Airlines tighten screws on tech expenditures

When the economy boomed in the late 1990s, airlines couldn't sink enough money into efficiency-producing information-technology initiatives funded by business travelers' hefty fares. But as Business Week Daily Edition reported, IT spending was cut to the bone after air travel declined following the Sept. 11 terrorist attacks on the U.S.

With the airline industry's financial picture looking grim, many carriers are rushing to outsource their remaining IT functions, according to consultants and industry experts. And in an industry spending from $8 billion to $10 billion on IT annually, that should mean big contracts for outsourcers such as IBM, Accenture, Unisys, and Electronic Data Systems.

Unisys already manages the IT infrastructure for cargo operations at Delta Airlines, Air Canada and Northwest Airlines, and EDS runs most of US Airways' IT systems. Systems-integration companies, which are hungry for work, could benefit the most.

"For an airline to have a huge IT department will be as ludicrous as them having their own oil wells to develop fuels," said Mike Boyd, principal of Evergreen, Colo.-based aviation consultancy ASRC, in Business Week Daily Edition.

The trend toward outsourcing IT in the airline industry has been slowly building over the past six years. Moving IT to an outsourcer has been a favorite way to reduce costs. Savings from outsourcing can range from 10 percent to 20 percent, according to outsourcers and consultants.

Still, outsourcers face challenges. Carriers that have already farmed out much of their IT operations now are looking to cut costs by reducing usage or service levels. And while outsourcers might grab a larger part of the airline IT pie and post a net gain in their revenues, they're slicing up what will ultimately be a shrinking pie. Outsourcers also face new risks that could temper their ardor for additional contracts. EDS revealed last month that it's one of the largest creditors in the US Airways bankruptcy, with $70 million on the line. That explains why most of the outsourcers now say they'll be taking a hard look at contract terms before they rush in.