First Quarter earnings last year in 2013 for United Airlines was a disappointing loss of $362 million.  United worked extra hard to deliver even worse results in 2014 with a loss of $580 million.

All of this in the face of historic and near historic profits being enjoyed by airlines across the United States.  American Airlines Group is having a banner day but we’ll have to excuse some of that blistering performance as it’s most recently out of bankruptcy and it has yet to stabilized in its merger.  Regardless of my dampening the mood on AAG, they have done far better out of the gates than virtually any other airline and that ain’t nothin’.

It bets the question of what will happen to United Airlines and I keep visiting this subject as things keep getting worse.  I strongly suspect we will see a change in leadership in the near future at that airline as these results won’t be tolerated for very much longer.

That won’t solve the problem, however.  United’s problems are both organizational as well as culture based.  This isn’t an airline whose employees want transformative change.  In fact, there is a belief that if the leadership would just get out of the way and give them what they want in salaries, the airline will operate profitably. Each union holds the company hostage with poor performances and behavior that is a patient wait for the company to start to teeter again.

Overthrowing leadership rarely gets you what you want.  An ailing airline doesn’t provide leadership in salaries, growth or quality of life.

It will take a transforming leader to turn United Airlines around at this point and I think that person will be very hard and very elusive to find.  Such a leader will have to gain the trust of both sides of the company (United and Continental) will simultaneously imposing change and bringing about vastly better operational efficiency.

That’s a tall order for that airline.  Who do you hire?

It will be tempting for someone to hire a CFO from another airline.  United has enough financial management to run 4 or 5 airlines.  Those good enough for the job have the dream jobs of their careers already.

And the excellent Continental Airlines leadership is just kind of . . . gone.

It will be tempting to find someone who is already a top CEO or who has retired from an already successful company.  I believe United will need someone hungry to lead and transform rather than someone who has the mission to act as steward for the airline.

The right leader is always out there.  The trick is to find her or him in time.  The UAL Board will have to remove the current leadership, find a steward and then go on a search to find the right person for the company.  Waiting very long simply means that the company loses more money.  The merger is almost 4 years old now and no modern airline merger had bled red ink like this one.

I would go look at the leadership at airlines such as American Airlines Group (but be prepared to fight Doug Parker hard for any of them), Southwest Airlines and Delta Airlines.  I would look hard at Alaska Airlines as well.  Find your man, give him carte blanche to execute change and step back to see what happens.

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Recently, the mayor of Houston, Annise Parker was quoted as saying that Dallas and Houston do compete for international traffic and my only reaction was “Finally, someone willing to admit the truth.”

Both cities are large hubs and both are large gateway cities for the region.  For 40 years, the cities have worked furiously to ignore the fact that each desperately competes with the other for international flights.  In fact, until recently, I would have argued that Houston IAH had more diversity in its international operations than Dallas Fort Worth DFW.

I know for fact of many IT professionals working in the Dallas area under H-1B visas frequently go to Houston by car to travel home because it’s cheaper.

With Houston’s construction of an international terminal at Houston Hobby, it’s about to get even more competitive with Dallas.  For while Dallas Love Field will be unrestricted to domestic traffic in the 48 states, Houston Hobby will be unrestricted . . . completely.

Dallas / Fort Worth has never treated Southwest Airlines as a full partner in the community.  In fact, the metroplex area has always been willing to embrace the employment but never has been willing to truly work with Southwest to find out how to grow the airline in the DFW area.  American Airlines has had something to do with that.

This area is home to the biggest US Domestic Airline by passengers (Southwest) and the largest airline in the world (American Airlines) but Southwest gets very little Love.

Dallas doesn’t drive competition.  It doesn’t drive access and it doesn’t drive diversity in who serves it.  Houston always embraced both Continental and Southwest and worked hard to become attractive to a wide range of international airlines.  As a result, air fares from Houston to destinations inside and out of the United States are more competitive in general.

That’s a shame for the Dallas / Fort Worth area because I think it will continue to favor American Airlines and it will continue to restrict Southwest Airlines.  Love Field will be held in check from any growth because of the latest deal with the Devil (holding the terminal to 20 gates of which Southwest gets to hold 16 and which Southwest must give up gates if it wishes to use DFW. ) It’s a problem that few in the area are really aware of.

