Jan 26, 2012 (08:01 AM EST)
American Airlines Reveals Limits Of World-Class IT

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It's now conventional wisdom that IT innovations can transform a company and industry, with potentially devastating consequences for slow-footed competitors. But the November bankruptcy filing of AMR, parent of American Airlines, is a reminder that market forces can sometimes trump even the best business technology.

In 1985, AA's IT was at its zenith. Its IT organization was large and well led. Max Hopper, AA's former senior VP of IT and one of the visionary creators of the Sabre computer reservation system, had just returned to AA from Bank of America.

AA's management team was IT-savvy. CEO Robert Crandall, an airline industry legend, had been in IT at Hallmark Cards and TWA. Robert Baker, head of airline operations, had been AA's senior VP of IT while Max was at Bank of America. The business leadership was everything a CIO could hope for.

Hopper's organization, which went far beyond IT, was built around Sabre, which AA owned and which generated revenue on each booking. In 1985, about 10,000 reservation agencies used Sabre to book flights for all the major airlines. Sabre generated more profits for AA than its flights did. Crandall once said that if he had to choose between the airline and Sabre, he would choose Sabre. But he didn't. Crandall retired in 1998 and AA spun off Sabre in 1999.

Throughout the 1980s, AA's business/IT programs were exceptionally innovative. Its AAdvantage program (and system), one of the largest loyalty programs in the world in its heyday, was a breakthrough. AA's revenue management system led the industry. Its Bargain Finder, introduced in 1984, gave agents a low-fare search capability. AA released easySabre in 1987, giving consumers access to Sabre for airline and hotel reservations. In 1988, the same year that AMR earned $535 million on revenue of $10.6 billion, AA introduced the Citibank AAdvantage card.

But in 1990, AMR lost $40 million; in 1992, $935 million. Why, if IT was and is so critical to business success, was American Airlines, with its world-class business and IT leadership, struggling just a few years after introducing so many innovative business/IT products? Three main reasons:

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The airline industry is a very difficult business. As Richard Branson, CEO of Virgin Atlantic Airlines, once said: "If you want to be a millionaire, start with a billion dollars and launch a new airline."

It's well documented that airlines face four major problems:

-- Airplanes are very expensive and need to be flown a lot to generate a return on the massive investment.

-- Airline operating costs, including pilot salaries, aircraft maintenance, and fluctuating fuel prices, are high.

-- The industry's labor relations are notoriously bad.

-- Profitable pricing is very difficult. All airlines constantly monitor competitors' prices and react. Pricing, as Crandall used to say, is dictated by your dumbest competitor: Airlines losing money cut ticket prices, forcing everyone else to match them. He who runs out of money last wins in the airline industry.