American Airlines lost $192 million in February and there is virtually nothing there to blame on the bankruptcy. You can even see significant cost reductions where you would expect to see them.
And that’s the rub. Costs are the 1st half of the equation. If you don’t solve for the second half, you’re done.
That second half is revenues which do not reflect any work done in the last year to improve them. To the contrary.
Once more, this is why I strongly believe that Doug Parker & Company are the right choice for leading the merged US Airways / American Airlines. It’s also why I strongly believe that Tom Horton should be leaving when this merger deal closes. This bankruptcy reorganization reflects emphasis on cost cutting only.
Anyone who believes the rebranding effort that was rolled out in January was an effort to improve revenues has got to look at the bigger picture.
A new aircraft livery and logo doesn’t attract customers. And it’s the fallacy many “finance” people make. Customers come to your business because you have a good or great service offering at a value oriented price. Period.
Airlines hate to be made to institute any changes in how they treat customers. They have a loathing for being required to do something by rule or law.
Mind you, they have absolutely no problem with change. Any time a change can bring about greater revenue or reduce liability, they will happily institute the change asap. Just look into how much airlines have changed their contract of carriage for what their liability is in lost or damaged luggage.
If I consider just how much the airlines shouted, stamped their feet and groaned over the 3 Hour Tarmac Rule, I have to chuckle a bit. Airlines and their CEOs in particular made viscious threats about how much this would raise costs and impact customers negatively. Even my fellow bloggers jumped on that bandwagon and decried the rules. Some people insisted that the customer really wanted to get to their destination at all costs even if it meant staying on the ground in an airplane for 9 hours.
And then the rule was instituted and these delays have largely just gone away. There really has been very little muss or fuss. After more than 2 years of this rule, we see no evidence that the customers costs are raised or that the customer is negatively impacted in a worse way.
To the contrary, airlines are planning and executing these plans to avoid storm induced problems and delays in a great way. Flights are cancelled earlier resulting in passengers being able to properly reschedule themselves. Airlines are positioning their aircraft better to recover from delays as well. Everything really got better. Few airlines have actually been fined and certainly the industry hasn’t raised airfares because fines raised costs. (Airfares have gone up, just not because of these fines.)
In fact, the fines are so rare that we’re surprised to hear about them when they do happen. \
There remains many things that are bad or negative for the industry but the actual service experience for most customers today is vastly improved over what it was just a few years ago. And largely because of the government getting involved and asking for change that resulted in a more humane, more appropriate approach on the part of the airlines.
The bankruptcy court has approved the US Airways / American Airlines merger as of yesterday without approving the controversial Tom Horton Grand Compensation Plan. This approval means that the two companies can continue progress towards putting together a complete reorganization plan that defines the merger in the exit from bankruptcy.
It’s well known that I disagree with a $20 million compensation plan for Tom Horton. In fact, I think that Tom Horton remaining onboard as non-executive chairman is an equally bad idea. It’s notable that despite Jeff Smisek’s strong personality, the United merger really didn’t get traction and coalesce until Glenn Tilton left the company as non-executive chairman.
Tom Horton has worked too hard to stay out front of this and claim it as his own success. The news story he gave the Dallas Morning News as an execlusive was, in my opinion, offensive towards anyone else who had a hand in the merger and who came to the table with clean hands.
I think $20 million to lead a company for effectively 2 years (and let’s not forget that Mr. Horton has been receiving an exceptional base salary as CEO already) in which its successful exit from bankruptcy is facilitated by US Airways is way too excessive.
Pay the man $10 million, cash money, to leave upon the deal closing. Even that is kind of blood money as it amounts to $5 million / year cash money for 2 years of Chairman/CEO service. That’s a great paycheck by any standard and certainly so for someone leading an enterprise that had fundamentally failled while under his CFO leadership.
Whether or not the $20 million package is legal or not doesn’t really concern me at this point. If we’re upset about a $27 million house in London at the beginning of this bankruptcy, we should be pretty upset about a $20 million compensation package given to this CEO.
It is rare for me to discover that I’m unaware of a development in the airline industry here in the US but . . . I am. It’s bag tracking and it ain’t sexy but it is very interesting.
