United Airlines has reported a 1st quarter loss of $417 million which is almost 60% of United Airlines’ 2012 total year loss of $723 million.

Yes, in the first quarter of 2013, United Airlines has lost 57% of the total losses for 2012.  For those keeping score, we have still got 3 more quarters to go.

There is runway for United Airlines to make this up.  I don’t think they will.  Not this year.  United isn’t running on all cylinders, not yet anyway and I see nothing to signal a dramatic change in their approach to earning money.  CEO Jeff Smisek points to a slightly improved operational record and while it is true, it isn’t the answer.

United has lost a lot of high paying customers and it isn’t earning enough revenue and it needs a strategy that reverses that course.

I’m now in the position of wondering if Jeff Smisek was the right CEO for this integration.  One thing that stands out:  Smisek isn’t very prominent in leading this airline.  Other Continental leaders were far more prominent and stood out in front with their employees.  I get the sense that Smisek is more like United leaders who hide in a tall building hoping problems might go away.  It’s his perception to change.

Maybe they should interview Tom Horton.

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US Airways has announced it will match United Airlines’ increase of $50 on ticket change fees. I find this unsurprising since US Airways tends to be very opportunistic with fees.  In fact, I would regard US Airways as the leader in developing fees and arguably one of the most successful airlines in implementing them.

Will this mean that American Airlines will adopt such a thing?  No, not necessarily.  Once the two airlines blend together, the analysis will ultimately be based on what’s best given the combined customers the new airline has.

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There is quite a bit of talk about United’s sudden increase in change fees which see a rise from $150 to $200 for domestic flights.  Most see this as overreaching and they’re not wrong.

If we accept that we’ve entered the Era of the Fee in the airline industry (and I do), then we have to accept that fees will be charged for a variety of things.  To a degree, I see fees as being something that can be OK but which the airline industry does very poorly.

Watching airlines implement fees for services is one of the most painful things I can do as an observer to this industry.

Change fees, like baggage fees, are inconsistently implemented and the rationale behind those implementations seems . . . without real reason.  United is now charging $200 to change a ticket.  Let’s be clear, if you have a $300 ticket, you can change it for $200 plus the difference in fares.  This essentially renders your ticket useless in all but extreme cases.

My question would be is a $200 change fee a revenue driver or a behavior driver?  I suspect the latter.  It’s there to drive people to not change and not create chaos.  Sometimes I wonder if airlines wouldn’t be happiest in taking people’s money and just not having them travel.  Often it seems as if the objective isn’t to deliver a service but, rather, part people from their money without delivering  value.

If we’re going to go to fee based systems, I’ll buy in on a change fee.  But why not simply have that fee cover the cost of the transaction plus some small penalty?  $50 for a domestic ticket change seesms both reasonable and appropriate.  $100 for international trips.  Make that change easy, not hard.  Let’s these changes happen fluidly and everything will work out in the end.

These change fees are, in my opinion, drive by overly complex fare structures among airlines.  Airline fares are so complex and so diverse that they make the airline believe that the opportunity costs of a seat are hundreds of dollars more than they really are.

People say that those change fees help defer the money that the airline lost in not being able to sell that seat in advance to someone else.  Well, did they lost that opportunity?  Part of that opportunity presupposes that all airplanes are full when they depart.  They are not.  They are nearly full and I’ll grant that it can be hard to fit standby people on but as for paying passengers who want to buy a ticket, you can almost buy that seat if you want it.  It just might cost you a small fortune when you buy it at the last minute.

The airline also doesn’t notice that the person who buys a ticket 2 months in advance has given money to the airline that it can benefit from economically for 2 months before it incurs the bulk of the costs associated with that purchase.

Why do airlines want to drive behavior with fees?  Because they hate saying no to a customer.  With an exorbitant fee, they can say yes but charge a fee.  The problem with that is it is assumed that the customer loves this and they don’t.

In fact, I believe its fees like change fees and baggage fees that breed some of the biggest contempt felt towards airlines.  Customers aren’t stupid and they do know when they’re being gouged.  They may not have a choice on that flight but they know they can exercise choice the next time and they will.  Think I’m wrong?  Just look at how things have gone for United Airlines when they inconvenienced their customers and abused their good will.  Bookings went down, revenues evaporated and everyone noticed real quick.

