For the past 3 years or more, we’ve heard virtually every airline CEO talk about the need for consolidation and the problem of too many seats chasing too many passengers.  Now we have Northwest Airlines fully consolidated into Delta and we’re about to see United and Continetal merge together as well.  But does that really solve the long term problems in this industry?

One the one hand, I admire how the airlines are using their dire straits to argue for greater dominance in their industry.  It’s the legacies doing this and their “poor me” story is working very well among the public as well as among their own employees. 

I would argue that, if anything, we need even stronger competiton in the industry for the long term.  The greater dominance we allow isn’t necessarily going to raise prices all that much but what it will do is make it ever more cost prohibitive for new entrants into the market.  That’s the ultimate goal of consolidation:  keep the new guys out and keep the current competition neutralized as much as possible.

Quite honestly, what we really need is for a legacy airline to go out of business and liquidate.  I had long hoped it would be United who had to do this but, sadly, they scrapped by and made it to the other side.  US Airways is often pointed to as a candidate and while I’ll agree they are potentially the most vulnerable, I’m not sure I want to see them go.

I’d like to see one of our behemoths leave. 

Yes, it would put a lot of people out of work for while.  It would lead higher fares in the short term.  It would also allow room for new entrants who’ll bring fresher ideas, staff, aircraft and, wait for it . . . , lower fares.

It will help break the stranglehold that unionization has on this industry. 

What I’m really proposing is that we need a revolution in the US airline indudstry rather than an evolution of the legacy carriers one more time. 

We need airports to have room for new airlines to enter their markets and establish footholds that result in lower fares.  That means someone has to go.

This country needs to quite looking at each individual airline as an essential industry to our economy.  They aren’t.  Not anymore.  If one legacy went out of business and liquidated, the other airlines would move so fast to establish new business in those markets that it would make our head spin. 

In other words, they would grow the old fashioned way:  through competition.

It’s interesting to me that the airlines who have managed to weather the economic recession so well also happen to be the airlines who didn’t contract but, rather, grew themselves as legacies withdrew from unprofitable routes. 

It is often claimed that we need the legacies because they serve the small communities.  I wonder how the small communities feel about paying a disproportionately high fare in the current systems.  The truth is, there are lot of markets that I question the need for air service in many areas.

Does Waco, TX really need flights from Dallas and Houston?  Probably not.  Those residents should probably be driving to Dallas or Houston for their flights.  It costs about $30 to drive to Dallas from Waco.  Air fares between those two cities are currently advertised from $130 to $600 one way at present.  It’s economically wasteful to take that flight.

We, as a country, should be looking to create more opportunities for new airlines as well as existing LCC carriers who want to enter markets but are bullied away from them at present by the established legacy carriers dominance.

Filed under: Airline Service, Death Watch, Deregulation by ajax
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Continental Airlines has announced the second 787 route that it will initiate with the arrival of the Boeing 787.  The first was from Houston to Auckland, NZ.  This time, it’s Houston to Lagos, Nigeria and I’m seeing a trend here. 

Continental is clearly intending to make Houston much more of a international gateway city and that makes some sense to me.  Houston Intercontinental Airport isn’t overcrowded, has excellent feed to it domestically and the new 787 makes a lot of long, thin routes not only possible but profitable. 

It doesn’t hurt that there is a fair bit of oil business in Nigeria too. 

This flight will be subject to a fair bit of regulatory approval and planning on the part of ContiUnited but it is both sensible and doable.  It’s clear that the 787 will be used to expand opportunities rather than simply replace existing aircraft, at least by ContiUnited anyways. 

It’s also further proof that very large aircraft flying hub to hub (hello A380 and B747) as a model for international travel is going to be reduced as these new, next generation widebody aircraft come online.

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There is no doubt the airline industry is changing again.  With legacies merging to become SuperLegacies and owners of very diversified fleets, there is more and more pressure on regional airlines.  In addition, the bankruptcies of the 2000’s have led to airlines with lower cost structures and revised contracts that allow more “regional” flying of mainline routes.  That would imply more regional airline flying but the “regionals” flying those aircraft under those scope clauses are, for the most part, owned by the legacy airlines. 

