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Digital Industry: Taking Rail Virtual

Uber-Trucking Is on Its Way
Speeding Up Aerospace Innovation
Reinventing Online Travel Booking
And more…


WELCOME TO THE 2016 EDITION of Oliver Wyman’s Transport & Logistics

journal. In this issue, we explore the complex and unprecedented changes
occurring in technology, markets, and society that are challenging companies
across the transportation, logistics, and travel sectors.
Many of these changes are encapsulated in the idea of the fourth industrial
revolution – a paradigm shift that will fuse together an array of evolving
technologies, thereby ushering in new levels of connectedness, automation,
and transparency. No industry will escape the business implications of a
digitalizing culture and economy. Operations and assets will continue to get
smarter, while simultaneously delivering a river of sensor-based data that
will require much more sophisticated analytical tools. At the same time,
changes in consumer culture – from e-commerce expansion to mobile
app-based everything and crowdsourcing – will increasingly guide the
choices companies make as they seek new avenues of growth.
The Internet of Things, artificial intelligence, big data, additive
manufacturing, the sharing economy, radical shifts in e-commerce and
energy: It’s a lot to take in. The brief articles that follow are designed to
be a starting point for consideration and discussion of what the next ten
years might hold for transportation-related industries – both in terms
of these global trends and changes specific to each industry. Passenger
railroads face new competition from buses. Freight railroads are dealing
with the fallout of energy transition. Airlines and airports are being
impacted by changing aircraft technology and traveler tastes. Trucking
is about to step into a new realm of digital solutions for longstanding
efficiency and labor issues. Nevertheless, across industries, the backbone
demands of operational excellence, customer service, reliability, and cost
control will continue to be as vital as ever.
We hope that you find this issue of the Transport & Logistics journal to be a
thought-provoking read, and we look forward to hearing your comments.


Rodney Case, Partner Rebekah Bartlett, Senior Editor

Joris D’Incà, Partner Campbell Reid, Lead Designer

Geoff Murray, Partner Adrien Slimani, Designer

Birgit Andersen, Marketing Director Mike Tveskov, Designer

Copyright © 2016 Oliver Wyman 1




Taking Rail Virtual Through Digital Industry 4

Hit by a Bus: European Passenger Rail 7

The Ancillaries Challenge in Online Travel Booking 9

A Whirlwind of Change for Postal Services 13

Uber-Trucking Is on Its Way 15

Aviation Growth Patterns Around the World 17

A Driverless Future for Freight? 18


Forestalling the Future With Predictive Maintenance 22

Aviation’s Technology Nudge 24

North American Freight Rail: Evolution Required 26

Optimizing End-of-Life for Big Assets 30

Speeding Up Aerospace Innovation 32

Are Cobranded Travel Cards Rewarding Enough? 34

Copyright © 2016 Oliver Wyman 2



Copyright © 2016 Oliver Wyman 3

TRANSPORT & LOGISTICS 2016 Innovations

THE STEAM POWER of the first industrial revolution Internet of Things, and new applications such as additive
ushered in the first great age of the railways. The manufacturing (3D printing) and autonomous vehicles.
second – electric power – saw steam replaced by For rail and other transportation industries, the fourth
diesel, and the third – which included the birth of industrial revolution promises continuing acceleration of
information and communication technologies – gave innovation on both the supply and demand side. From
rise to the modern and efficient rail systems of today. the manufacture of rolling stock to how rail operators
Now the world is entering a fourth such revolution, serve their customers, new technologies will lead to
which, in the words of the World Economic Forum, entirely new ways of doing business.
will be “characterized by a fusion of technologies that Disruption of value chains will reach unprecedented
is blurring the lines between the physical, digital, and levels as well, driven not by a few proprietary standard
biological spheres.” Some of the boundary-crossing setters (e.g., Microsoft, Oracle), but will bubble up from
technologies of what is variously called “industry 4.0” the most agile and innovative in an interconnected
or “digital industry” include cyber-physical systems, the world of “makers” as well as consumers. As an example,

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TRANSPORT & LOGISTICS 2016 Innovations

Deutsche Bahn has initiated a series of “Deutsche Bahn and testing environments to reduce time and cost for
Goes 4.0” hackathons, in which anyone can participate to the development of smarter and more sustainable
develop ground-breaking solutions to specific challenges, trains. Standardization and modularization will be
such as predicting track position defects or improving implementable even in complex environments. In
information desk services. addition, streaming data from rolling stock in operation
will feed back to improve the design and build process,
as well as enabling better predictive maintenance.
DIGITALIZING RAIL SUPPLY Longer term, one might see rail suppliers become
Digital industry will support new applications primarily product designers, outsourcing to “smart
and business models for manufacturing and factories” that produce modular components – often
disrupt all phases of the supply chain. The product 3D printed. While digital industry offers the potential
development process will become fully digitalized, for much greater customization, to take full advantage,
making it faster and more flexible. Railroads and the industry will need to work closely with certifying
their suppliers, working together, will be able to use bodies and regulators to streamline currently complex
real-time data, digital models, and virtual tooling approval and certification processes.





Integrated tools • Simplicity • Cross-transportation mode planning tool Kayak

for planning • Information • Mobility check – identification of “sturdy” connections Tripit
• Commuter advisory, including traffic forecasts Google

Information bundles • Information • Up-to-date news about the weather, events, activities TripAdvisor
complementing at the destination
• Improved comfort Gate Guru
the journey
• Personalization • Point of interest finder (museums, tours, etc.) Flight View
• Orientation and navigation for boarding, changing, and alighting HRS

Service and • Information • Alarm/reminder SMS prior to departure Groupon

comfort (based on current traffic situation)
• Improved comfort Car2Go
• Personalization • Dining offers DriveNow
• Parking spot finder BlablaCar
• Car sharing Apple

Social factors • Improved comfort • Overview of friends’ journeys/follow commuters Audible

and entertainment • “Friend finder” and chat TripTrace
• Games and audiobooks for children Facebook
Source Oliver Wyman

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TRANSPORT & LOGISTICS 2016 Innovations

SMARTER OPERATIONS streaming communication with their customers.

AND INTERFACES Travelers will be able to immediately report train
In the future, railroads also will leverage fourth problems, and in turn operators will be able to fix
revolution technologies to improve operations. defects faster and notify customers right away when
For example, big data analytical techniques could problems are solved.
increase train punctuality, by better predicting and
eliminating sources of service disruption. Smart
planning and dispatching networks will significantly RUNNING ON DIGITAL
reduce system costs, as will trains that are autonomous Companies are already beginning to see incremental
or boast increased artificial intelligence. Robotization benefits from this fourth revolution. Long-term
of intermodal terminals and yards might make use of substantive benefits will be more challenging, requiring
technologies similar to those now in use at advanced a new level of coordination between transportation
ports, such as the Port of Hamburg. suppliers and operators, and the willingness to embrace
Rail can be expected to play an important role in transformation that goes beyond information technology
next-generation mobility, which will be increasingly to the continuous revamping of organizational functions
characterized by a desire for access rather than and activities as new game-changing innovations emerge.
ownership, technology-enabled transparency, Ultimately, the rules of business will be different,
two-way communication, and shared consumption. governed by a paradigm of being sharable, accessible,
On the freight side, products themselves will reliable, and able to perform at marginal cost.
increasingly be direct users of the Internet; connected Companies will need to be both integrated and
railcars and containers will provide their own streaming decentralized (“glocal”), and engage both their
updates on location, condition, and itinerary. Longer term, suppliers and customers more broadly and deeply.
autonomous cars and trucks will communicate directly Railroads have a long history as networked businesses;
with dispatch centers, terminals, and even trains, the fourth industrial revolution will extend those
ensuring their passengers and cargos are at the right networks in ways that we are only beginning
place at exactly the right time. to comprehend.
In passenger transport, digitalization will improve
ticket changing and pricing, and make access for
customers easier. Most major rail companies are pushing
mobile ticketing solutions; this will be especially good JORIS D’INCÀ
for customers if simpler or best-price fare systems are Partner
introduced in those countries that now have complex
tariff systems. (Ideally combined with automated
passenger detection systems for coaches, so that TOM REINHOLD
separate ticket validation processes are unnecessary.) Principal
Further improvements can be expected in customer
feedback management. Current processes are
extremely slow, inefficient, and not customer-oriented. TOBIAS SITTE
Through better use of social media and feedback Partner
platforms, rail operators will achieve real-time,

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TRANSPORT & LOGISTICS 2016 Innovations

customers. This is especially true for routes

between cities that are poorly served by
train (low speeds, limited frequencies, or
limited on-board comfort).
As a result, two competitive scenarios
are emerging for passenger rail: On routes
operated with very high-speed trains
(300 kmh versus 100 kmh for bus), rail
operators will continue to benefit from their
huge travel time advantage. Rail companies
also can deploy economic models to help
limit their market share erosion on such
routes, such as a low-fare offering from
France’s SNCF called OUIGO. But on
traditional rail routes with lower speeds and
a less modern fleet (meaning buses can
compete head on), market share erosion for
rail operators is just beginning.

