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American Airlines Reveals Limits Of World-Class IT

Jan 26, 2012 (08:01 AM EST)

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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.




There are limits to what IT can affect. AA may have had the best IT in the industry, but IT couldn't solve the industry's core cost and labor issues (see above).

As for revenue, IT could only ensure that AA wasn't knowingly uncompetitive by instantly analyzing other carriers' pricing changes. Of course, the other major airlines also continually monitored and matched fares. For all the innovation in revenue management, pricing was still largely determined by factors that IT couldn't address.

Sabre, AA's most visible IT innovation, was successful at selling tickets and automating reservation agencies, but it didn't run the airline any better or cheaper. In fact, several lawsuits and Department of Justice rulings ensured that AA got no advantage (pun intended) over any other carrier just because the reservation agency happened to use Sabre.

All the marketing and pricing innovations yielded a competitive advantage for only a short time. While the AAdvantage system was hugely popular and did more than anything else to build loyalty among AA flyers, other carriers quickly copied it. Within weeks United Airlines introduced Mileage Plus, and within months Delta and TWA introduced their own frequent flyer programs. At that point it was a competitive disadvantage if an airline didn't have a loyalty program.

The same thing happened with every innovation. The other airlines were fast--very fast--followers. Maybe some of their systems weren't as feature-rich as those at AA, but they were initially good enough to protect their customer bases.

AA in the 1980s was an IT-savvy company with a history of IT-based innovation. But those innovations were on the periphery of its core business and, ultimately, they couldn't change the fundamental economics of the industry. By the 1990s, AA was in financial trouble; it was experiencing fallout from its CONFIRM travel reservation system project, combining airline, hotel, and rental car information; and its top IT talent was leaving the company. It failed to duplicate the kinds of breakthrough innovations of the 1980s and became just another airline battling other airlines, fuel costs, labor trouble, and price-conscious customers.

Even in Chapter 11, AMR continues a family feud lawsuit against Sabre Holdings, which owns one of the distribution networks that connects travel agents and the Internet to airline schedules and fares. The airlines, including AA, pay fees to Sabre Holdings for providing that distribution network.

Kayak and other sites provide price comparisons for consumers far better than was envisioned with easySabre. Sabre, Travelport, ITA, and Expedia provide flight search software. Consumers once mystified by airline pricing now have a variety of tools to shop around.

There are few other examples where a company had such a powerful business-IT partnership and capability and yet was unable to flourish. The economics and other challenges of the airline industry made a bankruptcy filing almost certain. I'm encouraged, though, that Hopper's Sabre lives on and flourishes, albeit as a private company. So, while the ability of IT to change the core of some industries is limited, its ability to disrupt and alter the nature of any industry is indisputable.

I just wonder how things would have turned out if Crandall had decided to keep Sabre and dump the airline.

Dr. Larry Tieman has been a senior VP at FedEx, a CIO, or a CTO for the last 20 years. He has worked with some of the great CIOs, including Max Hopper, Charlie Feld, and Rob Carter. He can be reached at Larry@LarryTieman.com.

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