Lufthansa Group's Journey Toward Modern Airline Retailing
Lufthansa Group discuss its journey toward Modern Airline Retailing. Dr. Jost Daft, Head of Order Transformation at Lufthansa Group, covers the current industry landscape, preparedness for transformation and foundational strategies for implementation. He addresses anticipated challenges and explores future perspectives on order management.
Full Transcript
Emcee: Good afternoon, please welcome Head of Order Transformation, Lufthansa Group, Dr. Jost Daft.
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Dr. Jost Daft: So this transformation that I will talk about a little bit is, I would say one of the biggest transformation programs that Lufthansa Group has run for a while and will run for a while. This is basically about replacing our PSS and all the legacy technology around the PSS. And in the next few minutes, I want to show you a little bit of why are we doing this, why are we so crazy to start transformation and also what is this about and how do we do this?
So first of all, the question is why are we thinking about modern airline retailing? And I think it's important to mention that we as airlines basically have invented e-commerce long before the Zalandos and the Amazons of the world came up, so long before the internet even came up, we were able to distribute our products all around the world in a very smart and very clever approach. And this was great news, downside those exactly the same processes and technologies we still use today. So when you look our dot coms, our mobile apps, they look quite modern. If you would ask our customers are airlines digital? And they would say, yeah, they are digital. I get a nice 3D barcode on my mobile phone to check in. This looks very digital, very modern. What they don't see, by the way, also top management normally don't see behind the scene, we are normally still using technology centered around the PSS world that is coming from the pre-internet era.
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And this was when we started thinking at Lufthansa Group that we have done a lot of things to implement dynamic pricing. For example, at some point then realized we want to hold it continuous pricing. We mentioned earlier today already we rolled it out or started rolling out in '19. So we have realized what is necessary to do these kind of innovations when you still have the legacy technology around.
And then we started thinking about we need to do a major transformation. And the question then immediately was, why should we do it? Why should we start such a transformation? And this was soon realized that we are not doing this too much because of the competition among the airlines. We are not so much afraid of the different airlines, but rather about the power of the digital giants out there, that getting more and more appetite to step into the business and filling those gaps that we as airlines might have.
So we have realized use cases and virtual interline is just one of these examples. So to connect low cost content with full service content, something we can't do because we have tickets, they don't have tickets, I cannot easily connect those things. What happened? New players came up and said, if airlines are not willing to fill this gap or to provide this capability to customers and there is a demand, there's a custody demand out there, I will step in. I will do. And this is exactly what we fear, that more and more players will see the gaps that we have, where we cannot fulfill the customer needs anymore and we fill those gaps. So therefore we realize that this transformation is about catching up again with the capabilities of the digital players. We will never be Amazon. This is not our target.
We will never have the capabilities of Amazon but at least the customer experience that all our customers, not only the digital natives, but more or less all our customers have in their day to day life. They want to have it in travel industry as well. And this is at least what we need to meet. Like having the same smooth travel experience, what you would have in an Amazon app also in the mobile environment of an airline. And not only in the happy path, we just book a flight, you get to the airport, flight departs on time, everything's fine, but also in the unhappy path, flight got canceled. You need to get a re-booking. What is about the auxiliary services that you booked on top of this? Are they rebooked as well? This unhappy path? This is the one that causes a lot of trouble and this is what we are looking to as well. So this was a need why we wanted to start this transformation.
And we looked a little bit into what is this all about? What are the challenges of this transformation ahead of us? And most importantly, as I mentioned earlier this morning, we decided that we are not building something on top. We're not building new capabilities on top of what we have. We have done it in the past. Continuous pricing is a good example where we have built a very innovative algorithm with a very good company together in a partnership. But the major effort was to make it happen in today's ticket based world. A lot of workarounds were necessary, we decided we'll not build something on top but we build a completely new technology stack. And along with this, there comes a lot of challenges. First of all, this transformation is basically touching all our processes. I keep saying a little bit of marketing, a little bit of HR and some operational systems will not be impacted.
