These three alliances have been forming, growing and shifting for some time now and it is almost fair to say that they’ve reached a certain maturity that lets us take a look at what the future might hold.
There will always be shifts between alliances as time goes by but the major structures are now in place and let’s be honest in that airlines are not equal partners in these alliances. There are bedrock airlines and there are airlines who are really more associate partners.
In the Star Alliance, US Airways has definitely been more of an associate member than, say, United, Lufthansa or Singapore Airlines and with the recent addition of Continental and the close partnership its formed with United, US Airways is even more the redheaded step-child in this organization.
SkyTeam really has the strongest core though. Formed, in part, from the original Northwest / KLM alliance that began in the 90’s, it now has an extremely strong network that spans both the Pacific and Atlantic oceans. If it has a weakness, it is in South America among South American carriers and I’m not sure if that is really a weakness right now.
The Star Alliance and SkyTeam have both managed to work among themselves in pretty close partnership and develop strong networks playing on each others’ strengths. Schedules between those partnership airlines are pretty rational and they do tend to treat affiliate partners as having value in the organizations.
Then there is Oneworld. Oneworld isn’t so much a partnership alliance as it is a looser affiliation of airlines. To be sure, at one time Oneworld’s members represented a very strong core of airlines who were profitable and very strong on a global level. To a degree, they still are but this has definitely become the weak alliance over time and with the fight over JAL taking place, its now fighting for its life.
Oneworld doesn’t know how to work well with each other. Partners American Airlines and British Airways have dominated that relationship and because of their obstinance over trans-Atlantic routes and slots at Heathrow, they haven’t been able to work closely together over time and develop those relationships that have been grown in other alliances. Because of their dominance, other potential strengths in their network, QANTAS, JAL and Cathay Pacific for instance, haven’t really been exploited fully either.
Oneworld is, for most intents and purposes, an old style Anglo-American relationship with AA, BA, QANTAS and Cathay Pacific dominating that alliance. (If you don’t think Cathay Pacific is Anglo, look up its history and its executive team.)
If Oneworld loses JAL, I’m not sure this alliance survives in the long run. It cannot afford to be an alliance with two dominant partners (AA and BA) and it cannot afford to lose even one trans-Pacific partner. If JAL moves over to SkyTeam, then I suspect over the next few years we’ll see one or more “majors” in that relationship find homes elsewhere.
No matter what Oneworld does, they lose a major network in Japan if JAL leaves the alliance and they have no hope of luring ANA over to their alliance either. The best they can hope to do is build their routes systems into Japan with more direct flights from outside Japan. That isn’t very satisfactory.
They already lack a major partner in China itself (Cathay Pacific isn’t quite that kind of partner) and lack a major partner centered in Korea and Southeast Asia/India.
I suspect we’ll see one or more core partners in Oneworld slip away to one of the other alliances. It wouldn’t be too hard to attract LAN away from Oneworld, for instance. Nor would it be difficult to perhaps walk Cathay Pacific away from Oneworld. That would leave three basic Anglo American core partners who have no harmonized strategy and not much to offer smaller affiliate partners either.
What’s more, JAL doesn’t need their money now that they’ve gone into bankruptcy. The Japanese government is financing them and will provide all the capital they need at this point since they have little choice to do anything else. That means JAL is free to consider a long term strategy and if it can get some real signal that anti-trust immunity would be granted to a partnership between Delta and JAL and the rest of SkyTeam, that’s their best deal.
It has occurred to me that the reason there hasn’t been more worry about the dominance such an anti-trust immunity would grant is that, maybe, Delta has signaled its willingness to draw down its legacy network to and inside of Japan that it gained in its Northwest Airlines purchase. Northwest Airlines not only had a strong system to Japan, it also had a strong network system of flights originating from Japan to regional Asian destinations.
If Delta is willing to let JAL fly that system on its behalf, that may well satisfy regulators in the United States.
So, the Dallas Morning News Aviation Blog has THIS entry about the United States telling Japan to slow down on their assumptions that all alliances applying for antitrust immunity in anticipation of a new Open Skies treaty between our two fine country will receive approval. Apparently the Japanese government has been presuming that any and all applications are a done deal and approval is just pro forma. So the United States went to Japan and essentially said “Yeah. Not so fast. Not only do we not choose the alliance for our companies, but we actually don’t just rubber stamp things either.”
With all the talk over the past two weeks about how it was all but announced that JAL would switch to an alliance with Delta and SkyTeam, I could not understand how everyone could regard that as a done deal. Such an alliance meant that 50% or more of the trans-Pacific traffic between the US and Japan would be owned by a cooperating alliance. In the airline world, that’s market power.
To put my puzzlement in perspective, the trans-Pacific BA/AA/Iberia alliance wouldn’t come to close to controlling that much of the UK/US traffic and, yet, the DoJ and DoT have *not* given blanket approval to that application. The DoJ asked for modifications and the DoT (which actually gives the approval and which is more friendly in general to airlines) is waiting for more comments.
So, as I’ve already written a couple of times, I didn’t see an anti-trust immunity agreement between JAL and Delta as necessarily anything genuinely possible. Frankly, I don’t know why Delta thinks it so doable either but from their perspective, there is no harm in trying to form the alliance.
This is the cultural difference that exists between Japan and the United States. In Japan, government still very much has a hand in the direction of businesses and, in particular, the airline industry. Japan, despite its size, remains essentially a two airline country where one of those airline (JAL) has been a government arm for its entire existence. From Japan’s point of view, if the US wants an Open Skies agreement and knows that granting immunity is essential to that agreement, then surely the US will make that happen regardless. Obviously, our government doesn’t work that way.
I suspect that was a rather stunning reveal for the Japanese government and the executives at JAL. I also suspect that the CEO of American Airlines, Gerard Arpey, smiled yesterday despite everything else slamming into AA this week. Now that I understand what was going on on this subject, I reaffirm my belief that, ultimately, JAL will stay with Oneworld if only because of anti-trust issues and the extreme difficulties and logistics of getting such an agreement to pass in Washington, DC.
And that isn’t exactly breaking news, is it? Everyone knew it was coming and now it has happened. Japan Air Lines must now face the music, reorganize and find a way to survive.
It isn’t as if they were a shining example of profitability over the years. Indeed, it was yet another airline formed as a national flag carrier that was ultimately privatized and which ultimately went into deeper and deeper debt. Its cousins are airlines like Alitalia and Olympic, not British Airways and American Airlines.
The blame lies in the company culture and by that I mean it went too long in a regulated and semi-regulated environment and then got set free into the competitive winds of the world with a crew of executives that never knew any real competition. Its one positive attribute was its service level which by most accounts was impeccable.
There has been a lot of criticism for the CEO, Haruka Nishimatsu, over the past few weeks. Particularly when it was announced that he was ultimately going to be replaced by Kazuo Inamori, founder of the Kyocera Group. I wrote about that announcement HERE. Tonight I remembered a video that was passed around among many airline enthusiasts as a kind of great example of what an airline CEO should be. Mr. Nishimatsu is shown riding a bus, eating in the general cafeteria of the company and generally being one of the people. I remember many people posting on other blogs about him earning just $90,000 in salary after cutting all his perks when he had to slash budgets and staff at JAL. (See below)
Let’s remember that this guy at least tried to do the right thing which is quite unlike many in this business at times.
So, what’s next? Well, JAL has to layoff thousands of employees, reduce costs at every level, probably purchase some new aircraft and find a way to claw itself back into profitability. That’s a tough thing to do even in good times.
I’ve some doubt about their choice of CEO to do it with. This is a man who plans to work for no salary and put in “3 or 4 days” a week as well as choose a second-in-command from the current airline ranks. Huh? Really?
What JAL needs is a seasoned airline executive who has extensive experience in competitive environments and who understands what it means to run both a national and international airline. There are plenty of those around in this world but, yes, it does potentially mean hiring someone who isn’t Japanese to run the airline. Or at least to lead the airline out of its current problems.
There is some precedent for this. Nissan’s CEO is Carlos Ghosn, a Lebanese-Brazilian man who came to Nissan from, of all places, Renault. He made enemies until he surprised everyone by bringing Nissan back to profitability. If they can’t stand to hire outside of Japan, then they would do well to find someone at ANA to take over.
If the Japanese government and JAL’s board want to be serious about recovery, they need someone who is the best, not someone who is politically safe.
JAL will likely rid itself of its 747 fleet in favor of a 777 / 787 fleet for its international operations. It is time for those Airbus A300 aircraft to go too. It will have to eliminate stupid routes like flying from New York City to Rio de Janeiro. Their focus on First Class and Business Class will have to be realigned. (An amazing portion of some of their international aircraft is dedicated to these two classes leaving only a small portion for Economy Class.)
