American Airlines announced an order for (2) 777-300ER aircraft during their earnings call today and I don’t think anybody saw that coming.  It’s a notable order for several reasons.  First, it’s the first order by a US airline for that aircraft.  Second, it’s the first airliner for AA to add that is for growth rather than replacement.  Third, it’s a new engine type for AA since the -300ER uses GE90 engines instead of the Rolls Royce Trent engines that AA has on its -200ER aircraft.   Finally, AA plans to receive these in 2012 and that’s pretty quick. 

Although these aircraft come with slightly better range than the -200ER, I think these are about capacity growth on some particular long(ish) routes.  These could be for any of 4 basic areas:  DFW or Chicago to London (I doubt this), DFW or Chicago to India (maybe), DFW or Chicago to Japan or China and, finally, NYC or Miami to South America (I doubt this.  My bet is on flights to India, Japan or China with India or Japan being a higher probability.  Time will tell.

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Virgin America has announced its intentions to order 60 new Airbus A320 aircraft with 30 being the A320NEO (New Engine Option) with deliveries taking place until 2019.  That means Virgin America will triple the size of its fleet (or more) over the next 8 years. 

While VA already signaled that they planned to buy 40 new aircraft, an additional 20 reflects a certain confidence that it is going to be earning solid profits going forward.  I’m sure that some of the new aircraft (probably the last ones) will replace some original aircraft in this scheme but it reflects a plan for heavy growth between now and the end of the decade.

Let’s put that growth in perspective.  jetBlue has about 160 aircraft presently serving 63 destinations after being in business for about 11 years.  In that fleet, there are about 115 A320 aircraft (with no orders on the books) and 45 Embraer E-190 aircraft (with an additional 60 aircraft).  I use jetBlue as an example because they are somewhat similar airlines with similar service products. 

So, Virgin America thinks it can grow its mainline fleet to about the same size as jetBlue over about the same period of time.   However, jetBlue got to its size in part by using the E-190s to “feed” traffic into their system from smaller destinations.  This would seem to imply that VA will have to think about a similar strategy. 

I suspect VA will start looking at how to build its network around its focus regions.  There is some opportunity on the West Coast but I think they’ll have to look to feed their system in other places as well.  Places such as DFW, Chicago and on the East Coast into New York City and Washington D.C.

Why order now?  Well, Virgin America is solidly in the Airbus camp and now they know what Airbus will be doing with its product line for the next 10 to 15 years.  With that knowledge in hand, it was an opportune time to make that order since Airbus will be very interested in getting airlines onboard with their decision to re-engine the A320 series.  In other words, they probably got a good deal. 

Why the A320NEO?  That goes to efficiency.  Again, VA knows what Airbus’ strategy will be for the next decade and a half and that means they know what kind of efficiency will be offered.  It only makes sense to get the most fuel efficient aircraft possible when competing here in the United States.  Even those that aren’t NEO aircraft will give VA an advantage in that they’ll be new engines with the latest upgrades available and that translates into money saved against the competition.

And they get one more advantage:  They’re at the head of the line when it comes to other potential buyers in the United States such as Delta or United airlines.   Virgin will be receiving the best, most efficient aircraft available as soon as or even sooner than most of its competition.  American Airlines has no new plans for aircraft other than to keep taking on 737-800s at present.  So on VA’s transcontinental flights, it will likely have the most fuel efficient aircraft available and having that advantage in that competitive marketplace means a greater chance of profitability and competitive advantage when it comes to fares.

Virgin has 2 or 3 years to go when it comes to considering how to feed its network with smaller aircraft.  I wouldn’t look for an order in that area for some time to come.  However, when they do start looking, I suspect the Bombardier CS series will be strong contenders for that airline if VA selects the new Pratt & Whitney GTF engines since Bombardier is offering a similiar engine on that aircraft product line.

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Remember THIS post from just a few days ago?

Well, Mexico’s low cost carrier, Interjet, has just ordered 15 of the long range Superjet 100 with options for 5 more.  This really is a big deal for Superjet as I believe this is their first Western Hemisphere order.

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It has been reported loudly that Delta is poised to issue an RFP (request for proposal) for as many as 200 jets and this is an order no manufacturer wants to lose.   The rumour comes just days after a record breaking Airbus order from IndiGo of India.

At this point, it’s still rumour but this one strikes me as pretty much dead on.   Delta has a huge fleet (720 aircraft with about 40 orders in place which include the deferred NWA order for the 787) and quite a few of those aircraft need to be replaced now or in the immediate future. 

Delta has the Northwest fleet comprised of the very old DC-9-5o, MD-88, MD-90, 757, 747 and some older Airbus equipment.  The Boeing fleet from Delta’s legacy side isn’t quite as old but there are some 757s and 767s in need of replacement as well.  Considering the widely varying fleet, it would come as no surprise that an replacement order is due.

Oil prices and future fuel prices will also drive the need for this order sooner than later if Delta’s goal of a consistent operating profit is to be realized. 

Pundits think this is Boeing’s to lose and I disagree.  Richard Anderson, CEO of Delta, has much more history with Northwest and he is no Airbus hater.  This will be an extremely heated competition and I will say that if Boeing were to lose this order or a significant portion of it, that will sting Boeing and its product line for years to come.

The prime driver for selection is going to be based on a number of items.  First and foremost, trip costs for aircraft to serve a particular grouping of routes.  We’ll see orders for single aisle aircraft to serve what I would call non-transcontinental routes.  In today’s world, that would be the Airbus A319 and Boeing 737-700.   Having trans-continental capability in the aircraft would be a plus but these aircraft are going to serve the focus cities of the airline with routes stretching out from the cities but not across the country.   The mission that the MD-88s, MD-90s, Airbus A319s and Boeing 737-700/800s are serving today.

