Korean Air gains altitude by leveraging its greatest asset: information.
by David Baum
The financial crisis that began rippling through the global economy in 2008 placed enormous pressure on the airline industry. Rising capital and operational expenses coupled with lower demand for domestic and international flights forced many airlines to seek new ways to maintain profitability. According to reports from the International Air Transport Association (IATA), the global economic recession caused airline revenues to drop by US$81 billion in 2009, leading to losses of almost US$10 billion.
Unlike many airlines, which were slashing costs and service to stay in the air, leadership at Korean Air saw the downturn as an opportunity to transform the business. Investments in infrastructure and automation would give the company an edge when air traffic picked up again. In a bold move that involved retooling all major information systems, IT leadership at the Seoul-based international carrier has systematically replaced or upgraded enterprise systems to help set a new course for the business.
Three years into the extensive four-year project, the market is only now catching up to savvy decision-making at Korean Air. Global traffic is back to prerecession levels with load factors nearing 80 percent and profits improving. Asia Pacific is powering the upturn with US$2.2 billion in profit and a growing market that now comprises one-third of all aviation worldwide, according to IATA reports.
Korean Air is a big part of that surge, thanks to its new Oracle technology–based information systems that enable managers to analyze ticket sales in real time, calculate revenue within two hours of a flight’s departure, and determine the profitability of the flight—often before it reaches its destination. In addition, Korean Air’s new aircraft and engine maintenance system allows production personnel to instantly create engine maintenance plans against flight schedules and to analyze maintenance costs within three hours.
“The function of IT is to help the business drive innovation,” reports SangMan Lee, senior vice president and CIO at Korean Air. “To position for the future, we knew we needed to expand our market share and enhance profitability, even as we differentiate our level of customer service. As technology advances, it gives us more opportunities to leverage information.”
After conferring with senior management, Lee saw his charter clearly: build a new software platform to gather enterprise data and share it with all the lines of business in a consistent way. To arrive at that destination, Lee’s team decided to implement an Oracle enterprise resource planning (ERP) system to integrate every aspect of Korean Air’s back-end operations.
An internal enterprise architecture planning study had revealed inconsistencies in master data for accounting and income management and a lack of integration between activities such as account settlement, passenger and cargo bookings, and aircraft maintenance. This made it difficult to complete financial tasks quickly and efficiently, meaning managers did not have timely access to critical information such as airline income and expenditures.
Oracle took charge of project management, implementation, and deployment of the new ERP platform, including a revenue accounting and managerial accounting system, using Oracle Business Intelligence Suite and Oracle E-Business Suite 12 (see sidebar “Implementation: Success Through Alignment”). Since then, the team has systematically revamped finance, procurement, materials management, facilities management, spare parts manufacturing, and aircraft maintenance, resulting in a dramatic reduction of the financial close cycle time and the integration of the company’s e-ticket database to deliver advanced profitability analysis.
“Business divisions within the company are using the ERP data, and management relies on the data to make critical business decisions,” says SookHyun Cho, general manager of IT at Korean Air.
As South Korea’s national airline and largest carrier, Korean Air operates a fleet of 140 planes, handling passenger and cargo transport throughout Korea and 40 other countries. Aircraft maintenance at Korean Air is a massive operation requiring thousands of work hours and approximately 12,000 components moved through inventory every month. Since 1980, Korean Air’s maintenance department had used a legacy maintenance system to plan and manage maintenance activities. But as newer aircraft began to employ modern IT standards and functionality (graphics and XML data, for example), the existing system could not keep pace with innovation in the industry.
The slow calculation of maintenance costs held up the completion of other financial tasks, such as month-end account settlement. Finally, the legacy maintenance system did not provide detailed information about required materials at the time purchase requests were made. Lack of integration with the core ERP systems limited visibility and led to inaccurate purchase requests.
To resolve these issues, Lee and his team decided to replace the legacy maintenance system with Oracle Complex Maintenance, Repair, and Overhaul and to integrate that application with several other modules of the new ERP system. Lee knew that integrating flight schedules and maintenance planning data would let managers calculate maintenance costs more quickly.
Today, the Oracle Complex Maintenance, Repair, and Overhaul system enables Korean Air to plan yearly, quarterly, monthly, weekly, and daily aircraft and engine maintenance against flight schedules. It not only supports regular repair and monitoring of the Korean Air fleet, but also integrates with the new financial system to deliver a more complete view of operational costs.
“We are seeing remarkable improvements, especially in the visibility of financial and maintenance data,” says GyooYeon Joo, managing vice president of maintenance planning at Korean Air. “Thanks to the increased accuracy of the maintenance planning operation, Korean Air has reduced its cost for materials and labor.”
