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."

A Tale of Two Airlines

The old US Airways, which can trace its ancestry back through several mergers to 1939, was a traditional hub-and-spoke carrier with an older workforce, a byzantine bureaucracy and an IT department outsourced first to Sabre, then to EDS. Consequently, its IT was about as flexible as your average brick wall. America West, just 23 years old, was an upstart carrier with a younger workforce, a more entrepreneurial culture and a do-it-yourself attitude toward IT.

But in the late 1990s, the two carriers, unfortunately, had a lot in common. "America West was not exactly an airline you looked forward to flying," says Harteveldt. "And US Airways was known as an airline of last resort. It was like the Aeroflot of the Northeast; you only flew it if you had to." Both airlines were viewed as unreliable by consumers and uncaring by employees.

In the travel downturn and fuel-price upsurge that followed 9/11, both companies, already suffering, faced ruin. Doug Parker, who became America West’s CEO in 2000, secured a government loan in late 2001 that enabled the company to avoid Chapter 11. He then set about improving the airlines’ operations, reputation and worker morale (earning points for saying that in order to turn the airline around he’d rather win concessions from his vendors than from his employees). US Airways, on the other hand, exited its first bankruptcy in 2002 thanks to a bailout loan from the government and entered Chapter 11 again in 2004, laying off thousands of employees and seeking concessions from thousands more.

US Airways’ only hope to emerge from bankruptcy this time around was to merge with another airline. America West, despite its improving situation, was still struggling with fuel costs and competition from longtime rival Southwest. "US Airways needed [the merger] a lot more than America West," says Harteveldt, "but it was smart for America West to jump-start their growth."

The new US Airways is now the fifth largest carrier in the United States and what it calls the world’s largest low-cost airline. (For a list of carriers by size and revenue, see "The Tragic 7 and the Happy 3," Page XX.) But bigger, of course, does not necessarily mean better. "When you put two troubled airlines together," notes John D. Kasarda, an airline expert and professor of management at the University of North Carolina’s Kenan-Flagler Business School, "you’re not suddenly going to get an untroubled airline."

But the new US Airways has a couple of things going for it. Both US Airways and America West had taken a lot of costs out of their operations prior to the merger (US Airways while in bankruptcy and America West while trying to avoid bankruptcy). And the airline was able to raise $1.7 billion from outside investors (including ACE Aviation Holdings, parent company of Air Canada, and Airbus) to help it with merger-related costs and the continued challenge of high fuel prices.

Still, airline mergers are notoriously chancy. Many have failed, notes Ray Neidl, airline industry analyst for Calyon Securities. Those that have succeeded long term, says Harteveldt, took years to work out. "But there’s a very capable management team from America West running this new company," Neidl adds. "They’ve studied previous airline mergers and they seem to be engineering this well."

"The biggest risk we face is cultural integration," says Scott Kirby, US Airways executive vice president of sales and marketing to whom Beery reports. "And the second biggest is IT integration."

Simple and Simpler

Engineering the IT integration is Beery’s job. When merger talks began in early 2005, it was not yet decided who would become CIO, but Beery and his America West team hit the ground running.

Beery spent last spring at the US Airways headquarters in D.C. looking at what applications they ran, what networks they used and what infrastructure supported it. He spent the most time analyzing US Airways $200 million contract with EDS. And out of that analysis, he and his team created an IT strategy that would cut costs by backsourcing some applications, upgrading legacy systems and networks, and renegotiating vendor contracts for an airline that would be more than three times larger than America West.

Beery was named CIO in late July, just two months before the merger was finalized, and he brought to the new company the IT decision-making making model he’d implemented at America West: "Anything we use to sell our tickets or fly our aircraft, we do ourselves," Beery explains. "It’s a more low-cost approach and it gives us a competitive advantage because we can be more flexible." Translating that to the new airline will mean backsourcing the majority of work that US Airways (which had only 12 in-house IT employees as compared to America West’s 150) had outsourced to EDS. (Beery won’t address how many EDS employees working on the US Airways contract might be laid off, saying only that he was not currently planning to bring anyone over from EDS.)

When times are tough, says Beery, keeping IT in-house "gives us a lot of flexibility. We can quickly reduce costs, if necessary, in multiple ways, as we did after 9/11." Among the options for reacting quickly to a changing business environment, says Beery, is reducing or eliminating maintenance services for hardware and software contracts, finishing some projects more quickly and redeploying those resources elsewhere, or reducing labor costs through workforce reductions. The old US Airways, with its long-term outsourcing contract, had fewer of those options available to them.

Beery and his team began the first hump of the integration work by examining the two airlines’ applications and business processes and deciding whether to keep the America West system or the US Airways system or some hybrid of the two. The philosophy guiding the decision-making came from America West. "To stay low cost, you need to be simple," says Anthony Mule, US Airways senior vice president of customer service who, like most of US Airways’ new leadership team, came from America West. "Always be simple." As a result, most of the new airline’s systems will be America West systems. It’s the only way Beery can get the combined $250 million IT budget of the two airlines down to $150 million.

"There’s a lot of opportunity to drive costs out of the business by investing in areas like automation, self-service kiosks, Web check-in—IT initiatives that make the business better," says Beery. "But you can build so much heavyweight infrastructure and incur so many development costs that you end up [cannibalizing] the savings you were able to provide." That, according to Beery, is what had happened at America West before he became CIO: Over time, IT costs rose and the ROI from existing systems and projects fell. "Our philosophy is that there’s a certain level of capability we need out of a system," says Kirby. "A lot of the time you don’t need all the bells and whistles."

Among the bells and whistles US Airways has decided it can live without are, for instance, the systems and processes that allowed it to carry hazardous materials and accommodate unaccompanied minors on connecting flights. The costs associated with supporting those functions were deemed too high and the benefits too low. "When you select the more simple process, it simplifies the systems you need," explains Beery.

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