In the latest financial results, most underperforming airlines attributed their lack of success to rising costs and specifically fuel costs.  Fuel costs did rise but let’s return to early fall when airlines were gleefully setting expectations for the winter season. 

Many airlines were so confident that they actually raised prices and talked confidently of record profits.  The problem is, the traffic didn’t materialize in many cases and I would attribute that to the fact that demand for the winter/holiday season is very dependent on price.  A few airlines did see that and held their prices or even had some sales.  Notably, Southwest Airlines kept a close eye on their demand and lowered prices were necessary. 

But the development that no one has talked about much but which is showing up is a rise in capacity.  That rise in capacity isn’t showing up in great numbers with new routes or increased frequency nearly as much.  Instead, it is coming from an increase in the size of aircraft on some routes.  Airlines are upsizing some routes and also increasing capacity through the aircraft they’re adding to the fleet to replace older aircraft.

Delta, for instance, has retired its smallest DC-9s in favor of Airbus A319 equipment.  American Airlines is replacing MD-80s with 737-800s.  Southwest is adding 737-800s to its fleet in about 1.5 years.  US Airways is adding A321s to replace 737-400s.  At first glance, these “replacements” are perceived to be a 1 to 1 exchange but in reality they’re often as much as a 10% increase in capacity per aircraft. 

The creeping rise in capacity shows that the industry isn’t necessarily in agreement on capacity restraint going forward and that could foretell a collapse in prices as these airlines chase customers to fill their aircraft.  I don’t think we’ll see huge losses in the next year but I do think we’ll see an erosion of profitability.   The airlines who possess fleet flexibility should fare better than those who are largely locked into large blocks of fleet types.  Think Delta vs American Airlines. 

Mergers didn’t solve an excess of capacity.  Not really.  They did bring some costs down but neither of the two big mergers had much overlap and capacity was therefore not really reduced much in that sense.  Since there are no merger candidates with much overlap in existence right now, I don’t think this problem is going to go away very soon.  The real solution is to actually let an airline go out of business.  The only candidate for that is American Airlines and they have lots of maneuvering room left presently. 

Look for capacity to be a bigger talking point among financial analysts over the next 3 months and particularly at the end of the next financial quarter.

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I wonder if I am the only one grossly underwhelmed by airline performance in the 4th quarter.  American’s performance is, at this point, embarrasing to the company’s leadership in my opinion and they hold on, in my opinion, only because of an ever thinning smokescreen.   Delta only managed to eke out $19 million and for an airline that had charged through most of 2010 with impressive profits, you have to ask “why” it was so dismal.  Even if you allow for weather disruptions, it still kind of stinks.

ContiUnited (I’ll stop using that moniker one day soon) managed to beat expectations but still posted a significant loss and let’s not forget that both of these airlines were performing exceptionally well prior to the consummation of their merger.   Even Southwest remained guarded abouts its prospects going forward despite a reasonably decent fourth quarter result.

Are rising fuel costs a problem?  Certainly but they aren’t a problem anyone was unaware of.   The same is true of labor productivity.  These are pretty well known variables and if you don’t know how to manage those effectively at this point, it is time to leave the business.

When US Airways manages to stand out among our airlines given the inherent weakenesses they have in the US marketplace, you have to ask who isn’t doing their job, no?  Alaska Airlines even shined and that is an airline who has all the costs one would associate with any of the legacy US airlines. 

It certainly points out that mergers aren’t the solution to everything and capacity management doesn’t necessarily ensure profits.  In fact, I wonder if this excess of restraint isn’t effecting demand in general and driving customers to other options secondarily.   There is a reason why Southwest keeps running up its revenue score. 

At some point, you have to go out there on the playing field and compete.  Competing isn’t just offering the best price, it’s earning that customer for more than one particular flight.  With all that the airlines have implemented to enhance their revenues, are we finally seeing the results of that behaviour towards consumers?  I certainly think its a important part of the equation.

It’s time to put on the pads and get out on the field ready to play rough and compete.

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American Airlines and Sabre have decided to enjoy a truce while negotiating a new contract until this summer.  Is this war between AA and the GDS systems over?  No, not yet. 