We recently surveyed European travelers
and found that while rail still clearly wins on

comfort and enjoyment (for now), travelers
consider bus a better value. Buses also win in
areas where rail ought to have the advantage,

such as innovation and service orientation.
Attempts by rail companies to retain
customers with isolated price reductions and

promotions have had a limited impact on
market share erosion thus far and are unlikely
to be successful over the long term.
Bus fleets are structurally much cheaper
and more flexible to operate than trains, so
rail operators won’t be successful competing
purely on price. Instead, they will need to
figure out how to best capitalize on their
strengths: national and dense networks,
WESTERN EUROPE IS in the midst of a believe that new bus operators have lured up strong brands, loyal customer bases,
sweeping deregulation of intercity motor to 20 percent of customers away from some committed staff, and well-appointed stations.
coach markets – Sweden, Finland, Germany, rail services in just a couple of years, thanks A comparable lesson is the emergence
Italy, and France have all recently opened to aggressive marketing tactics, a smart route of low-cost airlines in the 1990s, which
these services to competition. The result is network, and large seating capacities. traditional European airlines didn’t
a new class of low-cost competitors that are Consider the popular Hamburg-Berlin immediately perceive as a paradigm shift.
putting pressure on long-distance passenger route. Rail service is more frequent and The new entrants offered lower prices, but
rail services and rapidly gaining market faster, but bus fares are much less. The rail they also operated in ways that changed
share. Rail operators will need to move operator does offer some deeply discounted customers’ expectations and behaviors.
quickly to counter this existential threat. tickets at $20, but that’s still, on average, Several traditional airlines foundered when
twice the price of the lowest-cost bus ticket. they were unable to learn from these up-
And aggressive bus companies are slicing and-comers and adapt.
HERE COMES THE BUS fares even more on routes where they Passenger rail services in bus-competitive
The intercity buses of today offer train-like compete with rail. lanes now face the same peril if they fail to
comforts (such as luxury seats, restrooms, By offering comparable or even better rethink their product and service offerings
wi-fi, snacks, and beverages) but at a fraction quality service, bus operators are attracting and adapt their business designs. Fending
of the price of rail on high-density routes. We middle-income passengers and business off market share erosion will require not only

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TRANSPORT & LOGISTICS 2016 Innovations

Comparison of rail and bus services for Hamburg-Berlin

Frequency Every 30 minutes Every 75 minutes
Journey time 1 hour and 38 minutes 3 hours
One-way fare $42-$85, limited discount $8-$18
prices from $20 and up

lower prices, but innovation – improving the core competencies necessary to operate
the entire door-to-door mobility chain in buses and could even use its data on
terms of transparency, ease of use, and customer journeys and travel preferences to
interconnectedness – and aligning product build targeted bus and linked rail-bus offers.
offerings with what customers are willing to
pay. In some cases, rail operators may need to
adjust capacity while refocusing investments THE TIP OF THE ICEBERG
on enriched offerings. Stations also could be Passenger railroads are facing an uncertain
utilized to profit from evolving generational future as part of a broadening and JEAN-PIERRE CRESCI
changes, such as charging stations for e-cars, diversifying mobility market that includes Partner
upgraded work and play/rest areas, even not only new bus services but also car
drop-in “maker spaces.” sharing, integrated mobility solutions,
Finally, rail operators may want to consider and autonomous cars. Understanding JORIS D’INCÀ
diversifying, by taking a position in the low- these trends, anticipating their associated Partner
cost intercity bus market themselves. Some risks and opportunities, and being willing
already have: German railway Deutsche Bahn to adapt flexibly and rapidly can ensure
runs a low-cost luxury bus service on routes rail operators make good investment TOM REINHOLD
to/from Germany that are not well served decisions and maintain a strong position Principal
by trains. A rail operator already possesses in this market.



1.2 Bus 3.8x Bus 2x Bus 1.3x Train less With ~260 passengers (87% load factor),
less costly less costly less costly costly rail is less costly than bus
than trains than trains than trains than bus



0 0.02
0 100 200 300 200 250 300

Note Assumes double-decker with 85 seats, $3.26 per bus-km; train with 300 seats, $12.38 per train-km
Source Oliver Wyman analysis

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THE TRAVEL “BOOKING JOURNEY” has many for only about 8 percent of total US airline revenues
stages – from the first dream of a destination to the last in 2015.) There is broad consensus, however, that
photo shared on Facebook. And where once interaction ancillaries could reach $180 billion globally by 2020.
with a travel agent might have been limited to booking It’s an enticing future market that traditional travel
a ticket and a room, consumers now expect a wide suppliers are not doing nearly enough to win.
range of travel services and products to be on offer at
every stage of the booking journey. These “ancillaries,”
as they are known in the industry, are an important DIVING INTO THE
revenue stream for both travel suppliers, such as BOOKING JOURNEY
airlines and hotels, and travel retailers, such as online Online shopping, smartphones, and social media have
travel agents (OTAs). conditioned consumers with limited time to bookmark
Ancillaries come in two flavors: unbundled, which websites and download apps that provide quick, simple
refers to add-ons that were previously included in a solutions. This trend will only grow, given that global
core product offering (such as baggage and in-flight Internet and smartphone penetration are expected to
meals for airlines), and incremental or trip-related reach 80 percent by 2025. In the travel arena, this means
products, such as ground transportation, activities that consumers are gravitating to “one-stop shops” that
and tours, and insurance. Ancillaries currently account are perceived to offer good value for money, along with
for a relatively small share of total revenues for airline up-to-date information and a frustration-free booking
and hotel brands. (For example, ancillaries accounted experience. The result is that OTAs such as Expedia and

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TRANSPORT & LOGISTICS 2016 Innovations

Priceline have taken a significant chunk of direct travel hotel room, combined with trip-related ancillaries like
bookings (and margin) from travel suppliers. access to an exclusive supplier or product.
OTAs allow customers to build comprehensive Travel suppliers also must streamline and innovate the
and tailored travel packages, including a wide range booking process. Ancillary sales are often an afterthought
of trip-related ancillary products from a variety of on most suppliers’ websites, requiring lots of clicks,
suppliers. Many hotels and airlines have developed separate booking transactions, and the rekeying of
effective online booking flows for their core seat or room data. Suppliers must integrate ancillaries into the core
products and unbundled ancillaries. But they are not booking flow and design “omnichannel” processes
taking full advantage of the opportunity presented by that allow customers to seamlessly transition across
trip-related ancillaries – which could lead to their falling multiple platforms and engage social media as well.
further behind OTAs in terms of customer appeal.
Many airlines and hotels also have built only limited Increasing Customer Engagement
ancillary merchandising capabilities, focusing heavily on Ancillaries play a critical role in customer engagement
the booking stage of the customer journey. OTAs, on the by offering choices and simplifying hassles. Airlines and
other hand, are investing heavily to capture ancillary sales hotels could capture data from their direct booking
end-to-end. They inspire whole-trip ideas, seamlessly channels to develop a deeper understanding of
market targeted ancillary products between the booking individual customer preferences, so that they can
and traveling steps, and integrate customer review and better personalize the end-to-end booking journey and
rating systems and social media links. present tailored ancillary propositions at personalized
Travel suppliers’ immediate tactical response has price points. These insights also could be used to
been to offer benefits such as free wireless and loyalty fuel novel post-booking interactions that reinforce
points for direct bookings. This clearly is insufficient, customer engagement, such as a targeted reminder to
as evidenced by the continued slide in direct channel buy trip insurance or free downloadable apps that offer
bookings. Unless they dig deeper, airlines and hotels destination updates and reviews.
risk becoming simple commodity suppliers to OTAs.
Strengthening the Value of Loyalty
Customer loyalty and the likelihood of rebooking can be
GOING THE DISTANCE strengthened through better use of ancillaries. Customer
ON ANCILLARIES insights, for example, can be used to generate exclusive,
To regain their competitiveness in relation to OTAs, travel tailored offers of complimentary or reduced price
suppliers will need to consider a number of strategies to ancillaries for those who book through a travel supplier’s
improve their direct channel offerings and enhance their direct channels. Hotel operators in particular are
appeal to customers. increasingly making use of loyalty member “treats” like
free airport transfers and reduced-price breakfasts.
Direct Booking Enticements
Airlines and hotels need to give customers a reason to Focusing on Execution
book directly with them. This could include capitalizing Finally, if travel suppliers are to succeed in attracting
on their core inventory to offer unique unbundled customers to their channels and growing ancillary
ancillary products, such as the ability to choose a specific revenues, they must build out their execution

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TRANSPORT & LOGISTICS 2016 Innovations


Inspire customers Offer broader trip-related ancillary
with trip itinerary ideas options, e.g., in-destination transport
Host comprehensive destination Offer direct OTA price comparisons
information, including wider trip data