Republic airlines has been attempting ot diversify itself by buying Frontier and Midwest.  Mesa airlines is just holding on by a thread.  ExpressJet tried branded flying and corporate flying without much luck.  So, where does it from here?

I think cost is going to be the driver in the future.  Regional jets became prolific for one reason in the 1990’s:  cheap oil.  That’s gone and it is unlikely that we’ll ever see it again.  Three regional airlines adopted a newer model of flying modern turboprop aircraft and I think it is interesting that those three also happen to be pretty profitable and reliable operations.  Horizon (wholly owned by Alaska Airlines), Frontier’s Lynx and Pinnacle (Colgan) on behalf of Continental all adopted the Q400 turboprop and made it work very nicely. 

Yes, Lynx is going away since Republic couldn’t justify a small subfleet when it had other aircraft that were more expensive and which would sit idle if not used on behalf of Frontier.  However, even Southwest Airlines was very intrigued by what they saw of Lynx last year when they decided to bid for Frontier.  Horizon continues to be profitable and flies this aircraft on some pretty long routes and remains competitive with regional jets and even some mailine aircraft.  Pinnacle (Colgan) has done very well for Continental out of the NYC area and will soon be expanding its turboprops into Houston for Continental.

The turboprop is much cheaper to operate.   A 30% to 40% load factor can result in a break even flight whereas some airlines effectively lose money on similar routes using small regional jets. 

They are cheaper to buy.  A Q400 costs less to purchase than an E170/190, has almost as many seats and is just as comfortable for 90%+ of all routes.  They’re also a little bit cheaper to maintain.

The modern turboprop can fly block times on routes of 500nm or less that are competitive with any jet.  Oh, there might be 5 minutes difference in the block times between a Q400 and an E170 or B737 but it’s a competive block time.  Why?  The turboprops reach crusing altitude faster, can take off from more runways and can land quicker (reduced time to go from cruising to landing altitudes.) 

I think we’ll see independent regional airlines explore more turboprop flying for the legacy airlines in the future.  It is a niche that fits them well and, yes, goes back to basics.  The regionals which are flying mainline routes with semi-regional jet equipment are going to be subsidiary companies of legacies in the future.  The legacy airlines can use them to onboard new pilots and use them as places to keep pilots hired when furloughs are necessary from mainline flying.  Unions like that and, as a result, are likely to embrace allowing more “scope” for flying the 70 to 100 seat aircraft on more mainline routes in the future.

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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.

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Continental Airlines announced their first route to use their soon to arrive 787 aircraft.  It will be from Houston to Auckland, NZ and if nothing else, this is just fun to think about.   Tentatively scheduled for November of 2011, it’s a long way off still and I would regard it as being subject to a lot of things going right such as the aircraft arriving in time. 

This is exactly why I believe aircraft such as the A380 and 747-8 have a very limited role in the future of air travel.  We now have aircraft that, in the broad scale, are medium sized but very long range capable.  The 777-200LR was the first but even that aircraft is a touch big for some routes.  Not so for the 787-8.  The 787-8 is a 767/A330 sized aircraft capable of handling longer, thinner routes that, frankly, really don’t get flown today. 

Houston to Auckland may strike many as a little weird but it really isn’t.  It puts Auckland within range of the middle of the United States with a full load and margin for safety.  Suddenly there are a whole lot of cities on the East Coast and in the Midwest that can enjoy 1 stop service to New Zealand.  Previously those people had to fly to the West Coast and, in many cases, had to make 2 stops before arriving in LA.  Even if they had to make one stop, this flight will mean less travel time “door to door” than ever experienced before. 