United’s fee is exorbitant and insulting.  Unfortunately, United also cannot measure the ill will generated by this and compared it to the revenue it gains.

If you don’t like it, then vote with your money.  And for what it is worth, more and more I think that American Airlines’ decision to allow a customer to “insure” themselves against change fees with . . . a fee is pretty smart.  I don’t hand out compliments to them very often but I think they are trying to package real value for the customer on that front and that is better than most airlines right now on the subject of change fees.

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I saw today’s Cranky Flier mentioning a pretty disturbing incident experienced by Matthew of Live and Let’s Fly Blog.  This isn’t a case of United beating the stuffing out of a guitar or American Airlines picking a fight with an actor.  This is, in some ways, worse.

Because it wasn’t a mistake.  It was abuse of a passenger.

I’ve witnessed this kind of bullying.  While I’m unaware of the exact flight attendant or captain, it’s symptomatic of what is a general trend in the airplane these days.  Control by bullying.

This passenger presents a potential challenge for me because he’s knowledgeable about what he can and cannot do and he’s willing to question my authority on certain issues.  Off he goes by any means possible.  Captains are now very reticent to tell flight crew to grow up and act like adults because there is a bit of a culture of protection that exists among flight crew that can result in blow back on him.

I believe the blogger and while the Captain and Flight Attendant in this situation might have a different viewpoint of sorts in all of this, they don’t really have an excuse, do they?

This wasn’t done to this gentleman out of an abundance of caution.  It was done to punish and control and it was an abuse of authority.  Is that what we pay for when we buy a ticket to travel somewhere?

And if this kind of thing happens to high mileage frequent fliers who write blogs, what is happening to economy passengers that is going unreported?

People who lie to control their own customers are abominable and should suffer consequences within this company.  People who don’t exhibit courage enough to arbitrate a situation involving a customer that clearly has not gone out of control are abhorrent and should be retrained in leadership before being permitted to command an airliner again.

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United Airlines has managed to improve its on-time rate to a record 82.8 (Domestic) and 80.5 (Foreign) for January and it’s handing out $100 bills to its employees for the achievement.  Incentives such as this have been a big deal in the former Continental culture and it is nice to hear that they are being continued today within the United structure.

It’s nice just to hear United succeeding at something like this because you don’t get those numbers unless your organization is working together.  Clearly, they are working together better.

Should we give Jeff Smisek a $100 bill if he turns a profit for Q1 2013?

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United Airlines has posted a $620million loss for the 4th quarter and a 2012 loss of $723 million and that, my friends, isn’t trivial.  Conventional wisdom has it that this is the cost of a poor integration.  I think the integration has gone poorly and has impacted the company but I think the poor integration is an indicator of something else.

This management team isn’t working very well together.

We are at the point where United should be seeing its operations mesh together nicely and, instead, we’re seeing ever greater impacts from the merger on the bottom line.  Good, strong management working together makes this airline work better, not worse.  It’s notable that the combined operation earned $840 million in profit for 2011 when it really wasn’t integrated.   In one year, there is a direction change equivalent of 180 degrees.

This is a management problem.   Various management groups are executing the integration of their parts without regard to whether or not other parts are ready for that integration.  This is the source of their reservations integration.  It was pushed forward despite other parties not being ready so that a box could be checked on integration progress.

At some point, this becomes intolerable to external stakeholders.  In the meantime, I would hope that leadership calls a halt to integration efforts and executes a 360 degree review of each department and what its progress has been to date and what each expect to accomplish before allowing anyone to move forward any further.  In that process, I would hope that managers who are executing without coordination are replaced with managers who understand that this is a dance party that needs to work together rather than just a group of individuals seeking an ultimate payout as reward for checking the box.

Jeff Smisek described the integration being particularly tough in 2012 but also declared that things were back on track.  My problem with that is that just because you say it, doesn’t make it so.  Time will tell but, for the moment, a huge 4th quarter loss contrasted against other airlines who’ve had great years doesn’t signal that things are “back on track.”

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United Airlines is in discussions with Airbus about the A350-1000 as a replacement for aging 747 and 777 aircraft in the United fleet.  A significant portion of the United 777 fleet is comprised of very early build 777 aircraft (-200 series) and their 747s are particularly old as well.

