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Can American keep flying?

Can American keep flying?

During the past couple of years, the biggest U.S. airlines wrestled with the devastation wrought by the recession and 9/11. But by August, they were screaming uncle. In one three-day stretch, U.S. Airways declared bankruptcy, United Air Lines Inc.'s stock price hit an all-time low on fears it would follow suit, and American Airlines Inc. launched a cost-cutting campaign designed to alter the guts of its core business model.

On Aug. 13, American, the world's largest airline, announced that its Dallas/Fort Worth hub would begin spreading out flights more evenly throughout the day (a process called depeaking) in November; retire its 74-jet Fokker 100 fleet; reconfigure and consolidate a number of aircraft fleet types; reduce capacity 9 percent by November; and cut 7,000 jobs by March 2003.

Combined with other initiatives already implemented, AA expects to save US$1.1 billion in annual operating costs -- and that's before taking account of the capacity reductions. But that's not nearly enough: In a September speech, Chairman and CEO Don Carty said that during the next several years the $US19.6 billion company needed to reduce structural costs by at least $US3 billion annually.

A Centre Seat

In the middle of all this is Monte Ford, 43, American's senior vice president and CIO, who joined the airline two years ago at a calm-before-the-storm moment with orders (from a CEO who emphasises IT's importance) to rebuild his company's IT department almost from scratch as it goes through one of the most difficult periods in its 76-year history. Ford and his IT group are smack dab in the middle of American's efforts to rethink every aspect of its business. Almost everything the company does to right its ship and recover from the past couple of years -- from the recession to the 9/11 terrorist attacks -- affects IT's roles and plans.

For his part, Ford remains upbeat in the face of the utterly downbeat straits the company finds itself in. The fact is, he gets lift from his group's central role. He believes ITS (for Information Technology Services) can deliver.

"All of the things Don Carty said we have to do -- with the exception of moving seats on some of the airplanes -- has technology as the long tent-pole, has technology at the centre of it, has the delivery of technology as the fundamental part of the ability to make the change," Ford says. "There's not a product, service or enhancement we can make that doesn't involve technology."

One key example: The depeaking efforts -- spreading out flights more evenly throughout the day, a vital part of American's altering the way it runs the hub-and-spoke model -- rely on ITS's operations research group, which used its data warehouse capabilities to calculate new flight and airport scheduling. The depeaking that started at Chicago's O'Hare Airport in April 2002 was a proving ground for the airline to announce the changes at its Dallas/Fort Worth hub that start this month.

American is not alone in its quest to wring critical efficiencies and insights from IT. All the airlines, in fact, will need to focus on making IT an integral part of the business strategy if they expect to survive the inevitable, cyclical shakeouts that are part and parcel of playing in this highly competitive industry, says Henry Harteveldt, senior analyst at Cambridge, Mass.-based Forrester Research. "Airlines will probably compete more on technology than on the actual in-flight product," he says.

Making IT central to the airline's reinvention is one thing; paying for it is another. Like many CIOs, Ford's biggest challenges are squeezing the highest efficiencies out of a budget that keeps springing leaks and making those dollars that do seep his way work harder. Especially during this slump, which is forcing AA and its competitors to look closely at every nook and cranny of their business (had a hot in-flight meal lately?) -- or risk going the way of Eastern, Pan Am and PeopleExpress before it.

Ford sums up his role in AA's turnaround bluntly: "I either lead AA into clear technology leadership within our industry, or I have some difficult conversations with Don."

The Quadruple Whammy

Carty hired Ford in December 2000 and tasked him with a daunting challenge: Bring back the technology leadership -- decision-making power over the architecture, design and engineering of AA's IT systems -- that had parachuted out the cockpit door when the Sabre Group, AA's longtime IT outsourcer, was spun off earlier that year.

Ford planned on using 2001 as a transition period as he created a new IT organisation. He wanted a select group of IT and businesspeople to have an orientation period on IT and the airline industry before developing an IT leadership plan. American would build the right kind of IT group, focus on integration projects and develop a 2002 budget. It sure seemed reasonable at the time.