The A319s are brand new and so are the Boeing 737-700s/800s.  This is going to be about replacing the McDonnell Douglas fleet.

Then there is a need for the larger trans-continental capable aircraft that remain single aisle serving longer trunk routes that won’t justify a widebody.  Currently, the Airbus A320 and Boeing 757 are serving those routes.  The A320’s arrived in early 1990’s and the 757s date from the early 1980s to the late 1980s.  The options for replacement here are the Airbus A320/321 and the Boeing 737-800 and 737-900ER.    Neither aircraft actually “replaces” a 757 which has great range and great payload.  I don’t think the A320s are going anywhere yet so this will probably involve a 757 replacement and they (Delta) may or may not want it to harmonize with their existing A320s.

Then there are the 767s.  Some are getting old and some are quite new still.  Delta needs an aircraft stretching between what a 757-300 offers and an A330-300 offers.  The 787 fits this and the fact that Delta has deferred its legacy NWA order for these makes me think that these aircraft won’t be candidates for replacement.

The 747s are pretty old and frankly I don’t think these we very well cared for either.  They need to be replaced and I do think we’ll see orders to do this on these aircraft.  None really serve routes that demand 4 engines so I think we’ll see a replacement oriented around 2 engines.

I think it’s anyone’s guess on the single aisle orders.  Airbus will fight like crazy to win this order with their A320NEO options and Boeing may well have to announce a 737 replacement at a great price to win it back.   Boeing should actually have great incentive to get going on the 737 replacement if Delta is truly interested.  With Delta, Southwest and, potentially, Ryanair all wanting a better 737, there is an exceptionally strong business case to get going on this.

If Boeing doesn’t offer a better 737 in this, I think the order goes to Airbus.

As for the 757/767 replacements . . . well, I’d give the edge to Boeing.  I think the 787 *is* a good answer for these aircraft.  They offer the right amount of extra capacity for growth, long haul capability, extremely high efficiency and flexibility.  I do think it possible that an order might be mixed between the A330 and 787 unless Boeing gets off its duff and gets that 787-9 into production.  The 787-9 is the A330 killer.

Since I don’t think the A330s are going anywhere, I don’t see much opp0rtunity for Airbus’ A350 in this mix.  It’s deliveries are too far off and the A330s just don’t need to be replaced for a long time.

I think Delta’s large widebody strategy is likely going to be a mix of 777-200s and the 777-300ER to replace the 747s.  They already have a fleet of 777-200LR with GE engines so I think they’ll order 777-300ERs with GE engines to replace those 747s.  It will do everything the 747 will do only more efficiently.  I do *not* think the 747-8i will enter into this order.  Delta doesn’t need the capacity and the 777-300ER will serve all the routes the 747 is currently serving with no problem.  The A350-1000 is far too far off and its ability to perform is simply way too unknown for this to be serious contender at Delta.

I do not think that Bombardier or Embraer will enter into this order at all.  They just don’t have a product that meets the needs of an airline like Delta very well at all.

Don’t expect an order announcement for about a year.  Delta will let the manufacturers fight it out with best and final offers for quite some time and it will take time itself to do a detailed analysis.   But I can’t wait to hear their decision.

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With the announcement of Asiana Airlines purchasing (6) Airbus A380 aircraft, I began to wonder about the success of this aircraft as a whole.  So far, it appears that Boeing was right about the demand for very large aircraft although it lost all of that demand (practically speaking) upon the arrival of the A380.  My biggest concern about this program is the airlines it is dependent upon.

Just one airline, Emirates, is responsible for 37% of the A380 orders and just one region, the Middle East is responsible for 44 % of all the A380 orders.  That is a stunning amount of eggs in one basket for a region that is volatile and largely dependent on wealth generated from one commodity.  Think about that, roughly 1 of 3 A380 orders comes from a small handful of airlines who are based in a tiny area that is highly interdependent.

The next largest region responsible for orders, Oceania/India/Southwest Asia, is responsible for 23% of A380 orders with most of those placed by two airlines:  QANTAS and Singapore Airlines.  Now, I would bet on those two airlines.  QANTAS because of their rather unique position in their markets and Singapore because of their ability, day in and day out, to fill their aircraft.  But the remaining orders from airlines in that area such as Malaysia Airlines, Thai Airlines and Kingfisher, are suspect at best.  I question their ability to use and fill those aircraft regularly and I wonder if some of those orders won’t ultimately be converted to A350 orders with deliveries farther into the future.

Europe accounts for about 20% of the orders and almost all of those airlines do possess the ability to use the aircraft based on their current business.  However, their traffic is being impacted more and more by those Middle East airlines who’ve also bought the A380 but who also enjoy dramatically lower costs.  In addition, at least two of those airlines were, at least in part, driven to make their orders by their political leaders in Germany and France.  Any political influence in orders for such an aircraft bring some risk into the picture.  Ultimately, those airlines have to earn a profit from those very expensive assets and filling 500 seats daily is a difficult thing to do day in and day out.

The only region with orders that seem credible is the Far East (China, Korea, etc).  Those locations have the numbers to fill those aircraft and their orders are small and cautious, not big and grandiose, at 9% of all A380 orders.

Is it a success?  Well, when your order book is so heavily depedent one so few, it doesn’t speak well of your ability to drive future orders and ultimately have a program that at least breaks even.   Do you really believe that the Middle East and, in particular, Emirates, can continue to drive that order book up to the point that Airbus can earn a profit?  I don’t.  I also don’t think Europe or the Far East can do it either.  In the case of the former, routes are fracturing into ever more longer and thinner routes.  In the case of the latter, the number of people who can travel is very dependent upon what are, in some cases, still 3rd world economies. 