I think AA needed some of the heat to die down in the public given their most recent financial results and this was a way of moving one of 3 major problems off to the back burner and getting their revenue stream back online with the largest GDS system.   They can continue to play chicken with Expedia and Orbitz in the meantime and see if they can get any traction at all. 

But it begs the question as to why AA is choosing to fight this right now when it so obviously has a large pile of other problems to solve first.   They are the only legacy/SuperLegacy airline to lose money for 2010 and while they have some promising developments in their favor, they continue to fall further behind other airlines when it comes to earning a profit. 

If you compare the problem of fees with respect to GDS systems vs the problem of labor unrest and productivity, I know which one I would want to get solved first.  I wonder when AA’s board of directors and shareholders begin to be unsatisfied with AA’s financial performance relative to the rest of the industry.

In another development, Virgin America has inked a deal with Sabre to provide reservations systems and to continue its GDS relationship going forward in a multi-year contract.  Several airlines have reaffirmed the GDS model (US Airways as well) and American continues to stand alone in this conflict although I do think Delta is paying close attention. 

One good thing that may come from this is the GDS providers doing a better job of accomodating the a la carte fee structures and upselling.  That would not be a bad thing.  In addition, it may well spur the GDS systems to invest in new technology that not only will accomodate future needs as well as lower fees.  That, too, would not be a bad thing. 

Right now, I would say the GDS systems have a slight upper hand in this fight.

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Mexicana says it has made significant progress with its creditors allowing it to go forward with its debt restructuring and it now planes to start operations in the near future with seven aircraft and eleven routes.  Agreements with labor unions have been reached and Mexicana says it has 39 pilots, 80 flight attendants and 846 maintenance techs ready to go when they re-start.

If that 846 maintenance techs number is correct, I think I know who “won” among the labor unions.

Current plans call for Mexicana to start international routes to Los Angeles, Chicago, San Antonio, and Havana, Cuba and domestic routes to Guadalajara, Monterrey, Cancun, Oaxaca, Tuxtla Gutierrez and Veracruz.  Although Mexico City isn’t named, I presume that these routes will be centered upon Mexico city itself.

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Sounds like a really dull airline, no?

That’s British Airways and Iberia Airlines under their merged company name.  British Airways and Iberia will continue to operate under separate brands while enjoying the synergies of a merged company in the background.

Willie Walsh becomes CEO of the combined company while Antonio Vázquez Romero sits as non-executive Chairman of the group.  Why isn’t Willie the top guy?  Because in this case, the CEO is who gets to run things.  Chairman just gets to run the board of directors.

The new company hit the stock exchanges yesterday with a new fleet of just in excess of 400 aircraft and anticipated annual revenues exceeding $19 Billion.  They’ll sit as the 3rd largest airline in Europe but let’s put things in perspective:  American Airlines has 620+ aircraft and $22 Billion.  However, IAG should earn a profit and AA has yet to show a profit despite most airlines of its size already doing so for 2010.

Look for the new company to start targeting other purchases.  Willie Walsh has already stated their intent to go on a shopping spree for other airlines.  Who is anybody’s guess but an international airline purchase is always difficult given ownership rules that generally exist from one country to another.

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Virgin America has had a great experience with its new flights between DFW and Los Angeles as well as San Francisco.  So much so, they’re adding one new frequency on each route by terminating its LAX – Toronto flights. 

This is what I mean by it being time to compete with American Airlines.  That big bully that everyone sees in the DFW area is a lot more vulnerable than it may look at first glance.  AA has fought back some on those routes but with VA’s load factors running in the 80 percents and their advance bookings running about 70 percent, it’s clear that a new, service oriented entrant can compete with AA.  Especially on routes that have been traditionally dominated by AA over the past 10+ years. 

Once VA gets these flights settled and tweaked and finds itself satisfied, look for new flights out of DFW.  I see opportunities for them on DFW to New York city, Boston and Seattle.  All three routes are the non-stop domain of AA and all three have relatively high fares.  Just like the DFW-LAX and DFW-SFO routes had.  Virgin has a presence in each of those cities which would make it easier to integrate routes from DFW to those destinations as well.