5. REMEMBERING | SHARING SELF-REINFORCING Integrate trip-related ancillary
Suggest targeted next-trip ideas CUSTOMER
ENGAGEMENT RING products in core booking flow
and trip-related ancillaries,
based on social media posts Offer proactive package price
and previous trips comparison (e.g., “you saved $x
vs. flight plus/room plus”)

Present in-destination activity/excursion Target push promotions
purchase opportunities for last-minute ancillaries
and cabin/room upgrades
Offer e-concierge service tailored
to support trip-specific requirements Provide proactive disruption
management, e.g., automatic rebookings



Leading online travel agency (OTA)

• Fully integrated booking flow for
incremental ancillaries
• Broad product range

Major full-service airline

• Incremental ancillaries typically
offered through separate booking
flow and white label solutions

Major hotel company

• Booking flow focused on hotel
room sales
• Strong opportunity to expand
incremental ancillaries offering

Core travel offering Current ancillary space Potential ancillary space

Note Example search for SFO to NYC for two people from 6-Feb-2016 to 13-Feb-2016: Flight + hotel + car
Source Company websites

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tool kit. This means acquiring the right capabilities, also to reduce third-party distribution costs across the
assigning the strongest teams to deliver on ancillaries, travel supply chain and avoid commodity status. They
and increasing their appeal as go-to booking sites. might do well to take a page from the e-commerce retail
Through exclusive partnership arrangements with giants: By building a comprehensive and constantly
highly rated brands, travel suppliers can develop a innovating range of products, services, and experiences,
catalog of potentially unique incremental ancillary they can increase their appeal to contemporary travelers
products. They should consider information technology and build lasting customer relationships.
partnerships to close execution gaps and test minimum
viable products without waiting for the “perfect”
technology. Most important, they must develop the
big data analytics required to mine and then translate DAN KOWALEWSKI
customer data insights into a seamless, personalized Partner
customer experience across the travel cycle.

Clearly, travel suppliers need to invest more in ancillaries,
not only to deliver additional high-margin revenue, but

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POSTAL SERVICES TODAY operate however. In many countries, large integrators, favor of smaller, more flexible assets. As
in markets that are changing at an such as UPS, FedEx, and DHL, as well as these structures evolve, the traditional
ever-increasing pace. They may feel as if a regional firms, have ruthlessly optimized advantages of incumbents will become
house had fallen on them, given declining express and parcel products and continue less important.
letter volumes, deregulation of markets, to push the innovation envelope. Most critically, large online companies
increased competition, and an explosion of On the other side of the market, major continue to roll out new solutions across
business-to-consumer parcel volumes. But e-commerce companies, as part of their multiple countries with ease, while
there are more changes yet to come that will never-ending hunt for differentiation many postal and express parcel firms
radically impact postal services around the and customer convenience, are find themselves continuously playing
world and create a strange new landscape making increasing demands for service catch-up and are often limited to national
that they must learn to navigate. Choosing improvement and pushing down solutions. They also in some cases must
the right road will lead to relevancy and prices. Further complicating the picture deal with regulatory requirements and
profits; choosing the wrong one will lead to is that Amazon is becoming a true bureaucratic and political hurdles that are
disintermediation and decline. end-to-end logistics player and has making it difficult for them to invest and
already targeted the most profitable change faster. Clearly, postal services will
element of parcel services – urban need to get better at innovating from an
LETTERS AND PACKAGES, deliveries – through acquisitions, its own end-customer perspective and behave
OH MY delivery logistics services, and Uber-like more like their new competition.
The story for mail and parcel volumes is programs (AmazonFlex).
one of continuing divergence: We now
expect mail volumes to decline through NOT IN KANSAS ANYMORE
2025 before leveling off. Parcel volumes BEHIND THE CURTAIN Traditionally, postal services and parcel
will continue to increase; our market model We believe that three major innovations companies worried mainly about costs
for the US and Europe forecasts that by have the power to completely change the and often engineered solutions from this
2025, online purchases could account for postal industry’s structure: Crowdsourced perspective; cost concerns thus drove
60 percent of all parcel-size goods and delivery, autonomous vehicles, and drones. “old innovation.” But new forces are setting
non-grocery purchases. Even still largely By untangling network economics, these the pace now:
offline businesses like fresh/grocery could innovations could alter the cost structure End customers are convenience
see online penetration of 25-30 percent. of parcel delivery, giving less weight to driven, which means that “new innovation”
For postal services, these additional density, drop factors, and ultimately must focus to a much greater extent on
parcel volumes are not an automatic “get,” the utilization of large fixed assets, in removing existing customer hassles, even

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TRANSPORT & LOGISTICS 2016 Innovations

to the point of creating convenience where to remain relevant and competitive, management and operational excellence
the customer does not yet expect it. but given the rapid pace of change, will be underlying requirements, rather
Combining technology solutions options will not remain open for long. than differentiating factors. Strategic
has become the enabler of customer Specific opportunities will depend on partnering and favorable e-commerce
convenience. Customers expect to be able each postal service’s unique situation contracts will be important to bring
to route parcels to where and when they within its geography, regulatory regime, innovations to the table and secure the
want them, and track the process every and decision-making culture. As well, postal service role in the logistics chain.
step of the way in real time. Technology understanding end customers, technology, And let us not forget that some of
means that parcels can meet consumers, and the retailer mindset will be critical. the largest e-commerce companies and
while platforms linked to operations are The base for letter mail in most OECD consumer goods manufacturers globally,
enabling crowdsourced delivery and countries is still enormous – and letter mail like Alibaba, are eagerly looking from
curbside pickup services. likely will still be 30-40 percent of revenues Asia toward European and US markets,
The retailer mindset and focus are ten years out. In response, postal companies seeking distribution (and possibly
changing. Online and omnichannel will need to develop more flexible cost one-stop-shopping) partnerships. That
retailers have increasing expectations structures, while leveraging their networks alone is a whole new game and could lead
when it comes to the quality of delivery and new technology (just as on the parcel to a new industry structure. Unlike Dorothy
and return services. Securing a trusted side). There is certainly plenty of room in the Wizard of Oz, postal services can’t go
one-stop logistics chain has become vital to innovate: On the one hand, reducing home again. They do have a future, but it’s
even for non-traditional and niche retail physical service levels as mail volumes one they must create for themselves.
platforms like Ebay, Google, and others. fall can reduce costs (examples: Canada
In these cases, postal and express parcel and Italy). On the other, adding customer
networks become a valuable asset, one friendly hybrid solutions, such as daily
that cannot (yet) be duplicated by software digital plus on-demand physical delivery, SEBASTIAN JANSSEN
engineers in Silicon Valley. can increase revenues. Principal
On the parcel side, competing
effectively will require continuous focus
THE YELLOW BRICK ROAD on understanding customer hassles better MICHAEL LIEROW
We believe that there are a number of than Amazon and where customers are Partner
high-caliber options for postal services willing to pay to reduce those hassles. Cost



Total sales 2015 (traditional and e-commerce)


40 <10% Market Share

Food products
30 Health
& beauty Clothes,
shoes &
jewelry Sports & leisure

DIY & furniture
Consumer Other
Household & pet care electronics
Office supplies

0 10 20 30 40
Source Planet Retail, Oliver Wyman analysis

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MOBILE APPLICATION-BASED ride sharing load matching via online/truck stop load revenues (due to reduced brokerage
services such as Uber and Lyft have been boards and calls to freight brokers, and fees), and better fuel efficiency and asset
around only a few years, but they have documentation using electronic data utilization. More than 90 percent of US
revolutionized the urban taxi landscape. interchange (EDI). trucking companies operate six or fewer
Ride sharing has emerged as an attractive Many of the new trucking apps are units, and these small truckers are likely
alternative because of the way it solves so being developed by non-traditional to benefit the most. All-in-one apps could
many “getting from here to there” hassles: technology companies with brokerage level the playing field with larger trucking
instant location of a driver or rider, pricing authority, and these are looking to companies by providing mom-and-pops
and payment taken care of in the app itself, increase their appeal by undercutting the with better routing decisions and fuel
pre-planned route navigation, and ratings by middleman fees charged by traditional prices, low-cost GPS tracking, and the
both parties to keep the risk of problems low. freight brokers, while offering more ability to boost their market appeal through
Now the idea of doing something similar comprehensive solutions. Thus much like customer ratings and reviews.
for truckload and less-than-truckload the taxi industry, which is now fighting On the shipper side, larger app-based
freight is catching fire. At least a dozen back against ride sharing with its own marketplaces should give small shippers
companies are in the hunt to develop streamlined apps (such as Hailo and Arro), more access to ready capacity, at price points
and promote “smart trucking” apps that traditional truck freight brokers will need that they can more easily control. Large
provide an all-in-one solution for shippers to embrace “uberization” as well – or risk shippers, on the other hand, should be better
and carriers of non-contract freight: being displaced entirely. able to manage exception freight that falls
fast, automated load matching based on outside of their typical contract agreements,
location and equipment; turn-by-turn such as freight surges prior to holidays.
route planning and shipment tracking; CARRIER AND Across the supply chain, uberization
algorithm-based instant pricing; and SHIPPER BENEFITS promises to increase visibility and
seamless proof-of-delivery, billing, and The transformative power of smart trucking transparency for all stakeholders: which
payment. Such Uber-style apps are apps could be vast: On the carrier side, truck is nearby and has the right equipment
looking to displace closed, fragmented, benefits could include lower operating to handle my load; which load will exactly fill
and time-consuming legacy systems: costs, increased loaded miles, higher out my backhaul and is along my route; what

