In The Headlines
Aging Infrastructure Exposes Airlines to Risk of Outages
Airlines will likely suffer more disruptions like the one that recently grounded about 2,000 Delta flights because major carriers have not invested enough to overhaul reservations systems based on technology dating to the 1960s, according to airline industry and technology experts. Airlines have spent heavily to introduce new features such as automated check-in kiosks, real-time luggage tracking and slick mobile apps. But they have avoided the steep cost of rebuilding their reservations systems from the ground up, former airline executives said.
Scott Nason, former chief information officer at American Airlines, said long-term investments in computer technology were a tough sell when he worked there. “Most airlines were on the verge of going out of business for many years, so investment of any kind had to have short pay-back periods,” said Nason, who left American in 2009 and is now an independent consultant. The reservations systems of the biggest carriers mostly run on a specialized IBM operating system known as Transaction Processing Facility (TPF). It was designed in the 1960s to process large numbers of transactions quickly and is still updated by IBM, which did a major rewrite of the operating system about a decade ago. A host of special features, ranging from mobile check-ins to seat selection and cabin upgrades, are built on top of the TPF core, or connected to it.
“They have surrounded that old industry infrastructure with modern technology,” said Bob Edwards, United Continental former chief information officer until 2014. “Those systems have to always reach back into the old core technologies to retrieve a reservation or to figure out who flies between Dallas and New York City.” When a power outage shuts off that reservations system, as happened to Delta’s “Deltamatic” system, TPF falls out of sync with the newer technologies that passenger service agents use to assist travelers, Edwards explains. Airlines are then forced to cancel flights, Edwards goes on to say, as demands from stranded customers flood their employees, who meanwhile are handling bookings on an older platform without their familiar, modern tools, he said.
Several years ago, it took United six hours to recover from a test shutdown, thanks to complications with the many add-ons built atop TPF, Edwards said. Other recent disruptions include one in July that prompted Southwest Airlines to cancel over 2,000 flights, and two outages last summer at United Continental. Delta spokeswoman Kate Modolo said in a statement that a small fire resulted in a “massive failure” at the airline’s technology center. Delta was forced to cancel flights because critical systems did not switch over to backup power as intended, she said. Modolo did not indicate whether Delta relies on TPF, but said “the functionality of the IT programs we use” was not an issue. She had no comment on whether Delta had decreased or increased its spending on back-end technology over the past decade. “We have a new CIO who has a go-forward plan to ensure Delta is on the cutting edge of customer service technology while strengthening our IT infrastructure so that it is reliable, redundant and nimble,” she said in a statement. Most big airlines, including the four largest in the United States—American, Delta, United and Southwest—rely on TPF in some form, industry experts said. All stressed that they are upgrading their technology and are focused on reliability.
U.S. and Canadian airlines are projected to spend an average of 3% of their revenue on information technology this year—compared to 8% by commercial banks and 4% by healthcare firms, according to Computer Economics, a firm that tracks IT spending. Nason cautioned that comparing technology spending by airlines to some other industries, including banking, can be tricky. Banks have lower capital costs and they rely more heavily on information technology for their core business. Still, technology experts say that level of spending by the major airlines is not sufficient, pointing to the recent failures as evidence.
Part of the challenge is that U.S. airlines are under pressure from investors to top recent record profits and boost stock prices, even as economic troubles overseas have reduced travel demand. Delta, for example, is looking to boost its operating profit margin to between 17% and 19% by 2018. That is up from last year’s margin target of 14% to 16%. Airlines have also held off on making major network upgrades out of fear that systems could fail during the transition, making them feel that they cannot afford to take them down to add equipment, install patches and perform other maintenance, said Gartner analyst Mark Jaggers.
Henry Harteveldt, founder of the travel consultancy Atmosphere Research Group, said some airlines are choosing to risk outages that might cost them $20 million to $40 million rather than invest, for example, $100 million on technology upgrades. He believes investors and the general public will apply increasing pressure on airlines to avoid outages at any cost. “We cannot afford, as a nation, for any of our airlines to be rendered useless by a technology failure,” Harteveldt said. Yet it can be hard to convince airline management that the cost-benefit analysis justifies the major investments to make their computer systems truly fail-safe, said Edwards, the former United chief information officer. “When fuel prices are low and there’s extra cash on hand, they want to spend it on the cool shiny things like planes and mobile apps,” he said. “Nobody gets excited about the data center.”
Citations
1. http://for.tn/2bpwLlC – Fortune
2. http://read.bi/2bdSboe – Business Insider
Can Legoland Become a Tourist Destination?