United already has 787 aircraft on order (both on the Continental and United airlines sides of the house) as well as the A350-900.  While Continental executives are largely in charge of the airline today, I would suggest that Boeing pay attention.

It would be tempting to say that this is United rattling Boeing’s cage to get going on the 777-X.  I would agree that it has the secondary purpose of that but I also think United wants to know what it can get its hands on fairly quickly to replace a fleet of fuel inefficient aircraft that will begin to cripple profitability in a few years.

We’re not talking about replacing already old aircraft today, we are talking about replacing them in the 2018 to 2022 time period.  By then, these aircraft will be extremely fuel inefficient compared to other US fleets and time is of the essence.

When your capital costs for such an airliner are greater than $200 million for a single aircraft in that class, you want to buy the very most efficient aircraft you can get.  You want the best technologies because 20 years later, that is what you’ll be stuck with.

Whether Boeing thinks the current 777 lineup is still competitive on a spreadsheet, it is ignoring that it isn’t competitive in perception.  I’ll put it simply:

A350-1000:  New, efficient, modern, new

777-300ER:  Older, somewhat efficient, somewhat modern, not new.

Boeing needs the 777-X and it needs it today and airlines are signaling to Boeing that if Boeing doesn’t build it, they’ll buy it from someone else.

Curiously, Boeing already got this message handed to them over the A320NEO.  You would think that they had learned their lesson (again) and would be paying attention to airlines over the jumbo issue.  US Airlines can’t afford to be just loyal to Boeing anymore.  They must buy the best of the best and Airbus is the equal of Boeing in all categories.

If Boeing wants to sell some aircraft, it’s time to get authorization to offer and build a new range of 777 aircraft for its customers.  Customers who’ve plainly said “If you build it, we’ll buy it.  If you don’t, we’ll buy it from someone else.”

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Terry Maxon of the Dallas Morning News has a summary of 3rd Quarter Earnings that brings clear light to how airlines have done these past 3 months.  Before going further, let me say that both companies and pundits like to exclude special items from their analysis of earnings.  It is the airlines’ way of saying “Yeah But!”

Yeah, but if we had not screwed up on our hedges, we would have made this much.  Yeah, but if we had not had to pay off a bunch of senior employees to leave, we would have made this much.

I don’t like Yeah Buts.  Special items occur every month, every quarter and every year.  More so than ever before.  It’s time to accept that it is what it is regardless of how special items affect performance.   Now on to a few observations:

Delta Airlines is doing exactly what CEO Richard Anderson said was necessary in the airline industry.  They are raising their margins considerably to truly cover their capital costs as well as their operating costs.  Well done.  Very, very well done. Admittedly, they are farthest down the road in the New World Order of consolidation but it is a consummate performance nonetheless.

Alaska Airlines:  Ditto!  They are playing their game perfectly right now.

Hawaiian Airlines:  Again, well done and particularly so in light of where their market was just a few short years ago when it comes to competition.  Yes, they face less complex challenges than continental US airlines but they still are performing well.

US Airways:  I’ve already said it once this week.  These guys know how to run an airline and earn a profit even under trying circumstances.  They make a better case for merger with their financial results than any PR machine could make publicly in the news.

United Airlines:  It’s time for these guys to get a little more on the ball.  One begins to sense a certain lag in realizing their synergies and having a seamless system.  Special items shouldn’t be killing your entire net income at this point.

JetBlue:  Nice job but kind of a yawn.  We’ve been seeing roughly the same level of performance for years with no substantial growth whatsoever.  I’d rather have Alaska Airlines than JetBlue at this point.

Southwest:  I think their recent performance reflects their merger.  What I think hasn’t been brought up but should be is that their merger isn’t exactly brand new at this point and the lag is primarily due to how ill equipped they were to absorb another airline with respect to their systems.  Consider this:  SWA has made noise about how their IT systems impact their ability to do business with the rest of the world for a bit over 5 years.  They are operationally seeking to do business with the rest of the world in many different ways and they are certainly changing the way they operate to be more in line with a legacy airline.  SO WHY HASN’T THE IT PROBLEM BEEN ADDRESSED AGGRESSIVELY AT THIS POINT?

American Airlines:  B’ah.  Even with artificially contained costs and a fairly friendly bankruptcy judge, they continue to lose money.  What’s the definition of insanity?  Doing the same thing over and over again expecting a different result?

