When Emirates announced its latest purchase of 30+ more A380 aircraft, a lot of carriers took notice, particularly in Europe. The planned capacity increases that Emirates has put into place for the next 7 years is nothing short of baffling to most and it has made many airline CEOs wonder what they’re missing.
Emirates operates on a model of being “hubbed” in the perfect place from traffic between Europe and India, Asia and Australia. They compete with other international carriers on service and they compete with everyone with frequency and convenience. Currently, many of those flights from Europe to those destinations require a fuel stop and Emirates uses Dubai for that fuel stop which allows them a big advantage on X things: fuel is cheap, landing and taking off is cheap, Dubai is “on the way” to most of those destinations and isn’t much of a diversion for them, and they’re able to utilize their aircraft much more than some on a per day basis.
That’s a powerful advantage. Emirates has also kept many of the largest European governments (economies) from protesting much at all by being a huge customer of Airbus. It’s very difficult for those governments to bite the hand that feeds their aerospace industry. It’s notable that neither Canada nor the US have felt nearly as accomodating towards Emirates (and other UAE carriers) when it comes to access to their markets and in the case of the US, this is despite the fact that Emirates has also been a pretty good customer of Boeing’s.
All of that scares the hell out of European international carriers. Emirates also claims that these carriers are discovering that it takes an A380 to compete with an A380. And then they went all in with their latest A380 order. It’s very tough for those airlines to sit at the table and wonder if they can afford to go all in.
I don’t think it takes an A380 to compete with an A380. I think it takes an A380 to compete with an A380 on a few trunk routes and I think Emirates’ model crumbles with the 777LR, 787 and A350 for much of the destinations it serves.
Right now, I think there is an attraction to the A380 on those routes for 2 reasons. First, it’s the latest and greatest in long range aircraft. Second, it has the freshest service product installed as a function of it being introduced by airlines for only the past 2 years. Over time, the “newness” of the aircraft will go away (just as it did with other new aircraft introduced) and the service product will be matched by others on other aircraft.
Right now, a lot of those legacy international carriers that are so worried are trying to compete with Emirates using 20 year old 747-400 aircraft with a service product that is, in many cases, a generation out of date. If it isn’t a 747-400, it’s a 777-200/300 with a service product that was “copied” from the 747. See where I’m going here?
Since we don’t have much visibility into the real financial picture of Emirates, a lot of analysis of them is speculative. We don’t know where their financing comes from and at what terms. We don’t know what their fuel prices are and we don’t know what their labor costs are either.
That said, I don’t believe it is impossible to compete effectively with Emirates now and particularly in the future. I believe those long, high capacity trunk routes that Emirates works so well are going to fracture with the next generation of jets.
It’s already possible to use a 777LR to reach all of Asia from Europe and the 777-300ER will serve 90+% of Asia and do it point to point. While Europe has traditionally been the transit point between Africa and the Americas, that’s already changing. US airlines are now serving Africa more and more with smaller equipment that fits those long, thin routes pretty well. South American airlines are initiating services to several parts of Africa with similar equipment. and it only gets better as the 787 comes on line.
So Emirates may capture some traffic for a while from the US but it is unlikely to dominate particularly in the future. The magic routes to Singapore, Indonesia, Australia and New Zealand are likely to remain an Emirates strength but take note that those same international carriers in Europe who are freaked out right now are also now taking delivery of their own A380s. Air France has them, Lufthansa just took delivery of its first and British Airways has them on order. They will have the aircraft to compete with Emirates.
Frankly, I don’t understand why someone such as British Airways doesn’t explore setting up a Dubai base to compete directly with Emirates. Or any of the others, for that matter.
Regardless, this belief that huge trunk routes will remain is, in my opinion, false. Those trunk routes will fracture into more and more “point to point” routes that are longer and thinner than ever before and the airlines serving those will be the preferred airlines for that travel. People just don’t like connections when they can go non-stop. If they can’t go non-stop, they still prefer the fewest connections. It’s the time saver and saving time is why we fly.
Frankly, I can see Emirates becoming a bigger player in its region of the Middle East/India/Northern Africa/South East Asia but I see them contracting over the next 15 to 20 years on those trunk routes provided those other international carriers step up and get to work on their fleet and service planning.
