The Department of Transportation has decided to recommend against anti-trust immunity between Delta Airlines and Virgin Blue airlines Virgin Blue and V Australia.   This decision caught many by surprise and I’ll confess to being somewhat suirprised but pleased as well.

The DoT seems to say that they don’t think Delta has worked to establish itself in the trans-oceanic market and hasn’t done a very good job of showing the benefits to the consumer.  There is some truth to that.  Delta and V Australia are both new entrants to the US-Australia routes and neither has really done that well so far but neither has seemed to have invested in developing that business all that well either.  The efforts made seem more pro forma than with enthusiasm. 

I also think that both parties felt that with two very established carriers between the two countries, an alliance between two new entries would just be automatically supported.  An assumption that I would have said is likely just a day ago. 

I think everyone could stand to take a moment and breath on these alliances.  Yes, they grow the network and they offer greater potential for profit but is an oligopoly of 3 really better than an oligopoly of 2?   The public good isn’t just served by profitable airlines.  The public good includes what is generally good for the consumer such as competition that offers varying levels of service and price. 

If you want an alliance across the ocean, prove you can be a player on that same set of routes first.  Better yet:  be creative and open up some new business rather than just continuing to try to compete on the ubiquitous California – Australia routes. 

Alliances are fine but let’s not forget the purpose of business and competition and what it has to offer.  If you want to be in business on a particular route, the preferred pathway should be making a long term investment and working for the traffic.  We should desire to start seeing *more* competition between these alliances, not a continued effort to stake out their “just share” of business in a particular market.  Carving things up into 3 equal shares serves no one’s interests at all.

Good on the DoT for doing the unexpected as well as doing it for a good reason.  I would like to see a bit more of that attitude in other future decisions.

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British Airways Business Class subsidiary, OpenSkies, is introducing a money back guarantee to encourage new people to try their services between Newark/Washington D.C. and Paris.  Since their internal customer satisfaction surveys indicated that more than 96% of respondents would recommend OpenSkies, this seems like a rather safe bet to be making.

Offering such a thing is a relatively unheard of act in the airline business and it is a hint at the fact that airlines still need to attract customers, particularly business customers, in a rather innovative way.  It’s a rather satisfying guarantee because by its very nature, it’s unusual.  I suspect it will get some people to notice them and, perhaps, pay attention to them.  Especially if current Oneworld members are permitted to earn frequent flier miles on these flights.  I presume this will be possible since OpenSkies participates in BA’s Executive Club program.

But at the end of the day, OpenSkies is a tiny airline serving just two routes and this money back guarantee is unlikely to spread among larger airlines.  If they were serving more routes, it is possible that other airlines would match it on some limited basis. 

What would be nicer to see among airlines is a money back guarantee on the so called “services” that are now requiring extra fees such as the baggage fees or priority seat fees, etc.  Sadly, there is no sign of that developing at any airline.

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There is a reason there is a lot of focus on the near mid-west and east coast when it comes to airlines.  That’s where people are.  The population density in our eastern half far exceeds that of our western half.  Even LCC carriers “get it” and if you think otherwise, look at the focus of jetBlue, Airtran and Southwest Airlines.

But I think the opportunity of the west and mid-west is getting ignored.  All one has to do is take a look at routes flown from the DFW, Houston, Kansas City, Salt Lake City and, yes, Las Vegas area and wonder at the possibilities.  Yes, the flights are a bit longer in length and time but they also fly in and out of airports that are far less congested and far less affected by weather. 

Southwest ignores routes from DFW while it waits to fly unrestricted from Love Field in 2014 and I think that is a mistake.  jetBlue has ignored the Dallas market despite the fact that it connects an amazing number of people to areas where it already has a strength:  the east coast and west coast.

Airtran has game in the east and even in the upper-Midwest now but it has ignored the west so far and that puzzles me.  It’s an airline that is clearly ready to go to the next level and be a real national player.  Frontier is playing some in the west via Denver but take a look at the fares it is charging on those western routes.  I think Frontier is more vulnerable than it thinks. 

More importantly, I don’t think there has been the same LCC stimulus in many western markets that we’ve seen elsewhere.  Many LCC’s operating routes in the west seem to have come to some tacit agreement with legacy airlines on competition.  With the exception of the west coast, we don’t see much LCC stimulus going on past 150 miles east of the west coast. 