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Delta is introducing a program where upon check-in, you can bid to be bumped from certain flights.  The customer will name how much they want in order to be bumped.  The low bidder(s) get bumped for that compensation.  The passenger can opt to change their mind and if there are no bidders, the airline will have to involuntarily bump someone and compensate them accordingly.

I like this idea.  It is economically efficient by prioritizing bumps according to those who have the least to lose as opposed to the most to lose.  It also drives down the cost of bumps which inherently means the airline’s costs are driven down as well.  The current system for seeking volunteers bids upwards instead and passengers know that waiting before volunteering will drive up the offer of compensation.  In fact, frequent fliers know that they can game the system for high compensation that doesn’t necessarily go to whoever paid for the ticket:  their businesses.

If someone is on a leisure trip and they’re willing to be bumped in return for $200 in travel voucher plus a guaranteed booking on the next flight, that means those who really need to get to their destination have a far higher probability of doing so and at the least cost to the airline.  Remember, higher costs = higher air fares.

Yes, if you are in voluntarily bumpbed, you can get far higher compensation in the form of real cash, hotels and positive space on another flight.  However, the idea here is to bump those who have the least to lose, not the most.  It also means less probability of angry passengers as well. 

Other airlines could stand to adopt this system and, frankly, I think it should be deployed so that at a certain overbooking point, airlines solicit these people *before* they arrive at the airport.  And if this works as Delta believes it will, I suspect that will be the next step.

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Vision Airlines is a new entrant into the Florida leisure markets suddenly and I don’t see this going anywhere anytime soon.  Vision is a charter company that owns a number of 737s and a few 767s as well.  The truth is, they do a bit of everything.  Vision runs a tour operation using Dornier aircraft out of Las Vegas.  They do charter flights to Cuba.  They work for the United States government transporting spies for a spy trade.  And now they’ve decided to find a way to use their 737s a bit more and they’re going to operate scheduled services.

These scheduled services are primarily to the Destin, Florida area although there are a few flights into Gulfport/Biloxi.  Their flying routes from places like Macon, GA and Asheville, NC and Shreveport, LA to Destin/Fort Walton Beach Florida.  They do have some flights from Atlanta, Orlando, Tampa, and Miami but not because they have other flights to those cities feeding traffic. 

Frankly, I see this going nowhere in a great hurry.  The smaller destinations aren’t going to originate enough traffic for 737 flights and the larger destinations have, you know, real airlines like Southwest and Airtran serving them. 

In New Mexico, I read THIS interesting story about New Mexico Airlines.  New Mexico Airlines plans to offer service between Clovis, NM and Albuquerque.  Currently, that route is serviced by Great Lakes Airlines using Beechcraft 1900D aircraft twice a day during the week and once a day on the weekend.  A quick look at the Great Lakes Airlines’ website reveals a non-refundable fare of about $89/each way and a refundable fare of about $189/ each way.  This service is subsidized by EAS (Essential Air Service). 

New Mexico Airlines (a division of Hawaii’s Pacific Wings)  intends to come in with an even smaller, unpressurized aircraft and charge $600 round trip between the two cities.  But they’ll offer 1 more frequency each day.  They’ll have to since their Cessna Caravan’s can seat 9 people and the Great Lakes Airlines’ Beechcraft can seat 19.   NMA’s President said:

“There has to be more to your business model than collecting subsidies,” NMA President Gabriel Kimbrell said. “Otherwise, it’s just airline welfare.

“It’s the only sustainable approach.”

And I find that attitude interesting since they themselves were established in New Mexico by EAS contracts.   The truth is, New Mexico is sparsely populated and it will be decades before some cities grow enough to justify unsubsidized service.  While I’m no fan of EAS in general, it would appear that this is working OK in Clovis and at what appears to be an economically efficient price. 