There isn’t anything magical about Emirates and despite their potential advantages from being Dubai owned and based, that doesn’t make them the carrier that can’t be beat. It takes work, investment and planning but it can be done.
The last thing those airlines want is their own governments becoming more restrictive of access to markets. It’s a world where that game is tit for tat and that works to no one’s advantage. They can all survive and prosper with the right combination of leadership, management, planning and investment.
British Airways flight crew union, Unite, has signaled that it will ballot its members for another strike action against British Airways. The date and conditions of the latest work action, if approved, are not yet determined and BA itself has no comment since it has not yet received the ballot notice.
This is a dangerous path for both the airline and the union leadership. So far, the strike actions haven’t had nearly the impact that Unite would desire. On the other hand, the sticking point(s) seem to revolve around union membership who lost travel benefits by participating in the strike. BA offered to restore those privileges before the last go around but only at “entry level”.
I have to say that while this strike action by Unite has struck me as ill-timed and poorly led over the issues, BA’s position over the travel benefits is senseless at this point. It punishes membership (i.e. employees) instead of having an effect on the union leadership itself and it is the one thing that seems both petty and punitive at this point. CEO Willie Walsh would be well advised to put full benefit restoration back on the table if only to assist in closing a deal and to avoid any more damage to morale. It’s a small point and if Unite wants to crow about it, let them. At the end of the day, any sensible person will realize who “won” in this fight.
4 days of vacation and not reviewing anything to do with the airlines (or defense industry or the oil leak in the gulf) and it was quite relaxing.
Right. Well, I see British Airways and Unite still haven’t got their act together. These two desperately need binding arbitration. British Airways needs it in order to bring back a degree of certainty to their operations. Unite needs it to, well, preserve some semblance of the idea that they “won” something. British Airways is winning this conflict now. They’re winning it in public opinion and they’re winning it when it comes to employee viewpoints. For Unite to continue without a deal only weakens them week by week.
I see that all kinds of politicians are questioning details of the Continental / United merger. Oddly enough, many of them are from Texas and those folks are questioning the wisdom of Houston losing the Continental HQ. Well, so do I but for vastly different reasons. Houston is not going to be dimished as a hub nor is it going to lose many jobs. In fact, I suspect they won’t lose any jobs in terms of “count” but I do think there will be transitions and changes. This is a prestige objection on the part of Senator Kay Bailey Hutchison. She lost the race for the Republican nomination for Governor in Texas and she desperately needs to appear to be looking out after “the people” in Texas if she expects to keep her seat in the Senate.
I simply think it is stupid to move HQ to Chicago because it is fantastically more expensive there. That’s all.
I saw a few stories about Australian airline JetStar adopting the iPad for inflight entertainment. And, unlike most bloggers on the airline industry, I don’t care really. I don’t see it as an industry trend, I don’t see it as unwise and I don’t think it’ll be but a blip on the airline horizon. iPads are cool and probably cheap to deploy. Oh, and you can deploy them quickly too. Will it be a trend? I doubt it but I don’t care. I really don’t.
Boeing refuses to say whether or not they’ll bring a 787 to the annual flightshow in England this year in Farnborough. They say they’ll make that decision closer to the show. I say they would be insane not to give their customers a taste. If they’re refusing to say, it may only be because they don’t know if their GE equipped test planes will fly their first flights on time. Still, if I were to be money on an outcome, I’d be betting that ZA001, the first to fly, will be there all shiny and spiffy. Maybe they’ll bring ZA003 which has seats. One way or another, I’m betting there is a 787 at Farnborough.
I refuse to talk about the person(s) who were left on United aircraft over the past few weeks.
It’s been over a month since the new “tarmac rules” have been in place. Am I the only one to notice only the soft sounds of crickets so far? We’re 1 month into the thunderstorm season and nary a peep from anyone except Kate Hanni of FlyerRights.Org who wants rules in place to keep airlines from being punitive against people who want off an aircraft. Actually, I somewhat support the notion but I think Kate Hanni is the wrong supporter for such a measure. She’s got too much mud on her.
There is a whole lot of speculation on British Airways and its future. I noticed one reporter speculating on whether British Airways reputation will ever recover. I’ve seen other stories speculating on their financial viability for the next year. Still another story actually was making a “buy” recommendation on their stock. In other words, it’s great sport to speculate on BA right now.
