Airline-Owned SITA Seeks to Ride a Software Boom to Lift Sales

Tech provider SITA (Société Internationale de Télécommunications Aéronautiques), which was created seven decades ago by 11 airlines, is struggling through a sluggish stretch. While CEO Barbara Dalibard has been revving up its metabolism since she joined in June 2016, the company hasn’t yet found a fix to its troubled passenger service system.

SITA last year returned to revenue growth. It boosted its revenue 4 percent year-over-year to $1.7 billion as a consolidated group, it recently revealed. In the past, the private company has disclosed its consolidated group profit or cash flow. But this year it didn’t.

“So far, so good,” Dalibard said of the turnaround. “2017 and 2018 were good years. This year, we’re slightly winning market share.”

In theory, Dalibard reports to the more than 400 airlines and airports who pay to be members.

In practice, some players own more of SITA than others. Shares are redistributed across members each year based on the business they do with the company. The company’s board includes executives from Air France KLM Group, Lufthansa Group, and LATAM.

A majority of the SITA’s revenue last year came for the first time from its software services, Dalibard said.

That’s a switch from the past. The company’s core business had been to run communications support for nearly every airline and airport. But the vendor struggled after clients abandoned legacy tech to adopt internet-based communication. Its network business is now stable but remains in a declining market.

The company sees its future in selling software-based tools to process baggage, track passenger flows, run boarding gates, identify passengers, and run aircraft communications.

Shy About Some Details

As noted, SITA has stopped sharing profit and other numbers. So we did some digging into the privately held company. The company did publish financial filings in the Netherlands. The filings covered only 70 percent of the group’s activity. The filings excluded its flat business in network services activities and its money-losing passenger service system. But they gave a sense of the company’s fortunes.

SITA’s net profit last year dropped 10.7 percent to $100 million, according to the filings. Its free cash flow declined by about 21 percent.

The numbers didn’t paint a precise picture because they excluded items. For example, the numbers excluded how the passenger service system had a net loss of $29 million on revenue of only $70.8 million.

The company saw rising costs due to a rise in capital expenditure, such as for work in new areas like blockchain.

Challenges Ahead

SITA faces challenges on a few fronts. Many customers want it to launch products and fix software defects faster.

Rival vendors, such as Harris and NCR, are wooing airlines and airports for some services. Earlier this year, Amadeus acquired airport baggage tech company ICM Airport Technics. The public company’s moves bring it into competition with the airline-owned tech company.

Another challenge: SITA’s customers, airlines and airports, often have conflicting interests. Let’s say SITA sold a new biometric-based passenger security gate to an airport. The airport might pass some of the cost on by charging a higher “passenger service charge.” Airlines don’t always like the higher costs.

SITA’s move to cloud-based services can help relieve some of the pressure. It can price cloud software in various ways, such as by fleet size or by the number of crew members using it.

Turnaround Effort

Three years ago, Dalibard became CEO. She has since been restructuring operations, management practices, and the company’s culture.

SITA CEO Barbara Dalibard standing at the Geneva, Switzerland, offices of her airline-owned technology organization.

“We want to focus on areas where we have strong differentiation and potential to grow,” said Dalibard. Her vital segments are baggage and passenger processing, border management, airport management, and aircraft communications.

One of Dalibard’s tasks has been to cut products.

“We had a lot of products and sometimes many versions, or flavors, of the same product,” Dalibard said. “We need a simplified portfolio. We need to be much more industrialized, and we need to excel at providing integration services locally.”

Her goal is to sharpen the company’s focus on two key spaces: the airport and the aircraft.

The company has accelerated the decommissioning of legacy technologies. Examples include DSL (digital subscriber line, or telephonic communications), remote LAN (local area network) comunications at airports, and satellite site support services.

Dalibard said she’s a big believer that you can’t fix things unless you start measuring them first.

“When I joined, the company had no KPI [a performance metric] for project management,” Dalibard said. “We’re now tracking this and seeing improvements.”

When Dalibard joined, the average time to develop a product was about two years. But now the average is 11 months, she said.

Improving customer focus will remain a challenge.

In 2018, SITA’s net promoter score gained 6 points, suggesting the efforts are starting to pay off. But some experts said it needs to gain about another 5 or 10 points to be on a solid footing with rivals. To be sure, net promoter score is dubious and over-hyped as a metric. But some airlines said they welcomed the focus on customer service that it represented.

