Customer Self-Service: US Airways Eliminates Customer Drag
Wrapped up in the story of today's US Airways, a result of the merger between the twice-bankrupt airline of that name and America West, is everything that has gone wrong with the airline industry in recent years—and some signs of hope.
The airline industry as a whole was already slumping before the Sept. 11, 2001, terrorist attacks. US Airways Inc. subsequently went in and out of bankruptcy twice before it merged with America West in September 2005. America West suffered through 10 quarters of losses, stretching back to 2000, before returning to profitability in 2003, but lost money again in 2004 and 2005. Overall, however, America West was closer than US Airways to the low-cost airline model that has been relatively successful in the industry in recent years.
Now the combined company, US Airways Group, is showing signs of a quick turnaround. In July, it reported a quarterly profit of $305 million, excluding $35 million in transitional expenses related to the merger, and projected that it would make a profit for the full year 2006. Like other airlines that reported more optimistic numbers this summer, US Airways was seeing the results of years of effort to reduce costs and improve efficiency—partly by using information technology to drive down expenses associated with sales, customer service and maintenance.
Computer systems have remade parts of the airline industry several times over, starting with the advent of online reservations systems in the 1960s and continuing today with systems that manage gate assignments, track maintenance and manage crew schedules. But as airlines increasingly drive toward self-service customer service, the quality of those self-service systems is becoming a big factor in how many customers an airline has and how satisfied they are.
Both US Airways merger partners followed this industry trend, and now together they need to work to apply self-service technologies to their best advantage.
Of course, information-technology improvements are one part of a larger story that also includes the salary and benefits reductions US Airways forced on pilots and other workers during its bankruptcies.
"I.T. is never going to fly the airplane for you, but it definitely can help you run the business," says US Airways chief information officer Joe Beery, who was previously the America West CIO.
US Airways is also benefiting from structural changes in the airline industry, particularly a change in the relationship between supply and demand. As a whole, the airlines have cut back on the number of planes they fly and the number of routes they travel, eliminating excess capacity in the market and reducing the need for cutthroat competition. In other words, it's become possible for the airlines to raise prices in step with the increase in fuel costs and other expenses without as much risk of being undercut by their competitors. And with demand remaining relatively constant, price increases translate into better revenue.
According to an August 2006 report from the U.S. Department of Transportation, airline capacity has dropped 5% over the past year, the percentage of seats filled rose from 74% to 77%, and fares are up 12%.
The theory behind the merger was to let the Tempe, Ariz.-based America West management team, with its greater experience in low-cost airline operations, take charge of the larger US Airways, which had a big East Coast presence and flew internationally, while taking advantage of the cost reductions US Airways achieved the hard way during its bankruptcies.
The merger is still new enough that US Airways Group was reporting some financial metrics separately for the two formerly independent companies in the first quarter of 2006. For example, cost per available seat mile (CASM), a measure of costs compared to capacity, was 8.76 cents for America West and 11.44 cents for US Airways. By comparison, the Department of Transportation reports an average CASM of 8.7 cents for the airlines it classifies as low-cost carriers, versus 12.5 cents for the traditional network carriers. So, US Airways Group still has some work ahead to do if it wants to move the overall operation into the low-cost category.
NEXT PAGE: Helping Passengers Help Themselves
Helping Passengers Help Themselves
One of the ways America West has driven down costs is by following the airline industry trend toward passenger self-service, deploying increased numbers of airport kiosks for automated passenger check-in. The carrier has also tried to entice more customers to book travel through its own Web site, rather than through intermediaries or over the phone. Both trends were already underway in 2001, but have accelerated since then.
America West began selling tickets over the Web in 1997, but in recent years online booking has become a more significant sales channel. It rolled out its first self-service kiosks in 2002, using them to speed passenger check-in while lowering labor costs.
The quality of an airline's Web operations and its ability to attract customers to its own Web site has become extremely important, says Robert Goodwin, a Gartner analyst who covers information systems for the travel and transportation industries. "All airlines are trying to drive customers to their own Web sites to make those reservations," he says, because doing so cuts out the need to compensate intermediaries such as travel agencies and ticket distribution services such as Sabre.
In 2005, sales made directly over Americawest.com accounted for 31% of America West sales, while 13% of US Airways sales came in through its own Web site. Overall Internet ticket sales, including those from other travel Web sites, were 57% of total sales for America West and 33% for US Airways. According to a 2005 survey by SITA, an international organization that promotes airline technology standards, North American airlines on average now sell 63% of their tickets through Web channels, with 55% coming through the airline's own Web site.
Beery believes that America West achieved better results by investing in custom development of its Web site and kiosk software. "We thought we could move faster, control our own destiny and manage the costs better by doing it that way," he says.