So, no, the A380 isn’t succeeding financially and it isn’t likely to succeed financially.  40 years ago, a vanity project could be tolerated but if Airbus was run as a real business, this is a program that would be getting the axe, not promoted by the likes of John Leahy.

Airline           A380 Orders

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Southwest has indicated its readiness to investigate different fleet types in the future to meet its needs and the driver for this is fuel costs.  Their famous adherence to the 737 was more appropriate even 20 years ago but in this age, they have a large enough fleet and a large enough network to justify multiple types. 

Sticking to one fleet type has its benefits but those benefits don’t grow large when the fleet size expands past a certain point.  There is all kinds of debate on how many aircraft you have to have to make it efficient but I would say that for Southwest, a minimum of 60 to 80 aircraft is probably a sweet spot right now.  Big enough to make maintenance and handling optimum and big enough to offer flexibility through the network.

Does this mean SWA is going to add more fleet types?  No, not necessarily.  It means that it is time for them to put together a different fleet plan for the future.  If there is one thing I’m certain of, it is that SWA will have 737s for a long, long time.  The real question is . . . what kind of 737s?

In addition, SWA still does quite a bit of regional flying on mainline equipment that was efficient with 737s 20 years ago but isn’t nearly so today.  One great example of that is the flights from Dallas to places such as Lubbock and Midland and even Little Rock.  It might be beneficial for Southwest to identify a new fleet type that is smaller (in the 100 seat range) for maintaining frequency to those destinations but also offering better fuel economy and cost of ownership.   And they’ve got choices.

One thing is sure, however:  Should SWA pursue a smaller aircraft to standardize on, it won’t be a Boeing or Airbus.  They’ve got the 717 coming into the fleet via their Airtran merger and they’ll likely play with that aircraft for several years.  However, a 717/737-500 replacement won’t be a Boeing/Airbus aircraft.  It will be one of the semi-mainline regional jets being offered by the likes of Embraer and Bombardier most likely.  And it will be an aircraft that can be punished with high utilization rates.  On the surface, the Embraer E-190 series looks like the best bet to me.

I think their larger, single aisle aircraft will continue to be Boeings and I think that, for the near future, those will be 737s.  It is an almost foregone conclusion that they’ll also be pressuring Boeing for a new 737 replacement more and more over the next 2 years.  That replacement aircraft is liable to start with roughly the size of a 737-800 and have several larger types above it.  Southwest will likely choose to purchase several of the sub-types to meet their needs on various different routes that have wildly different constraints. 

This is about fuel efficiency and keeping down the trip costs.  Southwest has never had amazing load factors but the kind of load factors they’re experiencing today are historically high and they are unlikely to fall much in the future.  They need a larger aircraft than the 737-700 in the future. 

In the near future, they’ve got enough differences to work with.  This kind of talk is about pushing manufacturers to start considering what to offer airlines such as SWA in the longer term.

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United Airlines CEO Jeff Smisek says that there are too many seats chasing passengers on routes between the United States and Australia presently.  United has had a presence for over 25 years on those routes and its staying power comes from its corporate contracts and loyalty program but it is being challenged presently by lower fares from new entrants on those routes (Delta and V Australia) as well by the fact that its 747 aircraft have a less attractive IFE solution than others.

One of the great ironies for long haul routes such as these is that they have, for the last 40 years, been largely dominated by large widebody aircraft.  Most commonly, the 747.  Filling those aircraft day in and day out is a challenge and one reason why really only two airlines have traditionally succeeded on those routes.  New entrants or weak players usually leave the market because there really are too many seats chasing too few passengers, particularly in hard times.

Right now, QANTAS and United have 747s and A380s on that route.  Delta is using a 777-200LR and V Australia has 777-300s working the route.  Delta is probably right sized but they’ll have to remain committed to the market as a long term investment in order to succeed.  I understand why they want to cooperate with V Australia and I’m not sure that’s a bad thing for either airline but it appears that is going to take some time to work out.

United and QANTAS both are the dominant players but I wonder if they’ll remain so over the long term if Delta and V Australia hold their ground.  It’s anybody’s guess.  It does occur to me that we are about to see aircraft that would allow new entrants to make money on that route and, at the same time, be right sized for the route.  That would be the 787 and A350 aircraft. 

If those two aircraft permit the same profit margins that the larger aircraft offer, not only will those new entrants stick around but we might see more.  Delta isn’t going to have the 787 for 10 years or more.  United will have some and QANTAS should receive some too. 

Right now, the most practical approach is for airlines to depart the west coast of the United States using large widebody long haul aircraft.  What if United was able to start flying from the interior of the United States using 787s (which they are due to receive relatively soon)?  It’s doable and it might be practical. 

This is another great example of why larger and bigger isn’t always better.  The 787 and A350 are going to offer possibilities for long, thinner routes that will ultimately fracture those large capacity trunk routes flown by the 747 and A380 right now.

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USA Today’s Today in the Sky had THIS story about US and European airlines no longer being the biggest airlines.   The criteria is based on market capitalization and it said:

Citing the airlines’ market capitalization values, IATA says they are Air China ($20 billion), Singapore Airlines ($14 billion), Hong Kong’s Cathay Pacific ($12 billion), China Southern ($11 billion) and LATAM ($11 billion). LATAM is the holding group for the recently announced merger that would combine Chile’s LAN and Brazil’s TAM airlines.