But I have to say that I think this is going to turn much uglier before it gets better. I think JAL will flounder and I think the Japanese government will continue to pump money into it (and, in a way, they kind of have to since they provide the only competition to speak of for ANA.)
“We believe it is important to secure customer convenience by the injection of public funding. However, we are also highly concerned that the fair and competitive environment would not be secured under the financial support and injection of public funding.”
That kind of criticism is rare in Japan but ANA has had to fight for its success since its inception. They have a point but strangely even I find such a statement a bit tacky on this day.
Everyone says it is Delta and SkyTeam who will lure JAL away from the Oneworld alliance. I must say, given all the talk, I’m beginning to be swayed. However, I remain skeptical that they can enter into the SkyTeam alliance, particularly with Delta, without their being some anti-trust issues on the part of both governments. If they are leaning that way, I believe it is because someone in the Japanese government is leading them to believe there will be no issues. I do not think that that will be the case in the United States, however. One look at the criticisms of the AA/BA/Iberia anti-trust case and you’ll see what I mean.
According to the Wall Street Journal Middle Seat blog, American Airlines has decided to match the bag fees recently implemented by Delta and Continental. You can read more HERE.
So, at present, Delta (including Northwest), American Airlines, Continental, United and US Airways are now all charging $25 for the first bag and $35 for the second bag with some of the airlines offering “discounts” if you perform your “bag fee purchase” online. That would imply that they each see this price for checked bags being a bit more elastic than one would have thought. Or, at the least, they see it as elastic as long as they all go for the same increases much as the case is with air fare increases.
So far, no low cost carrier has adopted this pricing model or even raised their checked bag fees. I suspect they won’t either as it gives them an opportunity to show themselves as the good guy while gaining some incremental revenue.
If this rise in fees sticks for the next 1 or 2 quarters, I do think it will put tremendous pressure on Southwest Airlines to institute their own version of bag fees, at least by institutional investors and analysts. So far, Southwest and its CEO Gary Kelly have resisted these calls to add checked bag fees and, so far, they believe it is resulting in incremental revenue from passengers switching to Southwest to avoid fees. Since CEO Kelly (and Southwest as a whole) is not one to shade the truth, I’ll continue to believe these claims.
However, with other LCC carriers such as Airtran and Virgin America and even jetBlue (on the 2nd bag) have added fees and do report significantly improved revenues from that, I would imagine that the call for Southwest to add these fees will be defeaning particularly when Southwest could implement a jetBlue or Airtran style program and see improvements to their quarterly results which haven’t been too impressive in the last year.
It is sad but I don’t believe we’ve seen the last of these increases. I do think that some airline will probe the upper limits of these fees just a bit more yet. I do think that Southwest will resist the call to add these fees for at least another 6 months but if there hasn’t been some kind of collapse in the price of these fees by then, I would not be surprised to learn that Southwest has begun to make changes to their infrastucture to implement them. I think the first sign will be the withdrawal of their “no fees for checked bags” advertising.
Yesterday on my post about flights between Dallas / Fort Worth and Milwaukee, the surprise of that investigation was that Southwest Airlines was most probably the best choice based on cost (price + baggage fees + convenience from doorway to doorway) and service (mainline aircraft and service product).
Well, that got me to wondering about other routes out of the DFW area that I’m generally interested in. So, I checked on flights between Dallas and Portland, Oregon, another city I have an interest in. Southwest offers a number of two stop connections between the two destinations at competitive prices but your travel duration on those would be excruciating.
However, Southwest *does* offer a couple of flights each day that are one stop – no plane change flights. And guess what? They’re pretty reasonable in flight duration. Again, I cannot tell where that one stop is but it must be mostly right along the flight path. Best of all, their price is about as good as I’ve seen in a long time at an advance purchase fare of $129 each way. Again, considering that Southwest doesn’t charge for baggage and is more convenient in the Dallas area, this is the best deal all in all.
American Airlines offers 5 non-stop flights a day (all 4 hour long flights using MD-82 aircraft) for the same nominal price and charges for baggage.
And I have to tell you, I think I’d rather fly Southwest even with one stop. AA’s MD-80 aircraft are woefully worn out, uncomfortable and their crews are surly at best. Southwest offers me a more comfortable seat, most likely a newer aircraft and certainly a better maintained cabin and a service staff that was happy to get out of bed that day and go to work.
So, what does this mean? Well, it’s hard for me to research every route that SW and AA might compete on but it looks as if Southwest might be getting aggressive with American on a lot of routes that AA has been dominating with almost zero competition for a long time. Southwest is doing it by offering direct, one stop, no plane change flights and they look pretty good to me.
If you live in an area served by Southwest, it may very well pay dividends to take the extra moment to see what they’re offering on your chosen route. Just remember that you won’t pay baggage (or non-alcohoic beverage) fees and you will fly on mainline aircraft with friendly service staff. That has a value in and of itself.
In way, it is a shame that Southwest continues to refuse to list itself with online travel agencies like Expedia and Travelocity as I think they would compare so favorably against legacy airlines that it might well be worth it.
I follow this city pair pretty closely because Milwaukee is my birthplace and I continue to have a lot family there and because I’ve never really understood why this route has so often been the ugly step-child given the demand between the two cities.
I took a look at what service airlines were offering (non-stop) between the two cities and thought I would give a summary since its so reflective of what is going on in Milwaukee in general. Just to keep things interesting, I looked at flights in mid-April.
American Airlines will have 5 flights spanning each day starting early in the morning and ending each evening. Every one of those flights is an Embraer ERJ-140/145 aircraft flown by American Eagle. American is competitive on price and even currently the low fare leader this far out but only by quite literally a few dollars.
Airtran has its flights for April now. They have 2 flights a day with one morning and one evening departure and both are very convenient to both business and leisure travelers. These flights will be on CRJ-200 equipment flown by Skywest Airlines. I still expect that these will quickly transition to Boeing 717 aircraft if Airtran finds this a popular route segment. Oddly enough, Airtran’s offerings are just over $100 more than what AA is offering.
Midwest Airlines has 4 flights spread over the day and all at convenient times ranging from early in the morning to the evenings. These flights are competitive with AA and are currently flown on Republic Airways E-170/190 aircraft, certainly the best equipment on that route presently.
Frontier Airlines now has codeshares on every Midwest Airlines flights and at the same prices. So, if you want to fly Frontier, uh, I guess you can. At the end of the day, it is neither Frontier nor Midwest Airlines (although the aircraft are painted in Midwest colors), it’s really Republic Airways.
That makes 11 physical flights and 15 flight offerings on 4 airlines between the cities for non-stop flights.
Now, here is the interesting development. Southwest Airlines will be offering direct flights (one stop, no plane change) between Milwaukee and Dallas come April. So far, I cannot discern where that aircraft stops along the way but it has to be on the way. Perhaps Kansas City or St. Louis because the duration of those direct flights is only 3.5 hours which is nominally one hour longer than the non-stop offerings but if you allow 40 minutes to land, disembark passengers, embark passengers and take off again, it cannot be a long or bothersome stop.
An hour longer seems like a lot, maybe, but you get to fly it on a mainline aircraft (Boeing 737) and on airline that does *not* charge luggage fees. You also fly into Love Field airport instead of DFW which means (for many) a much more convenient airport to fly to and from.
Best of all, Southwest is highly competitive on price. AA remains slightly cheaper but advance purchase fares mean that Southwest is nominally a few dollars more, potentially as quick (doorway to doorway) and on a more comfortable airline with friendlier service and no baggage fees. This may be the best deal offered if their flight times work for you.
Delta Airlines chose to announce they are increasing their checked baggage fees. If you pay online, your fee goes from $15 for the first bag to $23 for the first bag. The second bag checked rises from $25 to $32 (paid online). Continental matched those fees almost immediately. While it seems exorbitant to me, I wonder if anyone will really notice right now.
I suspect Delta did this simply because they have pricing power at most of their hubs (ATL, MSP, DTW, SLC, CVG, MEM) and because they don’t think it is going to affect the consumer’s decision about which airline to fly in most cases. Delta doesn’t get a lot of LCC competition at its hubs except for ATL and there seems to be a unspoken agreement with Airtran not to get too ugly there. Besides, Airtran has checked baggage fees too.
The thing is, most online sites that offer booking for airlines in the US do not mention baggage fees when displaying prices for routes. Delta will continue to appear to be very competitive on routes while likely adding additional incremental revenue through the “gotcha” approach. Quite honestly, I suspect they’ll get away with it. At least until there is a healthy recovery in the airline industry and that is likely 18 to 24 months away still. Maybe more.
