IBM Partners Jet Airways – Analyst Blog

International Business Machines Corp. (IBM) has entered into a ten-year agreement, worth $62 million, with India’s leading international airline, Jet Airways.

 

Under the terms of the agreement, IBM will provide IT infrastructure and application support services including employee transition, data center operations, central helpdesk support, server and storage operations, Internet security services by deploying its Tivoli suite, network management, support for SAP AG (SAP) applications and other operating systems.

 

IBM is expected to provide high-end technical solutions for the airline’s day-to-day activities such as airport operations, direct distribution and frequent flier programs. This will help Jet in aligning its IT infrastructure with business strategy, thereby transforming the company to a more customer-centric organization and improve its operational efficiency as well.

 

Jet Airways is India’s second largest airline with headquarters in Mumbai. Jet operates more than 400 flights daily to 67 destinations worldwide. The $62 million contract is the first total outsourcing deal by any Indian airline operator.

 

The airline industry has faced significant hurdles in the recent past. The worldwide economic slump has dragged down its profit. Of late, airline companies across the globe are keener on improving their operational efficiency by reducing cost while nurturing customer relationships to maintain their competitive edge over the long term.

 

The Airports Council International (ACI) forecasts that the number of global passengers will rise from 4.3 billion in 2006 to more than 5 billion by 2010 and more than 9 billion by 2025. The majority of this growth will take place in Africa and Asia-Pacific, where passenger traffic is projected to increase by at least 7% and 6.8% a year, respectively, over the next three years.

 

By 2025, Asia will emerge as the world’s largest aviation market – up from its third position currently – as a result of fast growing economies like China and India. Airlines catering to Indian, Chinese and South East Asian markets are forming partnerships with IBM to boost their competitive capabilities in this highly fragmented market.

 

Most of the airline organizations, mostly low-cost carriers, are using IBM solutions to maintain their profitability. Low-cost carriers currently account for 16.0% of all flights worldwide, compared with just 6.0% in 2001. The number of low-cost airlines continues to perk up, and some are also beginning to enter long haul markets.

 

IBM’s customized services for the aviation sector include process innovation, system integration, application and architecture, networking and infrastructure services and system and technology.

 

IBM remains focused on this market, particularly in India and China, for the long term. The company completed a SAP implementation at Delhi International Airport in 2008, making it the first operational Indian airport to be run on SAP.

 

We believe the Jet Airways deal is significant for IBM as it will provide a fillip to its penetration capacity and customer base in the Indian sub-continent and South East Asia over the long term.

 

 

We remain optimistic on a long-term basis, given IBM’s high-margin recurring revenue business, new contract wins, accretive acquisitions, strong portfolio of products and solutions, global expansion, increased dividend payout and share repurchases.

 

However, IBM faces stiff competition from Hewlett-Packard Co. (HPQ), Accenture plc (ACN), Oracle Corp. (ORCL), VMware Inc. (VMW), Google Inc. (GOOG) and Microsoft Corp. (MSFT) in most of its markets, which compels us to maintain a Neutral rating over the long term (6−12 months).

 

Currently, IBM has a Zacks Rank of #3, which implies a Hold rating on a short-term basis (1−3 months).