If New Mexico Airlines really thinks it is going to succeed by doubling prices, well, I don’t.  I think they’ll fail miserably.  For anyone wanting to travel beyond Albuquerque, they can drive to Amarillo or Lubbock which are just 100 miles away and fly on Southwest Airlines.  Don’t kid yourself that they won’t.  If Great Lakes Airlines goes away and New Mexico Airlines takes over at those prices, people will simply drive.  It is the only economical thing to do.  If they’re traveling beyond ABQ, they’ll drive to Amarillo or Lubbock and fly from there.  If they’re going to ABQ, they’ll drive the 220 mile trip. 

Then New Mexico Airlines will fail and Great Lakes Airlines will come back under the EAS program.

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

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

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Watching Mexicana’s meltdown last summer was painful for any airline watcher and, at the same time, one more example of just how much the business has changed and just how much labor groups among airlines aren’t seeing the paradigm shift in the business.

Now a new group is trying to re-launch Mexicana and this seems pretty unwise to me.  In the short time Mexicana has been gone, the void it left has been filled by both domestic players (Aeromexico, Volaris, Viva Aerobus and Interjet) as well as foreign carriers from the United States. 

If anything, it shows that there was an excess of capacity in the marketplace and there may even still be a bit of that today.  Mexico’s domestic market decreased by just 1% year over year measured last October and that is with a world recession still very much in place. 

No, it’s best that that airline stay away.  The last thing Mexico’s domestic market needs is a revived Mexicana under any terms.  It’s sad to see them leave but it’s best for the airline industry there. 

If anything, it’s emblematic of what we have not done in this country:  namely allow a legacy carrier to fail.  It wouldn’t have collapsed our air system and it wouldn’t have even resulted in massively higher air fares or a massive disruption in travel.  It would have been destructive to the labor working at that airline but I honestly believe that would have recovered much better in the long run too.

It’s been a long time since we allowed a trunk airline to fail permanently and, yet, I think it would have been better than the consolidation we’ve permitted that has resulted in SuperLegacy airlines that are carving larger chunks of the US off for themselves. 

The best thing that could happen for Mexico’s aviation industry is a reinvestment in its infrastructure and encouraging its newer players to avoid the mistakes made with both Mexicana and Aeromexico.

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I think just about everyone was at least a little surprised at the announcement of the QANTAS flight between DFW and Brisbane, Australia.   It was a subject that would pop up on the radar now and then but generally dismissed with skepticism of it ever happening.  Particularly with the equipment that QANTAS had for making the flight, namely the 747-400ER.

Flights between the United States and Australia have been the domain of west coast cities such as Los Angeles and San Francisco and the primary equipment has been the 747-400.  The aircraft available to make such a flight has already changed and is due to change a bit more in the future.  The 747 got used more because of its range and ability to haul a passenger load with a strong load of cargo.  Generally, long flights like that work best if there is enough demand for a 747 because seat costs go down.

Now the 777-300 is plying trans-Atlantic routes between the US and Australia and soon will be on routes between the US and New Zealand.  It’s a good aircraft for the trip because of the 777’s ability to fly it non-stop, carry a load of cargo and a fairly large complement of passengers.  We’ll see these West Coast to Down Under flights fracture a bit more in the future when the 787-8/9 come online with airlines.

So why the 747 and DFW?  Well, it’s notable that SFO is losing its flight with QANTAS but that makes sense now.  San Francisco is the domain of United, not American Airlines and QANTAS is partners with AA via Oneworld.  Los Angeles remains and it should remain as a Western US departure point between for Oneworld. 

Until now, Oneworld has had to feed all its traffic from all over the United States to either Los Angeles or San Francisco and while LA is a Oneworld focus city, all other Oneworld focus cities are east of the Rocky Mountains.  They are Dallas/Fort Worth, Chicago, New York and Miami.   In that group, there was only one city that made sense with the aircraft available today:  DFW.

The other thing that has changed is the new anti-trust immune cooperative agreements that are forming in Oneworld.  First there is the trans-Atlantic Oneworld partnerships and second is the trans-Pacific(Japan) Oneworld partnership.  Next is logically AA/QANTAS. 

