost carriers going forward, traditional air- Continued slow econom- mile numbers have passed 2000 levels. Even be cognizant of,” Srom said. “You have poten- lines should ensure that they are “reexamining ic recovery in Japan Expansion of services Impact of SARS in 2003 Competition from high- in domestic travel, which is still lagging well tially SARS, terrorist activity, continued emer- their networks and the profitability of each between North America Increasing expansion of speed train links Strong and quick recovery and Eastern/Central behind 2000 levels, individual part of North America-Southeast Europe Extended European Union Strong Chinese and Vietnamese passenger levels are those networks (as Asia non-stop services will stimulate traffic World Economic Growth Verses Scheduled growth climbing. well as) examine the between Western and International Passenger Growth (percent change) Expected opening of “Year over year products. Are they dif- Vietnam-U.S. route Eastern/Central Europe we’ve turned the cor- 14% ------ferentiated enough in

ner,” Hendrickson 12% ------their market niche?”

Europe-Middle East said. “Coming from 10% ------Beyond restruc-

Serious short-term political and an environment like 8% ------turing to address the North American-Latin Within Asia/Pacific America/Caribbean military concerns the one we’ve just 6% ------challenge from low- Impact of SARS in 2003 experienced, that’s a 4% ------cost carriers, one of Capacity redeployment by U.S. Continuing expansion of Dubai as carriers leading to strong growth regional hub and tourist destination Strong and quick recovery positive thing.” 2% ------the main themes that Much of this 0% ------could continue to fuel in this route area Emergence of Doha hub with Qatar Continuing expansion of China’s growth, he said, is -2% ------a strong recovery still Economic problems in several Latin Airways international traffic fueled by the burgeon- -4% ------remains on the horizon. American countries Anticipated opening of mainland China-Chinese Taipei direct services ing U.S. economy, which -6% ------“The world has Europe-Africa in the third quarter of 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 too many airlines,” Within Latin America/Caribbean 2003 grew by 8.2 per- Tunnacliffe said. “Any Network expansion and fleet renewal by Passenger Growth World Gross Domestic Product Growth Serious economic problems in key largest African carriers cent — “It has been other industry faced markets more than five years Source: IATA with these sort of Some loss of routes due to Sabena and Creation of off-shoot operations by Swissair bankruptcies since we have seen economic conditions, financially stronger carriers in neigh- economic growth of According to IATA statistics, the health of the airline industry continues to mirror that of the natural reaction Political instability in some key markets boring countries that magnitude.” the world economy. From 1990 to 2003, the growth of scheduled international passenger would be consolida- Source: IATA As the economy traffic has reflected the growth of the world economy as measured by gross domestic tion. Airlines would improves, some of the product. Based on improving economic conditions, IATA predicts an “upbeat” forecast for merge. Some airlines According to IATA, airlines in various regions are expected to recover at different rates due to unique circumstances that affect the local pent-up demand for passenger traffic during the next few years. would go bankrupt. industry. While some areas such as Asia/Pacific are bouncing back more quickly, other regions including Europe and North America will travel is being released. Some would be experience slower recoveries due, in part, to their struggling economies. “Companies are saying, ‘OK, it looks like gence of low-cost carriers, potential fuel price acquired. This is very difficult to happen under the markets have stabilized, we know what our increases that could derail the recovery.” the current regulatory environment that the future looks like, let’s go out and face those Of the potential barriers to recovery for airlines operate in, especially internationally. customers and chase those deals,’” he said. major network carriers, the growth of low-cost But I think we have to see that change, and The region’s airlines have also taken airlines presents the biggest challenge. With we have to see the ability of major airlines to THE HIGH LEVEL some other steps to regain health such as low fares and point-to-point route structures consolidate.” focusing on long-haul trunk routes, aggressive- combined with competitive levels of service Still overall, the future looks bright espe- News Briefs from Around the Globe ly pricing their product, attacking inefficiencies and unique amenities, the entire concept of cially compared with the recent past. vıew and rationalizing their fleets. low-cost flying has changed in the minds of “I’m optimistic,” said Tunnacliffe. “I Still, it will take six to eight quarters of many travelers, sending them aboard those think we’re going to see some quite substan- consistent revenue and earnings growth to airlines that bring the most value. tial changes in the way the industry operates Who staff forecasting and planning system, director for JASG. “We visited several return to some semblance of health, “There’s no doubt that the network car- over the next decade. I think we will see some Jardines Aviation Services Group to efficiently manage its resources at Sabre Airline Solutions resource Hendrickson said. riers as we know them are going to have to rationalization as far as the regulatory environ- What Hong Kong International Airport. management customers thoughout “The industry really needs to show remake themselves if the marketplace contin- ment. We will see consolidations in the indus- some earning power and some revenue ues to move the way it has with the low-cost try. When that happens, the industry should Europe and could see similarities Implemented Asia/Pacific’s first new- Why growth momentum before Wall Street is ever carriers bringing products that are of compara- be stronger. Individual airlines will be more with our operations. After an intensive generation, integrated resource man- “JASG required an efficient and cen- going to recapitalize it,” he said. ble quality into the market with much lower profitable. They will be able to invest more in costs,” Hendrickson said. “They can’t just sit technologies that they’re going to need in the ® evaluation, Sabre Airline Solutions agement suite, including the Sabre tralized staff and equipment planning The Future is Still Cloudy there doing what they’ve always done.” coming years.” a was proven to offer the best-of-breed StaffAdmin ™ employee tracking and system for both passenger and ramp Even with the positive signs, “it seems like Even in Asia/Pacific where low-cost car- customized solution for the require- assignment system, the Sabre ® handling that would enable a move we’re always right around the corner from riers are just beginning to make their mark, the something unforeseen that could potentially traditional carriers are having to respond. B. Scott Hunt and Stephani Hawkins can ™ ments of JASG, which was instru- StaffManager automated staff alloca- away from the current non-centralized be another major setback, or at least the fear Carriers such as Qantas Airways, Singapore be contacted at [email protected] and mental in the contract win.” a tion system and the Sabre ® StaffPlan ™ setup,” said David Clymo, finance of such a force,” Hendrickson said. Airlines and Thai International Airways have [email protected].

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ner,” Hendrickson 12% ------their market niche?”

Europe-Middle East said. “Coming from 10% ------Beyond restruc-

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