In many respects, BA’s problems with its labor are of its own making. Long after many other global airlines wised up and trimmed their costs, BA was plunging ahead with its so very “British” service product. Management continued to pay very generous salaries to crews, buy aircraft and send the “flag” to odd places in the world. It was unsustainable, particularly in Europe, but they persisted along just like a drunken Alitalia as long as they could.
Two things happened. First, Willie Walsh showed up from Aer Lingus where he spent most of his career and where he built a reputation as a CEO by transforming Aer Lingus from a doddering state owned airline into an enterprise capable of competing with the best, Ryanair. Walsh learned how to lean out a company, maintain good service levels and operate an airline in this century.
Second, the world airline economy crashed with unprecedented oil prices and an unprecedented decline in business travel all at the same time.
Walsh rightly identified that BA had to be more productive. Indeed, rather than just focus on slashing staff, he wanted concessions that allowed BA to simply compete with other airlines on productivity. He’s worked tirelessly to reduce costs, manage money better, maintain service and improve productivity. He’s done this despite years of relative neglect on the part of previous CEOs and, yes, he’s been brash about doing it.
I’ll be honest. He rubbed me the wrong way when he showed up at BA and, more importently, in the global press. As time has gone by, I’ve changed my mind in many ways. Now, he strikes me as much more a leader than just a cost slasher. I’m impressed with his read of his airlines economic situation as well as his take on the markets served by British Airways.
My own take on most of BA’s employees is that most “get it”. The pilots even get it and that’s saying something because pilots are generally the most militant of all labor groups. You see, few countries have better examples for losing entire industries due to obstinate labor actions that ignore changing markets and economic climates than Britain. Seriously, take a look at what happened to their car industry in the 1970’s. Or their aviation industry from the 1970’s through the 1980’s.
I’ve noticed that most British citizens who are engaged in the world understand that demanding your cake no matter what the circumstances doesn’t work and often removes an industry from your country forever. It isn’t that they are anti-labor, it’s that they have, in most cases, become a pragmatic people and that’s good for them.
Then there is Unite, the labor union representing crew staff (flight attendants) for British Airways. This cheery crew has set about to inflict real and serious damage upon the airline at every opportune moment and over issues that most in the company agree have to change. It’s as if all the labor organizers who struck against the British car industry took a 30 year holiday and showed up drunk and clueless to lead Unite.
It’s hard to respect a union that seeks to inflict strikes on both the airline and the traveling public during, oh say, the Christmas Holiday Season. Or after their employer announced record losses well in excess of $800 million dollars. It’s particularly strange to see them make these choices despite the fact that a large minority of their own membership are crossing the picket lines to support their airline. No, actually, it’s downright bizarre.
If Willie Walsh (and the board of directors) understand anything, it is that they cannot lose the issue in this strike. Failure to “win” on the productivity issues will set a precedent and likely see the downfall of the airline show up shortly thereafter. While Walsh has been a very stern and scrappy fighter in all this conflict with Unite, he has, by all appearances to me, also shown great restraint in not allowing this to be personal. He continues to show this restraint despite Unite making it not only very personal for Walsh but for anyone who attempts to help the airline as an employee.
I’ll grant that the one petty thing I take issue with Walsh on is the travel privileges restrictions he imposed on any crew that struck. That was a misstep and one that he pursued for too long. It is nice to see that he’s offered to reinstate those privileges in the last round of negotiations.
Here is a kicker, during the last negotiations where Walsh was offering those privileges back, one union negotiator (Derek Simpson) was “twittering” about the negotiations in real time from his Blackberry.
What. . . the. . . hell?
Anyone in the industry accepts that union leadership is going to tend to be loud and bombastic and even full of threats in public and especially when the cameras are own. It’s also accepted that those same people will be restrained, professional and serious in negotiations. Playing games with Twitter during negotiations is just a wild breach of protocol and, frankly, does a great misservice to the Unite membership.
Why? How do you engage in negotiations with people who play games like that and then act as if it is nothing after the fact? It’s very difficult to do and very hard to establish trust after a breach like that.
It also insults the public following this strike. Yes, even the public knows that is a breach. And it was completely unnecessary given just how close the two parties are to having an agreement. Indeed, British Airways essentially came to an agreement when the leadership of Unite then attempted to re-open settled areas of the disagreement. They longer Unite’s leadership continues to act as they have, the more they have to lose in both public opinion as well as negotiating leverage.