Houston might seem an odd gateway to Auckland but it isn’t.  Consider the hub cities the new ContiUnited will have.  You can feed traffic from NYC, Philadelphia, Washington DC, Cleveland, Chicago and Houston to that flight.  That’s probably not enough to fill a 747-800 but it’s plenty to fill a 787-8 aircraft and I suspect a lot of that traffic will tend towards a more premium customer. 

The United part of the airline will continue to handle West Coast to Australia trips.  Air New Zealand will probably keep their routes from New Zealand to the US but ContiUnited will now be the first to open up the eastern half of the US to Down Under.  That’s huge and a bit of a blow to both Delta (SkyTeam) and American Airlines (Oneworld).  This could potentially see Delta and/or AA opening up routes using the 787 to similar destinations Down Under. 

Will it happen?  I think so but it does have a certain fairy tale quality to it.  I remember Aviation.Net members discussing such fantasy routes as far back as 2005 I think and when such things get fantasized on Aviation.Net, I tend to believe they’re too good to be true.  However, I believe this has a better than 50% chance of happening because it fits well within how Continental is run, the Star Alliance network and its what a SuperLegacy network airline should be flying when it comes to long haul destinations.

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Continental has announced that 15 of about 150 pilots furloughed in 2008 will be recalled back to the company.  Another 100 who took voluntary leave will also be coming back.  Supposedly this is because of some planned growth on Continental’s part including the addition of 2 new Boeing 777 aircraft in the near future. 

 It’s a good piece of news both for these pilots and the industry.  Delta has announced it will be hiring some additional pilots as well. 

But the Continental news has me wondering even more about how Continental and United pilots will integrate their seniority.  If I were a betting man, I would bet that United pilots have a higher average seniority and that means a seniority merge could result in a lot of Continental pilots getting bumped back down.  Seniority determines pay so it will be a contentious issue.  Sadly, neither group has someone like Delta ALPA leader Lee Moak to guide them through in a reasonable way.

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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?

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Well, over New Jersey, actually.  He just lives there.

CNN had THIS report today about Continental Flight 9 from Newark, NJ to Japan having to return to Newark airport after developing hydraulic problems shortly after take off.  Because the aircraft was full of fuel for the long flight, fuel had to be dumped until the aircraft had a safe landing weight. 

An aircraft that can take-off with one weight can’t necessarily land with that same weight without risking damage (or worse) to the aircraft.  So fuel is dumped.  At least it is with large widebody aircraft such as the 777.  Otherwise the aircraft would have to stay airborn for 6 or more hours until it had burned off enough fuel.  The fuel vaporizes long before reaching the ground in almost all cases.  It’s regrettable but also unavoidable.

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I still don’t like this merger too much.  I like that the identify remains mostly Continental and I like the fact that the Continental management appears to be the group that will run the airline.  However, I see quite a few risks here.

1)  While I have more confidence in the Continental management team than United’s, I’ll point out that Jeff Smisek is still a somewhat untested airline CEO.  He’s had about 4 months in the job at Continental and he’s been pretty aggressive in just those 4 months.  So far, I think I would be a bit more comfortable with Larry Kellner in control.   He wasn’t quite so “in your face” but still managed to be very tough when it came to making decisions.

2)  Glenn Tilton appears to be given a nice cushy position as non-executive Chairman of the new company but I’m not so sure he won’t try to influence the direction of the company.  He was brought in to execute a bankruptcy and always appeared to want to sell the company and move on but his actions said a bit more.  Is he ready to take a back seat?  I’m not so sure he is.   This isn’t a man who is used to taking a back seat to anyone.

3)  Employees and labor.  United employees might have something to look forward to in a management team that acts like it wants to run an airline.  However, Continental employees appear to be having some trouble figuring out why this is good for them.  They had it good and now they can look forward to some rather bad karma and aggressive behaviour from their brothers and sisters at United. 

