Mandate for Technology
Mandate for Technology In 1960, American set up a pair of IBM 7090 computers in Briarcliff Manor, N.Y., to create Sabre. The two computers each of which contained 20,000 individual transistors costing $80 apiece were able to process a then-breathtaking 84,000 telephone calls per day. The research and development, according to Sabre, took 400 man-years of work and cost almost $40 million, an investment that would be the equivalent of $231 million today.But Sabre has flown the coop. Last year, AMR spun off Sabre in a tax-free stock distribution worth $5.7 billion. Now completely independent, Sabre has become one of Americans chief rivals in the reservation business. American and four other major carriers hope that Orbitz, an online service expected to begin operating in June, will steal customers from Sabres Travelocity.com. The airlines believe Orbitz will give them a lower-cost channel than the one now provided by Sabre.Orbitz is just a small piece of the puzzle, though. American and other airlines are also investing heavily in computers and Internet technologies for a simple reason: They have to. Airlines have high fixed costs and razor-thin margins. Net profit margins for most carriers are less than 2 percent of revenues. By comparison, in 1999, the median net profit margin for companies in the Fortune 500 was 5 percent, according to Fortune magazine. Jet fuel prices have surged, cutting into profits. Labor accounts for about 35 percent of the average airlines total expenditures, and that figure is rising. Indeed, like bad weather, the threat of labor strife is a constant in the airline business. On March 9, President George W. Bush blocked a possible strike by Northwest mechanics and ordered the union and airline to start a 60-day cooling off period. Other major airlines, including American (flight attendants), Delta Air Lines (pilots), Southwest Airlines (ground workers) and United Air Lines (flight attendants), are quarreling with unions and face the possibility of strikes in coming months. David Swierenga, chief economist at the Air Transport Association, predicted that the airlines labor costs would rise by about 4 percent this year nearly double the expected rise of the rate of inflation. "Anything that can be done to increase productivity and drive down costs, especially labor costs, the industry will embrace," said Swierenga. "And technology is the easiest way to increase that productivity." Although Sabre gave American an early lead in technology, many of Americans competitors have adopted Internet strategies that have left American stranded on the tarmac. Deltas purchasing agents have been using an eXtensible Markup Language-based purchasing system since last summer. Last year, about 1.5 million new users registered to purchase tickets on the companys Web site, and revenue from the site rose 270 percent. This year, the airline expects consumer ticket revenue from its Web site to double, to $1.4 billion. "We will save $45 million in distribution costs this year in the B2C [business-to-consumer] sector by getting more of our customers to use delta.com," said Steve Scheper, Deltas managing director of e-business, B2C. Southwest Airlines has had great success with its Web site. Last year, 30 percent of the passenger fare revenue earned by the company came from the Web. "It costs about $1 for southwest.com to book a reservation on its Web site. A travel agency will charge us $10 for the same work," said Melanie Stillings, the companys manager of marketing automation. "We can take that $9 savings and use it to keep our fares low." Northwest is the "shining star" when it comes to Net initiatives, Harteveldt said. Last fall, a survey by research firm Gomez found that Northwest had the best Web site in the industry. The site allows customers to buy tickets and print their own boarding passes as well as book hotels and car rentals. At the airport, the companys customers can check in at special Net-connected kiosks that run a variation of Microsofts Internet Explorer browser. The airline has installed 227 kiosks in 35 airports, and nine more airports will get them later this year. "People in our focus groups tell us that customers want more control over their travel experience," said Mary Beth Schubert, a Northwest spokeswoman. "Being able to use the Internet to make reservations and print their own boarding pass fits into that." American is currently testing 30 self-service kiosks in eight cities, and it plans to have 300 kiosks operational in 30 airports sometime this summer. Scott Nason, vice president for research and analysis at American, said the airline is "leading in some areas and catching up in others." Nason, who served as the companys CIO between 1996 and 2000, said American is "clearly a leader on things the customer doesnt see. Scheduling, revenue management, revenue accounting, all the back-office functions, I dont have any doubt that we, for a long time, have been ahead of the game."