The issues that BA is fighting for with Walsh’s leadership are recognized as so important that other airlines are lending support to BA and many of them are BA’s arch enemies in the marketplace. Seriously, who would have ever thought that Ryanair would be leasing aircraft and staff to BA in order to maintain airline schedules during strikes.
I think BA will win. I hope that Walsh survives this strike but I do have some small doubts about that unless he manages to close this deal soon. I don’t think BA’s reputation is in tatters for the rest of its life. It will take a short while and that will be that. Anyone declaring that they’ll “never fly BA again” over this strike is almost 99.9% certainly full of it. They’ll fly them the very next time the price is right for where they’re going. I don’t think BA is going to become insolvent over this but I think they’re looking at several years to rebuild their financial strength again.
The one curious thing (to me) about all of this is the apparent lack of government involvement in this conflict. If this had been going on in the US, someone would have stepped in by now and insisted on binding arbritration and cooling off periods. Both BA and Unite could use one of those.
One very noticeable development with the announced United Airlines / Continental Airlines merger is that 2 of the 3 major airline alliances (SkyTeam, Star Alliance and Oneworld) now have Super-Legacy airlines participating in it. SkyTeam has Air France/KLM and Delta (Delta/Northwest). Star Alliance will have United/Continental and, so far, will continue to have US Airways in the US market.
Oneworld has American Airlines. A lone airline ever increasingly burdened with debt and who shows little sign of recovering in a market that several airlines have shown improvement in. Oneworld has the fewest airline partners although it arguably maintains global coverage. I see some opportunity for a few of its partners, too.
QANTAS has long had ties to both British Airways and American Airlines but I wonder if they aren’t looking around and realizing that there may be better opportunities with Star or SkyTeam. They compete with British Airways on many international routes so I wonder how much love they feel on that side. It’s true that AA provides them with lots of feed in the US but several other partners could do the same in the same cities. In fact, I suspect SkyTeam would love to have them on board. United (Star) already flies US/Australia routes. In addition, Air New Zealand is a Star member and doing nicely on trans-pacific routes too.
Oneworld doesn’t directly access Canada and has mediocre ties to Africa (via European partners) and Latin America is perhaps a bit underserved in that LAN is the only partner there and their concentration is on the west coast of South America. The Far East remains well served by Cathay and JAL but India is conspicuously missing. That’s a country of 1 billion (with a “B”) people. You would think that having a regional partner in India would be a priority. Southeast Asia is weak as it is basically served with flights to and from that region but not within. There is another 1 billion people located in that region.
There are several European partners but I do notice that there are two primary hubs: London and Madrid. Not the hubs most people want to fly in and out of. London is congested and prone to delays and Madrid is served by Iberia, not an airline with a great reputation. It also doesn’t “feel” like a convenient hub.
What is more noticeable is that the founding partners of Oneworld were mainstay legacy airlines. Airlines that have not seen any revolution to date and who often are burdened with some of the highest costs to operate in their regions.
With the ever growing size of both Star and SkyTeam, I do wonder if there will be any room for Oneworld. Could the Oneworld alliance be absorbed by the other two?
Anyone who follows this industry is well aware of labor problems at many US and European airlines. There have been at least three major strikes I can think of in the last month in Europe (BA, Lufthansa and Olympic). American Airlines seems to have had almost its entire operations labor force at the negotiating table for the past 4 years and not a one of them seem to be acting like a deal is soon to be had with several threatening to ask for release from negotiations to begin a 30 day cooling period and one (the TWU) who has asked for such a release.
Even Southwest Airlines has had a couple of snags in the past year with its pilots union and their TWU local. Delta’s flight attendants are making noise about trying to unionize again and this time they may have the votes for it when you consider that Northwest’s flight attendants were rabidly unionized. Frontier employees haven’t rebelled yet but I kind of wonder if that isn’t closer to happening than many realize given Republic Airways’ direction.
US Airways has problems with its pilots’ unions not being able to get along well enough to come to a consensus on whether or not the sun rose in the east. I do wonder how long it will be before we see the unions at United Airlines begin to overheat much like American Airlines’ already are.
