Last week’s announcement that American Airlines (AA) was filing for bankruptcy protection is both personally and professionally disappointing to me. But not surprising. I started my post–Air Force career at AA, and the late Max Hopper — the airline’s former senior vice president of IT, one of the creators of the SABRE computer-reservation system, and a man CIO magazine called “a founding father of IT-inspired competitive advantage” — was very influential in shaping my thinking, style, and career ambitions.
I joined AA’s IT department in 1985 when it was, perhaps, at its zenith. Hopper had just returned from Bank of America (where he was CIO), and the organization was dominated by the SABRE reservation system, the crown jewel of the IT department. SABRE generated revenue on each booking and was used by a large majority of the reservation agencies for all the major airlines. It generated more profits for AA than its flights, and the revenue generated per IT person far, far exceeded the revenue per any other airline employee. Robert Crandall, CEO of AMR, the holding company of AA, once said that if he had to choose between the airline and SABRE, he would chose SABRE.
AA was well positioned. The airline management team understood IT and the IT organization was world class, innovative, large (about 3,000 full-time employees), and well led. SABRE was often used in business-school case studies. The AAdvantage program (and system), at that time one of the largest loyalty programs in the world, was a breakthrough innovation combining business and IT. AA’s revenue-management system was industry leading.
In sum, AA had the best IT — and the best understanding of and appreciation for IT — in the airline industry.
So why is it in bankruptcy today, following United, Delta, Northwest, U.S. Airways, Continental, Eastern, TWA, Pan Am, and all the rest?
A Tough Business-Model Nut to Crack
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 have four major problems:
1. Airplanes are very large capital investments. Planes are expensive. And as with any large capital asset, it needs to be highly utilized. That means you have to fly the plane a lot.
2. Operating costs are high. Fuel costs have always been a huge factor in whether or not an airline makes a profit, and there’s very little an airline can do about the cost of fuel. Pilots are expensive. They require continual training, testing, and licensing. And, generally, their salaries are based on the type of plane they fly and the route. That is, a 737 pilot flying from Dallas to Memphis makes a lot less than a pilot flying a 747 from Los Angeles to Tokyo. Consequently, every pilot opening sets off a chain of retraining and relicensing as pilots are powerfully motivated to move up the ladder. Finally, maintaining airplanes is very expensive. Mechanics are expensive and airplanes require a lot of maintenance to keep them in the air safely.
3. Labor relations are terrible. Airlines historically seem to have the worst labor/management relations of any business. The unions appear self-destructive; management is incapable of building trust. There is little to no cooperation.
4. Revenue is fragile. Once a plane leaves the gate, the potential revenue represented by every seat is lost forever if that seat is empty. But the cost of flying that empty seat is the same as flying an occupied one. To sell those seats, airlines offer deep discounts. As AMR’s Crandall used to say, pricing 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.
The Limits of IT
AA may have had the best IT in the industry (I believe it did), but IT could not solve the industry’s core issues: capital costs, operating costs, and labor/management relations.
As for revenue, IT could only ensure that AA was not knowingly cost uncompetitive by instantly analyzing other carriers’ pricing changes. And while the AAdvantage system was hugely popular and probably did more than anything else to build loyalty among AA fliers, it was quickly copied by other carriers. For all the innovation in revenue management, pricing was still determined more by external, competitive factors that IT could not address.
SABRE, AA’s most visible IT innovation, was successful at selling tickets and automating reservation agencies, but did nothing at all for running the airline any better or any 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. (In 1996 AA spun off SABRE, and in 2000 SABRE went public.)
A favorite theme of mine is that IT can change an industry in unexpected ways and business leaders need to integrate IT into their strategy, becoming IT savvy themselves. But the lessons of AA are more subtle.
In the 1980s, AA was an IT-savvy company with a history of IT-based innovations. But those innovations were on the periphery of the core business, and ultimately they could not change the fundamental economics of the industry that led eventually to last week’s Chapter 11 filing.
That said, the industry has been changed by IT. Even as AMR files for Chapter 11, it continues its family-feud lawsuit against SABRE and Travelport. SABRE and Travelport own or operate the distribution network that connects travel agents and Internet sites to the schedules and airfares of the global airlines. The airlines now pay fees to SABRE and Travelport for providing that distribution network. Hopper’s great innovation continues to flourish by controlling access to the airlines’ products.
While I am saddened that AA has sought bankruptcy protection, I know that the economics and challenges of the industry made it almost inevitable. But I am equally delighted to see that Hopper’s SABRE lives on and flourishes. 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. A little thing like bankruptcy does nothing to disprove that.
Larry Tieman has been a senior vice president at FedEx, a CIO, and a CTO for the past 20 years. He can be reached at mailto:[email protected].