Summary:  It’s no surprise that the two top performers are also partners and close ones at that.  These are airlines that know what they’re doing and who exercise strict discipline in operating their airlines.  Yes, I’m talking about Alaska Airlines and Delta.

No one is talking about growth, everyone is talking about capacity restraints and raising margins.  Well, all except American Airlines.  That alone speaks volumes.

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United Airlines CEO Jeff Smisek has recently made some comments about the airline and its fleet with particular attention to the 787.

Smisek notes that the range, efficiency and passenger capacity opens up new point to point routes for the airline such as Denver to Japan.  These are the kinds of routes we can expect from US airlines who take on the aircraft and the 787-9 will be used to upgrade service on those routes originally developed with the 787-8.

Smisek also reiterates that United doesn’t see the A380 as an airplane for them (and I agree) and does acknowledge that the 747-8i is being looked at (but likely not very seriously) and notes that it has a lot of airliners on order.  I strongly suspect that United would rather purchase the 777-X rather than buy either the 747-8i or A380.  In addition, I think he sees a lot of aging 777 aircraft that would be better replaced with a 787-10 or 777-X as well.

But Boeing has slipped its authorization to offer plan for the 777-X to late 2013 or early 2014.  Most think that Boeing doesn’t need to offer the 777-X now and that waiting to see the final definition of the A350-1000 will help them.

I think that you can’t lead in an industry from behind.  Waiting too long for to see what your customer does leaves you playing catch up and if that customer delivers on its promise, it doesn’t matter what you can do to better the situation, people will buy what’s available.

If you think I’m wrong . . . just look at what Airbus pulled off with its A320NEO against Boeing who is still lagging behind and who has a “me too” offering at best.

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The 787 has been delivered to several different customers now and it is worth looking at who has received their aircraft thus far:

• Air India (2)
• All Nippon Airways (14)
• Ethiopian Airlines (1)
• Japan Airlines (6)
• LAN (1)
• United Airlines (1)

And many are set to be delivered in the near future.  Airlines such as LOT, China Southern, QATAR and Hainan Airlines should all be receiving their first 787 aircraft as well.

Notice anything yet?  With the exception of United Airlines, all of these airlines are far away from the North American continent.  It exposes just how much US based airlines have *not* been thinking far ahead for the past decade.

And it shows just how far they have to go to catch up with the efficiencies that other airlines will be enjoying in the near future.  One has to ask oneself how it is that Air India has two 787s already and Delta, American Airlines and US Airways have . . . none.  With none on the horizon.

Yes, United Airlines will be receiving more and more as time goes by but they are the only ones for the near future.

Airlines have to be managed tactically (short term) at any one moment.  But they must be planned strategically and failing that, you’ll see their fortunes decline considerably at some point.

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As was inevitable, there are now public interest groups decrying a merger between US Airways and American Airlines as anti-competitive and bad for the consumer.  No surprise.

Industry consolidation has been good for airline profits and we definitely have seen airlines move towards a more sustainable business model as a result.  I would, however, credit capacity restraint for as much improvement in airline profits as anything else.  Frankly, all of the major airlines in the United States (with the exception of AA) have impressed me with their discipline in the marketplace.  It isn’t a discipline ever seen before and after 4 years, I think we’ve seen a transition to a truly different way of operating airlines.

That new model for operating as an airline includes looking at routes in the right manner, for once.  They are now being treated as “businesses” and evaluated individually for profitability.  In the old model, it was about market share at any cost.  The problem with market share at any cost is that it required unfettered, almost violent, competition between airlines on routes and found routes being operated at a substantial loss for years.  That has largely stopped now and I applaud the airlines for showing enough discipline over the last 4 years to make that stick.

Airlines also now seem to recognize that defending market share at any cost is a bad model as well.  Curiously, the one airline that seems to have continued to trouble itself with defending routes is American Airlines.  Until bankruptcy, the airline has “punished” intruders on its “turf” over and over again with high frequency, high capacity and extremely low fares to push out that intruder.

Finally, I think airlines have actually realized that providing a reasonable service experience is important again.  It’s not the service model of the 1970s or 1980s, no.  However, it also isn’t the embodiment of the idea that all a customer ever wants is a rock bottom price.  If price was truly the only key to winning on a route, Spirit Airlines and Allegiant would be exploding with growth never seen before.  They aren’t.  In fact, what we have seen is that broader offerings of service levels attract more revenue per seat and that’s what airlines need.

