When AOL merged with Time Warner to become an even bigger media company, a primary reaction was a dot com bubble was buying a multi-generational colossus.

But others who paid attention were quite a bit more concerned in the dissonance between the two companies in terms of leadership and culture.  In short, they were incompatible and didn’t understand each other.

I understand the desire for Alaska Airlines to buy an airline.  They are in a “eat or be eaten” world and presently look very attractive as a hors d’oeuvre for a much bigger airline.  So buying someone lets the airline continue to exist rather than become food for another.

Pardon me.  This merger is nuts.

The airline fleets are entirely at odds with each other.  The service products are entirely at odds with each other.  The networks are somewhat at odds with each other and where they aren’t . . . it doesn’t mean Alaska Airlines is going to pick up the customers from a consolidation point of view.

The company cultures are way at odds with each other.  Alaska Airlines has a multi-generational history and a very unionized, very conservative airline culture.  Virgin America is the millenial who just turned 24 and thinks they should be a vice president in their first job.

What bugs me more about this is that no one seems to be calling anyone out on this.  That alarms me.  Analysts and everyone else shouldn’t like this merger at all hughesairco.com.  It doesn’t speak to merger synergies and it doesn’t look like a merger that is easily accomplished which means it looks like one hell of an expensive merger.

In the face of incredible and record setting airline profits in the past 2 years . . . no one seems to care very much.

And that’s what scares me about this industry.  It appears to be losing its focus again.

Filed under: Airline News, Airlines Alliances, Mergers and Bankruptcy by ajax
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Alaska Airlines has been a maintstay in the Seattle area for decades and has always done well by providing above average service combined with competitive fares in the area.  They have built a lot of loyalty in this area.  Over the past two decades, Alaska has also engaged in partnerships with almost all comers.

They have been willing, for instance, to do business with both Delta Airlines and American Airlines (and many other airlines) on the premise that they were too small to ignore anyone and what they had to offer.  That worked very well for Alaska.

A few years ago, after the Delta / Northwest merger, Alaska and Delta formed a more special partnership.  The idea was that Alaska would provide feed in Seattle for a relatively small group of flights that Delta wanted to operate from Seattle.  Flights that, mostly, were to go across the Pacific but which also included flights to Europe and some of Delta’s hubs.

It seemed innocent and very beneficial to Alaska at first but over time Delta grew Seattle into a big focus city that now borders on the verge of being a hub.  Delta treats Seattle much like it treats both Los Angeles and New York:  a good place to aggregate traffic onto international flights.  Since Delta has so many international flights departing Seattle now, it needs more and more feed.

Feed that Alaska can’t provide in total.  Alaska’s feed is more expensive anyways in that it doesn’t give Delta the economies of scale that a focus city/hub require.   So Delta is adding more and more of its own flights and directly competes with Alaska out of Seattle on many routes now.

Each continues to act as if the other is still a great friend.  Neither is really kidding anyone at this point.

At some point, Alaska will have to withdraw and do better at aligning itself with a variety of players again.  Alaska is useful to Delta only to the point that Delta is unable to do for itself in that market.  Delta is doing for itself just fine.

Alaska won’t pick a fight with Delta and probably won’t appear to do much at all until it finds a way out of this relationship that preserves all relationships.  In the meantime, Delta will encroach more.

Competition is alive and well in the United States airline industry and this is a perfect example of the market power a behemoth such as Delta has vs the market power the LCC airlines have.  Delta created a major focus city and did so in a few short years quite successfully.

Filed under: Airlines Alliances by ajax
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A while back Alaska Airlines decided to use its subsidiary Horizon Air to provide most of the service between its Anchorage hub and Fairbanks Alaska.  I wrote about this decision when it was made and notice that they are preparing to introduce this change in the near future.

The Q400 was insulted by Fairbanks, to be honest.  It was regarded as a big insult to the city of Fairbanks who failed to recognize that those 30% savings were needed on routes between the two cities.  Let’s be clear:  air fares between these two cities are highly competitive yielding as little as about $130 per seat.  A Q400 makes it possible for Alaska Airlines to better serve the route.

As they are introducing the aircraft to the city, I thought it might be interesting to offer a few links to photographs of the cabin of the aircraft just so people could see just what citizens of Alaska are getting.

Alaska Airlines Cabin

Alaska Airlines Aisle

One other item of note:  Alaska Airlines / Horizon Air’s biggest competition on this route comes from Era Alaska.  Era Alaska uses the Q400’s father, the Dash-8-100 on that same route.

