DL to reinsource IT functions

[WorldTraveler]

In a move that is contrary to the outsourcing of many IT functions, DL is reinsourcing from Travelport the operation of existing passenger service and operational systems as well as the development of new systems.

http://finance.yahoo.com/news/delta-travelport-agree-transfer-passenger-140000561.html

"These systems are the data and operational backbone for more than 180 technology applications used to run our airline every day," Richard Anderson, Delta CEO said. "By bringing the systems along with the highly skilled people who support them under Delta's direct management, we gain greater flexibility and control over the technology enhancements that will continue to improve our operational performance and passenger experience. This transaction builds on our ongoing efforts to build a stronger airline for our shareholders, employees and customers while reconfirming the importance of our strategic partnership with Travelport."

As a result, Delta will be the only U.S. airline to directly control these critical technology systems, making it better able to build the next generation of technology that will improve the travel experiences of its customers.

The transition of more than 175 technology professionals to Delta is effective July 1.

 

[eolesen]

Lots of water cooler discussion on this... the biggest question to me is who initiated the move.

The message from DL is about keeping control, but I wonder if there's a different story at play.

The PSS business for Travelport hasn't exactly been profitable, especially since losing UA's business. In an article published in The Beat this morning, it sounds like the work they're doing for DL's PSS has been operating at almost zero margin.

Either Travelport approached DL and said "we're done... it's all yours if you want it" or DL approached Travelport and said "we'll take it on" as a way to ensure that they don't get dragged down by potential cuts at Travelport.

Either way, it's an interesting twist. By eliminating the 2018 contract expiration, DL can chose to either keep what they have, re-architect, or outsource on their own timeline and terms (as opposed to finding themselves in the position that Cape Air did when Google told them they were shutting down their ITA created PSS, and they had 14 months to find a new provider...)
 

As a result, Delta will be the only U.S. airline to directly control these critical technology systems, making it better able to build the next generation of technology that will improve the travel experiences of its customers.

That's splitting hairs... UA owns most if not all the IP on SHARES/A and controls all the direction of what happens with it. SHARES/A and SHARES/B are forks of the same core code from 30 years ago, and don't resemble each other as much as people might expect by sharing the same name.

On an industry basis, the only large airlines who will own and support their PSS seem to be DL, EK, NZ, and AC. It's a fairly costly proposition to keep your own system. DL's alliance partners are probably not interested in going to a DL operated PSS (AM just migrated to Sabre and is locked in for another 6 years, VS signed with SHARES not to far back, and GOL just renewed with Navitaire).

 

[WorldTraveler]

thanks for your perspectives. I was hoping you would respond fairly quickly on this one.

As you remember, the original intent at the time of the merger was to ditch DeltaMagic but DL found there were a host of back office and other issues which made a transition much more difficult and would result in a loss of some functionality which DL deemed to be more costly than what the NW side would lose. I know there are people like Kev who believe that the NW side lost a lot but, because DL was so late in upgrading its IT in the 90s, they had some fairly recent technology that was fairly advanced - at least at the time.

I suspect you are right in that Travelport wants out but there is also some degree of cost saving involved since Travelport was still working exclusively to upgrade/replace a system for which DL would be the only user.

It is also possible that there were issues of keeping DL's IT restructuring much closer to the vest which might allow them to do other more radical things that they don't want to get leaked.

As with the refinery, this is likely a long term transaction that might not make as much sense in the short range as it does longer term.

it is, however, evidence once again that DL doesn't mind swimming in a different direction than the rest of the industry.

and it does bring some high paying jobs back to DL.

 

[eolesen]

We saw no evidence that Travelport was looking to do any upgrades, and if they were, DL was on the hook for the full cost.

The reality of the situation up until now is DL already had effective control as the sole user of the system.

What I see here is risk mitigation, perhaps with Travelport as a going concern. There is some rumbling that they'll be up for sale. That poses considerable risk e.g. potentially losing the people who understand the skeletons hidden within the TPF code, and finding TPF programmers is not exactly easy anymore. They have to be trained from the ground up.

I'll disagree with the notion that there's somehow a competitive advantage in owning your own IT systems. The data? Sure, but there are few secrets when it comes to the actual lines of code.

What this does is ultimately increase DL's costs.

There's a market price for outsourcing, and one of the reason so many successful carriers have gone into the shared systems environment is so they know what their costs are going to be.

DL will have some idea, but will have to invest in the hardware, software, and training. They'll have nobody else to share that burden. It's not too far removed from AA's decision to back away from Jetstream. It sounded great five years ago, and then the cost model became more and more evident on both sides of the transaction...

 

[700UW]

E,

Wouldn't it be grand if they hire your company to help them!

 

[WorldTraveler]

it is hard to imagine how DL would bear much in increased costs if DL was already the only user and if DL is already planning on replacement systems for which it, again, would bear the full costs anyway. If a new system is in the works, investment in the existing architecture is probably limited to maintaining what they have, not upgrade or expand.


as for the predictability of costs, that was the same argument that has been used in part for fuel hedging but predictability does come at a cost.

DL very well might be willing to absorb some of the potential cost increases in return for a lower overall cost.

Again, there really isn't enough detail to know what is taking place but the biggest part of the whole announcement seems to be that DL is looking toward a new generation of IT.

 

[eolesen]

DL does need a new generation of IT, which was part of the problem being chained down to Travelport. The DNS project built a great services layer around a dinosaur of a core, but at the end of the day, there were still limitations.

WN and UA went thru the same process. They each built a great services layer and applications to hang from it, but still found themselves limited by dinocores. That's why WN eventually went forward with our product -- it's giving them a better foundation, and when they cut the ties to SAAS, you'll see them leapfrog what other airlines can do.

Why do I see costs as an issue? That's for paying customers only...

What I will say is that some businesses like to do all of their own automation, and like that level of control over the end product. I'm seeing more and more who prefer to buy it off the shelf so they can concentrate on their core business. If DL can manage to run this group as an IT shop, and not just another cost center within the airline, they'll probably do OK. Their best bet would be to spin this out like the TransQuest deal from 20 years ago (absent the JV).

 

[WorldTraveler]

The Wall Street Journal has a story today on DL's decision to reinsource its IT functions.

Fair use excerpts:

Moving away from a shared software model, with both operational and reservation systems now under Delta’s own control, Delta will be able to achieve the industry’s lowest reservation costs, CEO Richard Anderson tells the WSJ’s Susan Carey. ‘”We need to own, control and operate the data around our operations system,” he said.

Delta is just the latest company to put more emphasis on developing its own software, reversing an earlier bias toward outsourcing much of that work. As CIO Journal reported, Facebook Inc. and other companies are moving in that direction as well. Facebook is developing its own sales tools, and GM is taking essentially all of its IT in-house. Pivotal CEO Paul Maritz told CIO Journal: “We have to rediscover software development … We have to rediscover product development

full article available by Googling "The Morning Download: Delta Latest Company to Bring More Software In-House"