Taking a trip to profitability

New information management strategies are helping a beleaguered industry regroup and rebound.

by D.C. Agle

Despite the proliferation of luxury hotels and palatial cruise ships, the travel industry is still faced with a grim economic reality. Travelers demand top-notch service for the lowest possible prices, and they're not afraid to switch brands if it means getting what they want.

The result is a hyper-competitive, $555 billion global industry, where companies try to outdo each other even as they are forced to trim operating expenses to the bare minimum.

"The industry is crawling out from under the rocks it's been under for the last few years," says Henry Harteveldt, vice president for Forrester Research. "9/11 was an absolute meltdown for the travel industry. In its aftermath, there was a lot of trauma and concern about traveling. Then the recession hit, and SARS and the Iraq war."

While all components of the travel business were hit hard, none was sent reeling like the airline industry, where the downturn in demand, new competition from low-cost carriers, spiraling labor costs and surging fuel prices rode into the friendly skies like the four horsemen of the apocalypse. U.S. carriers are expected to report nearly $2.9 billion in losses in 2004. Cumulative industry losses have topped $30 billion since 9/11.

Empowered consumers
There is good news on the horizon. The Air Transportation Association trade group predicts passengers will board aircraft 685 million times in 2005, breaking the previous record set in 2000. As a result of this growth, a similar upturn can be expected in other areas of the industry as well. But these are not the same business and leisure travelers of a few years ago.

"We are a price-based society, and the travel consumer is now more empowered than ever," says Harteveldt. "In 2004, 29.4 million U.S. households bought $53 billion of leisure travel online. In 2005, we expect 32.1 million households will use the Web to buy nearly $63.6 billion worth of leisure travel."

"Buying travel is a combination of emotion and logic," adds Harteveldt. "And even though only 24% of the leisure market is brand-loyal, these are the folks who tend to travel more and are more likely to purchase premium products and services. Travel companies will not survive without creating, identifying and sustaining a relationship with their most profitable customers."

Informed enterprises
How does a travel business do that with the relatively small percentage of its customers who are responsible for a disproportionate amount of the company's profits?

"Here is a little example," says Ian Tunnacliffe, vice president of industry services for META Group. "My frequent business travel usually allows me to be seated in an upper-class cabin. But on this one occasion, my family and I were on vacation, and I certainly was not going to buy four business-class tickets."

The British Airways flight was uneventful for the Tunnacliffe family until the plane was airborne and the cabin service director made his way down the aisle. "I asked for a red wine," says Tunnacliffe. "He actually went up to first class and brought back a bottle and served me a drink from that. He said to me very quietly, 'We understand you usually fly in a different cabin, but we thought with the compliments of the airline that you would like to have something that perhaps you were more accustomed to.'" The reason for the personalized treatment? An enterprise data warehouse and the judicious use of CRM applications.

"Data warehousing allows you to do things you couldn't do with a mainframe system," Tunnacliffe says. "With good data warehousing, frontline staff—the ones that interact with the passengers—can see and respond as a situation warrants. If a valuable frequent traveler has been inconvenienced or otherwise distracted, then action can be taken now to remedy or at least improve the situation."

Improved profitability
Engaging proactively with your most well-heeled clientele is of critical importance, but airlines are using enterprise data warehousing for much more than performing analysis on preferred customers. They are working to improve the productivity of sales and distribution channels, optimize business by centering on the most profitable routes and markets, and implement initiatives around proactive maintenance of assets to generate clear and quick savings in capital expenditures, labor deployment and fleet efficiency.

What does that mean in the real travel world? Service providers now have somewhere to turn when previously unpredictable developments like surging fuel prices or poor weather conditions impact their bottom lines. Data warehousing allows the kind of predictive analysis that can determine, for example, what an airline's fuel needs are likely to be and make recommendations to alter purchase practices to take advantage of price fluctuations. Once the best fuel options have been attained, reservation analysis can maximize the number of people on each flight. Similarly, cruise lines, airlines and other areas of the industry can more profitably reroute customers during ice storms or hurricanes if they can quickly identify their best customers and calculate the profitability of each in order to prioritize who is reassigned.