Yes, Houston and Dallas compete and Houston generally kicks Dallas’ ass on a regular basis.

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In the airline industry, mergers are a mixed bag of successes and failures.   Continental Airlines, for instance, nearly died twice due to poorly executed mergers.  Northwest Airlines was impacted for years and years from its merger with Republic.

In more recent history, those mergers have been more successful such as US Airways (from America West and US Airways) and Delta (Delta and Northwest).  The jury remains out on Southwest and Airtran (although this is trending towards success) and US Airways and American Airlines.  Sadly, I think the trend on United is that it is failing as a merger.

Delta is the rock star of airline mergers and I think there two great reasons why.

First, Delta engaged in an airline merger that built a powerhouse network.  Delta and Northwest had hubs that were truly complementary and which brought together a strong domestic network and a strong international network.

That union of networks provided genuine revenue synergies that you rarely see in a merged airline.  The networks supported each other and built upon strengths and didn’t merely see capacity reduction on common routes.

The second reason Delta hit the right pace is financial.  This airline watched its capital costs and set financial targets for performance that, for the first time, included paying for the cost of capital at an airline.  Instead of buying all new aircraft, the airline has managed its fleet carefully using aircraft that had low capital costs but which also provided near competitive fuel efficiency.

The airline also managed its revenue appropriately by focusing on doing something that my own father was a vocal advocate for:  treating each city pair and route as a business that should be profitable.  Instead of asking that a sum of routes make some kind of profit, Delta expects its routes to ultimately become profitable or to be removed from its system.

The airline is no loner focused on being the biggest airline nor the airline with the greatest frequencies.  It’s focused on being the most profitable airline and managing to that goal by ensuring what it does brings a return on investment to the company.

And who embodies this same kind of approach?

Definitely Southwest although they continue to be on my watchlist.  Before anyone says it isn’t the same Southwest Airlines from 20 years ago, let me offer this:  I wouldn’t want it to be.

Southwest does watch its routes carefully still and does work hard to ensure it’s city pairs are profitable.  However, they are clearly going more network than ever before and I do wonder if the complexity is going to overwhelm their good senses.  Time will tell.

I think the American Airlines / US Airways merger has the potential to be more profitable than Delta in time.  And I think it will have one key advantage over Delta:  Better aircraft.

Delta is walking a very fine line on its fleet ages and will be in danger of getting into trouble from a fuel spike as a result.  American will have one of the newest, most fuel efficient fleets around and that will help mitigate against fuel spikes quite a bit.

United, I think, is a growing failure and the truth is that while I think this has a great deal to do with poor management, I also struggle to find a compelling argument for merger these days.  The synergies don’t seem to be there and I don’t see the two parts adding up to a sum greater as a whole.  The jury may still be out on this merger but the jury foreman is taking final votes and it’s not looking good presently.

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Continental and United Airlines announced their merger in 2010 and here in Q1 of 2014, I think that their earnings are shameful.

That’s because they didn’t have any earnings in Q1.  Instead, they had $609 million in net losses.

It’s been 3 years since they were able to close on the merger and begin integration.  It’s been more than a year since they acknowledged that they had problems in their integration.  This picture isn’t getting better, it’s getting worse.

Jeff Smisek famously joked that by having Continental merge with United, he saved United from having to marry the ugly girl. The ugly girl was US Airways.

The ugly girl married American Airlines and reported a Q1 net income of $408 million.  With the ugly girl management (Doug Parker & Company) in charge and they’ve barely gone to work on AA operations.

Seems to me that marrying the ugly girl would have been the smart thing.

Everyone looked at US Airways and sneered.  Delta, Continental and even American Airlines.  But the ugly girl kept earning money.  Big money for an operation that was nominally second to every other legacy airline when it came to advantages.

Jeff Smisek worked so hard to avoid the ugly girl that he made a compromised deal and the merger of equals ultimately resulted in a merger where United effectively took over Continental.

Let’s be clear about something:  Continental Airlines, at that time, had a great and profitable operation.  United Airlines did not.

United needed someone to move it past the Tilton Era and into competition with Delta.  Continental didn’t want to lose in the merger game but it had options.  At the least, Continental didn’t need to be the most eager bride around. I always thought it prescient that Smisek saw Continental as the bride rather than as the groom.  Sometimes our statements speak volumes.