In short order, however, Ford and his still-forming team had to deal with a quadruple whammy.

1. The $US742 million purchase of TWA. Ford says the TWA merger announcement, in January 2001, didn't make him put aside other projects as much as it refocussed him on the goal of bringing TWA into AA's IT environment. Ford also notes that AA didn't have to reinvent the wheel. "It became another large set of activities and projects that we had to integrate into our planning cycle.... TWA already had a great methodology and capability in its organisation; it now had to focus on integrating its systems into American," he says.

With the merger came TWA's vice president and CIO, Ken Wilcox, who would take charge of the IT infrastructure for the combined airlines.

2. An economic recession that severely affected business travel. Soon after work on the TWA merger got going, in spring 2001, came the beginnings of the recession. Ford immediately cut $US50 million from the ITS budget. (American won't disclose its total IT budget, but the company expects 2003 spending to be down another 10 percent.)

American also slowed down long-term technology projects, such as the implementation of some wireless productivity tools in the maintenance and engineering departments, and a rotatable parts inventory project (for parts that wear out, then are fixed and reused).

3. Sabre's announcement that it was selling its outsourcing business to EDS. The EDS-Sabre deal, announced March 15, 2001, included the $US670 million sale of Sabre's IT outsourcing business. Sabre also hired EDS to run its IT systems for $US2.2 billion over 10 years.

Talk about change management. Ford says the impact of that transaction was as much cultural as quantitative or qualitative. He made a lot of trips to EDS and Sabre locations to talk with employees about AA's strategy and what role they would play. As that deal kicked into gear, Ford slowed down more projects, some in the flight area (the process of getting planes out on the tarmac and in the air) and some at airports (service and productivity enhancements), many of which involved Sabre and EDS people.

4. The events of 9/11 caused an immediate reassessment of everything at the airline. The events included two American airliners, one that hit the World Trade Centre and another that struck the Pentagon.

"We stopped everything we were doing and reevaluated it all," says Ford. "We spent a great deal of time participating with various government agencies and airport authorities around getting the country back up and running in a secure manner that also focused on trying to provide convenience to our customer base."

Once again, Ford says, he and his team looked at their portfolio of projects to make those focusing on customer service and security the priority. Projects with long-term ROIs were either slowed down or jettisoned. He was also forced to cut back spending further. But it wasn't a slash-and-burn exercise, Ford notes. After all, American still had to finish the TWA integration by the end of 2001.

In person, Ford manages to keep a sense of humour about his first year at American. "All that was not part of the interview process with Don," he says, chuckling, leaning forward in his chair. Ford is tall, at least 6 feet 2 inches, with large brown eyes, a wide moustache and a commanding presence. He's dressed in an open-collared, greenish-hued short-sleeve shirt, slacks and well-polished loafers. (Ford says that when Carty became chairman in 1998, he decreed casual dress every day, a welcome benefit in the often stifling heat of Fort Worth, Texas, AA's headquarters.)

Ford adds, "What I've learned in business is that it's not a question of what things will happen to disrupt your plan. It's a question of how you respond to those things when they do, because they will."

A Staffing Rubik's Cube

Because he was building up an IT department and dealing with the disruptive events of 2001, Ford spent a lot of time figuring out how to fit people into his staffing puzzle.

Upon joining AA, Ford inherited about 100 IT people who had helped manage the Sabre and American relationship under the direction of then-CIO Scott Nason (Nason is now vice president of operations and planning technologies). There were also a few hundred, very decentralised IT people scattered throughout the 40 business units that ITS needed to bring together under one roof as part of an American-wide consolidation.

For example, AA.com, previously managed by the marketing organisation but now part of ITS, supplied 80 people. Ford insourced, or hired back, 259 people from Sabre and brought 15 of his former colleagues from The Associates First Capital, the financial services company where he had served as CIO before coming to American. Ford also needed to deal with about 4,500 folks who were transitioning from Sabre to EDS. And American kept 33 IT people from TWA following the merger (the rest of TWA's IT staff was laid off). ITS now has about 900 employees.