US Airways has, in many ways, been a leader in executing change to meet the new industry model.  It has figured out how to drive incremental revenue in ways that exceed most any other airline.  At the same time, they have steadily improved customer experiences across their lines both on and off the airplane.  They are now an airline that can be depended upon to deliver passengers to their destinations reliably and with their luggage.  Am I the only one to notice that US Airways is about the only legacy airline to not experience a major public embarrassment over customer treatment in recent times?

American Airlines is actually the antithesis of US Airways and has shown a strong reluctance to acknowledge the industry changes.  They’ve pursued market share, they’ve defended routes at all costs, they’ve been more price driven than any other legacy airline and many LCC airlines.  They have not upgraded or improved their cabin experiences in any significant way since the 1980s.   Their website drives customers away or at least angers customers.  Their aircraft are old, inefficient, and painful to fly.

The SuperLegacies, United and Delta, have done quite a bit to improve everything across the board and one thing that AA hasn’t done:  evaluated routes for profitability on  a regular basis.  Furthermore, UA and Delta now see opportunity on routes that have traditionally been owned by American Airlines.  They’ve even overwhelmed cities where American Airlines was once a major presence and a dominant player (NYC, Wash D.C., Chicago, Los Angeles).

SuperLegacies are now evaluating competitors routes and going after those routes which are yielding major revenue.  Delta and United both are targeting both AA and US Airways as well as holding their own against airlines such as JetBlue and Southwest Airlines.

Yes, American Airlines and US Airways need each other.  American’s operations need US Airways executives who know how to methodically fix operations in a lean manner.  US Airways needs American’s hubs and routes to build much better network yield.  Yes, US Airways can exist quite nicely as a stand-alone airline.  It cannot expect to rise to the scale of the SuperLegacies and compete both domestically and internationally over the long term without a merger.

A combined US Airways / AA company nominally looks like the biggest airline in the world once complete.  That won’t necessarily be true.  There will be consolidation and rationalization between the two airlines  but the entity will be a member of the SuperLegacy group and it will have the potential to compete in the market on a level playing field.  That’s all they can ask for.

3 SuperLegacy airlines, Southwest (who doesn’t quite fit into any category now), and a smaller stable of LCC carriers looks about right for the modern competitive landscape.  At this point, I actually think we will see increased competition over the long term among the Big 4 and that will be good for the consumer.  We will not, however, see that increased competition until there is a Big 4 and until those airlines have time to settle their operations in the new competitive landscape.  If the US Airways / AA merger were consummated by the end of 2013, I would expect a rational and highly competitive marketplace to be fully emerged by 2017/2018.

If there is an area where I see reduced competition in the US, it’s among the LCC carriers (and doesn’t include SWA).   I think the narrowed gap in costs and differences in revenue models between the LCC carriers and SuperLegacies removes the best business argument for an LCC carrier.  It will be a struggle for those carriers in the future and we do need them.  On the other hand, if a relatively new LCC carrier with rock bottom costs can’t compete against SuperLegacies, the market place has done its job.

So, no, I do not think the proposed US Airways / American Airlines merger is wrong.

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It is interesting to me that AMR is crowing about its reported Q2 profits of $95 million (excluding bankruptcy costs and special items).  American Airlines is #3 in revenue (behind Delta and United Airlines) presently.  Delta and United Airlines are projected to report net income in excess of $500 million.

Alaska Airlines, number 7 in revenues (and certainly in possession of a greatly inferior network and high-ish labor costs) has pulled in $105 million in net income.
US Airways, #5 in revenues, should be reporting about $250 million in net income.  Southwest Airlines, #4 in revenues, should also be reporting about $250 million in net income.  It’s notable that SWA also has exceptionally high labor costs (although it also has exceptional productivity from that same labor group).

I really wouldn’t go bragging about $95 million in what is arguably an excellent quarter for all airlines.  This is, if anything, a reminder that the costs aren’t the only thing at play here.  There remains a significant revenue problem that doesn’t really get entirely addressed in the Corners Strategy.

