There have been two airlines hamstrung by scope clauses in particular over the past 10 years.  First, American Airlines which has been restrained significantly by its pilots with respect to what kind of flying its subisidiary American Eagle can do.  Second, Continental Airlines pilots held a death grip on the company by keeping a 50 seat maximum scope clause in place as well.

Now, with American Airlines bankruptcy filing and the combination of United Airlines and Continental Airlines, scope clauses are going to be massively changed.   The United-Continental merger was, in many respects, an opportunity to redefine that scope and there is no doubt in my mind that the parts of United being retained are in part to bolster the case for supporting the loose scope clause that United enjoys over the tight scope clause that Continental suffered under.

Seniority integration between UA and CO is a hot button and CO pilots don’t want to give up the scope clause.  UA pilots kind of like the way that scope clause looks and so are working with CO pilots to stir up trouble.  Ultimately, a single contract will likely continue to enjoy a loose scope clause if it isn’t even looser as a result of the merger.  In other words, expect a whole lot of flying for United to be done by regional airlines that isn’t very “regional” in nature.  That’s good news for regional airlines . . . perhaps. 

At American Airlines, you can bet that they’ll work very hard to eliminate scope clauses limiting flying and they’ll work even harder to lower pay rates for smaller aircraft due to enter the fleet such as the A319.  Pilots won’t have much choice but to accept those changes or they’ll face an airline unable to survive or so massively cut down in size, layoffs will be plenty.  They’ll want to preserve jobs at the expense of controlling scope, is my guess.

With these changes in scope clauses, the competitive landscape for regional airlines will change.  American Eagle will likely go from being not much threat to being quite a bit of threat.  Pinnacle may well file for bankruptcy and, if it does, it will lower its costs and shed unproductive fleet quite a bit.  I think there will be plenty of flying available for them to bid for but I think it will be at costs significantly lower than what they’ve been enjoying. 

That begs the question of whether or not regional airline flying can survive much.  I don’t think regional airlines will go away but I do think we might see more consolidation before things are over.  One thing that has prevented a fair bit of consolidation is the patchwork roadmap of scope clauses that have choked airlines so much over the past 10 years.  With those gone, reasons for maintaining so many regional airlines kind of evaporate.  Some will die, some will be bought and some will grow. 

Whether or not it regional airlines can fly profitably is yet to be seen.  Legacy and SuperLegacy airlines still need the regional airlines and they’ll need them more going forward if they’re to find the network feed necessary for their hubs.  But given the restructuring they’ve all gone through, will they need to farm it out or might it be more attractive to keep it “in the family” going forward.  If I were a CEO for a regional airline, I would be predicting a very stressful 3 years ahead of me.

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There are rumours that Delta Airlines and Texas Pacific Group (who has extensive airline experience) are working on offers to purchase AMR, holding company of American Airlines.  Rumours that are reported in the Wall Street Journal.

It’s possible that Delta is preparing an offer but I remain fairly skeptical that they are serious about this since such a purchase would form a SuperSuper Legacy airline that would far exceed any other airline in size.  Furthermore, I’m not sure I see how Delta benefits as much from AA’s network given its already extensive network within the United States. 

Internationally, Delta already flies to more diverse international destinations and doesn’t need anything AA has to offer in terms of access.  It certainly doesn’t need or want access to the Oneworld partnership either. 

Regardless, I’ll concede that it is possible that Delta is doing work to see if it thinks it can buy AMR.  I also believe that anti-trust attorneys will point out that the likelihood of such a purchase is only made possible if Delta were prepared to give up substantial market presence in some key cities.   Cities such as New York City, for instance.  Giving away that piece of the pie would greatly reduce the value that AA offers an airline such as Delta.  Furthermore, it doesn’t enhance competition or the consumer experience one iota.  I don’t see it happening for Delta.

TPG, however, does feel a bit more viable.  It was formed by David Bonderman who had great success with its Continental Airlines buyout although it also didn’t do too well with its passive investment in Midwest Airlines.  It’s one of the few investment companies that sees potential in airlines and who has made significant attempts to enter back into that business. 

Why would TPG want an American Airlines?  Because it can do what the present AMR board of directors cannot:  change the leadership, change the business model and potentially earn a good return on investment.  The AMR board would have to admit it was wrong about a lot of things in order to reverse course and make such changes.  That’s unlikely. 

If that is TPG’s analysis, they’re likely not wrong.  The scale of operations that American Airlines has is opportunity alone.  The new fleet coming on board for the next 10 years is also similarly good.  AA also has a good network that could earn significantly better revenue that it does now.  What it takes to do that is bright and shiny new executive leadership.  TPG can lure such leadership.

The main issue for TPG, I think, is can it swing the purchase alone or does it need a partner?  I suspect it needs a partner and partners dilute the vision quite often.  If TPG is able to find partner(s) and it’s able to be the managing partner, I would say such a purchase has some fair opportunity of being a successful investment. 

I also expect that the present AMR executive leadership and board of directors will resist such a purchase adamantly.

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The Dallas Morning News Airline Biz Blog has THIS entry about a reader question regarding American Airlines’ management and its board of directors.  Journalist Terry Maxon explains that AA’s board of directors is full of people with a long tenure and who are reluctant to “fire” the management as it would reflect upon them.

