Last week, Delta CEO Richard Anderson made the comment that there was no apparent effect from the government shutdown on airline business.  While the effect was not immediate, I truly think we’re going to see some down times (again) for the airlines in this country.

Economic uncertainty leads people to defer purchases, travel and seek alternatives to face to face meetings in business.  We have seen this time and time again.  Corporate America’s reaction to the 2008/2009 economic crisis shouldn’t be forgotten by now but it seems to be.

The shutdown introduces uncertainty about our future.  Economies aren’t just driven by the stock price on Wall Street or the unemployment numbers calculated by the government.  They are a kind of living, breathing creature.

And not a smart creature either.  Economies tend to be dumb and emotionally reactive.  They are not nuanced and subtle and they do not act with patience.  One would like to think that they reflect the whole of those participating in them but they don’t.  They just don’t.

So, when uncertainty from a government shutdown is combined with the uncertainty and growing fear that a failure to raise a debt ceiling introduces, I do worry for the industry.

Creatures that are kind of dumb and reactive don’t do well when Congressmen who are veterinarians by trade start making statements that they have “read a lot” about the economy and believe that “nothing will happen” if the nation defaults on its debt.

No, it isn’t emotionally upsetting to anyone when the most financially strong country in the entire world defaults on its debt.

Anyone who wants to vote Congressman Ted Yoho out of office for saying things too stupid for Congressmen to say is welcome by me.  The alternative is that Florida should get exactly what it asked for in electing such person to that office.  Your choice, Florida.  Make it soon.

Congressman Ted Yoho – He’s read about economy and knows what’s best for the United States photo from Wikipedia

Business travel is one of those expenses companies very quickly act to restrain when uncertainty or hard times come about.  You can bet that CFOs and CEOs are already instructing people within their company to curtail expenses, especially travel.

Because in times of uncertainty, it’s best to hold on to what you have as tightly as possible.

The political stalemate over the shutdown and the debt ceiling is going to be the undoing of 2014 for the United States left to continue much longer.  Whether you approve or disapprove of the Affordable Healthcare Act or not, that piece of legislation was not the law to fight over and put our country at risk.

I personally think that there are far greater issues that could have been debated over than whether or not greater healthcare coverage for all in this country was a good or bad idea.

I also think that the failure to acknowledge that a great deal of our debt resulted from an economic crisis of global proportions and which originated from a fundamental failure to properly oversee and regulate financial markets is egregious on the part of both houses of Congress.

What happened in 2008/2009 wasn’t ordinary by any stretch.  Entire industries which are huge i this country were literally at stake.  Extraordinary times have extraordinary consequences that take time to get past.

It’s beneath the dignity of this country to threaten shutdowns that hurts its businesses and citizens and it’s beneath the dignity of this country to threaten default on debt simply to force a change in a law.

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Richard Aboulafia has written a scathing criticism of Boeing’s loss in his October newsletter which finds that Boeing’s management lost a contest which was entirely Boeing’s to lose and that’s not nothing.

Particularly when it comes from Aboulafia.

Aboulafia criticizes Boeing for much the same things I did just 2 days ago and the only notable part of that is that it is easy to make that criticism at this point.  The evidence has become obvious.

Next up is what will Boeing do to keep ANA in the Boeing fold?  If this were Boeing in even the early 2000’s, I would bet on them finding a way to keep ANA in the 777-X.  A deal would be made and a crisis averted.

I think the fight for ANA business will be epic and I think Airbus’ John Leahy will be smirking at Boeing in a very justified way.  Leahy and his team have spent 3 years taking a par product and a company that is simply executing in an acceptable manner and parlayed that into big wins.

There used to be one thing I would identify as the key to Southwest Airlines’ success.  They did exactly what they said they would do.  They didn’t promise sunshine and roses and the world’s greatest experience onboard their airplanes.  They simply promised to try hard to be nice to you, try hard to get you where you are going on time and to do it at a price that struck most as reasonable.

Southwest made no extraordinary achievements in winning its very loyal customer base.  It performed no superhuman tricks to beat its competitors.  It didn’t even promise a reserved seat and it still won.

That’s what Airbus is doing.  They’re winning with a management that is merely setting reasonable schedules, designing reasonable aircraft and doing it all with no great promise of huge advancement.  They doing what they say they are going to do and the airlines are noticing.

The question is . . . has Boeing noticed that?