Will others match it? I suspect that American Airlines might. There is no precise harmony among airlines on these fees, not yet anyway. Continental already had pretty high fees at $18 and $27 for online checked fees (with a $2 and $3 surcharge at the airport). AA is at $20 and $30 respectively whether you check online or at the airport. US Airways is at $20 / $30 for online (with a $5 surcharge for checking at the airport.) United is $15 and $25 for online checking.
By contrast, Southwest Airlines has no fees up to the 3rd bag, jetBlue offers the first bag free and $30 fee for the second while Airtran charges $15 for the first and $25 for the second. In other words, these fees are all over the place. The truth is, as competitive as airfares are on many routes, these fees can change the equation pretty dramatically in some cases since those fees are for each way on a round trip flight.
These fees have added dramatic amounts of revenue to airlines’ bottom line and I don’t see them going away at all. I don’t think the fees among legacy airlines will harmonize much at all until and if online travel sites begin showing an “all in” pricing when comparing fares. Even with such comparisons, I don’t think the fees go away so much as they just begin to merge together among the airlines.
Will anyone else raise their fees? Well, maybe. I’m sure it will be tempting to do so among all the legacy airlines. One or two may even try to raise the ante some. I kind of think both United and American Airlines will try some kind of new mix in the future. I don’t see the LCC carriers playing around with their fees much if at all. They have the revenue and now this may be their chance to follow Southwest’s strategy in a modified form by advertising lower checked baggage fees.
I don’t think Southwest will change its attitude on these fees based on this new development. Their strategy appears to be working for them and they don’t have a history of following the pack when something works. That said, I’m sure it is something they’ll re-examine from time to time and it doesn’t mean they won’t add fees at some point in the future. Right now, they appear to be capturing customers with their ‘no fees” approach and their aggressive advertising seems to have caught some attention.
As much as I hate these fees for the 1st bag checked, I hate that airlines and travel websites have done really little to truly show the “all in” price for these trips. It makes things just that much more murky for the consumer and that is a bad thing. However, the best thing you can do is learn the fees for the airlines you may be shopping for a trip and do the math yourself. You’ll be frustrated by it and no doubt resent it but there isn’t a ready made solution at this time.
Frankly, these developments are just one more reason why I wonder about Southwest re-joining the travel agency world. The world has changed since they left it and, quite honestly, I think they could re-structure their IT infrastructure and re-join those agencies with little incremental costs involved. At that point, they become the no brainer for many consumers from my view. Even as aware as I am of airline options and even being located in the DFW area, even I tend to forget about Southwest as an option sometimes.
One strategy for learning these fees is to visit LuggageLimits.Com (also linked in my sidebar).
Today, part 2 in my views on whether or not we’ll see a real “Ryanair” style airline here in the United States.
Watch what you fly here. The most recent LCC entrants here have bought Airbus. No real surprise as Airbus likes to make a heck of a deal on an aircraft for new airlines in the hopes they’ll have the “in” for future orders if that airline succeeds.
Boeing isn’t too interested in that. They want to see a solid business plan and a real possibility of success. What’s more, big orders aren’t the enticement they once were for Boeing. Boeing got burned on a few of those deals with Ryanair being the most notable since it allowed Ryanair to buy aircraft, fly them for a couple of years and sell them at a profit. Boeing isn’t going to let that happen again any time soon.
Is Airbus the right aircraft? Yes. No. Maybe. I kind of think not. I think it is well suited to the jetBlue and Virgin America airlines of this country because they can support that upgraded service product nicely. That said, those airlines would have done just as well with Boeing aircraft. In fact, jetBlue went with Airbus because Boeing refused to offer a decent price for a decent order.
But Airbus doesn’t strike me as quite the right choice for an LCC. They’re a bit higher off the ground, have a little worse operational dispatch rate and don’t always have the best range vs weight ration for certain routes. Yes, they’re a family of aircraft that offers a range of size that captain can fly across the type range.
Boeing seems better. Supported here in the United States, you have better access to mechanics, parts and plenty of maintenance contractors to keep you going. They’re a little bit closer to the ground, a little easier to turn around and have a little bit better dispatch rate. In addition, their range of capacities is a little bit better for routes and virtually every model has trans-continental capability now without being weight restricted.
The model I would look long and hard at isn’t either of those. I think a new LCC carrier trying to emulate Ryanair ought to take a serious look at the Embraer 170/190 aircraft. They’re cheaper to operate and can carry a full load of passengers and baggage although little cargo (which isn’t an LCC’s concern anyway.) They offer a family of sizes, have a good dispatch rate, offer quick turn arounds, great range, good comfort and great potential for routes requiring frequency and low costs. It is no wonder that David Neeleman chose them for his new airline, Azul, in Brazil.
But you can go used in the US and do pretty well too. Allegiant Airlines buys used MD-82/83/87 aircraft, for instance. They MD-80’s are overbuilt, cheap to buy and still pretty cheap to operate. They have range, good dispatch rates, ease of maintenance and they’re abundant on the used market. The same is true of older Boeing 737 models (pre Next Generation models) and those are becoming to cheap to purchase as well.
In the end, an LCC needs an aircraft type that is relatively easy to expand into a fleet, keep one class of pilots flying it and which has a ready source of aircraft to augment and/or replace the fleet with.
One type, many sizes should be the rule. Ryanair uses one size, the Boeing 737-800 and Southwest basically uses one size, the Boeing 737-700 but they can afford to do so. A new LCC needs operational flexibility and being prepared to use the three basic sizes of either type would be a good thing.
But you can split your types too. Airtran did this successfully by entering the world with DC-9s, transitioning to Boeing 717s and then growing in capacity by bringing on the Boeing 737. That worked because while they needed two different pilot groups, the pilot groups could be kept “rational” with the same pay rates. jetBlue split their types between the Airbus and the Embraer(190) and split their pilot groups pay rates too. There was risk involved in that but jetBlue avoided that by offering pay rates on the Embraer that were as generous as that being offered other pilots flying mainline aircraft at other airlines.
Find airports that welcome you and that have demand to locations you can serve. Sounds easy but it isn’t. In the US, airports tend to be wedded to airlines that have served them for decades. When DFW opened, it was served by a number of major airlines and each terminal served one or more airline. Now, DFW has been taken over by American Airlines (nearly 4 of 5 terminals) and does little to serve the needs of airlines who aren’t AA.
Airports need to figure out that putting all their eggs in one basket with a major, hubbed airline isn’t a good strategy in the long run. Once those airlines have that dominance, they use it to beat airports down on fees and coerce airports into paying for infrastructure the airlines then get to own. It doesn’t benefit the local economy to have one dominant airline as prices rise and service falls. This isn’t just true for DFW either. When airports begin to aggressively pursue new entrants, everyone will win.
New and existing LCC entrants need to make a better argument too. All too often, LCC’s tend to fear competing in those markets dominated by a major legacy carrier and that’s a mistake. Airtran wasn’t afraid to go up against Delta and it paid off. jetBlue wasn’t afraid to compete in one the most competitive markets in the world (NYC) and against some of the biggest airlines. In the past, there weren’t good examples of what an LCC can do for both an airport and a metropolitan area. Now there is and new LCCs in particular need to use that to their advantage.
Treat your staff well. Airlines sell a service product and while you may get customers on price, you’ll keep them with service. Offering strategies to your crews that permit you high productivity and your crew a living wage along with a good working conditions can only lead to your success. Treat them like commodities and you’ll fail. Southwest, Ryanair, jetBlue and Airtran get this. Skybus and Mesa Airlines don’t. Look at who is making money.
Quality of life is just as important to airline crew and staff as wages. Airlines that offer good quality life tend to have happy crew flying their flights and treating their customers right. At the end of the day, it is a lot cheaper to keep a customer than it is to find new ones every week.
Will we ever see a close replica of Ryanair’s model here on a national basis? Yes, I think so. Right now, no. The market is too crowded but that will change again and new airlines will be started again. US attitudes towards fees and advertising are changing, although slowly.
First we need to see a major airline liquidate or merge with another to reduce capacity some more. Then we need to see an uptick in the economy that induces people to spend some money on travel again (both leisure and business travel.) There needs to be a glut of aircraft useable for such a venture (and that’s happening already) and airports need to figure out that it is in their best interest to find space for these new entrants. That really hasn’t started to happen yet but it may yet still happen.
Since Virgin America began operations, I’ve been watching for something sensible to happen. There have been a few developments that make sense.
In addition to VA’s initial trans-continental routes, they began to add some West Coast service to places such as San Diego, Las Vegas and Seattle. This let me increase aircraft utilization since those routes from San Francisco and Los Angeles weren’t 6+ hours but, rather, 2 hour (or less) hops. And having a bit of network to feed into those trans-con flights made sense too.
