When V K Mathews was general manager of IT at Dubai-based Emirates airline in the 1990s, he saw a clear gap in the world of aviation technology. The carriers’ demands were not being met by global technology players, let alone local IT companies, so when Mathews led the team to set up Emirates’ Mercator, a strategic business unit (SBU) aimed at providing technology services to other airlines, his ambition to fill the gap he spotted years ago grew even stronger.
The result? The birth of IBS Software. Mathews established the product development company in 1997 to cater to worldwide aviation and transportation industries, and, since then, he has not looked back.
“Airlines all over the world were still using their legacy technologies when I had left Emirates to set up IBS. Today, we can say with much satisfaction and confidence that over these years our company has changed the way airlines are carrying out their fleet and crew management, passenger reservations, accounting, cargo management, etc to get optimal operational and cost efficiency,” says the executive chairman, who was the youngest GM from Asia at Emirates when he decided to leave the Gulf airline. We meet him in the sprawling, green IT complex Technopark located on the outskirts of Kerala’s capital, Thiruvananthapuram.
Emirates continues to invest in personnel, technology and infrastructure to keep its competitive edge
The walls of the meeting room are dotted with photographs of historical personalities, ranging from American inventor Thomas Edison to Indian politician Mahatma Gandhi and English social reformer Florence Nightingale. Mathews says the pictures act as inspiration for him and his team to become the preferred technology partner for global airlines such as Etihad Airways and Lufthansa.
“The IT industry globally is a $5 trillion industry. As, against this, the entire aviation industry was only about $700bn in 2018. The IT operation of the airline industry accounted for a smaller share of it. So, the IT business of airlines was a small pie for the IT industry, and airlines mostly had to develop their IT technologies in-house back in the earlier days.
“But the airline industry required advanced technology to manage the highly complex but most crucial operations such as passenger and crew management, flight operation management, cargo management, etc. to drive efficiency in the operations and make huge savings on their costs. This is the only way for the airline industry to keep growing at the current rate of 4-5 percent,” says Mathews.
While IBS has no plans to expand its operations to other industry segments, it plans on bringing more innovative products to maximise efficiency levels.
Dubai International Airport will adopt the next generation technology to harness its capabilities
In order for airlines to keep up with the current growth pace of technology, they need to invest says Mathews.
“Investments are done by companies like IBS – three to five percent of their revenue annually to sustain and ensure the growing pace of the industry. Spending less than this will lead to them acquiring flab over time, slowing down their growth,” he says.
Financial constraints
Their growth has already slowed down. Leading airlines in the Middle East have reported losses or declines in profit in the last few quarters, with Emirates having reported a 69 percent year-on-year decline in profit for the 2018-2019 financial year, while Etihad posted a third consecutive annual loss in excess of $1bn in calendar year 2018. Many airlines in the Middle East have also posted negative air passenger traffic growth in recent months.
“Middle East airlines have been facing headwinds for some time now. This is because of a host of reasons. The geopolitical and socio-economic tensions in and around the region are adding to their troubles. A major reason for the slowdown in the scorching pace of growth of the leading Gulf-based airlines, such as Emirates, Flydubai, Etihad and Qatar Airways, is the fast changing dynamics of the aviation-travel industry today. To understand this, one has to understand the backdrop in which the leading Middle East-based airlines, especially Emirates, were able to achieve the phenomenal growth they had for over a decade until 2016-2017.
“Their business model depended on taking passengers and cargo from nearby regions – India, African countries, etc – and connecting them to all parts of the world. The geographic centrality of the region [Middle East] helped airlines like Emirates to optimise this business model to its full potential. Besides, no airline in the world would have dared to do what Emirates did in order to implement its growth strategy – going for a massive fleet expansion by ordering about 200 Boeing 777s and another 110 or so Airbus A380s (in their early growth phase). They have flights originating from and returning to Dubai from all parts of the world.
IBS is a leading provider of modern IT solutions for the travel, transportation and logistics industries
“This has helped Dubai to emerge as the largest globally connected hub. As many as 1 million Indians transit Dubai every month. Similarly about 700,000 Indians transit Saudi Arabia every month for various destinations.”
Mathews says Gulf carriers are losing passenger traffic from destinations such as India as more international and Indian carriers launch direct flights to Europe and the US from various Indian cities, bringing down airfares significantly. “Currently, a Kochi-Europe ticket costs double that of a Bangalore-Europe ticket as the flight from Kochi to Europe is via Dubai,” he says.
While Gulf carriers were experiencing fast growth, they also acquired some “flab”, Mathews says.
“During this time, airlines all over the world had been continuously resorting to continuously cutting down on their operational costs by spending on technology.