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The Transport Workers Union represents thousands of employees of American Airlines and US Airways (and several other airlines such as Southwest where they recently had an odd scene go down as well).  This union is under new management and they’re just itching to get in the way of themselves.

Most recently, the TWU filed to become a party to the lawsuit the DoJ has filed against the merger of American Airlines and US Airways.  The technical term is intervenor and it means that they want to become a part of the lawsuit as the plaintiff or defense.  In this case, they wanted to be the defense.

US Airways and American Airlines both filed objections to that stating that, in this case, the TWUs interests were fully aligned with the airlines’ and therefore didn’t need representation.  The DoJ objected as well.

The truth is that no one wanted them at the table because who needs a union coming in late to the party on an accelerated court schedule?  Who wants an airline union showing up to be involved in such a lawsuit under any terms.

No one.

So now the TWU wants to be an amicus to lawsuit so it can file it’s opinion.  This is likely to be granted as several other parties are already “interested friends of the court” in this trial.

The TWU has been under fire from other unions.  Most recently, the Teamsters attempted to grab a good portion of their membership away from US Airways and American Airlines and they barely fought them off.

It’s feeling threatened and insecure and its leadership wants to show it can play with the big boys.

The thing is, it can’t.  It can’t even keep its membership all that happy despite a very good deal negotiated for them in the merger.  The TWU is a hot mess and needs to go get its own house in order instead of interfering in issues it has little grasp of.

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Airbus has managed to land an order from JAL for (18) A350-900s, (13) A350-1000s and another 25 options for the A350.

This from an airline which operates the 787-8 and 777 and which has a decades long relationship with Boeing.  This isn’t a shot across Boeing’s bow.  This is a cannonball going through the hull with water spilling into the engine compartment.

JAL is burned by the 787 and is under the control of entrepreneurs who want operational success more than a good deal from Boeing.  Boeing has had years to take care of JAL as a customer.  Even looking in from the outside, JAL appears to not have been given any more consideration than the average Boeing customer.

And the 787 is a pain in the ass to its operators.  Yes, some operators are being overly dramatic but let’s not ignore the fact that not a single operator is publicly singing the praises of the 787 yet.  Not a one.

If there was such a thing as a safe Boeing customer, it was JAL.  This is the signal moment where everyone realizes that Boeing is not only vulnerable in the marketplace, it’s declining.

Boeing had a chance to kill Airbus with the 787 and lost that chance to a 4 year production delay.  Even if you consider all the old-time Boeing people cautioning that the airplane needed to be birthed in its own time, 4 years is one hell of a long delay for a company that, you know, is supposed to know how to build aircraft.

Boeing had a chance to throw Airbus onto the ropes of the ring by announcing an all new 737 replacement family that would cover from 737-700 to 757-200 seating options.  Instead, Airbus won the hearts and minds of airlines with a warmed over redesign of the A320 aircraft.  Boeing had to respond with an aircraft that doesn’t win many hearts and minds of any airline.

Boeing even had a chance to badly hurt the A350’s sales by announcing a 777 upgrade or replacement and, instead, dithered along until that was a bit late as well.

Boeing chose to build the 747-8i on the idea that Boeing had customers that would buy Boeing no matter what.   They built an aircraft that in the hearts and minds of customers was 40 years old.  That was refreshed some but which really didn’t fit a need.  They followed the idea that Boeing customers will buy Boeing and since the 747-8 is a Boeing product, it will work out OK.  Billions of dollars have been wasted on that aircraft as well as the time and energy of good engineers.  Imagine what would have happened to Airbus if Boeing had focused those resources on a full 737 replacement instead.

Boeing is losing this game.  It’s losing the game to Airbus and it is going to start losing its game to Bombardier.  Warmed over designs and delay in taking the next bold step is killing that company in ways that will be painful to watch.  This is the legacy of McDonnell Douglas and this is exactly how McD lost the game against Boeing and Airbus.  Exactly how it was lost.  There are no real differences here.

Apologize for Boeing if you want but before you do . . . name one strong decision that yielded immediate and positive results for Boeing in the last 8 years.  Just name one.

I’ll wait.

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United Airlines has announced routes into the fortress hubs of Delta just days after Delta announced flights into UA fortress hubs.  United is adding routes from both Los Angeles and San Francisco to Minneapolis / St. Paul and Atlanta.

Delta previous announced routes from Seattle (which is nearing “hub” status for Delta) to Los Angeles and San Francisco.