I also have trouble seeing United’s labor unions cooperating.  They’re pretty militant and often remind me of American Airlines’ labor group.  While Continental’s labor groups generally accept that it is a new world out there, United’s seem to want to return to the glory days of the mid 1990’s.   And who decides seniority integrations?  Better yet, is the bad example set by US Airways EAST/WEST groups going to set a precedent for becoming recalcitrant if they don’t like the decision?  Part of me believes that United’s labor groups will most likely attempt to shove their desires down Continental’s groups’ throats.

4)  Fleets in these airlines show some opportunities but they also show some risks.  In the Boeing area, there is some room to “harmonize” the fleets.  Both operate 767’s, for instance, but different variants.  That’s a good thing if the pilot and flight crews are able to agree on seniority lists and get on with things.  It’s a bad thing if you have to use one part of the company to operate one variant and another to operate another variant.  The same is true on the 777 and 757 fleets. 

Both have orders for 787 aircraft and I suspect those will remain on the books .  United ordered A350’s and I kind of think those orders might just go away.  It’s the domestic fleet I wonder about.  UAL uses primarily A320 series aircraft and CAL uses primarily 737 series aircraft.   Again, if the pilots and flight crew can get together on labor agreements and seniority, it would be good to settle on one type.  The two aircraft are so similar that it is silly to operate two different fleets serving the same purpose.  (This really isn’t the case in the Delta/Northwest situation where the fleets were dissimilar enough to offer some opportunity for “right sizing”.) 

5)  Regional airlines.  United has relied more and more on regional airlines to serve mainline routes.  Continental has used them much more in the model of a traditional feeder network and primarily because of scope clauses with their pilots.   There are more than 10 different regional airlines serving the two airlines.  They need to consolidate and, frankly, they should consider buying 2 or 3 of those regional airlines and harmonizing their services a bit more.  Right now, I see a mad scramble to keep a lot of different kinds of regional aircraft in service with the two and I think those regional airlines are going to do anything they can to keep their contracts.  Service will suffer with so much competition.

6)  Service products.  Continental has a nice, focused service product for two classes (economy and business) that has worked fantastically for them.  United has 3 or 4 depending on how you count them.   First, business, economy plus and economy.  How do you harmonize these service offerings and keep both frequent flier groups happy.  A lot of Continental OnePass members already feel a bit cheated with the entry into Star Alliance and what it entitled them to on United and US Airways.  Those travelers count and you have to find a way to keep them happy.  Whose program survives and, at the same time, how do you keep from diluting the program(s) by being all things to all people?

Call me crazy but if I had been Continental, I would have encouraged a US Airways / United merger just to watch that organization melt down while I made plans to capture their business the old fashioned way:  By competing with good service.

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I just saw THIS Seattle Post-Intelligencer Blog entry with the photo of the proposed livery for UAL/CAL.  I have to say that it is a pretty handsome look.  Everything is Continental (including the typeface I believe) except the name.

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Now, this morning, I’ve seen several reports that the new combined airline will use the Continental livery and logo but the United name.  If nothing else, at least I can look forward to not seeing that horrid United livery anymore.

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There are now reports that the boards of both United Airlines and Continental Airlines have approved an agreement that sees UAL buying CAL for approximately its current market price of $3.2 billion.   It is an all stock deal where Continental shareholders will receive 1.05 shares of United for their Continental stock.

The Washington Post reports that the new company will have a 16 member board with 2 seats reserved for labor unions.   The combined companies will have employees number over 90,000 and a combined fleet of more than 690 aircraft.

Official announcement of the deal is said to come on Monday morning.

It’s basically the deal we’ve all been hearing about for 2 weeks now.  UAL buys CAL, the company uses the United name and the Continental executive team runs most of the show.  Read the CNN/Money Magazine article HERE.

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This news story HERE from Reuters indicates that United Airlines and Continental Airlines have agreed on stock pricing and the share price would seem to indicate that Continental got what it wanted.  If true, that would seem to indicate that Continental is for most purposes running this show.   I still wonder what becomes of John Tague at United.