The Daily Traveler via Brett Snyder Aof the Cranky Flier has this story about US Airways quietly rolling out its own real time tracking system. Now, each time a bag enters or departs a major entity (primarily an aircraft), it gets scanned and reported into the system. Delta apparently has this too!
I am thrilled about this for so many reasons. It’s not perfection in tracking as your bag still could get lost between an airplane and a baggage claim area, for instance.
But now you can see where your bag(s) are and keep things honest about what is going on with them. It has been my experience that airline employees are particularly untruthful about the location of a lost bag much of the time. Lost bags are hot button problems for passengers and baggage agents don’t want those problems.
I also think this will actually help to tighten airline responsiveness to lost baggage problems. It’s a good thing and a system that absolutely should be carried over into American Airlines asap.
Rolls Royce has told people that it has lost the opportunity to be on the 777-X models and we know that Pratt & Whitney has been “out” for some time. Customers are probably not thrilled with the prospect of a single engine offering for the two 777-X models.
Competition helps a lot although Rolls Royce has impacted itself by aggressively retaining engine overhaul and maintenance for itself even in the used market. RR says it doesn’t want to be second fiddle to GE and I say it wouldn’t have been. There are a great number of 777 aircraft out there today using the Rolls Royce Trent engines. In fact, some would even say that they were the preferred engine for 777-200ER.
Boeing likes the partnership because it keeps complexity down and profits up. GE likes it because it gets to enjoy a kind of dominance in this class of airliner for as much as 20 years. And everyone makes money.
But airlines should question whether or not this is what they want. Even if GE is able to provide exactly the engine everyone wants, competition here would be wise. These engines cost so much that two of them can exceed the price of a 737. That’s a lot of money to spend on two engines.
Boeing is working too much on these partnerships, in my opinion. It needs newer partnerships with both Rolls Royce and Pratt & Whitney. These companies have something to offer in terms of different approaches and viewpoints.
For example, how is that the Pratt & Whitney GTF isn’t on the 737Max? There certainly will be more than enough of those aircraft produced to justify two engine choices. It’s notable that GE controls the Leap56 engine.
The authorization to offer the 777 to customers will come within a couple of weeks and Boeing will start soliciting orders for the 777-X airplanes aggressively. Airlines would be wise to stand firm and ask for two engine choices before committing to orders. That’s something that could save them hundreds of million of dollars over the life of the 777-X family.
I recognize that Southwest Airlines has to evolve just like any other airline in this business. I also believe that its core principles don’t have to change either. It’s not an airline that got where it is by being a Me Too! enterprise.
So what’s up with all the small but cumulatively damaging mis-steps lately? I’m talking about new CFO Tammy Romo channeling an AA executive on fees and now Southwest’s new television commercial.
[youtube http://www.youtube.com/watch?v=IKVxuBeEQTc&hl=en_US&version=3&rel=0]
What the hell? Someone found an old American Airlines commercial, filed the serial numbers off, sprayed some new paint on aircraft and re-used the same actors to create an incredibly flat commercial for a great airline.
This is not evolution and it isn’t going to attract the business travelers either. The business travelers know what Southwest looks like. THEY TRAVEL THE AIRLINE REGULARLY.
So why not espouse what the airline really is and be proud of it? My own father, a man of probably 6 or 7 million miles flown in his lifetime, prefers Southwest Airlines out of his home airport. He can afford to fly who he wants, when he wants and he’s got enough AA and UA miles to buy a 787. And he buys Southwest.
That commercial was made by someone who not only doesn’t get Southwest Airlines but who is also afraid to embrace the People Culture that airline has. Want to see what Southwest really looks like?
Hey, here is a quick, dirty little secret about the FAA tower closings at airports around the country.
They really don’t impact things much. Seriously.
The air traffic control systems aren’t closing and those using these smaller airports will still get guidance to a final approach to these airports.
They will just have to coordinate their arrivals and departures between themselves and that’s done already in many places. Particularly late at night.
It’s not even necessary to discontinue airline flights to these airports. Airlines can fly into these airports safely and without trouble. There is the chance that flights to these airports might necessarily get cancelled more frequently in bad weather but the typical flight shouldn’t be affected at all.
For those of you who think this still might be unsafe . . . it’s not uncommon for regional flights into rural airports late at night to arrive under the exact same procedures that will be used for these airports with tower closings.