But this put them into competition with a few very well established airlines as well. United, Southwest, jetBlue and Alaska Airlines all operate on the West Coast very effectively and on the same routes.
Alaska Airlines, a legacy airline with a very good full service product started to jump on the anti-VA bandwagon and issued a number of objections to their “US Owned” status to the DOT. Most likely because VA had a product that competed very well against their full service business class product and that was a major source of revenue. Alaska Airlines had a lot to lose on some of those routes in particular. Strangely, United remained pretty quiet and probably because their frequent flier program kept their business customer pretty loyal.
Speaking of frequent flier programs, that was another area that Virgin America was a bit lax in and that kind of surprised me too. They had 2 extra years to develop a strong program and have the infrastructure in place to support it. It was something that, in my mind, would have made sense since the business customer likes such programs and they had a good trans-continental service product to attract those people. Instead, it was rolled out a tad late and still lacks much of a partnership with anyone.
Although VA positions itself as a low cost carrier, it really offers a 2 class service product that is comparable to any legacy airline and, in many cases, it is a service product that is much better.
Aircraft are equipped with a two class cabin (first and coach) called, oddly enough, First Class and Main Cabin. There is a Main Cabin Select product but that’s really access to Main Cabin seats that have a bit more legroom (exit aisles and bulkhead seats) with some of the First Class service product (meals, beverages and premium tv channels are free). It’s an economy plus plus or semi-business class product.
I believe all airlines could stand to offer more service products through their cabins and this was an area that I thought VA was kind of smart in. I still think a lot of airlines could stand to differentiate even more but I liked what VA had there. It was more “business” than “coach” than a lot of airlines’ economy plus products and even competed very well against a similar offering from jetBlue.
jetBlue really took things to aother level with their LiveTV offering on their aircraft. Virgin America took it to yet another level by offering a full entertainment system (including TV) that even allowed shopping and the ability to order food and drink from a menu, thus eliminating the traditional beverage and meal cart services. The system, called Red, worked pretty well although some reviews had it not always working or in need or a re-boot from time to time. Such systems do take time to work out bugs and time for staff to learn to work with.
VA also got aggressive and was the first US airline to offer GoGo inflight Wifi on its aircraft. With accomodations like power ports at each seat and the existing entertainment offerings, this was likely adding whipped cream to the ice cream. All of their aircraft are equipped with it and Virgin says they’re doing OK with it. Probably more so than some airlines.
All of these offerings cost a lot of money to both purchase and maintain and VA continued to see red ink as time passed by. (It is difficult to get a very good picture of VA’s finances because it continues to be a private company instead of a public corporation.) At one point, rumors that its US investors wanted out spread around and Alaska Airlines filed yet another objection to VA with the DOT who, recently, yet again ruled that VA was more than sufficiently US controlled. (Read THISfor more info.) CEO David Cush did continue to speak publicly that their revenues were improving monthly and that he did think VA was edging closer to an operating profit.
In fact, VA did manage to eek out a small third quarter operating profit as reported in December which, frankly, surprised a lot of people. I know I was. It was a 59% improvement (according to VA) over the previous year’s third quarter and they managed to make it happen in what has been arguably one of the worst economic climates for airlines ever. This got my attention. Frankly, the climate hasn’t been good for VA since they started to improvement during those times is impressive, to me anyway.
Virgin America is also a bit unusual for the airline industry in that it has a number of women in senior leadership positions. Their SVP for Inflight Services, VP – Marketing, SVP-CFO and VP – Planning & Sales are all women.
Also curious is the rather interesting Canadian influence in their leadership. The Chairman of Virgin America is Canadian Don Carty, former Chairmen and CEO of American Airlines. Frances Fiorello, SVP – Inflight Services has had a long career with Candian airlines such as Canadian Pacific, Canadien Airlines and Air Canada. Bob Weatherly, SVP of Flight Operations, has a similar Canadian history.
And then there is the American Airlines connection which kind of puzzles me at times. Don Carty, David Cush, Diana Walke, and Ross Bonanno each have a history with AA. Virtually all their senior leadership has extensive with experience with previous airlines. In fact, after looking into their biographies, it made me realize just how VA might be managing to make it despite all predictions against them.
It’s a strong team with a strong background in successful airlines that, for the most part, have reputations for good cost control and good service products.
Virgin America has been on my death watch for at least a year. Now, a lot of my inclination towards that has been based on routes. Yes, they’ve grown and, yes, they’ve added routes. But they don’t seem to want to really compete except where there is really low hanging fruit against their service product.
They recently opened up routes between, of all places, Fort Lauderdale and Los Angeles and San Francisco. Obviously they saw some opportunity there but I don’t get what the attraction is in adding those two routes before a lot of other opportunities.
VA doesn’t have an East Coast network at all. They have destinations in NYC, Boston and Washington, D.C. (in addition to the Fort Lauderdale routes) and that’s OK. Competing on the East Coast is brutal and those three main destinations have enough originating traffic in them that they don’t necessarily need network traffic feeding in on the West Coast yet.
David Cush has, at times, talked of adding routes from the West Coast to Chicago but he wants O’Hare airport and claims there are no gates to be had. This isn’t exactly true. There are gates but VA doesn’t want to pay the price to get entry to them. There were, at one point, gates available at Chicago’s Midway airport but VA doesn’t like that idea either.
More recently, Mr. Cush dropped hints of adding a route possibly to Austin or Dallas / Fort Worth. Most agree that Austin might happen (there is a strong tech connection between Austin and the West Coast) but doubt the DFW possibility.
You see, my problem is that VA seems to be ignoring the possibities in the middle of the country. With their service product, they could compete very well against AA on routes between DFW and San Diego and Los Angeles. They could compete well with AA and United on routes between Chicago and Los Angeles and San Francisco. There is a strong connection between Denver and Los Angeles and despite the back alley fight going on in Denver, it has possibilities.
They’ve by-passed Portland, Oregon which has strong ties to both LA, Seattle and San Francisco and Alaska Airlines, who owns a lot of that traffic has already proven to be susceptible to VA’s service product.
Indeed, if you look at their route map right now, they have every appearance of avoiding any destination that is a real hub for a legacy airline.
I can’t think of a market that is more need of a real competitor in service product to destinations on the West Coast than DFW. Completely dominated by American Airlines, the service product and prices to West Coast destinations is weak and expensive respectively. Atlanta could stand a bit of competition on routes to the West Coast too. The same is true for Miami, Minneapolis / St. Paul, St. Louis, Detroit, Kansas City, Cleveland and maybe even Philadelphia and Baltimore.
It’s always a nice strategy to enter airports where the barriers to entry are easy and cheap when you’re getting started. But VA is more than 2 years old and clearly has a product that, like jetBlue, can compete against major airlines and win. In any of the major hubs I”ve named above, they are dominated by one or two airlines on those West Coast routes that are flying old aircraft with little new service product and who have much higher costs than VA. It isn’t going to get easier to compete with these guys with time.
That’s why a part of me continues to view VA with skepticism. New airlines don’t win by being afraid to compete. Airtran and jetBlue are perfect examples of airlines who were willing to go up against major legacy airlines and beat them on both price *and* service. Airlines who weave and duck from their opponents tend to lose. Skybus was a great example of that.
There are often moments that are ripe for smaller businesses to make a commitment to going against their major competitors and, if you wait too long, those moments go away and never come back. I’m starting to sense that Virgin America is beginning to lose those moments.
Would I fly VA? Sure. I’d love to enjoy their service product. However, they fly nowhere I want to travel so it is going to be a long time, if ever, that I get to try them. Would I suggest them? Absolutely. At least for now. They aren’t going to go bankrupt any time soon. They’ve managed to get past that infancy stage now and kudos to them. They offer some fantastic prices on their routes and I doubt anyone would be disappointed by flying them.
I tend to ignore Virgin America often even when they do make the news. I’ve had a lot of trouble figuring out what this airline is supposed to be and even more figuring out whether or not they are really going to succeed.
VA has made some news in the past couple of months, though, and I figured it was time to talk about them.
Virgin America began as a concept annunced by the irrepresible Richard Brandon (founder of Virgin Atlantic and the Virgin Group) and it went through quite a few iterations before it launched. It changed its announced name from Virgin USA to Virgin America, for instance. Ownership structure was fiddled with several times to meet US restrictions on foreign ownership of airlines. Business leaders changed and their original CEO, Fred Reid, was eventually removed to satisfy the DOT and gain permission to launch.