Sure, there are some airlines who are managing to get along with their operations employees pretty well. That includes Southwest Airlines, Continental and even Frontier (for the moment.) However, a pretty vast number of airline employees seem to be simmering just before the boil over point and I’ve begun to wonder if there doesn’t need to be a better industry solution to collective bargaining than what they’ve got now. With the way things seem to be headed, particularly at legacy airlines but certainly not limited to them, there could be a truly momumental perfect storm of labor actions in the US.
I won’t argue who is paid well, paid poorly or over-paid. I certainly won’t argue who is or isn’t over worked either. Frankly, if you think being an airline employee in operations is a cush job, you really don’t have visibility into just what those jobs entail and just how many hours a day they consume. But if there is this much job dis-satisfaction among these ranks, clearly change is called for and I really don’t think this is all about money.
I think this is about job satisfaction. Yes, the union leadership (such as it is and that ain’t much) expresses the grievances in monetary terms but I really don’t think it’s all about the paycheck. I think it’s about feeling job satisfaction and feeling some meaningful reward from the job which, yes, includes salary levels. For airlines, I think this about a need to have greater flexibilty and ways to improve productivity that aren’t constrained by decades old rules.
Who is going to find a better way in this system which is largely based on 1930’s law and habits? I really wonder if there is any industry leadership who has the ability to find a better way.
Lufthansa is reporting a 152 million Euro loss for 2009 compared to a 1.3 billion Euro profit in 2008. No doubt that declining markets in Europe can account for a good portion of this reversal in fortunes particularly considering that the decline in Europe lagged behind that of the United States (and is likely to lag behind the US in recover too.)
However, their addition of Austrian Airlines and British Midland in 2009 is also highly suspect. I’ve been suspicious of their multi-brand strategy in Europe for a while and more so now after seeing their financial results. Adding sub-performing airlines to the portfolio is never a strategy that works in the long run (witness the demise of the original Swiss Airlines in 2001) and Lufthansa has so far not shown much inclination to benefit from harmonizing operations among the various airlines.
I also suspect that this loss is only the beginning for 2010 since Lufthansa is faced with labor problems and hasn’t made the moves that other European airlines have made to cut costs and re-structure service offerings (a la British Airways.)
It’s been announced that India’s airline, Kingfisher Airlines will be joining the Oneworld alliance, probably in about 18 to 24 months. While Oneworld and Kingfisher are playing this up big in today’s news, it puzzles me and, frankly, I have some doubt as to whether or not it will actually come about.
First, Kingfisher hasn’t exactly been the most financially solvent airline in a market with 2 other major competitors (Jet Airways and Air India) nor has it exhibited a very rational strategy on choosing its destinations. It has a couple of trunk routes from India to London and Singapore, a couple of route to leisure destinations in Asia and a domestic network that is reasonably extensive but not overwhelmingly competitive.
While I’m sure that Kingfisher offers Oneworld partners AA, BA and QANTAS some feed, it doesn’t appear that Kingfisher itself has the resources to make use of the partners in their home countries. Their fleet is comprised of A330 aircraft and while they’re scheduled for A380s and A350s, not a person around thinks they’ll actually take up the A380 and the A350 is scheduled for deliveries to start in 2014 but it’s unlikely that those will be on time either.
What also surprises me is that Jet Airways, Kingfisher Airlines major competitor, already had a good codeshare relationship with American Airlines and QANTAS. Their equipment and services better aligned with Oneworld so I’m puzzled why we are not hearing about Jet Airways joining Oneworld.
There certainly is a need for a Oneworld partner in India and with Air India joining Star Alliance, that left Jet Airways and Kingfisher. My guess is that they couldn’t make a good enough business case for Jet Airways who enjoys good relationships with SkyTeam members too. However, if I had to pick between the two, Kingfisher wouldn’t be my choice.
I suppose Kingfisher may work if it wants to be the domestic provider for Oneworld in India. They do have the domestic network to make that work. But they will likely become jealous of feeding all that high dollar traffic to AA, BA and QANTAS just to get the domestic traffic in India. It doesn’t feel equitable. One thing I’ll say for Oneworld, their partnerships do seem quite equitable for the most part with each partner airline appearing to bring a good strength to the table both domestically and internationally.
American Airlines and British Airways won tentative US government anti-trust approval to cooperate closely with each other on routes and pricing. Iberia Airlines, Finnair and Royal Jordanian are also a part of this package. The one caveat from the Department of Transportation is that the “partnership” yield 4 slot pairs at London Heathrow airport to other airline(s) that might provide service between Heathrow and the United States.