Yes, it will require a change in procedures on the part of pilots (which they are already trained for) and it will possibly slow traffic into and out of these airports. And who cares? These airports aren’t exactly busy in the first place. That’s why they are on the lists for closure.
Go about your business. There really isn’t anything to see here.
I would argue that of the airliners introduced over the past 25 years, the 777 is probably by far the most influential airliner to become available. In the fashion of the “old” Boeing, it was made in a variety of styles to meet a variety of needs and just has kept on selling and selling throughout the years. Even today, Airbus doesn’t have the best competitor possible for this aircraft.
There are some people who’ve shunned this aircraft over the years and, in my opinion, paid the price for it. It was noticeable that Lufthansa, amid its order for a large batch of A320 aircraft, ordered (6) 777-300ER aircraft for its SWISS subsidiary. Lufthansa famously stuck with the Airbus A340 and 747 instead of incorporating the 777 into its fleet.
QANTAS has also studiously ignored the 777 despite market conditions changing so dramatically in favor of using the 777 that I now wonder if someone at Airbus has compromising photos of the entire Board of Directors for QANTAS. The 777 is an airliner that would have served QANTAS extremely well domestically, regionally and in long haul guise.
The 777 could have served the high frequency, relatively short haul routes between Melbourne, Sydney and Brisbane as well as some routes across to Perth and New Zealand. The original 777-200 “domestic” co8uld have served all these routes in a very able manner.
The 777-300ER was the answer to needs on the Kangaroo route as well as to northern Asian destinations in China and Japan. Why an airline such as QANTAS would continue to use the 747-400 exclusively when it could have greatly benefited from the 777 is a bit baffling to me. While oil prices weren’t sky high until quite recently, the fuel cost argument for the 777 was really made successfully right from the beginning. Even when fuel was cheap(er) in the 1990s, those who bought the 777 knew they had made the right choice.
Now we hear that Boeing is about to give Authorization to Offer the next 777 series aircraft and this means, potentially, that the 777 may well have as long a history in commercial aviation as the 747 with far greater numbers sold. Any airline who ignores the very real capability of this airliner does so at its own peril. Long haul routes will be based more and more on frequency in most cases and more on “point to point” arguments going forward. With just a few exceptions, they will not be based upon the traditional hub-and-spoke model and certainly not based on trunk routes using the largest aircraft possible.
Yes, a few A380/747 routes will remain out there and that’s right and appropriate. But the world will belong to airlines who have the ability to fly routes such as Dallas-Sydney or Houston-Johannesburg or Denver-Hong Kong with the lowest costs. The lowest costs will come from the next generation of airliners such as the 787, A350 and 777-X.
U.S. Bankruptcy Trustee Tracy Hope Davis is objecting to American Airlines CEO Tom Horton’s Platinum Parachute of $20 million in compensation for stepping down shortly after the US Airways / American Airlines merger is complete.
Actually, she doesn’t like the plans for severance and retention payments being made to many managers at American Airlines and she wants it changed. Davis points out that AA should show “the payment is part of a program that is generally applicable to all full-time employees and the amount of the payment is not greater than 10 times the amount of the mean severance pay given to non-management employees during the calendar year in which the payment is made.”
Most will assume that this won’t pose a problem for American Airlines in front of the judge and that the objections will be ruled against or a compromise found shortly. I’m not sure this is true.
Emotions about such payments runs high these days and federal law changed how that kind of compensation might be given quite some time ago (2005 during the Bush Administration). Personally, I find the payments being discussed fairly egregious.
I do not like seeing executives of a company receiving extraordinary compensation for having done a mediocre to poor job in managing that company. Gerard Arpey is gone, that’s true, but the the entire executive team being compensated in this manner, including CEO Tom Horton, were all on duty when mediocrity was being executed.
American Airlines’ bankruptcy is somewhat unusual in that they executed it when the company still had a great deal of cash holdings (which is really the right time to do a bankruptcy, to be honest) but there remain some facts that should be kept in mind. American Airlines was clearly headed towards bankrtupcy. AA had no positive relations with any union whatsoever. AA had been unable to reduce costs (not just labor but elsewhere too) for years.