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2016 2025
35 Internet penetration >80
(% global population)

31 Smartphone subscriptions >80

(% global population)

26 Social network users >70

(% global population)

15 Connected objects 80

15 Global value of the sharing economy 335

($ billions)
Source Oliver Wyman analysis

is the best price I can get/pay for this load their excess capacity into the market when technology spending is needed every year
that must arrive in 36 hours. By unlocking their own demand is down. to stay current and not fall behind.
excess capacity that is now hidden due to Third-party logistics terminals and Many industries over the past couple
logistics inefficiencies and origin/destination distribution centers also could see new and of decades have endured the pounding
imbalances, new load-matching apps also changing demands, such as increased load of successive waves of disruptive
could help offset the growing shortage of sharing and load exchanges, which would technology – and many incumbents have
truck drivers in the US and Europe. And enable truckers to optimize their schedules foundered as a result. Right now, who reaps
making load finding less frustrating could and routes and expand opportunities for the value of disruption in trucking is still up
improve driver retention. small motor carriers to compete against for grabs. Realizing that value will require not
large ones. only embracing evolving technology but also
Eventually, the many different figuring out how to morph organizational and
WHAT HAPPENS NEXT? smart trucking apps in development customer-facing structures in tandem (and
As all-in-one trucking apps evolve and could narrow down to just one or a soon). The choice is going to be as simple for
become more widely adopted, they few choices – meaning marketplaces trucking industry stakeholders as it has been
could generate disruptions that ripple with visibility across a large share of for media, taxis, and retail shopping: Don’t
outward across the supply chain. For available loads and capacity, backed by stand in front of a wave you can’t stop.
example, consider the potential impact all of the tools required to make booking,
of smart trucking apps on private fleets. transporting, tracking, and payment as
Companies with large private fleets – such painless as possible. As shippers and
as Tyson Foods or Albertsons – might be drivers come to expect the immediacy MARC MEKETON
able to downsize to meet their average and ease of use that make mobile-based Vice President
requirements, secure in the knowledge tools so appealing, even large contract and
that smart apps used by hundreds of common freight carriers will need to modify
thousands of truckers could readily locate their fleet and transportation management BILL RENNICKE
extra capacity when needed to meet peak systems accordingly. Prior work we have Partner
demand; equally, private fleets could sell done with motor carriers suggests that

Copyright © 2016 Oliver Wyman 16

TRANSPORT & LOGISTICS 2016 Innovations

AIRLINES AROUND THE WORLD are growing, and faster than world averages. Africa/Middle East, although
they are doing so primarily by adding more seats and a small market overall, is seeing strong growth as
flying longer routes. Our latest research shows that well – into the double-digits for seats and seat-miles.

year-over-year world growth in seats (6.5 percent) and Latin America and North America are demonstrating
available seat-miles (ASMs, 7.2 percent) is outpacing similar growth patterns at present: minimal to no growth
the increase in departures (4.1 percent). in departures, a small upturn in seats, and steady growth

Each region presents a slightly different growth in ASMs, which may be indicative of the impact of newer
picture, however. In Asia, for example, now the largest regional routes (see “Aviation’s Technology Nudge” in this
aviation market in the world, departures, seats, and ASMs issue). Europe, while a mature market, is nevertheless
are all growing by more than 8 percent year-over-year, seeing interesting growth in capacity and miles.




+5.9% +5.8%
+8.4% +8.7% +8.4%
+5.6% 1.45

+10.3%+11.1% 1.15


2011 2012 2013 2014 2015 2016
+6.5% +7.2%
+4.1% +3.9%

8.5% 8.5% 4.9%

9.5% 30.8% 9.9%
36.0% 36.0%

21.3% 22.4%

Departures Seats Available seat-miles 29.8% 23.2% 27.1%

Source by Oliver Wyman

Copyright © 2016 Oliver Wyman 17

TRANSPORT & LOGISTICS 2016 Innovations

DRIVERLESS CARS ARE expected to revolutionize

personal transport in the next decade, and driverless
trucks and trains may not be far behind. Specialized
automated trucks are already in regular use at off-road
and remote locations, and over-the-road commercial
trucks with partial and fully autonomous systems
are being tested in the United States and Europe.
On the rail side, mining giant Rio Tinto is currently
phasing in the first long-distance driverless freight
rail service in Western Australia. (While not freight,
nearly 50 city metro rail-based systems worldwide are
already automated, as are dozens of airport shuttle
and people-mover systems.)
As is the case for driverless cars, the technology
for autonomous freight transport is quickly becoming
feasible. While plenty of obstacles remain before we
see trucks and trains driving themselves, economic
and competitive considerations are likely to keep the
pressure on for driverless freight transport solutions.
Economically, trucking is likely to benefit more than rail
from going driverless, but autonomous trucks could so
alter the transportation landscape that railroads might
have little choice but to follow suit.


Several options for driverless trucking are currently being
tested. One is driverless with backup – that is, an onboard
autopilot system handles a portion of the driver’s duties,
thereby reducing driver fatigue and stress (similar to the
autopilot system in an airplane cockpit). Such a system
is already legal on Nevada’s roads. A second option
is “platooning” – whereby a lead truck is operated or
overseen by a driver, with one or more driverless trucks
following behind. Fully autonomous trucking with no
driver on board would be a final step, but likely require
the longest timeframe to gain public acceptance.
Driverless trucking could help alleviate a growing
shortage of drivers in the United States and Europe, the
result of aging populations, increasing regulation, and
a younger generation less willing to spend long periods
away from home. According to the American Trucking
Associations, the US trucking industry will be short

A 73,500 drivers this year – and that number could rise to

174,500 by 2024. Press reports put the current UK truck

driver shortage at 50,000, while Germany could see a
shortfall of some 250,000 drivers over the next decade.
Smart trucks with autopilot systems could help

FUTURE FOR keep older, experienced drivers on the road, while

fully driverless trucking would free up drivers for more

complex local pickup and delivery operations closer to
home. Another advantage of automation is that trucks
would not need to sit idle during drivers’ mandatory
rest periods. This change alone could reduce driver
costs by up to two-thirds and increase equipment

Copyright © 2016 Oliver Wyman 18

TRANSPORT & LOGISTICS 2016 Innovations

utilization by a third. Going driverless also could GOING DRIVERLESS:

lead to a 70 percent drop in accident rates, meaning WHAT WILL IT TAKE?
lower casualty claims and likely lower insurance rates. For freight railroads, the critical barrier at present
Equally, highway capacity could increase by 200 is that trains cannot detect and avoid obstacles in
percent or more, since driverless vehicles can operate their paths. Several different strategies in tandem
with closer spacing and at more consistent speeds. will likely be needed to overcome this problem, such
In the case of train automation, many of the as real-time monitoring systems for grade crossings
technological building blocks already exist (or are and navigation app-based alerts for car drivers when
being implemented) in the US and Europe: remote they are approaching crossings. As real-time train
control systems, onboard computers that enforce tracking becomes more common as well, it’s not hard
speed limits and regulate movement, and software that to envision a future of mobile devices warning drivers
optimizes train operation and fuel consumption. And and pedestrians of an oncoming train in their vicinity.
while railroads currently are able to fill most of their Of course, no rail corridor can be completely sealed
train crew jobs (pay is higher in rail than in trucking), off, which means trains will need obstacle detection
projected retirements and the same lifestyle issues and avoidance systems. Autonomous cars, for example,
as in trucking suggest that a shortage of personnel use light detection and remote sensing technology,
may not be too far off. Automation would enable linked to the braking and steering systems, to avoid
operating support jobs to be converted to regular shift obstacles. The challenge for a train will be determining
assignments at fixed geographic locations, improving what an obstacle is and whether to brake for it, since
the appeal of railroading to employees who want more sudden deceleration creates a risk of derailment. Is it a
consistent schedules and to work near home. At the car that can’t get out of the way – or a deer that can?
same time, railroads could reduce their labor costs and For autonomous trucks, the challenge is somewhat
boost their network capacity. Asset utilization, service different, and likely greater, given that trucks operate on
levels, and reliability could improve as well, as more open roads with full public access. A phased approach
frequent, shorter trains could be operated at no cost may make the most sense: Autopilot systems, once they
disadvantage versus current operations. demonstrate their safety and reliability in testing, could




Object detection Driver distraction monitor Lane tracking
Far infrared capability Enhanced mapping Object detection
Far infrared capability

Long- and

Long- and Short-range blind spot sensors and cameras


Vehicle-to-vehicle communications
Algorithms for trailer movement and braking
Handling for adverse conditions

Copyright © 2016 Oliver Wyman 19

TRANSPORT & LOGISTICS 2016 Innovations

be an entry point for licensing. These systems could in terms of solving long-term industry structural
then be gradually expanded over time to take on a larger problems. Railroads could face regulatory and labor
share of tasks or to control trucks as part of a platoon. union issues, but automation would be easier to
Safety concerns might lead to public demand that implement from a technology standpoint.
fully driverless trucks initially operate on dedicated Most critically, automation could reduce motor carrier
and segregated highway lanes. But while converting costs enough to make them competitive with rail over
some lanes to autonomous-only vehicles would likely longer distances. If this happens, failure by the railroads
add highway capacity (and thus cut congestion), to move quickly enough in response could lead to a loss
this approach could be a political non-starter unless of market share that would be difficult to make up.
there are sufficient lanes in each direction to serve
conventional drivers as well.

