With the heat up on American Airlines’ financial situation as well as the strict scrutiny its share price has gone through, the old dog called merger has started to pop up again.
The truth is, financial analysts and investors want to see something more happening at American Airlines. Something that goes beyond “we’ll stay the course with our fixed strategy and hope other airline’s costs rise to ours before our money runs out.” That really is what has been communicated thus far.
There is a new culture at some airlines. It’s a culture of fiscal responsibility that is fostered by airlines leaders such as Richard Anderson (CEO of Delta) and Jeff Smisek (CEO of United). It’s the idea that a stready return on investment is necessary for airlines going forward. It is refreshing and it does seem to help as a basis for decision making at airlines. Enough so that they’re starting to convince me that capacity discipline really will continue in the United States.
On the surface, it would appear that American has the right executive leadership to execute that strategy. It’s an airline that has a strong reputation for financial management and one would expect that they would lead on this subject.
However, as much as I do think the strategy has value, it ignores the human element of airlines. We all too often talk about the capital requirements for airlines and the huge amount of cash flow necessary to keep operating and even the huge labor component. What we don’t talk about is the people.
At the end of the day, airlines are made up of people. It is a labor intensive business and it requires many different kinds of people and it continues to be an industry that generally grabs you and holds onto you once you work for an airline.
To drive those tens of thousands of people into the same direction and achieve success requires a bit more than being a good numbers man. It requires a certain vision, a certain charisma and the ability to get people to follow you.
American Airlines hasn’t got that. It’s got a clinical, almost detached view on its labor and leadership that continues to ignore the human component to their success.
What investors and analysts want to see is some revolution, not evolution. Steady is the course has simply seen debt rise, cash holdings drop and angrier employees. Those who know airlines, know that that is the precursor to a long, ever quickening drop into failure.
You can manage those pennies all you want but if you can’t get your people to turn an aircraft quicker or your pilots to work more productively or get your staff to treat customers better, you’ll still fail. Even analysts know that.
American won’t engage in a merger with its current leadership. However, CEO Gerard Arpey won’t stave off a coup with his present course either. There will come a time when the board will decide new leadership is necessary. It will happen rapidly and it will be a result of a sudden consensus view by the board that they’ll be held responsible for further failure. I would argue that that set of circumstances may be closer than Arpey & Co thinks.
While I don’t think a merger is on the horizon, I do continue to wonder what the executive team at US Airways could do with American Airlines. They’ve worked wonders with enormous challenges and a disadvantage to virtually every other legacy airline. They’re reponsible to providing a return on investment and they seem to have figured out how to please customers better every place improvement was called for.
American Airlines will outsource heavy maintenance on (4) 757 aircraft to TIMCO in North Carolina within the next month. You might imaginge that American’s Tulsa maintenance union thinks that is just an awful idea.
American says it needs to do this because of a backlog of maintenance at its Tulsa center and the local TWU says that American knew about this maintenance more than a year ago and failed to do anything about it including considering the union’s proposal to keep the maintenance in Tulsa.
Making decisions like this at an airline always involves more variables than most can consider. Do you pay overtime to get the work done internally? Do you have the space to do the work internally? Is your labor force fatigued and unable to keep pace? Is the costs to do it in house higher than outsourcing? Do you want to try outsourcing to see if pursuing a long term outsourcing strategy is worthwhile on a grander scale?
Is this a move by AA to pursue outsourcing? Actually, I kind of doubt it. AA’s maintenance facilities have done their work not just cost effectively but in concert with the unions and the results have shown. Right down to its labor force finding additional cost savings both in time and money as well as showing that AA could save more money by doing certain small items like “tuning” the engines more frequently for more fuel savings.
I think that AA just also recognizes that having a backlog of maintenance on aircraft could cost them flights and those flights represent revenue. On the other hand, the unions have to make noise about it because they are unions, they want to protect jobs and they want to keep their jobs.
The real failure here is in not simply reaching an agreement with the unions over this issue quietly. It sets up the perception that executive leadership isn’t listening and why reinforce that perception among its labor force?
Southwest Airlines CEO Gary Kelly is now openly predicting that SWA will see as much as $1Billion in revenue growth as they restructure the Airtran Atlanta hub into a more traditional Southwest focus city. Airtran currently operates a traditional hub and spoke system in Atlanta.
Airtran’s model as an LCC carrier was really a hybrid. It did operate primarily a hub and spoke system and it also used focus cities and even did a little point to point flying. Airtran did what they had to do to compete with Delta, earn money and to do it by perenially being the little guy in most markets. Absolutely nothing wrong with that.
Southwest is right, however. Operating a traditional SWA focus city is the right thing to do because it serves the greater good in the SWA system as well as focusing on the customer that yields the most *profit* rather than the most revenue. More importantly, SWA has some horsepower to offer that premium customer that Airtran doesn’t have. More connecting flights to more destinations, primarily.
I’ll miss Airtran’s business class and I’ll miss their style of business. It worked for me very well and I’ve flown them many times. Even Gary Kelly admits that SWA expects to see some business travelers move to Delta as a result of the changes in service product. After reflecting on this for several weeks, I think this is, at the most, a trivial issue.