Let’s take a look at this.  First, it’s notable that none of these airlines (with the possible exception of Singapore Airlines) plays in very competitive home markets and all (except for Singapore Airlines) receive forms of market protection and support from their home governments.  Further, each of these is able to buy aircraft and finance these purchases through low cost financing being provided by import-export banks.   Finally, all of them benefit from relatively inexpensive labor compared to other parts of the world. 

Market capitalization really doesn’t mean much in terms of size except for how people are valuing the company.  It is the value of a share of stock in the market place times the number of shares out standing and often market caps are distorted by individual owner perceptions of the company and the market it plays in.

Some like to measure airlines by fleet size or the number of markets it flies to but each of those measures can be distorted too.  Are we to equate a fleet of 250 regional jets with a fleet of 250 mainline aircraft?  Similarly, is an airline that flies to 50 markets with one flight a day going to be the same as an airline that flies to those same 50 markets 5 times a day?

A far better measure would be revenue passenger miles.  That is the number of passengers times the number of miles the airline flew those passengers.  In other parts of the world, the measure is revenue passenger kilometers but it is the same measurement. 

By that measurement, European and US airlines continue to dominate the world’s airlines.  They also enjoy a wider mix in their fleets and tend to travel to far many more markets as well.  They are airlines that are typically broad based in everything that they do. 

These airlines, however, don’t enjoy the same market caps because their governments have engineered open skies agreements with most other places or at least liberal travel treaties.  They see far more competition compared to these other airlines and most do not benefit from low cost financing for their fleets either. 

Do we really want to believe that Air China is capable of buying and operating Delta Airlines?  It isn’t.  Even Singapore Airlines would be challenged by owning and operating a US or European Airline.  It is a bad idea to compare airline size and speculate about the future on the basis of what an airline is being valued at in the marketplace.

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The dirty little secret in aircraft sales are the subsidies that are used both in the United States and Europe to bolster their exports.  You see, you can actually affect your trade balance by selling just a few extra aircraft and that really isn’t possible to do with virtually any other industry.

Right now, foreign airlines such as Emirates or Ryanair can purchase airliners using financing from sources such as the US government in the form of low cost loans.  If we sell and deliver more 737s to Ryanair or 777s to Emirates, it helps our trade balance.  The airlines get to grow with lower costs that are a function of these loans that offer lower than market interest rates.

And let’s face it, Ryanair and Emirates aren’t exact airlines in need of subisidies. 

The same situation exists in Europe with Airbus.  You didn’t think that United Airlines and Northwest Airlines bought those Airbus A320s at market rates, did you?

To date, it’s been the dirty little secret among governments and the manufacturers.  Recently, US airlines started pointing out the inherent disadvantages of this when it comes to their ability to compete and they’ve got a strong point. 

The truth is, sudsidies aren’t necessarily bad if we’re using them to bolster transportation in parts of the world where obtaining any financing is difficult.  But we’re not.  Not really.  It’s a good idea that has been turned on its head with loopholes for situations that just no longer exist. 

Now a pack of airlines who are major beneficiaries have indicated that they are open to relaxing the “home country” rule that forbids such subsidies being offered to airlines in home countries as long as no restrictions are put into place that would inhibit their own great deals.  Read more about it HERE. 

How nice.   It’s notable that removal of this “home rule” would also permit several of these airlines to get the same great financing  in Europe on Airbus models in addition to Boeing aircraft. 

How about we end all subsidies to all airlines with the exception(s) of those in true third world areas?   Is it appropriate that an airline like Ryanair can purchase airliners from Boeing at already ridiculously low prices and then finance them with such low cost loans that they’re able to buy a 737 and re-sell it for a *profit* 3 years later?

No, of course not. 

A better idea would be to come to an agreement on how to offer these subisidies to airlines in poor countries who might really benefit from such a subsidy and then eliminate such things for any airlines operating in modern economies.

This means you Ryanair/Emirates/Virgin Blue/Etihad/CargoLux/Oman/Norwegian/Pegasus/Wizz airlines.  Not a one of you is a disadvantaged airline.  Instead, you’re all airlines who are pounding your competition into the ground with lower costs that really are a direct function of these subisidies.

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There has been a lot of talk about the Chinese aircraft, the COMAC C919, over the past year and what it means for Boeing and Airbus.  From my perspective, it’s not the aircraft that is a threat.  To the contrary, I do not believe this aircraft will be any more successful than any other Chinese made commercial airliner.  However, I do think that there is a signal to be read in that the way the Chinese have chosen to engage in this project signals that they are learning and they do want to be a player.

To build a successful Boeing/Airbus competitor, you really do have to have quite a bit more experience than what the Chinese have.   The real threats to Boeing and Airbus come from Bombardier and Embraer, in my opinion, because they not only know how to build an integrated system called an aircraft, they also know how to meet an airline’s needs as a function of having built their businesses from the ground up.

Bombardier and Embraer have doing what they do for a long time and they’ve learned through both successes and failures as well as from working with airlines to find out what they need in the next product they make.  There is no substitute for experience when it comes to building that integrated system.  That has never been more true than it is today.

China has a robust airline industry, to be sure, but it is one that has been dominated by the sublime customer service that Boeing offers every customer and even Airbus has struggled to bring itself to parity with Boeing in this market.  Chinese airline executives understand and, more importantly, value what Boeing brings to the table when it comes to a complete customer product.

Chinese aviation industries would have been far better served with the goal of producing a world competitor in the regional jet class and taking their time to do it right.  I’ll point out that Japan’s aviation industry has decades more experience building aircraft systems and even they are just getting their feet wet with a total system in the new Mitsbusihi regional jet.