There is opportunity there and the airline that figures out how to build a better network there is potentially set to earn a great deal of money.  Sure, Southwest is out there and they do have pretty good coverage but even they could stand a little competition these days.  At least outside of California and Arizona.

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The pilots of Continental and United Airlines have decided to throw a whopper on the table and see if the stink gets them anywhere in their negotiations for a unified pilots’ contract for the proposed ContiUnited merger.  They want an end to all outsourcing of flights.  In other words, they want ContiUnited pilots to fly all the flights.

Never. Gonna. Happen.

Pilots want job security and I can’t blame them.  The investment in both time and money towards their career makes them much more tied to an airline to earn a living than most people experience in their lives.  The seniority system just compounds that issue for them even more. 

But airlines aren’t going to agree to eliminating regional airline partners for their flying.  They can’t.  It isn’t economically viable at the labor rates insisted upon by unions of these legacy airlines.

Each part could give a little on this.  Regional airlines don’t offer just cheap pilots.  They offer flexibility and less expensive flight attendants and even less expensive maintenance.   Both parties need to find a way to offer employees better job security in exchange for more competitive costs.

Given that this is most important for pilots, it seems to me that the SuperLegacy airlines might be better served by “leasing” not only their aircraft but their employees to these regional airlines in down times.  In other words, craft an agreement that allows the SuperLegacy pilots to displace the regional partner pilots when their laid off.  Lease those pilots at the regional partner rate and, at the least, preserve some job security. 

It’s one way to work within the seniority system.  A system that, frankly, pilot unions are using to make their membership become indentured to airines.  It’s a system that I disagree with but if you must preserve it, at least find some flexibility within it.

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Ryanair’s Michael O’Leary has done it again and raised the ire of pilots, agencies and even the public by suggesting that not every flight needs 2 pilots.  He made his suggestions in this Bloomberg Business Week story.

O’Leary suggests that by eliminating one pilot and ensuring that a flight attendant was “trained” to land the plane, airlines could save even more money and offer even cheaper flights.  And, as always, he’s got the media and other interested parties attention with his outrageous suggestion. 

Relax.  It isn’t going to happen.  O’Leary is masterful at getting free publicity with his comments to the press.  Just like suggesting pay toilets and standing room only fares, this one is more about getting in the news than it is actually about doing it.

The truth is, the workload for pilots is at its greatest on the very short flights he suggests pilots are unneeded on.   Even though it is possible for computers to take off, fly a route and land an aircraft, it’s still important to have situational awareness and our traffic control systems don’t provide that level of situational awareness.

Nevertheless, O’Leary is right about one thing.  You have to work at challenging present business models in this industry or you can fall behind.  One thing I do agree with him on:  Passengers aren’t nearly the delicate creatures they are made out to be. 

There is another thing I kind of like about the man.  He got Kate Hanni to bite at his bait on the one pilot concept and now she and her organization, FlyerRights.Org, are running around trying to get governmental organizations to assure her that such ideas won’t trickle into the United States. 

Of course they won’t.  They’re unworkable in terms of flight safety.  They’re unworkable in terms of the sheer legal liability they introduce.  And to pay them attention at all affords O’Leary and Ryanair a win.   It’s one very important way that Ryanair saves money and offers the very low fares that attract its large base of customers.

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British Airways CEO and soon to be chairman of the International Airlines Group, the holding company for the merged BA and Iberia airlines, says he and his company have a large list of acquisition and merger targets as part of a strategy to become the world’s largest airline.

It’s a strategy that would have the potential for really shaking up the airline world because it would be the first real multi-national airline (Air France/KLM and the soon to be BA/Iberia consolidations don’t count given that they are in the European Union.)  Yes, there are already cross-border airline but they’re typically between two countries within an economic union or with strong business ties between each other. 

A real multi-national airline would be much more like something between British Airways and American Airlines or Delta and Cathay Pacific. 

Obviously strong ownership restrictions in many countries would inhibit such a strategy and frankly I’m a bit skeptical of Walsh’s optimism that they can be overcome.  Furthermore, I think that such a grouping is an ill-fit for the current world we live in.  It potentially denies countries strategic capabilities that they both want and need.