Their approach to finding a home was weird to me and kind of reflected a European viewpoint that led me to believe they weren’t necessarily looking at the US market properly. After leading a kind of competition to find a home, Virgin America settled on San Francisco as its “operations” home and New York City as its “corporate” home. Neither location struct me as particularly wise because NYC and California are expensive places to operate and they’re no more representative of the United States than a lot of other locations.
While they went through the start up process, Virgin America faced a lot of criticism from other airlines. Flatteringly, it was quite a bit more than many startups have received over the years. On the surface, the objection was always to the perceived foreign ownership of Virgin America. My own sense was that other US major airlines saw another potential jetBlue starting up and given jetBlue’s success, yeah, it would worry a few airlines.
Strangely, at the end, some of the loudest objections came from Continental Airlines who, from my point of view, had the fewest reasons to fear Virgin America’s competition. Continental had a strong 2 class operation that was highly favored by businessmen for both its service, comfort and frequent flier program. From my perspective, American Airlines and United Airlines had the most to fear from this upstart’s trans-continental plans. Even jetBlue had some reason to be worried since VA’s product most closely competed with jetBlue’s and had the biggest chance of nibbling away at jetBlue’s customers.
I think the biggest concern from existing airlines was that, once again, a well financed 2 class airline was entering the market that had low labor costs and brand new efficient aircraft. Startups always have low costs because the airline industry is based on seniority. A new airline with all new employees quite naturally has some of the lowest labor costs but that does change over time and it really depends on the airline on whether or not those costs rise dramatically or not.
jetBlue has been able to keep its labor costs relatively low by being pretty good at taking care of their employees, for instance. By having such low costs, airlines like jetBlue and VA, are able to compete very hard on those trans-continental routes that are many airlines bread and butter.
When VA agreed to remove CEO Fred Reid from the operation after no more than 9 months of operation after the certification was awarded, they had to go find a new CEO. Now, Fred Reid never had the kind of reputation that I would expect an operation like VA to need or want. Formerly of Delta, Fred Reid performance at Delta was mixed and he certainly wasn’t a charismatic leader which I thought would help VA quite a lot in the US. Richard Branson’s kind of bravado has never played nearly as well in the United States as it has elsewhere in the world.
My thought was that VA would seek a more personable, charismatic leader who would not only have a strong airline background but who would also be a good public figure for this venture. VA, apparently, felt otherwise and found their next CEO at American Airlines in the form of David Cush.
Mr. Cush certainly fit the bill when it came to having a strong airline background. He had 20 years of airline experience in a wide variety of positions and a great education too. The thing is, Cush did it all at the most conservative of airlines, American Airlines. Huh? Yes, Cush had youth going for him and he does present himself rather well but it still didn’t mesh in my mind.
I suspect VA’s investors, most particularly its US investors, wanted someone who had a very strong financial background and who understood just how important it was to preserve cash and operate with strong controls in place. They had, after all, funded VA with more money than had ever been put together for an airline startup in the US when VA began. He did most recently work as Vice President of Alliances and Chief of Sales for American and this hints at Mr. Cush’s ability to access corporate clients. With VA’s transcon strategy, this kind of made sense.
Virgin was so delayed in getting permission to start up, it leased several of its delivered Airbus A320 aircraft to the late Skybus Airlines. When they did begin to operate, they were hindered in fully starting up operations because some of those aircraft were occupied until Skybus failed miserably.
But . . . operate they did. Finally in August of 2007 and fully 2 years delayed, they began flights between San Francisco and NYC and Los Angeles and NYC. This wasn’t a bad start in that they were connecting major business centers with lots of traffic but it didn’t allow them to really get high utilization of their aircraft and pricing on those routes has always had lots of competitive pressure so they lost lots of money operationally.
Every airline loses lots of money in its first months and years. Airlines really operates lots of small businesses. Each route is really its own business and it takes time to grow those routes into profitable operations and it takes varying time to do it for each route. It is an investment that takes time to go profitable and much more time to provide a good ROI (return on investment.)
VA was off and running and I was still scratching my head. There were still many parts to this airline that defied rational thought in my opinion. Tomorrow, more on VA and its service and routes and where it is today.
Airtran has decided to make Milwaukee an important crew base and is now using the term “hub” when talking about its Milwaukee operations. You can read more details about this HERE.
Initially, 50 pilots (B737) and 50 cabin crew (737/717) will be based in Milwaukee but expect those numbers to grow over time. Why? Because not only is Milwaukee a good place to connect flights to other destinations, the market between Milwaukee and many cities is one of good yield. There is a reason why airlines are starting to fight it out there.
It also offers a relatively inexpensive place for crew to live in, an airport that endures weather very well and customer base that has long been neglected by most airlines. There are a number of experienced flight crews in the MKE area that should be available for hire including pilots who know how to fly a 717.
This latest development is just one more reason why I believe Airtran’s route between Milwaukee and DFW to be flown by SkyWest will quickly move over to a mainline aircraft such as the Boeing 717. It’s also worth noting that air fares between MKE and DFW have already dropped with Airtran “buying” the business even before direct flights have been initiated. With service not expected to start before April 2010, it’s clear that Airtran intends to dominate that route and, unlike other airlines, Airtran isn’t afraid of going head to head with a major airline such as American Airlines.
According to the story . . .
In Milwaukee, AirTran now operates a line maintenance station, regional human resources, sales and community relations staff, and an airport station consisting of more than 200 customer service agents and other personnel. With the additional crew members added with the establishment of the new bases, the airline’s total Milwaukee payroll is estimated to be more than $11.5 million per year.
That’s a big commitment to the Milwaukee area and I do wonder how Republic will or will not respond with Midwest Airlines in that city. Midwest is hardly even a brand anymore since it flies none of its own aircraft. Republic Airways owned Frontier Airlines is flying 5 Airbus A319 aircraft (configured with Frontier seating) and Republic is directly supply another 20 E-170/190 aircraft for other routes.
Republic has moved about 200 maintenance and 100 customer service jobs from Frontier’s Denver but if Airtran continues to enlarge its operations and compete strongly with Republic in that city, one wonders how long it will last.
There is a huge battle taking place over who gets to have Japan Air Lines (JAL) business. The financially struggling airline has suddenly become a hot property and American Airlines (OneWorld) and Delta Airlines (SkyTeam) are fighting over JAL like it’s a supermodel. Both airlines are offering hugely attractive financial packages to JAL and I suspect the poor airline has no idea of who to nod their head towards.
Ultimately, I think JAL will stay in Oneworld. There is more at stake here than what is offered as a financial rescue package. Japan is still a very nationalistic country and keeping the identify of what is, for most purposes, its flag carrier will be important. It has a solid relationship with Oneworld and American Airlines and compared to the risk of joining with SkyTeam and the possibility of being a second tier player in that relationship, JAL has a safer bet with Oneworld.
In addition, I don’t think JAL can afford to wait for anti-trust immunity to act with airline partners and it won’t have to by staying with Oneworld.
The Middle East:
I continue to think that the major international airlines (Emirates, Qatar, Etihad) of the Middle East are more at risk than they claim. Yes, they’ve experienced phenomal growth and, yes, they continue to purchase aircraft like a 5 year old buys candy but what’s next for them and their route systems?
The Middle East doesn’t offer a good connecting point for North or South America. Airlines in North America can reach their markets non-stop with existing aircraft and why would a passenger choose to connect via an airport in the UAE (United Arab Emirates) when they can fly non-stop at a competitive price. Better service product won’t attract these customers.
There is very little business between South America and Africa, India, The Middle East or Southeast Asia and, so, South America isn’t a place that could serve as a growth area for those airlines.
Emirates, Qatar and Etihad have succeeded by offering a hub between Europe and the Middle East, India, Southeast Asia and (to some extent) Australia/New Zealand. However, even European airlines are adding longer range aircraft and are able to reach each of those destinations non-stop more and more with the exception of Australia and New Zealand.
In addition, each of those airlines is bankrolled to some extent with oil profits and the uncertainty of those profits and the uncertainty of other investments in the Middle East has to raise the risk for that continued bankrolling. I don’t see any of these airlines failing in the next year but I do see them perhaps deferring orders and re-organising their fleets.
India:
What a catastrophe! No airline in India will do well for now and there has to be some consolidation in this market in the near future. Kingfisher and Jet Airways are both excellent candidates for takeovers and, perhaps, they are excellent candidates for each other. Kingfisher bet on Airbus by ordering A330 and A340 aircraft first. Their A330 fleet doesn’t quite have the range it really needs to expand outside of its current markets and the A340 was a terrible choice for long range flights. So much so, it got rid of the aircraft on order.