Three years later, United doesn’t have it’s act together and it shows zero signs of getting its act together. I fully expect Jeff Smisek and his team to start getting smacked around pretty badly by financial analysts.  Particularly since even Southwest Airlines who merged with AirTran at the same time has now found itself experiencing great joy in the financials game.  The airline with the highest costs (Southwest) is beating an airline with lower costs (United).  Badly.

What to do?

In an ideal world, Smisek would take stock of whose departments ain’t making it and hire new people.  Go hire the best and get them from whoever he can.  Pay them what they need to make a jump.  And do it now, not 6 months from now.

The ranks need to see a new sheriff in town (even if he looks like the old one) and the executive team needs to get the message that performance does, in fact, count.

United employees are, traditionally, their own worse enemy and they remain so today.  They will sink that airline to spite their own faces and the worst part of it is that they will take very good Continental employees down with them.

It will cost to fire some of that executive team.  It won’t cost nearly as much as keeping them on.  Right now, it’s costing $609 million a quarter.

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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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There are many fans in the airline world who freely speculate on what would have happened if someone or something were different when it comes to their favorite airline.  I see this a great deal in the Braniff International world.

There are schools who believe that Braniff’s CEO Harding L. Lawrence ran that company into the ground singlehandedly.  Some believe that deregulation did the company in, some think it was American Airlines who struck at Braniff and some think that if Braniff had continued to be managed by its CEO Chuck Beard, it would be here today.

The big “What If” isn’t just with Braniff.  It’s with virtually every beloved airline that has disappeared.  What if the unions at Eastern had not gone nuclear with Frank Borman?  What if Pan Am hadn’t suffered an image problem from the Lockerbie 747 crash?

I want to talk about deregulation.  What if deregulation hadn’t happened?

Well, the truth is that that was never an option.  We think it might have been but it really wasn’t.  Regulation of the airline industry was inhibiting economic growth.  If it was not deregulated, you would have seen the United States a highly regulated environment playing against a highly deregulated environment that would exist in the rest of the world.  Want to know how ugly that would get?

Alitalia, Air India, Aerolineas Argentinas are 3 great examples of what the US airline industry would look like as a protected, regulated industry operating against deregulated airlines.

This country nor its airlines are in control of the changes that occur naturally throughout the world.  There is no altering the dynamic forces of change to fit the needs of an airline.

The truth is that deregulation hurt all US airlines.  Not a single US airline was prepared for deregulation.  Most airlines were led by people who had no concept of how to cope with deregulation.

Successful airline industry titans either left as the writing showed up on the wall or were violently ripped from their companies as they held on too long.   In Braniff International, Harding Lawrence bet heavily on deregulation being reversed and lost badly.  Continental’s Bob Six lost his entire airline because his company was poorly equipped in leadership for deregulation.  American Airlines’ Albert Casey made an orderly departure but only because he did have a leader equipped to deal with deregulation:  Robert Crandall.

Lest you believe that only legacy airlines were affected by this, let’s take a look at airlines such as the original LCC carriers.  People Express died being started and run by people who still thought that marketshare was king.  Air Florida:  Same thing.

There is just one major airline who survived deregulation and thrived ever since:  Southwest Airlines

Arguably the best prepared airline for deregulation since it started in a threatening and competitive environment and had to fight for its existence for the first 20 years of its life.  It started in an deregulated, intra-state environment and learned how to fight before moving out of state.

What if the leaders of legacy airlines were right and deregulation didn’t happen?  It’s a question premised on the idea that deregulation might not have happened.  That’s a false premise.  It did happen, it would have happened no matter what and timing was the only issue at hand and even that was somewhat predetermined to happen within 10 years or so of when it did happen.

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United Airlines and Boeing have announced the United purchase of the Boeing 737 finally.  This hasn’t been much of a secret for almost 2 months but it does contain a small surprise.

United is buying 50 737-900ER aircraft immediately to start replacing older 757-200s which really wasn’t on the radar screen based on the rumor mill.  However, this makes sense as well.  United has some pretty old 757-200s with 45 in their fleet that are 21 years or older which are all original United Airlines 757s with Pratt & Whitney PW2000 engines.  Engines that no one regards as the superior choice for a 757.