Filed under: Airline Service by ajax
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If we use the premise put forth by the US Department of Justice that the US Airways / American Airlines merger is bad for the consumer, then we need to take a very hard, long regulatory look at all of the US airlines, many of its busiest airports and taxes as well.

If anyone was truly concerned about competition in the airline industry, the Justice Department should have continued to block mergers as they did with the original United Airlines / US Airways merger (which was vastly smaller than the one being proposed today).  Instead, they did not.  Rather, a few years later they signaled with US Airways the idea that mergers were necessary in the airline industry landscape.

Quite frankly, I was perfectly happy to see the status quo maintained pre-2005.  That landscape saw:

• Delta Airlines
• Northwest Airlines
• United Airlines
• Continental Airlines
• US Airways
• America West
• Southwest Airlines
• AirTran Airways
• American Airlines
• Alaska Airlines
• jetBlue

It was a pretty well balanced mix of airlines of both the legacy and LCC flavors and pretty well distributed across the United States.  Barriers to entry were, compared to today, fairly low.

Then several bankruptcies occurred which included US Airways, United Airlines, Delta Airlines and Northwest Airlines.  One airline (America West) had to get a massive loan after September 11th and essentially reorganize itself to survive as well.  Another airline, American Airlines, got Billion Dollar givebacks from its employees to lower costs instead of performing a bankruptcy.

Of the 11 airlines listed above, 6 suffered exceptional financial trauma.  Another 2 existed on fine line of financial trouble:  AirTran Airways and jetBlue.  Only 3 managed their finances appropriately and saw appropriate returns on investment:  Southwest, Continental and Alaska Airlines.

So we permitted mergers and this is what happened:

• 2005:  America West takes over US Airways and retains the US Airways name.
• 2008:  Delta and Northwest merge as equals and retain the Delta Airlines name.
• 2010:  United and Continental merge as equals and retain the United Airlines name.
• 2011:  Southwest Airlines takes over AirTran Airways and begins the wind down of the AirTran name.

By 2011, the competitive landscape was dramatically different and American Airlines had to throw in the towel (it should have in 2006, in my opinion) in November of 2011 by filing bankruptcy itself.  In the 2012 / 2013 period, the new airline landscape looks like this:

• Delta Airlines:  Revenues  $36.6 Billion (2012)
• United Airlines:  Revenues  $37.1 Billion (2012)
• American Airlines:  Revenues  $24.8 Billion (2012)
• Southwest Airlines:  Revenues $17.0 Billion (2012)
• US Airways:  Revenues $13.8 Billion (2012)
• Alaska Airlines:  Revenues  $4.6 Billion (2012)
• jetBlue:  Revenues  $4.9 Billion (2012)
• Virgin America:  Revenues $1.3 Billion (2012)
• Frontier Airlines:  Revenues $1.4 Billion (2012)

As you can see, the airlines that exist today are hardly equal despite the perception otherwise.  For instance, Delta and United Airlines both are roughly equal as airlines but the next biggest by revenue is American Airlines which is a staggering $12.3 Billion behind.  If you added US Airways revenues to American Airlines revenues in 2012, you still come in at just $38.8 billion.  Put another way, the new American Airlines Group would operate at roughly the level of United and Delta Airlines.

Southwest would be at a disadvantage seemingly but Southwest’s revenues are based entirely on US based operations and therefore see Southwest operating at parity with the other 3 large carriers.  So, now we have 4 carriers operating at roughly the same scale in the domestic US market.

The remaining four airlines:  jetBlue, Virgin America, Frontier and Alaska Airlines have combined annual revenues of $11.2 Billion or a number that is still less than that of US Airways.  It’s notable that those last 4 airlines are nowhere near national airline scale.  They are all regional or niche in their marketshares.  They can and will survive and at least 2 of them have every opportunity to organically grow much larger.

What my point in all of this?  Scale is critical in this industry and while those billions in revenues sounds healthy, airlines often earn zero profits on such revenues.  The dollars are large, the profits are tiny, at least until very recently.

If you stop the mergers now, you have two giants and three other airlines that would have to be labled as “at risk” over the next decade.  While you allowed that to sort out, the two giants would only become . . . more giant.  And the bigger they grow, the more influence they have on airports and route infrastructure.

So, if you feel the combination of US Airways and American Airlines is anti-competitive and anti-consumer, then you *must* be ready to “break up” Delta and United Airlines.  They don’t have the potential to be dominant.  They already are dominant.  So much so that they dwarf every other airline in the industry.

More on these subjects tomorrow.