According to Cho, the biggest benefit to customers is the timely turnaround of flights. His team can determine necessary maintenance while an airplane is in the air, so mechanics are ready to service the plane when it lands. This has minimized flight delays and enabled Cho’s team to support more accurate maintenance plans, allowing managers to simulate maintenance schedules and keep necessary resources on hand to meet maintenance deadlines.
“We achieved significant improvements in preventive maintenance and can better plan the capacity of human resources and material resources in advance. We always have the proper inventory of parts, components, and materials on hand,” Cho says of the system. “This will reduce the cost of the maintenance operation.”
Like most large airlines, Korean Air must make significant capital investments to expand, such as the recent purchase of six Airbus A380 jumbo jets for international service. At the same time, the company’s margins are constantly affected by budget carriers that are moving into new markets. This raises critical questions: How much can Korean Air management reduce fares without pricing the company out of business? How quickly can managers gauge the impact of network planning changes?
Answering these questions requires knowing the exact cost of each flight, a metric that has historically been very difficult to obtain. Korean Air’s new revenue management system, integrating data from line-of-business applications with core ERP, helps managers to answer these questions more quickly than ever. For example, they can calculate the exact cost of each flight within two hours of departure and analyze flight profitability within three hours. This allows them to determine precisely when—and how much—they should increase or decrease flight costs, schedules, and routes, often while the planes being analyzed are still in the air.
Managers can also track revenue more precisely and gauge profitability based on the passengers traveling on each flight. This data improves network-planning activities and ultimately boosts sales performance. Other Oracle applications help the catering department to create route-specific menus based on the demands of each region. These costs are finalized the moment in-flight meals are stored on board the aircraft, reducing catering and inventory costs while minimizing waste.
Airlines are required to follow precise rules of revenue accounting to comply with domestic and international regulations. This includes filing regular ticketing and booking reports, overseeing a complex seasonal pricing system, settling accounts among affiliate airlines, and reviewing data about in-house and external transportation.
This big reporting job is getting easier as Korean Air makes decisive headway with enterprise technology. The airline processes roughly 5 million transactions every month, 99 percent of which are electronic tickets. The integration between the e-ticket system and ERP allows managers to easily calculate profitability by route, nation, or destination, inbound versus outbound flight, class of service, and other variables.
The system performance and profit data, as well as market trend insight, can be combined to simulate air traffic for network planning. “By analyzing diverse cost data we can find areas of improvement where we can further cut costs,” says Lee. “We also combine market data and competition data with sales performance data from the ERP system to create more-accurate simulations for network planning. Previously we did not have a dynamic tool for this type of simulation.”
Korean Air’s Oracle technology–based maintenance system went live in 2011, and the new Oracle financial modules have been in place since 2009. Collectively these deployments have been a huge success. “Korean Air is growing fast and positioned for a strong global presence,” adds Lee.
IT integration and standardization at this level is unique in the airline industry, which is why many other airlines have visited Korean Air to learn from its success. Industry insiders are especially impressed with how data is accumulated and shared for aircraft maintenance and revenue accounting.
“We are receiving lots of inquiries from other airlines that want to emulate what we are doing, including Cathay Pacific, Aero Mexico, and Emirates,” concludes Joo. “We are now poised to enjoy the benefits of an integrated enterprise software system. Our systems are interconnected, and we have streamlined communication among the various lines of business.”
David Baum is a freelance writer specializing in business and technology.
Success Through Alignment
The scope of Korean Air’s enterprise software project was the most comprehensive ever attempted in the airline industry. CIO SangMan Lee attributes the company’s success to excellent collaboration between the business function and the IT function. “In order for an IT project of this scale to be successful, you need not only ownership from top management, but also tight collaboration from the working-level people in each line of business,” he states. “We have achieved this remarkably well at Korean Air.”
Korean Air worked closely with Oracle Consulting on all aspects of the enterprise software project, forming an executive steering committee with stakeholders from both companies. The enterprise resource planning (ERP) task force included a senior business executive from each area along with a senior executive serving as the business/IT coordinator. The team spanned several countries and a dozen business units. The project stakeholders had to manage data across finance, procurement, and different sales channels, and also overcome diverse language and cultural barriers.
To implement dozens of software modules, Oracle recommended a gradual system launch that divided the Oracle E-Business Suite deployment into five phases over a four-year period. The first phase involved implementing systems to manage finance, purchasing and materials, facilities, and manufacturing. The second phase involved rolling out new systems to the catering business unit. Phase three entailed deploying new revenue accounting and managerial accounting systems. The final phase focused on airplane maintenance and engineering.