United owns a total of 93 P&W powered 757s of which 84 will be 20 years old or older as of next year.  There are just 9 more P&W aircraft that will be 19 years old or newer.  It’s not hard to guess that the very oldest are being replaced with 737-900ER aircraft as fast as possible and almost certainly because the old Continental already has excellent operational experience with that very aircraft.  They know it can do the job today.

All of the original Rolls Royce powered Continental 757s are 18 years old or newer with the bulk of those considerably newer.  The Rolls Royce powered 757s remain a very viable aircraft to use for those long and thin routes to Europe and trans-continental routes in the United States.  Those will get replaced eventually but with later build 737-9MAX aircraft.

United says their 100 airplane order for the 737-MAX will be for the -9MAX and that those could be used to replace old aircraft or to expand the fleet.  Trust me when I say that those will be replacing old aircraft as the remaining 757s will be 20 years old or older by the time the -9MAX starts delivering in quantities to United.

Is this bad for Airbus?  I think not.  Boeing almost certainly won this fight on price and that’s OK.  There are still quite a few Airbus aircraft from the (old) United fleet that will require replacement as well.   The oldest are nearing 20 years old but don’t require replacement quite yet so there isn’t a firm order for their replacement quite yet.  Airbus will compete for the A320 replacements in a few years and will have a real chance at winning as it should have some production slots for time appropriate deliveries.

The A319 aircraft are fairly new and a sub-fleet really.  I expect that if United sees an opportunity to unload these aircraft and replace them with E-195 or, perhaps, a CSeries 300, they will.

There are lots of aircraft orders to come over the next few years.  Both United and Delta really haven’t addressed all their needs here in the United States and even US Airways will need to start thinking about the next step some time soon.

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Here we go again.  United Airlines CEO Jeff Smisek has done very, very well in creating the world’s largest airline between his merger incentives and compensation.  Well enough to anger unions who represent labor forces that are touchy about executive compensation already.  His executive team has also done extremely well.

But UA still isn’t consistently earning money and it has had a rockier time in integrating the operations of United and Continental airlines.  Mot recently, the reservations migration provided a less than stunning experience for customers.

The standard for smooth mergers remains Delta/Northwest and one can hardly expect all of them to go that well.  But it will leave people asking if, once again, airline executive teams aren’t getting compensated a bit prematurely as well as for milestones that don’t show a consistently profitable airline.

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United Airlines performed its cut-over to the Continental based IT systems for reservations and frequent flier programs nearly 2 weeks ago.  By all accounts, this was probably about as smooth as it could have gone for merging two legacy airline systems.  That doesn’t mean there were no problems, it means it was better than most.  There was problems, some complaints and some frequent fliers saw accounts with incorrect mileage and other passengers found it difficult to get their seat assignments.

At present, there are a few who are still experiencing problems and United is still responding to larger than normal call volumes but here is the good news:  flights are flying and people are getting on those flights and arriving at their destinations.  There are issues that remain to be fixed.

There are, however, quite a vocal minority complaining loudly and I see media picking up on this and describing United’s transition as being far worse than any real appearance gives.  In USA Today’s Today in the Sky Blog, we see customer’s such as ultra elite frequent fliers making complaints about United (not Continental) agents being unfamiliar with Continental’s SHARES system still or having trouble making a seat assignment at a kiosk.   There are others from frequent flier enthusiast websites complaining that United changed the miles accrued for routes.  How much did they change?  In most cases by less than 20 miles.

I have message for those people:  Grow up and act like adults.

If someone is missing a flight due to incompetence or is unable to book a frequent flier award due to incompetence, I’m willing to hear your complaint.  If something is taking you 500% longer to accomplish than previously, I might even be willing to listen.   But, seriously, do we really want to be complaining about whether or not a gate agent knows the SHARES system completely yet?   Do you really want to moan about the fact that San Francisco-Hong Kong flight went from accruing 6921 miles to  6909 miles?  That’s a difference of 12 route miles or 0.17% change in mileage.  Not 17 percent but 0.17 percent.

Complaints like that give credence to my belief that the customer is absolutely NOT always right.  A principle that I will point out is in violent agreement with a former industry leader named Gordon Bethune.

