The creation of Sabre Inc., now the world’s leading provider of information technology for the travel and transportation industries, did not stem from an intent to form a new outsourcing group. “It became an outsourcer,” says Robert L. Crandall, chairman and CEO of AMR Corporation and American Airlines (retired), “but its origin was as a business.” Crandall became convinced in the late 1970s of the importance of data processing and communications and realized there were a lot of things AMR Corporation and American Airlines could do with information technology (IT). That belief led to the creation and phenomenal growth of an organization that now handles more than 400 million annual reservations bookings.
The tale of Sabre is a classic example of being able to recognize the ingredients for success and how to sustain competitive advantage. “Where there is intense competition, there is no place to hide,” explains Crandall. “You have to be efficient and also get maximum asset utilization. You must also generate interesting ideas. No other issues involved. This was always an effort to maximize the value of both American Airlines and Sabre.”
Fertilization and Birth
Crandall recalls the late 1950s, when jet airplanes were introduced to the US and airfares “dropped like a rock.” Travel agents handling about 80% of all airline reservations at that time?by calling airlines reservations offices on color-coded telephones–simply could not keep up with the volume of work.
United and American Airlines launched efforts to sell their reservation systems to travel agents in the mid-1970s, and a tremendous amount of controversy and expense surrounded those efforts. The systems displayed every airline’s flights but, in the early days, there was a point system that gave preference to the sponsoring airline, whether American or United. The preference system was halted by the Department of Transportation; but American and United were permitted to charge fees for bookings made on their agency-installed reservation systems. Suddenly, Sabre was a big business.
In the late 1970s, the U.S. Congress deregulated the airline industry and American Airlines, led by Crandall, launched an all-out effort to determine how technology could be used to compete effectively in the new environment. One very successful application facilitated the implementation of the American Airlines AAdvantage Program. “It was the first and most successful frequent flyer plan,” says Crandall. As the airline’s use of technology expanded, the term “Sabre,” which originally described the reservations system, came to be a general descriptor of all the airline’s IT and communications applications.
American also became interested during the 1970s in using operations research as a means of developing new ways to cut costs and raise revenue. “We hired Tom Cook, an outstanding operations research guy,” recalls Crandall, “and he built an extraordinarily capable operations research group.” The group functioned as a department of the airline and worked on such things as optimum designs for baggage systems and more efficient methods of routing airplanes and airline crews. Its most ambitious project was yield management, which Crandall explains is a way of determining the optimum demand-driven price for each airline seat. American’s work in this area ultimately led to a whole new industry, as other companies developed yield management applications for many industries.
Throughout the 80’s and 90’s, Crandall says, technology leadership was a very important part of American’s strategy. “American was, and is, a high-cost airline,” he says. “We needed to find better ways to do the job and use every means to enhance revenues; it was the only way we could compete. I’m glad to say it worked.”
As American developed an ever broader suite of airline applications, other airlines sought to buy both applications and services from the carrier. Since Sabre was the biggest of the airline systems, American had to find ways to operate multiple processors simultaneously. This, in turn, led to developing expertise in operating multiple editions of the same program on the computer complex (a process known as multi hosting). With this capability came the opportunity to provide more services to other airlines and the† decision to begin the process of transforming Sabre from an internal department to a separate company.
The first step was to put in place the complex accounting and measurement processes necessary to allocate costs fairly between American Airlines and Sabre’s other customers. Then, American and Sabre had to work out all the minute details of a contract describing exactly how the American and Sabre (functioning as an independent service provider) would work together. Crandall says the process took several years and, even today, it is continuously improved and refined.
As Sabre’s reach grew, it became evident to the shareholders in AMR, the parent company, that Sabre was worth a lot of money, Crandall says. “But the problem with an outright sale of Sabre was that it is uniquely qualified to do American’s work. Thus, AMR chose to go the route of a spin out and established a public value for Sabre by doing an IPO, in which approximately twenty percent of the company was sold to the public.
At the heart of the decision on whether to complete the spin out lies the crux of a very unique issue. “Sabre has to do something that very few outsourcers do,” explains Crandall. “It has to be the engine of ideas for new applications that will enable American Airlines to sustain its technological and creative leadership. Unless Sabre can do so, American will eventually have no choice but to re-establish its own data processing staff to drive the new ideas that the airline needs. Sabre can’t be just an engine; it must be a provider of leadership ideas.”
In most outsourcing relationships, non-core functions are outsourced to one or more suppliers. Crandall describes the complicated airline business as a complex and constantly changing mosaic. This means there is an enormous premium on timely, accurate data and on flexible information systems that can manage constant change. “Therefore, although the real core of an airline’s business is flying planes,” he says, “you could argue that data processing and communications is a core process for American Airlines. If IT is not its core function, then it is at least extremely important and is a core aspect of American’s success. American’s competitive position is dependent on IT excellence.”
In spite of that, there were compelling reasons to break out the function into a separate company and eventually to accomplish a spin out. “We went that way,” recalls Crandall, “because it was a rational way to create value for the shareholders. Sustaining the leadership of the airline was a perfect opportunity for an outsourcer, and that intellectual challenge ought also to attract very good people to Sabre. That is the opportunity I saw in the beginning. In today’s world of Internet time, you cannot sustain difference?but you can sustain first mover advantage.”