With DFW and Los Angeles as that “hub”, Oneworld can feed traffic to DFW from points east of the Rocky Mountains and from points in Mexico, Central America and South America all to DFW.  Yes, AA can feed that 747 nicely.  And if they do it well enough, you can bet on seeing an Airbus A380 being switched into that route. 

DFW gets a nice boost from all of this as well.  It’s already started to transition back into a more “international” airport than it has bee in some time.  British Airways is now using a 747 on one of its flights to DFW and AA is using more 777s for its flights to Europe.  It will continue to grow as a Oneworld “hub” both because of its good location (not nearly as affected by weather as other potential hubs) as well as the availability of room to grow. 

I would be completely unsurprised at the addition of another direct route to Tokyo and a direct flight to China in the near future.   Currently AA has 2 flights to Japan via 777s and I think we may see one more or, alternatively, we may see JAL start flying one of those flights with its own 777.  AA has wanted to fly direct to China from DFW (and it should) but has so far been blocked by its pilots over duty time rules that AA wanted a variance for from the union.  The flight they wanted to do ultimately went to Chicago instead.  Expect AA to make another run at such a route.

One thing I don’t think we’ll see is a lot of additional routes from Los Angeles to Oneworld destinations.  It’s a crowded airport with limited room to grow.  Delta/Sky Team has a strong base in Seattle and United/Star Alliance has got strength in San Francisco.   Dallas / Fort Worth offers the growth opportunities now with the ability to fly longer range flights using the 787 and 777 and I think we’ll see more and more long haul flights from DFW.

I have to say that I’m very pleased for DFW and I see this as a very good development for American Airlines as well.  It’s nice to see opportunities created like this within Oneworld and on AA’s part, too.

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QANTAS is adding a flight between DFW and Brisbane (with continuing service to Sydney) in May.  And I don’t mind saying that I didn’t see this coming.  Certainly not a QANTAS 747 flight.  This flight will come at the expensive of QANTAS serving SFO and I actually do think that is quite smart.

More on all of the details in another post after I’ve had time to do research on this development.

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One thing that has become clear as a result of the conflicts between American Airlines and global distribution systems and online travel agencies:  there is, at the least, a need to change the transaction model.

One thing American Airlines is right about is lowering the costs per ticket sold via these systems.  In a modern world, the IT infrastructure should provide lower costs now.  If the GDS companies want to retain this business, they need to come up with an e-commerce model that works for present day airline needs. 

Those needs are accomodating the unbundled services and fees that airlines are now using to enhance revenue as well as upselling customers into better services.  The present systems are basically the same old distribution systems that have existed for decades with a web interface on the front. 

The airlines would be better served by establishing a standard for others to work from.  The requirements for what airlines need today and what they may need tomorrow should be established first and the GDS companies and online travel agencies need to re-think their own business model some too. 

But allowing one airline to push out of the system and establish its own standard doesn’t necessarily permit transparency.  These companies need that transparency because they do their business on the basis of schedule and price.  Their value added is in offering you the best available fare for your schedule and in establishing complicated itineraries. 

The transaction costs associated with offering fares/tickets through such a system should be less than $1.00 per ticket if operated under a modern and well designed system.  It’s no more a complex purchase than buying something on Ebay. 

Airlines have an industry group and they can write these requirements and they should.  GDS and OTA companies have a place in this industry as well and they need not fear their imminent demise but only as long as they do move along with the times.  It’s 2011 now and systems that date back as far as the 1960’s should be put to bed no matter how much renovation they’ve gone through.

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

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

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

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

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

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

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

Airline           A380 Orders

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SAS is a difficult airline.  Actually, it’s a good airline with a lot of difficult problems in its future.  Formed as a consortium of the flag carriers of Denmark, Sweden and Norway, it continues to be 50% owned by the governments of those three countries.  All three countries have a strong social policy for employment as well.  But despite the relative wealth of its citizens and their desire to travel, it has been losing money regularly.  In part because its clientele also enjoy a good deal and have chosen low fare discounters such as Ryanair and Norwegian Air Shuttle.

The governments have made noise about about selling off their stakes but that’s a tricky business.  Each government needs to agree to that in order for that to work well at all and in order for it to be an attractive sale to potential purchasers.  The airline deals with a huge number of unions and unions with quite a bit of political power. 