And regardless of Tom Horton’s claims that the idea for the merger was his, it wasn’t. Why should mediocrity be rewarded? To get them out of the way? I have an idea: Let’s deliver a letter that says “I’m sorry but your services are no longer needed.” Why should the executives be paid to leave and not make trouble when regular employees will simply be told their services are no longer needed?
It’s a busy week for me but I want to keep making some comments on various items. There just won’t be the usual analysis until I settle down again.
On the US /AA merger: The criticisms, comments and half-truths about reduced competition from this merger. I realize that certain metropolitan areas have a lot to lose if a hub or focus city leaves your area. Air fares will go up. I also realize that there is a perception that air fares rise each time a merger happens.
A lot has changed in the airline industry landscape over the last 5 years. It’s not your papa’s airline industry anymore. For one thing, it’s focused on profits, not market share. For another, if there are excessive profits on a route, there will be an airline that will enter that market. It’s happening all around us. Just look at the DFW market where AA is so dominant that you can sit at the DFW airplane viewing center and not see a different livery on an aircraft for an hour.
Spirit Airlines is here, jetBlue is here, Virgin America is here, Frontier and Westjet (starting soon) are here. That is some serious LCC competition. Delta Airlines has entered AA dominant routes and United is starting to fire up some stuff on the Houston-DFW and Chicago-DFW routes too.
If air fares go up because of this next merger on a few markets, airlines *will* enter those routes because that is low hanging fruit and represents real profit.
Airlines are pushing hard to use XML for defining and exchanging fare data instead of the current standard which is more than 4 decades old. One company, Farelogix, is showing just how smart it can be to use this because it allows airlines to define an entire fare by more than just a base price.
Airlines will be able to use this data presentation to present a more full picture of what is available and the traditional GDS (Global Distribution System) companies do not like this one bit. They want their death clutch on the data in the form of the industry proprietary standard and they want it fuzzed up.
Truth be told, I took airlines to task for trying to eliminate GDS companies from the equation a couple of years ago. Now I would like to take GDS companies to task for not being a part of the solution.
So much of the airline industry relies upon what is, at best, very much legacy IT systems. Even the most modern reservations systems aren’t so much modern as they are just not as old as others.
A good deal of my day job involves understanding the various propositions involved in IT systems for both transmitting as well as processing data. I’m on the airlines’ side.
XML is the right choice and, frankly, there really shouldn’t be debate on this question. It’s smart, it’s flexible, it’s an open standard and it’s used by every modern IT system.
Yes, GDS companies are going to have to re-engineer their entire systems. Tough. This is the kind of thing that should have been done 10 years ago and was done by many other industries.
Yes, it’s going to present more opportunities to present data in more ways tailored to a customer. Yes, it could be tailored in ways that might seem threatening. My response is that the more we encourage information and options in this system on the part of both airlines as well as GDS companies, the better things will get for a customer. Seriously.
Information is power. Why do you think a better, more open and more complete standard for data is so threatening to incumbent GDS companies?
XML defined data open up possibilities for more efficient IT systems using the latest in protocols such as DDS (Dynamic Data Distribution) to be built. This means IT systems get less costly for airlines, more robust for consumers and if GDS companies want to remain in the game, they can figure out how to add value just like the rest of us in the real world.
This really is what we want as consumers and we would be well advised to break this GDS hold on this data.
Bombardier’s CS-100/300 aircraft are nearing the p0int where the first test aircraft will be taking flight in a few months. Last week, an unveiling of sorts took place to show off the aircraft which, up to this point, has actually stayed on time more than most aircraft being developed today.
I had a few thoughts on what I have seen and heard so far. Wow, that aircraft is big compared to anything made by Bombardier before. It doesn’t look like a regional jet, it looks like a mainstream jet with mainstream intentions.
Apparently Bombardier has been running around and promising potential buyers that they can make the aircraft a little longer and manage to cram in as many as 160 seats on the airplane at 28″ seat pitch. This is sold as feasible because a rather large executive with Bombardier can “fit” into these seats they are planning at that pitch. I would like to point out that even I can fit into such a situation. The real question is whether or not I will willing subject myself to such a seat pitch. And do we not recognize that a Bombardier executive might just have an incentive to say it’s a dandy thing to experience?
