Aviation 2010: Achieving efficiency and differentiation in turbulent times

Airlines and airports face escalating costs, revenue growth constraints and an increasingly dissatisfied customer base. By offering passengers a highly differentiated experience and simultaneously enhancing its operational efficiency, the aviation industry can position itself to become and remain profitable in a volatile business climate. To accomplish this, we believe the industry should adopt a new business model that combines distinctive customer services, a flexible infrastructure and greater collaboration, both among partnering airlines and between airlines and airports.

Introduction
The world of commercial aviation has changed dramatically during the past few years. If anticipated trends come to pass, these changes will continue – and in a fashion likely to make the business cli-mate even more difficult for airlines and airports.

Challenges in operational costs and increased competition

• Jet fuel prices more than doubled between 2001 and 2005, and most analysts believe prices will remain volatile for the foreseeable future.¹
• Global public- and private-sector spending on anti-terrorist goods and services reached US$59 bil-lion in 2006 and is expected to virtually double by 2010.²
• Low-cost carriers now account for 16 percent of all flights worldwide, compared with just six per-cent in 2001.⁴ The number of low-cost airlines continues to increase, and some are beginning to enter longhaul markets.

Challenges regarding differentiation and the customer experience

• The airline industry earned a lower customer satisfaction score than all but two other industries in 2006, according to the American Customer Satisfaction Index.⁴
• Low-cost carriers surpassed the traditional network airlines in at least one major customer satis-faction survey by J.D. Power and Associates.⁵
• The global average rate of self-service check-in via kiosks is expected to be 38 percent by the end of 2007 and is forecast to reach 50 percent by 2008, a shift that will transform passenger process-ing and give customers much greater control over their journeys.⁶

All of these challenges point toward the need to develop a new business model for the aviation indus-try. The current business model is based on a trade-off between cost and quality of service. But re-search by IBM Global Business Services shows that, to improve their customer image and help increase their profitability over the next three years, leading airlines and airports will likely need to adopt a hy-brid business approach, which we have called the Smart Aviation Model.

To read the full report, download the PDF file at the top of this page.

References
¹ "Airline Cost Performance." IATA Economics Briefing No. 5. IATA.org. July 2006. Citigroup Investment Research. "Quarterly Oil Price Outlook 2004-09E." HSBC Global Research. "What's Down With the Oil Prices: Europe?" January 24, 2007.
² Stoller, Gary. "Homeland security generates multibillion dollar business." USA Today. September 10, 2006.
³ "Aviation growth hits all-time high." OAG.com. May 8, 2007.
⁴ "The American Customer Satisfaction Index." University of Michigan. 2006.
⁵ "2005 Airline Satisfaction Index Study." J.D. Power and Associates. March 14, 2005.
⁶ "2006 Airline IT Trends Survey." SITA. 2006.