This partnership is still contingent upon EU approval but I suspect the EU will grant it as well.
Is this good for the consumer? Well, in the long run I suspect so. There is plenty of competition between the US and Europe in general and frankly I suspect travel to London Heathrow hasn’t been this competitive ever already. In this case, I think we’ll see some capacity reduction between AA and BA on those US-London flights and that might well be justified. There may be a few non-stop routes that see fares rise some but overall the general population of the US and the UK will likely find fares pretty reasonable or even unchanged in most respects.
This will be a huge plus for OneWorld members in that they’ll be able to find better coordinated schedules for a variety of destinations throughout Europe and the US. And it should put OneWorld on much more equal footing with both the StarAlliance and Sky Team.
Of course, Richard Branson finds it all outrageous but, then, if you follow Richard Branson and Virgin Atlantic, you knew that he would already, didn’t you. (I do think Richard Branson has finally cried wolf one too many times and no longer gets the credibility he might once have had. One thing is sure, it’s time for VA to start looking for a partnership.)
Both BA and AA might moan and grown over giving up 4 slot pairs at Heathrow but both know that 1) those pairs will yield a tidy sum in a sale and 2) they’ll still have plenty of maneuvering room to make lots of money.
I doubt very much either airlines’ unions will be happy about this though. AA pilots will worry about a reduction of flying on their part which, in my opinion, is only a worry if they continue to fight new ultra-long haul services that AA could use their aircraft on. This is a real concern given this agreement’s potential to free up 777 aircraft to fly to new destinations.
The real win for OneWorld will be gaining anti-trust immunity with JAL for trans-Pacific services. With that agreement and this one, OneWorld gets the opportunity to compete with the other two alliances on pretty good footing and they haven’t had that in quite a while. Both agreements would also make it more attractive for other airlines to join OneWorld now.
I would not be surprised if this development doesn’t suddenly make it a bit more attractive for OneWorld to approach US Airways about joining. US Airways would make for a very complimentary addition to OneWorld and it would allow them to leave an alliance where they are quite literally relegated to secondary status on all fronts. In OneWorld, US Airways could offer good domestic service to the other partners and cooperate well on both trans-Pacific as well as trans-Atlantic services.
It’s official, JAL is staying inside Oneworld and the folks at American Airlines can relax on that front.
The only thing that surprises me about this announcement is that it was done this quickly. I thought it would take a month or more for the airline to come around. That said, it was a smart move for two reasons.
First, the last thing JAL needs to be doing right now is agonizing over an alliance. Their problems were not going to be solved by being in the right alliance. They were going to get solved when the executive leadership started focusing on cutting jobs, slashing costs and rationalizing the routes. The new JAL Chairman and new president apparently decided to move that issue of their plates and get on with the real work.
Second, it’s a smart move because there were big anti-trust issues involved with a lashup with SkyTeam and Delta. The US government signaled as much a couple of weeks ago when it told Japanese negotiators for the new open skies treaty that approval for anti-trust agreements already applied for was not a “done deal”. By staying with Oneworld, JAL gets to preserve its alliance infrastructure, benefits from revenue guarantees for the next few years and has the time to focus on restructuring itself rather than wasting their time on fighting an anti-trust battle in the US.
One thing that has become clear from this fight. American Airlines has emerged as the leader of Oneworld. The other major partners, Cathay, QANTAS and British Airways, didn’t really step up in the way you would expect of such a partnership. Yes, this was a fight based in the US but those 3 airlines stood to benefit but didn’t really work terribly hard to win the fight on behalf of AA. Look for AA to become the Oneworld leader and the airline that starts setting the direction for Oneworld for the future.
That could be good or bad. Good because Oneworld really hasn’t had much leadership from any airline to date. However, American Airlines has to set a direction that other airlines want to follow and one that benefits everyone in the alliance. If they don’t take up the leadership reigns, look for Oneworld to melt away in 5 years or less.
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.
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.
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.
British Airways cabin crew (aka “the flight attendants”) were going to go on strike this holiday season believing it best for everyone concerned that they get their way on everything. The British courts nixed that idea.
HERE is an entertaining essay by Jeremy Clarkson of Top Gear television fame on Christmas Travel.
