The New Reality for Customer Engagement
Of all the mainline domestic carriers, Alaska has been the most bullish on technologyand results seem to indicate that its strategy is paying off. Alaska says that about a third of its revenue comes from its Web site, compared to more than 60 percent for discounters such as Southwest and JetBlue, but just 15 percent, or so, for large airlines such as Delta and American.
Thanks primarily to Web ticketing and stingier policies regarding travel agency commissions, Alaska, which is headquartered in its hub city of Seattle, has shaved off about $60 million in distribution and selling expenses since late 2001. Additional savings are expected from Alaska's reengineering of its computer architecture.
Alaska is also heavily promoting a technology to the lower 48 states that it developed in Juneau: The technology uses global positioning satellites to land in bad weather. In January, the Federal Aviation Administration gave Alaska the okay to use the system at California's Palm Springs International Airport, but the carrier hopes to spread the technology to other airports in the next couple of years. The airline claims that the GPS approach, which so far it alone is using in the U.S., would have allowed it to land 21 of 24 Palm Spring flights that were diverted, cancelled or delayed last year.
Thanks to such initiatives, Alaska has become the lowest cost U.S. network carrier (10 cents per seat-mile versus 14 cents for Delta, for example) and the most profitable, with an operating margin of 6.9 percent in the third quarter of 2004.
Alaska will never be a discount carrier, says e-commerce staff vice president Jarvis, because its hub activities are too costly and much of its business comes from companies such as Microsoft Corp., Boeing Co. and Hewlett-Packard Co., which require flexibility in the form of late bookings, first-class seats and the ability to change plans. "But philosophically we're trying to deploy a low-cost carrier's architecturecost control, quick turns and operational simplicitywhile we want to provide a high level of service and enjoy a revenue premium because of what we do," says Jarvis.
"Our model is companies in other industries, such as Target, Nordstrom, Starbucks and Costco, that are able to drive value at a higher revenue point."
Widespread computerization is now three decades old at some industries, and as many as four to five decades in others. Yet the network carriers' lack of automation is, unfortunately, their most salient characteristic, experts say.
What other industry, for instance, would allow its most important employees to carry around manuals, maps and related documentation, the way pilots do, to perform jobs that are generally routine but at times require split-second thinking?
With so many essential safety rules governing every flight, this paperbound system severely slows down the pace of a business that makes money only when the planes are flying.
The benefits of jettisoning this old-fashioned approach have been aptly demonstrated by JetBlue Airways. The five-year-old discount carrier has been so stingy that its cost per seat-mile is more than a penny below industry-standard Southwest.
As with so many aspects of its business, JetBlue, a start-up with no legacy technology to reinventin fact, 75 percent of its information systems is devoted to new projectsis in the enviable position of being able to reexamine every feature of its operations before committing to a system. As a result, the carrier made some radical cost-saving decisions, such as creating a virtual call center with hundreds of agents working out of their homes.
But it was the situation in the cockpit that needed the most attention, because what went on in the cockpit slowed down operations, and that cut into potential revenue. So the airline equipped pilots and first officers with laptops and access to the Web to retrieve manuals electronically, perform load calculations, submit airplane data and ease flight clearances and updates. This speeds turnaround time by as much as 15 or 20 minutes, says Todd Thompson, JetBlue's vice president of IT.
For the large carriers, it would take more than a paperless cockpit to get planes back in the air quickly, although that would be a good start, experts say.
The problem is that, in order to manage many connecting flights and not inconvenience passengers too greatly, these carriers generally stack arrivals and departures in peak periods. That results in long aircraft turnaround timesplanes can sit for three or four hours on the tarmacwhile passengers and baggage must be moved from one side of an airport to another, and traffic congestion builds up.
Productivity necessarily falls and labor costs rise as manpower expenses are driven by how long an aircraft sits idle at the gate.
To mitigate this, while not completely replacing their business model or adopting the rules of low-cost airlines, the network carriers need to shift to so-called rolling hubs, says Tom Hansson, a Booz Allen vice president who specializes in airlines. This approach involves eliminating rush-hour connecting flights in favor of a continuous all-day schedule of arrivals and departures designed to meet the needs of nonstop passengers rather than those of the connecting flyer; the latter, after all, provide about 45 percent lower revenue per seat-mile than do point-to-point travelers.
In other words, connections might be lengthier, but airline operations would be sped up, thus enabling the carriers to get more of their planes in the air with more profitable customers in the seats. To make this work, Hansson adds, the airlines would have to invest in technology to improve scheduling, compress baggage handling and speed up airport logistics.
"The airlines schedule flights to arrive and depart in peaks to provide effective passenger connections," says Hansson. "The result is low labor and aircraft utilization, and a system structured around the needs of the least profitable customers. By redesigning the network around the needs of the local passengers, making connections a by-product of the operation, it's possible to nearly halve turnaround times, increase aircraft utilization, reduce congestion, and significantly improve labor productivity."
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