Futhermore, crowing about revenue performance gains isn’t entirely honest either as American Airlines already has the most room to make a difference.  AA has not brought itself to parity with the other legacy airlines on the revenue side of the equation, it simply has experienced revenue growth that all other legacy airlines have also experienced in the past financial quarter.  The real question is how would American Airlines done if it had parity with United, Delta and US airways.  Legacy network carriers who all operate with similar equipment, similar approaches and with the same hub advantages and disadvantages.

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United Airlines and Boeing have announced the United purchase of the Boeing 737 finally.  This hasn’t been much of a secret for almost 2 months but it does contain a small surprise.

United is buying 50 737-900ER aircraft immediately to start replacing older 757-200s which really wasn’t on the radar screen based on the rumor mill.  However, this makes sense as well.  United has some pretty old 757-200s with 45 in their fleet that are 21 years or older which are all original United Airlines 757s with Pratt & Whitney PW2000 engines.  Engines that no one regards as the superior choice for a 757.

United owns a total of 93 P&W powered 757s of which 84 will be 20 years old or older as of next year.  There are just 9 more P&W aircraft that will be 19 years old or newer.  It’s not hard to guess that the very oldest are being replaced with 737-900ER aircraft as fast as possible and almost certainly because the old Continental already has excellent operational experience with that very aircraft.  They know it can do the job today.

All of the original Rolls Royce powered Continental 757s are 18 years old or newer with the bulk of those considerably newer.  The Rolls Royce powered 757s remain a very viable aircraft to use for those long and thin routes to Europe and trans-continental routes in the United States.  Those will get replaced eventually but with later build 737-9MAX aircraft.

United says their 100 airplane order for the 737-MAX will be for the -9MAX and that those could be used to replace old aircraft or to expand the fleet.  Trust me when I say that those will be replacing old aircraft as the remaining 757s will be 20 years old or older by the time the -9MAX starts delivering in quantities to United.

Is this bad for Airbus?  I think not.  Boeing almost certainly won this fight on price and that’s OK.  There are still quite a few Airbus aircraft from the (old) United fleet that will require replacement as well.   The oldest are nearing 20 years old but don’t require replacement quite yet so there isn’t a firm order for their replacement quite yet.  Airbus will compete for the A320 replacements in a few years and will have a real chance at winning as it should have some production slots for time appropriate deliveries.

The A319 aircraft are fairly new and a sub-fleet really.  I expect that if United sees an opportunity to unload these aircraft and replace them with E-195 or, perhaps, a CSeries 300, they will.

There are lots of aircraft orders to come over the next few years.  Both United and Delta really haven’t addressed all their needs here in the United States and even US Airways will need to start thinking about the next step some time soon.

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Houston’s city council voted to approve allowing Southwest Airlines to build a small (and let’s stress the word small since it’s just 5 gates total with just 4 dedicated to SWA) international terminal at Houston Hobby airport. United’s Jeff Smisek decides to make an internal company pronouncement that they’ll be eliminating 1300 jobs in Houston and likely will not be initiating the Houston to Auckland flight with their 787 deliveries either.

This is just bad form.

United clearly has been contemplating these changes to Houston for some time. You don’t make such a decision as a result of a city council decision and off the cuff. So far, I’ve seen no public announcement from United and certainly no indication of what those 1300 jobs actually do. In other words, the elimination of 1300 jobs in the Houston area is likely another step in the consolidation of the operations of ContiUnited’s merger.

But it makes a great public soundbite for a threat, no?

Furthermore, the Houston – Auckland flight was exciting and in some respects made sense way back when it was originally announced but the landscape has changed (again) and it is entirely likely that the revenue from such a flight didn’t make sense when compared to other opportunities to deploy the 787 to when it arrives.

Let’s not forget that airlines are businesses which require careful revenue management to yield the best income and profit possible. You do not run such businesses on the basis of a temper tantrum. Smisek isn’t going to be the guy who does so. So my conclusion is that this threat isn’t a threat but simply a well timed business decision designed to smack at a city council that isn’t allowing United to be its master.

And why should it? It isn’t as if the ContiUnited merger benefited Houston. It didn’t. It was known from the start that in such a merger where the headquarters would be located in the Chicago area jobs would be lost in Houston. No Big Surprise. Why should Houston reward United for having a near monopoly on flights in and out of Houston Intercontinental Airport?