Filed under: Mergers and Bankruptcy by ajax
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I’ve long noticed that Alaska Airlines has maintained an exceptionally high stock price relative to other airlines.  As I write this, Alaska is at about $51 / share while Delta is at about $18 / share.

I honestly do not know Alaska’s strategy for stock prices.  This is an airline that does a good job on itself and despite it’s legacy airline roots and relatively high costs, it turns a profit very well.  That in itself helps with the share prices.

Yet, I can’t help but keep wondering if Alaska’s high share prices have given it shareholders who tend to invest for a longer view than the typical airline investor.  I wonder if it has enough breathing space to make the right decisions and hence the reason it performs so well financially.

United Airlines stock price is pretty high right now at $30 / share but I actually don’t know why.  It’s not an airline that has so far shown itself to be capable of benefiting from its merger.  I suspect that investors in United are simply hoping that good news will miraculously appear one day soon.

All airline share prices are up but it is curious to me that Alaska has performed so well.  It’s worthy of debate and investigation.

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Alaska Airlines is being excoriated by Alaska residents primarily in Fairbanks for switching their flights between their fair city and Anchorage over to Bombardier Q400 turboprops.   No more jet service.

I have a few words for Fairbanks residents:  Alaska Airlines just did you a big favor.

Fairbanks is likely to get more frequency on flight segments where it will take absolutely no longer to fly the segment.  The Q400 is made for such service and it can provide it reliably and, most importantly, at lower cost than the 737.

Flight durations won’t change.  Dispatch reliability won’t change.  Frequencies will go up.  How is that bad?

Fairbanks will retain jet service to Seattle and Portland, Oregon and it will keep jet service on one 747-400 Combi flight between Fairbanks and Anchorage.

There appears to be a perception that these aircraft are dramatically noisier than the 737.  They are not.  There is also a perception that they cannot climb very high.  They can climb quite high.  Each aircraft can climb as high as one would ordinarily want to climb on a flight segment that short.

There is a perception that the Q400 isn’t good in mountain turbulence.  Those in Fairbanks should observe that all the flights between Portland, Oregon and Seattle, Washington are in the Q400 directly over mountain ranges.

There is a perception that weather will be a real issue for passengers.  Possibly for a small number.  Possibly and depending on whether or not Alaska Airlines makes accomodations for its passengers (I think they’ll handle special circumstances just fine.)   Let me also point out that the climates in both Anchorage and Fairbanks aren’t exactly North Pole-like.   It can get very cold there during storms and winter months.  About the same as what is seen in International Falls, Minnesota where they fly turboprops in and out of all year round.

There is a perception that turboprops are more prone to icing.  They are not.  The altitudes in which icing occur are altitudes that both the 737 and the Q400 spend about the same amount of time in.  Both have anti-icing features and they work well.

And I want to point out one more thing:  Fairbanks city population is 31,000 people.  The entire metropolitan area is 97,500 people.  Waco, TX has 125,000 city population and 235,000 metropolitan population.  Waco doesn’t get 737 aircraft either.  In fact, Fairbanks is roughly equivalent to Sherman, TX in population sizes and Sherman, TX doesn’t even get commercial air service.  Take a minute to go lookup Sherman, TX and we’ll wait until you’re done.

Anchorage – Fairbanks sees about 11 flights a day in aircraft ranging in size from a small 30 seat turboprop to a large 737-400 with 144 seats.  ERA Aviation is flying the same class of turboprop between the two cities multiple times per day with zero problems.

So, basically, there is no problem here.  Just pride over issues that don’t exist.

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Alaska Airlines is adding flights to hubs of its major partners from Portland, Oregon and I think this is long overdue.

Seattle has been Alaska Airlines’ “hub” but Portland, Oregon has always contributed a major portion of traffic to Alaska.

Since Delta’s pull back from Dallas / Fort Worth, there have been no non-stop flights between Portland and Dallas / Fort Worth.  That is American Airlines’ domain.

In addition, Delta “owns” all the flights between Portland and Atlanta.

Alaska Airlines will be able to provide the Alaska Airlines experience both to its own passengers as well as both AA and DL who codeshare with Alaska Airlines.  It’s a good fit all around and Portland has missed having such flights for a long time.

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Delta and American Airlines have matched US Airways and United Airlines with $200 domestic change fees for those who want to change their tickets.

We think this is a mistake on the part of all these airlines and an opportunity for non-traditional, non-network carriers.  What’s the opportunity?  The chance to court some business travelers.