I don’t disagree with his analysis whatsoever.  To the contrary, it is the conundrum that many companies face in AA’s situation.  However, let’s refer to the definition of insanity for a moment:  Doing the same thing over and over again and expecting different results.

No one representing the shareholders (aka the board) is challenging the management (aka the CEO) to do better and to do things differently.  Yet, that’s exactly what American Airlines is in need of.  A better plan than a focus on its existing hubs that are under attack by leaner and meaner Super Legacy airlines.  It’s also in need of a management team that has a better chance of earning the trust of the employees.

The truth is, Tom Horton may or may not be the right guy.  We really don’t know that yet.  What we do know is that Tom Horton and the rest of the team are a part of a team that has existed at American Airlines in one form or another since the late 1990s.  That would be the team that has not succeeded in any real and measurable way but which has managed to simply maintain the status quo far longer than anyone imagined.

There are a number of talented CEOs out there and available to run an airline such as American Airlines.  I’ve already more than once expressed my thoughts that the executive team at US Airways could, in my opinion, do wonders for American Airlines.  But there are others who understand that the game has changed and that the game requires an entirely different thinking to succeed in what is by any standard a very anemic economy.

American has got one chance with this bankruptcy reorganization.  It’s not just about lowering costs (although that is a significant part of things).  It’s also about improving revenues and improving the profits as a result of those revenues and that’s something that hasn’t been going on at American Airlines for some time. 

Improving revenues is going to be done with more innovation in things like cabin service, routes and partnerships.  It may even improve with more de-bundling of services and different seating.  To get that innovation in place and earning money as American exits bankruptcy is going to require someone working on that now.

Instead, the perception is that American Airlines is actually focusing on who it is going to pay for aircraft and who it is going to leave with empty hands as a function of removing aircraft from its fleet. 

In addition, to succeed, the employees will require more motivation and leadership than they’ve seen in the last 15 years.  It won’t be easy for the airline to succeed existing bankruptcy without employees who are motivated to see it succeed.  Leadership and management aren’t the same thing.  The executive team is actually very, very good at financial management.  But it is very, very poor at leadership.

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2011 wasn’t the worst year for airlines and 2012 won’t be either.  Instead, I think we’ll see more of the same in most respects.

Airlines will continue to constrain their capacity and that will show more discipine than I thought they had 3 years ago.  They’ve proven me wrong and I think the results are too good for them to not to continue over the next 12 months.

Fuel costs will continue to be a difficult thing for airlines to manage.  There will continue to be volatility but I don’t think we’ll see anything like 2008/2009.  The financial crisis in Europe will reduce some demand on oil but I see no real economic growth in any part of the world that will drive demand either.  The truth is that the emerging economies are largely dependent upon demand from both Europe and North America and neither of those economies will see high growth in 2012.

Airlines will continue to make large orders for more fuel efficient narrow body aircraft.  This only makes sense as the gains are more than enough to justify the purchases and now is the time to gain an advantage in bargaining with both Boeing and Airbus.  Furthermore, airlines need to hedge against their labor costs which will only grow over time.

Aircraft manufacturers have a much more sure path for the next 10 years now.  Boeing will be biding its time on improvements to the 777 until it sees more definition of the A350-1000 and it will throw its resources into ramping up 787 production, 787-9 development and 737MAX development.  It’s possible that we’ll see a real 787-10 announcement in 2012 but, if so, probably not until the latter part of the year.

Airbus has to get its act together on the A350 and try very, very hard to prevent too much schedule slip.  Despite its efforts, I think we’ll see more schedule slip and it won’t reveal the entire picture as that unfolds.  While I don’t expect quite the same delay as the 787 saw, it will be a significant delay and it will impact Airbus.  They’ll also try to flog the A380 as much as possible and may even succeed with small orders in parts of the world it hasn’t penetrated much to date.  I do not see any US based orders for the A380.  Furthermore, Airbus made some big promises for the A320NEO and it’s got to work hard to deliver on those.  They’ve made it out like the A320NEO is a no-brainer for development and while it is an incremental improvement, the engineering to deliver is non-trivial.

Bombardier will work its tail off to sell more of the CSeries and I think it may even succeed.  The sweet spot its lineup offers will become more attractive to airlines once they see Bombardier actually perform in the development and test of this aircraft.  The CS100 isn’t the attractive aircraft but its the one that will fly and deliver first.  Once the performance of that aircraft is established, I think we’ll see orders from US and European airlines come in large numbers.

Embraer has got a nice grip on the regional airliner business but it also has a problem in that, right now, there is no growth path into a larger plane for purchasers.  It has plans to work on re-engining the E-Series but I think they’ll concede the need to develop a larger airliner as well.  The Bombardier CSeries presents just a touch too much threat in the future. 

I don’t think we’ll see much from the other regional airliners being developed.  The Mitsubishi MRJ doesn’t feel quite right for airlines to me and doesn’t offer a growth path into a larger airliner.  The orders its racked up so far are fairly paltry and at risk, in my opinion.

The Sukhoi SuperJet, on the other hand, has a real chance, I think.  It’s Westernized, it’s flying and it does feel like its the right size.  The real challenge in this aircraft is ensuring support and with Boeing as a consultant, it may well have some help in that arena.  If it does succeed, that success will begin in Europe as well as for airlines of lesser developed areas such as the Middle East, India and the Far East.   If any orders come from the US, it will be years in the making.