Everything else, everything that touches the customer will be impacted, even going down to the step of accounting. And you will see it later on again. There is a huge impact coming for us. There's a long, long phase of parallels of old and new world because unfortunately, you cannot do a cutover overnight saying, okay, today we are an old world, a legacy world, and tomorrow we switch off PSS on a new world. This is not possible for this transformation. So we have to come up with a solution that efficiently can manage both worlds for quite a while, quite a while, means what, five years, maybe even longer. So this is another big, big challenge.
Then this is not only about Lufthansa Group, but it's an entire ecosystem that has to change. So we are talking about replacing PNRs, tickets, EMDs legacy processes, proration, interlining. So this is an ecosystem change and this is a challenge but it's also a opportunity and I will also come to this later on again. But I think it was important for Lufthansa Group to understand that everyone in this value chain will be affected by this transformation one or the other way.
And finally, we also realized there's another opportunity inside. So we always considered IT as IT cost. I said, we wanted to decrease our IT cost, but there's a lot of opportunities behind. So we see also new business models can arise, new partnerships can arise from this transformation. And this is definitely something that we also look into when we think about this transformation.
The question is, what is the overarching roadmap that we have to move forward with this transformation? So we started in '22. Keep in mind we were just coming out of COVID crisis and we were asking for a lot of money with our executive board and they said, are you crazy? We just survived this crisis. Now we want to start this major transformation. And you see, I'm standing here in front of you. We managed to get some funding from our executive board. We started the buildup of the foundation layer in '22. Then we made a very important decision about the sequence.
So we decided that this transformation, which is about offer order, settle, deliver the end to end flow that we will start this transformation with order. I know some airlines wanted to start with offer first like building offer capabilities on top of the PSS and there might be arguments to go this path but we clearly decided we want to go with order first because we learned very painfully all the workarounds that are required to come up with fancy new offer capabilities that you then have to build back into the legacy world.
And this is why we decided we want to know will your foster the investment into the order capabilities. We will start implementation next year with the order management system and with the settlement system. I remember also a lot of discussions on industry level where people said we can do a lot of crazy things, but I will never ask my revenue accounting colleagues to be part of this journey. And we approach our revenue accounting colleagues that, no, there's something coming. We want to replace revenue accounting. There's something new coming. And we were quite surprised, they were very open to this and I said, we understand that the way how we settle today, this is not a modern way anymore. We need to change. At least Lufthansa Group side, our accounting colleagues were quite open to drive this transformation and therefore we have a package of order and settle to be the first implementation wave for us.
Then the next big thing will be offer. So offer is where a lot of the fund will be. A lot of the revenue increases will come, all the things that you discussed in detail today where you can really build up AI capabilities, drive the optimization of offers. This will be then our next big wave to come up with a new offer landscape.
Then unfortunately, we also have to deliver our offers. Not only calculate an offer, create an order of out of it but also ensure that the customer can actually bought an aircraft. This is what we call departure control today or delivery. And this is exactly what is then covered in our third big phase where we'll look into replacing today's departure control systems and getting an order based delivery system. And then hopefully around 2030, Lufthansa Group will be a hundred percent an average with office and orders, which basically means by then we will have switched off any application that is still using PNRs tickets and EMDs.
This is our transformation roadmap and we know it's very ambitious. There's a lot of respect but we totally believe, as I mentioned on the slide before, there is a long time of parallel worlds. You need to do everything to ensure that you're not too comfortable in parallel worlds because there's a risk that you will never switch off the old world. And we really have a very clear target by when we want to switch off our old world.
