Treasury technology in the airline industry: ready for take-off?
Zanders presented a benchmarking study at the IATA World Financial Symposium in Abu Dhabi
Sir Richard Branson once said: “If you want to be a millionaire, start with a billion dollars and launch a new airline.” Although this statement might be an exaggeration, the airline industry has continuously struggled to achieve financial health in recent years. Despite impressive growth rates over the past decades, airlines have (on average) not come close to returning the cost of capital
The disappointing return on capital costs is mainly caused by structural deficits airlines inherited from the days of heavy regulation while, in the meantime, low-cost airlines have completely reshaped the industry The emergence of new players from the Middle East as well as sky-high fuel prices were the most recent ingredient in the current challenges facing the industry.
Together with the International Air Transport Association (IATA), Zanders recently conducted a benchmarking study specifically focusing on treasury technology within the airline industry. The aim of the benchmarking study was to evaluate how technology, a major enabler for efficient treasury operations, is applied within airline treasuries in order to support mastering the key challenges.
In particular, the study investigated whether the trend witnessed in many other sectors, of leveraging technology throughout the whole treasury organization, is also present in airlines. This offers the substantial benefit of streamlining and simplifying the IT landscape while achieving maximum integration.
In total, 56 airlines were surveyed and there was considerable diversity within the sample group with regards to geographical representation and size of the company. The key results were presented by Zanders to airlines and its business partners at the IATA World Financial Symposium, an annual gathering of finance executives. The very demanding business environment has direct implications for the daily work of airline treasuries
Cash is both king and emperor
Forty-seven per cent of the airlines indicated that they don’t have a dedicated treasury management system (TMS) in place. The most widely used TMS in the airline industry is still MS Excel, implying inefficient and error-prone, manual processes. For those who have a system, the treasury modules of the ERP providers (SAP, Oracle/Peoplesoft etc.) are the frontrunners with 38% market share. Of the best-of-breed systems, SunGard is the largest player in the airline industry with 16% of overall market share. None of the other vendors has more than 8% market share, indicating that despite the recent consolidation, the vendor landscape is still relatively fragmented
The survey also looked into several core treasury processes. Cash in the airline industry is not only king but emperor as well, placing cash management very high up on every treasurer’s agenda. There is room for improvement in multiple areas: cash pool structures, used by 59% of the airlines, are predominantly bank-administered. They are often subject to manual interventions and lack control from the customer’s side.
While 89% of surveyed airlines perform cash flow forecasting, only 17% integrate this process into their existing ERP treasury or TMS. The vast majority, 74%, still use MS Excel as their main cash flow forecasting tool External payments, either commercial or treasury, are only in 47% of the cases managed out of the TMS or ERP treasury. Best-in class treasuries aim to integrate all of the above cash & liquidity management processes into their existing TMS or ERP Treasury environment, allowing maximum automation with minimal interfaces.
Managing the risks
Requirements towards risk management are higher at airlines when compared to other industries. This is mainly due to the fact that airlines typically operate in a wide range of countries and regions, resulting in complex foreign currency portfolios to manage Furthermore, commodity price risk, which is mostly fuel in the context of airlines, accounts for up to 40% of the operating costs while the financing structures are often long-term, requiring a tighter interest rate risk management approach.
The survey has shown that these financial risks are often managed outside the existing TMS or ERP Treasury landscape. For example, 54% of airlines who manage commodity price risk don’t have any system support or use MS Excel. Only 14% manage this risk within the existing ERP Treasury or TMS, while the rest rely on specialized standalone systems. This also implies that existing TMS or ERP treasuries do not fully meet the complex risk management needs of airlines
Corporate finance, another core process for airline treasuries, is the least relevant in terms of treasury technology. This is because those activities, such as funding the balance sheet through the capital markets or the supply chain, offer less potential for automation. Technology is often limited to support back-office tasks, for example covenant calculations or headroom analysis.
In terms of bank connectivity, technology has become much more advanced and accessible in recent years. Nevertheless, the survey revealed that less than 10% of the airlines make use of SWIFT, which is typically considered to be best-practice as it offers a single, bank agnostic connection with banking partners.
In order to future-proof treasury operations, sound and robust treasury technology is a key requirement. This benchmarking study has shown that airlines have not yet unlocked their full potential. Therefore, it is very likely that airlines continue to invest in treasury technology in an effort to become more efficient and meet the challenging business requirements in order to (hopefully) disprove Sir Richard Branson’s statement in the future.