Merlin Entertainments lacks name recognition in the U.S., but its brands are somewhat better-known: Madame Tussauds, Sea Life, the London Eye, and most notably Legoland. As the second largest theme park group in the world by attendance, Merlin boasts 62.9 million visitors a year, according to data collected by the Themed Entertainment Association, or TEA. But being No. 2 does not mean Merlin is anywhere close to the industry leader. Walt Disney Attractions gets more than twice as many visitors and dominates the list of most-attended parks. None of Merlin’s parks is even among the top 25 most visited globally.
Legoland parks are highly interactive, more so than other amusement parks, allowing children to build their own creations. At its California location is a miniature “Highlights of America” tour, including all the nation’s top attractions constructed from the ubiquitous little Lego blocks. There is also a Lego movie theater featuring its trademark blockbusters, meet-and-greets with the characters, and all the mechanical rides and roller coasters typical of a theme park. As family-friendly as that sounds, the regional U.S. amusement park industry is pretty unpleasant. Data kept by the National Amusement Park Historical Association shows that while 27 parks have opened around the country since 2010, 55 have closed.
With four venues outside the U.S. and two more on the way, Merlin has been eyeing expansion into the Northeastern U.S. for some time. Rather than go head to head with the giant mouse, the company has fashioned a midsize strategy, as underlined in a 2014 TEA report. In it, the association noted that while “Merlin Entertainments continued its upward momentum,” it faces “a somewhat mixed picture for their midway attractions.” The report cites political unrest affecting projects in Thailand, poor weather on the U.S. East Coast, and a “delay in the capital investment program.” Even with these challenges, the company has grand plans for America, seeking to replicate its successful midsize seasonal parks in Denmark, the U.K., and Germany. It has no desire to try to match the scale of the small cities built by Disney. Merlin’s Florida Legoland is, at 150 acres, only a small fraction of the 40 square miles that constitute the nearby Walt Disney World Resort. Focusing on the midsize market gives Merlin a unique advantage in the themed attractions business, said Jim Futrell, historian for the Pittsburgh’s National Amusement Park Historical Association, because development costs tend to be lower. “These smaller parks help them define their niche, which is families with preteen children,” Futrell said. “Scattering a number of smaller parks, vs. having a Disney-style park, can draw a big customer base.”
Taking the kids to Disney is an event, one that typically requires airline tickets, hotel stays, and several thousand dollars. As a result, Disney’s parks are referred to as destination attractions because they are impressive enough to draw out-of-towners for extended stays. Smaller, more remote parks are referred to as regional parks. And many of these are seasonal, and thus intensely dependent on a good summer turnout. Disney’s established destination parks operate year round. “Disney doesn’t have to go anywhere. People come to them. People fly in from all over the world,” explained Bloomberg Intelligence analyst Paul Sweeney, who focuses on amusement parks. “Disney properties draw globally. Everyone else draws locally.”
Legoland’s Goshen, New York location will be the first of its American parks that is not Disney-adjacent. In Florida and California, its parks are situated within Disney’s orbit, close enough to peel away visitors for a day of Lego brick building. In Orlando, Fla., home to Disney and essentially America’s theme park capital, Merlin operates a shuttle bus that takes visitors to the Legoland in Winter Haven, about 45-minutes away. “It’s not Orlando, but it draws from Orlando,” explained Birket. Amusement park historian Futrell added: “There was a lot of skepticism in the Orlando theme park community: Will this park an hour outside the theme park hub be able to survive? Merlin has done a good job tying it in.”
In New York, Futrell hypothesizes that Merlin could leverage its existing attractions in the Big Apple to draw people up to the Legoland in Goshen. In Times Square, Madame Tussauds is a hugely popular attraction, and there is a Lego Discovery Center in Yonkers, just north of the city. It is not clear yet how visitors at these locations would get to Goshen. There are no train stations in Goshen. The closest one with a direct route from the city, in Middletown, N.Y, is about seven miles away.
While Sweeney argues that Disney is the king of destination parks, and Legoland is generally seen as regional, Merlin says the Goshen location can be a destination. “We will draw people from as far as Boston and Philadelphia in addition to New York City. We would expect it to be a destination park with one-third tourists, one-third locals, and one-third day trippers in terms of guests who would visit,” the company says. But industry findings cast doubt on these projections: The majority of theme park visitors, some 64%, stay only for the day, according to a survey by the International Association of Amusement Parks & Attractions. Only about 25% said they were willing to stay overnight. Nevertheless, Futrell says Legoland Goshen could prove a success given Lego’s name recognition, unique attractions, and themed hotels. “I think any location challenges can be mitigated a lot by the quality of the product,” he said. “You have to be a very smart operator, and in the case of Merlin, they know what they’re getting into.”