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There have been two airlines hamstrung by scope clauses in particular over the past 10 years.  First, American Airlines which has been restrained significantly by its pilots with respect to what kind of flying its subisidiary American Eagle can do.  Second, Continental Airlines pilots held a death grip on the company by keeping a 50 seat maximum scope clause in place as well.

Now, with American Airlines bankruptcy filing and the combination of United Airlines and Continental Airlines, scope clauses are going to be massively changed.   The United-Continental merger was, in many respects, an opportunity to redefine that scope and there is no doubt in my mind that the parts of United being retained are in part to bolster the case for supporting the loose scope clause that United enjoys over the tight scope clause that Continental suffered under.

Seniority integration between UA and CO is a hot button and CO pilots don’t want to give up the scope clause.  UA pilots kind of like the way that scope clause looks and so are working with CO pilots to stir up trouble.  Ultimately, a single contract will likely continue to enjoy a loose scope clause if it isn’t even looser as a result of the merger.  In other words, expect a whole lot of flying for United to be done by regional airlines that isn’t very “regional” in nature.  That’s good news for regional airlines . . . perhaps. 

At American Airlines, you can bet that they’ll work very hard to eliminate scope clauses limiting flying and they’ll work even harder to lower pay rates for smaller aircraft due to enter the fleet such as the A319.  Pilots won’t have much choice but to accept those changes or they’ll face an airline unable to survive or so massively cut down in size, layoffs will be plenty.  They’ll want to preserve jobs at the expense of controlling scope, is my guess.

With these changes in scope clauses, the competitive landscape for regional airlines will change.  American Eagle will likely go from being not much threat to being quite a bit of threat.  Pinnacle may well file for bankruptcy and, if it does, it will lower its costs and shed unproductive fleet quite a bit.  I think there will be plenty of flying available for them to bid for but I think it will be at costs significantly lower than what they’ve been enjoying. 

That begs the question of whether or not regional airline flying can survive much.  I don’t think regional airlines will go away but I do think we might see more consolidation before things are over.  One thing that has prevented a fair bit of consolidation is the patchwork roadmap of scope clauses that have choked airlines so much over the past 10 years.  With those gone, reasons for maintaining so many regional airlines kind of evaporate.  Some will die, some will be bought and some will grow. 

Whether or not it regional airlines can fly profitably is yet to be seen.  Legacy and SuperLegacy airlines still need the regional airlines and they’ll need them more going forward if they’re to find the network feed necessary for their hubs.  But given the restructuring they’ve all gone through, will they need to farm it out or might it be more attractive to keep it “in the family” going forward.  If I were a CEO for a regional airline, I would be predicting a very stressful 3 years ahead of me.

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Two airlines founded by the same man somewhat recently decided to get married.  Can you name the two airlines and the man who founded both?  The answer after the fold: (more…)

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It’s been quite a while since the Continental United merger was announced and pilots from both sides are *still* negotiating their integration.   This stands in stark contrast to the SWA / Airtran deal announced a few days ago and completed in far less time than the ContiUnited merger has been going on.  It’s been over a year now since the ContiUnited merger was announced.

This is about pay, seniority and job security.  Both sides of the table have given up significant pay over the past 10 years or so and both want a raise that shares in the wealth.  United has more senior pilots and that’s a threat to Continental pilots.  Continental pilots have enjoyed quite a bit of job security as a result of scope clauses that have limited Continental to using regional airlines for 50 seat missions or less. 

Mostly, neither side wants to budge.  I think the Continental pilots have viewed this merger as more threatening than any anticipated.  Despite the appearance of this being Continental with the United name to the public, more and more of the United model has been retained.  Any attempts to “outsource” Continental flying to United has been stopped in courtroom skirmishes by Continental pilots who don’t want to see regional jets flying *their* routes. 

So what breaks the impasse?  It’s hard to say.  There isn’t much One Love going on here despite the fact that both are represented by ALPA.  United pilots are very militant and Continental pilots are very concerned.  Failure to reach an agreement on much of anything here has caused these talks to look stagnant. 

ContiUnited can’t start benefiting from this merger until it has a merged single certificate as an airline and until it can flow flight crews between both airlines.  That day isn’t in sight as of today. 