AUTONOMY: Vice President
The technology for driverless trucks and trains will
largely be in place within the next few years, and the JUERGEN REINER
economic imperative will only escalate. Driverless Partner
trucking faces more hurdles but has more to gain

Copyright © 2016 Oliver Wyman 20



Copyright © 2016 Oliver Wyman 21



PREDICTIVE MAINTENANCE IS one support – spanning from procurement and intervals. Train manufacturers estimate that
area in transportation that is innovating operations planning to top management. use of asset monitoring tools can reduce
on two fronts – drawing from both big material-related costs by up to 15 percent.
data and the Internet of Things. And it is By triggering specific maintenance
growing: A recent survey by Oliver Wyman THE BENEFITS OF operations only when they are actually
in the aviation maintenance, repair, and PLANNING AHEAD needed, predictive maintenance helps
operations (MRO) space found that more As its name implies, predictive maintenance optimize maintenance planning and
than half of the companies surveyed are uses techniques to determine when allocation of capacity (such as teams and
planning more investment in predictive in-service equipment is most likely to workshops), which in the airline industry
maintenance over the next five years. need maintenance. Timing maintenance alone could reduce maintenance labor costs
That’s because a holistic program of procedures to match maintenance needs by 5-10 percent. Finally, customers benefit
predictive maintenance can increase is improving rapidly, thanks to big data too when equipment breaks down less: In
asset reliability and availability, as well analytics, while smarter equipment is Singapore, the introduction of predictive
as generate savings in areas such as labor able to provide operators with real-time maintenance reduced the number of train
and material costs. condition information. breakdowns from 3.3 to 1.3 per 100,000
The implementation of such programs, By reducing time-consuming routine train-km between 2012 and 2014.
however, is anything but simple. To maintenance, for example, experts estimate
fully capture the benefits of predictive that Airbus’s and Boeing’s predictive
maintenance modeling and analytics maintenance systems in the aviation space DEPLOYMENT CHALLENGES
can require a level of transformation that could increase fleet availability by up to Deploying predictive maintenance is a
companies often initially underestimate 35 percent. Similarly, asset monitoring three-step process, and each step comes
and fail to engage around. Predictive means that parts are replaced or repaired with its own trials:
maintenance is more than just a technical only when needed, rather than using Collection of relevant real-time data:
shop project – it requires comprehensive traditional time- or distance-based Key onboard metrics must be defined

Copyright © 2016 Oliver Wyman 22


and data collected from a broad and 500 companies believe that they have actions across the value chain, such as
growing range of sensors that enable a talent gap when it comes to big data maintenance activities planning and
increasingly accurate assessment of analytics – a critical capability needed to spares ordering.
asset condition. Predictive maintenance make predictive maintenance work. One Supplier relationships and contracts:
algorithms also require collecting relevant way to address this problem can be through Predictive maintenance can support
data from external sources, such as cooperation with advanced big data firms. stronger operator-supplier relationships and
prior maintenance done on the asset For example, to develop the concept of more innovative contract models. By jointly
and baseline information from original Digital Twin (a data model of a specific analyzing performance data, for example,
equipment manufacturers (OEMs). physical asset), GE Aviation collaborated operators can negotiate with manufacturers
Data processing and analysis: Analyses with its sister company, GE Digital, to for targeted levels of performance or
must be geared toward determining consolidate the digital capabilities of the equipment availability, while manufacturers
estimated remaining useful life of industrial group. can secure more lucrative contracts if they
components and spotting irregularities IT infrastructure: Requirements can supply spares and repair services in
in asset functionality that might signal a for predictive maintenance IT usually response to real-time equipment needs.
need for maintenance intervention. Typical differ significantly from other systems, Of course, to make these changes work
challenges include developing algorithms as these systems need to be real-time, at a transformative level also requires strong
that translate data into usable results, highly interfaced, and extremely secure. top-down engagement, on-boarding and
scarcity of talent (such as data scientists), Implementation of predictive maintenance buy-in across functions, a sound business
and gaining access to data that might be may thus require major modernization of case, and rigorous program management.
limited by OEMs’ proprietary protocols. IT systems. The airline industry is dealing Regardless, no crystal ball is needed to
Forecasting and acting: Defined with this problem now, for example, as understand that predictive maintenance
actions should be triggered based on three-quarters of its IT systems were must be part of the future for transportation
rules integrated into the predictive model. installed prior to 2002. companies looking to ensure long lives and
Finding the right threshold to trigger Data management: Data acquisition top-notch performance from their assets.
an action is critical, especially to avoid raises many issues, including quality
over-maintenance. Information technology and usability of data collected and data
interfaces may require upgrading to ensure ownership. One solution widely adopted
actions are triggered across all relevant by leading companies is to set up a ERIC CIAMPI
systems, such as maintenance planning dedicated structure, such as a data lab, Principal
and procurement. with responsibility for managing the
predictive maintenance system and data
flows across the company. JEAN-PIERRE CRESCI
SOLVING THE PUZZLE Functional coordination: Maintenance Partner
Successfully introducing predictive planning and parts procurement must
maintenance requires finding innovative be done in real time to make predictive
solutions to these challenges, which maintenance work, which often exposes a SÉBASTIEN MAIRE
in turn may necessitate some level of lack of coordination among maintenance, Partner
transformation across the company. operations, and supply chain teams. In the
There are five areas that may require UK, operator Virgin Rail and manufacturer
extra attention to make predictive Alstom Transport developed a tool called Lucia Zhang, an Associate in the Munich
maintenance happen: HealthHub to align their roles. The tool Office, also contributed to this article.
Talent: According to the Harvard calculates the remaining useful life of Developed in collaboration with Teradata.
Business Review, two-thirds of Fortune components and automatically triggers

Copyright © 2016 Oliver Wyman 23


A NEW GENERATION OF MEDIUM-SIZED, or killing off airports. Airlines and airports their long-range counterparts (such as
long-range, and fuel-efficient aircraft has remain locked in competitive dynamics the Boeing 777 and Airbus A380), making
opened up non-stop routes that not long and still must find innovative ways to it possible for airlines to serve medium-
ago would have seemed incredible: London, draw in passengers and remain relevant. and long-haul markets worldwide that
UK to Austin, Texas; Birmingham, UK to New But the new aircraft, if used intelligently, otherwise would not have enough demand
Delhi, India; Stockholm, Sweden to Oakland, could provide a welcome competitive tool to support large aircraft. Airlines can use
California; and San Francisco, California to for airlines. At the same time, major hub the planes to schedule more non-stop
Chengdu, China, to name just a few. airports will need to work harder to keep up services, thereby increasing travel time
This technology is connecting mid-sized as the technology boosts traffic and service flexibility for business travelers, while
secondary and small regional markets levels at secondary and regional airports. higher service levels can be offered at
that previously would have required a an attractive cost per seat, appealing to
stop somewhere along the way to serve business and leisure travelers alike.
long-haul destinations. It’s an evolution of NEW PLANES, Airlines are using the technology to
technology, rather than a revolution: These NEW MARKETS explore some interesting new business
new aircraft aren’t turning unprofitable New aircraft like the Boeing 787 and the models, such as low-cost service for
airlines profitable, changing travel habits, Airbus A350 seat fewer passengers than longer flights or to feed network carriers’