Future strategy
Mathews says that Middle East airlines will have to follow a three-pronged strategy to regain their past growth performance: firstly, they have to undergo a significant amount of cost rationalisation by spending on technology; secondly, airlines such as Emirates will have to look at retaining their status as differentiators in providing travel experiences and, thirdly, they have to introduce aggressive social media-based marketing strategies to attract millennial travellers.
Mathews is helping companies and organisations maximise their efficiency and manage their growth
“If Emirates has to remain an endearing airline, it has to get the youngsters to fly with them. But the question is whether millennials are travelling for the seat or the destination. Various trend studies say youngsters go by what their friends recommend. So airlines have to use social media aggressively to attract the new age travellers,” he says.
Despite the sustained growth in air passenger traffic globally, why do airlines periodically go bust in many countries? In India, two airlines – Kingfisher and now Jet Airways – were grounded in a short span of three to four years.
“The airline industry – the travel and transportation industry – has been growing at 4-5 percent annually in the last several years, and is projected to grow at similar pace in the coming 10 year-period (as per the core user group of airlines and other related agencies). The travel industry globally is estimated at $8 trillion, which is about 9.5 percent of (global) GDP. It is projected to grow to $10 trillion – 10 percent of global GDP – by 2028. This means $1 out of every $10 spent is on travel. With further expansion in GDP, this sector is only going to grow further,” Mathew says.
“Occasionally these blips [airlines going bust] will happen. They are mainly linked to country-specific or global developments,” Mathews believes.
In India, he says irrational competition is the major cause of financial strain on airline operators.
“The yield per RPKs (revenue passenger kilometres) has been dropping to unsustainable levels in recent years. As against the global average airfare of $103 per flying hour, the Indian average is just $40-$50. Besides, some investors who did not have enough knowledge about the aviation industry also started airlines.”
Etihad Airways was the most punctual Middle Eastern carrier in the first seven months of 2019
After working for Emirates for 15 years, Mathews still has a strong connection to the UAE, with IBS having offices in Dubai and Abu Dhabi, meaning he travels to the emirates on a regular basis.
“I am connected to Dubai, [am] passionate about aviation and grateful to Emirates,” Mathews says.
“Besides, Dubai is a great place to do business. Most of my business meetings take place in Dubai as people love to travel to Dubai.
What he hopes to see, however, is Indian airlines competing on the global scale, in the same way that Emirates has done.
“Airlines in India have huge potential to emerge as global players if their business model is right,” he says, adding “I understand the airline industry well and I am confident that I can make a difference”.
Regional outlook
Middle Eastern carriers are expected to report an $800m net profit in 2019 (up from a weaker $600m in 2018). The expected net profit per passenger is $3.33 (1.2 percent net margin). The region has been challenged by the earlier impact of low oil revenues, conflict, competition from other ‘super-connectors’ and setbacks to particular business models, leading to a sharp slowdown in capacity growth (after more than a decade of double-digit growth, passenger capacity growth was halved to 6.7 percent in 2017). The region reported 4.7 percent capacity growth in 2018 and is expected to slow to 4.1 percent in 2019, which together with restructuring is helping to generate a recovery.
Information courtesy of the International Air Transport Association (IATA)
Cautious optimism
Airlines heading for a decade in the black
The International Air Transport Association (IATA) forecasts the global airline industry’s net profit to be $35.5bn in 2019, slightly ahead of the $32.3bn net profit in 2018.
Highlights of expected 2019 performance include:
- The return on invested capital is expected to be 8.6 percent (unchanged from 2018)
- The margin on net post-tax profits is expected to be 4 percent (basically unchanged from 3.9 percent in 2018)
- Overall revenues are expected to reach $885bn (+7.7 percent on $821bn in 2018)
- Passenger numbers are expected to reach 4.59 billion (up from 4.34 billion in 2018)
- Cargo tonnes carried are expected to reach 65.9 million (up from 63.7 million in 2018)
- Slower demand growth for both passenger traffic (+6 percent in 2019, +6.5 percent in 2018) and cargo (+3.7 percent in 2019, +4.1 percent in 2018)
Lower oil prices and solid, albeit slower, economic growth (+3.1 percent) are extending the run of profits for the global airline industry, after profitability was squeezed by rising costs in 2018.
It is expected that 2019 will be the 10th year of profit and the fifth consecutive year where airlines deliver a return on capital that exceeds the industry’s cost of capital, creating value for its investors.
“We had expected that rising costs would weaken profitability in 2019. But the sharp fall in oil prices and solid GDP growth projections have provided a buffer. So we are cautiously optimistic that the run of solid value creation for investors will continue for at least another year. But there are downside risks as the economic and political environments remain volatile,” said Alexandre de Juniac, IATA’s director general and CEO.
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