This airline needs what many European state owned airlines have needed:  privatization and a merger. 

It’s fleet is rather broad for an airline of this size and that could use some rationalization.  It should be an attractive property for an airline like Lufthansa if a purchase is desired because it could benefit from Lufthansa’s purchasing power and the ability to give it a rational fleet as well as flexibility.  And it’s already a member of the Star Alliance.

If a merger is what’s called for, I think this could be a very attractive deal for British Airways / Iberia Airlines.   While this is a Oneworld group, it is a group that could allow SAS to maintain its identity much easier and offer it some long haul route rationalization but, at the same time, offer SAS the opportunity to continue some long haul flying as well. 

This would be a group that, in Europe, would have Northern Europe, the British Isles/Ireland and Southern Europe covered very well.  The problem is, you would have to pick just one Nordic city for a hub and who gets that?  Stockholm?  Oslo?  Copenhagen?  Each country wants to maintain its links to the world.  Stockholm is the most rational choice for a hub in that area since it offers a large O&D market, strong business ties and quick hops to all of northern Europe.  Oslo could remain a focus city and so could Copenhagen.

But the trick is the unions and the strong socialist social policy in that country.  I don’t see things changing for this airline because of that.  Sadly, those countries political power is based on such ties to labor unions and disrupting those unions or even causing them to lose out on what are exceptionally well paid positions is political suicide. 

It happens over and over again.  Does the airline want to survive?  Or do the owners want to avoid political problems today at the cost of even having an airline tomorrow?

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Analysts say that airlines are betting that the recent surge in oil prices is temporary and they are not hedging their fuel costs any more at present.  Airlines “hedge” their fuel costs by buying contracts on fuel oil that closely track with the price of jet fuel.  If the price of fuel goes up, they earn more and that offsets the cost of jet fuel.  However, if the price of fuel goes down, they earn less (or even a loss) and that raises the cost of their jet fuel.

Frankly, I don’t think oil will stabilize until both the dollar and euro stabilize as a function of recovering economies.  The US economy is showing all manner of recovery now but it will remain slow and we still have an enormous debt to manage for the next few years.  The dollar will remain weak for the time being and weak currencies make for more trading in things like oil right now.  The more trading in oil, the more volatile its price is and the more likely it is to surge and retreat. 

It’s a hard bet but it’s something they, the airlines, will have to revisit in a few months again.

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I went to work on figuring out air fares to travel from Dallas to Chicago as well as from Norfolk, VA to Chicago today and made a startling discovery.

The air fares got a bit more confusing all of the sudden.

Why?  Because American Airlines is no longer being listed (or emphasized at the least) on my 3 favorite travel websites.  And it looks as if the other airlines might just be tweaking their availability on AA routes to take advantage. 

How would they do that?  By offering flights that are connections because suddenly it appears as if they are the only available game on those routes.  I’ve never seen so many different Delta connections at what is a pretty good price between Dallas and Chicago and let me remind you that Delta has no hubs in either city.

I found great fares and, no surprise here, they were on Southwest instead of the others.  In addition, I did check AA fares on their website because despite my strong desire to avoid AA, I may have to fly into O’Hare airport instead.  Their fares are exceptionally low compared to previous times that I’ve checked them.  Off the top of my head, I’d say they’re lower between DFW and ORD than I’ve seen them in 3+ years. 

Also interesting, to me, is that United (with a hub in Chicago) is *not* the cheapest fare between DFW and ORD.  Not by a long distance.  It’s Delta and Frontier leading that pack on online travel agency sites. 

US Air gets the nod now between Richmond, VA (alternate for Norfolk in the case of my other traveling partner) instead of American Airlines. 

American Airlines might say they’re doing fine but I suspect they may not being doing as fine as they say.  The picture presented out there suddenly is a very different landscape and to the traveling consumer who isn’t an airline fanboy or an AA enthusiast, the choices being presented are very much new and different and even attractive.

