by Stephanie Overby

How to Save an Airline

Feb 15, 200619 mins
IT LeadershipMergers and Acquisitions

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.

In some cases, however, more complex and costly processes developed by US Airways will be kept. The older airline, for example, had developed a sophisticated application for determining where and when to purchase fuel. US Airways also had check-in applications to support its international routes, which America West didn’t have. The merged airline will either keep those legacy US Airways applications or incorporate those functions into America West’s systems. “It’s a merging that has to take place not just at an IT level but at a business process level,” says Beery. “And we’re still working through it.”

Reservations About Reservations

One buy decision Beery made falls outside the realm of applications that provide competitive advantage. In general, the industry believes it’s better to purchase reservations applications from third-parties because these systems are too complex to build from scratch and vendors have spent years developing them. Beery decided to go with the Shares system used by America West and owned by EDS. “Every time the passenger touches the airline, they touch the reservations system,” Beery says. “And as much as people believe they’re all the same, they’re actually very different.”

US Airways had been using Sabre and America West had been using Shares (both now supported by EDS). But because many of America West’s systems—which will become the new US Airways systems—are Shares-based, Beery decided to keep Shares rather than use the larger airlines’ Sabre system.

Beery was confident the Shares system would scale to support the bigger company because Continental, which is slightly bigger than the new US Airways, also uses Shares. This will be the one area (so far) in which EDS will remain a US Airways partner, rolling Shares out across the company later this year and supporting it long term.

“Deciding which reservations systems to go with was a big issue given that they were tripling in size,” says Gartner’s Goodwin. Goodwin agrees with the decision to ditch Sabre for Shares because of the significant integration costs that would have been associated with a Sabre deployment. “They did the smart thing,” he says.

Not everyone is so sure. “Sabre is a much more robust, sophisticated and scalable tool,” says Forrester’s Harteveldt, who used to work at Continental and knows Shares intimately. “Shares is a good tool but EDS hasn’t made as much of an investment in upgrades and additional functionality. Shares doesn’t have sophisticated capabilities in the area of revenue management, which is every airlines’ secret sauce. [Airlines use revenue management systems to make the right seat available to the right kind of customer at the right price at the right time to make the most money possible.] Frankly, it seems like they just said, we’ve always done it this way and we don’t want to change it.”

Beery insists that a siginificant amount of due diligence went into making the reservations system decision. “It’s been proven to scale,” he says confidently.

Flipping the Switch

Once all systems decisions are made early this year, the truly tricky part begins: Rolling out—and ripping out—applications and infrastructure across the company at a total cost of $75 million to $80 million, according to Kirby. Whether or not the merger is ultimately successful will depend in large part on how effectively US Airways migrates IT systems from America West to US Airways and visa versa.

“The IT of an airline is the most complex and interconnected technology of any business in the world. There are real-time connections to travel agents and websites, in addition to all the day-to-day operational systems like crew scheduling and baggage handling that run an airline,” says Kirby. “Converting to a single platform for all the various IT systems that run this airline is a huge risk and one that we’re going to have to manage if we’re to be successful. We’re worried about it.”

Replacing the reservations system alone will take 12 to 15 months, Beery estimates. And that real-time system’s replacement—the second hump of Beery’s camel—may be the most prone to problems. The process is analogous to replacing a jet’s engine in mid-flight.

“Transitioning to the Shares platform for the large portion of airline that was on Sabre is a very, very large challenge,” says Beery. “You have to transition all the airports and train those employees on the new system. You have to move all that data over. There’s always something you can miss.”

Beery and his team are working with EDS on an incremental rollout of the reservations systems across the company, rather than a riskier big bang replacement. After the reservations system will come the rollout of all the other operational applications, including back-office systems (such as payroll and revenue accounting) and operational systems (such as crew scheduling and aircraft maintenance), which Beery estimates could take another year.

According to US Airways, the combined airline is now running reliably with its separate systems. And reliability is everything to an airline. You don’t have to look too far into either company’s history to see what happens when applications fail. In 2000, for example, America West’s flight planning system broke, forcing the airline to cancel 160 flights and leave 1,000 passengers stranded. One day last spring, US Airways inadvertently became the lowest cost carrier of all when a glitch caused the airline to sell round trip tickets to several cities for $1.86 plus fees. No one at the new US Airways wants to see something like that happen on an even larger scale. But running two sets of applications in parallel is wasteful, eating away at the savings the merger is supposed to produce.

“Of course, we’re anxious to save money,” says Kirby. “But we won’t cut any systems until their replacements are highly reliable.” “We can’t screw up things like payroll or rolling out a new badge system because it will make people feel like this is like every other airline merger, this one sucks too,” says Larry LeSueur, vice president of cultural integration. “Whatever we roll out has to be robust and strong. There’s such a magnifying glass on us.”

So Beery must be cautious, but not so cautious that the integration process grinds to a halt.

“The thing that keeps me up about the integration process is our ability to maintain robust systems reliability while still achieving the synergy savings we’ve forecasted,” says Beery. “It’s a very complicated thing to do.” The key, he says, is good project management. “That’s what enables us to execute,” he says. “We have to maintain robust due diligence and system testing and dry runs and all those things to make sure nothing falls through the cracks.”

So far, those fundamentals have proved valuable in the integration of systems at those airports where both US Airways and America West operated. The integration was completed in most airports near the end of last year. “That program went very well,” says Beery. “And that’s just the start.”

Beyond Low Cost

Assuming Beery and his team are able to get the airline running on a single set of IT systems, and the rest of the company completes such final tasks as consolidating and painting the fleet and agreeing on common labor contracts with employee unions, the three-humped camel will lope onto the runway sometime next year. And industry analysts will be watching to see if the new US Airways can maintain a robust national network while delivering the $600 million in annual savings (including that $100 million in IT cost cuts) on which the merger was predicated. Like most observers, UNC’s Kasarda is “cautiously optimistic” about US Airways’ prospects. Even US Airways insiders temper their comments with knocks on wood. “We’ve got a mountain of work ahead of us,” says Mule. “If we continue like we have been, it will be a success. But we’re a long way from that point.”

If successful, “US Airways will have a network like a Continental and a cost structure closer to a Southwest,” says Harteveldt. “Then, the question will be how will they take advantage of that? A low-cost airline with a national route network could still effectively be an airline of last resort for passengers, like the pre-merger US Airways and the pre-9/11 America West.

“Because they’ll have lower costs than other carriers, they can afford to do certain things,” says Harteveldt. “They can simply charge lower fares, or they could get more serious about CRM and customer data warehousing or develop more sophisticated and innovative tools in areas like revenue management or employee self-service. America West had been good at using customer-facing technology with things like their website and airport kiosks. What remains to be seen is whether they [as US Airways] will use technology as wisely as they had but in new and different ways.

“If this new airline just focuses on costs and provides a rotten customer experience and ends up with demoralized employees, they will end up in the dead airline heap on eBay,” Harteveldt says. “But if US Airways is able to successfully implement the low cost structure that America West had and continues to build out relevant customer-valued services, they stand a chance of making US Airways a sought-after brand. But there are no guarantees in the airline business. You’re here today and no one knows about tomorrow.” For now, Beery remains focused on the integrations tasks at hand—one hump at a time.

“It’s a huge challenge,” Beery says. “Combining a smaller carrier with a larger carrier and doing something a little counterintuitive—deciding to go with the smaller carrier’s systems. And doing it with the whole industry watching. But this low-cost model is the future and we’re positioned to be a very dominant player in this industry as time goes on.”