Frankly, I think Walsh and the new International Airlines Group would be far better off just making their new airline work profitably for now.  They already have strong cultural problems to solve, I suspect, as well as the need to compete in the present markets they occupy.

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Steven Slater says he quit jetBlue.  jetBlue says he’s no longer with the company and comments no more on the subject. 

Regardless of the circumstances behind Slater’s official departure from jetBlue, it was time for him to go. 

It was time for him to go because he clearly had reached a point in his career where dealing with problematic passengers was more of a problem than he was perhaps prepared to tolerate.  I’ve said it once already but I’ll say it again:  The big shame in this episode is that the passenger wasn’t criticized more for their behaviour and banned from the airline.  All too often airlines accept that kind of behaviour tacitly in the belief that it will scare away customers.  I myself suspect it might only scare away the people you don’t want as customers to begin with.  My strongest suspicion is that it will scare no one away.

It was time for him to go because jetBlue can’t have that kind of liability in the air.  Once Mr. Slater acted out in public like that and abused emergency systems for his grand exit, he was a liability.  What if he did something again and this time is resulted in harm against a passenger or co-worker?  He created a record of not being in control of himself and that’s a liability for his employer. 

That said, jetBlue missed an opportunity to back its other employees and demonstrate that while bad behaviour from employees won’t be tolerated, nor will bad behaviour from passengers.  I truly believe it would have been a strong morale booster and it would have raised respect for jetBlue yet another notch.

But it was time to go.

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In an interview with TheStreet.Com, jetBlue CEO Dave Barger says that jetBlue has earned the right to grow.  His justification for that comes from jetBlue having positive cash flow, steady earnings and it’s contrarian nature that has lead to success at difficult airports.

Personally, I think all airlines have a “right” to grow.  I just think they have to make a busines case for it and as far as I’m concerned, have at it. 

I think this signals something else.  Here is an LCC announcing its attention to grow in almost insolent manner.  In particular, Barger declares their intentions at Washington Reagan National and fails to mention that his opportunity for growth there comes from a partnership with American Airlines that included a slot swap.

But this is somewhat classical behaviour on the part of LCC’s.  They see revenue opportunities on routes that legacy airlines are only, at best, barely managing to cling to and the LCC’s want to earn that money.  Their costs are lower and they can handle going in at a lower fare and capturing the business.  The only tool a legacy has to use to fight off that competition when that happens is adding frequency and matching prices for a sustained period.  It does work sometimes.  From time to time, a legacy airline can fight off an LCC intrusion but it’s hard and it does eat up cash and resources until it’s over.

That was easier to do when there were few LCC’s and they were focusing on peripheral airports and lesser routes.  Now we have quite a few LCC carriers and they want in on the big action.  That’s why we have Virgin American flying trans-continental routes, jetBlue flying from JFK and Southwest Airlines introducing itself at both La Guardia and now Newark airports. 

Can legacy airlines fight these attacts on many more fronts as the airline business recovers in the US?  Maybe.  At least to some degree.  But I suspect they’re going to have to be a bit more choosy on their fights and I think w’re going to see some markets where even SuperLegacy airlines concede, eventually, to LCC intrusion. 

Dave Barger and jetBlue are the first to declare their intentions but they won’t be the last.  It’s notable that all of the US LCC’s are earning good profits and increasing their revenue base (with the exception of Virgin America who has yet to earn a profit).  That makes for a warchest and with their sizes approaching a critical mass, they can afford to take on more and more legacy airlines.

Airtran did it in Atlanta.  jetBlue did it at JFK airport, Southwest did it in Denver and now it’s happening at Washington Reagan National.   It’s going to happen at more and more airports too. 

One alternative defense might be for more and more legacy airlines to strike deals with LCC carriers and offer them some success but access they can control as opposed to an all out fight that results in legacy airlines bleeding red with losses. 

Look for more airlines to declare their intentions and justify those intentions with their current earnings and revenue growth.

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When Delta decided to sell off several subsidiary regional airlines recently, we all noticed that Comair didn’t receive any takers.  It’s costs are higher and its equipment is more dated and now Comair is slimming down to reduce costs in the hope that it might become attractive enough to find a suitor.  Just the reduction in the CRJ100/200 fleet alone will save the airline considerable money but the workforce will be reduced as well.

