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Outsourcing Helps Legacy Air Carriers Fly Back to Profitability

While it’s too early to see how the foiled London terrorist attack will affect the industry, several of the world’s major airlines are poised for an economic recovery that few experts would have predicted just a few months ago.

Outsourcing has been one of the most important factors in the industry turnaround, providing an opportunity to remove large amounts of fixed cost while drawing on the expertise of the outsourcer to update the airline’s technology base. The vast majority of airlines now outsource important business processes, ranging from equipment maintenance to IT and computer support to traditional BPO areas such as HR, ticketing, and other back-office functions.

The terrorist attacks of September 11 plunged the major legacy carriers into a free fall that has led to five years of devastating losses for all and Chapter 11 reorganizations for Delta and Northwest. Even before the terrorist attacks, the older airlines were under pressure from low-cost competitors with smaller pension and labor contract obligations that offered fewer, but more profitable, flights.

“The transportation industry has been in a state of turmoil for the past six to eight years now,” says Steve Reynolds, Regional Vice President of Transportation for business process and IT outsourcing provider Affiliated Computer Services, Inc. (ACS), which numbers 13 major airlines and six online travel services among its customers. “After 9/11, cutting costs became a matter of survival–especially for the older carriers with significant cost structures.”

That a recovery is now in sight strikes many industry executives and analysts as something just short of a miracle. “The economy is running pretty strong, demand has been high and some of the airlines have cut back on capacity, which has firmed up prices,” says Al Lenza, Vice-President, Distribution and E-commerce at Northwest Airlines. “Some of us have had to go through bankruptcy and reorganization which is allowing us to restructure our labor costs and debt load to be more competitive with the low-cost carriers. You put all those things together and it has allowed us to be optimistic about the future again, even with the rising cost of fuel.”

How Outsourcing Created a Flight Plan for Recovery

How did the legacy carriers come this far? In the post-9/11 environment of declining global economies, terrorism, and frightened consumers, the long trek back to profitability demanded a laser focus on increasing revenues, decreasing costs, and improving efficiency overall–including channels of distribution and levels of customer service. All are things outsourcing can do well.

There are dozens of examples of outsourcing playing a key role in the major airlines’ recovery strategy. They include:

  • United Airlines has a 10-year information technology (IT) services contract with EDS
  • Delta outsources some of its customer care to Wipro, its European finance and accounting processes to Accenture, and many of its human resources (HR) services–payroll, HR information services, compensation and benefits administration, and employee call center services–to ACS. ACS also provides Delta with paper-based passenger revenue accounting services under a separate contract
  • More controversially, several airlines now outsource some or all of their aircraft maintenance

A Case Study: Northwest and ACS

Northwest Airlines was one of the first airlines to recognize that the Internet offered a lower-cost alternative to expensive in-house reservation call centers. It was the first major carrier to launch a Web site that allowed travelers to book reservations and check in online, beginning in December 2000. At the same time, management recognized that any savings produced by this then revolutionary new channel would be offset by providing customer support for the Web site through its existing, heavily unionized call centers.

Northwest decided to take a more innovative route by backing Tom and Kelly Doering, a couple of Minneapolis-area entrepreneurs, in the creation of a new travel outsourcer called E-Travel Experts, Inc., (ETX.). The founders designed the company specifically to handle much of the back-office work of online travel. This included emailing itineraries and managing transactions for tickets bought on Web sites, including Northwest’s site and Orbitz, an industry-neutral Internet travel agency founded by a consortium of airlines in 1999 in which Northwest also has a stake.

When ETX launched, online booking accounted for less than one percent of the market. In 2005, travelers booked more trips online than by any other method, according to the Travel Industry Association of America, with 35 percent of travelers making their own reservations online.

This is good news for the airlines like Northwest that have aggressively promoted Web-site buying. Every ticket sold on the Internet means one less expensive customer/agent interaction by phone or at the counter and one less commission paid to a travel agency.

But even Web sites need a significant amount of customer support, and that can quickly add back costs, especially in highly unionized environments like Northwest’s own call centers. By helping to create and then outsourcing its Web support to an outside operation with its specialty focus and lower overhead, Northwest managed to maximize the return on its retail Web operations, saving money on both the ticket purchase and the requisite customer support and fulfillment functions. The airline is reluctant to say how much it saves by outsourcing its Web site, but industry estimates are 25-to-50 percent over the traditional telephone call center approach.

ETX grew steadily by filling the growing demand for online customer care and fulfillment services; ACS bought the company in April 2004. ACS was already a leader in domestic airline paper ticket processing and fulfillment, and the acquisition of ETX provided a solid entrance into the online travel market, including a large marquee client in Northwest Airlines.

Today, ACS handles all of the telephone, instant messaging, and e-mail customer support for Northwest Airlines’ Web site and those of many other airlines. “We have found that many carriers are looking to move out some of their customer-care and document-processing requirements. We frequently acquire their customer-care or document-processing facilities and charge them back on an hourly or transaction basis, which represents savings for them, and a good business for us since we can do it more efficiently,” Reynolds says.

In the case of Northwest and ACS, the arrangement has been good for both parties, Lenza says. “Most of our payments are tied to actual tickets sold; it’s not a cost-plus model, so it’s very much tied to performance. It has become by far our lowest-cost channel for selling tickets. In fact, it’s so efficient that if you call the call center now, we charge $10 on the ticket as a kind of ‘human service’ fee.”

Northwest has had several major battles with its employee unions over outsourcing various processes in recent years. But Lenza says that decisions to outsource or not outsource are not taken lightly or for no demonstrable business benefit.

“Northwest takes into account more than just cost savings when evaluating whether to outsource a particular function,” he says. “It has to meet service standards, be economically competitive, and be able to produce a level of service that is comparable to what we could provide ourselves. But, we still have far more complex operations than the low-cost airlines, and we have no choice but to be more efficient. Outsourcing is an important tool to help us do that.”

Lessons from the Outsourcing Journal:

  • Legacy airlines need to outsource most of their non-core functions to weather the challenges posed by low-cost model airlines. In the fiercely competitive airline industry, the winners are those carriers who can put together a combination of in-sourcing and outsourcing to provide the most value at the lowest cost to the customers.
  • Outsourcing delivers not simply the potential for major cost savings, it also provides an opportunity to reengineer processes and legacy practices that have become inefficient and costly and are a drag on the company’s ability to compete.
  • Thinking outside the box is not just a clichÈ. By anticipating the demand for online services and helping to create a pioneering Internet customer service and fulfillment company to whom it could outsource its own Web operations, Northwest leveraged the inherent economic advantages of the Web as a retail sales channel.

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