A good jet engine isn’t the key to success in producing a Boeing/Airbus competitor.  Competitive jet engines are easy to find.  The harder part is the airframe, the avionics, the testing, the wing and many other things.  It comes from knowing how to squeeze out even 1% more efficiency from an already mature system.  You can’t buy that experience off the shelf.  You have to earn it.

All that said, China has decided to get partners and good ones at that.  They learn and they’ll listen and they’ll build their upon their experiences and as long as they keep trying, they will succeed more and more with future generations of aircraft.  They key is to be in this for the long haul.  

 Traditionally, executing a strategy in support of the long view is a strong point for the Chinese but in this particular case, I sense a very un-Chinese like impatience to be a player.   The real thing Boeing and Airbus should pay attention to is whether or not they regroup and re-engage when the C919 isn’t the killer app they think it is.  If they do, it’s time to start getting worried.  If they retreat and allow their experiences to wither, it’s over.

You can’t even build a modestly good aircraft and expect to succeed.  You have to not only be able to make it look attractive from a performance point of view, you have to be able to service and support that product 100% of the time.  Even Boeing and Airbus will tell you that it isn’t easy to do.

Take a look at the ARJ21 aircraft being built in China at present.  It’s an aircraft that has already, for all intent and purpose, been exceeded by Bombardier and Embraer.  It won’t fly for any airlines outside of China most likely and even then it’s unlikely to be even much of a political success.  It’s an exercise to learn how to build an integrated system and China will have to work mightily to build upon that effort with the C919. 

Even the Chinese airlines who made “orders” for the C919 at the recent Zuhai aviation show signaled some doubt.  Most only made firm orders for 5 aircraft each with options for more.   Frankly, that implies resignation to political realities, not enthusiasm.  China is a country to watch in this business but this particular aircraft isn’t a threat whatsoever.

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United Airlines (ContiUnited aka Continental and United Airlines merged) has a problem.   Continental pilots have enjoyed one of the most restrictive scope clauses in the industry so far and United pilots have seen quite a bit of mainline flying move from their group to being outsourced to regional airlines flying the CRJ-700/900.   Both parties are unhappy with outsourcing the flying and both see the merger and need for a new contract as the perfect opportunity to gain ground on this issue.

At the same time, United needs to keep its costs in line with rivals Delta and American Airlines and, if possible, lower.  To do that under the present day model, that means outsourcing even more flying to regional airlines.

As usual, I would suggest that both parties need to meet in the middle a bit.  Pilots (and other flight crew) could stand to permit lower wagese for this “regional” flying to keep it “in house”.  United needs to recognize that this is about job security and these pilots want some assurance that their seniority means something in bad times.  Neither party is going to get what they want or even a majority of what they want. 

And if this conflict blooms into a multi-year negotiation, things won’t be good for either side.  Pilots will lose out on salary increase opportunities and United will lose out on the synergies that this merger is supposed to provide. 

One solution could be to retain the 50 seat Continental scope clause but pilots permit a lower entry level wage for 51+ seat aircraft or even perhaps a “B” wage scale until a pilot moves into generally accepted mainline aircraft (say 125+ seats.)  The pilots could be permitted to use their seniority to retain a job in the lower pay scale in the event of a downturn and bad times displacing only the newest pilots and at the same time the airline could benefit from being able to use regional airlines for truly regional flying. 

CEO Jeff Smisek would be wise to get creative rather than tough here.  This is a real obstacle to realizing the benefits of his merger.

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It’s always been hard to make the case fo re-engining commercial airliners.  The government does it because their aircraft see far fewer cycles and are therefore used for a much longer duration. After 20 years, the government may well have another 20 years of service life left in the aircraft and re-engining makes sense.

I can’t honestly think of a re-engine program on a commercial airliner that was a financial success and that’s why both Boeing and Airbus are backing away from this idea.  Admittedly, Airbus isn’t exactly backing away yet but it is growing quieter and quieter about the subject.

Boeing has openly discussed building a new design as a 737 replacement and several airlines have openly expressed interest in the idea.  It is the obvious pathway to go forward on but the timeline is what is giving manufacturers fits.

Boeing and Airbus want to offer a quantum leap in efficiency with new aircraft and they sense that they don’t have the right technologies to make that happen on a small, single aisle aircraft yet.   It is going to be very difficult if not impossible to offer 30%+ gains in efficiency on the next airliner.  There has been too much learned in the art of making an airliner efficient now and that means the gains will be incrementally smaller as time goes forward. 

The engines are close enough to make that call.  With a firm build committment, engine makers could make an engine that would be a leap ahead of the rest in time for first flight.  It would require a big investment and hard work to make that happen but it is possible at this point.  Of course, the numbers of aircraft that would use these engines make the business case for that investment so the likely road block on engine development going into high gear resides with Boeing and Airbus. 

We already know quite a bit about wings and there isn’t much to be gained there.  Use of new materials could help with weight and that will help a bit but huge gains from new wing designs are likely a thing of the past.

Fuselages are one area that everyone speculatese about.  We see the gains to be had from CFRP (carbon fibre reinforced plastic) in the 787 project and assume we can get those in a 737 project.   Well, with the existing technology, those gains aren’t quite there.  That solution doesn’t “scale down” to a single aisle, 150 to 190 seat aircraft very well.  In addition, Boeing and its partners haven’t quite gotten their production to scale “up” to a level that would support high volume production that a 737 replacement would require from day one.