If anything stirs in the US airline industry, I think it will be in the LCC arena and I think it will be small(ish) if anything.  I do not think we’ll see any legacy consolidation despite wishful thinkers for a US Airways / AA merger.  Something like that becomes much more likely in 2013.

I think American Airlines will plod through its bankruptcy in 2012 with a bit of scandal here and there.  I think its labor force is about to take a beating on wages and benefits and I think the resulting bitterness will last for years.   I also think that United and Delta will be growing a bit more concerned about AA late in 2012 once they have a picture of what AA’s cost structures are likely to be.

2011 was largely a “rebuilding” year for the airline industry.  2012 will be largely so as well.  Until the world economies recover, the best the industry can hope to do is manage its problems and earn a bit of money.  That’s eminently possible for them to do.

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World Alliances

I’m not sure we’ll see much in this territory for SkyTeam or Star Alliance.  They’ll continue to succeed and be smart in their attempts to gain more dominance in more parts of the world.  I think Oneworld is going to be smarting through this next year as a function of health problems at founding members American Airlines and QANTAS.  I also think that gaining the LATAM membership is not nearly as “sure” as they think it is. 

The Middle East

After ordering an insane amount of widebodies in 2011, Emirates will order another insane amount of widebody aircraft and beat up on Boeing about its 747-8i.  This has begun to feel like an addiction problem.

India

The airline industry in India has imploded and we’re just watching the mushroom cloud of debris settle.  For 2012, more explosions and more governmental heads will push even deeper into the sand.   Air India has already become the new Alitalia.

The Far East

Chinese airlines will order more aircraft and I expect we’ll see orders from them for 777s and A380s and possibly some A350s.  Not unlike 2011.  I don’t think we’ll hear about any stunning orders from that part of the world, however. 

China will tout its COMAC C919 even harder and most of us will try desperately to keep from laughing even harder.  Ryanair will back away from this aircraft quietly, I think. 

Japan will find ANA deploying more and more 787s on more and more routes with more and more success with that aircraft.  JAL will take delivery of its 787s and find that they not only work well for JALs needs but actually exceed expectations.  I think we’ll see an order for some more Boeing aircraft from JAL this year and I think it will be the 737MAX and 777-300ER.  No huge numbers but large enough to make a splash.

South America

LATAM got its approval from Brazilian and Chilean authorities (barely) and LATAM will begin consolidating its operations to make more money.  I think we’ll see a largish order from LATAM and it will be for an airliner to replace aircraft on both the Brazilian and Chilean side of the airline.   The aircraft of choice will be, I think, the Airbus A320NEO and I think they’ll bump up orders for the 787 and 777 as well.   TAM has 27 A350-900s ordered and I think that order *might* be at risk.  The strategy of using Airbus for narrow bodies and Boeing for wide bodies seems to be a smart one for airlines in that region.

I don’t think we’ll see more consolidation in South America but I do see South America becoming a bit of a battle ground between airline alliances.  Most see LATAM going with Oneworld and while I can’t disagree with the arguments, I think that SkyTeam and/or Star Alliance might just swoop in with one hell of a package that may be too hard to resist.  If this happens, Oneworld and American Airlines gets kicked in the groin in South America.

Aerolineas Argentinas?  The Alitalia of South America in 2011 and the same in 2012.  Enough said.

Europe:

British Airways managed to get through 2011 without any huge problems and saw Willie Walsh move up to the CEO position of International Airlines Group which means Willie’s still in charge.  Iberia, British Airways’ sister airline, saw Willie stirring things up with plans for a LCC subsidiary.  Iberia pilots decided to strike because shooting onself in the foot can’t be just an Indian thing.   IAG also managed to get a tentative deal to buy BMI from Lufthansa and become the Emperor of slots at London Heathrow . . . maybe.

Virgin Atlantic didn’t die, didn’t find new partners and didn’t extricate itself from the chokehold that Singapore Airlines has on it.  Richard Branson actually didn’t make the news very often except to shout, stamp his feet and act insulted that Virgin Atlantic wasn’t able to do a deal to win BMI.  Expect Virgin Atlantic aircraft to start carrying some message against the IAG deal for BMI.  I actually think that Virgin Atlantic will have to find an airline alliance to join and if I’m right, I would lay very heavy odds on it being the Star Alliance. 

Lufthansa did itself a favor and got rid of BMI and I expect they’ll continue their very conservative mangement of the airline and the subsidiary airlines.  I do wonder how much longer Lufthansa can rely upon its A340 aircraft and somewhat expect Lufthansa to bite the bullet and buy the 777.

KLM/Air France:  I see nothing here at all.  Not in 2012.  I don’t expect a large widebody order nor a narrowbody order. 

I do expect Ryanair to make an order and I do think it will be the 737MAX.  In fact, I think it may well end up being the 737MAX-9 instead of the 737MAX-8.  Instead of repudiating the C919, Michael O’Leary will just quit talking about it.  Instead, he’ll suggest stripper poles could be installed on Ryanair aircraft. 

All in all, I think it will be a tough year for European airlines.  The financial crisis on that continent will make it very hard to earn an honest profit and Middle Eastern airlines will continue to erode the long haul traffic that European airlines have enjoyed for decades.

Tomorrow, a summary of what I see for 2012 and the world airline industry.

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Over the past 12 months, FlyingColors has doubled its readership and has seen nearly 1000 blog entries reached with enough words written to equal a book with over 1700 pages.  But enough about me, let’s look at the last year in the airline world.