First, Los Angeles is actually no ones hub but it is a strong focus city for all.  Los Angeles serves as a major gateway city for airlines and just like New York City, everyone wants to be dominant there.  A few years ago, American Airlines spoke of Los Angeles being a part of its “corners” strategy.  More recently, Delta has been building its operations up there.

Los Angeles won’t be anyone’s hub because it isn’t suited to such operations.  It will, however act as a gateway city with significant focus city operations just as New York JFK and Newark airports serve the same role in that area.

There is a lot of first class and business class traffic in the Los Angeles area and everyone wants a larger piece of it.  Delta is ready to battle it out with United in that market and United is responding.

The two SuperLegacy airlines will trade more and more blows with each other but neither will gain advantage much over the other.  However, both will gain advantage over the smaller airlines in those markets such as American Airlines, US Airways and LCC carriers.

The one airline who can hold their own in those cities is Southwest Airlines.  They are the equal of UA and Delta from a domestic point of view.

These route announcements are just one more sign of the power the two largest airlines both have and which they will wield to gain advantage in the marketplace.

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Unions, particularly American Airlines’ APFA, are now putting pressure on other attorneys general in Florida, Virginia and Arizona to also engage in a settlement on the lawsuit filed by the DoJ.

So far, each is resisting.

I think that will change, perhaps.  Florida really hasn’t got a big stake in this lawsuit and their attorney general may feel the exceptional voice of APFA out of Miami in a short time.  Politically speaking, it’s not wise to go against pay raises for airline employees.  They come so infrequently that it is a major hot button.

Virginia is going to hold its position, I think.  But mostly because they do have a stake in air fair prices at Washington Reagan National.

Pennsylvania is exacting revenge on US Airways for what happened in Pittsburg, in my opinion.  That is a mistake as it could strongly affect how the merged American Airlines will treat Philadelphia in a merger.  But I think there is a deal to be had here and I think that this deal is Doug Parker’s to make.  The deal is to retain Philadelphia as a hub for a certain number of years with a minimum number of flights to be maintained.  Is that a problem?  No, that’s a good hub for US Airways and it should remain a good hub for the merged airline. It costs little to make that deal.

Arizona is protecting its stake as well and this time its with an attorney general who has a less than steller reputation.  The Arizona AG may well find exceptional political pressure applied here too.  Why?  Because pilots and flight attendants for US Airways are desperate for a pay increase and there are one hell of a lot of pilots and flight attendants in Phoenix.

Will the merged company retain its hub in Phoenix?  I think it will.  It has never been practical to operate a hub in Los Angeles or San Francisco.  Delta operates a profitable and beneficial hub in Salt Lake City.  United has Denver and Dallas is too far from the West Coast to be well positioned.  I think Phoenix stays although in a revised configuration.  Again, this is Doug Parker’s domain and he and his team should begin applying pressure and working with their unions to achieve a deal here.  I actually don’t think that the Arizona AG will  mind smiling and reversing his position if he sees his political fortunes dim with pressure.

Tennessee is just mad.  It’s mad about Memphis and that AG is actually politically isolated.  There is no deal here, in my opinion, but I also think their opinion and participation amount to nothing in the lawsuit.

Time will tell but right now the lawsuit proceeds, deals are being made and the US Department of Justice has little maneuvering room at present.  The DoJ will say that the fight is in the courtroom and isn’t a popularity contest.  They would be right about that but when your support abandons you over time, few people want to go into a courtroom and be your friend.

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Southwest Airlines has terminated the captain who flew the 737 that was crashed at La Guardia airport some months ago.  This was done, according to SWA, after an intensive internal review of what happened.  The First Officer flying that day is being re-trained.

The Southwest pilots union has expressed their disappointment at the termination in such a way as to make me believe they barely found enough energy to do their unionly duties and object to a pilot’s termination.  In other words, I think the union really didn’t mind this one.

Southwest and Southwest’s pilots have exceptionally high standards and these guys work very hard to be the best of the best in their business.  By all accounts, they don’t tolerate fools.  It sounds like they don’t want to tolerate this one and that’s OK.

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Once again, it is rumoured that KLM-Air France may be in the running to merge with Alitalia of which it already owns 25%.

Once again, Alitalia is unable to financially succeed on any level despite its own government propping it up in anyway possible.  This is an airline given every advantage in its marketplace and which still fails regularly.