Why? Because SWA actually offers a great service product. The seating is good. The flight crews are good. The business traveler can accomodate themselves with priority boarding. No, it isn’t a “first class seat” but neither was Airtran’s really. Airtran offered an economy business class seat, in my opinion. You didn’t get the same perks that legacy airlines offered with their first class. You got a better seat and a few free drinks. That’s it.
Southwest can compete with that. More importantly, if you’re a business traveler and you’ve chosen Airtran, I would guess that, most often, you’re an entrepreneur or work for an entrepreneurial company that places a premium on appropriate spending for travel. If so, Southwest fits that role just fine. I’m very skeptical that there are very many traditional frequent flying businessmen who are using Airtran. Delta fits their needs better.
I look forward to seeing what SWA does in Atlanta. I look forward to seeing new connections as a result of Atlanta becoming a SWA focus city. It should work very well not just for Atlanta residents, but travelers from the entire southeast region.
Remember the woman who was removed from a Southwest flight because of some improperly perceived threat based on someone “overhearing” a partial phone conversation? She was actually kept off by the captain because the crew just didn’t feel “safe”. Get the details here with a Dallas Morning News Aviation Blog post.
The woman, Irum Abbasi, has decided to sue and I don’t blame her. You see, I’m not a subscriber to the idea that the 1% rule is valid and I sure don’t subscribe to the “abundance of caution” approach to safety. The woman was inconvenienced, humiliated and insulted primarily because she was a muslim and dressed accordingly.
A muslim woman dressed according to her religion is *not* a threat. It’s time that commercial businesses, even a nice one like Southwest, get their act together and start using better judgement. I do *not* disagree with the woman being questioned. That is, perhaps, appropriate. But once the TSA determined she was not a threat, she should have been put right back on that aircraft and into her same seat.
And the aircrew should have been told to settle down and do their jobs. And captains need to get over themselves and failing to do so, should be reprimanded for engaging in behaviour that would get most people fired today. If airlines continue to fail to exercise good judgement, I would recommend a few airline execs and airline captains go through extra screening, have their religions questioned and be inconvenienced with a voucher and offer to fly the next day.
The woman suffered harm and, possibly, damages. That’s what lawsuits are for.
QANTAS is going to ramp up its flights between Dallas / Fort Worth and Australia from 4X weekly to 6X weekly and then daily. The move to 6 times a week comes in January and QANTAS will go daily in July of 2012.
Why? Because the flight works and work well for a variety of people. The flight duration from DFW to Brisbane is essentially the same as it is from the West Coast (is there much of a difference in an hour more duration when we’re talking about 15+ hour flights?) and it affords a connection in a city that is uncrowded vs many West Coast cities.
The real deal here is feed. American Airlines must be feeding a ton of traffic to QANTAS and vice-versa. This is one benefit in the Oneworld alliance that does work.
It’s also why I’m skeptical of Emirates doing very well in DFW. Emirates has no relationship with any airline in the DFW area. Furthermore, DFW airport is exceptionally dominated by American Airlines. Without a codeshare and/or interline agreement with AA, I just don’t see much feed going over to Emirates.
As for Origin and Destination traffic between DFW and Dubai . . . forget about it. As for connections to the Middle East, India and Africa, let’s take a look.
Dallas isn’t an oil city. That’s Houston. Dallas is banking and real estate and software. There are ties to India but you can get there just as conveniently or more so via the airlines already giving you frequent flier miles. I think the lure of frequent flier miles is silly but I won’t argue against the fact that they are a major driver for most fliers. Africa? Again, there just aren’t many ties from Dallas to that part of the world.
Now, as for air cargo traffic, I see that this might work. But at the end of the day, you still have to fill those 777s with passengers to succeed.
It will be fun seeing their aircraft here just as it is seeing QANTAS 747s here. And if the 747 is doing *that* well between DFW and Australia, it’s quite possible we’ll see an argument made for some of those flights to be served with an Airbus A380 (which should be able to make the hop to Australia east to west without Brisbane in the equation.)
Chilean regulators have tentatively approved the LAN / TAM merger (which is really LAN buying TAM) with the usual provisions and conditions that frequently come with these deals. The big one is that LANTAM must pick one airline alliance to go forward with.
Right now, that means choosing between Oneworld or Star Alliance. LAN is associated with Oneworld and TAM is associated with Star Alliance. The choice means that one or the other kind of gets shut out of South America so the stakes are big.
Expect both alliances to make captivating pitches for being the winner and both will likely promise exorbitant revenues (via guarantees) to the airline group but who is the best choice?
For LANTAM, either could be good but I think Star Alliance might look just a little bit more promising in terms of synergies. Oneworld won’t be shut out with a fight but you have to evaluate that alliance on performance and its “majors”. American Airlines, British Airway, QANTAS and Cathay Pacific run that group and none of those airlines is the picture of health or innovation.
Star Alliance might offer more synergies, more partners and, more importantly, more money going forward. It’s an alliance that works well and which is more egalitarian in its treatment of smaller partners than Oneworld.