We tend to think of the business traveler as this road warrior who is traveling by airline 4 days per week and . . . not so much.  The real business traveler travels barely enough to get real status in a frequent flier program and usually their status is so long that they do not get the upgrades they hope and pray for.

In fact, for most of those business travelers, it’s a back of the bus experience over and over again.

Southwest and JetBlue and others such as Alaska Airlines now have a greater opportunity to court businesses and their traveling employees by pointing out a lower “all in” cost to get where they need to go.

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AA 777 Livery

Terry Maxon at the Airline Biz Blog of the Dallas Morning News has photos of the new 777-300ER in the new livery colors introduced by American a couple of weeks ago.  It isn’t quite as jarring as that of the 737-800 we’ve already seen.  That said, I still think it’s a very ugly tail and in conflict with the logo now in use.  I still like the silver and I still think the stylized eagle implies a star more than an eagle.

Alaska Airlines

Alaska Airlines had a captain faint while in the cockpit on a flight over Oregon.  The first officer declared an emergency and landed the aircraft on a priority basis in Portland.  Another captain ferried to Portland and flew the flight the rest of the way.  The captain who fainted was an industry veteran with a current medical certificate.  He gained consciousness in the cockpit and removed himself from the cockpit to the back of the plane where he was tended to by an onboard doctor.  The only real problem here is if Michael O’Leary of Ryanair gets wind of a 737-800 being landed by a single pilot.

All Nippon Airlines

All Nippon Airlines (ANA) says that its losses due to the 787 grounding are now up to just over $15million.  Once the final effect of the grounding is known, ANA (and other airlines) will likely enter into discussions with Boeing over compensation for their losses.  No doubt Boeing will see this an opportunity to book more orders for aircraft.

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Hawaiian Airlines has made an order for the A321NEO which, I think, causes trouble for Boeing.  It’s a validation of the A321 as a 757 replacement that, I think, Boeing didn’t need showing up given its desire to sell the 737MAX-9.  It is increasingly clear that the new A321 isn’t going to be the dog that the current A321 has been.  Good on Airbus.

Hawaiian is clearly going to make trouble for a couple of airlines with this purchase.  The first is Alaska Airlines.  When Hawaiian takes delivery, it can start to compete with Alaska on the smaller routes such as Bellingham to Hawaii.  Hawaiian succeeds quite well in this area when it goes up against other airlines with its Airbus A330 and Boeing 767 aircraft.  It knows how to attract the right passengers at the right fares.

The other airline that, I think, will be a surprise to some is Southwest.  It’s clear that Southwest has been eyeing the Hawaiian markets for some time and it has even talked about its need to gain ETOPS experience in order to do this.  I think Hawaiian is responding to this threat by bringing its games to the kinds of markets Southwest might be tempted to enter.

And that brings me to a criticism I have for Southwest:  This airline isn’t responding in a very agile way to opening up new markets and opportunities.  By the time it studies and prepares for new flying outside its comfort zone, the opportunity is often gone.  Witness its vaunted codeshare deal with WestJet and Volaris as more evidence.  Southwest could have been flying those Hawaiian routes as soon as this year but the conventional wisdom is that Southwest won’t have itself ready for this challenge until 2015 or about 2 or more years from now.

2 years is an eternity in the airline business.

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Terry Maxon of the Dallas Morning News has a summary of 3rd Quarter Earnings that brings clear light to how airlines have done these past 3 months.  Before going further, let me say that both companies and pundits like to exclude special items from their analysis of earnings.  It is the airlines’ way of saying “Yeah But!”

Yeah, but if we had not screwed up on our hedges, we would have made this much.  Yeah, but if we had not had to pay off a bunch of senior employees to leave, we would have made this much.

I don’t like Yeah Buts.  Special items occur every month, every quarter and every year.  More so than ever before.  It’s time to accept that it is what it is regardless of how special items affect performance.   Now on to a few observations:

Delta Airlines is doing exactly what CEO Richard Anderson said was necessary in the airline industry.  They are raising their margins considerably to truly cover their capital costs as well as their operating costs.  Well done.  Very, very well done. Admittedly, they are farthest down the road in the New World Order of consolidation but it is a consummate performance nonetheless.

Alaska Airlines:  Ditto!  They are playing their game perfectly right now.

Hawaiian Airlines:  Again, well done and particularly so in light of where their market was just a few short years ago when it comes to competition.  Yes, they face less complex challenges than continental US airlines but they still are performing well.

US Airways:  I’ve already said it once this week.  These guys know how to run an airline and earn a profit even under trying circumstances.  They make a better case for merger with their financial results than any PR machine could make publicly in the news.