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American Airlines is a pretty conservative organization.  It doesn’t hire from outside the airline very often and it manages itself pretty closely.  It is, in many ways, the IBM of the US Airline industry.   Well, the IBM of the 1970’s anyway. 

Mergers and acquisitions haven’t been a very successful pathway for American.  One look at the TWA “merger” which was really a purchase and you’ll understand why.  They tend to focus on their core strengths and it is particularly difficult for them to adopt new staff and destinations.  Purchases, for them, seem to be more about keeping dominance in a particular area rather than growing their business. 

When Delta and Northwest started off on their merger, it was easy to understand why AA was unruffled by the development.  There was no assurance of success on any level be it financial or operational.  Being the biggest isn’t AA’s game nearly as much as being the strongest and I’m sure their management corps looked at that merger and decided it wasn’t something to worry too much about. 

But Delta has had better financial success than AA and it seems to be “right sizing” aircraft to routes and enjoying better yield and that has got to be attention getting on some level.  It got Continental’s attention apparently.  If the Continental / United deal does go through, I have to wonder who AA starts to look at.   It’s one thing to have an aberration in Delta but it is a whole other bag of bananas to have Delta/Northwest and United/Continental next door to you.

So, is it US Airways?  They aren’t just the logical choice because they’re the only legacy airline left.  There is a certain sensibility to the idea.  AA has no hubs out west (just a large presence at LA) and, in fact, has no dominance in any of the areas where US Airways does operate.  Well, Philadelphia is close to Washington DC and NYC but it isn’t the DC or NYC market either.    AA has no southeastern presence either.  Miami is a hub but it isn’t an regional hub like Atlanta or Charlotte. 

There isn’t much fleet compatibility there and I’m not sure there needs to be.  Delta has shown that as long as you have an economy of scale in the aircraft type, you can have it in the fleet and use it to your advantage by rightsizing your aircraft to the route. 

Labor problems?  Well, AA is kind of used to labor problems and their labor unions are so strong that I kind of wonder if they wouldn’t smack all those US Airways EAST/WEST conflicts into shape.  If nothing else, it would give the EAST/WEST unions something to unify over. 

Say, did you know that US Airways CEO Doug Parker used to work for AA?  His wife still does.  Guess who US Airways’ President Scott Kirby used to work for?  Sabre when it was a division of AMR, the holding company for AA.   Two more of the executive team come from Northwest Airlines from an era when they really weren’t that different from AA culturally speaking. 

Both airlines have a lot of debt.  The US Airways team has actually proven itself to be pretty scrappy in many areas.  They cleaned up the Philly problem from US Airways EAST, managed their finances carefully and have continued to be a player despite unresolved challenges.   Neither has really made money though. 

However, a real merger, not just a purchase and dissolution but a merger, has some potential even if AA’s team retains most of the control.  It has some of the same potential that Delta / Northwest had and fewer of the risks that a United/Continental merger has.  It helps the Oneworld alliance as well. 

While I think AA could do it, I also think the chances for them to screw up a real merger are far higher than I would give many other airlines.   I think they would approach it as a takeover and attempt to dominante everything.  And as a result, I think we would see the hubs in Phoenix, Philadelphia and Charlotte slowly fade away over time with nothing much to show for its effort after 10 years.

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It’s been reported that United Airlines and Continental are at an impasse in their merger talks over how shares of each company would be valued in a transaction.  Essentially there are several ways a price can be set on a share and much of it depends on the day or date they agree upon.  For more on that complexity, you can read THIS.  The short story is that United favors  a methodolgy to their advantage and Continental favors a methodology to theirs.  No big surprise except that whatever is decided can affect the value of the deal to certain shareholders by millions.

Oddly enough, my concerns about this merger don’t get past the several other issues.  Rumour has it that the agreement has Jeff Smisek (CEO of Continental) becoming CEO of the new company and Glenn Tilton becomes non-executive Chairman.  The new company retains the United brand and remains in Chicago.   My question is why?