Ford says that, relative to the other hurdles he's faced, his biggest challenge was bringing this diverse mix of people together around a common culture, a shared set of values and goals. The ITS vision was this: Deliver innovative, high-return technology solutions to propel the airline into clear industry leadership. Ford and his team also developed a set of guiding principles: Emphasise the value of people, and give them training, education and rewards; communication; a simplified technology environment; execution without excuses; and continuous improvement.

Projects Move Ahead

And so IT projects continue, with an emphasis on wringing costs out of processes that make air travel happen. The airline is tackling a massive network upgrade, simplifying its complex, aging legacy environment and rolling out new customer service initiatives, like its self-service kiosks in airports. At the same time, it's drastically cutting back on its day-to-day operational costs and sunsetting some systems because of a cutback in funds for IT.

One area where American is investing a lot of energy is airport technology. That means an emphasis on the self-service kiosks, which lower costs and reduce the hassle of standing in long check-in counter lines. Customers with e-tickets can use the kiosks to check in (with or without baggage), get a boarding pass and change their seating assignment. John Samuel, vice president of customer technology, says that by the end of the year American will have more than 700 of the kiosks in U.S. airports. The company is also rolling out wireless curbside check-in, and roving agents are using wireless devices to help speed up lines in terminals.

Samuel, a laid-back sort who frequently interjects his conversation with a folksy chuckle, also oversees AA.com (he helped create the website six years ago), which was overhauled earlier this year. According to Samuel, booking volumes have roughly doubled every year since the site's birth; about one in four customers now book trips on the Web, and nearly half of those are using AA.com, which gets an average of 600,000 hits each weekday.

Samuel says the Web will soon be the single largest sales outlet for the airline. That's a good thing: This year, AA will pay some $US350 million in booking fees for tickets sold via travel agencies and websites using computer reservation systems like Sabre. The more tickets AA can sell direct, the more savings that will drop right down to the bottom line.

Ultimately, American wants to make as much of its processes electronic as possible. In June, it announced it was moving to 100 percent e-ticketing by December 2003. AA also wants to make airport transactions all-electronic. Dan Garton, executive vice president of marketing, says that there are currently 72 paper transactions at airport counters, such as pet kennel purchases, senior citizen discounts and upgrade coupons. Garton says they not only want to make those virtual, they want to reduce the overwhelming number of those transactions. "It's not just technology's job to automate complicated solutions," he says. "Its job is to eliminate, reduce and clarify."

Dog Days in the Airline Industry

In spite of the upbeat nature of Ford and his team and all their actions, there are reasons to wonder about the future of the nation's airline industry. While the overall picture is about as ugly as the airlines hope it can get, experts like Steven Morrison, an economist at Northeastern University in Boston, say it's likely American will survive, though in a smaller form.

Morrison, an economics professor at Northeastern, says that the industry, a low-margin endeavour even in good years, is still staggering from the aftereffects of the recession and Sept. 11. "I'm not worried about their fundamental survival. They may survive smaller. The industry needs to lose capacity but not that much," Morrison says.

Last year the industry lost a record $US7.7 billion. Through July of this year, the year-to-date revenue of the major carriers was only 77 percent of the same period in 2000. In May, revenue passenger miles (RPMs), the basic measure of production, declined 8.7 percent compared with May 2001 (one RPM equals one fare-paying passenger transported one mile).

American reported a second-quarter net loss of $US495 million. Its systemwide traffic for August declined 9.3 percent from a year ago, while the airline decreased its seat capacity by 9 percent. Year-to-date, through August, RPMs were down 12.1 percent systemwide versus a year ago. To help stop the bleeding, AA slashed its capital spending this year from $US3.6 billion in 2001 to $US1.8 billion this year, laid off 20,000 workers (not counting the 7,000 job cuts announced in August) and significantly reduced its operating expenses.