CNN is reporting that British Airways has won an injunction against a 12 day holiday strike planned by the labor union representing cabin crew called Unite. More on Unite and its recent actions in a post for tomorrow. I suspect there are a few european airlines who are moving quickly to adjust their plans (again) for accomodating extra passengers.
And now we come full circle back to the United States and Europe. Both have highly developed, highly competitive airline markets. Each has both LCC type carriers and legacy carriers (and Europe’s legacy carriers are the former national flag carriers in many respects.)
This won’t be a rebuilding year. To the contrary, both markets really need one large airline to be removed from the market. In the case of the United States, I firmly think that should be United Airlines but in Europe that is a harder guess. If I had to pick an large airline in Europe for the surprise of the year, it would be Lufthansa. They are, by all accounts, a great airline but I smell trouble in that group. First, they have been buying into airlines that have been unable to survive on their own. That lack of survival, in many cases, isn’t because of poor management but just a lack of market share being available to them.
Lufthansa has bought SWISS, for instance. I’m not sure why and I’m not sure if they can tell us why. They could have just as easily taken SWISS’ business and left them in a heap. Further, Lufthansa has a lot of Airbus A340 aircraft. Those airplanes just don’t compete on high capacity, long haul routes anymore. What’s more, they also have orders in for the Boeing 747-8, another large capacity, four engine aircraft. Their competitors, Air France/KLM and British Airways, have seen the light in buying more and more Boeing 777 aircraft for their long haul, high capacity routes. It costs less to operate them and they make more money as a consequence. So, going out on a limb here, I say we’ll discover that Lufthansa is nearly insolvent some time by the end of 2009.
Both markets in Europe and the US will continue to face challenges in costs (fuel and more particularly labor) and LCC competition will continue to press air fares downwards. The real solution for large legacy carriers won’t be found this year. Expect more losses (with some exceptions such as SWA and jetBlue) and more merger talk in general.
Here are a few more random predictions:
United Airlines will ask Glenn Tilton to resign and hire an experienced airline executive. One possibility will be Doug Steenland, most recently Northwest Airlines CEO and now Vice-Chairman of Delta.
Southwest Airlines will, for the first time, examine adding another aircraft type to their fleet. My guess is it will be the Embraer 170/190 series.
Airbus will land a major order for aircraft from a traditional Boeing customer in the United States. My bet is that Delta orders more Airbus A330 aircraft.
China and Japan will drop their regional jet programs or, at the least, defer them for up to 5 years.
Bombardier will announce a major order (more than 20 aircraft) for the Q400 Turbo-Prop from a US Airline.
If fuel prices remain steady, Airtran will seek to form a small mid-western hub.
Last but not least, one LCC type carrier such as jetBlue or Virgin America will attempt to fly to DFW Airport (wishful thinking on my part.)
Using FlightAware.Com, I’ve been able to see some (but I don’t think all) of the government flights from around the world heading to Washington D.C. for the G20 Economic Summit. So far, I have identified these:
No doubt there are others that are not being tracked inbound. The mix of aircraft will include a 777, several 747 aircraft, Airbus A330 and A340 aircraft, a 757, IL 76, IL 62 and IL 96 aircraft from Russia and even a 747-SP (Saudi Arabia).
United Airlines, an airline that has offered spotty-at-best service for more than 10 years, seems to have the 9 lives of a cat to most people. Unfortunately, of all the legacy airlines, it is the one that should have melted away some time ago. It emerged from bankruptcy in 2006 after spending 3 years and over $300 million reorganizaing itself to operate in a world with $50 / barrel oil without a realistic plan to deal with contingencies.
The problem is, oil was already at $60 / barrel when it started fresh. Since 2006, United has been the one airline that always manages to arrive to the party in rumpled clothes and only a $5 bill to pay the door charge. Those rumpled clothes are an aging fleet (although all of the truly old Boeing 737s are now being withdrawn from service to cut capacity) of aircraft that do not match the interior quality or service level of most of its competitors.
The management team, most importantly CEO Glenn Tilton, has spent more than 2 years maneuvering to merge this airline with another and, yet, has been rebuffed by all potential candidates such as Continental, Delta and US Airways. Indeed, they took a particularly condescending attitude towards US Airways’ offer to explore mergers when Glenn Tilton implied that he and his team would remain in place and “mentor” the US Airways management team including Doug Parker.