North America:

Southwest Airlines did its deal with Airtran and bought itself an Atlanta base of operations and some very valuable landing slots at Northeastern airports.  As if that wasn’t enough, it made a firm deal on a bunch of 737MAX aircraft and agreed to take on even more 737-800 aircraft for its routes.  However, the airline wasn’t without some trouble:  Airtran pilots tried real hard to step on their on feet in a seniority deal with Southwest Airline pilots.

American Airlines struggled (more) and lost more than a Billion dollars (again).  Instead of making any real progress with its labor force, it decided to file bankruptcy but not before having made a historic order for aircraft from both Airbus and Boeing for the A320 and 737 series aircraft (with both A320, A320NEO, 737 and 737MAX in the mix).  2011 also saw long term CEO Gerard Arpey depart the company (to work with former Continental CEO Larry Kellner) and AA President Tom Horton took over.

Virgin America has horned in on American’s routes, Frontier has struggled more and more under Republic Airways leadership and US Airways still doesn’t have pilots or flight attendants integrated onto one seniority list.  JetBlue decided to fly more to the Caribbean, entrench itself even more at JFK airport and blew it during an October snowstorm (again).    United and Delta made money.  Quite a bit actually.

I think we’ll see Frontier either spun off rapidly in 2012 or the rapid decline of the airline necessitating bankruptcy of Republic Airways.  I don’t see a real strong suitor for Frontier except, perhaps, JetBlue but since Frontier isn’t based at JFK airport, I do wonder at JetBlue interest in an airline like Frontier.

I think we’ll see Alaska Airlines find even more odd partners for its success and still manage to cozy up close to Delta while doing it.  Southwest will start painting Airtran aircraft in its colors and operating even more great deals to more places from Atlanta but I also think that if any slots at JFK, LGA, EWR, IAD or DCA come available for purchase, Southwest will bid the cost of a Boeing and lose again.

I think it’s possible that Virgin America will make money in 2012 and I think it is really possible that we’ll all be pleasantly surprised by that.  The determining factor?  Cost of fuel. 

United will order a nice chunk of aircraft and I’ll bet that it will be an order similar in mix to the American Airlines order from both Airbus and Boeing.  However, I do not think it will be similar in size.  I think it will be a partial fleet replacement with lots of options for incremental change in the fleet.

I think Delta will continue to make a big pile of money with very little controversy surrounding it except that I think Delta will look for and execute a plan to encroach on more Legacy and SuperLegacy airline routes as it has announced its intention to do so from La Guardia Airport.   I also think that Delta will decide its not afraid of Southwest and it will decide to give Southwest a taste of bullying it hasn’t experienced before.   Particularly in Atlanta.  It’s not just an opportunity for Southwest to succeed in Atlanta but it is also an opportunity for Delta to capture lost customers.

I think we’ll see capacity restraint for another year and higher air fares than seen in a long, long time.  I do not expect to see another new airline show up and I think we may well see one true LCC depart the picture if things get particularly rough with respect to fuel prices or competition.  Milwaukee will become the regional airport it was intended to be instead of a bloody battleground between LCC airlines.

Tomorrow:  The rest of the world

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I am somewhat stunned at the lack of nominations for choices of Airline of the Year.  That said, I did manage to spend quite a bit of time thinking about the subject.

Domestic airline of the year isn’t hard and withour further ado, I name:

American Airlines

Believe it or not, it was a touch call.  I did consider Southwest Airlines as well for the obvious reasons of its own moves throughout 2011.  However, I think that American Airlines was more consistently in the news for both good and bad reasons.  The airline spent 2011 managing its problems, announcing poor financial results, trying to come to agreements with its labor groups (and sometimes failing), buying a new fleet from both Boeing and Airbus and, finally, announcing its bankruptcy.   Southwest Airlines was in the news quite a bit as well but more inconsistently overall.

For International Airline of the Year, it was harder.  A number of airlines made heavy news at one point or another.  Most recently, QANTAS had quite a thundercloud around it with its shutout of labor.   Lion Air made noise with its Boeing 737MAX purchase committment as well.  LAN and TAM airlines were prominent as a function of their tortured merger needing approval in 2 different South American countries. 

 But there is one airline who did make more noise as a function of its creation and how its managed its brands.  For International Airline of the Year, I name:

International Airlines Group (IAG), operator of the British Airways and Iberia .

IAG is perceived as an airline holding company but it really isn’t operating like that and for proof look no further to Willie Walsh and his prominence in answering Iberia’s labor problems late in the year.  They are two brands that will operate and are already operating quite closely together.  They’ll harmonize more over time but IAG is “the airline”. 

In addition to operating as an airline in 2011, Willie Walsh’s prominence on issues regarding both brands and aircraft purchases, IAG also managed to snatch the purchase of BMI right out from under Virgin Atlantic (though the deal still has to be approved in the European Union.)

Over the next many days, I’ll be doing my traditional year in review for 2011 on what has happened and what will happen with airlines in 2012.

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It’s been revealed that American Airlines had been engaged in preparations for bankruptcy weeks in advance having engaged Rothchild’s as a financial advisor in the process.  AA is now asking its bankruptcy judge to retroactively approve Rothchild’s services for the course of its reorganization.