Italy is already posturing itself to show what an outrage it would be for a flag carrier to be taken over by French and Dutch.  But this time those who have money in the airline have signaled that they may find Air France-KLM to be attractive enough to be worthwhile.  Curiously, it was those same people who “rescued” Alitalia from Air France-KLM’s hands.

The merger will probably happen.  It probably will result in the Italian government wringing its hands mightily and trying to extort concessions like guaranteed full employment for all the Alitalia employees for the next 10 years.  Something silly like that will be demanded.

It won’t happen.

The difference this time is that Italy is in a very precarious financial position and has a particularly weak (OK, weaker than usual) government.  It won’t be able to stand up to powerhouse participants in the EU such as France and The Netherlands.  Countries that currently provide a fair degree of solvency to Italy.

But that doesn’t stop me from wanting to plead “Dear Mother of God just complete this merger and erase Alitalia from our memories for once and all time.”

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Norwegian Air Shuttle has had a giant fit of impatience with Boeing over its inability to pound their 787 aircraft on a daily basis.  Accordingly, Norwegian has returned at least one 787 to Boeing claiming its unreliable.

Norwegian’s CEO is notoriously outspoken and the airline likes to drive its aircraft like any good LCC carrier would.  Hard.

Can the 787 be operated the same way a 737 is?  I actually think not.  And certainly it would be unwise for an airline to do it so early in its operation of the aircraft.  It takes time to learn a fleet and understand what needs to be done to keep the airplane flying.

What needs to be done to keep a 737 flying is well known.  What needs to be done to keep a 787 flying is still somewhat unknown.  The 787 will be able to keep a hard schedule in the future but today . . . not so much.

As much as I think Norwegian is being overly critical and dramatic over this aircraft, I also think that Boeing continues to have an engineering problem with the aircraft.  That is that they continue to fight fires and continue to miss quality control as a part of the process.  That was understandable at one time but it’s 2013.  This aircraft has been flying for some time and, more importantly, has already experienced several critical problems.

It’s time for Boeing to get a CEO in place who understands what it means to deliver a product to customers that customers both want and can use.  Right now, the 787 is what the customers want but they can’t use it yet.

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Frontier Airlines has been purchased by someone new and the world has barely noticed.  Republic Airlines is selling its Frontier subsidiary to Indigo Partners for $36 million in cash and $109 million in debt assumption.

Indigo Partners is headed by Will Franke, a founder of America West and most recently involved with Spirit Airlines.

Indigo Partners will focus on completing the transformation of Frontier into an Ultra Low Cost Carrier which it has most recently done with Spirit.  If you think Spirit Airlines was aggressive, I expect Indigo to force even more aggressive behavior into Frontier.

Will it work?  On some level, I think so.  I think it will be a long while before we see an airline such as Spirit or Allegiant, however.  Frontier has to divest itself of its bases and reorganize itself into greater point to point flying.  It also must find that high density sweet spot that is so necessary for.

Frontier flies 138 seat Airbus A319 (it also flies the A320) and Spirit flies a 145 seat A319.  In general, Spirit flies with even less seat pitch than the already now constrained Frontier flies with.

The market for ULCC carriers in the US is limited.  I think there has been some growth but the idea that ULCCs will explode across the country is somewhat silly to me.  The distances that are flown here compared to Europe where ULCCs do thrive is considerably less.

It’s a lot easier to tolerate a 29″ seat pitch when your flight lasts an hour on average.

Frontier will likely survive and succeed and I put that prediction out there based on Indigo Partners’ success in investing in these kinds of airlines.

Hardly anyone noticed the announcement though.

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2nd Update:  The Judge in this lawsuit has also decided that the Department of Justice won’t get its requested stay and has to litigate the case on time.  It’s not a good day for those serving as plaintiffs in this case.

UPDATE:  Greg Abbott has announced a “settlement” in which the Great State of Texas will get what it wanted by legal agreement.

In other words:  American Airlines put in writing the promises it has already made long prior to the lawsuit nonsense.  AA will continue to serve 22 communities in Texas for at least 3 years.

The fact that the press conference was held at American Airlines facilities speaks volumes about this “settlement.”  I would imagine that AA just barely let him call it a settlement for face saving purposes.

The Dallas Morning News says:  “Abbott denied that political considerations played a part in either joining the lawsuit when it was filed Aug. 13 or deciding to withdraw now.”

(more…)

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