As airlines deliberate on new generation solutions for one of their most critical business systems - the reservations platform - there are doubts about whether the technology is ready and whether there are enough suppliers to choose from
Santiago Ontañon, the chief information officer at Mexicana, is not the first, and he certainly won't be the last, to describe changing an airline's passenger reservations system as "open heart surgery". But there are times in life when a hospital visit is the only option to enable life to move on.
And many carriers over the next few years will elect to make the move from today's legacy reservations platforms to a next generation system based on the industry's latest technology. Said like that it sounds perfectly simple. In reality it is a complex decision, for the reservations system goes to the technological and business core of an airline, and choosing a new one is one of the most important commercial decisions the board makes.
"We had to recognise only Amadeus had invested in a new generation platform"
Chief information officer, Lufthansa
The industry first began talking about transferring from legacy platforms in the late 1990s. Based on mainframe computers and technology dating to the 1960s and '70s, although reliable, these systems are becoming increasingly costly and inflexible. "Everything we have in IT is completely outdated and expensive, we have to change the whole thing," says Ontañon. Moreover, these systems are poorly equipped to support the industry's transfer to online selling and desire to sell ancillary products, such as insurance or car hire. "We are looking forward to getting an enabler for new processes and to support new business models," confirms Tong.
According to Gianni Marostica, chief commercial officer of ITA Software, for network and low-cost carriers alike "the single most important message is flexibility in the solution and to be able to make changes and make them quickly at low cost". ITA is one of the new breed of technology suppliers developing a next generation platform for this market. Its first customer and development partner is Air Canada.
While many carriers have seen the need to move to next generation systems for several years, the cost crunch faced in the post-2001 period led to many IT renewal decisions being put off. Up until then the reservation platform choices available for major carriers broadly came down to a choice of suppliers like EDS, Sabre and Unisys, with SITA offering solutions for small and medium-sized carriers. Several carriers also had developed their own in-house reservation systems.
It was at this point that Amadeus and Unisys decided to come to the table with new approaches to the market. Although Amadeus had pieces of the technology needed to provide a solution in the reservations "layer", it was using it for its global distribution system, explains Frédéric Spagnou, vice-president airline business group. "We were not a player at that time in reservations," he says.
However, with its major GDS customers British Airways and Qantas seeking to renew their reservations systems with next generation technology, the opportunity to enter the market beckoned. Amadeus put E300 million (about $300 million at 2000 exchange rates) on the table to get started with its Altea system. "We decided to invest at the bottom of the cycle," says Spagnou.
With BA and Qantas as its first customers, and starting from scratch, Amadeus has shot from nowhere to a strong position of being able to offer large carriers a new generation reservations platform. The immense task of renewing these platforms at network carriers is illustrated by the time it has taken to get this far. The solutions for BA and Qantas are still in progress, with months and perhaps years before they go fully operational. "We started with two large partners and it took close to five years to bring the reservations and inventory layers live," says Spagnou.
In 2003 Lufthansa also selected Amadeus to replace its 30-year old Unisys platform. "We had to recognise at the time that only Amadeus had invested into a new generation platform," says Christoph Ganswindt, Lufthansa's chief information officer. "The other providers offered us some kind of middleware stuff to put on top of the legacy platforms and over many, many years there would be a piece-by-piece replacement by a new system. The solutions were nice but highly complex and would take up a tremendous amount of resources and time."
Large players making the migration from legacy platforms to new generation technology, such as EDS and Sabre, argue that their solutions do provide a compelling business case. At Unisys, which like Amadeus also started from a white piece of paper, development of its new generation solution Aircore began in 2001, says Olivier Houri, president of Unisys Global Transportation. It took until 2007 to complete Aircore's full suite of solutions from reservations to inventory and departure control. A year earlier, Unisys had signed up its first Aircore customer, All Nippon Airways, which is initially going to use it for domestic operations in Japan.
In Houri's view, some carriers have been reluctant to take the plunge and go for new technology solutions. "It is disappointing for us. The industry has been talking a lot about new generation systems but there are very few people who are really moving onto the new generation. Everybody is buying the same old legacy systems."
There are two main reasons for this. Firstly, carriers have doubts about the bold claims of the next generation system suppliers. "We saw some very nice Powerpoint presentations that had flawless architectures," says Mexicana's Ontañon. But answers to questions about "anchor tenants" and "IT investment per year" sounded less convincing.
Secondly, the providers with legacy solutions have been aggressive on price in the lead up to an eventual migration of their products to new technology. "When you are doing an evaluation you are tempted to go for the short-term break," says Ontañon. Such breaks are especially offered by suppliers that have GDSs. "They not only give a very good price on the legacy system, they also give you a break on distribution fees," he says.
Houri of Unisys estimates that over the past few years this competitive edge has managed to cut the operational costs of reservations systems by 60%. In pure cost terms this has cancelled out the cost advantage promised by the new generation systems. "The market has realigned itself," he says. Marostica at ITA Software agrees: "If you look at the number of transactions conducted in the past 5-6 years, up to three-quarters of them have seen airlines deciding to stay with their current solution."
In the short-term, competing against providers with fully-amortised legacy platforms has proved tough for the new wave, but suppliers like Amadeus, ITA Software and Unisys are confident their time has come. They believe legacy solutions are simply time-limited when it comes to delivering what modern airline businesses require.