Some may think this shows a darker side to what led up to the bankruptcy but it really comes as no surprise to me.  The mere fact that American did file for bankruptcy was proof they were preparing for it as it is no trivial process and requires answering a lot of “what ifs” if you plan to do it right.

American Airlines would likely need financial advice during the process and having a heavyweight like Rothchild’s on its side makes for a smoother discussion with a variety of creditors.  The judge will approve Rothchild’s and Rothchild’s will earn its money over the course of reorganization.

However, the success of the reorganization remains in the hands of the executive team at American Airlines and that’s as it should be.

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Before and after American Airlines bankruptcy filing, there has been a great deal of speculation on American merging with another airline.  Most often, US Airways is cited as the candidate.

The truth is, there isn’t a perfect candidate at this point.  Prior to the Delta / Northwest and United / Continental mergers, American Airlines was vastly larger in size by any measurement you would care to use.  Now there are 3 airlines roughly the same size in the United States and a larger number that are greatly inferior in size to those.

A merger should add value before anything else.  How it adds value is subject to debate.  American Airlines acquisitions never really added value so much as they eliminated nuisance competition.  American, in a sense, bought airlines more to pay off people from competing with them.  To be fair, Southwest Airlines has done this as well.

With the state American Airlines is in today, a merger doesn’t add value.  The first order of business is to get the house completely in order.  Unfortunately, this means quite a bit of pain for everyone involved and I include the executive management in this as well.  If anyone thinks they come out of this bankruptcy unscathed, they are kidding themselves.

US Airways might be a candidate for merger with American Airlines but where US Airways adds value is in conflict with the very people who are running AA today.   What I mean is that US Airways has the management team (and I do mean team, not just Doug Parker as CEO) that knows how to run a competitive, revenue positive airline in today’s marketplace.  Unfortunately, the current management team at American Airlines shows no evidence of knowing how to do so thus far.  They know how to manage money and an airline is a whole lot more than money. 

The only conceivable situation where US Airways adds value to American Airlines in a merger is if most of the executive team at AA is let go. 

Are the systems compatible?  Frankly, I think so.  Far more than I think many appreciate.  US Airways is in possession of a system that is fairly complementary to AA’s system.  US Airways has strengths in marketplaces where AA is weaker (the Southeast and Southwest) and in cities that are weaker in the American Airlines system (Philadelphia, Washington D.C., Phoenix come to mind.) 

Must the fleets be compatible?  To some degree, yes.  They need not be perfectly compatible.  Frankly, I think American Airlines could use the A330 in its system and I think US Airways could use the 777 in its system.  Both will have Airbus A320 series aircraft in a short time. 

The real challenge is labor.  Can you take one airline that has yet to see its pilots and flight attendants integrated into one system (US Airways) and merge the seniority lists with an airline’s employees that are viciously disappointed in its own company (American Airlines)?  I think that is a very, very tough job for anyone. 

In short, I think we won’t see a merger with AA and anyone else for the next 2 to 3 years.   Over that time, it is quite possible that circumstances will have evolved considerably and a candidate for merger with AA may appear.  It is entirely likely that US Airways may be that candidate.  But to expect those two to merger over inside the next two years is, I think, unreasonable.

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By now, most of you have heard of the choice little asset listed in American Airlines’ bankruptcy that is a house in London potentially worth $30 million or more.  The townhouse has been used over the years as a place to stay for executives and has occasionally hosted AMR events as well. 

To say that most found it objectionable would be an understatement.  American points out that it bought the place for considerably less and many years ago.   All very true but considerably less was apparently $13 million and it does point out a disease that many companies and especially airlines often get.

There has been a growing opinion that airline executives are underpaid compared to other industries and that is quite true.  What doesn’t get spoken very often is that one could argue that those other industry executives are likely *overpaid*.   It’s thought that talent follows the money and while I think there is a grain of truth there, I would argue that talent chases the challenges far more than the money.  Airlines present a set of challenges that are addicting for the management executive.

Here is my objection.  No company, airline or otherwise, needs to own a townhouse in London for occasional use costing millions.  Just as no company really needs to own Gulfstream jets.  $13 million can pay for a lot of nice hotel suites for executives and for a lot of hotel banquet area for events.  To have continued to own that property prior to bankruptcy or even prior to 2002, really is insulting to both shareholders and employees. 

What’s more, it makes one wonder what other dirty little secrets there are about extravagance with company funds.  I’ll point out that $30 million can almost pay for a 737-800 at the prices American was paying.   Furthermore, it lends credence to labor unions and their claims of executives lining their pockets.  Where that is true, or not, isn’t the point. 

Owning that property wasn’t very transparent or responsible on American’s part.

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Delta Airlines, not unexpectedly, made a big announcement last Friday about its plans for New York City upon consummation of its slot swap deal with US Airways.  That announcement included a number of bold statements including Richard Anderson offering that Delta intended to build a hub.  So far, no surprises.

Where it gets interesting is Delta announced plans to introduce multiple daily round trip flights to other airline’s hubs.  American Airlines gets to defend against them on routes from New York La Guardia to Dallas / Fort Worth and Miami.  These are major cornerstone routes for American and its cornerstone strategy for its existing hubs.

United Airlines sees encroachment on routes to Houston and Denver.  Both cities are fortress hubs for United and both will be defended strongly.  US Airways gets to fight off Delta on routes to and from Charlotte although generally only with smaller Bombardier 70+ seat jets. 