Now, Kingfisher has a few A350 and a few A380 aircraft on order for deliveries starting in 2014. While it could desperately stand to have the A350 now, I don’t see how it can wait until 2014 for the aircraft. I also seriously doubt it will ever take up the A380 both because of cost and an inability to fill the aircraft enough for regular flights.
Jet Airways also has a great service product but bought too big of an aircraft for the routes it needed to compete on. Jet Airways purchased the 777-300ER when it really needed the 777-200ER/LR for the international routes it proposed to serve. Now 4 of the aircraft are leased to Turkish Airlines and 3 are going to Royal Brunei leaving just 3 for Jet Airways.
Both Kingfisher and Jet Airways have a great service product and good networks across India and neighboring countries. They would be better served by merging and using one brand for their national service and another for their international services. Kingfisher for India and Jet Airways for international service.
The Far East:
China has a lot of problems coming to roost with the inevitable decline in their economy which is heavily dependent on North America and Europe. Look for some consolidation in this market. I do think that Chinese airlines face potential issues from government mandates to purchase indignenous aircraft being developed now. There is little chance that the aircraft being built will be competitive internally or externally. At least for this first round of development.
While JAL is suffering and ANA (All Nippon Airlines) isn’t performing that great at present, I see no major changes in the Japanese markets. This is an area that will bounce back but only after a long fight. The same is true for Korea.
Oceania:
Australia will be interesting to watch. I’m tempted to guess that the status quo will remain in most cases. The competition between the US and Australia only continues to grow more fierce and something has to give. I still think that United Airlines may well be the airline to withdraw from this market and only because of the rather unique market relationship formed between Delta and V Australia (and Virgin Blue).
QANTAS will continue to own a large piece of all air travel from its home nation and they could be helped along with some deliveries of the 787. At some point, QANTAS must grow and growth means a lot of long and thin routes to be added.
South America:
I don’t think there will be any major news from this continent over the next year. LAN will continue to succeed by operating smart and honest. Brazilian airlines will continue to fight things out but there is enough international business for each of them and their real threat comes from Azul on a domestic basis.
Look for Azul to consider adding a larger aircraft to its fleet and don’t count Boeing out on that deal. It would be easier for David Neeleman to add the Boeing 737 to his fleet in Brazil because he could outsource maintenance more easily.
Aerolineas Argentinas: Well, what can I say? This disaster is much like the country itself. It won’t go away but it won’t perform either. No outside airline will consider taking it over after what happened with Grupo Marsans’ ownership. They lack an appropriate fleet for their flying, a strategic plan for stabilizing their revenues and no clear plan for future growth. But the Argentinian government also won’t let them go away. It is a matter of national pride.
LAN Argentina is growing in Argentina but somehow I remain skeptical that it will be allowed to succeed too well. Why? For one reason, the government of Argentina owns Aerolineas Argentinas and it has a vested interest in that airline earning money. For another reason, LAN Argentina is owned by the LAN Group of Chile. Look up how Chileans and Argentinians feel about each other.
Colombia and Venezuela:
Avianca Airlines has joined hands with Grupo Taca and I suspect that will be a good thing for both airlines. Avianca could benefit by the exellent managment of Grupo Taca and Grupo Taca could benefit from greater access to South American markets. Its almost certain that the two will harmonize their fleets and service products for greater economies while maintaing the two identies for greater acceptance throughout Central and South America.
Venezuela: All airlines erode further due to the increasing interference of the Venezuelan government and, more specifically, Hugo Chavez. I lost hope for Venezuela’s airline industry when they forced Conviasa (in partnerhsip with Iran Air and originally using an Iran Air 747-SP) into a route between Caracas and Tehran with an intermediate stop in Damascus. This is the ultimate in “this route makes no sense.” If the government can do that, then they’ll do other things to damage the industry.
Europe:
The European continent’s airlines are hunkered down just as much as the US based airlines. There isn’t much to be expected in Europe for the next 12 months but let’s look at it anyway.
British Airways is kind of the American Airlines of the UK. They’ll always somehow manage to survive and generally pretty well. They have their own labour troubles but, again, they seem to be capable winning these for now. British Airways needs to cut costs a bit more so I wouldn’t be surprised at some order deferrals and/or hastening the exit of the 747-400.
The one airline I continue to wonder about in Europe is Lufthansa. While they have a good service product and an excellent reputation, they also seem to have some weaknesses. Lufthansa continues to purchase weaker sisters in Europe such as SWISS, Brussels Airlines, Austrian Airlines, Lauda Air and, now, BMI.
20 years ago, this would seem reasonable in that European countries were pretty nationalistic. Now, not so much. Yes, there are some pockets of nationalism that exist but I wonder at maintaining so many different brands, fleets and networks now. It would seem that the brands could be pared down to 2 or 3 mainline airlines and 3 to 5 regional airlines. BMI wasn’t an airline that was succeeding in any great way and what does Lufthansa get for their purchase? I see little of value. I don’t know that BMI gets Lufthansa an entry into the UK that is of any more value than the Lufthansa brand itself.
I also wonder about their fleet. They have a large fleet of A340 aircraft serving medium to long haul routes and that cannot be very efficient or profit enhancing. Yet, Lufthansa has made no real move to correct this problem. Their one major aircraft order in the past several years was for the four engined 747-8i. They have no orders for the 787 (although Boeing would no doubt happily accomodate them with early delivery positions) nor the A350 (and I’m certain Airbus ould love to add them to the order book as well.)
This puts Lufthansa into competition with British Airways who has moved towards operating more twin engine, long haul aircraft (777 and 787) as well as KLM/Air France (777). Yes, they do own some A330 aircraft but their true long haul equipment is the A340 and 747.
KLM / Air France: Not much here. I don’t see an order for aircraft coming from them unless Airbus magically announces a GE engine for the A350-1000. Otherwise, I seem them holding their cards close to their vest and waiting to see what happens in Europe.
The BA/Iberia merger: I never saw the attraction myself. It’s a low rent copy of the KLM/Air France union and I suspect there are many issues to resolve before the two really combine. Personally, I think the odds of this merger actually taking place is, at best, 50/50.
Their alliance with AA over the Atlantic will continue to be a strong issue for the US Justice Department. The BA/AA strength on the US/UK routes and the the IB/AA strenght on the US/Spain routes is really a bit too much. I think the DoT/FAA is willing to let this alliance go forward but I think the DoJ is going to speak loudly and force a request for concessions. Concessions that I think, this time, BA and AA may meet with some negotiation.
Unlike this time last year, probably not much. There was some momentum for change last year that really doesn’t exist this year. Airlines will continue to fight to hold their own in the marketplace and with the reduction in capacities, even the worst of the lot will likely cling to life this year.
North America:
Major airlines of North America have made all the changes they can and all are managing their businesses and cash very closely right now. I don’t expect much, if any, change to develop in the next 12 months but let’s take a look anyway.
American Airlines has some labor issues to address but with the current economic climate, they have been getting away with their efforts to defer those issues. Labor unions would like to push a few issues with American but they’re smart enough to realize that now isn’t the time. Most likely they’ll continue their face saving efforts at making a point with their members but I don’t expect any real labor action at this airline this year. Perhaps, if things get better, we’ll see some movement in the 4th quarter.
United Airlines, my least favorite legacy airline, has similar issues that American has with labor but, again, those labor issues aren’t likely to see much movement either. I suspect that United will continue to move more of their flights over to regional airline partners because its worked (for now) and their customers will find themselves on more and more regional jets. Since price is the prime driver for customers right now, they’ll accept that move and hate the flights as much as they always have.
Delta/Northwest should see more of its operatioins combined and, possibly, a unified single operating certificate by the end of the year. That doesn’t mean much for their customers since Northwest aircraft are being painted into Delta colors at a furious rate. The service product is already being harmonized to a fair degree and it’s a good one already.
I don’t see any major aircraft purchases and I remain interested in whether or not they’ll keep their 787 orders. There has been rumour and innuendo that they won’t but I kind of think they will keep them. Their 767 fleet is old (except for the 767-400) and I can’t think of a reason why you wouldn’t want to have the 787 begin filling the role of those aircraft. I’ve wondered if their hints aren’t just an opportunity to get Boeing to get interested in offering a better deal for more aircraft.
US Airways needs two things in this next year. First, they need their pilots to get together and start operating as a single group. As dangerous as it is to try to interfere with a union group, I wonder if US Airways won’t wade into the problem in an attempt to have a final resolution. Certainly they could argue that they’ve been patient enough.
They also need to manage their cash very, very closely. Cash is blood to an airline and US Airways has a bit of risk in this department. Should cash holdings be depleted more, they’ll have to start seeking that merger partner again and no one appears interested in marrying with them. This is another reason it needs resolution for its labor problems. That said, I don’t see US Airways disappearing or filing for bankruptcy again.