United Airlines:  It’s time for these guys to get a little more on the ball.  One begins to sense a certain lag in realizing their synergies and having a seamless system.  Special items shouldn’t be killing your entire net income at this point.

JetBlue:  Nice job but kind of a yawn.  We’ve been seeing roughly the same level of performance for years with no substantial growth whatsoever.  I’d rather have Alaska Airlines than JetBlue at this point.

Southwest:  I think their recent performance reflects their merger.  What I think hasn’t been brought up but should be is that their merger isn’t exactly brand new at this point and the lag is primarily due to how ill equipped they were to absorb another airline with respect to their systems.  Consider this:  SWA has made noise about how their IT systems impact their ability to do business with the rest of the world for a bit over 5 years.  They are operationally seeking to do business with the rest of the world in many different ways and they are certainly changing the way they operate to be more in line with a legacy airline.  SO WHY HASN’T THE IT PROBLEM BEEN ADDRESSED AGGRESSIVELY AT THIS POINT?

American Airlines:  B’ah.  Even with artificially contained costs and a fairly friendly bankruptcy judge, they continue to lose money.  What’s the definition of insanity?  Doing the same thing over and over again expecting a different result?

Summary:  It’s no surprise that the two top performers are also partners and close ones at that.  These are airlines that know what they’re doing and who exercise strict discipline in operating their airlines.  Yes, I’m talking about Alaska Airlines and Delta.

No one is talking about growth, everyone is talking about capacity restraints and raising margins.  Well, all except American Airlines.  That alone speaks volumes.

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I found a rather odd story on the Seattle Post Intelligencer aviation related blog (found HERE) referring to American Airlines indication of interest in possibly having Alaska Airlines as a merger partner.  There were two things of interest in this story but before I go on, I’ll just comment that I found it amusing that Alaska Airlines basically replied with a polite response that amounted to “Yeah, we’re happy with where we are today.”  And they should be since their own market cap is an order of magnitude greater than AA’s is presently.

The other item is odd.  It mentions AA showing interest in Southwest Airlines as a merger candidate.  First, I hope Herb Kelleher didn’t choke too hard from laughing.  He’s a nice guy and I wouldn’t want to think of him hurting himself.  Second, that isn’t a merger, that would for damn sure be SWA taking over *everything*.  Third, SWA is much smarter than that and knows how to responsibly represent its shareholders interests in the marketplace.

I hope that the reference to SWA was a mistake on the journalists part.  If it wasn’t, then if I were a financial analyst, shareholder or member of the unsecured creditors committee, I would start questioning just what the hell the company leadership is thinking.

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It is interesting to me that AMR is crowing about its reported Q2 profits of $95 million (excluding bankruptcy costs and special items).  American Airlines is #3 in revenue (behind Delta and United Airlines) presently.  Delta and United Airlines are projected to report net income in excess of $500 million.

Alaska Airlines, number 7 in revenues (and certainly in possession of a greatly inferior network and high-ish labor costs) has pulled in $105 million in net income.
US Airways, #5 in revenues, should be reporting about $250 million in net income.  Southwest Airlines, #4 in revenues, should also be reporting about $250 million in net income.  It’s notable that SWA also has exceptionally high labor costs (although it also has exceptional productivity from that same labor group).

I really wouldn’t go bragging about $95 million in what is arguably an excellent quarter for all airlines.  This is, if anything, a reminder that the costs aren’t the only thing at play here.  There remains a significant revenue problem that doesn’t really get entirely addressed in the Corners Strategy.

Futhermore, crowing about revenue performance gains isn’t entirely honest either as American Airlines already has the most room to make a difference.  AA has not brought itself to parity with the other legacy airlines on the revenue side of the equation, it simply has experienced revenue growth that all other legacy airlines have also experienced in the past financial quarter.  The real question is how would American Airlines done if it had parity with United, Delta and US airways.  Legacy network carriers who all operate with similar equipment, similar approaches and with the same hub advantages and disadvantages.

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It is being reported that American Airlines is now considering 5 merger partners and they are US Airways Group Inc., JetBlue Airways Corp, Alaska Air Group, Republic Airways’ Frontier Airlines, and Virgin America.   There  are interesting choices here but at the same time one can see a less than enthusiastic theme here.

Alaska Airlines is a great airline and has a great operation on the West Coast of the United States.  That said, be 100% sure that Delta isn’t about to let Alaska Airlines get away without a fight.  I would rate this opportunity rather low.