Citations
1. http://bloom.bg/2aU4Ry2 – Bloomberg
2. http://bit.ly/2b5Rvjt – Themed Entertainment Association
The Good News Is . . .
• U.S. producer prices unexpectedly fell in July on declining costs for services and energy products, pointing to a tame inflation environment that could make it difficult for the Federal Reserve to raise interest rates. The Labor Department said its producer price index (PPI) for final demand dropped 0.4% last month, the first decline since March and the largest since September 2015. In the 12 months through July, the PPI slipped 0.2%. A strong dollar and cheaper oil continue to keep price pressures muted, leaving inflation running persistently below the Fed’s 2% target.
• Coach, Inc., a global leader in premium bags and accessories, reported earnings of $0.45 per share, an increase of 45.2% over year-earlier earnings of $0.31 per share. The firm’s earnings topped the consensus estimate of analysts by $0.04. The company reported revenues of $1.2 billion, an increase of 15.0%. Management attributed the results to strength in its North American direct sales, and double digit sales growth in China and Europe.
• Walmart, the world’s largest retailer and the dominant player of big-box stores, announced it was buying Jet, the year-old online bulk retailer, for $3.3 billion, the largest deal ever for an e-commerce company. The purchase is Walmart’s clearest acknowledgments yet that its online strategy is not working. Jet is perhaps best known for an algorithm that encourages bulk buying, an area where Walmart.com has fallen short and could energize its sagging online growth. Walmart said Jet offered it access to urban and millennial customers, two groups that the retailer’s large rural footprint has been slow to attract. Walmart noted that Jet had added more than 400,000 users monthly. Under the terms of the deal, Walmart will pay $3 billion in cash, a portion of which will be distributed to Jet.com stakeholders over time, while $300 million will be paid in Walmart stock over time.
Citations
1. http://bit.ly/1esdPSr – Bureau of Labor Statistics
2. http://cnb.cx/1gct3xa – CNBC
3. http://bit.ly/1Ty1zSc – Coach, Inc..
4. http://nyti.ms/2bdJoSZ – NY Times Dealbook
Planning Tips
Home Remodels to Reconsider
In most regions of the U.S., real estate values have moved up considerably from the dark days of the Great Recession. If you are thinking about remodeling your home, there are some renovations you may want to reconsider. Just as there are features that increase its value, there are changes that can decrease the value when it is time to sell. Below are some renovations that may fall into the latter category. Every property market has its own characteristics, so be sure to consult with a knowledgeable real estate advisor when considering a major renovation to your home.
Sacrificing limited bedrooms for storage – If you are considering converting your tiny third bedroom into a walk-in closet, take a moment to reconsider. In family-friendly neighborhoods, a house with three small bedrooms is still more valuable than a house with two bedrooms and a big closet. But if your home has four medium-size bedrooms with no master bedroom, then converting one of the rooms to expand another is a safer move.
Spending big for a custom home theater – The idea of a movie room or home theater might be loved by buyers, but not everyone will be willing to pay for it. It is also hard to keep up with the newest, best, or flattest televisions when technology is always changing. All the gear you spent a fortune on easily becomes dated.
Converting your garage into another room – Just because you need more room in your home does not mean that you should touch your garage. In communities where most of the homes have one, a garage is expected. If your house is the odd man out, many buyers will not even look at it. Make changes to your porch or finish the basement rather than permanently eliminating the garage.
Putting in a pool – In most cases a swimming pool does not add enough value to a house to offset the cost of putting it in. Not only will the pool be expensive for you to install, but many buyers consider a pool to be a maintenance hassle, and those with small children are often afraid of the safety risks associated with backyard pools. The only place a pool makes sense is in very warm climates where people spend time outside all year long. But still keep in mind you will not likely get all your money back for putting it in, even in these climates, mainly because of ongoing maintenance and energy costs.
Building highly specific rooms that cannot be easily changed – Luxury add-on rooms such as a basketball court, cigar room, or wine cellar might seem like a good investment, but, they have limited appeal. Unless the market you are in can sustain these kinds of luxury add-ons, they just are not worth the money.
Citations
1. http://bit.ly/1J17cFj – US News & World Report
2. http://bit.ly/2bs7jQu – GoBankingRates.com
3. http://read.bi/2aSJy4f – Business Insider
4. http://bit.ly/21b6j5Y – remodeling.hw.net
5. http://on.mktw.net/1Mi00TM – MarketWatch.com