United is an inferior brand to Continental among the favored high revenue passengers.  It’s name recognition abroad isn’t so much greater than Continentals that that is a good reason.   And why would anyone want the costs of being headquartered in Chicago?  Continental has a nice HQ down in Houston where they control an airport and in a right to work state. 

Most importantly, Continental has good relations with its labor unions and United has abysmal relations with its unions.  Why would you want to preserve a status quo that sees United labor taking over with seething resentment? 

The Delta / Northwest merger did result in a company that was valued more than its two separate companies.  That new company has not yet made a profit.   Bigger equals better has not really yet been proved in that merger and they managed to accomplish it by taking care of labor issues (or at the least the dealbreaker labor issue) first.  And only then with the assistance of a pilot’s union chairman (Lee Moak) who “got it” when it came to what the airline industry is today. 

There is no evidence that the labor unions of either company are going to be happy about this.  How do you think Continental labor is going to feel about being taken over by the Bitter Unions of United?  Not good I suspect.   What is Continentals management team going to think of having to move to Chicago and deal with the mess that is United? 

It almost seems as if Continental is suffering from an inferiority complex.  There is no need for this merger on their part and there is no need to entangle themselves with a company that hasn’t got a single good thing going for it as it is.  Yet they appear willing to submit themselves to a fading airline glory who hasn’t done much right in the past 20 years. 

United’s shares are up since the merger rumours about it has started.  Considerably up.  Continental’s not so much.  There is a message there.  United’s owners see hope in a good company like Continental being mated up with their jalopy of an airline.  Continental’s owners don’t seem all that thrilled with the idea.  This isn’t potentially increasing the shareholder value for Continental’s shareholders.  There is no guarantee that this marriage will result in a company valued more than its parts.   There isn’t any concrete evidence that this will result in a profitable company.  Isn’t time we be concerned a bit with airlines being profitable rather than shareholder value rising temporarily anyway?

I’d actually feel more positive about a merger if Continental took over US Airways instead.  This potential merger just smells bad to me and it feels like no good can come from this.

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During American Airlines earnings call yesterday, one financial analyst got a little rough with AA and, more specifically, Gerard Arpey and Tom Horton.  By rough, I mean the question posed was “Is that all you got?”  The Dallas Morning News Aviation Blog has a good description of the exchange HERE. 

They make a good point.  American Airlines has really been a disappointment for a decade and the leadership has frequently leaned on multi-year plans and talks of how well things are going and what can be expected from new deals and new alliances.  Sometimes it is talk of how one time expenses got in the way of a profit, etc.  At the end of the day, you really should deliver something now and then.  I would point you to Continental as an excellent example of this.

American Airlines didn’t file bankruptcy.  Everyone talks about how they did the right thing and didn’t file bankruptcy.   The employees gave back 30% or more of their salary instead.   Problem is, when your competition (United, US Airways, Northwest, Delta) does file bankruptcy and does lower its costs and does streamline its operations and does reinvigorate its workforce, they’ve got you boxed in.   All the airlines in that list gained a permanent advantage over AA and regardless of the talk of “doing the right thing”, AA has a big disadvantage. 

What’s really frustrating isn’t that disadvantage.  What really irritates people is the leadership’s habit of deferring and delaying to another day many of the problems that do, at some point, need to be solved.  It’s the risk created by ignoring, deferring or delaying the resolutions of these problems that makes one so irritated and, dare I say, now a bit unconfident about AA’s long term future? 

They have an old, fuel inefficient, passenger inefficient fleet.  Much of that renewal has been deferred resulting in a fleet of aircraft that is more maintenance intensive, which carries fewer passengers per segment and which burns more fuel doing it.   

There isn’t a labor group at AA that isn’t spoiling for a fight at this point.  The risk of one or another getting their way and having a strike is increasing month by month.  For 4 years, we’ve seen AA labor groups have their contracts become amendable, negotiations begin and then . . . nothing.  There is no sense of urgency on AA management’s part to have this settled.