Consider that the plan is to cram 160 seats into this aircraft which is 127 feet long and compare that to today’s American Airlines MD-82/83 aircraft which is 147 feet long and which has just 140 seats on it. Even if you lengthen the CS300 a touch (which they plan to do) it still doesn’t really get you where you need to be.
I have a feeling that Bombardier is already discovering that the CS-100 might be a touch undersized and that the CS-300 might need to be a bit longer at the cost of range as well. Both these aircraft nominally are capable of trans-continental flights in North America and I would argue that that range is just a hair too much for those aircraft.
This is a good looking aircraft and it sounds like it’s coming together very well on the whole and despite high use of composites. I would suggest that Bombardier get it built, get it in the air and start showing the economics to airlines quickly. There is no need to grow into Boeing/Airbus territory with this aircraft. Airlines will buy this aircraft if it can offer 110-130 seats with the same dispatch reliability as a Boeing/Airbus with the promised improved seat costs.
This is an airliner that AA, United and Delta all need in the domestic United States. This is an airliner that, if it proves itself, Southwest should be looking at as well. Have faith in yourself and recognize that until you can show people that this airliner meets or exceeds promises, there will be some skepticism. Bombardier is entering new territory here and it needs to remain confident in itself in the meantime.
Several days ago, I wrote about new Southwest Airlines CFO Tammy Romo making comments about perhaps putting restrictions and/or fees onto the Wanna Get Away fares of Southwest. Today, I was told that she also was asked at the JP Morgan Conference if Bags Fly Free was an essential part of Southwest’s brand and her answer was “no”.
I disagree vehemently. Not only has it been an acknowledged huge revenue driver for Southwest Airlines, it is the component that keeps Southwest Airlines on the right side of “customer friendly” as a brand.
Get rid of this feature and you have just lost the ability to distinguish between Southwest and the other members of the Big 4 going forward. And I think CEO Gary Kelly knows that.
So is CFO Tammy Romo going rogue in the attempts to drive policy and make a name for herself? I might expect that of someone who was new(ish) to the company but Romo has 20 years with Southwest.
So is someone sending a trial balloon up to see how both customers and analysts react to the idea? This isn’t really SWA’s style but I suppose anything is possible.
Or has crazy broken out at Southwest Airlines and we’re about to witness the demise of greatness?
William Swelbar has a white paper posted on his blog about small community air service and the merger of American Airlines and US Airways that has inspired me to some thoughts. The essential point (of interest to me) among his many well thought out points is this: It isn’t the LCC carriers that provide this service. It’s the network carriers that do so and we have lately denied that air service through slot divestitures to LCC carriers.
On the one hand, he’s entirely right. On the other hand, I question who “deserves” air carrier service in today’s world. My own view of the history behind this is that there are cities where such service is, in my opinion, not justified today.
Let’s not forget that small communities were originally served with some regularity in the past due to a few primary circumstances which are very different today.
First, fuel costs are monumentally more than they were even 20 years ago. Low fuel costs allowed for a competitive fare to these communities via available aircraft that just doesn’t exist today. Airlines are constrained by the fact that sub-50 seat jets are un-economical to use in just about any circumstance today and there are no desirable replacement aircraft in that category on the way.
Second, those many of those communities needed that air service because overland transport to major cities was very poor and even non-existent at that time. Today, we have not only a full major interstate highway system but every state in the continental US has an excellent secondary highway system. It’s difficult to find a place in the continental US today that is truly remote. In most cases, people are no more than 1 to 2 hours away from air service at the worst.
Third, we don’t encourage this service the right way. We do subsidize it under certain circumstances and do so for routes that, in my opinion, defy imagination as to why their subsidized. At least quite frequently. What we don’t do is subsidize industry to come up with a cost effective, profit earning solution to providing the service. Even airlines receiving subsidies today look at those routes and realize that even if they are earning a modest profit, greater profits can be earned elsewhere and they go to earn those.
I think we need a program that encourages an airplane manufacturer to come up with what I would call the Essential Air Service Airplane. This is an aircraft that require no greater than 500nm range fully loaded and no more than 30 seats and should travel at speeds comparable to ATR and Q400 aircraft. They should be ruggedly reliable for dispatch so that they do not strand themselves at outstations and they should be capable of rough weather service.