From a personal point of view, I’m glad to see Delta enter the DFW-NYC market.  I’m glad to see American Airlines get the competition it should have on those routes because the prices on those routes are exorbitant.  Frankly, I had hoped that we would see Virgin America or JetBlue run the route but I’ll take Delta.   The timing is good for adding those routes because it will be 2 more years before Southwest can run that route non-stop and American Airlines now has to pay attention to reorganization under bankruptcy for the next 18 to 24 months.  Delta has a rare window of opportunity to exploit those vulnerabilities.

It’s also notable that Delta isn’t just investing in La Guardia but intends to transform its JFK operations into a focus on trans-continental and international long haul flights.  This, too, is an attack at the heart of American Airlines’ operations.

The greater picture is more interesting.  I’ve long felt that the SuperLegacy airlines would eventually arrive at the conclusion that to grow, they would have to start exploiting each other’s weaknesses at other hubs.  To me, it seemed inevitable but I also thought that the airline that would really get picked on would be American Airlines because of its higher cost structure.  It the lowest hanging fruit from that perspective.

I wasn’t wrong.  In a way, American Airlines isn’t just getting picked on with respect to two routes.  Those two routes represent a war cry of sorts.  However, the major expansion that Delta is about to engage in at La Guardia.  Delta makes it clear that it intends to own that market and owning a good portion of New York City is a profitable thing.

The problem for American Airlines is that, right now, it has higher labor costs, less efficient aircraft and little maneuvering room to fight off competition.  They’ll be fixing that and they are likely to come out with similar labor costs to Delta and United.  However, they are still a long way away from having the benefits of a relatively efficient fleet.

Another problem is that Delta (and other airlines) now have probably at least 18 months to attack American Airlines on its home turf secure in the knowledge that they can do so without too many consequences. 

It’s also interesting to me that Delta felt it was possible to encroach on two airlines’ (US Airways and United) mainstay routes with success.  That’s where the hub mentality comes into play.  To be a hub, one must have those mainstay routes.  Typically, New York City generally doesn’t serve as a hub in the form that we see in Atlanta, Chicago and DFW.  Delta wants to make it more like that and it’s clearly willing to invest heavily to make it happen.  It’s notable that Delta is *able* to invest heavily to do that.  It’s the only airline that can right now.

I’m pretty sure we’re seeing the dawn of a new form of competition among US airlines and I’m pretty sure it gets pretty bloody in, perhaps, 5 years or so.  I think the smaller airlines and the low cost carriers are going to be shocked at the vicious nature of the competition that is about to take place.  The cost structures are far more similar than ever before in the US airline market and the advantages are slim.  But the war chests to fight will be big among the largest airlines.

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In light of American Airlines bankruptcy filing and its status as a founding member of Oneworld, I thought about alliances in general and wondered if Oneworld isn’t in real trouble at this point. 

American Airlines won’t be engaging in any serious growth or aggressive strategies for some time to come now.  Every real move they make will be under the scrutiny of bankruptcy stakeholders and their attention will be focused on re-scaling the airline to fit the new realities for success. 

To me, that means that AA won’t have much to offer its partners in Oneworld.  It doesn’t mean they won’t benefit from AA but it does mean that working in concert with these partners to achieve a more aggressive growth for the alliance is probably off the table for now.

Furthermore, QANTAS isn’t exactly shining with success these days either.  They cannot use their A380s as they want and they have as serious labor problems as American Airlines does.   More and more, QANTAS seems at real risk to serious competition from both within Australia as well in the South Pacific/South Asia markets.  I’ll point out that QANTAS is also a founding member of Oneworld.

So, two of the Big 3 in Oneworld are currently hampered by their problems.  That’s kind of serious, I would think.  How does one make a strong business case to LANTAM for their alliance when that situation exists today?

In the meantime, SkyTeam and Star Alliance are racking up new partners and, more importantly, they are planning strong growth with a strategy that continues to seem far more coherent than Oneworld.  They question I ask is this:  Is there some scenario under which existing Oneworld partners start scattering to other alliances?  If one bolts, will others follow?

I don’t see British Airways / Iberia leaving anytime soon but what about the lesser partners such as Cathay Pacific or JAL or LAN says “Buh Bye”?  I think we would see several others looking for new relationships.  (It’s notable that Oneworld is so clueless as to still have Mexicana’s name on their website.)

The other scenario is that both Oneworld and other alliance partners separate and form a new alliance that displaces Oneworld.  More possible than one might think since Star and SkyTeam are clear dominated by just a handful of airlines.   Some partners in those alliances may be chafing to play a bigger role in an alliance and with enough world partners, creating a new alliance may well be not only possible but smart.

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The FAA has just given approval to American Airlines to use iPads in the cockpit at all times including during take-offs and landings.  This would be the same device that just got Alec Baldwin into hot water on American Airlines for use during time at the gate and/or taxi.

I’m not defending Baldwin.  To the contrary, I think that, once more, a celebrity has gone too far in their denouncement of an airline.

Use of these devices probably should be limited during those times.  On the other hand, if there is good reason for their limits for passengers, I can’t fathom a reason why it is OK for pilots.  Particularly since pilots happen to be at the pointy end of the airplane where all the electronics are located.  

disclaimer:  I work for a major aerospace company and I *know* that interference from electronic devices has been experienced and is a risk albeit a very minor one.   There is a reason why we take extra precautious during take-offs and landings.  Those are the two very critical moments for danger when it comes to airliners.  They are more at their limits than at any other time.  Something causing even a minor problem can be a real risk at those moments.