Say what you will about US Airways but it isn’t the company we knew in the 90’s or even 3 years ago. Doug Parker and team are really America West and they’ve been better at executing to plan than virtually any other management team at a legacy airline. If anything, Mr. Tilton would be well served by Mr. Parker’s mentorship.
Now the marriage dance in airline mergers is essentially over. Delta and Northwest are walking down the aisle, Continental has chosen to stand alone (wisely in my opinion) and American Airlines has decided to pursue trans-atlantic partnerships with British Airways and Iberia Airlines. There is no one else left for United to pursue a merger of equals and they lack the cash and operating plan to purchase a smaller airline as well. Indeed, Continental Airlines is joining the Star Alliance (of which United is a founding member) and that may benefit United but if they think they will remain the shining star in the US market for that alliance, they are sadly mistaken.
Continental’s management team is stable, smart and agile in this market. They are uniformly the choice of airline among business travelers (and that is who pays the bills) and possess a young, modern, harmonized fleet of aircraft that serve the routes efficiently. Continental has hubs that will serve that alliance well in both NYC, Houston and Cleveland and offer Star Alliance members excellent codeshare options throughout the United States.
United Airlines has a fleet of 747s that are some of the oldest -400 models and by all passenger accounts they are in desperate need of refurbishment (unplanned for 3 years and not recognized for another 2 years while United showed its legs to potential suitors). They possess a large 777 fleet which, on the surface, would imply some modernity there. However, about half of that fleet are early model “A” market 777s powered by the less powerful and efficient Pratt & Whitney engines. No lip gloss found there. The other half are 777-200ER models that would at first glance appear to be more modern intercontinental aircraft. They aren’t, really. They’re what Boeing originally referred to as “B” market 777s and, once again, they are powered by the less reliable and efficient Pratt & Whitney PW4000 series engines. I would point out that every other operator of this aircraft in the US is using the more powerful and efficient Rolls Royce Trent or GE90 engines (American Airlines, Delta Airlines and Continental Airlines.)
Their 767 fleet, a large one comprised of 767-300ER models, shows the same flaws as their 777 fleet. While some were built as recently as 2001, they are all powered, once again, by the less fuel efficient Pratt & Whitney engines. I’m sure a theme is beginning to reveal itself here.
The same also remains true for their 757 fleet in that they are powered by the lesser Pratt & Whitney engines while other airlines are utilizing the real rocket of that type, the Rolls Royce RB211 powered 757 that, with winglets, is capable of ETOPS trans-atlantic operations.
Ignoring the soon to be gone 737 fleet (which is old and dingy but not powered by Pratt & Whitney for once), the remaining aircraft are various Airbus A320 types. While they are not old by airline standard, most are more than 10 years old and some are approaching 15 year of age now.
An old airplane is not an unsafe one but, in United’s case, it is an uncomfortable one. While other airlines have paid attention to maintenance, comfort and even tuning engines, United has spent its time navigating bankruptcy and its management team has bet their golden parachutes on a merger. With no other really suitable partners, they are now faced with operating an airline that by most standards, is not competitive. What’s worse, they have lost 2 years time that could have been spent executing a service plan that might work.
If the cost pressures airlines are facing continue for another year, they (United) will be faced with another potential bankruptcy and, this time, it should be a liquidation. There is no argument for this airline continuing its operations under the present regime nor is there an argument for it continuing to operate simply to support air transportation in the United States or abroad. There are plenty of air carriers that can take up the slack and operate more coherently than United. In fact, the only part of United ceasingly to exist that I find distasteful is that it potentially offers American Airlines an even greater lock on Chicago’s O’Hare airport. Since I experience that kind of fortress here in the DFW area, I know just how expensive that can be for a consumer.
Successful airlines share a few qualities that I’ve noticed over the years. They generally possess a young, fuel efficient and harmonized fleet. They buy the airplanes configured for performance on a variety of routes. They have leadership rather than just executive management. They focus on a clean, comfortable flight experienced that is defined by the service provided by its employees. Such an airline also carefully watches its money and nurtures its finances to avoid running cash short on the wrong day. It takes care of its employees not by offering the best salaries but by offering a living wage, a hospitable workplace and with fair treatment in both hard times and good.
That is the antithesis of United Airlines and, so, they go on the Death Watch.