JetBlue is another interesting option in that it would bolster American Airlines in its cornerstone market strategy as it applies to New York City with its operations centered on JFK.  I think that JetBlue is rather stagnant and while it offers market share, there is nothing else here to be gained and given AA’s history of buying airlines and then not knowing exactly what to do with them. . . this merger could happen but it adds little value to AA overall and certainly doesn’t bring American Airlines back into United and Delta’s scale.  All it does is leave existing AA management in control of AA.

Frontier and/or Virgin America?  No value added here.  There is no great complementary system found here, the management of either airline isn’t doing very well and the most that happens is that AA eliminates a tiny bit of competition on some profitable mainline routes.   These are red herrings in my opinion and I think there is very little probability of a real merger with either of these airlines.

US Airways:  Enough said already.  There are complementary systems, there are good executives who know how to make money and there is enough scale to compete effectively with United and Delta.   It’s interesting to me that US Airways’ Doug Parker says that he still hasn’t been contacted by anyone with American Airlines.  This is the least attractive merger path for AA executives and, yet, the one that makes the most sense.

I think the intent in leaking these potential merger partners to the press is to appear to be doing something about examining all options while focusing all the real effort and work on a stand-alone emergence from bankruptcy.  While that gives people like Tom Horton a chance to realize extremely beneficial financial rewards and an opportunity to keep their jobs, I’m not sure that it means that US Airways can’t be the dominant merger partner.

AA is almost certainly going to emerge with a higher market capitalization than US Airways presently has.  However, that doesn’t mean that they have very much maneuvering room against US Airways who has been building cash holdings and operating their business both profitably and sensibly.  AA’s current cash holdings are almost certainly going to be reduced in this bankruptcy and will be needed to finance both operations as well as aircraft purchases.   Furthermore, creditors and shareholders aren’t likely to be amused at the notion of using those cash holdings for a purchase of US Airways.

I would like to see a conversation about AA’s ability to be a dominant merger partner today.  This is an airline that has essentially dismantled every purchase and just made it go away.  Reno Air, TWA and Air California all were airlines purchased by American and removed from the competitive landscape without adding any real value from the purchase with the exception of some aircraft.  They were, for all intent and purpose, minor asset purchases.

Is that what creditors and shareholders want to see out of the next merger?  My guess is that won’t fly with anyone.

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Respected airline consultant and research engineer Bill Swelbar has recently taken a swipe at the idea of a merger between US Airways and American Airlines in a blog post.  Swelbar suggests there may be more benefits to a full integration between AA and JetBlue and Alaska Airlines who just as adequately (if not more adequately) cover areas where American is weak (the West and East Coasts).

Swelbar is factual and correct about AA’s weaknesses in these areas with respect to its network and market shares.  He’s also correct in that those two smaller airlines do operate in the weakest portions of American’s network.

I see significant problems for that kind of approach.  First, Alaska Airlines is increasingly under the influence of Delta Airlines these days and enough so that I do not think it can afford to ignore Delta’s desires entirely and Delta would like competition to go away.  Second, JetBlue already has some agreements in place with American Airlines that do bring a benefit but it also has little incentive to cooperate with American Airlines as AA doesn’t bring much to the table for JetBlue.

Both Alaska and JetBlue are working hard to be all things to all carriers in the form of interlining, codeshares and alliance agreements and that works for both airlines very, very well.  Alaska works at this from a domestic perspective and JetBlue plays more on the international side of things but they’re both pursuing the same strategy and it’s a strategy that works well for both.  Why give up success for the risk of fully integrating with AA and under AA’s management?  If I’m a shareholder for either airline, I don’t like the idea.

Furthermore, at this point, this isn’t about what AA leadership wants.  It is already rapidly becoming much more about what AA’s creditors want and what their shareholders want.  And what they want is performance.

A marriage with US Airways can be disrespected over and over but there are two exceptionally important things to be mindful of.  US Airways knows how to run an airline well and earn money despite labor issues.  They also know American’s business pretty well and they’ve got an established track record that didn’t exist in the same form back when they made a bid for Delta.  Creditors will listen to them carefully today.

US Airways also has the strengths that are complimentary to AA’s network.  They aren’t the most optimal strengths but they are one hell of a lot better than American Airlines standing alone.  Philadelphia, Phoenix and Charlotte are very complimentary to AA’s strengths.  No, there isn’t much overlap that would result in “synergies”.  I would argue that the so called “synergies” of reducing capacity via a merger are harder to obtain than generally appreciated, overvalued and largely non-existent today as a result of consolidation and capacity restraint that has gone on for the past 4 years.

