Why is the airline industry’s most important co-operative, SITA, going to become a unified company once more?

One of the toughest definitions in this industry is to come up with a succinct explanation of what SITA is and does. Is it an IT supplier; a communications company; a solutions provider? The organisation, founded in 1949 by airlines, for airlines, as a not-for-profit co-operative to develop their own private network capable of transporting their data and information to every corner of the globe, is a bit of all three.

Paul Coby SITA W250

And while some in the industry struggle to define SITA, the organisation too has been undergoing its own identity crisis. That struggle has extended to its commercial role. As one airline chief executive said, thinking out loud, the risk for SITA is that it becomes “just another vendor” and relinquishes the long-standing and intimate relationship with its airline members.

That should soon pass as SITA’s board, which is made up of airlines and other large buyers of SITA’s services such as Sabre, is proposing to present a single face to the industry it represents and serves, explains board chairman and British Airways chief information officer Paul Coby. It is a move the board hopes will be rubber-stamped by SITA’s Annual General Assembly in June.

The need to recreate “one SITA” dates back to 2000 when SITA was divided into two businesses – one to manage the transfer of communications around the network, the other to develop and market IT products. Equant, a company hived off by SITA to manage the actual telecommunications network – the “wires” as Coby puts it – was sold to France Telecom, producing an astounding cash windfall for the shareholder carriers. “It sold out at the top of the dot.com boom,” says Coby.

It was a smart move that raised millions for shareholders and got them out of a business that was rapidly becoming commoditised. “It has been a tremendous success and turned a network company from something that owned a slice of infrastructure into something that is selling network services for the industry’s best interests,” says Coby. “Now there is tonnes of capacity out there – the last thing you want to own is IT infrastructure.”

SITA’s network business (called SITA SC), providing data and voice services, represents around $800 million, or just over half of its $1.5 billion annual revenues. But these revenues are gradually shrinking, says Coby, alongside the trend of ever-decreasing telecommunications costs. With its zero margin principle, SITA has leveraged its own bargaining power with the network providers to achieve lower prices for the industry. “It has cut the price of connections each year by the best the market can do,” he says. This resulted in $100 million of price cuts being given back to the industry in 2004 and another $60 million last year.

The other part of the business involved pulling a bunch of disparate products, such as the popular CUTE check-in system, into a focused offering under the SITA INC (for Information Networking Computing) umbrella. These IT applications are sold to airlines, airports and others. This was the more commercialised side of the company and also the fastest growing with revenues climbing to just over $700 million by 2005.

However, having two business divisions had alienated airlines. “The two bits of the company had definitely been going slightly different ways,” says Ed Nicol, director information management at Cathay Pacific Airways and a SITA board member. Dealing with the two SITAs was also confusing and cumbersome. “A lot of customers had been vocal to SITA, saying that it had got to get its customer relationships under control and bring it back together again.”

But it is important to recognise that returning to one SITA is “not putting Humpty-Dumpty back together again as some think it is”, says Bill Miller, managing director IT services at Continental Airlines and SITA vice-chairman, as nothing was broken in the first place. Creating a pseudo-group structure in 2000 was as close as SITA could legally get to its goal of getting the company to operate as one at the time, he says. These laws have now changed, and the company can now evolve and take the “next logical steps”.

However, that step was not the outright sale of SITA, at least for the time being. “An equity event is not a short- or medium-term priority,” says Coby. “The priority is to build this business.” He adds: “By now the dot.com bubble had burst. When we thought about it the value to the airline business of this entity is in the fact that it provides services the airlines want at the right price.”

IATA’s head of industry distribution and financial services division Tom Murphy says: “IATA welcomes this move back to a more co-operative stance.” SITA’s shift towards a more commercial animal meant it had “lost its way a little bit”. The two groups can “identify ways to help the industry reduce its costs through co-operative effort”, he says, pointing to the joint IATA/SITA World Tracer automated service for lost and mishandled baggage as a good example of such co-operation.

Cost savings

Refocusing SITA’s on the needs of its members is a subtle yet critical part of the move. The new structure will strengthen the membership rights of carriers, says Miller. It will also produce further cost savings through only having one organisation and simply being easier to deal with. Enshrined throughout all of this is the principle of reinvesting or returning any profits to members through cost reductions, says Coby.

On the commodity network side, SITA will continue in its mission of leading costs downwards. On the IT applications side, the company will build on its increasingly wide portfolio of products. Bringing these elements of the business together again will enable SITA to become the central IT services provider some carriers may be looking for. But crucially it will be one that is inherently serving their needs as they own a small slice of it.

This does not mean SITA is seeking to oust the major IT players, but it has a clear mandate to win business. “I want something I own to be successful over some external, non-dedicated provider,” says Miller.

It wants customers to think of creating partnerships between SITA and big IT companies, such as CSC, EDS or IBM, and leverage the skills of both, says Coby. However, SITA is widening its product range to enable it to take over the IT services of whole airlines or airports. This has only been done in one case so far at Germany’s Düsseldorf Airport, where SITA has a 10-year, $200 million contract. However, there are no full outsource deals with airlines yet although Coby says one carrier is in the process of outsourcing its network services to SITA.

“What we are aiming to do with one SITA is to offer customers a one stop-shop if they want the full suite of IT services,” says Coby. “SITA was not well positioned as two elements to perform this more intimate outsource role.” And SITA does need to grow. “It is essential we have market share, you can’t represent the air transport industry if you are a bit player,” says Coby. SITA needs scale and volume to develop new products and to secure the best network access price, he says.

SITA will develop products to ensure smaller carriers that do not have the size of big players like BA stay competitive. “I think increasingly there will be those airlines that use technology as a differentiator and others who will need access to modern technology at cost- effective prices to stay in the game,” believes Coby.

The restructuring of SITA, if it gets the green light at the annual assembly, will mean a single chief executive to lead the new unified company. The board has selected current SITA INC managing director Francesco Violante to take this job, with current SITA president Peter Buecking and Hans-Peter Kohlhammer, director general of SITA SC, coming to the end of their three-year contracts.

Violante, a former EDS executive, will lead a business that has reaffirmed its commitment to serving the air transport industry. “I know SITA will be there through thick and thin,” says Continental’s Miller, which is just how airlines feel it should be. ■


Community service

One excellent example of SITA forming a partnership that is a community project as well as a commercial venture is OnAir. This joint venture with Airbus and Tenzing was set up in February 2005 to develop on board telephony services so that passengers can use their own mobile phones during flight. Chief executive George Cooper says that while the company is primarily a commercial venture, “there is no doubt that the airline community will share in its prosperity, both through a revenue share of the service proceeds, and also through being shareholders in SITA itself”.

He adds that the company endeavours to remain as agnostic as possible to any particular affiliation. An obvious example of this is the fact that although Airbus is a shareholder, there is no emphasis on installing the system on Airbus aircraft. Cooper stresses too that OnAir is not aligned to any individual global system for mobile communications (GSM) operators. He says the SITA heritage of neutrality is an extremely important factor, both for GSM operators and the airlines themselves, which are keen to ensure that anyone’s network is accessible on their aircraft.

OnAir is on track for a late 2006 or early 2007 entry into service, according to Cooper. TAP Portugal and the UK’s bmi have already announced their intention to test the system in flight on their short-haul services and several new European customers will be announced shortly, he says.

Source: Airline Business