TechWeb

Airlines' Computer Glitch Is Latest Problem For EDS

Aug 24, 2004 (02:08 PM EDT)

Read the Original Article at http://www.informationweek.com/news/showArticle.jhtml?articleID=30900015


PLANO, Texas (AP) -- When a computer glitch delayed hundreds of American Airlines and US Airways flights around the country earlier this month, the blame fell squarely on Electronic Data Systems Corp.

An EDS-run computer system had gone haywire.

The timing couldn't have been worse for EDS. In the past few weeks, the computer services company has seen its credit downgraded to junk status, has slashed its dividend, and has paid a steep price to get out of a money-losing contract.

EDS's revenue is growing, but barely. The company managed a profit in the April-June period only by selling a big software division, and there is talk of more layoffs as EDS loses business to rivals such as IBM Corp.

Against that backdrop, EDS got the publicity black eye on Aug. 1 when a single data entry by an airline employee into a flight operation database--part of the old Sabre system--triggered a cascading failure that made empty planes appear fully loaded.

The computer system had to be shut down and hundreds of flights were delayed for two to three hours.

EDS blamed the foul-up on "user error"--essentially an incorrectly typed command--but now acknowledges that the system never should have failed.

"That problem has been fixed and resolved, and we and the customer are moving forward," Steve Schuckenbrock, EDS executive vice president of global sales, said in an interview. He said potential EDS customers will remember the company taking responsibility long after they've forgotten about the one-day snarl at airports.

Some analysts aren't so sure.

"It's the last thing this company needs," said Bob Djurdjevic, an analyst with Annex Research. "You can say it's just a software glitch and these things happen, but if there was ever an example of what should never break it's a mission-critical airline system like this."

A series of recent setbacks have raised doubts about the state of EDS, which is well into a turnaround effort that began in March 2003 when chairman and chief executive Richard H. Brown was ousted and replaced by Michael Jordan, the retired chairman of CBS.

Jordan has hired his own management team, largely through buying a consulting firm run by a longtime associate, and tried to fix big money-losing contracts signed on Brown's watch.

There are signs that after a difficult first 16 months, Jordan is making progress.

Within the past three weeks, EDS has announced changes in an $8.8 billion contract with the Navy that will allow it to bill for additional services. The federal housing agency upheld EDS's win of a $750 million contract that had been challenged by a losing bidder, Lockheed Martin Corp.

And new contract signings rose 25 percent in April through June, compared to a year earlier.

EDS now offers many services, including consulting, call centers and back-office operations, but its main business remains running computer systems for other companies and government agencies. Company officials say they see a pickup in corporate demand for technology services. EDS says the company's pipeline--contracts it believes it can win--has doubled since last year and is the largest in almost two years.

Last month, EDS won a $1.1 billion, 8-year contract to take over the Bank of America Corp.'s communications systems and integrate them with Fleet Boston Financial Corp., which BofA recently bought.

Several analysts said, however, that the BofA deal highlighted EDS's dependence on winning work from existing customers--EDS already had $4.5 billion in work for the bank--rather than from new clients.

EDS officials say the BofA contract showed that existing customers--who presumably know EDS the best--are giving the Plano-based company a vote of confidence. They argue that jobs with existing customers tend to be more profitable than new business.

Analysts say rivals are busy spreading the word that EDS is in shaky financial shape and can't be trusted to carry out complex, long-term technology contracts.

Even before Moody's Investors Service cut EDS's debt to junk status last month, saying the company was making only slow progress at fixing its business, the company's sales force hit the phones to reassure current customers and potential clients that a downgrade wouldn't mean much.

EDS has built up a stockpile of $3.6 billion in cash and liquid investments, and says that cash will equal debt by year's end, reducing the need to borrow. And Schuckenbrock said EDS has signed more than 400 contracts worth $880 million since the Moody's downgrade.

Those deals also underscore another strategy at EDS--moving away from the multibillion-dollar deals that once pumped up its revenue but actually drained profits. EDS got burned on several big deals, especially the contract won in 2000 to build and operate a communications network for the Navy and Marine Corps.

The job turned out to be more complex than EDS imagined, Congress imposed additional testing requirements after the contract was awarded and EDS has lost $1.7 billion by spending more on people and equipment than it gets paid from the Navy. EDS has stopped predicting when it will profit on the deal.

Schuckenbrock says EDS will eventually get credit for sticking with the job, and Rod Bourgeois, an analyst with Sanford C. Bernstein & Co., said the Navy's willingness to let EDS bill for more services was "a positive to EDS at a time when they could use a credibility boost."

Bourgeois raised his rating on EDS stock this week. Still, he said, the company will be challenged to grow revenue.

In less than two years, EDS must also compete to keep its biggest customer, General Motors Corp., which once owned EDS and still accounts for 9 percent of EDS's revenue.

EDS also remains under the cloud of an investigation by the Securities and Exchange Commission into actions under Brown's leadership.

EDS officials say the turnaround is alive and well. Second-quarter revenue rose from a year earlier and beat analysts' expectations. The company is cutting costs by $1 billion this year to lower the price of its services. Some institutional investors have been buying EDS stock, albeit mostly as a value play, since the shares have dropped more than 30 percent since January.

"The right pieces are there," said Julie Giera, an analyst for Forrester Research who toured EDS this month. "The mistakes of the past aren't being repeated. They're reducing debt, signing new customers and moving along in their transformation."

Giera said the company needs to show the momentum is real and avoid missteps like the airline-system glitch.

"They've got to put a stop to the surprises," she said.