Business travellers, who generally pay higher fares and constitute a good chunk of the major carrier's revenue, have been slow to come back. There are a number of reasons: Increased security measures in airports have made flying more time-consuming; company travel budgets, which took a major hit after 9/11, have not rebounded the way the airlines had hoped; and face-to-face meetings are being replaced by phone and videoconferencing.

When they do travel, business fliers are now scouring the Internet, looking for the best deals on sites like Travelocity (owned by Sabre), Expedia and Orbitz. They're also gravitating toward lower-cost airlines, like JetBlue and Southwest (both have been profitable this year).

What's American to do? Carty thinks that there are fundamental problems in the way the major carriers do business. "I believe what we're up against in the airline industry is much more than a cyclical problem.... We need to take a long, hard look at literally everything we do, including some things that have always made good sense, to see if they still make sense in the new reality," he said in a speech at a transportation conference in New York City earlier this year. That includes reengineering the high-cost hub-and-spoke model, especially because airlines like Southwest, which don't use that model, can keep turnaround times on the ground briefer and thus keep their airplanes in the air longer. Carty also said the pricing model is badly broken. "It's hard to defend a system whereby the average fare we in the industry collect has -- in nominal, not inflation-adjusted terms -- declined over the past 10 years," he said.

Put another way: "The planes are nearly full, but they're losing money," says John Kasarda, professor of e-commerce and IT at the Kenan-Flagler Business School and director of the Frank Hawkins Kenan Institute of Private Enterprise at the University of North Carolina at Chapel Hill.

Then there's the potentially devastating wild card of a war with Iraq. In a September speech, Carty said a war could throw more carriers into bankruptcy.

Everyone Into the Boat

Ford has been dealing creatively with the dilemma he and many CIOs currently face: How to maintain critical IT investments in the face of decreasing IT budgets.

"The best time to implement capabilities and efficiencies is the time when you are cutting back and being more discriminate about the investments you make," says Ford, adding that with less money available, American moves forward only on those projects that have the highest impact and payback in the shortest period of time.

The result, Ford says, is that "the productivity on a per-person basis in the IT organisation is actually higher now than in times when we had more money."

Ford says his department's portfolio approach to IT investments makes that possible. He compares it to an individual investor who is bringing home less money. "You may be more discriminate about how you invest. You still need to make investments that are domestic, international, short term, long term, high risk, low risk." He says that companies that view IT only as a cost don't follow this approach. "They say, How much am I spending on IT, and how much can I cut?"

Ford also says cutbacks in spending make people more open to new ideas and more receptive to the kinds of fundamental changes American is making in its business to restore profitability.

To help his predicament, he's enlisting AA's key technology vendors in the battle. Earlier this year, he called about 12 of his most strategic vendors and consultants -- including EDS, HP, IBM, Sabre and Sun -- to a powwow at company headquarters. He told them that they could bring two people; most brought a senior salesperson and a company executive. All of them sat in the same room, competitor next to competitor, as Ford laid out AA's IT strategy and vision, a vision based on productivity, simplicity and innovation.

"I wanted our vendors and technology partners in the boat with us," he says. Ford told them what AA expected of them, their role in being a good supplier and AA's role in being a good customer. He didn't pull any punches -- he said that companies that wanted to make software implementations as complex and costly as possible would not be doing business with AA very long. On the other hand, those vendors that worked with Ford to innovate and simplify the company's technology systems, even if it meant reducing their revenue streams, would be rewarded.

Ford clearly relishes his role at the IT helm of the world's biggest airline. "It's the largest and most complex business problem in the world," he says, referring to the airline industry. How much IT can help invigorate American's fortunes remains to be seen. But Ford and his team won't be bystanders in the effort -- Carty has made it clear to Ford that technology is the engine that will drive the business going forward. However, it's clear that American will be taxiing for a while on its runway filled with struggles before it -- and the industry -- leaves the ground for bluer skies.

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