John Samuel has a confession to make. Although its Samuels job to make sure that American Airlines Web site, AA.com, is the best in the business, he says “Ill be the first to admit I like Northwest Airlines homepage better than any other homepage out there.”
Northwests site is easier to use and the layout is better than AA.com, says Samuel, Americans vice president of e-business. And while his candor is refreshing, its also indicative of the challenges that Samuel and his cohorts at American are now facing. Over the next three years, the U.S.s second largest airline will spend $2 billion bringing its computer systems into the Internet Age. Its the largest investment in computer technology the airline has made in 40 years.
Updating the Web site is one of a jumbo jet-load of technology upgrades now taxiing toward takeoff at the Fort Worth, Texas, headquarters of the air carrier. American has begun integrating a pair of business-to-business (B2B) portals that will shift much of its $5 billion annual purchasing budget onto the Web. It is replacing its companywide data network — portions of which now run at speeds of just 9.6 kilobits per second — with an Internet Protocol (IP) backbone. Other projects include a new data center for Americans Web operations, new hardware and software systems for the carriers airport agents and a companywide computer-integration effort to allow greater sharing of information throughout the organization.
Upgrading computer systems is never easy. But as it spends the cost-equivalent of 11 brand-new Boeing 747s on software, hardware and services, American is also dealing with some extraordinary circumstances. For instance, the airline has purchased Trans World Airlines and must integrate its planes, employees and computer systems. Monte Ford, the chief information officer, has only been at American since January. Then theres the not-so-small matter of keeping aloft the two airlines operated by Americans parent, AMR. Between them, American Airlines and regional carrier American Eagle have 117,000 employees and 985 planes, and make 4,100 flights per day to 237 airports around the globe.
Given the thin profit margins and keen competition in the airline business, American cannot afford to miss even one flight due to technology problems. Ever since American plugged in a pair of IBM mainframe computers four decades ago to create the worlds first automated reservation service, Sabre, the carrier has had a reputation as a technology innovator. American used Sabres data-crunching capability to launch the first frequent- flyer program. Today, that program, AAdvantage, has 43 million members. In May 1995, American was among the first airlines to put up a Web site, and it later became the first carrier to offer Web-only discounts on airfares.
Some observers believe those achievements and Americans technology-centric culture may be helpful as it launches these new initiatives. Americans employees “are far more amenable to looking at ways of employing technology than other companies that havent had that culture,” said Max Hopper, who spent 10 years at American, two of them as chairman of Sabre.
Others arent so sanguine. Henry Harteveldt, a senior analyst at Forrester Research, said other airlines are “beating American to the punch” when it comes to utilizing the power of the Internet. “American has fallen way behind companies like Continental, Northwest and Alaska Air,” Harteveldt said. “Theyve got to make decisions and start implementing changes as quickly as they can.”
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.”
: a Solution?”>
Purchasing: a Solution?
Purchasing is one back-office function that American plans to move onto the Web. Every year, American spends $2 billion on jet fuel and another $3 billion on everything from parts to pretzels. To increase its supply chain efficiency and get better pricing on commodities it needs, American will move its purchasing to two B2B portals, Cordiem and Jet-A.com. Jet-A is a consortium backed by six major oil companies and 22 airlines, including American. Cordiem is backed by industry suppliers, including B.F. Goodrich, Honeywell and United Technologies, as well as Air France, American, British Airways, Continental Airlines, Delta, Iberia Airlines, SAirGroup, United Air Lines and United Parcel Service.
Jet-A will allow the airlines to digitize the cumbersome process of tracking jet-fuel inventories and airplane fuelings. Whenever fuel is put on a plane, as many as four paper tickets are generated that must then be handled by different entities involved in the process. Jet-A hopes to streamline the accounting process and allow the airlines and oil companies to have real-time Web updates on each fueling, as well as to track fuel inventories at each airport.
Cordiem offers similar promise with regard to a wide array of products and services. The airlines would like to purchase everything from catering services to engine parts on the site. One key value airlines look to reap from Cordiem is its promise to purchase and manage aircraft parts, which are highly regulated and must be tracked from cradle to grave. Every time a part is put on a plane or moved from one location to another, it has to be recorded. Using Cordiem, the airlines hope to create continually updated databases that will show where specific parts are, how long they have been in use and when they should be repaired or replaced. That information will then be shared by the companys accountants, purchasers and mechanics. The same information will be available to the airlines maintenance contractors and parts suppliers, a move that the companies say will allow them to reduce their inventory and speed deliveries through the supply chain.
American already does a great deal of its purchasing electronically. About 70 percent of its parts and other goods are bought using electronic data interchange networks. The other 30 percent are purchased using phone and fax. The company estimates that by using Cordiem, it can shave $10 off the cost of each EDI-based transaction and $57 off the cost of each phone/fax purchase. John P. Rau, managing director, purchasing, at American, refused to say how much American hopes to save by using Cordiem. However, he said the company expects to save “a significant amount just on transaction costs alone, not to mention that we think we can get better prices as a result of streamlining our processes.”
But American faces big challenges. The company must update its legacy computer systems and integrate them into a companywide Web-based system. At present the company has 8,000 employees that occasionally buy things like office supplies and routine maintenance items. Each one of those employees will need access to the Net and each must be trained to use the new system. In addition, the company has 150 full-time commodity managers who must be trained to use Cordiem and Jet-A.
Since each of those buyers is already used to ordering materials with Americans EDI system, “we dont believe the change for those 8,000 users will be significantly different, which is a big advantage for us,” said Nancy L. Walker, manager of strategic planning, corporate purchasing, at American. All of Americans buyers are “used to inputting order information. Now they will be able to do it quicker in a shopping-cart type of environment,” on the Web, Walker said.