A Problematic Business Unit

The company’s passenger service system, in old and new versions, has lost dynamism. It lost $158 million across the past two years. The company has struggled to find an exit for the troubled unit.

In late 2017, SITA entered into exclusive negotiations with an unnamed potential buyer. But it couldn’t close a deal. In 2018, it re-opened bidding. It then hoped to have an equity partnership with another business by now. But it hasn’t announced an agreement.

In April, a five-hour server failure caused carriers like Air India to delay more than 100 flights. A similar computer glitch happened a year earlier.

Other systems from other rivals have also had problems from time to time. But the problems became symbolic of a broader malaise.

SITA’s passenger service system has less than 10 percent of market share.

In contrast, Amadeus has as much as 60 percent, as measured by the number of passengers boarded worldwide. Sabre has about 30 percent share. Rivals like HP Shares, Mercator, Radixx, TravelSky, Unisys, and Emirates have tiny slices of share outside of China. Some airlines, such as Delta, have built their own systems.

As recently as a decade ago, four or five competitors offered passenger service systems. But today it’s Sabre and Amadeus taking share.

Workforce Changes

In January 2018, the overall SITA group outlined new values as part of its transformation program. Since then, about 70 percent of its 4,700 employees and contractors have attended workshops. They’re encouraged to collaborate more and adopt a customer focus.

Dalibard has also been restructuring the workforce, too.

In March, the company hired a new chief information officer, Didier De Nadai. Dalibard worked with De Nadai before at the French railway SNCF (Société Nationale des Chemins de fer Français).

The company has been hiring engineers who understand DevOps, short for development operations. This hot concept emphasizes releasing software and resolving issues through collaboration.

In 2019, SITA plans to spend at least $27 million on DevOps-related people and infrastructure, filings said. DevOps aims to break down silos among product, development, and operations teams.

An aspect of that effort has been bringing teams of experts closer together physically. One center is in Montreal, where the company will hire more than 60 data-science specialists over “the next few months and years.” The center recruited a new head of data science, Jean-Paul Isson, from SAP, and it relocated key product teams to the Canadian city.

This year, Jean-Paul “JP” Isson became Chief Data Science and Artificial Intelligence Officer at SITA. Source: Isson

This month, the company said it had 4,700 full-time equivalents in employees and contractors, down from the 4,800 it was reporting a couple of months ago. A spokesperson said the recent change in number didn’t represent layoffs but an ebb-and-flow in contracting.

Between when Dalibard joined in 2016 and mid-2017, the company laid off around 300 workers out of about 4,500, it said. The company had at least $31 million in severance and restructuring costs that year, filings said.

The company decreased and outsourced some centralized functions, such as in finance. It reduced some layers of management. When Dalibard joined, the company had more than 80 vice presidents — a number that has since declined somewhat.

Dalibard has decentralized some decision-making, too. The goal is to speed up the ability of employees to respond to customer requests.

For example, in 2018, Dalibard installed Diana Einterz as president of the Americas region. The two had worked together before at French telecom Orange. Dalibard has given Einterz freer reign to call shots than the role had already had.

The airline tech company said it had made strides after all the changes. Dalibard points to signs of her company’s improving competitiveness. In 2018, it had a record number of new members and applications for membership.

Late in 2018, SITA acquired Mexia Interactive, a company that captures and analyzes data from people’s mobile phones. The companies didn’t reveal the terms of the deal. Mexia’s technology studies the flow of people in about 20 airports. It can match that information with data on how much passengers spend in stores, for example.

SITA bridges 60 percent of the data exchange between airlines, airports, and border patrols. Using new technologies, such as machine learning and artificial intelligence, it might build tools that make more of that. It’s seeking opportunities in how the internet of things will change what happens in airports, for example.

A year ago, SITA inserted itself into an industry tussle over how carriers distribute their ticketing content to agencies. It began offering cloud storage support for a program called NDC Exchange (short for New Distribution Capability). It works with another organization, ATPCO, formerly known as the Airline Tariff Publishing Company. The joint effort translates and meshes conflicting versions of industry communications standards.

“We will become more customer-focused, more innovative and agile, better at providing services in the field, and faster at bringing products to market,” Dalibard said. “But it’s a journey.”