Indian outsourcing vendors such as Wipro (NYSE: WIT), WNS (NYSE: WNS) and Tata Consultancy Services are setting their sights high, with global airlines’ outsourcing to India on the rise.

Wipro has been in talks with Singapore Airlines to relocate the airlines’ call centers handling reservation services from four existing locations – in the US, Canada, Australia and New Zealand – to India. Tata Consultancy Services (TCS) recently won a multi-year US$90 million deal with Qantas Airways for application development and support. The deal has made significant contribution to TCS’s revenue for the third quarter in 2006-07. BPO services provider WNS owes 43% of its total revenue to the airlines industry, which is the largest percentage contribution from a single vertical to the company’s revenue. Last year, WNS acquired PRG Airline Services, which specializes in financial processes for the airlines industry. The acquisition, which brings with it Verifare – PRG’s revenue accounting and recovery services platform will strengthen WNS’s position in this vertical further.

Large global airlines have traditionally used technology providers such as Accenture, EDS and Unisys for their outsourcing needs. However, offshoring is picking up as major Indian vendors are building capabilities rapidly. In fact, several Indian BPO players have had an “airline legacy”. They have emerged as captive centers or joint ventures set up by airlines or travel companies, and have all successfully transitioned to third party providers now. Of these, WNS started as a British Airways subsidiary RDM India, a JV of Lufthansa and the Bird Group. British Airways diluted its stake when WNS listed on NYSE in 2006. Another provider, Tecnovate was a subsidiary of UK-based travel firm, ebookers, while AFS started as a joint venture with Swissair. Others such as Infosys, Kale Consultants and Hexaware, though not born out of airline company initiatives are also actively engaged in servicing clients in this vertical.

What is being outsourced?
Processes such as IT operations, revenue accounting, reservations, customer care, finance and accounting and human resources are relatively easier to part with, and have been typically outsourced. But services such as aerospace engineering, design and maintenance, repair and overhaul (MRO) have been more domain-centric and outsourcing is relatively recent, more so to service providers in India.

The airlines industry has been a pioneer in using outsourced services in areas like IT operations, telemarketing and 24/7 helpdesks. However, some of the airlines have traditionally resisted outsourcing, citing the complexity of their operations and criticality of safety considerations as reasons. Other inhibitors have been the steep learning curve and the long settlement periods, as well as negative stakeholder opinion about outsourcing. However, global dynamics are forcing several airlines to re-evaluate their decisions. The post 9/11 slump in the travel industry put immense pressure on airline and travel industry margins. The surge in oil prices has also been a contributor. Most airlines that have outsourced since 9/11 have primarily done so to cut down on inefficiencies and improve bottom lines.

Going forward…
Airlines services require high domain expertise, and are extremely technology oriented, compared to most other verticals. This should provide certain advantages to firms that can offer outsourcing solutions built on strong technology frameworks, coupled with domain knowledge. Indian companies wanting to cement their position in this industry in the long run will be looking to build capabilities in both the above. More acquisitions, and mega contracts in this space may be worth watching out for.

ValueNotes Outsourcing Watch: Insights for Investors is a unique news and analysis service from the ValueNotes Outsourcing Practice, focused entirely on outsourcing; This weekly publication analyses events in outsourcing, outsourcing companies, trends in the sector, impact of global competition from offshoring to established US companies, and emerging investment opportunities.

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