Survey the network airlines and ask them what such an aircraft looks like to them in definition. Create a government RFP for such an aircraft and contract the network carriers into committing to a minimum number of purchases and let the markets go to work. Frankly, I would like to see Bombardier and/or Embraer work this problem themselves because I think such an airliner has potential in places such as Africa, India and parts of Asia and Australia. Small and efficient can be very profitable if it is reliable. Look at Azul in Brazil and you’ll see just how that works out.
In these conversations, I pick on cities here in Texas like Waco quite often. Waco does not justify high frequency flights to DFW airport (and Houston Intercontinental) with 50 seat jets. It’s far too close to Dallas for that. But if you had a small essential service airliner defined above, that airliner could actually serve the frequencies that exist today as fast or, possibly, faster than the 50 seat jet and potentially with greater reliability.
Don’t build this aircraft with too much range. Keep it simple and constrained to true regional routes. It can’t be a mistress to the short haul, small community markets and also mistress to the long and thin markets.
Make it large enough to inspire confidence and I think we know enough about building such aircraft today that we can make it possible to walk an aisle in this aircraft without feeling like you’re crawling into a cave. Make sure it can serve these routes from hot and high locations such as Denver, Salt Lake City and Phoenix. That means some slats and flaps most likely but do not make this aircraft a STOL aircraft. The airports it would serve today are all adequate for a small aircraft configured to meet these needs with efficient wings. STOL aircraft sound great until you realize they are rarely needed but they always have the penalty of being built with draft that can’t be avoided.
If I’m Embraer or Bombardier, I would look to build this aircraft in Wichita, Kansas. There is enough expertise there, enough facilities and I’ll bet that Kansas would be looking to make a heck of a deal on taxes these days. Use modern avionics but design it to be simple and easy to qualify on. Make it the airliner that future jet pilots start on. Make it forgiving which will help some in making it rugged and reliable. Use as many Commercial Off The Shelf components as possible and go to Garmin to build your flight deck instead of going with a pricey system from someone else.
Make it so that a network airline and/or regional airline can purchase this aircraft and operate it profitably with oil at $130 / barrel right from the start. Offer loans at low interest rates to ensure capital costs are low enough to be attractive to these same airlines. Get airports to offer low cost fees for using such airliners to their airports. Convince those same airports that these airliners are their future and not their shame. Keep the jet ego out of this conversation.
This airliner can be built and it can be profitable for the manufacturer and the operator. It needs a sponsor and while I readily admit that it might not offer as much net profit as a 737 sold at list, just how many of those 737s do we think are selling for list prices anyway? It is entirely possible that Boeing and Airbus are now making profit on lease deals rather than on the sale of an aircraft.
This aircraft needs someone of vision and leadership to see it done. That person needs to be able to go to 8 to 10 airline heads in the US and convince them that not only can it be done in a timely manner, it can be done cost effectively as well. Those guys still exist but they are a bit harder to find. And it doesn’t have to be Bombardier or Embraer either. This could be Cessna or maybe even the new Beechcraft. Maybe it needs to be a partnership between the two companies. Partnerships have been very good in some instances. I point to the GE/SNECMA relationship as just one example.
Airlines are dysfunctional organizations. You won’t get them to provide that air service by offering them the chance to break even or make a modest profit. They won’t necessarily band together and ask for a new airliner either. But if you deliver that baby on their doorstep, they just might adopt it and call it their own.
When Lan of Chile and TAM of Brazil decided to merge and form the LATAM group of airlines, they were told to pick one alliance to be a member of by regulators. Those reading tea leaves gave the nod to Oneworld and mostly because Lan is really the “leader” of that merger.
I thought so too but I couldn’t prevent that nagging feeling that the Star Alliance might choose to pull a rabbit out of the hat with incentives. These days, you never know. Think back to when JAL was considering defection from Oneworld. Delta Airlines made an offer that seemed almost certain to pull off the unthinkable and bring that airline into Skyteam.
But American Airlines and Gerard Arpey and Oneworld sweetened their deal with JAL and everyone breathed a sigh of relief.
I’m fairly sure that American Airlines went to work with LATAM too. It’s an essential component to the current success that AA enjoys in South America. With this decision completed, it’s time for someone to get busy on finding a better China partner and it wouldn’t hurt to figure out how to bring QANTAS back into alignment with the interests of Oneworld either.
Maybe Tom Horton can work that for Doug Parker over the next year.