For all the talk that airlines engage in about competition being good, I’ve never seen competition that an airline wanted to see show up. In fact, the airline industry is very reactive in a negative way to competition. Airlines have gone after other airlines with a genuine vengeance and intent to kill just for an airline introducing a route on “their” turf. These are real gang fights.

Oddly enough, every time a market gets competition into airports dominated by a single airline, everyone seems to win in one way or another. Cities see increased economic impacts. Airports see new revenues. Existing airlines (smart ones anyway) tune up their schedules and services and more often than not see *better* revenue performance than they had when it was a near monopoly.

Furthermore, it isn’t as if Houston is a new city for SWA. Southwest has done one hell of a lot of business in Houston over the years and has treated the city very well over that time. Why wouldn’t you want to work with an airline that has brought good to your area?

This was a bad move on United’s part. Bad for publicity, bad for the airline making this fight about jobs and bad for the industry as a whole as it just portrays these SuperLegacy airlines as bullies to large and small governments.

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The Fort Worth Star Telegram’s Mitchell Schnurman has THIS POST on SkyTalk about companies keeping morale high to maintain profitability.  It’s timely since it coincides with my own blog post about the labor cost that American Airlines is incurring with its battle over costs with the unions.

Profitability is about quite a few things in a major company such as an airline.  It’s about keeping a strict eye on costs, certainly.  It’s also about keeping a close eye on cash flow and cash holdings.  One little storm can cost an airline tens of millions of dollars.  It’s about maintaining strong metrics in ontime departures and arrivals and it’s about being smart enough to buy a fleet to do the job you have without overextending oneself.

Some airlines have been profitable with poor labor relations.  Generally that has occurred at a “peak” in the airline industry curve and almost always when contracts are in place and not up for re-negotiation.

How an airline survives the downturn in the airline industry has a lot to do with employee morale.  Employees with a strong, loyal morale tend to fight for their company.  They realize that their jobs and their success are tied to their airline succeeding more often with more customers more of the time in those bad times.

Employee morale isn’t about high salaries.  It really isn’t.  Study after study has shown that employee morale can’t be maintained at a high level with just a high salary.

It’s about making employees a part of the business.  Giving ownership of problem solving to employees who experience the problems.  Providing a share in the profitability and providing benefits that allow them to feel secure with their families while they work.   It’s also about employees perceiving “shared pain” on the part of their management team when things are bad.  There is nothing worse than an executive earning a bonus while other employees are “sharing the pain”.

A workplace where treatment is both fair and just is also important.  Valuing the inputs of a baggage handler should be just as important as valuing the financial analyst who monitors and sets pricing.

It isn’t just about your union employees delivering great service to customers either.  It’s about being able to get agreements to cover your needs now and the future.  A company that is doing right by its employees is better able to negotiate union contracts to cover new flying, new aircraft and new partnerships.  The faster you can negotiate those contracts, the more competitive advantage an airline has.

It’s notable that Southwest and Delta airlines are working very hard with their union employees to put new contracts into place to cover opportunities for new business very quickly.  It’s also notable that airlines such as American Airlines and United Airlines aren’t doing too well with their employees and aren’t executing new strategies to compete and, most importantly, earn sustaining profits.

Employee morale isn’t the only key factor to success.  But it is one of the top 2 or 3 key factors and one that several airline CEOs seem to be ignoring more and more as time passes by.  Historically, the airlines who have done well both in regulated and deregulated environments with respect to profitability are those that had genuine leaders as CEOs.  Shareholders would be wise to pay more attention to leadership at the helm and a little less attention to quarterly profitability.

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Southwest Airlines wants to build a small international terminal at Houston Hobby airport and thinks that doing so will benefit Houston with more jobs, more economic impact for the city and everyone wins.  United (Continental) Airlines doesn’t want a damn thing going on at Houston Hobby and definitely does not Southwest Airlines beginning international flights from that airport.  United thinks that allowing this will reduce jobs, have a negative impact on the economy and, well, HOUSTON SHOULD JUST DO WHAT UNITED WANTS BECAUSE WHAT’S GOOD FOR UNITED IS GOOD FOR HOUSTON.

It’s like watching Southwest Airlines and American Airlines fight over Love Field airport in Dallas.

Make no mistake, this fight is over competition.   Southwest provides LCC competition on international flights from Houston to Mexico, Central America and the Caribbean and that is United Airlines’ major domain from that airport.  In fact, those United routes are a huge profit earner for the airline.  Of course United doesn’t want the competition.

