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1/27/2006
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VC Deal Signals Turbulence Ahead For Airlines' Legacy IT

The whopping $100 million in venture funding that ITA Software won last week may be the most telling indicator yet that sweeping changes are in store for the airline industry and the IT infrastructure the industry has relied on for decades.

ITA, a developer of airfare pricing and shopping applications, has provided a fare-searching service to airlines for six years. Now it's locked onto bigger goals. The company has developed airfare-booking software that lowers processing costs to a few dollars per ticket, far below the $12 a ticket airlines pay reservation processors like the Sabre Travel Network. And CEO Jeremy Wertheimer sees opportunities to develop apps to help airlines modernize everything from reservation systems and call centers to gate operations and aircraft maintenance.

But buying and selling tickets is the focus for now. "Almost every ticket you buy is still being handled by assembler code running on a mainframe," Wertheimer says. ITA's applications run on inexpensive x86 PC hardware running Linux. That has caught the attention of major airlines, which see a chance to drive down costs and compete with low-cost carriers such as Southwest Airlines.

For decades, the major airlines have relied on Amadeus Global Travel Distribution, Cendant's Galileo International, Sabre, and Worldspan to sell tickets to travel agents and corporate travel departments. Most signed contracts with those companies a few years ago, agreeing to make all of their ticket inventory available in exchange for slightly discounted fees.

With most of those deals expiring this year and the deregulation of airfare reservation systems in 2004, airlines are leveraging their increased bargaining power. While they need the Sabres and Galileos to display fares to travel agents--last week Northwest Airlines signed a new five-year pact with Sabre--the savings ITA is promising has some airlines rethinking those relationships.

Alaska Airlines has shunned such contracts so it could offer special fares exclusively on its Web site. The strategy has worked, as Alaska generates nearly 40% of its revenue from its Web site. It's using ITA's booking application to make those low fares available to travel agencies more cost-effectively. The airline may further restrict, or even remove, its airfares from certain places "if we can't get economics that we think are fair," says Steve Jarvis, sales and customer experience VP.

Continental Airlines has used ITA's shopping engine to support sales through its Web site, which accounts for 45% of the airline's domestic reservations. It's also testing ITA's ticket-booking technology and plans to put it into production soon. Continental's use of ITA technology may not stop there, especially if ITA can offer faster, cheaper alternatives to other systems the airline runs, says John Slater, managing director of distribution and E-commerce.

Troubleshooter
The $100 million from five VC firms was ITA's first infusion of private equity. Scott Tobin, general partner at lead investor Battery Ventures, says he's particularly impressed by ITA's efforts to map out every airline business process to develop IT systems that solve as many business problems as possible.

One hurdle for ITA and its closest rivals, G2 Switchworks and FareLogix, are travel agencies that have balked at using multiple systems to search for airfares. And Sabre has been overhauling its applications to run on Linux and low-cost servers, although mainframe-based systems remain at the core of its business.

ITA's capital infusion will accelerate the industry's transition to new technology, Continental's Slater says. "We're waiting for these systems to mature a little bit and give travel agents more of the information they need," he says. "It's important for us to see these new entrants gain traction." One hundred million dollars should buy a lot of traction.

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