Comair is unattractive because of its divergence from what legacy airlines need in a regional airline partner:  It isn’t so cheap anymore.  Comair is pretty old when you consider its life and various forms.  It’s had enough time to add on a senior workforce and its found itself boxed in with its equipment (partially because of what it invested in and partially because of scope clause limitations.)  It really tends to be more “legacy” than “regional” in its airline DNA these days.

And that sounds a lot like American Eagle.  American Eagle has an aging fleet, increasing labor costs and a workforce that is aging and gaining seniority rapidly.  So far, it remains profitable on some level but only because of its contract carriage on behalf of American Airlines.

What happens if American Airlines sells this airline and pursues contracts with other regional airline partners to lower its costs?  Suddenly American Eagle doesn’t look at all attractive given the kind of aircraft it is burdened with as well as its labor obligations.  Would American Eagle find a suitor?  Maybe but I somewhat doubt it at this point.  Regional airlines are consolidating and attempting to move upstream.  American Eagle doesn’t bring very much to the table and without those revenue guarantees from various airlines, it doesn’t look all that profitable either.

What I am beginning to wonder is whether or not we’re seeing the end of the first real cycle for regional airlines in the deregulated US market?  In other words, have regional airlines that have their roots in the 19080’s become marginalized by their growth in labor costs and fleet irrelevance much as the legacies found themselves suddenly experiencing in the late 80’s / early 90’s?  If so, that would indicate that new players will find it potentially profitable to enter the market with a young crew and a more modern and relevant fleet. 

If there are new entries, their barrier to entry will end up being scope clauses governing the size of jet that can be flown by a regional.  Some airlines have pretty restrictive scope clauses and some not so much.  Some of those restrictive scope clauses got amended as a result of bankruptcies and, notably, those that didn’t go through bankruptcy in the 2000’s (AA and Continental) have some of the most restrictive clauses.  

At the end of the day, it would appear that AA and Delta are unlikely to realize very much value from their “old” regional airline companies in a sale.  Any buyer with any experience at all is liable to realize that without some sort of guarantee of a revenue stream from the seller, these airlines (American Eagle and Comair) are unlikely to be positioned to earn very much profit going forward.  And who wants to buy a lame duck?

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

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

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

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

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JAL is considering setting up a budget airline with some of the money it was given by the Japanese government to compete against the budget offerings of other airlines in Japan.  For the past 20 years, a number of airlines have conceived of this idea that an airline within an airline designed as an LCC is a great idea.  Continental has Continental Lite.  Delta had Song.  United had Ted and the list goes on.

If it is such a great idea, how come none of those offerings are around? 

They can have some value.  They can show an airline a model for operating differently and more cost effectively and that may be worth something. However, I don’t think the cost of setting up an entire new brand is worth learning those lessons.

Indeed, those budget airlines inevitably end up being a compromise to ensure that labor unions for the Mother Ship don’t spurt blood from their eyes and try to doom the airline.  As a compromise, they’re unsatisfying because they don’t yield the same results a real LCC aka budget airline enjoys.

The best thing a JAL can go is get on with the slashing.  Slash costs, labor and anything else that stand in the way of profitability including vanity routes and vanity aircraft.  Reduce your fleet to as few types as possible and get new labor contracts that ensure productivity that is on par with those you are competing with. 

In other words, rip the band-aid off, don’t tug at it slowly.  Get it done and the quicker you get it done, the quicker you start to show the rewards of your work and, hopefully, some of those rewards should be profits.  It’s very tough to do it and you definitely have to have the right leadership to get it done. 

I question the leadership at JAL if this is truly what’s being considered.  It’s delaying the inevitable and simply burning more cash than necessary.  Cash that came from the Japanese taxpayers. 

Often in the US, a hatchet man is hired to make the hard cuts and slash costs and once he’s done, he’s replaced with a different leader who is tasked with maintaining those savings and leading its staff to a happier place.  Indeed, Glenn Tilton was supposed to be one of those guys but he’s continued to hang on long after he was done. 

What JAL needs is an unconventional businessman who knows how to wield a hatchet.  Someone who is at least familiar with businesses that burn a lot of cash each day and which depend on reliable revenues to survive.   What they don’t need is someone interested in serving political masters who want jobs saved rather than businesses fixed.

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