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Next up:  World Alliances

There is never that much revolutionary change in alliances.  Last year, there was a fight over JAL between Oneworld and SkyTeam and Oneworld won but they really were destined to.  It made sense for JAL.  The alliances worked a bit to get better access to areas they were deficient in and to a large degree, they were successful.  I don’t expect much change, if any at all, this year.

The Middle East:

Emirates did what Emirates does:  it ordered more aircraft.  I did what I do:  failed to see how they’ll use all those A380s and 777s.  The financial scene in the Middle East and, in particular, the UAE continues to be weakish and while I suspect it will recover somewhat this year, I think the area no longer carries that gleam it once did.  I don’t see any failures in the near future but I don’t see any airlines really blooming either.  Success there is, as is true for most businesses there, fairly dependent upon oil prices.

India:

Nothing astonishing happened there but it was already pretty mucked up.  It remains mucked up and will likely stay mucked up this year.

The Far East:

China did kind of force their airlines into agreeing to buy Chinese aircraft as I predicted.  In fact, Chinese aviation is suddenly acting very Chinese in that it is being required to toe a more obedient line.  Face is everything there and I don’t like it when airline businesses are operating on the basis of “face” rather than good decisions.  It’s notable that in the launch orders for the COMAC C919 aircraft, each airline took up just 5 aircraft orders each.  They don’t want that airliner any more than anyone else.

JAL has done OK for the year.  They’ve made progress with their finances and they did make some hard choices.   They did have to file for bankruptcy protection and no one should have been surprised about that.  The new CEO, Kazuo Inamori, and President, Masaru Onishi, are succeeding and making hard choices.  Frankly, more so than is characteristic of a Japanese company and they deserve credit and support.  This airline isn’t fixed yet but it is on its way.

Oceania:

QANTAS got hit pretty bad by the Rolls Royce failure on its A380.  United Airlines is still on the US-Australia routes but badly needs to upgrade its product and it doesn’t appear positioned very well to do so.  Perhaps Jeff Smisek & Company will address that better this year.  Delta and V Australia didn’t get to form an alliance and they’re trying again.  Someone has to give in this area and it will be either in the form of a codeshare alliance between Delta and V Australia or in the form of an airline withdrawing from the market (United or V Australia).

South America:

LAN, in fact, did continue to succeed in South America.  So much so, they bought TAM to create LATAM and then bought AIRES (a Colombian airline)covering both the east and west coasts of South America.  LAN is, in my opinion, now a SuperLegacy of South America and that’s a bit dangerous for them.  South American governments are more protective of their countries airlines that is the custom in other parts of the world.  

Curiously, LATAM is now operating airlines in two different alliances:  Oneworld and Star Alliance.  While there is speculation that they’ll continue this with LAN brands in Oneworld and TAM brands in Star, I think they’ll have to pick one and this may well mean a big battle among all three alliances.   This is an area where SkyTeam could do well for itself by gearing up for battle now.

Aerolineas Argentinas:  Well, what can I say?   Well, I’ll say exactly the same I did last year. 

This disaster is much like the country itself.  It won’t go away but it won’t perform either.  No outside airline will consider taking it over after what happened with Grupo Marsans’ ownership.   They lack an appropriate fleet for their flying, a strategic plan for stabilizing their revenues and no clear plan for future growth.  But the Argentinian government also won’t let them go away.  It is a matter of national pride.

LAN Argentina is growing in Argentina but somehow I remain skeptical that it will be allowed to succeed too well.  Why?  For one reason, the government of Argentina owns Aerolineas Argentinas and it has a vested interest in that airline earning money.  For another reason, LAN Argentina is owned by the LAN Group of Chile.  Look up how Chileans and Argentinians feel about each other.

Colombia / Central America: 

Avianca TACA is doing fine and I look forward to seeing how they’ll compete against LAN. 

Venezuela:  Bah!

Europe:

British Airways accomplished a few things.  They got into a royal battle with their flight crew that remains unresolved today in part by being petty.  Their flight crew union, Unite, furthered that argument by being petty.  BA did get their merger with Iberia accomplished and after many, many years they have their anti-trust agreement for trans-Atlantic flights between its European Oneworld partners.