Maybe diving a little bit deeper, comparing today's world with the future world. And one of the things that we addressed already this morning was, the architecture that we have in place today, which is very monolithic. So if I would like to build an airline by tomorrow, completely new airline, I could technically do it with one system from one provider from my.com to the very last step in accounting, one stop shopping, everything in one application. This has some benefits, but there are also a lot of drawbacks. So we want to move out of this architecture. And good news is that it's not only Lufthansa Group with some crazy ideas, but it's industry that have realized that we need to move out of this architecture. And therefore the IATA Consortium has developed a reference architecture which exactly shows how we want to cut the pieces and how we want to set up a new modular architecture.
So, and this is exactly where we want to move from what you see on the left side here, the monolithic architecture where everything is basically centered around the PSS to the new modular architecture. And this is not only about cutting modules, it's a lot about processes. So in our world, everything, what we do is determined by the PSS. So whenever we want to do a new thing like we implemented in Lufthansa, what you called Green Fares. So where you had CO2 compensation as part of the fare, this should be basically a marketing campaign, nothing more. But you will be wondering how much efforts we had to look again, how can we realize it in the PSS environment with the ticketing constraints that we have, with the fares that we have around. So how can we do this? And this should not be, it should be just an easy configuration of a new product.
So therefore it's a lot about processes. So not only about the IT, architecture and the backbone, but also how do you define the processes. And I think this was also mentioned in one of the panels earlier today that indeed a lot of processes will change. Changing processes obviously means change management. So you have a lot of fear in the organization to be very open with you guys. I mentioned the example of revenue accounting. They are on this transformation. They are absolutely supporting, but there are definitely other areas where you have to convince people more to start this transformation. Always explain what is the benefit? Why are we doing this? Because it's important to emphasize it's an end-to-end perspective. If you stop at some point and not transferring end to end, you will lose a lot of the benefits. So the full benefits will only come if you have done the transformation from top to bottom, end to end.
And this is important. So means the beauty and challenge that you have to convince everyone in your organization at some point to do this transformation. Good news, as I've shown on the slide before, you don't have to do it all at the same time. You can do it in a staggered approach. And I've shown you our approach where we believe that is digestible steps that we are doing. Different airlines might have a different sequence or might even have a different bundling of those topics. But the key message is you can do it in a very staggered approach. This is very, very important.
Then also to mention, modular architecture means just cutting your architecture into pieces. This is more or less the easy part, but ensuring that the different components can talk to each other. This is the tricky part. And here Lufthansa Group together with Consortium clearly made the decision that we want to rely on industry standards. So we really want to ensure that the standards that we are started using to distribute our products. What we called back in time, NDC now called more or less off on order that we want to use the same standards to connect every component. This is very important for us. This eventually means that dot com is just another channel like NDC. We will use the same technology, we use the same kitchen underneath to power this channel. So we will not differentiate from technology standpoint, whether that's our mobile app or dot com or NEC channel from technology standpoint, very efficient.
We use the same technology underneath. Content, its a different question. So our offer colleagues will know what is the best content per channel and they will have exactly all the capabilities that you discussed here in detail today. And so we'll discuss tomorrow, like coming up with predictions, what is the right content, what's the right price per channel maybe? And this is exactly what we will facilitate, but with one technology and nowadays, we have different channels and unfortunately sometimes per channel, even on offer creation way. And this should not be. So the NDC standard or the offer order standard, how we call it now is the basis when it comes to connecting all the different pieces. This is another cornerstone of this transformation. Not only on paper saying, yeah, we cut pieces but also discuss about how do you connect those pieces. Because by having the standard in place, you also get to the point where you can do best of breed selection. So you can give different components to different providers because the connection is ensured by the standard.
Unless you ensure that this exact standard is used, then you're good. You can connect different providers very easily. And this is exactly what we are aiming for. We want to get away with that we have to go, that everything runs with one provider only because I say yeah, we technically we are modular, but actually it works better if you would connect your delivery to our order and also to our offer. And this is exactly what we're re-fostering and we are on very good track on this one. And when I say we, this is not only Lufthansa Group thing that again, this is an industry thing. So this is important that other airlines, IATA, industry bodies are working exactly on this one.