For all the talk of the new generation, the simple fact is that nowhere is such a solution fully operational at a carrier of any size, yet. Across the board the developments have taken longer than expected, and there have been some serious stumbles along the way. "About $150 million has been written off in failed reservations projects in the last 18-24 months," says John Dabkowski, managing director of Navitaire, the leading supplier of reservations systems to low-cost carriers.
This includes the E40 million ($60 million) Lufthansa Systems wrote off when it suspended development of its Future Airline Core Environment platform. Then there was the $31 million write-down WestJet took last July when it cancelled a contract with Travelport for the Aires reservations system.
Both experiences illustrate that there is nothing simple in hitting either the target market or developing such complex systems in a fast-changing business environment. Almost no supplier is immune from some form of hiccup. "We are in the final stages of what has been a long development on the New Skies platform," says Dabkowski. New Skies will succeed Navitaire's popular Open Skies product. "We've spent more than we originally thought it would cost and taken more time, but we have 18 real customers live on it today." One of the former Sabre executive's challenges is to get the message across that its technology is suitable for all types of carrier.
"We are perceived as the low-cost guys," says Dabkowski. However, he believes that New Skies will be able to compete hard with the "stripped down versions offered by Amadeus". "We will fight hard for the middle ground, probably up to but not including the alliance members, we're right up to that level."
Houri believes that with Aircore Unisys will eventually at least match the 35% market share its legacy platforms now enjoy. He is also hopeful that the system will find an industry partner. There are ongoing talks with a major player to offer the solution to its customer community, he says.
Unisys has already been linked with several partners, but a deal to allow SITA to offer Aircore has faded away. The Unisys system was also an integral part of the Lufthansa Systems FACE platform, but this opportunity has passed with the German IT service provider exiting this market.
The Aires offering, which has been developed by India's IBS Software and marketed by Travelport, may have failed to make it at WestJet, but it is in operation at newly launched Virgin America.
Over at ITA, the partnership with Air Canada will prove to be valuable because the carrier is at the forefront of experimenting with new distribution and sales models, believes Marostica. "There are a dozen carriers very interested in what we're doing for Air Canada," he says, but ITA wants to bring this system into full operation before going out to the market. "We're way down the path with Air Canada, the system is running and being tested," he says, but the carrier has not announced when it will enter full operation.
Spagnou's assertion that its Altea system is the only next generation system available for the network carriers is challenged by Unisys and ITA, and by its big rival Sabre. "We believe there is a very good opportunity in this space going forward," says Steve Clampett, president of airline products and solutions for Sabre Airline Solutions. "Strategically we are making some very big bets in the reservations space, but we are following the value chain with these bets, looking at where airlines are looking to generate revenue." It is a strategy that sees Sabre building new generation technology solutions off its Sabresonic legacy mainframe platform. The tactics have paid off with a strong sales story. India's Kingfisher Airlines is one of its latest customers.
Moreover, Sabre does not think of itself as a legacy provider. "We don't back off our technology story at all," says Clampett. "Five years from now Sabresonic is going to look completely different from today." However, he won't be drawn on any partnerships with other suppliers to further accelerate its transition to a complete next generation solution. "We will explore all sorts of different avenues to drive our business," he says.
Eric Harte, vice-president and leader of the global air services industry group at EDS, says his company is taking a "measured pace" to transform its legacy platforms to robust and reliable next generation solutions by 2012. "In the reservations space we are absolutely engaging in a modernisation programme," he says.
EDS believes its wide experience as an "enterprise" IT solutions provider to leading carriers is a key differentiator in this market. Continental and Swiss have already committed to reservations upgrades with EDS that will see them migrate to a next generation solution "in the course of time", says Harte.
SITA announced late last year its strategy to make the transition from its legacy platform Gabriel to new generation technology. Originally the plan was to work with Unisys and its Aircore solution. "But we acknowledged that the project to go for a big bang replacement and ask a supplier to do that was too risky," explains SITA chief executive Francesco Violante. "Our approach is to provide a healthy attention to the industry, we are not just there to resell the solution or technology. We need to own our destiny."
Today its Gabriel system, and the various products that make up its Horizon portfolio, generate some $200 million per year in revenue for SITA. But without a new reservations platform SITA risked becoming a marginal provider. "This was not an option for us - that would not make SITA a global player," says Violante.
In one of the company's largest ever investments, totalling $100 million over five years, it will develop a complete next generation reservations platform around its Horizon offerings. The idea is to offer carriers a transition period to this new system to get around the high risks associated with switching. "We want a gradual approach which is a protection for us and for them," says Violante.
SITA has identified the "roadmap" for its journey to the new system, with various modules transferred as they are ready. These modules can be developed by SITA or bought in, says Violante, but SITA will be in charge of design, testing, migration and integration. Initially the company will target medium and smaller sized carriers for its solution. Most current Gabriel customers fall into this category. Once it is fully developed, SITA will offer the product to network players, he says.
But with such long lead times to develop these complex systems, Ganswindt at Lufthansa observes that the industry could see a repeat of the situation of the early 1970s when many carriers chose Unisys systems, giving it a dominant market position. "I see something very similar happening again - only now it's Amadeus leading the game."