Copyright © 2016 Oliver Wyman 24


hubs. For example, British Airways has

launched a London-to-Austin route that
uses a 787 with just 214 seats – a roomy,
passenger-friendly seating arrangement AIRBUS BOEING
compared to most transatlantic flights.
At the other end of the density spectrum, Narrowbody Widebody Narrowbody Widebody
Norwegian Air Shuttle is now operating 5,535 1,243 4,373 1,278
low-cost flights from Scandinavia and
London to North America, using Boeing 1,064 311 1,301 199
787s configured to hold 291 passengers.
The next generation of smaller,
single-aisle aircraft now being built, with
around 180 seats (the Airbus A320neo 4,471 932 3,072 1,079
and the Boeing 737 MAX), will add around A319neo: 50 A330neo: 170 737 MAX: 3,072 777X: 306
500 miles of range over existing models. A320neo: 3,327 A350: 762 787: 773
This will make possible another wave A321neo: 1,094
of potential regional routes between
the East Coast of North America and
Western Europe. WestJet is already
testing the potential for such services on
Dublin, Ireland-St. John’s, Newfoundland
and Halifax, Nova Scotia-Glasgow,
Scotland routes, using its existing 737s. Key: Aircraft model type
Still, these examples don’t indicate Legacy Next generation
fundamental change to the industry. Rather,
Note As of December 2015. Excludes aircraft models for freight or military use; Airbus (A330-200F) and
they show that airlines are experimenting Boeing (737-800A, 767-300F and 777F)
with how the new technology can be used Source Airbus, Boeing, Oliver Wyman analysis
to increase their competitiveness and open
up new markets, while maintaining their
traditional hub-and-spoke networks. As a
result, many airlines also are using the new
planes in traditional ways. For example, convenient connection services, or top- is to remind airlines and airports that
British Airways has put 787s on its London of-the-line entertainment and shopping. the choices available to customers are
Heathrow-Toronto, Canada route to replace Another option could be innovative greater now than ever before – and these
larger 777s and aging 767s. collaboration with other stakeholders in the choices will only multiply. Generating
travel value chain, such as joint marketing future value will require looking to both
campaigns with local city, tourism, and hotel the past and the future: embracing
THE STICKINESS PROBLEM organizations to drive incremental demand. innovations such as digitalization, while
Long-haul point-to-point services will And then there are the innovations to be working harder to achieve traditional
increase passenger traffic through some had from “going digital.” For example, when strategies such as customer service and
secondary and regional airports, which travelers face a choice over which airports to operational excellence.
could reduce the dominance of some hub use, digital innovations such as wayfinding
airports. They are unlikely to be more than apps or automated parking/transit systems
a blip on the radar, however, for the largest could tip the balance for some customers. At
hub airports and the tens of millions of the same time, a “digital inside” focus would MICHAEL KHAN
passengers they carry each year. Hubs seek to maximize data automation and Principal
that do find themselves under pressure digitalize processes that connect the airport
will need to work on making themselves to airlines, ground handlers, and other air
as “sticky” as possible for customers. This service providers. BJOERN MAUL
will require putting the customer at the Partner
center of all activities and delivering a client
experience that is a true differentiator – one LOOK BOTH WAYS NOW
not easily matched by competitors. This The most important lesson of the new TOM STALNAKER
might include state-of-the-art services and aircraft technology now in use and Partner
operations, such as the fastest and most coming online over the next few years

Copyright © 2016 Oliver Wyman 25


NORTH AMERICAN FREIGHT RAILROADS are in the future, it will likely be an even better value as
currently caught up in an unstable environment that crude-by-rail costs increase due to new regulations.
is shifting on many different fronts. Their baseline
energy traffic is eroding – some of it for good. They
face structural industry changes that will impact MEXICO AND E-COMMERCE MOVES
their businesses for the foreseeable future. And The automotive industry is picking up its tools and
innovations in the trucking industry may challenge moving large portions of production to Mexico, which
the railroads in new ways. What will it take for the bodes well for US-Mexico cross-border rail, but is
railroads to acclimate and prosper? reducing US-Canada cross-border and US domestic
rail movements. A number of other manufacturing
industries also are increasingly near-shoring in Mexico,
THE DROP-OFF thanks to its more than 40 free-trade agreements.
IN COAL AND OIL Another large slice of the rail business, intermodal
One of the biggest issues for North American freight traffic (containerized freight) is being impacted not
railroads is the rapid decline in coal traffic, which only by increased Mexican manufacturing but also by
accounts for a third of rail tonnage, and which fell by the continued movement of both wholesale and retail
12 percent from 2014 to 2015 alone. Coal is being buyers from brick-and-mortar stores to the Internet.
replaced by cheap and abundant natural gas as well as These customers will increasingly expect same-day
renewable energy for electricity generation. In 2015, or even two-hour delivery windows. In response,
natural gas surpassed coal as the top fuel source for e-commerce giants are developing larger, faster
electricity, while renewables accounted for 68 percent networks that can support shorter hauls between
of new US electric generation capacity installed. ports/warehouses and distribution/fulfillment centers.
Crude oil poses similar concerns. A boom in
domestic production over the past ten years added
many thousands of rail carloads, as North American CONTINUING
pipelines were unable to keep up with the rapid COMPETITIVE PRESSURES
increase in this trade. But crude now looks unlikely Existing and potential developments in trucking are
to grow beyond its current 3 percent of rail tonnage. adding to railroads’ competitive challenges. Right now,
Pipeline infrastructure is being added and low oil prices low fuel prices are proving to be a great boon for trucking,
have led to a drop in drilling. Pipeline was already half which is less fuel efficient than rail. Trucking companies
to one-third cheaper than rail for crude oil movements; have been able to raise driver wages without increasing

Copyright © 2016 Oliver Wyman 26


Copyright © 2016 Oliver Wyman 27


rates, thereby reducing turnover and slowing the pace of single-commodity trains, such as those that carry
what is expected to be a long-term driver shortage. intermodal, coal, or grain, and mixing traffic on trains
In the medium term, there’s the threat that size instead (as smaller “blocks” of railcars). As one railroad in
and weight limits could change, meaning that trucks North America is already doing, mixing blocks of different
could get longer and heavier. Those in favor cite economic commodities keeps train sizes stable, but enables more
and environmental benefits from loading more freight frequent departures, as the cars do not sit waiting until
on each truck; those against are concerned about safety there are enough of one type to make up a train.
and yet more damage to tired infrastructure. Congress This approach is going to be increasingly desirable,
is currently studying the issue, but we expect that larger as it caters to a consumer-based economy that requires
trucks are indeed on the horizon. smaller, more frequent, and highly reliable shipments
to meet the needs of fast-turn supply chains (e.g., retail
stores, Amazon fulfilment centers). Large volume, 100-
BECOMING THE BEST OF BREED plus car shipments, on the other hand, are a declining
For the North American freight railroads, ensuring share of the railroad business. In 2015, average train
their survival under the weight of these changes will speeds increased by more than 10 percent, but average
mean evolving to offer greater speed and flexibility, so as dwell time and railcars on-line remained high,
to better serve just-in-time manufacturing and exports, suggesting no change or even longer wait times for
as well as e-commerce driven containerized goods. The train departures – this is a situation that will have to
result is that North American freight rail may need to change if railroads are to correct their current slowing
become a bit more like European freight rail, in the sense growth trajectory.
of running higher-frequency trains. We also may be seeing the beginnings of a more
Running more frequent trains can serve two goals: regionalized North American economy, with origins
improving shipping reliability and improving asset cycle being clustered closer to destinations. As an example,
times and overall costs, by reducing the time trains sit auto parts plants are being built close to car assembly
idle between departures (dwell time). Generally, running plants, creating a cheaper, faster, and more dependable
more frequent trains requires breaking up traditional supply chain. Another example is container board


2011-2015 (QUARTERLY DATA)




2011 2012 2013 2014 2015

Note Includes BNSF, CN, CP, CSX, FXE, KCS, NS, and UP
Source Oliver Wyman analysis

Copyright © 2016 Oliver Wyman 28


production: Historically, producers sent products out RODNEY CASE

to customers across the country from a single plant. Partner
Now, large producers maintain a plant in each major
production area, so that they can deliver product from
the plant closest to each customer. JASON KUEHN
Logistics terminals that facilitate the transfer of Vice President
goods between modes (such as rail-truck) also are
now being increasingly co-located in high-density
business districts with facilities that can process a BILL RENNICKE
range of commodities (plastics, lumber, steel, building Partner
materials) and distribution centers for finished,
containerized goods. Compressing distances in these
ways could drive the development of new regional David Hunt, an Engagement Manager in the
services, including blended trains (with a mix of bulk Transportation Practice, also contributed to this article.
commodity, automotive, and containerized traffic)
and more direct point-to-point services.
This is not the first time the North American rail
industry has been forced to adapt. Thirty years ago,
new emissions regulations led to long trains moving
low-sulfur coal, rescuing an industry in the throes of
bankruptcy. Now another energy revolution, coupled
with logistics innovations, will likely require the industry
to make another breakthrough transformation, adapting
to shorter distances and smaller shipment sizes, while
delivering the speed and reliability that are the hallmarks
of a precision supply chain.