Maybe let's dive a little bit deeper in one of these layers, which is basically the product catalog and stock keeper. It's a very good example of modules that we are looking into and separating them from the stack that we have in place today. Today, everything glued together and actually what we call the inventory today was never meant to be a product management system. Never. Like if you look how inventory systems independent of the provider are built today, they were never meant to be actual product catalog systems that can facilitate inspiring e-commerce systems behind. So therefore, we made a very clear decision that we have to build a product catalog that is more or less inspired from e-Commerce world and this is a major change. And then by nature, the decision came. This is a standalone component. It can be easily carved out.
It's not glued to the order management or to the offer management system, but it's a standalone component in itself. Helping you again to do a staggered approach. You can decide to calve out product catalog, product management in a first step without already having carved out offer for example or carved out order. So you can do this really in a standalone way. Then stock keeper, same story. This what we call inventory management today and a lot of logic is in there today. And the stock up here in the future, it's a very dumb list. It's just counting what kind of products you have and how many of them you still have in stock.
So I have a flight LH 400 from Frankfurt to New York tomorrow, and then I'm just counting, I have 10 seats in first class. This is what the stock keeper's doing and saying, I have five sold. So the reminder is five. That's it. Nothing else. No decision whether I want to still sell five seats on in first class. Whether I want to close it completely, whether I want to sell it, not tomorrow, but the day after, again, I will sell it again, no decision whatsoever about the actual offer. It's pure information about what is in your warehouse, what is the stock that you have available and available is a dangerous term because available immediately people think about availability display, meaning this already has an offer and this is important when we talk about change stock.
That's why we called it stock, why we decided on purpose not to call it inventory anymore. To avoid that, people think, ah, there's some opening and closing of booking classes. There is no booking class in the stock keeper. There's products inside and the list of how many you technically have physical capacity and how many are still physically available. That's it.
And then there's an important addition to it because this works very nice if you're one airline on an airline or not, an island and you do only business with yourself, but if you have to connect to others, these layer has to connect to your partners both from the catalog perspective as well as from the offer creation perspective behind. And this is where we have installed a work group one and a half years ago at IATA to define exactly what is the minimum standard that we need to have in place that airlines from all around the world with their completely different products can easily connect and make them understandable for the partners and have always this crazy examples. Crazy good examples from Air New Zealand. They have very crazy products bunk beds that they want to install now in 1000 lives they would not be able to install them in today's legacy environment.
That's why they need to have this technology. And this is why we need to have a definition, how we can connect and talk to each other because I want avoid that I have to have a one-to-one translation of this product in my system because then I would be overwhelmed. I need to have a taxonomy in place that helps me to translate between the different products and the descriptions of the products. Another example is United Polaris, the system somehow would need to know this is a business class seat so that when I'm interline connection that I can combine Polaris to what we call our boring Lufthansa Group business class. No fancy marketing name to this. So you need to know, the systems need to know how to connect those things in the proper way.
And this is where we have the work group in place to define a taxonomy and the process, how to connect those systems. And it's becoming even more interesting when you talk about outside airlines because this one is not ending with airlines. You can talk about tour operators, you can talk about any kind of product that you want to sell, local tours, the Uber rides, diving tours, whatever you want to connect. Whatever you feel your offer colleagues feel together with the product colleagues that they want to put it on sale needs to be supported here. Important to mention, again, this is just facilitating.
I am just facilitating. I'm making no decision about what kind of products I want to put in there. I was just want to ensure that if my product colleagues come up with a crazy new idea next week that I can sell it. So, you know, there is European championship coming up in a few weeks and if they decide that they want to create a new, a package just sold for one week, which is combining a ticket to the stadium and a flight, they should just easily implement it within a few hours. And that's it. If, we, for whatever reasons, campaign reasons, we got some free tickets that we can put on sale, should not take weeks or months to file fares. Think about how I can create tickets EMDs, how this is working. No way.