There are newer technologies emerging that may be satisfying for such a project’s fuselage but we’re not quite there yet and this is where the delay is coming from, I think.   I don’t think that Boeing and Airbus quite have a handle on whether or not the technologies are viable enough to pursue for production and I think that is requiring more study and thought before a committment.   The fuselage (and interiors) are the last place to make big gains and the “efficiency” needed is going to have to be won from that area. 

At the end of the day, it isn’t engines that is driving these decisions, it’s fuselages and their weight.  The manufacturers want to offer everything they can because this is an aircraft they’ll likely be building for decades and you want to have what people want when you make that kind of committment.

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Delta Airlines has come to an agreement with Boeing on deferring its order for (18) 787 aircraft until the year 2020 or about 10 years from now.  Delta inherited the order when it merged with Northwest Airlines and there has been talk of this happening for over a year now.   It has also arranged to sell (4) 737-800 to third parties upon delivery from Boeing. 

Delta has new(ish) aircraft and it has really old aircraft.  What it doesn’t have is worn out aircraft that require replacement.  Not in the 787 category anyways. 

What’s going on?  Well, operating airliners is a funny thing.  You can buy new, operate new and sell relatively new.  Your costs to do that are generally worth it because you’re also getting a lot of efficiency and since the aircraft is new, maintenance is far cheaper.  Ryanair does this.  You can also hold on to old aircraft, refurbish them from time to time and while they aren’t very efficient with fuel, the capital costs to operate the aircraft are dirt cheap.   Northwest was in the habit of doing this with 40 year old DC-9 aircraft. 

Delta has been buying up used aircraft that fit its model such as the MD-90 and it is going to hold on to other aircraft that have lots of life in it.  Their 767 fleet will hold up for quite some time yet and there is some evidence that the 767 may be no more costly to operate on routes of about 5000nm or less than the 787 is.   In addition, they have a pretty young A330 fleet that was inherited from Northwest and it definitely won’t require replacement anytime soon either. 

Delta is clearly going to preserve its capital and work towards distributing profits from its revenue streams.  This hasn’t worked for airlines very well in the past but it is the stated intention of Delta CEO Richard Anderson.   Even it becomes necessary to change courses, they can.  Delta is a huge airline now and if it decides it wants to move up deliveries on aircraft or even just order more aircraft for timely delivery, Boeing and/or Airbus will happily accomodate them.  They have some flexibility here.

Is this the right move for every airline?  No, it isn’t.  Delta’s 767 fleet is pretty young with a considerable number of its 767 fleet having been delivered in the late 1990s and very early 2000s.  The A330 aircraft have all been delivered to the airline starting in 2003.  They don’t need to elbow their way to the front of the line to get their hands on aircraft. 

Is this the move for every airline?  No, it isn’t.  Other airlines have the bulk of their fleets being delivered in the 1980’s and early 1990’s and that means they are wearing out and do require replacement.   Each airline has to manage its money and its fleet and it can be a delicate dance.  In today’s airline world, flexibility is the key.

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Regulatory authorities are going to start seeing Southwest Airlines differently as a result of this merger.  SWA has done a great job of characterizing itself as the small underdog.  In truth, it’s a big airline and this merger is going to get authorities such as the Department of Transporation and Department of Justice to see it a bit differently.  SWA flexes more muscle against its own competitors than most realize and this move does eliminate a lot of problems that Airtran was giving it.  Airtran had lower costs and a nice service product and competed very, very well against SWA on major market routes.  SWA will forever be seen differently going forward now.

Southwest’s fleet strategy has always been a popular topic of conversation.  While it’s true that they’ve stayed close to their 737 roots, different aircraft types aren’t unheard of for them.  In the 1970’s and 1980’s, they briefly operated 727 aircraft.  In the 1980’s they bought Muse Air and operated their MD-80 aircraft for a while too.  The addition of the 737-500 was, in some senses, the addition of a different type for them as well. 

Adding the 717 isn’t quite the challenge for them that many think it is.  This purchase grows their fleet from approximately 550 aircraft to 602 737s and 86 717s or 686 aircraft total.  Let’s put that in perspective for a minute.  American Airlines has about 630 aircraft, Delta about 728 and the soon to be ContiUnited will have 700.  Southwest leaps past AA and plays in the SuperLegacy category on fleet numbers.  It will continue to lag behind on capacity measured as revenue passenger miles.  Nonetheless, SWA is a huge player on a global scale. 

There is already speculation about SWA “de-hubbing” Atlanta.  Well, I think the structure  of the routes into and out of Atlanta will change dramatically.  I think we’ll see a SWA-like operation in Atlanta after a period of time.  However, it will remain a “hub” in the sense that will be a major player in the SWA system just like other cities such as Phoenix, Los Angeles, Houston, Dallas, Denver and Chicago.  Those cities are hubs too.  SWA just doesn’t operate flights into their “hubs” like a network carrier does. 

I wonder if SWA isn’t missing an opportunity to reinvent itself with this purchase.  Airtran did many things very, very well and they are a profitable and very competitive carrier.  They introduced Sirius/XM Satellite Radio on their flights.  They were one of the very first airlines to have an all Aircell GoGo Wifi fleet.  Their business class product is popular and upgrades to that business class product were also profitable. 

There are some elements here that SWA could stand to step back and examine.  They aren’t nearly as far from their own business model as they think.  SWA is working hard to attract the business passenger and that business class product might well be worth keeping and even introducing across the fleet.  Southwest is introducing Row44 Wifi (too slowly in most people’s opinion) and now they have an airline that knows how to do it quickly.  They have a unique opportunity to take a look inside the viability of Aircell’s GoGo product and see if they don’t want to reverse course. 