Continental Airlines has felt the hurt this past year and its unlikely to feel much better this year. Their business model depended a bit more on business class travel and the economy hurt that demand the most. That said, I can’t imagine a better group of managers for keeping that airline on track through the rest of the downturn. Things will hurt and belts will be tightened a bit more but I don’t see the service product changing. When the economic downturn does really turn the corner, Continental will be better placed to succeed than many.
Despite their recent move to the Star Alliance, I do *not* see Continental getting any closer to United Airlines whatsoever.
Low Cost Carriers / Regionals:
Southwest Airlines continues to manage itself to the tune of its own drummer and the results of their long(er) term thinking are showing left and right. They’ve managed to make solid overtures to business clientele in areas that, I suspect, count more day in and day out.
I don’t see a merger partner in the future for them except, possibly, for Sun Country Airlines. For some reason, I see this as a real winner for Southwest in that it gives them space and routes in Minneapolis / St. Paul, a labor group that is accustomed to delivering Southwest style service and which can be harmonized into the Southwest labor groups relatively easy. There is no rumour of this purchase but Sun Country has its own problems and it’s a match that fits the Southwest acquisition model.
I think Southwest will remain persistent in its Denver expansion and will work hard to create a network in the upper midwest states of Wisconsin, Minnesota, Illinois and Missouri. The wild card, in my mind, is the Washington D.C. area and the NYC/Boston areas. Shuttle type service is what Southwest knows very well and I wonder if they won’t try very hard to organically grow their flights in these areas. If so, Southwest needs to find an “in” at Washington Reagan airport. To do this, they would need to buy a shuttle operation from US Airways and/or Delta. Perhaps US Airways will be interested in such a sale if their cash holdings erode more.
Frontier/Midwest/Republic: I don’t know what happens here. Midwest really isn’t an airline anymore. It really isn’t even a brand anymore. It’s a name for selling tickets. Frontier remains an airline and a brand and Republic seems to want to continue caring for both. Since Republic is managed by very smart people, I kind of think that they may look for a way to wind down the Midwest name over the next 12 to 18 months and make Frontier the primary airline. A tasty cookie isn’t a good reason to keep the Midwest name around.
Airtran deserves some applause. This airline has managed to grow itself some, find new markets and earn some money during one of the worst downturns in the airline industry.
Their move into Milwaukee has succeeded and promises to continue to succeed. Milwaukee is a loyal city, to be sure, but it is a city that appreciates value even more. Airtran has managed to offer great value, good service and appeal to a city that just a couple of years ago was kind of anti-Airtran. The one obstacle in their way is the arrival of Southwest, another airline very good at offering value and appealing to the Milwaukee kind of customer. I think Airtran has the upper hand but they are by no means the sure winner in this market. Southwest may be able to beat them with frequency.
Virgin America keeps showing up and usually right after I become convinced they’ll disappear. I still don’t know what this airline does best and I still don’t see them as being a scrappy enough operation to fight their way into the cities it needs to be in. Virgin continues to dance around Chicago (claiming they can’t get space but if they wanted it bad enough, they could). Their product would servce cities such as Dalllas, Denver, Houston, Chicago, Atlanta, Baltimore, Philadelphia, and, perhaps, Cleveland/Cincinatti very well.
Instead, they added flights from the west coast to Fort Lauderdale and talk about adding service to a Texas city such as Austin. This is too timid. The CEO, David Cush, seems afraid to compete against his old employer (AA) and that is a shame since they have a very competitive and attractive trans-continental product. I would speculate on VA being bought by another airline but . . . why? They just don’t have much there and seem to have little interest in exploiting real advantages that they do have. Maybe they’ll just run out of money and get shut down.
Alaska Airlines has felt the heat from Virgin America but they continue to do pretty well with their little airline and they continue to do it without being aligned with a major. I don’t see much changing for Alaska Airlines. They’ll continue to be a scrappy airline with good service to a limited number of destinations. And, somehow, that seems OK when it comes to Alaska.
I don’t spend a lot of time on two aircraft manufacturers who really are the first real potential competitors to Boeing and Airbus in the future. Embraer and Bombardier.
Let’s take a look at Embraer today. Embraer, a Brazilian aerospace company, got its start in the 1960’s and entered the commercial aviation world with its EMB 110 Bandeirante (1968) and EMB 120 Brasilia (1983) serving the small commuter turbo-prop market.
These tough aircraft from Brazil managed to serve a need in many US markets and I remember them flying for American Airlines in the 1980’s and 1990’s. American Airlines used them to fly multi-stop routes from their DFW hub and others such as Delta and United used them similarly from their hubs.
It was the ERJ-145 that Embraer brought to market in 1995 that took this company to a new level. This line of regional jets were the first to combine small size (as few as 30 seats and as many as 50 seats) with modern turbine jet engines to provide a (near) mainline aircraft experience to the small feeder routes of major airlines. Unfortunately, these aircraft were only economical to operate when jet fuel was inordinately cheap through the 1990’s and early 2000’s.
Embraer knew this and began development on a larger, more capable family of airliners that aren’t quite regional jets and aren’t quite mainliner jets. These new jets, now referred to as “E-Jets”, are the ERJ-170/190 family and this is where Embraer signaled its willingness to encroach on the territory of Boeing and Airbus.
The E-Jets, introduced in 2002, have a seat capacity ranging from 80 to 120 people in an all coach configuration and, at first glance, that doesn’t seem to quite reach into the 737/A320 territory but its worth another look. The E-Jets, at least the larger E-190/195, offer similar size and range to the early 737-100/200 and the first DC-9 series aircraft. This was confirmed when David Neeleman (founder of Morris Air and jetBlue) chose them to start his new airline in Brazil, Azul. US Airways is now deploying this aircraft on its East Coast shuttle routes.
These aircraft offer something that neither the 737, A320 or DC-9 never offered: no middle seats. Designed for a 2×2 configuration, these aircraft offer a coach experience that really is no different than the current offerings from Boeing and Airbus and, in some cases, really better. These aircraft are now serving the routes originally serviced by first generation 737’s and DC-9’s.
And what’s next? Embraer has shown it has the technical expertise to offer a mainline aircraft and if it expects to grow as a company, the next step will find it offering a 737/A320 competitor. If timing is anything to go by, I would be unsurprised by a new airliner being offered in 5 years or so and quite likely offering the new Pratt & Whitney GTF engine.
With both Boeing and Airbus deferring development on the 737 and A320 series of aircraft for as much as 10 more years, there is an opportunity there for makers such as Embraer and Bombardier since even major US airlines are eager to re-develop their fleets with more fuel efficient aircraft.
At some point, both Boeing and Airbus will have to make a few choices. They can choose to cede the 100 to 140 seat market which is tough to imagine given that this where aircraft are truly mass produced.
They can choose to form a partnership with Embraer and/or Bombardier and co-market a new aircraft under one or the other’s brand names. Airbus has some ties to Embraer and Bombardier has had contact with Boeing over the years but neither has anything approaching what would be called a close tie. I think there is some likelihood of this happening and, frankly, I expect that whoever forms ties with Embraer is likely to succeed. Embraer has a bit more financial strength and a much cheaper labor base to manufacture from than Bombardier (located in union-heavy Canada).
The final choice is to go head to head with Embraer and Bombardier. From a personal viewpoint, I hope that both Boeing and Airbus take this route. It can mean only better aircraft in the future for everyone. However, both Boeing and Airbus are currently manufactured in areas with strong union ties (Boeing is reducing this risk with the establishment of an assembly line in South Carolina and Airbus is “experimenting” with an assembly line in China for low production volumes) and with a relatively expensive supplier base.
There is no doubt that Embraer offers a great product and certainly possesses the ability to take it to yet another level. They are poised to take advantage of another family of aircraft that could be made in a way that type ratings between the E-Jets and a new, larger family could be shared. This would be very attractive to a wide variety of airlines.
Due to the building midestern winter storm that is already gaining strength, airlines are, once again, waiving change fees to diminish the impact of looming cancellations and delays.
For a list of airlines and details on their current policies, visit USA Today’s Today in the Sky blog HERE.
If you have any flexibility at all, consider attempting to depart on your flight early or, perhaps, re-routing yourself through a connection in a city likely to be unaffected by the weather. Considering the current weather picture and current forecast, hub cities such as DFW, Houston, Atlanta, Phoenix, and Denver.
Hub cities such as Denver, Chicago, Minneapolis, Detroit, Cincinatti, and Cleveland are all likely to be affected at least somewhat by the looming weather over the next few days. Based on that, airlines likely to be most affected might be Delta / Northwest Airlines (Minneapolis, Detroit), United Airlines (Chicago and Denver), American Airlines (Chicago), Airtran (Milwaukee), Southwest (Minnesota, Wisconsin, Illinois, Colorado, Michigan), and Continental (Cleveland).