These issues and more make it appear as if no one is really solving problems.  They’re deferring them, delaying their resolution or, in some cases, just ignoring them but no one is showing up, raising their hand and saying “We solved this problem.  It won’t be on our plate anymore going forward.” 

The thing is, bankruptcy would have done that for them.  There would have been final solutions and the airline would be coping with immediate problems instead of being bogged down with what is really nearly 20 years of baggage.   My point is, I’m not sure bankruptcy *was* doing the right thing. 

It’s OK to describe problem resolutions as ongoing for a year or two or maybe even three.  It’s been going on a lot longer than that at AA and JP Morgan analyst Jamie Baker has noticed.  And I think this is just the beginning.

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The FAA has denied exemptions for their 3-Hour Rule at NYC area airports.  They replied:

“Passengers on flights delayed on the tarmac have a right to know they will not be held aboard a plane indefinitely,” U.S. Transportation Secretary Ray LaHood said in the department’s announcement. “This is an important consumer protection, and we believe it should take effect as planned.”

 

” In denying the requests, the Department concluded that airlines could minimize tarmac delays by rerouting or rescheduling flights at JFK to allow the airport’s other three runways to absorb the extra traffic.”

 

“The Department also noted that it has the ability to take into account the impact of the runway closure and the harm to consumers when deciding whether to pursue enforcement action for failure to comply with the rule and the amount of a fine, if any, to seek as a result of non-compliance.” *

And that is really what I both expected and hoped for as a reply.  I am certain the war of words is not over, however.

*  These quotes are from the Dallas Morning News Aviation Blog entry which can be read HERE.

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The Dallas Morning News Aviation Blog has THIS story about Delta possibly deferring or cancelling its (inherited from Northwest) 787 orders for 18 aircraft (and 50 additional options.)  And this kind of makes sense to me. 

Northwest probably did need those 787 aircraft for its trans-pacific routes.  Its 747 fleet was adequate for some routes but others just couldn’t stand a 747 and Northwest doesn’t have any 777 aircraft.  The combined fleet of Delta and Northwest is a different matter, however. 

If anything, I think Delta might have one long haul aircraft type too many.  That said, they have 767 (Delta) and A330 (Northwest) aircraft for medium haul routes and configured so that each is nearly ideal for passenger density.  They have the 777 (Delta) and the 747 (Northwest) for long haul, high density routes as well.  Frankly, I think Delta might be better off adding the 777-300 to its fleet and retiring the 747 but that isn’t their plan.  They are refurbishing the 747 aircraft and extending leases on them.  Clearly Delta sees a profitable use for them at this time. 

The 787 isn’t going to be a trans-Atlantic aircraft.  Certainly not on the first routes for any airline.  A new(ish) build 767-300 or A330-300 can do those routes just as economically.  The 787 is better suited to routes like NYC to Tokyo or LA to Sydney or Atlanta to Rio de Janeiro or even the US to India.  Delta has the right sized aircraft for those routes.  

Delta can probably sell those orders profitably at this point.  There are a number of airlines who don’t have new(ish) 767s or A330s and there are several more who need to downsize from a 747 or 777 on long haul routes.  Airlines such as Continental and AA come to mind.  

Mind you, the enthusiast in me wishes all US airlines flew the latest and great aircraft.  The practical side of me says we’ll probably only see Continental take up its orders on schedule and even AA will likely take its time adding the 787.

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Senator Charles Schumer has obtained “commitments” to not charge fees for carry-on luggage from several major legacy airlines.  Read HERE for the entire story.

There are a couple of things I notice.  First and foremost is that each airline making the commitment (American Airlines, jetBlue, Delta Airlines, United Airlines and US Airways) each have significant operations at La Guardia or JFK Airports (or both.)  Airports in the state of New York and both of which are within Senator Schumer’s power base. 

Also notable is that Continental has been quiet.  Continental’s operations for NYC are concentrated at Newark Airport located in New Jersey.  Well, I also suspect that new Continental CEO Jeff Smisek is sensible enough to ignore the Senator. 