Furthermore, management can’t afford to agree to an unsustainable raise for both sides given the current economic climate.  So there are few incentives that management can offer to stimulate an agreement among the pilots. 

Is this going to be another US Airways / America West problem?  Right now, I don’t think so.  It already doesn’t represent the smooth transition that Delta and Northwest enjoyed but it can be wrung out.   The problem here is that there is no momentum.  Continental pilots felt Continental was doing just fine on its own and that they were doing better than most pilots out there.  United pilots are out “to get theirs” at almost any cost.  Someone, somewhere, has to find something for both parties to agree upon and get some momentum going for an agreement.

Continuing these talks for years or coming to an agreement that falls apart hurts the pilots the most.  Senior Continental pilots are going to need to have some assurances with respect to seniority that go beyond “date of hire” integration.  Pay is the easy part here.  Job security and seniority are the hard parts.  Seniority in particular because a Continental pilot that is, say, bumped from his job as a Captain on a 777 stands to lose quite a bit of pay. 

I suspect we’ll see these jobs “fenced” at the airlines with a date sometime in the near future (3 to 5 years) of breaking down those fences so that pilots can bid for jobs they want on each other’s equipment. 

How does all of this happen?  It should happen with Jeff Smisek, CEO of ContiUnited.  It’s always dangerous for  a company leader to get directly involved but he needs to find a way of assuring both sides and an incentive for them to agree upon something.  That incentive is going to cost but the sooner he finds it, the sooner United starts making consistent profits.

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In what I will declare to be the most greedy of moves for 2011, most US airlines have decided to raise fares to offset the FAA taxes that have (temporarily) disappeared as a result of Congress’ inaction on a new bill for the FAA.

By most US airlines, I mean airlines such as American, United, Continental, Delta, US Airways, Southwest, AirTran and JetBlue.  By raising fares, I mean they’ve raised them about 7.5% to offset the taxes that disappeared.   A few airlines such as Virgin America, Frontier Airlines and Alaska Airlines have so far not raised fares to grab that cash.

I am immensely disappointed in this development and particularly disappointed that I find both SWA and Airtran in that group.  Airlines don’t deserve this money and it is shameful behaviour to run and grab it.

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A reader wrote me yesterday about some pricing he saw between Kansas City and New York City (Newark Liberty International Airport aka EWR)  recently.  In the past, he’s always flown Continental on a regional jet non stop for a competitive price.  Most recently, he saw the same flights for far higher prices than in the past with other airlines offering one stop pricing that reflected what he was used to.  He asked if this was one effect of the recent Continental / United merger and I said that I didn’t think so.

I think the pricing were seeing from airlines today, particularly on non-stop exclusive routes, is reflective of just how hard it is to make money in this business today.   In United’s case, they probably enjoy more competition into and out of Newark than they used to.  However, they also need to earn more money and show promised profits.  On exclusive non-stop routes, they’re going to price seats for the most they can get. 

Business travelers do differentiate between non-stop and multi-stop flights.  They may be closed off from traveling in business class these days but most aren’t being required to take the least expensive coach seat.  In the reader’s particular market, they probably fill those regional jets with mostly business travelers and business travelers remain a big piece of profit for airlines.

I pointed out to the reader that he could probably enjoy almost as quick a flight on more comfortable equipment if he shopped Southwest Airlines but that points up another issue.  With the conflicts going on with Global Distribution Systems and American Airlines as well as the fact that LCC carriers in many cases are using GDS companies and/or online travel agencies to advertise their fares.  Absence of those fares being shown makes it possible for network carriers to raise prices on those GDS systems and earn more.

And this is why I would like to see LCC air fares start showing up on these travel websites.  I think there is quite a bit of low hanging fruit for the LCCs to reach on these sites and I think the travel websites have the potential to continue on in the travel world if they find a way to embrace and entice LCC carriers.  In addition, it narrows the fare gap we see between network carriers and LCCs.

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As the new United airlines has worked towards integration between United and Continental, two flight numbers got reinstated:  Flights 93 and 175, the United flight numbers of planes involved in the September 11, 2001 attacks.  Typically after a disaster, an airline “retires” flight numbers to simply avoid the controversy that might erupt around them.  And United had avoided these but in “harmonizing” schedules, these two appeared available to sync with Continental flights that do use the numbers.