And it’s a risk that can be easily mitigated.  Do we really need to have our devices on at *all* times during our trip?  No, really don’t.  And acting like children because you were asked to shut them off just makes you look silly.

But granting the authority to use them in those very same situations to pilots makes the FAA look awfully silly too.

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The Communications Workers of America have filed with the NMB (National Mediation Board) to have an election to represent American Airlines passenger service agents.  The NMB will decide who should represent the passenger service agents and then set an election.

American Airlines says it respects the rights of its workers to organize and points out that it has excellent communications with this work staff. 

I rather suspect that what American Airlines would like to say is “Give us a break.” 

No doubt the CWA senses it has an opportunity here in that American can hardly afford to fight this battle very well during bankruptcy and I’m sure the CWA becomes a much more attractive choice for passenger service agents who probably feel pretty strongly that they would like to have a seat at the table when it comes to AA’s bankruptcy reorganization.

I’ve already pointed out that AA’s major unions all won a seat on the unsecured creditors committee and when you have such a seat, you have a major voice in who and how the airline is run during reorganization.

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JetBlue is coming to DFW. 

I’m rather surprised that they could not find one more Caribbean island to start service to but here we are:  JetBlue is coming to the DFW area too.

Now, it’s not a real deep commitment.  It’s 3 daily round trips from the Dallas / Fort Worth area to Boston and they’ll be using their Embraer E-190 100 seat aircraft for those flights.  The aircraft itself isn’t bad, particularly on JetBlue where minimum seat pitch is 33″ and the seat widths are just a hair wider than what is found on the typical A320 aircraft.   That said, it’s one inch less seat pitch than the standard JetBlue A320 and JetBlue’s main attraction, in my opinion, is the level of seat comfort offered.

I’m always pleased to see new entrants in the DFW area and I don’t think it’s a coincidence that these flights showed up a  week after American filed bankruptcy.   I also expect to see others swooping in to pick up business on high fare American Airlines routes in the near future.  This is one moment in time where American can’t hit back and many airlines will see significant opportunity. 

I fully expect that the guys at Virgin America are having numerous conversations about both Dallas and Chicago.

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One of the things to come out of American Airlines’ bankruptcy filing is that they intend to ask permission to get out of 24 aircraft leases.  That would be 20 very old MD-80 series aircraft and 4 Fokker 100 aircraft. 

All are currently parked in Roswell, NM. 

American has had those Fokker aircraft parked for a very long time and never found buyers or lessors for them.  The MD-80 aircraft are just plain worn out and too costly to fly. 

It’s not a stupid move on the part of AA with respect to its costs.  It will, however, no doubt anger lessors who were earning quite a nice revenue stream on parked aircraft.  It isn’t always wise to anger the leasing world when you have big plans for fleet renewal.  If it remains only these aircraft, the damage to reputation will be miminal at worst.

I think, however, this is just the tip of the iceberg.  I suspect we’ll see many, many more MD-80 series added to that list for no other reason than they have little or no value to AA when they can get shiney new, efficient airplanes from Boeing and Airbus.

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Update:  For those sending me private emails, no, this will not change a thing with respect to travel on American Airlines today or even next year.  If you have a ticket, it will be usable.  This is not a liquidation but, rather, a reorganization.  AMR (American Airlines) has enough short term cash holdings to exist in its present state for at least 3 years barring a dramatic change in the airline economy.  Even if there was a dramatic change that ate up cash faster, AMR could survive in its present state for at least 2 years.  Its current situation will be fundamentally different in 2 years with respect to costs as a function of labor and fleet. 

Original Post:

It’s not entirely a surprise but it isn’t entirely expected either, is it?

American Airlines has filed for Chapter 11 Bankruptcy protection and Chairman and CEO Gerard Arpey is “resigning”.

Digest that for a minute.

We’ll be seeing some people say “they knew all along it would happen now” and we’ll be seeing others expressing deep shock.  If you followed American Airlines, you knew this was a possibility.  I think few of us expected this to happen this month, this year or in the next 6 months.  Not really. 

But it isn’t the *wrong* thing to do.  By doing this now, American gets its house in order and they do it while there is ample cash holdings to accomplish it.  This isn’t being done because American is out of money or can’t meet some obligation. 

It’s being done, primarily, to break labor contracts and gets its costs aligned with that of the other SuperLegacy airlines.

By doing it now, American gets to be in control of its destiny much more than by waiting to until cash holdings become somewhat critical and creditos get antsy.  Want proof of that?

Look who just got named Chairman and CEO of American Airlines:  Tom Horton.

My first reaction is that Tom Horton is *not* the person to be put in charge of reorganizing American Airlines (and AMR).  My second reaction is that maintaining the executive corps and the status quo is *not* what you want to be doing at this point. 

American isn’t having a tougher and tougher time of things simply because of what pilots earn.   That’s part of it and labor costs in general are a big part of their troubles.

The biggest problem?  American Airlines increasing irrelevancy to the consumer and its exceptionally decreased value to that consumer when compared to both SuperLegacy and LCC carriers. 

Evolution in AA leadership is going to be very unsatisfying.  A little more Revolution is what is called for.  Tom Horton & Company aren’t that, I believe, but they are free to prove me violently wrong.