I found a blog entry on an Australian airline blog called Plane Talking that, I think, has found an important discrepancy in Boeing’s PR campaign for the 787. As someone who actually works for an Aerospace Company, I wanted to explore things a bit more. Boeing’s Commercial Aircraft President Ray Conner has been saying “Boeing has compiled 200,000 hours of analysis and testing on what might have gone wrong and how to prevent it from happening again.”
A significant portion of my own job is to manage resources on engineering efforts. 200,000 hours of engineering effort would translate into an effort that would ordinarily executed over 2 to 4 years and by roughly 30 to 40 engineers. That is a non-trivial effort. Let me re-state the facts: 200,000 hours of engineering time would translate into a project of about 3 years consuming from 30 to 40 engineers.
So, how did Boeing accomplish all of this in just about 1 month? Let’s assume that engineers worked 7 day weeks and 12 hour days for about 1 month. That would mean about 560 to 580 engineers attacked this problem over the course of a month to find, analyze and suggest a strong interim fix with testing behind it in just one month.
Sorry but there is no way that Boeing stood up between 500 and 600 engineers virtually overnight to attack that problem and have a solution. It would take Boeing a weeks of meetings to allocate that many engineers to such an effort. So either 200,000 engineering hours haven’t gone into solving this problem or, if they have, they started a long time ago long before the battery problem was highlighted by two incidents days apart.
Each time two airlines merge, there are Great Debates on competition in the marketplace among airlines and those debates usually start in Congress and among pundits for the airline industry. It’s a valid concern but there is something that gets ignored in the debate.
Airlines are presumed to be competing openly in perfectly competitive markets throughout their business structure. They are assumed to be gaining some advantage through ownership of fortress hubs but we know that such fortress hubs are not always as “fortress-like” as we might believe.
With so much emphasis on airline competition, I do wonder when we focus on another part of the competition equation in the airline industry. That would be airports.
We do very little foster competition at most airports even when there is a demonstrated desire by an airline to enter a marketplace and lower fares. In fact, many airports simply do not cooperate nor do they ask for cooperation on the part of existing airlines to bring in new airlines except when that airport is a ghost town (think Pittsburgh).
American Airlines has more than 80% of the traffic in and out of DFW airport these days and will be approaching 90% after its merger with US Airways. This airport won’t get scrutinized by regulators because there is nominally some gate space available for airlines to use.
Consider this: American Airlines effectively controls 4/5ths of DFW airport today. It has full control of 3 very large terminals (A, B and C) and effective control of Terminal D. The only terminal it doesn’t control is Terminal E, the least optimal terminal for an airline to operate into and out of. And by far the terminal most in need of a refresh (it’s getting that now and that is long overdue.)
But what if an airline would like to start substantial operations at DFW? Is there space today? Not really. It would be possible to find two or three gates at best and that doesn’t not exactly invite airlines to enter the market. If airlines want to share space, they can but it’s up to them to figure out how to do it.
Will DFW build a new terminal for new entrants? No, not without a very substantial commitment from an airline to help pay for those facilities. Yet, without new space and flexibility, DFW can’t begin to hope to add new airlines except on a small, ad-hoc basis.
That new terminal space is exactly what would attract more competition into this airport. People wonder why Southwest doesn’t give in and use DFW but this is one very big reason why: DFW actually can’t provide adequate gate space for a substantial operation run by Southwest . Consider that for a few minutes. . .
Competition isn’t just controlled by airlines, it’s controlled by those operating the airports. Those airport boards feel very beholding to large incumbents and often do not accommodate anyone else due to unspoken (and sometimes not so unspoken) threats by those owning the fortress hub.
Take a look at how United (Continental) Airlines treated Houston after it allowed Southwest to build a 6 gate international terminal at Houston Hobby. It was unseemly and unwarranted.
If you want more competition, you have to make it possible for new entrants to gain a foothold in a market and you have to make it possible for them to grow a little too. I realize (and so does everyone else) that there are a few airports where that has to be governed a bit differently such as NYC’s La Guardia and JFK and Newark Airports. In fact, those are about the only places where it has to be done a bit differently. Everywhere else things could be done more attractively and more efficiently than is the case today.