So I want to facilitate my product colleagues together with my offer colleagues to actually implement new products that I can put on sale in a very, very agile way. And this is also means consuming whatever my partners came up with, new ideas. So if my partner Air Canada came up with a new idea, there should not be weeks of meetings where they explain what is a product, how can we install it, how do we connect. If they have it in the standardized way and the product catalog, my product catalog layer can understand, my offer engine can pick it up and can create a joint offer out of this. And this is a huge change to what we have in place today.
And this is why I want to emphasize this topic because this also at some point needs your support. So, on industry level the standard that we define can only be as strong as much ideas as we have in there and the needs. So because when, Air New Zealand, for example, had their ideas about products, you immediately get inspired saying, we need to have a standard that also supports this one, which shows you the standard should not look into very concrete products, but it needs to be in a way agnostic, ignore about the actual product, but be agnostic enough to cope with anything. And this is exactly what we need as an industry, to move forward, to make the standards more robust, that we can easily connect the pieces and avoid that others are stepping in like virtual interline and seeing there is a customer need, customer want to connect different businesses like the Uber ride with the flight.
We should be in the position that we can create this offer, that we can sell it in our touchpoint wherever our customers are, that we can provide it, and that we're not relying or at risk that someone else steps in and steals away the customer or the customer relationship. Because everything you discussed here about AI is about data. And the one who has a customer, the one who owns the order, is the one who has the data. And this is the one who can drive all the AI magic behind. So if we want to run the AI magic, we need to have the data. And again, this transformation will help us to get those data, keep the customer and our ecosystem.
So I talked a lot about already doing this thing together. We totally believe in this one. So, we were working on this since quite a while. But from the very beginning, we realized we will not be able to do it all alone. And you see just illustrative the ecosystem and the different partners. And there might be plenty of partners that I have not listed here that might be missing on this one. This should give you an indication of this will have an impact for more or less everyone in this value chain above the wing - what we call everything that happens with the customer - in the value chain, even below the wing - that is kind of the operational things. Keep in mind my famous example, weight and balance, calculating the trim sheet for the aircraft. Every aircraft that departs needs to get this trim sheet.
Today, this data feeds coming out of the PSS. So we need to touch even this interface to ensure that you can calculate the trim sheet also in the future, because this one is not changing. Physics is not changing. So you see a lot of impact that will come here. And this is why we started investing from the very beginning to engage with partners. So again, staggered approach. You cannot do exchanges with all of them at the same time. Again, you should set particular focus or particular times. So we obviously looked a little bit into the distribution side, because this is a very early partner in the value chain where you see the impact of orders like your NDC partners. They will see orders spread soon. We need to let them know, sorry, ticket number's gone.
Now we have an order ID. So they need to know. So we engage with them quite early. The other reason why we engaged with the quite early is because of the NDC learnings. One of the key shortcomings of NDC was we missed a little bit, as industry, to talk with our distribution partners about it, to engage them. And this is what we want to do differently here engage, the partners that will see the impact early on to keep them on board because definitely this will mean a major impact for most of them. Think about the distribution partners. They are back office systems 100% based on PNRs and tickets. So you will need to have them on board as well to change. So therefore, I just can encourage everyone think about your transformation roadmap. Think about how you want to engage with the industry, their industry bodies.
IATA obviously defining the standards, one of the most important ones, but also talk to your IT providers. We have done, we listened very carefully to all our IT providers and there are new ideas coming up as well. Thinking out the box will create some of new ideas also in this architecture. This architecture is not set in stone, should be robust for future changes. But when you talk to our private IT providers, there might be also new opportunities and ideas for your particular airline need coming up. And this is what I just can encourage you, think about this as an industry transformation and we need to ensure that we are all doing this together. And with this, as Lufthansa normally do it on time arrival. Now I think it's time for drinks. Thanks0 a lot.
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