United’s flight crew unions immediately slammed the airline for this and have expressed their outrage over such a mistake.

“How could these flight numbers have been ‘inadvertently reinstated’ as the company indicates?” asks Capt. Wendy Morse of the United branch of ALPA. “The pilots of United Airlines expect accountability of how these flight numbers were considered in the first place.”

I’d like to suggest that everyone take a breath.  First, this was a mistake and an understandable although regrettable one.  Second, it was corrected immediately upon discovery.  Third, United’s corporate response to this was nothing but brief and deferential. 

You have to wonder at unions who want to make such a thing political when it comes to those flight numbers.  It’s militancy at its worst and more distasteful since United’s was a mistake the union’s moves are intentional.

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United Airlines has about 1800 flight attendants returning from voluntary furloughs soon and Continental Airlines is due to be short about 800 flight attendants in the coming year. The holding company wants the flight attendant unions to help out by agreeing to shift employees between the two separately operating airlines.

The two airlines are merged but they are still operating from two operating certificates which are some time away from being combined into one. The unions are due to hold elections and then begin negotiating seniority lists thereafter. United says it can’t wait that long, however.

My prediction? You won’t see any cooperation from old United flight attendants on this issue. In fact, I’ll wager that they’ll use this as a bargaining chip against United management. If Jeff Smisek, CEO of United (and former CEO of Continental), thought that things would operate much as they did at Continental when it comes to employee cooperation, he’s in for a rude shock.

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United Airlines flight attendants (comprised of about 15,000 United employees and 9,000 Continental employees) will be voting on which union will represent them in the merged companies I like to call ContiUnited. 

United (old) flight attendants have been severely unhappy with United since they lost their pension in bankruptcy in 2002.  The blame has often aimed at United Chairman Glenn Tilton and employee groups at United (old) have made it clear they intend to get what is theirs with this merger including the Flight Attendants.

It’s been my observation that Continental crews haven’t viewed their merger with United with great enthusiasm either.  Continental crews have had pretty good working conditions, good industry salaries and have been rewarded with the company’s success.  That experience has been seen to be at risk since United (old) employees typically outnumber Continental employees in the same jobs.

This vote will be won by the United (old) flight attendants and expect Continental flight crews to be displeased by this.  Jeff Smisek, CEO of United and formerly CEO of Continental, has been exceptionally quiet during this merger and hasn’t put much of a “one team” spin on this merger in the public in my opinion.  As times passes, this merger appears, from the employee perspective, to be less and less a merger of equals and more and more one of Continental executives taking over United operations.

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Continental’s flight attendants have voted on a new 20 month agreement on pay and no furloughs as they prepare to merge into United Airlines.   The agreement gives the flight attendants the highest pay among legacy airline flight attendants.

When this merger began, United flight attendants attempted to co-op Continental flight attendants into their dissatisfaction with United and the Continental crews resisted expressing a desire to have a voice in their destiny.  This new agreement displays, once more, Continental management’s ability to work with their staff.

But can they work with United staff?  This is a bigger challenge than meets the eye.  United unions have no reason to trust Continental management as they have no real experience with them.  They do, however, have a long history with being shoved around by former and current United management.  These conflicts don’t evaporate because a few good guys take over.  It takes time to win that trust.

I think the crew integration going on with United has several more painful chapters ahead before things settle down and all parties do better.  Continental pilots are liable to continue to resist relaxing their current scope agreement (no more than 50 seat jets) and add in the fact that United pilots are generally a more “senior” bunch, I suspect they’ll be playing the spoiler for some time to come.

This merger isn’t as easy or as logical as the Delta/Northwest merger and doesn’t have the benefit of forward thinking union leaders like Lee Moak to help set a tone that lets things get worked out.

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At the beginning of each new year, I like to review what I thought would happen over the previous year and where I think things might go in the next year.  Let’s take a look.

North America:

I thought that not much would happen with AA labor in the past year and that pretty much was the case.  We’ve now seen several years of virtually no movement on solving these issues and I suspect that 2012 is the year that we see some kind of movement.  Look for the flight attendants to be the aggressive parties but the pilots to be the leaders.  All they need is a management group that wants to get something done.  This might end up being a make or break year for AA CEO Gerard Arpey and it could well be based on coming to an agreement with their labor groups.