On the other hand, the pre-merger US Airways had a hard time investing in systems development during its bankruptcies. It had outsourced systems development and maintenance to EDS, according to Beery. And when it came time to decide which Web site and kiosk software to stick with going forward, the America West systems were chosen, he says. The America West Web site was essentially re-branded to power the new USAirways.com.
It wasn't quite that easy, however, because the Web site had to take on added functionality to support existing US Airways customers, unite the frequent-flier programs of the two airlines, and connect to two different reservations systems on the back end—Sabre for the US Airways operations and Shares for America West's. Making the two systems act like one, rather than combining them, adds complexity and acts as a drag on the performance of the Web site and other customer service systems. So, consolidating all reservations onto Shares is Beery's next priority.
Shares is owned by EDS, which remains an important technology partner, Beery says, but the combined airline will pay EDS less for technology hosting than the two airlines did separately.
The combined Web site also caused customer service problems initially, as travelers overwhelmed the call center with complaints about incorrect balances in their frequent-flier accounts. Most of that was because of the need to create new, combined accounts for customers who had flown on both airlines, Beery explains: "It took us multiple weeks to get some of these things done."
America West has been deploying kiosks since 2002, using devices from NCR's Kinetics division. Beery discovered that the America West software could be adapted to run on the IBM kiosk hardware US Airways had deployed, because both platforms used the Windows operating system. "It was mostly a matter of changing the drivers to support different printers and things like that," he says.
America West has also deployed its self-service software to the multi-airline kiosks that are starting to appear in places like Las Vegas and adhere to the International Air Transport Association's Common Use Self-Service standard, which defines a common kiosk hardware and software environment. The opening screen on these devices features the logos of multiple airlines, and the user's selection determines which airline's check-in software will be loaded. That could be another way to save money if enough airports adopt it as a standard because the kiosk hardware would be purchased by the airport rather than the airline, Beery says, although it requires him to invest in more testing to ensure his software conforms to the standard.
So far, it's not a big factor, he says: "We will embrace it where it's the standard and put in our own kiosk hardware where it's not."
America West declined to provide specific return-on-investment figures for the kiosks, but one way they pay off for airlines is by decreasing the number of employees needed to staff passenger check-in counters. The airline industry as a whole has gotten more efficient in terms of being able to bring in greater revenue with fewer employees, although those savings have been offset by an increase in fuel costs.
The number of America West employees dropped from 12,850 in 2000 to 12,100 in 2005, even while the airline increased the volume of its operations, as measured by available seat miles, by more than 90% and its revenue by 7.5%. In other words, though the cost of salaries and benefits rose from $557 million to $701 million over that period, the percentage of revenue required to cover the airline's labor costs dropped from 25% to 21%.
More efficiencies will come as a result of the merger itself, and Beery expects to cut $100 million per year out of the combined $250 million information-technology budget of the two airlines by eliminating redundant services and contracts. That's a significant part of the $600 million in overall expense reductions US Airways Group expects to achieve as a result of the merger.
NEXT PAGE: Consolidation = Integration
Consolidation = Integration
The merger that formed the new US Airways may be a sign of further consolidation among air carriers, which would bring with it the need for information systems integration.
When the US Airways merger was still in its early stages at the beginning of the year, CEO W. Douglas Parker called Delta CEO Gerald Grinstein to discuss adding Delta to the fold. From a technology perspective, US Airways might benefit from absorbing the investments in self-service technology and real-time data integration that Delta made while it was trying to ward off bankruptcy ("Delta's Last Stand," go.baselinemag.com/apro3). But regardless of the value of those technology assets, such a merger, like any other, would also come with its own integration headaches.
The conversation between Parker and Grinstein was initially reported in The Wall Street Journal and later confirmed by US Airways. But it's only one of several possible combinations creating a buzz of speculation in the airline industry.
From a technology perspective, Beery says he has his hands full trying to complete the integration with one other airline and wants to get it finished.
Still, if US Airways should pursue an additional merger, the experience from this one ought to pay off, he says: "First of all, I think it would be a lot of the same—but we would be smarter about it because we did it once."
At A Glance: US Airways Group
Headquarters: 111 W. Rio Salado Pkwy., Tempe, AZ 85281
Phone: (480) 693-0800
Business: Newly merged passenger airline formed by America West, a low-cost carrier, and US Airways, which had gone bankrupt twice since 2001.
Chief Information Officer: Joe Beery
Financials In 2005: The combined revenue of the merger partners was more than $5 billion, but on a consolidated basis the company's net loss was $537 million.
NEXT PAGE: CRM Then and Now
Then and Now