On the other hand, Oneworld fits the Chilean portion of the airline very well already and several partners service Brazil with high frequency too. If LANTAM is smart, they’ll extract promises to cooperate and a seat at the big boys’ table. That would give them the leverage they need going forward. If Oneworld appears unwilling to acknowledge them as a player, you can bet that Star Alliance will be happy to make room for them.
Over the past several days, we have seen quite a ride for American Airlines’ share price. There has been rampant speculation that the decline in share prices were due to the higher than average number of retirements at the end of September. Some think the pilots “know something” and are sure there is going to be a bankruptcy.
I am by no means high on American Airlines. To the contrary, I think they continue to act as if their problems are being fixed or are not that severe and I think the executive leadership is approaching irresponsible in certain areas.
That said, we’re also talking about a company that has enough unrestricted cash to live unconstrained for another 4 years. That doesn’t spell bankruptcy. The pilots don’t know anything special and, frankly, they probably know less than many.
But I do think this reflects the frustration and negative emotion that many feel about this company. I think there is a sense that there are growing missed opportunities to come out alive and healthy. I think many people have looked for a reason to dump their shareholdings and they finally found one that works for them.
But I also think that I’m tempted to buy up AA stock right now because not only do I think they survive in the near term and not only do I think they won’t enter into bankruptcy, I think their share price will climb considerably over the next year from where it is today. Because everyone likes a deal and right now AA stock is a pretty good deal.
I am ordinarily not anti-tax in virtually any form. The truth is, I believe that we get one hell of a lot for our taxes in this country compared to virtually any other country in the world. In general, I believe that we need to raise taxes in many areas to meet our obligations in the next several years.
That said, I’m wholly unamused at the latest proposals for taxes on air travel. On the one hand, we know that air travel requires an expensive infrastructure and that needs to be paid for. I don’t think anyone would argue any differently. Furthermore, it is an infrastructure that needs reinvestment to modernize many parts of it. That means it is only going to be more expensive to sustain for a while.
What I object to, however, is placing the bulk of the burden upon air travelers alone. You see, it isn’t just air travelers who benefit from the air transportation system. Everyone in this country benefits from it and often a great deal albeit somewhat indirectly and that means everyone should be paying a portion of its costs rather than just those boarding the aircraft.
Taxes that sustain the air transport system should be crafted in such a way that we all share some proportionate burden of the costs. Air travelers should, perhaps pay a bit more than the guy who never flies but that exists today in the form of current taxes and fees charged. But don’t tell me that the burden shouldn’t also be shared by some of these people:
1) Private aircraft, particularly private jets, who consume a disproportionate amount of resources with respect to air traffic control and airports. Look up how much it costs to handle a Cessna Citation jet at a major airport vs a 737. Now consider that a Cessna is essentially using the same amount of resources that a 737 uses. Starts to look a little cheap for the Cessna, trust me.
2) How about the flower farmer who uses the air transport system to ship his flowers to market every day of the week?
3) How about the citizens of metropolitan areas who get to host headquarters of Fortune 500 companies because they do have good access to the air transport system? There is a direct economic benefit to those people that isn’t often shared by them.
Three good examples of parties who don’t share a proportionate burden of the costs to sustain that system.
It’s easy to continue to levy taxes against the paying passengers of airlines. Politically, we know they have no choice but to pay in most instances. We don’t really care about the direct demand impacts to airlines (and any airline can tell you just how quickly a $10 increase in a fare can affect demand) because airlines, for some reason, are horrifically bad at political lobbying in our governments. In short, we can get away with it and few people with political power can object.
British Airways has begun a new ad campaign based on their old motto “To Fly. To Serve”. Here is a video created in support of that new campaign. Enjoy.
US Airways and its pilots union, USAPA, got a hearing to discuss what US Airways says is an illegal work slowdown. In that hearing, the judge pretty much agreed with US Airways and told USAPA to cut it out and get their membership in order. What the judge actually said was:
“USAPA and its members, agents, and employees, and all persons and organizations acting by, in concert with, through, or under it, or by and through its order, are enjoined from permitting, instigating, authorizing, encouraging, participating in, approving, or continuing any interference with Plaintiff’s airline operations, including, but not limited to, any slowdown, strike, work stoppage, sick-out, work to rule campaign, or any concerted refusal to perform normal pilot operations in violation of the RLA, pending a hearing on the permanent injunction.”
Beyond that, the judge also ordered the union to make a concerted effort to communicate to its membership that such activities were illegal and punishable.
This is where USAPA wants to pay real close attention to things because it was the APA (American Airlines pilots) who got hit with a large judgement against it for the very same kinds of actions in the 1990s. There is ample precedent here and it will be the pilots who pay for that kind of judgement against them.
So here is my question: When does USAPA quit acting like children and get to work representing and, more importantly, *leading* its membership to a unified seniority list and a new contract with US Airways? What’s the plan? When does action take place? Right now, if USAPA got its act together and started down that path, union members *might* see a new contract by 2015. That’s only 10 years after the merger.
