Airline Taps IBM For Flexible Pricing Deal

On-demand computing is a good match for fluctuating business in travel industry
Faced with a pressing need to replace its 30-year-old data center, Qantas Airways Ltd. had to decide whether to build a new one it would maintain in-house or outsource those functions. The decision was made easy when IBM Global Services pitched an outsourcing arrangement that offered flexible pricing, CIO Fiona Balfour says. Qantas last week signed a 10-year contract with IBM, worth more than $450 million, that promises on-demand computing--meaning Qantas should be able to lower its IT costs by paying for computing power only as it's needed.

With that option, the $8 billion-a-year Australian airline didn't see any point in maintaining its own data center. "I don't think airlines get a competitive advantage from IT anymore. They get competitive advantage from how they use it," Balfour says. "Running IT at a low unit cost becomes a competitive advantage."

Cutting IT costs provides Qantas with a competitive edge, CIO Fiona Balfour says.

Cutting IT costs provides Qantas with a competitive edge, CIO Balfour says.
Balfour, who wouldn't provide specifics on projected savings, says the deal covers primarily the infrastructure and systems that support its core applications. Qantas will continue to do its own application development, while IBM will handle change management for development and maintenance of applications and the migration of applications from testing to production. Most of Qantas' 450 Unix servers will be replaced by Linux servers at IBM's Sydney hosting center. IBM also will provide Qantas with IT-system-procurement and security services and a service desk for resolving issues with all of its IT-service providers.

The deal coincides with a contract valued at more than $500 million that Qantas awarded to Telstra Corp. to convert the airline's telecom infrastructure to an IP-based network and to provide data, voice, and desktop services. Qantas whittled its IT staff down to 700 from 900 as a result of those deals; some former staffers took jobs with IBM and Telstra.

The IBM deal sets a baseline usage that represents less than half what Qantas had been paying in fixed IT costs, Balfour says; the airline can adjust that usage upward or downward, depending on business conditions. "What we want to be able to do is better match the shape of our infrastructure with our business and also get out of the capital-investment cycle," Balfour says. "We get to run systems as our business requires, but we get to run them on state-of-the-art technology."

Qantas' moves reflect a growing trend among companies in the travel industry to outsource IT operations so they can focus resources on core business issues, Forrester Research analyst Henry Harteveldt says. It's that trend that has made IT-service providers such as IBM and EDS aggressive in marketing their outsourcing services to the travel industry. Once word gets out about how Qantas structured its deal with IBM, other airlines could be looking to make similar deals with service providers that center on on-demand computing, Harteveldt says.

IBM is getting queries about on-demand computing from companies of all sizes and from various industries, says Barry Pipella, VP of sales for IBM Global Services in Australia. "They want to turn themselves on when the growth is there and scale back when the environment slows down," Pipella says.

Qantas is able to predict its computing needs based on how it's filling aircraft seats, Balfour says, so the airline should be able to use booking information to accurately anticipate its need for technology resources. Meanwhile, the airline's reduction in fixed IT costs will free up Qantas' IT workforce to pursue other technology-modernization projects. Says Balfour: "It's going to allow us to move forward on a whole host of issues."