New mergers will benefit from scale and operational expertise.  They’ll benefit from having a more diverse fleet that permits “right size” flying on routes.  They’ll benefit from international alliances.

There is a great example for that last part.  US Airways is now the awkward partner in the Star Alliance with United filling that role on a far greater scale within the United States than US Airways does.  US Airways could benefit a great deal more from Oneworld than it does Star at this point and a merger with American makes Oneworld very competitive in the United States again.  A great reason for Oneworld partners to stand aside and look at these issues with less emotion and more reason.

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Every airline under the sun is submitting applications to the FAA to fly a route that is outside the perimeter rule for Reagan National Airport in Washington, D.C.   Virgin America wants to fly from San Francisco to DCA.  Southwest and JetBlue want to provide non-stop flights between DCA and Austin.  Southwest plans to offer follow on service from Austin to San Diego.  Alaska Airlines wants Portland, Oregon to DCA. 

Like I said, everyone wants a piece of the action.  Why?  Well, those flights outside the perimeter are typically good revenue earners because they are limited on those routes, provide direct connectivity to politicians and businessmen and provide access to an airport that is very difficult to get.

And once you have those slots, you’re often able to reuse them for something else that falls within the original constraints of the award if you want.  A toehold at DCA is very, very valuable to an airline. 

Who gets them?  I actually tip this towards the JetBlue and Southwest proposals for connectivity to Austin.  It fits within a strong need.  I think that flights to San Francisco and Portland aren’t as attractive because there is decent competition on those routes albeit via Dulles airport.   I do think that connecting state capitols and, in particular, those of politically powerful states such as Texas, will be an unofficial driver in this choice.

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Over the past 12 months, FlyingColors has doubled its readership and has seen nearly 1000 blog entries reached with enough words written to equal a book with over 1700 pages.  But enough about me, let’s look at the last year in the airline world.

North America:

Southwest Airlines did its deal with Airtran and bought itself an Atlanta base of operations and some very valuable landing slots at Northeastern airports.  As if that wasn’t enough, it made a firm deal on a bunch of 737MAX aircraft and agreed to take on even more 737-800 aircraft for its routes.  However, the airline wasn’t without some trouble:  Airtran pilots tried real hard to step on their on feet in a seniority deal with Southwest Airline pilots.

American Airlines struggled (more) and lost more than a Billion dollars (again).  Instead of making any real progress with its labor force, it decided to file bankruptcy but not before having made a historic order for aircraft from both Airbus and Boeing for the A320 and 737 series aircraft (with both A320, A320NEO, 737 and 737MAX in the mix).  2011 also saw long term CEO Gerard Arpey depart the company (to work with former Continental CEO Larry Kellner) and AA President Tom Horton took over.

Virgin America has horned in on American’s routes, Frontier has struggled more and more under Republic Airways leadership and US Airways still doesn’t have pilots or flight attendants integrated onto one seniority list.  JetBlue decided to fly more to the Caribbean, entrench itself even more at JFK airport and blew it during an October snowstorm (again).    United and Delta made money.  Quite a bit actually.

I think we’ll see Frontier either spun off rapidly in 2012 or the rapid decline of the airline necessitating bankruptcy of Republic Airways.  I don’t see a real strong suitor for Frontier except, perhaps, JetBlue but since Frontier isn’t based at JFK airport, I do wonder at JetBlue interest in an airline like Frontier.

I think we’ll see Alaska Airlines find even more odd partners for its success and still manage to cozy up close to Delta while doing it.  Southwest will start painting Airtran aircraft in its colors and operating even more great deals to more places from Atlanta but I also think that if any slots at JFK, LGA, EWR, IAD or DCA come available for purchase, Southwest will bid the cost of a Boeing and lose again.

I think it’s possible that Virgin America will make money in 2012 and I think it is really possible that we’ll all be pleasantly surprised by that.  The determining factor?  Cost of fuel. 

United will order a nice chunk of aircraft and I’ll bet that it will be an order similar in mix to the American Airlines order from both Airbus and Boeing.  However, I do not think it will be similar in size.  I think it will be a partial fleet replacement with lots of options for incremental change in the fleet.

I think Delta will continue to make a big pile of money with very little controversy surrounding it except that I think Delta will look for and execute a plan to encroach on more Legacy and SuperLegacy airline routes as it has announced its intention to do so from La Guardia Airport.   I also think that Delta will decide its not afraid of Southwest and it will decide to give Southwest a taste of bullying it hasn’t experienced before.   Particularly in Atlanta.  It’s not just an opportunity for Southwest to succeed in Atlanta but it is also an opportunity for Delta to capture lost customers.

