13 December 2001
This year has undoubtedly been the airline industry's annus horribilis, but there may be worse to come. David Arminas looks at how airlines can begin the long climb upwards again
One of the toughest jobs in the procurement profession as the year comes to an end is in the airline industry, where major carriers are fighting to fill their seats amid worsening economic conditions.
It's been tough all year as passengers became an increasingly rare commodity. The final blow, of course, came on 11 September, an event that spelt disaster for the airline industry's financial figures.
Before this year, catching a plane in the US had been akin to getting on a bus. But a recent survey from marketing and research company Yesawich, Pepperdine and Brown showed business travellers are now increasingly likely to drive rather than fly.
A further indication of how bad the global situation has become is in the annual corporate travel survey from the International Air Transport Association (IATA), published in November.
It says most frequent-flyer passengers believe it will take a year for business travel levels to return to normal. Around half of these think levels will return in six months. But 14 per cent say it will stretch out for at least two years.
Before 11 September, 35 per cent of respondents in the IATA survey believed that business travel would increase within the year. After 11 September, that "cautious optimism" dropped to 10 per cent.
Many airlines will be asking themselves if they have even a year to turn their financial situation around. Time has already run out for Swissair, Sabena and Canada 3000.
Airlines will have to pull the stops out to save money in 2002 and the meeting at KLM headquarters of the e-procurement heads of nine major airlines was a good start.
Strategic thinking will be essential in all purchasing areas and it must be backed up with some fancy tactical footwork to save the millions of pounds necessary to keep many of the national carriers flying for the next several years.Best practice
As one airline executive at the KLM meeting said, best-practice procurement has become the buzzword in their department - that is why they attended it in the first place.
Understanding best practice will come only from sharing information in the belief that the industry will be stronger for it. In fact, the airline industry has a good record of sharing already, according to Jan Witsenboer, vice president and chief procurement officer at KLM, in an exclusive interview with SM at the KLM headquarters.
Indeed, KLM appears to be showing the way for airlines to develop an understanding of best practice. As long ago as last March, the Dutch airline, which has seen a 15-20 per cent drop in passengers since 11 September, reorganised its procurement department and sought best practice models. Every two months they now have a procurement council meeting of all purchasing managers, often attended by the chief financial officer.
KLM is in good shape to ride out the slump in passengers, insists Witsenboer, as only those companies with good cash flow - KLM has around £900 million (d1.4 billion) - will survive. The real issue will be where to invest that cash for a return on their investment, and that includes supporting their marketplace Aeroxchange.
The present tight financial situation is focusing minds on a very simple equation - if the exchange doesn't deliver on its promises, then it is doubtful the airlines will give them more cash.
Witsenboer believes the industry is not talking years but months for some reorganisation among airlines and exchanges. He reflects the private opinion of many of the e-procurement heads at the KLM meeting.
Admittedly the exchanges have not been around for long, so it is early days for return on investment. Angelica Jarnaker, e-sourcing manager at KLM, belives the exchanges haven't really benchmarked their services yet and they could learn a lot from their clients' activities. But in the present economic climate, the nine airline shareholders of Cordiem and 13 of Aeroxchange are in no mood to live on promises of return on investment.
As 2002 progresses, there will likely be tough talking among airlines and exchanges about improving service for shareholders. There is plenty of goodwill on the part of the exchange operators. They are willing to adapt to their clients' needs. But whether this will be enough to keep money rolling in remains to be seen.