While fluctuating fuel costs and passenger counts are obvious business opportunities that must be exploited today, hidden costs will surface in the future. "I was told a story by one airline executive that uses Teradata that two employees were having lunch with some airline executives when someone suggested they should look into movie licensing fees," recalls Monica Smith, Teradata senior travel and transportation consultant. "Within the hour their data warehouse was able to identify $400,000 in overpayments for licensing fees on equipment that was inoperable. Close to a half-million saved just like that. Just imagine what the future will bring."

Breakthrough technology
Travel experts like Smith are doing just that—imagining the future of an industry that requires instantaneous solutions to its somewhat Byzantine data management needs. One breakthrough technology that promises to yield significant returns on investment and enable complex decision-making in near real-time is radio frequency identification (RFID).

The most immediate and visible area where RFID can have a positive impact is also one of the travel industry's biggest sore spots—baggage handling. The International Air Transport Association estimates that 1.5 billion bags are handled by air carriers worldwide per year. That is 1.5 billion opportunities for carriers to have a passenger walk away either happy or irritated and inconvenienced by misplaced luggage.

RFID for interline baggage management promises improvements in handling accuracy in the range of 15%, yielding significant improvements in luggage service and recovery and reductions in replacement costs.

What role could RFID play in the U.S. Transportation Safety Administration's enhanced baggage inspection policies?

"Imagine knowing exactly where a bag is at all times in the system," says Peeter Kivestu, senior travel and transportation consultant for Teradata. "If a passenger does not board a flight, their baggage can be identified and unloaded quickly—less inconvenience to the passengers and more security and efficiency for the airline."

Streamlined logistics
But as valuable as these high-profile, passenger-friendly issues can be, RFID's greatest potential lies behind the scenes. "Airline maintenance, repair and overhaul (MRO) will be transformed by RFID," said Kivestu. "Mechanics are already under considerable pressure to minimize their spare parts inventory and keep the assets in the air, which is where they make money for the airline, as much as possible."

Interchangeable parts on commercial aircraft and other modes of transportation are replaced regularly, representing a huge ongoing logistical problem for carriers large and small. Studies show that between a quarter and a third of out-of-stock occurrences are caused by poor on-shelf management, regardless of supply chain problems. Those are substantial hits to the bottom line in terms of highly skilled labor and expensive inventory. The logistics problem extends even further to the management of linens on a cruise line, food service equipment at a resort and safety equipment in nearly every area of the industry.

Through RFID technology, travel service providers will be able to streamline the process of shipping, receiving and inventorying expensive parts, tools and equipment. The resulting reduction in manual labor and operating costs and increase in data accuracy and integrity will enable airlines, cruise lines and other carriers to enjoy significant cost savings.

Safer world
CRM and logistics aside, two pressing issues for the industry are fraud detection and security, both of which go hand-in-hand.

Having a single repository of information, complete with historical context and trend analysis, enables travel companies to more readily identify fraudulent behavior, which undermines profitability. One major airline has developed an application that automatically roots out fraud related to group bookings. It tracks bookings by agent and itinerary information to identify groups of 10 or more travelers that have not complied with advance deposit regulations. Other, similar applications target frequent flyer fraud, fictitious bookings, false lost baggage claims and more.

If historical and real-time customer data yield such valuable insight for fraud detection, imagine the benefits related to security. Especially in a post-9/11 world, travel companies need the agility to respond quickly to requests for information from governmental agencies. Many airlines are working to develop or already have in place comprehensive databases that are regularly mined for suspicious ticketing patterns.

For instance, a full passenger name record (PNR) includes everything from when a ticket was purchased to how it was paid for and when it was used. A PNR showing a ticket purchased with cash or a fraudulent credit card number one day in advance of a one-way trip between New York and London would raise an alert, as this fits the profile of an increased security risk.

Ensured success
This type of data mining and decision-making—indeed, all of the decision-making mentioned here—only works when there is enough historical information to identify trends and when the data is fresh enough to allow officials to react quickly to a developing situation. A real-time enterprise data warehouse satisfies both requirements and helps drive the travel industry toward efficiency and profitability. T

D. C. Agle is a science, aerospace and health writer whose work has appeared in Hemispheres, Smithsonian Magazine and Sports Illustrated for Kids.