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American Airlines has chosen to receive Airbus A319 aircraft and A321 aircraft in its first round of deliveries from Airbus as a result of this summer’s order.  So far, it isn’t know how many of each will be received. 

The A319 choice surprised me somewhat.  Some speculated it would be ordered as a gap filler between AA’s 160 seat 737-800 and its largest regional jet, the CRJ-700 which has about 65 seats.  AA’s MD-80 aircraft are configured with 140 seats.  The A319, in American Airlines configuration, should have about 126 seats based on my research into how other SuperLegacy airlines are using the aircraft.  Delta has 126 seats on its A319s, United has 120 seats (but with Economy Plus in the mix) and US Airways has 124 seats.  I expect American to meet or beat Delta’s seat count. 

I myself didn’t expect the A319 to be selected because it is heavier aircraft and the costs to operate it are similar to the A320 much as what has developed between the 737-700 and the -800 on the Boeing side.  I actually thought that something such as the CSeries might get considered as that gap filler.  The A319 offers a bit more flexibility on payload and range but the CSeries would offer better trip costs most likely. 

Unlike many, I don’t regard the CSeries as a program that will fail.

The A321 was the no-brainer.  It will fill the 757-200 role nicely on most domestic routes.  I would expect these to be configured with about 185 seats on anything but specially configured international aircraft.  US Airways has 183 seats on its A321 aircraft but, again, I expect American Airlines to beat that number by a few seats.   Current American Airlines 757-200 aircraft have 182 or 189 seats depending on the mission its configured for.  I expect we’ll see something close to 189 seats for AA’s A321s with the remaining 757-200s to be reconfigured for those long, thin trans-continental and trans-Atlantic flights. 

But here is the real surprise for me:  The A319s will have CFM engines and the A321s will have IAE V2500 engines.   While you can choose from either manufacturer on both airframes, American has decided that commonality is trumped by mission performance evidently.  Again, I would have expected American to probably go with CFM on both airframes if only because they do have some experience with the engines as a function of owning the 737-800. 

However, the IAE is reportedly the better performer for longer duration flights and it would appear that the planners at American would prefer to optimize performance of the aircraft according to its expected mission as opposed to reduce costs by having a common engine family.  Contrary to what some may think, I think that’s the right decision.  SuperLegacy airlines will own enough of an aircraft/engine family to enjoy economies of scale and it is no longer necessary to try to maximize cost benefits by sticking to one aircraft type and one engine.

In other words, buy the aircraft and engine that best fits the expected mission should be the purchase strategy we’ll see not only from American Airlines but other SuperLegacy airlines as well.

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American Airlines isn’t getting any traction on deals with any of its unions.  In the pilot negotiations, there was a push for a deal but leadership in those negotiations just kind of faded away and each party went to the press to plead their case instead.

Tentative deals are being denounced by membership in the TWU and the flight attendants are eerily quiet but some of the most militant at American Airlines.

Suddenly, not only analysts are using the “B” word but even employees seems to becoming familiar with the idea.  It’s a word that should never be used lightly.

The AMR board met last week and a few new directors were brought on board but anything else that was discussed has so far been kept quiet.  In fact, almost too quiet. 

Will the board willingly go into bankruptcy?  No, I do not think so.  Their job is to manage in the interests of shareholders.  If bankruptcy comes along, the biggest losers of all will be shareholders as their ownership will evaporate.  Creditors will get something.  Employees will get nothing additional and likely face years more of negotiations for anything.

Several current generation CEOs of airlines like to talk about how it’s a business and it should be managed as a business.  Return on investments and profits should be the focus.  We couldn’t agree more but . . .

Airlines require very strong leadership.  Leadership isn’t just providing a return on investment or earning profits.  In fact, neither of those are possible if you don’t have the interests of your large workforce aligned with those goals. 

And if the workforce is unhappy and resentful, it isn’t interested in the company goals. 

American Airlines is lacking in leadership.  It has all the management an airline could ask for but nono of the leadership it needs.  It means getting everyone on the same page working towards common goals and doing so in the best interests of everyone.  Does that sound like AA leadership?

Everyone is way too comfortable with the idea of bankruptcy.  I think the employees look upon it as almost welcome in that it almost certainly means the end of the Arpey regime.   When it’s gotten that far, it may well be time for the board to act and install a leader before that shareholder value goes poof.

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American Airlines and the Allied Pilots Association have started to unfold in their talks and the best evidence is how both parties have gone back to the media and their respective stakeholders with public messages of complaint against each other.

As long as we didn’t hear much or anything at all, I had a little hope for those two groups. Now? Not so much. They can still surprise me but I think not.

American chose to criticize the union for not negotiating through the weekend and I think that was a move to keep them talking in hopes of wearing them down. Sometimes walking away for a day or two results in better perspective and if the union wants a weekend off, shut up about it.

On the other hand, the APA has decided to describe AA’s offer as “concessionary” and offer that the future of the talks will continue on. This is a change in APA President David Bates’ tone and will tend to coalesce its membership into resisting a contract rather than being open minded.

My prediction? Either AA gets a new contract that serves its interests in every area but total compensation and its costs continue to be an anchor around its neck or . . .

These two groups continue to slug at each for at least another 12 to 18 months. Then that will be the anchor around AA’s neck.

More and more, this is a lose / lose proposition for American Airlines.

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