I don’t think onboard entertainment is necessary but I do think the Airtran satellite radio offering is a great value added item on their flights and, again, it’s worth taking a look at.  I don’t want SWA to be jetBlue but the satellite radio quite possibly “fits” within their quirky nature. 

I don’t think many airlines, if any at all, will object to this merger.  It eliminates a lower cost competitor for them and replaces them with someone who has rising costs that are moving closer to legacy airline costs these days.  In addition, the sheer size of SWA and the access it gains to major slot-controlled markets such as NYC and Washington D.C. mean that legacy airlines can now argue that there *is* enough competition in those areas.  I wouldn’t be surprised if Delta and US Airways wanted to revisit their proposed slot swap deal in the near future.

Finally, there is another airline out there that kind of fits neatly into this mix.  An airline that would be as unconventional as a purchase for SWA but which would really be a west coast mirror equivalent of Airtran purchase.  Alaska Airlines.   If SWA is willing to take on integrating an LCC carrier like Airtran, it could take on integrating a sub-legacy carrier such as Alaska Airlines.  Especially one with a fleet type that remains compatible with SWA but which offers even more potential since Alaska Airlines operates a broad range of the 737 family. Such a purchase gives SWA a strong presence in all of the regions in the United States and an opportunity to see how a regional airline (Horizon Airlines) works using a very cost effective type:  the The Dash 8 / Q400.

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It’s become more and more clear that airlines are going to likely have 3 or 4 basic categories of aircraft.  First, the 100 to 135 seat category with a range that isn’t transcontinental but which allows a full load fly 3 to 3.5 hours maximum. 

Second, the 150 to 210 category with a range that will include trans-continental routes.  This was previously served by the 757 and 767 but has seen today’s 737 and Airbus 320 families take over. 

Third, the 220 to 280 seat arena which includes flights ranging from trans-continental to trans-oceanic including both the Pacific and Atlantic oceans.  We’ve seen the Airbus A330 and 767 and even the 777 in this area and that’ll continue for a bit longer too.  But it will be owned by the 787, 777 and A350 soon enough.

Finally, the very large aircraft on trunk routes that demand high capacity and high-ish frequency.  The 777-300ER, 747 (-400 and -8i) and A380 are the players here.  In the future, we’ll see more of the 777-300ER and A380 than the 747-8i and I think Boeing will have to come up with an aircraft that fits this area better both in economies as well as seat range. 

Nothing much has changed except that the models from Boeing and Airbus are getting freshened or replaced and their ceding the 100 to 135 seat market to Bombardier and Embraer.  The regional jet manufacturers are invading Boeing and Airbus territory and that’s brought along an interesting development. 

We can ignore the Comac efforts to date.  Their plans for a 150+ seat aircraft are just that, in my opinion, plans.  You don’t enter that arena without a lot of experience building something smaller and generally without experience being a partner on similar efforts for a while.  Those aircraft won’t fly, pun intended.

With a couple of exceptions, regional airlines are bringing those new 100 to 135 seat aircraft with them instead of that flying remaining with the majors.  Scope clauses continue to get revised to include larger aircraft and instead of major airlines adopting new equipment to serve those routes, they’re ceding that area largely to their regional airline partners.

The why involves what it always involves:  labor costs.  They can have it flown cheaper by someone else and earn more money.  As that scope increases, however, I do wonder why you would continue to contract that out to an independent airline instead of owning it and its revenue stream.  Why wouldn’t you want to vertically integrate and own that lower cost structure as well as control the service product?

Instead, we see SuperLegacies prepared to sell off their regional airlines and pretty cheaply at that.  Even new-ish ones with pretty low labor costs. 

At some point, these regional airlines are going to see that they can operate their own networks and while they may choose to remain partnered with majors, they’ll also see they can take on more of the risk and much more of the profit available. 

Yes, it’s been tried already a couple of times and while those efforts sputtered at the 50 seat jet level, they won’t necessarily sputter using 90 to 110 seat jets that are coming on line.  Republic may be the first to do it successfully by buying brands and working to build an integrated network while continuing to service partnerships with major airlines, time will tell.  If they are successful, will they one day leave their partnerships with the majors and become a force to content with on their own?

And where does that leave the SuperLegacies in the future?  Will they continue to walk away from the bottom end of flying when it comes to capacity?  Will they continue to cede that work to partner airlines while working to build their long haul flying?  Can they afford to cede that much control on what, today, feeds their networks for that long haul flying?

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Southwest Airlines’ flight attendant union has come to a tentative agreement on introducing the larger 737-800 into the SWA fleet.  By all I can see, this is a reasonable agreement  and reached in what has to be nearly an all time record time even for SWA.  When this originally came to light a bit over a month ago, there was rampant speculation (even on my part) that SWA made this public in order to cajole a recalcitrant union.  Now, the agreement has been reached and SWA is still working with their pilots who, if anything, should have even less of a problem agreeing to the addition.

So what was the fuss about?  Perhaps this once it was what the flight attendant union said it was.  They were contractually obligated to talk and they really saw no large obstacle to making it happen.  This just doesn’t feel like there was a real conflict brewing.  Suddenly it feels like the pilots might be hemming and hawing over this. 

Actually, I doubt even that.  Perhaps SWA and its unions will have complete agreement in a few weeks and make their order with Boeing.  No one yet has found a reason why adding the -800 is a bad idea for SWA.  Yes, there will be a slight change in the number of FA’s on these aircraft and, yes, it will add a slight level of complexity for managing scheduling.  However, the benefits are bigger and this potentially gives SWA a chance to find out if they’re ready to go to another level in the future.