United Airlines (and Continental) really didn’t go where I thought which was the status quo.  Instead, they merged and got going on getting somewhere and I like that.  I didn’t think they would merge and said so at the beginning of last year.  They proved me wrong.  However, I think CEO Jeff Smisek hasn’t considered carefully what he needs to get agreement on to move forward with each phase of the merger.  Look for this year to be good for United financially but bad on getting labor groups to agree on something.  I don’t think they are headed in the same direction as US Airways . . . yet.

This is a year for Delta Airlines to continue rationalizing its routes and aircraft.  They spent much of last year doing so and saw great financial results.  However, their goal of a sustained 10%+ profit margin makes me think we’re going to see some weird stuff out of them somewhere around the beginning of spring.  Probably in the form of new and innovative fees.

US Airways pretty much performed as predicted and I like how they are earning a profit but I hate how they still have no agreement with their flight crews that will permit them to quit operating two airlines in one.  If Doug Parker were to have a New Year’s Resolution, it should be to hire someone who’ll get that taken care of this year.

LCC(s) and Regionals:

I didn’t see a merger partner for Southwest except, perhaps, Sun Country.  Southwest proved me very wrong on that but I like the results.  One concern I have is the somewhat “plodding” progress towards consummating this merger into one company.  Does it indicate a plodding approach to actually consolidating operations?  One good thing is this brings the potential for greater international flights and, hey, Southwest, consider just keeping that Airtran reservations system and then spending some real time to pick or develop a new one that will last another 30 years.  You could do a lot worse.

Frontier/Republic is holding its own and I thought they would hold their own.  I think they’ll hold their own this year but I don’t see them merging with anyone and I don’t see them growing subtantially either.  Brian Bedford could prove me wrong and I hope he does.

Airtran made the Milwaukee market.  They deserve the credit for the huge growth that city has seen in air travel.  Southwest needs to commit to doing the same when they lead the game.

I slammed Virgin America a few times last year for appearing to be afraid to compete.  In particular, with American Airlines.  Finally, Virgin America made the plunge and came to DFW with flights from both San Francisco and Los Angeles.  I liked the move and I think there is room for them to grow here.  Time will tell.  One thing I’ve noticed so far:  AA doesn’t seem to be attacking them quite as badly as one would have expected from AA just 5 years ago.   Mr. Cush, let me suggest that you could really do well with some flights from DFW to the NYC area.  In particular, to Newark. 

Alaska Airlines has moved closer to Delta in the past year and that worries me a bit for Alaska.  They’ve generally been an airline willing to do a deal with anyone that made sense.  Now, they appear to be more and more the Delta lackey and that could harm them in the long run.  Another thing:  Alaska doesn’t have any more logicical merger partners that make sense.  American Airlines may have missed an opportunity here by not getting closer to Alaska instead of withdrawing more and more. 

I don’t think we’re going to see any big mergers in the US this year.  We might see one minor merger and that’s OK with us.  I think this year we’ll see legacy and SuperLegacy airlines attempt to earn as much money as they can to retire as much debt as they can and to bank as much war chest as they’re able.  However, I see competition heating up this summer and I think the LCC and new entrant carriers are going to put pressure on the legacy and SuperLegacy airlines in the form of adding capacity *and* routes.  The question is, will the industry discipline we’ve seen hold strong or will someone crack?

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ContiUnited just lost a ruling in arbritration that will forbid it from marketing flights on United Express aircraft with greater than 50 seats as Continental flights.  Continental had planned to have United Express fly routes out of Continental hubs in Houston, Newark and Cleveland in the new year. 

Arbitrator Richard Bloch ruled that that can’t be done as it would be a violation of the collective bargaining agreement in place with Continental pilots.  While Continetal and United are a merged company named United now, the pilots and flight crew are still flying as two different companies and will be for at least another year.

This is a pretty big blow to Jeff Smisek, CEO of United, and it was, perhaps, a bit bold of him to try to make this move without buy-in from the Continental pilots.  Continental has been constrained for years with their contract with their pilots on regional jet flying and it needed those rules relaxed in order to compete with other airlines.

United needs to get their labor ducks in order before attempting to press on with other controversial things such as this.

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