How to Save an Airline

The merger of US Airways and America West is predicated on keeping processes and applications simple -- and cutting $100 million in IT costs.

Joe Beery compares the job of merging US Airways, a national airline, and America West, a low-cost, predominantly regional carrier, to creating a three-humped camel. Sitting in his ninth floor office in Tempe, overlooking the Arizona desert, the CIO of the new airline that began operating under the US Airway name in September 2005 seems to have found an appropriate metaphor.

It’s apt because 1. there’s no such thing as a three-humped camel and 2. successful mergers in the airline industry are nearly as rare. But if there’s ever going to be one, chances are it will look a lot like the carrier Beery, formerly CIO of America West, and his fellow US Airways executives are trying to build right now: a low-cost, full-service airline—a seeming contradiction in terms.

Beery’s first hump represents the consolidation of the applications currently running the two airlines. The second hump represents moving the entire airline onto a single reservations system. And the third hump represents the complete integration of both airline’s IT systems and the award from the Federal Aviation Agency (FAA) of the all-important single operating certificate that will allow the new airline to operate as a single entity. (Until then, it must run separate fleets, flight crews, maintenance and operations control centers—which pretty much defeats the purpose of the merger.)

As the camel is being assembled, executives at the new US Airways are envisioning a traditional carrier with a fully developed national route network and such amenities as first-class seating and a loyalty program that simultaneously supports the lower prices that U.S. consumers have come to demand. In order to get there, says Beery, "we have to figure out how to do things differently. In some cases IT will be a big part of enabling that low-cost model and in some cases IT itself will be a part of the cuts." At the core of this new airline will be simplified business processes supported by the low-cost IT infrastructure of the smaller but more successful of the merged airlines: America West.

"There’s not an airline around today that wouldn’t want to simplify their processes further," says Robert Goodwin, managing vice president of Gartner. With this merger, US Airways is hoping to find synergies between traditional airlines and the newer low-cost carriers in order stay aloft in a viciously competitive market (see "Another Turbulent Year").

"All airlines have been reexamining their IT strategies and expenditures and strategies," says Henry Harteveldt, vice president of travel research for Forrester. "US Airways is certainly going to be watched with great interest."

The Urge to Merge

On paper, the merger makes a lot of sense. If one combines US Airways’ experience and strong Eastern seaboard network with America West’s low-cost structure and routes in the western United States, one gets the best of both worlds: the reach of an old fashioned hub-and-spoke airline with the newfangled low-cost structure that’s made airlines like Southwest and JetBlue so successful. US Airways executives say the new airline will record savings of $600 million a year. And Wall Street has approved; US Airways’ stock rose 92 percent from its initial listing last September to year end under the symbol LCC (short for "low cost carrier," industry lingo for airlines that actually have been able to make money in a low-fare, high-fuel cost environment).

But making sense is one thing, making it work is another. The two airlines couldn’t be more different in terms of their cultures, business strategies and IT philosophies. The most critical piece of this merger puzzle is the systems integration effort, which is supposed to save US Airways $100 million, the figure deemed necessary to make the new business plan work. "It keeps me up at night," says Beery, whose IT department is charged with finding the $100 million. "Every night."

To wring 40 percent out of the two airline’s combined $250 million annual IT spend, the merged entity for the most part will be adopting the scaled-down and more nimble IT systems and processes of America West. Beery, who worked as America West’s CIO for five years before getting the job at US Airways, is piloting the effort. And, not surprisingly, the new US Airways’ IT philosophy comes straight out of America West as well. If a system provides competitive advantage, it will be built and supported in-house. If it’s a commodity, like a back office corporate system, it will be bought off the shelf and kept as vanilla as possible.

US Airways has been up front about the risks of the systems integration effort specifically, and the merger in general, noting in regulatory filings that the airline faces "significant challenges in consolidating functions, integrating their organizations, procedures and operations," and therefore "the integration of US Airways Group and America West Holdings will be costly, complex and time-consuming." The filings go on to note that although US Airways expects "that the merger will result in certain synergies, business opportunities and growth prospects," the company "may never realize" them.

"This is going to get them a case study in the Harvard Business Review or the cover of Business Week," says Forrester’s Harteveldt. "It’s just not clear yet if it will be as a winner or a loser."

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