200 9 of total


150 Crude oil 6 CAGR

4.0% Solar
of total
Natural gas energy
100 3

Coal Wood/waste
50 0 biomass
2008 2011 2014 2017 2007 2017

Note Index basis: coal production: millions of short tons; crude oil: Note Does not include hydroelectricity. Wood biomass is wood
million barrels per day; dry natural gas: billion cubic feet per day and wood-derived fuels. Waste biomass is municipal solid waste
Source US Energy Information Administration from biogenic sources, landfill gas, sludge waste, agricultural
byproducts, and other biomass. Liquid biofuels are ethanol,
biomass-based diesel, and co-products
Source US Energy Information Administration

Copyright © 2016 Oliver Wyman 29


WITH MORE HIGH-TECH COMPONENTS time: manually developing an end-of-life an integrated, holistic modeling approach
and ever more stringent regulations to maintenance plan for the final 6-12 months and big data tools and techniques to fully
meet, the costs to own, lease, and maintain of use. This approach narrows down the account for the complexity of multiple
transportation assets keep going up. On options available to optimize use versus assets with different return or retirement
top of this, the expense of maintaining costs, however, and so can be a recipe for requirements. As an example, an airline
a plane, ship, or piece of rolling stock in wasting millions of dollars in unused asset might have 200 to 300 aircraft with widely
top shape generally increases as an asset uptime, unexpected maintenance, or lease varying lease return dates and terms.
ages. End-of-life or end-of-lease can be a return penalties.
particularly fraught time for decision making Our research has shown that asset
about when and whether to undertake end-of-life planning needs to start much BALANCING COSTS
repairs and overhauls. earlier: three to five years in advance of AND USAGE
Too often, the approach to keeping retirement or lease return, to provide It’s odd that companies which employ some
costs from spiraling as an asset’s expiration maximum flexibility. This planning also must of the most advanced operational research
date nears is a throwback to another move into the information age – utilizing tools in the world often don’t apply similar
analytical might to their fleets. Yet today’s
optimization modeling tools and techniques
can bring together many variables – such as
utilization, asset maintenance history, lease
COMPONENTS OF TOTAL FLEET COST return conditions, and projected used asset
AVIATION EXAMPLE availability and market pricing – to extract
the most value from each and every asset.
AIRCRAFT LEASING AND FINANCING End-of-life optimization works to increase
Aircraft-specific costs of leasing or financing asset availability and minimize costs by
Opportunity cost of ownership considering the most intelligent use of assets
across a fleet and how assets should be
sequenced: In the case of an aircraft engine,
for example, when should the engine go on a
wing, when should it move to a lower-mileage
service, and when should it become a spare
to ensure that it is returned with exactly the
amount of lifespan required by the lessor?
Ultimately, optimization modeling allows
remaining asset uptime to be balanced
against the residual value of the asset.


Engine costs Fleet-specific fuel cost SIMPLIFYING LEASE
Airframe task costs Fuel pricing VERSUS BUY
High-value component costs Engine age and It is also useful for making “lease versus
Landing gear costs degradation curves buy” decisions and contract-length

Copyright © 2016 Oliver Wyman 30


decisions for leased assets, as modeling can per redelivered aircraft in maintenance developments, such as an expanding flow
factor in the supply and pricing dynamics costs alone. of real-time information from smart assets
of the used asset market, the impact of Similarly, asset maintenance in the rail (for example, streaming health monitoring)
remaining uptime at retirement on value, and maritime industries represent large and and more coordinated information sharing
or provide ideas for better alignment to complex cost buckets. “Own versus lease” between operators and manufacturers.
lessor-stipulated return requirements. is a common dilemma and asset lifespans These upgrades will provide even more
As an example, a delivery surge in the are both long and somewhat flexible: Older opportunities to plan ahead, making end-
early 1990s means that airlines will likely rolling stock and ships can be cascaded of-life decisions more a matter of choice
retire more than 11,200 aircraft over the down into secondary services or even than chance.
next decade, nearly twice the number rebuilt. These industries also face volatile
retired over the past ten years. Many of markets that make sophisticated modeling
these aircraft are leased, and preparing and scenario evaluation even more
an aircraft for redelivery to a lessor can be necessary, as multiple “what if” choices KRISTINA GERTEISER
a costly process if not planned properly. can be explored to optimize the tradeoff Partner
Some airlines will face tens of millions of between maintenance/overhaul costs and
dollars in last-minute maintenance costs, the likelihood of generating future revenues.
late redelivery penalties, and out-of- NEIL McCONACHIE
service downtime. Principal
By thinking about lease return EMBRACING A
optimization more holistically over a DATA-DRIVEN FUTURE
longer time period, however, an airline We expect that end-of-life optimization CHRISTOPHER SPAFFORD
has more options. These include more modeling will eventually become the Partner
efficient engine swapping, life limited norm for transportation industries with
part (LLP) programs that match parts to life-limited assets that require complex
the remaining life of the leased assets, maintenance and operate in highly
and more proactive and predictable regulated environments. Evolving
surplus parts management. In our such an approach sooner rather than
experience, such planning can help later, however, will make it easier to
an airline save an average of $2 million incorporate anticipated “digital industry”







2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Turboprop Regional jet Widebody Narrowbody

Note Excludes government and military

Source betterinsight™ by Oliver Wyman

Copyright © 2016 Oliver Wyman 31


THE AEROSPACE INDUSTRY is moving from a ten-year intellectual property. Without any new, large programs,
development cycle to a need for immediate, on-demand that means quickly developing incremental innovations.
services. This means that as original equipment Rather than making one big bet on a new aircraft model
manufacturers (OEMs) move into the testing and or engine, companies will need to make thousands
delivery phases for a new round of aircraft models, their of small, quick-turnaround bets on new ideas and
attention will need to turn from long-term projects to technology. Additive manufacturing (3D printing) and
a range of short-term issues associated with launch, predictive maintenance are examples in the aftermarket.
support, life extension, and operational flexibility. These On the delivery side, OEMs will have to reduce lead
issues are not new, but a record volume of deliveries times both on the factory floor and across the aftermarket
and the emergence of new customers will make quick while lowering the risks associated with upstream
resolution of any challenges paramount. materials and suppliers. Similarly, manufacturers will need
At the same time, OEMs must determine how to improve shop-floor work instructions while rapidly
they will facilitate and accelerate longer term growth, integrating systems for final assembly. Under pressure
particularly in the aftermarket. Crucially, OEMs find from the changes coming about due to the development
themselves facing off against aftermarket maintenance, of “digital industry,” engineers will need to shift from
repair, and operations companies (MROs) to serve managing multiple development cycles over long periods
emerging markets and clients. of time to solving problems in real time.
It’s important as well that OEMs empower local leaders
to make the split-second decisions that are required to
GOING BEYOND THE BACKLOG maintain efficient operations. Typically, a shop manager
Major OEMs currently have up to ten years of production within a factory may oversee several hundred workers
in backlog, and the required delivery rate for new and is responsible for the end-to-end performance of
products keeps on accelerating. Most critically, as what boils down to a profit unit. The shop manager thus
aircraft and engine orders are delivered, they will not be needs the skills and decision-making power to collaborate
replenished at the same speed. Manufacturers therefore seamlessly with all relevant functions (supply chain,
will need to complement their revenue and earnings quality control, technical, work preparation, etc.). The
with aftermarket growth. Integrated and differentiated same pattern should be followed for local management in
services that reduce downtime while improving the engineering, procurement, and sales, such that cascading
performance of the existing fleet will be particularly empowerment permanently boosts performance.
vital. We see two opportunities here for OEMs to set
themselves apart: product strategy and delivery.
In terms of product strategy, OEMs will need to THE AFTERMARKET RACE
propose products and services that differentiate them As their backlogs wane, manufacturers will need to grow
from competitors and leverage their design-related after-sales margins in the face of fierce competition from

Copyright © 2016 Oliver Wyman 32


MROs, which are innovating at a rapid pace. MROs are GLOBAL MAINTENANCE, REPAIR, AND OVERHAUL MARKET
moving to adopt new technologies and solutions such FORECAST BY SEGMENT ($ BILLIONS)
as big data analytics, aircraft health monitoring systems,
predictive maintenance, new repair technologies, and 2015-2020 2020-2025
additive manufacturing. At the same time, large MROs CAGR CAGR
keep on expanding the range of services they offer to
operators and lessors, thereby reducing the need for
operators to maintain high parts inventories and helping 3.5%
them avoid long grounding periods for aircraft. The MRO $67.1
4.0% 4.7%
market is expected to grow from $67 billion last year to
$100 billion in 2025, and at least 10 percent of this value 4.1%
is projected to be in the area of completely new services. Component
In addition, the focus of competition between OEMs 4.8%
and MROs is likely to shift increasingly to emerging 5.9%
markets that are seeing high levels of fleet growth,
such as Asia. In these newer markets, after-sales 1.9% 1.0%
services are as yet fragmented and uncoordinated, with
low levels of workforce and logistics maturity. In these 2015 2020 2025
cases, OEMs looking to capture a larger share of the Source CAVOK Global Fleet and MRO Market Forecast
aftermarket from MROs could leverage their strong
supplier relationships and sophisticated supply chain
networks to offer new integrated service bundles, parts
management, and logistics solutions.
The engine for new growth in the aerospace
industry will be faster definition and roll out of ANY OF THESE TECHNOLOGIES NOW OR IN THE NEXT FIVE YEARS?
strategies to accelerate production and meet the Percent of survey responses (multiple selections possible per category)
demands of a growing aftermarket. OEMs will need
to continuously innovate to counter their competition Composite repair Additive
and take advantage of the large opportunities that will capabilities manufacturing
34% 15%
be offered by the aftermarket over the next decade.