Integrating the hardware and software needed for the shift to Cordiem will take two to three years, Walker said. American will depend on PriceWaterhouseCoopers and Sabre to integrate an Ariba Buyer software package into its Enterprise Resource Planning system.
American chose Ariba Buyer in large part because Ariba, along with i2 Technologies, is providing the software for Cordiem. The two software makers were chosen because “they are the leaders in the industry,” Rau said. “I2 is clearly the leader in supply-chain-management functionality. And Ariba has been the leader in the whole purchase-order-processing area,” he said.
In addition to the B2B integration challenge, American plans to tie together many of its databases. To do so, the company will use enterprise application integration software from Vitria Technology. “Right now, we have 25 computer systems that have point-to-point connections,” Walker said. Vitrias software will act like a bus that ties all of those systems into Ariba Buyer and Cordiem, she said.
Rau and Walker expect to begin using Cordiem some time in April to buy items like office supplies and other things used in the routine operation of an airline. And while American is confident it can integrate its computer systems to take advantage of the B2B portals, Michael Burkett, a senior research analyst at AMR Research in Boston, has doubts. Integrating the airlines legacy systems with the new portals and getting all of its suppliers to integrate their systems with Cordiem and the other purchasing sites will take at least a year, perhaps even longer. “The airlines are going to have a harder time doing this than they think,” Burkett said.
During a recent trip to Bermuda, Nason watched as an airline employee retrieved e-mail with a 9.6-Kbps modem. That will soon change. By the end of this year, American plans to have an entirely new companywide data network in place. The $140 million all-IP network will be the most expensive piece of Americans technology overhaul.
The network will be a welcome replacement for the current system, which uses a mixture of protocols — including X.25, a standard for packet-switched networking that dates back to 1976; Asynchronous Transfer Mode, which supports maximum data rates of 622 megabits per second; and Systems Network Architecture, a protocol originated by IBM for mainframe computers that has evolved over the years. Americans implementation and planning vendors on the project are Sabre (which recently sold its computer-services arm to EDS) and IBM. Cisco Systems will provide most of the hardware.
Nason said American decided to go with an IP network because it will give the carrier the greatest amount of flexibility. “We are going to an environment that is any data, anyplace, and IP is the best way to go for that,” he said.
The new network will also play an important role as American works to integrate various databases. The company plans to use Vitria software to unify a half dozen databases containing customer information. But if American is to make full use of the software, it will need a fast network that can exchange information among its databases quickly, so that customers arent kept waiting.
The network will allow the carrier to distribute in-house video, as well as e-mail and data. But, according to Nason, “We are not doing it for e-mail or video. Those are side benefits.” The main objective for the network, he explained, is to allow Americans reservation agents and other “customer-facing employees” to get fast access to Americans databases like frequent flyer membership, flight schedules, baggage handling and reservations. Getting that data to frontline employees is critically important, Nason said. It will allow airline employees to get “the full view of the customer. But getting that requires being able to transmit more data from all these sources.”
Last year, American paid some $1.3 billion in commissions to travel agents and online travel sites like Expedia and Travelocity. Thats a lot of money, particularly when you consider that Americans net profit last year was $804 million on revenue of $19.7 billion.
With those numbers, its easy to see why American, and every other carrier, is trying to sell more tickets directly to the public. In addition to reduced commission costs, an effective Web presence can reduce the amount of labor an airline needs to staff a telephone call center. “Any money they save by selling tickets on their own Web site goes straight to the bottom line,” Forresters Harteveldt said. The analyst pointed to recent projections by his firm that said the total value of Internet travel bookings this year would top $24 billion, a figure expected to double by 2004.
But American has lagged its competitors on the Web. AA.coms functionality is limited when compared to other airline sites. For instance, travelers cannot book hotel and car-rental reservations on the site. And the site is often slower than those run by Americans competitors.
Consumers are noticing. Last fall, a survey by Gomez found that Continental, Delta and Northwest had the three best sites in the industry, based on usability and customer service. American came in seventh, one spot behind rival United. In February, Forrester released its ranking of airline Web sites. It gave the top spot to Alaska Airlines. American placed fifth.
The travails of AA.com are clearly galling to Samuel, who played a key role in getting American to put up its Web site in 1995. “We have had our share of problems; I wont deny that. On the other hand, we have an extremely high penetration rate with our AAdvantage program. And thats our target customer — where the money is,” he said. “And our customer-satisfaction surveys show a high level of satisfaction with the site even in its current form.”
A key problem with the site, Samuel said, has been the BroadVision software it uses. American will be replacing the system with software from Art Technology Group. Its Dynamo software can be programmed with standard Java tools. The key factor, Samuel said, was “how much more open the ATG architecture is. The Java programming capability has almost no restrictions.”
Samuel expects the new AA.com to go live sometime this fall. In the meantime, Americans other technology initiatives will continue.
Analysts believe technology in general and the Internet in particular can provide big payoffs for airlines that can use them to increase productivity and lower costs. But lowering costs is expensive. American and its competitors will likely spend billions of dollars in coming years on Net-based technologies. Economist Swierenga predicted the airlines tech spending will continue for “as long as Moores law stays in effect.”
Nason and Samuel agreed with Swierengas prediction and they made it clear that Americans checkbook will be open for many years to come. “We are spending a lot of money to be the best in almost everything,” Nason said. “We dont want to be just one of the airlines thats playing leapfrog with each other.” When it comes to technology, he said, “we really do want to be clearly ahead.”