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American Airlines CEO Gerard Arpey has hinted that his company may well use their new 787s (when they arrive) for replacing 767’s and that they would make a good fit for flights between New York City and London.   This is in stark contrast to announcements we’ve heard from airlines such as Continental who are planning New Zealand and Africa flights with theirs.

There is no doubt that putting the newest aircraft and one with the amenities that the 787 promises on NYC-London routes certainly will serve the business class customer well.  However, many analysts have already speculated that the 767 may well continue to be an equal performer (or nearly so) on that kind of route.  The 787 is expected to realize its real benefits on routes in excess of 5000nm. 

AA already has a large fleet of 777-200ER aircraft configured for not that many more seats than their 787s and uses them on its long haul routes already.   Given that you would want to use those aircraft for those profitable routes, you have to find a place for the 787 and that means new routes and growth or replacement of existing airframes.  In this case, many of AA’s 767’s are rather old and a 787 replacement will still yield benefits that should be appreciable.

Nonetheless, it’s disappointing that AA’s hints point to replacements on existing routes rather than growth.  It is early days for that kind of speculation and that may well change.  Currently, AA doesn’t even have a new pilot agreement governing that aircraft as of yet.

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The Southwest Airlines Flight Attendants say that they don’t want to obstruct SWA from getting a larger 737 at all in response to speculation that this internal debate at SWA went public in order to force the hands of the Flight Attendants union. 

Instead, they simply point out that adding another aircraft, according to their current agreement, opens that same agreement up to renegotiation on issues such as pay and working conditions. 

Huh?

I don’t see any reassurances that they are for or against this still.  Instead, I see language that I would interpret to mean that they see an opportunity to renegotiate their contract earlier than the first date it becomes amendable.  It would appear that this remains a potential obstruction, to me anyway.  At the least, it appears opportunistic.

One thing to come out last year during SWA’s attempt to purchase Frontier as well as during its controversy on codeshares with WestJet and Volaris was that SWA employees wanted to see more flying ( and more employment opportunities as a result of that additional flying) on their metal, not another company’s.

This addition to the fleet of the 737-800 does just that for the Flight Attendants with absolutely no change in their working conditions on a per person basis. 

That would lead me to believe that SWA Flight Attendants do, in fact, present a possible obstacle to the addition of a new 737 type to their fleet.  And until they speak more clearly on their intent, I think they continue to present the most risk to this decision.

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Southwest Airlines admits it is considering adding a bigger 737 to its fleet and its the 737-800 that it is interested in.  The 737-800 would give the airline more revenue opportunity used in and out of airports that have slot restrictions such as La Guardia or on routes with ever increasing density but where frequency isn’t justified.

Current SWA aircraft, the 737-300 and 737-700 carry 137 passengers and a 737-800 would probably carry about 175 people in a Southwest configuration.  That’s an additional a potential increase of 38 passengers for those critical routes with costs that wouldn’t be all that much more than their current costs.  A little bit more fuel and an additional flight attendant is all that is really required.  That spells more profit.

And I like the idea.  Frankly, I think Southwest could stand to add all 3 models of 737 to their fleet and I think they ought to seriously examine the potential of Hawaii and trans-continental flights.  But, then, I also think they could stand to look at smaller aircraft for regional routes with high frequency too.  It’s going to be the only way they can continue growth in the future.

However, don’t go thinking you’re going to see a 737-800 in SWA colours next year either.  Southwest likes to mull decisions like this for quite a while and it would require negotiating amendments to their union contracts with the pilots and flight attendants at minimum. 

Take note here, SWA pilots and FA’s, here is your chance to be industry game changers again.  Pilots, you shouldn’t ask for a dime more to fly these aircraft.  They require no extra effort on your part and it keeps the flying in your house, not SWA codeshare partners’.  Flight Attendants, the same goes for you.  The passenger count per flight attendant actually *drops* by two passengers with these aircraft.  Be game players and make this happen.  It costs neither union anything to make this work and most likely will add profitability to the company as well as future stability to your jobs. 

This really is win-win.  Get greedy and it is the beginning of a long end to SWA.

If SWA does adopt this idea, expect aircraft in the fleet 12 to 24 months after the decision is announced.

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In a month, Frontier will have withdrawn the remaining Bombardier Q400 aircraft from the Lynx fleet and I continue to think that my have been a mistake.

Lynx routes will be operated by Republic Airlines E170 jet aircraft.  I get that “pure jets” remain somewhat attractive but I think the Q400 will have been shown to have earned more profit on those same routes.  I get that Republic needed to find a use for some of their aircraft, too, but I continue to believe that retaining the Q400 would have proven profitable.

Yes, I’m repeating myself.  It was a small fleet but a fleet that fit extremely well.  In addition, the Lynx outfit was one of the things that really caught Southwest Airlines’ eyes during bidding this time last year.  If you’re catching SWA’s eyes, you *must* have something going for you. 

It’s interesting to me that despite the emphasis on finding lower costs, so many airlines continue to ignore the turbo-prop.  Yes, Continental has it for its regional flights on a large(ish) scale but that’s about it if you ignore Horizon Airlines. 

The fact that Alaska/Horizon Airlines is making pretty good money from them and on segments that, frankly, are a bit long for the Q400, should be signaling something to other airlines.  But those airlines remain tone deaf and I think that’s a shame. 

I look at the flights that American Eagle flies regionally from DFW and it makes me cringe to see those old ERJ-140 aircraft going to Texas and Oklahoma and Lousiana destinations that could be served so much more efficiently with a Q400 or ATR-72.  The same is true for the Chicago area. 

I honestly believe that the airlines are the only ones afraid of these aircraft, not the customers.  Imagine how much more competive one might be using them, however.  Low fares are the key, not a jet engine.

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