Look for the BA/IB union to do OK in its first year and they may even start looking for another partner as soon as possible.  The anti-trust agreement between Oneworld partners should also add to the bottom line.  However, it’s time to settle this fight with Unite and it’s time for Unite to get real.

Lufthansa is moving along and did do something with their BMI purchase.  I don’t think it did them any good when its CEO, Wolfgang Mayrhuber, started complaining about its ability to compete with the likes of Emirates.  Whether or not he had a real point (and he probably did), it also did signal just how hard a job they’re having with the task of competing with the Middle Eastern airlines.

They also still have their A340s and their plans to add the 747-8i.  They got their first A380 and all I see is fat, fuel consuming airplanes.  This is going to be a problem for them if oil prices rise much more and when you consider that much of their competition is flying fuel efficient A330s and 777s, it makes you wonder about their long term strategy.

KLM/Air France:  More of the same.  I think this airline will need to make an order for new widebody aircraft soon.  Because it remains, essentially, a French airline, I see a large order for A350s and a small order for 777s.  I do not see the 787 in Air France’s future.

Airlines will earn profits and even earn great profits throughout the world.  Many will be “record breaking” but as much from inflation as a recovery.  Those profits will soon start to burn a hole in someone pocket and that is when I think we see capacity growth.  I think that capacity growth will start with the Middle East airlines pursuing more revenue lucrative traffic from Europe and North America.  But we’ll see it happen in the United States, too. 

I would dearly like to see the 787 enter into service with someone and I think we will see it do so.  But Boeing has got to get a rein on itself.  The failures in the 787 program are as much about poor management as they are about stretching technology.  There is too much accountancy going on there and not enough visionary leading.  It’s time for them to start winning and they could do so by winning the KC-X tanker program once and for all.  But it is also time to start talking about what’s next. 

The demands of the 787 program *will* decrease as will the demands from the 747-8 program.  Will it be talk of a 737 replacement or an improvement to the 777?  I think the airlines would like to talk about the 737 replacement and that seems sensible.  Rather than play cautiously, reach again, I say.  Push engine manufacturers to come up with something to raise the game and push technologies again.   It’s also time to talk about the 787-10 and I think there are more than a few airlines who would like to be a part of those discussions.

Airbus is going to muddle along denying any real problems with the A350 until the end of this year.  Then we’ll hear about something delaying the entry into service date by a considerable amount.  John Leahy will insult Boeing and claim the A350 will put the 787 to death but it won’t.   Airbus might well buy the KC-X tanker program but I question the wisdom of this in light of their ongoing A380/A400/A350 problems as well as their announcement development of a new engine option for the A320 series.  When do they earn money the proper business way?

It would be nice to see Embraer make a move into the 130 seat market and I think those guys could do it very well.  Bombardier gets bashed by everyone but I still think they have something with their CS series and I think it will be taken up by another airline soon.

I think we’re going to see another round of fees.  Just as soon as airlines can identify what other parts of their service they can de-couple from the basic flight.  I think we’re going to see airlines put a price on early boarding and we’ll probably see fuel surcharges amounting to tens of dollars.

But let’s hope we see an interesting and prosperous year in the airline industry.

Filed under: Airline News, Airlines Alliances by ajax
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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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In the Global Distribution System aka Online Travel Agent Wars with American Airlines, SABRE just dropped a bomb and announced that it will discontinue AA listing one month before their contract ends in August and it will list AA different between now and then.

Care to guess who owns Travelocity?  That’s right.  SABRE does. 

So far, AA continues to insist that it is comfortable with booking levels at present while it remains in discussions with both Orbitz and Expedia. 

This really doesn’t feel like something that AA is going to win on its terms.  There may be some adjustments because, after all, Orbitz, Expedia and Travelocity all have something to lose as well.  However, this whole push on the part of AA is beginning to smell a lot like its attempt to “rationalize” fares under CEO Crandall back in the 90’s.  That didn’t work out too well for AA either.

Care to guess who used to own SABRE and who developed the system as a subsidiary company?  That’s right, American Airlines did.

Filed under: Airline News by ajax
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