Business & Finance
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2/24/2006
04:15 PM
Tony Kontzer
Tony Kontzer
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Merger On The Fly

Can a failing legacy airline be welded to a low-cost carrier? The new US Airways is about to find out.

Last year, when America West Airlines merged with US Airways, the new company and all its planes took on the US Airways name. But it's America West that dominates the merged company--from its low-cost business model to the people in its executive suite to its IT strategy, which largely shuns outsourcing. And make no mistake, IT strategy will play a vital role in this first-of-its-kind attempt to meld the operations of a dying legacy carrier like US Airways onto the low-cost approach that Southwest Airlines pioneered and America West copied. With other legacy carriers in bankruptcy or losing money, more airline deals could be in the offing, so this merger's fate may be a bellwether for the industry.

Flight plan: CIO Beery has to find a way to meld two very different IT systems.

Flight plan: CIO Beery has to find a way to meld two very different IT systems.

Photo by Jon Gipe
US Airways was about twice the size of America West but was struggling through its second bankruptcy of the past five years when the companies merged in September. "It really is an opportunity for us to take this airline, take the systems, and be part of a big turnaround within this industry," says Joe Beery, CIO of America West and now CIO of the new US Airways.

IT execs skeptical of outsourcing will be happy to hear that US Airways relied almost entirely on an outsourced IT organization, while America West--the low-cost airline--relied on its in-house IT staff to keep costs down and run a highly customized IT environment. "Our systems are very highly tailored to what we do. You don't get any productivity gains from outsourcing," says Scott Kirby, who was executive VP of sales and marketing for America West and now holds the same title at the new US Airways. (Eighty percent of the new company's management comes from the America West side. CIO Beery reports to Kirby.)

One example of America West's anti-outsourcing stance goes back five years to when marketers at the airlines wanted to develop a promotion for the carrier's Web site using a Wheel Of Fortune theme. They considered outsourcing the work because America West's IT staff was backlogged with projects. When managers learned it would cost $500,000 and take nine months to design, build, and deploy the Web promotion, they balked and looked for a way to do the work in-house. IT cleared its plate later that year and built and deployed the promotion in two weeks for a fraction of the cost.

Philosophical Differences

US Airways is deep into what's projected to be a two-year effort to combine the merged companies, and melding the airlines' IT operations is perhaps the most challenging part of that. In addition to their 180-degrees-apart philosophies toward outsourcing, there were significant differences in how the two airlines--which executives refer to internally as "East" and "West"--approached IT. For one, they relied on competing reservations systems. US Airways was an E-commerce laggard and sold few tickets through its Web site, while 28% of America West's 2005 revenue was booked through Americawest.com. And where America West had an IT staff of some 140 workers to handle its in-house projects, US Airways' IT staff barely exceeded a dozen, most overseeing outsourcing contracts. "We couldn't have been more different when it came to the IT systems," Beery says.

$100 Million Savings

The integration, which will create the industry's largest low-cost carrier and the nation's fifth largest airline, comes amid intense price competition, rising fuel costs, a string of bankruptcies, and the lingering effects of the 9/11 terrorist attacks. The challenge for Beery is adapting America West's IT systems to handle more than double the number of aircraft, airports, and employees it originally supported. When the work is complete in 2008, the company's IT costs will be $100 million a year less than the combined $250 million budget of its predecessors--despite a projected increase in IT staff to 220--largely through eliminating redundant systems and terminating US Airways' outsourcing contracts.

Integrating the US Airways and America West reservations systems is undoubtedly the most complex project on which Beery and his team are working. Those systems have countless connections with just about every other application the airlines run, from frequent-flier systems to aircraft maintenance. Integrating systems that handle such tasks as flight dispatch and passenger management with minimal downtime also will be challenging. And with employees from each side hoping they'll be able to continue using the systems with which they're familiar, decisions on which systems stay and which ones go have serious implications for the airline's workforce. "Trying to put two airlines together from an IT standpoint, there's no way around it--it's ugly, it's expensive, and it takes a long time," Forrester Research analyst Henry Harteveldt says.

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