The Dallas Morning News Aviation Blog has a story about new Southwest Airlines CFO Tammy Romo indicating that Southwest would be looking to tighten up restrictions on the Wanna Get Away Fares that are Southwest’s most affordable. This occurred at the JP Morgan Chase Transportation & Defense Conference and one questioner indicated his own experience with these fares and the fact that he was asked for no additional money to change a ticket. Surprise was expressed that there was money being left on the table as he was ready to pay a change fee and found there was none.
Now we are getting into dangerous territory for SWA in my opinion. First, while there is no “fee” to change a ticket, it’s often misunderstood that a change in the ticket results in no extra cost. That’s not true. The user has to pay the difference in fares and that often can be considerable.
Second, change fees for such tickets will never be a big revenue driver but they can be a huge discriminator when it comes to adding customers. It’s like the bag fee thing only better. If I were Southwest, I would advertise the hell out of this and drive more traffic my way.
Third, Southwest perhaps should look at every time it has in place today but that doesn’t mean it should change every item in place either. Should Wanna Get Away Fares be restricted? Probably to some degree. I would say that charging a $25 fee to change a ticket would be of no real impact to Southwest but at the same time add incremental revenue where it would be appropriate to add incremental revenue.
But I would also be very careful of letting analysts drive my focus in these areas. Analysts are paid to find anomalies in data and point them out. They are not paid to quantify intangibles. Southwest’s success is based a great deal on the intangibles that the airline offers and I would be very careful not to corrupt that perception. Furthermore, just because a very well paid people earning considerable 6 figure salaries are willing to pay change fees does not mean the consumer of Southwest’s services is willing to pay these.
Southwest’s advantage is in delivering a high value experience. Every fee is potentially an item that diminishes that value.
Consider this market landscape that we should see, in fact, by the end of this year:
Delta Airlines
United Airlines
American/US Airways
Southwest Airlines
Those 4 airlines will carry about 85 to 90% of airline traffic in the domestic United States airline market. Of the 4, 3 of those airlines will use regional airlines for “feed” to their hubs. The bulk of those regional airlines will still be using many 50 seat regional jets (CRJ200/ERJ-145 aircraft) for those regional jet routes.
The original regional jets were built and meant for routes that were spokes to a hub from a region. For instance, those regional jets might serve cities such as Waco, Abilene and even Midland/Odessa from DFW airport. They still do today.
For those short, simple flights, there cannot be much quarrel with the airliner being used. (Well, there can but that’s a blog post for another day.)
But regional jets get used for routes that go far beyond a “region”. I remember that when I flew Continental from Dallas to Milwaukee, I had to take an ERJ-145 from DFW to Cleveland and then another from Cleveland to Milwaukee. It was a total trip time of 5+ hours in the air and that’s a bit much in those airliners.
Many believe that the new 70 to 100 seat regional jets are taking over such routes. Here and there, that’s true. There are presently 50 seat (or less) regional jets also flying routes such as OKC to EWR (Oklahoma City to Newark, NJ and 1325nm long) or Milwaukee to DFW (853nm) or Portland, OR to Ontario (Los Angeles), CA (838nm). Try Cleveland to Miami at nearly 1100nm.
It’s the Long and Thin syndrome. We can fill 40 seats a day on this aircraft and fly it for over 3 and sometimes 4 hours and earn money by feeding people into a hub that is as much as halfway across the country.
But just because we can, doesn’t mean we should. Those routes add incremental revenue but they are rarely stand-alone profitable for an airline. In fact, the one airline who is getting away from that mentality is Delta. A route gets evaluated for its ability to stand on its own two feet at that airline, more often than not.
Will there still be regional jets? Yes. Will there still be 50 seat jets? Yes. For the foreseeable future the 50 seat regional jet will be used. It will be used less and less and you won’t find another newer, more efficient 50 seat jet showing up to replace it either. Airlines will continue to use them if for no other reason than the fact that capital costs of a 50 seat jet will approach unheard of low levels as time goes by. If you can acquire a used 50 seat jet cheap enough, you can still make money.
And those aircraft are getting cheaper every month.
I think we’ll see them around for another 7 to 10 years but then I think we’ll see them replaced more and more with either larger mainline style regional jets or smaller turbo-prop regional aircraft.
There won’t be any such thing as a replacement for those first generation aircraft.