Hint: If you are a member of a frequent flier program, see if there is a dedicated phone number you can call.
Hint: Make sure your cellular phone is charged and you have your charger in your carry on luggage.
Hint: If you have a laptop computer, consider traveling with it in your carry on luggage.
Hint: If you are seeking to re-route yourself, explore options among codeshare partners with your airline when speaking to a reservations agent.
Hint: If you must board and travel on a flight in a city being affected by the storm, purchase some snacks and water in the terminal to take on the aircraft with you.
Before anything else, I’d like to announce that this is my 200th post to this blog. Quite the milestone all in all.
USA Today’s Today in the Sky Blog is reporting that several airlines have removed their advance purchase requirement for bargain fares this holiday season. Their source, Tom Parsons (CEO of BestFares.com), says that airlines such as American Airlines, Delta, United, Northwest, US Airways, Frontier, Airtran and Midwest have all removed the advance purchase requirement through January 4th. Continental still has a 3-day advance purchase requirement. This would seem to imply that holiday travel is extremely soft this season so far.
NPR did THIS story recently on various airlines’ secret “invitation only” frequent flier programs. In addition, the new movie, Up In The Air, mentions such a program on American Airlines. Lately, these programs are starting to get some publicity and, frankly, I wonder if the airlines aren’t encouraging this.
I have a small link to airline fame. My father created the first modern frequent flier program at Braniff. Yes, I know the popular wisdom is that it was done by Robert Crandall but it wasn’t. His program rolled out about 2 months after Braniff’s did. I still remember my brother and I being somewhat outraged that someone copied our father’s good idea. The original intent was to simply cement customer loyalty to one airline. Essentially, if you flew the airline a lot, you got some free trips via points accrued on the basis of miles. Now, while that exists still in each program, the truth is that these mileage programs lost their intent and value when they started awarding miles for things like credit card use and hotel affiliations.
Let’s face it, it’s a *lot* easier to be a mile pig than it should be. The loyalty isn’t to the airline anymore. It’s to the program and with programs working in concert with airline alliances, the loyalty is diluted even more. That, my friends, is why airlines have secret invitation only programs. You can bet that invitation to those programs is not mileage based but, rather, dollar and frequency based. I suspect that if you are traveling on full fare tickets in first and/or business class on a frequent basis, then you’re going to be considered a candidate by the airline. Do it several years in a row, and I”m sure you’re going to be invited into the program.
And I suddenly wonder how my father isn’t in one of those programs given the nature of his travel for the past 30 years. He’s exactly the kind of customer an airline wants and he really isn’t a mileage gamer either. He just buys a lot of tickets at full coach fares to go where he needs to go. Since he’s lifetime platinum on a couple of airlines (I believe), he is the guy that bumps most people from getting that upgrade.
Airlines want customers and I suspect that we’ll see a bit more of these programs come to light if only to speak to the business travelers a bit more. But I guarantee it won’t be based on how much you spent on your credit cards unless those purchases were full fare business class or better tickets. If your company is buying those tickets for you, I doubt you’ll be invited. They want the person who is buying his tickets based on his desires regardless of what a company is doing for him or her.
A number of airline blogs are reporting and commenting on this story from the Consumerist found HERE. I don’t have much to say that hasn’t already been said except that this kind of general hostility to passengers from American Airlines flight attendants is not an uncommon experience. This story has legs and I suspect we may see American’s Broken Guitar moment.
At the first of the year, I wrote 3 blog posts shown HERE, HERE and HERE. It was really just my random speculation on what to expect over the next 12 months. Well, now it’s December of 2009. Let’s see how I did.
Boeing 787: I guessed at an April 2009 first flight. It still hasn’t flown although speculation has it flying this month either by December 14th or December 22nd.
Airbus A380: I guessed they would make their goal of producing 21 aircraft this year. As of November 30th, 2009, Airbus says they have delivered 7 A380 aircraft this year. Ouch. This is a program that is in financial trouble. No, I don’t think it will be cancelled. Not yet but please don’t try to tell me this program will make a profit.
My deathwatch had Midwest Airlines going away most likely by a sale. That did happen and while the airline has essentially evaporated (from its original form), it does remain as a brand being run by Republic Airways.
I speculated that Frontier Airlines would be bought out of bankruptcy but I guessed that jetBlue would be the buyer. In fact, Southwest Airlines and Republic Airways were the suitors and Republic won.
I thought that United Airlines and US Airways would announce a new merger with Continental a dark horse candidate for buying United. In fact, Continental became a member of the Star Alliance and firmed its relationship up with United but wisely kept its distance otherwise.
I said that Southwest Airlines would maintain its status quo but that Gary Kelly would be under fire from both employees and outsiders and he was. However, that view is already being reversed again by Southwest’s resurgent strength in the business.
I thought that the Middle Eastern airlines such as Emirates, Etihad and Qatar wouldn’t see a bankruptcy or merger but would slow their growth and aircraft deliveries. That, in fact, has happened and now we see Emirates working hard to distance itself from Dubai World’s financial woes.
China: I said deferred orders. Pretty much what happened.
The Far East: I said airlines from that region would maintain their status quo, probably would not defer orders and might make new orders to replace existing equipment for greater effiency. Again, pretty much what happened.
Australia: I saw QANTAS slowing growth, deferring some orders and fighting hard against new entrants. Again, that’s pretty much what happened. I also saw two weak competitors on the US-Australia routes: United and V Australia. That is pretty much what is happening although V Australia has been pretty smart in working into a relationship with Delta where it appears the two airlines will cooperate with codeshares. United remains alone and with weakening demand.
South America: I said the Argentine government would take Aerolineas Argentinas back from Grupo Marsans and the airline itself would muddle along or contract rather severely in some areas. Bingo. Exactly what happened. I also predicted Azul would become the jetBlue of Brazil and its not hard to guess that that airline is pummeling its competitors. A future prediction was for the airline to fly internationally in 2014 with Airbus equipment. We’ll see.
Africa: I saw Delta continuing to pursue flights to major African cities (true) and SAA (South African Airways) issuing a small RFP for 777 aircraft to replace its rather inefficient A340 aircraft (didn’t happen.)
India: I thought Jet Airways and Kingfisher might merge with the name Jet Airways being retained. In fact, both airlines continue to exist but both are suffering severe financial problems, deferring aircraft deliveries and generally flailing about trying to find a way to continue. One of these airlines will still ultimately have to exit the market and I continue to think it will be Kingfisher. They have the wrong aircraft and the wrong aircraft on order. However, Jet Airways is suffering badly from labor actions among its employees.
United States: I picked United to fail. It hasn’t happened and while they continue to live, their cash holdings are being reduced, they still have severe labor issues, their service product continues to suffer and I still think they should be the ones to disappear. I also thought Glenn Tilton would be ousted and, possibly, replaced by Doug Steenland. That didn’t happen but John Tague has been groomed as Tilton’s replacement. I still think Tilton should go if United can’t fail.
Europe: I thought we would hear of a surprise from Lufthansa. I didn’t like their purchase of SWISS and I didn’t like their flying the A340 in competition against the 777 being flown by many of their direct competitors. They’re still here, still making money and they bought BMI. I still think we’ll here of misfortune from them but apparently it will take a while longer.
Random Speculations:
I thought Southwest might add another aircraft type. It didn’t happen but I think their interest got perked up when they looked at buying Frontier and saw the economics on the Q400.
I thought Delta might order more Airbus A330 aircraft. Instead, Delta is parking them in the desert for the winter season.
I speculated that both China and Japan would defer or drop their regional jet programs. That didn’t happen but the Chinese jet program appears to be a bad aircraft and unlikely to be used by anyone except Chinese airlines forced to buy it.
I thought Bombardier would see a major order (20+) for their Q400 series aircraft from a US customer. Horizon Airlines did up their orders for 10 more but there were no other significant orders.
Airtran to form a small midwestern hub. Yup, that happened. In Milwaukee where they’ve taken over from Midwest Airlines and now face Midwest (brand owned by Republic) and Southwest Airlines entry into the market. I think Airtran will hold on here and continue to develop business.
Last, I hoped that jetBlue or Virgin America would enter the DFW market. Virgin’s CEO, David Cush (formerly of American Airlines) did recently speculate about adding flights to either DFW or Austin. I suspect they’ll choose Austin and DFW will remain a fortress for AA.
That’ s it for my 2009 predictions. I’ll make more at the start of 2010. On the whole, I probably did as well as anyone in making predictions in this business.