Airlines, especially SuperLegacy airlines, hate competition.  And they loath competition on the very routes that earn them the most money.

Here is my take:  Southwest wants to introduce more flights to Houston Hobby.  In the process of introducing international flights there as a kind of “hub” for SWA International operations, it will almost certainly introduce more connecting flights to more SWA focus cities such as Dallas, Atlanta, Chicago, Baltimore, Los Angeles, etc.  This is a good thing.  Southwest has a great product and one that isn’t going to negatively impact Houston.

United Airlines has major investment in their fortress hub at Houston Intercontinental from commitments made by Continental Airlines pre-merger.  Houston Intercontinental is a fortress hub for them like DFW is a fortress hub for American Airlines.  Fly into IAH and you’ll be amazed at how dominated that airport is by one airline.  It is a crown jewel of hubs and the last thing United wants is an airline poaching customers from those routes.  But one reason why those routes are so profitable for United is that there is virtually no competition.

Competition is good.  Houston should allow Southwest to build its 5 gate international terminal.  It will benefit Houston and if United isn’t quite so profitable there, so what?  I don’t think there will be a massive increase in overall traffic to international destinations served by both airlines a la “Southwest Effect”.  I do think that SWA will poach quite a few customers locally and I say that what benefits the businesses and private parties of Houston is far more important than whether or not United gets to have its cake and eat it too.

The airlines are actually similar in labor costs but SWA maintains higher productivity.  It’s not as if United doesn’t have a fighting chance against SWA, it does.  For one, it has a frequent flier program that will be stronger for Houston residents most likely and it has the ability to feed as much traffic as it wants through Houston to southern international destinations.

The one party here that I do not think gets hurt with this is the city of Houston.

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Here we go again.  United Airlines CEO Jeff Smisek has done very, very well in creating the world’s largest airline between his merger incentives and compensation.  Well enough to anger unions who represent labor forces that are touchy about executive compensation already.  His executive team has also done extremely well.

But UA still isn’t consistently earning money and it has had a rockier time in integrating the operations of United and Continental airlines.  Mot recently, the reservations migration provided a less than stunning experience for customers.

The standard for smooth mergers remains Delta/Northwest and one can hardly expect all of them to go that well.  But it will leave people asking if, once again, airline executive teams aren’t getting compensated a bit prematurely as well as for milestones that don’t show a consistently profitable airline.

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United Airlines performed its cut-over to the Continental based IT systems for reservations and frequent flier programs nearly 2 weeks ago.  By all accounts, this was probably about as smooth as it could have gone for merging two legacy airline systems.  That doesn’t mean there were no problems, it means it was better than most.  There was problems, some complaints and some frequent fliers saw accounts with incorrect mileage and other passengers found it difficult to get their seat assignments.

At present, there are a few who are still experiencing problems and United is still responding to larger than normal call volumes but here is the good news:  flights are flying and people are getting on those flights and arriving at their destinations.  There are issues that remain to be fixed.

There are, however, quite a vocal minority complaining loudly and I see media picking up on this and describing United’s transition as being far worse than any real appearance gives.  In USA Today’s Today in the Sky Blog, we see customer’s such as ultra elite frequent fliers making complaints about United (not Continental) agents being unfamiliar with Continental’s SHARES system still or having trouble making a seat assignment at a kiosk.   There are others from frequent flier enthusiast websites complaining that United changed the miles accrued for routes.  How much did they change?  In most cases by less than 20 miles.

I have message for those people:  Grow up and act like adults.

If someone is missing a flight due to incompetence or is unable to book a frequent flier award due to incompetence, I’m willing to hear your complaint.  If something is taking you 500% longer to accomplish than previously, I might even be willing to listen.   But, seriously, do we really want to be complaining about whether or not a gate agent knows the SHARES system completely yet?   Do you really want to moan about the fact that San Francisco-Hong Kong flight went from accruing 6921 miles to  6909 miles?  That’s a difference of 12 route miles or 0.17% change in mileage.  Not 17 percent but 0.17 percent.

Complaints like that give credence to my belief that the customer is absolutely NOT always right.  A principle that I will point out is in violent agreement with a former industry leader named Gordon Bethune.

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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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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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