I think we’ll see capacity restraint for another year and higher air fares than seen in a long, long time.  I do not expect to see another new airline show up and I think we may well see one true LCC depart the picture if things get particularly rough with respect to fuel prices or competition.  Milwaukee will become the regional airport it was intended to be instead of a bloody battleground between LCC airlines.

Tomorrow:  The rest of the world

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then why haven’t we seen more purchases of turboprop aircraft for commuter and regional routes?  After all, they make sense in that they can offer block times comparable to regional jets for routes 500nm and less.  They can take off from less used runways and they have operating costs that are as much as 60% less than the equivalent regional jets.   They’re quiet and vibration free and cost less to purchase.  And they continue to be used for such routes in many other parts of the world.

I wish I could guess that the problem was scope clauses but it isn’t.  Most of these aircraft fit well within the existing scope clauses and I think pilots would accept more turbo-prop flying in their scope clauses if it was asked. 

I think the problem is inertia.  Airlines got away from turboprops as the first generation regional jets arrived and the customer feedback was exceptionally good.  What airlines lost sight of is that the turboprop world changed around the same time and for much the same reasons.  

It’s a marketing issue, I think.  Airlines haven’t figured out how to sell such a flight and I don’t know why.  I’m pretty sure that no one is going to shy away from a lower price and the airlines can offer a lower price *and* make more money with these aircraft. 

The one other obstacle is that it takes a leader to see the possibilities and adopt the model.  Airlines aren’t managed by leaders anymore.  They’re managed by finance men and finance men see the adoption of these aircraft as risk.  Why?  They’re afraid people will avoid them in favor of regional jets offered by others.

I maintain that it’s a price driven world out there and adopting these aircraft will allow an airline to lower prices, offer the same connections and earn more money.  Ironically, if one wanted proof of this, one only has to look at how Horizon Airlines has rejected the regional jet and flown its Dash 8 / Q400 aircraft in support of Alaska Airlines and made a nice patch of money doing it.  Stranger still, Horizon is using these aircraft for fairly long flights.   Some in excess of the 500nm mile advantage.

So the question is:  if costs are a real issue, why aren’t airlines working harder to use the right equipment and earn more?

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Right on the heels of Southwest terminating flights between Spokane and Seattle (due to low loads), Alaska Airlines / Horizon has announced that it will be filling that gap with Horizon flights.   Alaska already services that route but they are offering more flights and should be doing so with its Bombardier Q400 fleet which is ideally suited to that route and which will provide just as quick service but costing the airline far less than it costs Southwest to operate 737s.

This is why I believe that Southwest has to start looking at aircraft that can operate such fleets with less cost.  The 717 can’t offer the cost savings that a right size regional jet and/or Q400 can.  And, frankly, I think the Q400 could be operated *very* effectively by Southwest in its smaller markets. 

While Southwest says it doesn’t operate hubs (and it really doesn’t), it does operate focus cities that would benefit greatly with feed.  For example, imagine Wichita, KS flights to Kansas City, Oklahoma City, Tulsa and Denver.  Or flights from places such as Boise, Spokane, Salem or Salt Lake city to Portland and/or Seattle.

There are plenty of places where those aircraft could operate not only very efficiently but at no loss of schedule time either.  Think flights into focus cities such as Dallas, Houston, Chicago, Denver, Seattle, Phoenix, Atlanta, Baltimore, and several cities in Florida.

If Southwest is prepared to be a multi-type fleet, then the Q400 and Embraer E-170 series have something to offer them.

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Just weeks ago, Alaska Airlines went paperless in their cockpit with respect to their flight manuals by issuing iPads to their pilots.  They also expect to replace their flight charts by adding those to the iPads as well.

Now American Airlines is moving a step forward with that by testing iPads to replace pilots charts.  All of this is being done under the FAA’s Electronic Flight Bag program and it’s good for everyone involved.

The move saves airlines big money on paying for paper chart updates and saves big weight on the aircraft because each pilot carries as much as 30lbs of paper in manuals and charts.  Multiply that by the number of pilots on board and it really can save fuel costs too.

And I like it because it’s time to use technology like this more.  Are the iPads the right tool?  Why not?  They are fairly robust, long lived in battery life and much easier to carry.  But if the iPad proves not to be quite robust enough, Panasonic makes a fully ruggedized tablet PC now and if it is good enough for the military, it’s certainly good enough for a pilot.

Filed under: Airline News by ajax
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