Of course they made the commitment.  It doesn’t fit within their business model and is impractical for them to try.  It costs them nothing to make the commitment and get their name in the news much as Spirit has had theirs in the news since making the announcement that they would charge carry-on fees. 

The only people benefitting from Senator Schumer’s diatribes is Spirit Airlines.  I leave Senator Schumer out of that equation because the more he speaks, the more it becomes clear that he doesn’t know what he is talking about and that this is more about his name in the press that advocating something for his constituents. 

Imagine the good that could be done if he shouted as loudly for redefining NYC’s air traffic area and getting better air traffic control systems in place. 

Instead he leads the charge against an airline who has no New York bases and who flies just 14 flights from NYC (La Guardia) to destinations such as Detroit (2 flights), Fort Lauderdale (7 flights), Myrtle Beach (4 flights) and Atlanta (1 flight). 

Hard to view them as a threat to NYC area consumers particularly since they offer flights on the NYC – FLL route as low as $60 each way with a checked bag fee of $19 and who *still* allows personal items free on board if they fit under the seat in front of them.  

Let me point out that several airlines who he received commitments from charge *more* for checked baggage. 

So much for reality.

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In a BusinessWeek story today, which can be read HERE, I noticed a paragraph that gives some hint as to who wants to be in charge of the new airline if a merger agreement does come about.  It says:

UAL, based in Chicago, and Tempe, Arizona-based US Airways are discussing an all-stock transaction to combine the companies, with the smaller US Airways being the acquirer, said the people familiar, who asked not to be identified because the talks are private. The merger would help United steer travelers to international flights from US Airways’ domestic routes, said one of the people.

That sounds like US Airways management being the “lead” group in a merger and, more importantly, Doug Parker as CEO.  However, I don’t know where US Airways has the financial capability to be the surviving entity either.  (Note:  Just because US Airways is the surviving entity doesn’t mean that the name United Airlines goes away.  They may well choose to keep that name.)  In addition, where does that leave United President John Tague?  He is arguably the executive who has best managed United and who is arguably the one to succeed Glenn Tilton as CEO. 

Doug Parker and team have done a fairly admirable job in keeping US Airways afloat and viable but they still have unresolved issues with their labor unions at present.  Such a merger would mean 3 different groups of pilots who would have fairly strong ideas on which union should represent them and how much they should be paid.  The AmericaWest/US West group is the minority group at present but could potentially regain some leverage and power if they could agree with the United pilots. I find it hard to believe anyof the 3 groups would agree with another.

If they really wanted to do this, I suspect they’ll have to give up some substantive group of routes and, possibly, equipment to gain approval.  The Washington D.C. area is the trouble point since US Airways has a strong position in Washington, Philadelphia and Charlotte and United has a strong position in Washington as well.  I’ll bet Southwest could be interested in paying for routes into and out of Washington National airport but I’ll also bet that UA/US doesn’t want Southwest having a foothold there either.

None of this makes really good sense.  If this is a real negotiation for a merger, I don’t see it happening without giving up lots of advantage in Washington which hurts the merger potential.  If it is an attempt to bring someone like Continental to the table, I think Continental is smarter than that.  That leaves American Airlines and they just don’t seem to like mergers like that.  They don’t mind acquisitions but mergers aren’t their cup of tea.  However, one could make a case for an AA/US merger that might actually have some benefits similar to the Delta/Northwest merger. 

But I seriously doubt AA’s unions would cooperate with a merger like that.

Some analysts see Continental making a bid.  I don’t.  Merging with United doesn’t give them any advantage they don’t already have and saddles them with labor problems and a fleet that is aging and which doesn’t mix with Continental’s well at all.  People keep pointing to United’s position on Asian routes but I would point out that if Continental had the equipment, they could probably siphon off United’s customers without buying the company.  Coincidentally, Continental has early 787 positions that could allow them to do just that.  I just don’t see Continental going for this.

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