New repair

Partner Predictive Aircraft health
maintenance monitoring
49% systems
Live maintenance 52%
through wearable and
mobile tech manuals
Source Oliver Wyman 2015 MRO Survey

Copyright © 2016 Oliver Wyman 33



Copyright © 2016 Oliver Wyman 34


THE CREDIT CARD MARKET is intensely competitive. hold bank credit cards, and high‑frequency travelers are
In the United States alone, the ten largest issuers four times as sensitive as low‑frequency travelers.
offer some 140 cobranded travel rewards credit cards. So the answer to the question above appears to
Cobranded travel cards are popular with consumers, be better and differentiated rewards and benefits,
who receive points that they can use for free flights as these exert the greatest influence by far on a
and hotel stays; and with travel suppliers, as a means consumer’s decision to acquire a cobranded travel
to grow their share of a travel market that totals card, together with moderate interest rates. Card
$1 trillion annually in the US, according to the US Travel attributes such as issuer, network, and sign-up bonus
Association. But their popularity may be in danger, as are taken into consideration as well by consumers,
bank-issued rewards cards offer incentives that may have but count considerably less in decision making.
more appeal than current cobranded travel card offers. To create offers that “stick” with consumers, travel
Most airlines and hotel chains offer a cobranded card. suppliers will need to carefully consider the needs,
It’s no surprise that they do, as cobranded travel cards preferences, and travel and purchasing behaviors of
have been shown to solidify brand loyalty and increase their target customers, and use these inputs to develop
consumer share of wallet – by two or three times as differentiated and innovative rewards packages.
much for airlines and up to seven times as much for Benefits like discounts on in-flight meals and room
hotels, compared to what the average travel consumer service or elite-level qualifying points for purchases
spends with an airline or hotel chain. But the sheer are popular among travelers. But they are becoming
number of rewards-based cards makes it a struggle to increasingly common as well.
stay ahead of the pack. Furthermore, generational and Our research suggests companies need to take a
technology changes are emerging that will require travel harder look at rewards that are highly personalized,
suppliers to innovate as never before if they want to keep experience-based, offer more choices, or that are
their cards in travelers’ pockets. perceived as exclusive, particularly for higher-spend
card users. Such rewards might include flight simulator
tours, suite upgrades at prized properties, or private
RAMPING UP REWARDS dinners with renowned chefs. Creating products that
Credit card holders do value cobranded travel cards, combine both better rewards and interest rates is
according to an extensive survey we recently conducted another route to consider, as these would appeal to
of the US cobranded card market: 80 percent of card customers who carry a balance. The effort would be
holders believe that they offer as much or more value than worth it: Such customers account for more than 80
bank-issued rewards cards. But consumers also are willing percent of credit card profits for partner banks; these in
to switch when the grass appears greener: 40 percent turn underwrite travel suppliers’ rewards programs.
change their primary credit card at least every two years. At the same time, airlines and hotel companies must
This leads to a critical question for airlines and continue to maintain strong travel rewards redemption
hotels – how do they persuade consumers to acquire programs, as over half of cobranded travel card holders
their specific cobranded card, spend with it, and not are infrequent travelers and primarily want to earn and
switch to the next card that comes along? The data tells redeem reward points for flights and rooms.
us that better rewards are the reason for half of primary
credit card switches. Even customers who carry a balance
month-to-month are more likely to switch because of NEXT-GENERATION
rewards than due to a lower interest rate. Not that interest CONSIDERATIONS
rates don’t matter – cobranded travel card holders are In addition to increasing the appeal of their cobranded
twice as sensitive to higher interest rates than those who travel cards for current travelers, travel suppliers need

Copyright © 2016 Oliver Wyman 35


to think seriously about the future. In particular, how growing competition and ensure that their cards
will they deal with generational shifts in consumer continue to be relevant, airlines and hotels will need
preferences and payment behavior? to design rewards programs that balance strong
Today, only a third of credit card-carrying Millennials travel points redemption options, differentiated and
(the generation aged roughly 18-34) hold a cobranded novel benefits, and interest rates. And they must start
travel card, compared to half of credit card users who crafting strategies now to deliver next-generation
are their parents’ age. These tech-savvy consumers cobranded travel card programs that can encompass
value different features and use credit cards in a different evolving technology and changing consumer lifestyles.
way than older generations. For example, Millennials
like being able to customize physical card designs. They
also expect credit card payment capabilities and other
features to be wholly integrated with their digital lives. INDERPREET BATRA
Millennials are two and a half times more likely than Partner
the overall market to use mobile wallets as their primary
spending method. Features like keyless check-in and an
invisible payment experience within the travel supplier’s DOUG CARLUCCI
mobile application are the starting line for this segment. Partner
Winning the wallets of this generation as they age will
require figuring out what rewards and experiences
they most value. The good news for travel companies is JESSICA McLAUGHLIN
that Millennials exhibit a passion for travel, spending a Partner
greater share of their income on flights and hotels than
any other age segment.
In summary, cobranded travel rewards credit Chris Hartman and Jeff Marx, both Engagement
cards are an incredibly powerful financial- and Managers in Oliver Wyman’s Transportation Practice,
brand-boosting tool for travel suppliers. To counter contributed to this article.

Copyright © 2016 Oliver Wyman 36



Under 25 Airline rewards

30-34 Hotel rewards

Retail rewards
50-59 Other travel
65 or older Other rewards
0% 50% 100% 0% 50% 100%


6-7 1% 10 or more

5% 2%
4-5 1-3
21% 71%

of people

Preferences by age group
#1 preference #2 preference

Ability to choose your own

rewards from a list of options
<25 35-39 50-59 60-65 >65 40-49

Discounts on reservations
with the cobranded merchant
30-34 40-49 (e.g., discounted tickets, room rates) 35-39 50-59 60-65 >65

Elite-level qualifying
miles or points
25-29 <25

BY <35 AGE GROUPS existing reservations
Increased options for card designs
Merged mobile app for issuer Accrual benefits
and cobranded merchant from other card issuer products
Mobile/innovative payment capabilities (e.g., checking account, mortgage) 30-34

Source Oliver Wyman 2016 Cobranded Travel Rewards Credit Cards Study

Copyright © 2016 Oliver Wyman 37


For copies of these publications, please visit


2015-2016 JOURNAL, VOL. 5
An annual study that provides A collection of perspectives on the



Tom Stalnaker, Partner
Khalid Usman, Vice President
Aaron Taylor, Senior Manager
a detailed breakdown of airline complex risks that are determining
economic data. many companies’ futures.




INCUMBENTS IN THE How incumbent organizations can A collection of viewpoints on industrial
LAGGARDS WILL BE LOSERS ultimately win in a marketplace companies’ challenges and trends as
transformed by digital disruptors. PERSPECTIVES
well as their opportunities and potential
INDUSTRIES courses of action.


The Internet of Things is unsettling VOL. 2
established players in insurance, In this collection of articles, we
manufacturing, services, telecom, showcase ten ideas from across our
retail, distribution, and utilities. firm for how business leaders can
improve and grow their businesses.


A magazine for automotive industry ENERGY JOURNAL This issue of the Oliver Wyman Energy

leaders that provides insights into Journal reflects the latest thinking across
trends, prospects, and solutions for Oliver Wyman’s energy practice on how
manufacturers, suppliers, and dealers. shifts underway will create new risks and
opportunities across the energy sector.

Copyright © 2016 Oliver Wyman 38

Oliver Wyman is a global leader in management consulting. With offices in 50+ cities
across 26 countries, Oliver Wyman combines deep industry knowledge with specialized
expertise in strategy, operations, risk management, and organization transformation.
The firm’s 3,700 professionals help clients optimize their business, improve their
operations and risk profile, and accelerate their organizational performance to seize
the most attractive opportunities. Oliver Wyman is a wholly owned subsidiary of
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Oliver Wyman’s Transportation Practice advises companies and governments along
the entire transport system to help shape the face of the industry. With deep industry
expertise, our consulting staff helps clients stay ahead of the competition by working with
them on their most difficult problems around strategic growth, operational improvement,
and organizational effectiveness. Our team also excels at innovative financial solutions
for transportation assets and has a series of specialized transport-related capabilities,
including CAVOK’s maintenance program and safety and regulatory certification support;
the suite of MultiRail software products for enhanced rail planning and operations; and, a powerful suite of analytical tools to manipulate reliable and enhanced
aviation data to drive key business insights.

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