In what I will declare to be the most greedy of moves for 2011, most US airlines have decided to raise fares to offset the FAA taxes that have (temporarily) disappeared as a result of Congress’ inaction on a new bill for the FAA.

By most US airlines, I mean airlines such as American, United, Continental, Delta, US Airways, Southwest, AirTran and JetBlue.  By raising fares, I mean they’ve raised them about 7.5% to offset the taxes that disappeared.   A few airlines such as Virgin America, Frontier Airlines and Alaska Airlines have so far not raised fares to grab that cash.

I am immensely disappointed in this development and particularly disappointed that I find both SWA and Airtran in that group.  Airlines don’t deserve this money and it is shameful behaviour to run and grab it.

Filed under: Airline Fees, Airline News by ajax
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There are those out there making political hay at Delta’s expense claiming they (Delta) are complicit in discrimination against Jews because of (at the core) Delta’s participation in the Sky Team alliance which Saudi Arabian Airlines is joining.

Let’s be clear about something at the outset.  Saudi Arabia does not permit the issuance of visas to any Jew for travel to or transit through Saudi Arabia.  Furthermore, airlines are required to not board people to travel to countries requiring visas when those people do not have the required visa.  This is as true for travel to Australia as it is for travel to Saudi Arabia.

Is it discriminatory for Saudi Arabia to have its policites?  In my opinion, yes.  However, I’ll also point out that Saudi Arabia is a sovereign nation that gets to make its own laws whether they are rational and sensible or not.

Is Delta discrminating? In my opinion, they are not.  It’s notable that Delta, at present, has no flights to Saudi Arabia.  Also notable is the fact that there are other nations that have similar laws with respect to Jews.

Delta isn’t a national flag airline.  They are a US based airline complying with law.  To make their operation about politics is bad on the part of everyone involved in this.

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Delta Airlines and Virgin Australia have gotten their approvals for an anti-trust immunity agreement to cooperate across the Pacific between the United States and Australia.  They did so, in part, by promising to keep up frequencies between the two countries.

This doesn’t mean that routes won’t be rationalized.  The frequencies will stay the same, the routes won’t.   These two airlines will deploy their 777 aircraft on routes that are complimentary rather than competitive.  Expect V Australia 777s to start arriving in San Francisco to replace QANTAS’ recently withdrawn flights.

Delta’s 777-200LR aircraft can potentially make the flight between Atlanta and Sydney (although with a touch of payload restriction) and provide competition to QANTAS’ new 747-400ER flights to Dallas/Fort Worth.

And for the first time, there is real competition for the QANTAS/British Airway/American Airlines Oneworld consortium.  Virgin Australia can provide domestic connections to Delta in Australia and Delta can provide domestic connections to Virgin Australia in the United States.

John Borghetti, CEO of Virgin Australia (and formerly an executive with QANTAS) has made it clear that he intends that Virgin Australia be a strong competitor with QANTAS rather than an constant underdog and he has experience with building networks as a result of working for QANTAS for many years.

Look for quite a bit of new competition on routes between the United States and Australia and I think United is going to be the airline to take the hit.  United has pretty old aircraft with a pretty old service product and no partners in Australia to assist with feed.  They also have no new large widebody aircraft to carry passengers with either although they will have the 787-8 with which they can start direct flights to New Zealand and Australia from cities in the United States that have never traditionally seen direct flights.

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So, Delta got hit badly by a viral Youtube video made by two soldiers among a group of 30+ soldiers traveling under orders back from overseas.  Because they (the group) mostly had 4 bags instead of 3, Delta charged $2800 in extra bag fees (for the entire group) and then got pummeled with bad press for it.

Before we go further, let me say a couple of things as qualifiers.  First, I’m no fan of baggage fees although I think that when anyone is traveling with more than 2 checked bags, yes, a fee is probably in order.  Second, I am not anti-military or anti-GI whatsoever.  Their government service is appreciated by me as well as most.

Now, airlines have typically allowed 3 free bags to traveling servicemen under orders with fees for in excess of that.  That alone is exceptionally generous and it isn’t a kindess to the servicemen, it’s a kindness to the US Government and, by extension, taxpayers.  Why?  BECAUSE TRAVELING SERVICEMEN UNDER ORDERS HAVE THEIR BAG FEES PAID REIMBURSED BY THE US GOVERNMENT.

From USA Today’s story:  “Army spokesman Paul Boyce says the reservists won’t be out anything because their traveling orders stated that all excess bag charges will be reimbursed by the government.”

The airlines aren’t imposing a hardship on servicemen.  In fact, they giving the US government a considerable break on fees instead.  Why is an airline obligated to giveway services and take a hit on revenue just because its government travel by GIs?  It isn’t in my opinion.  To the contrary.  Why isn’t the US government paying for the services it receives from airlines?

In other situations, airlines would heartily argue that giving away such stuff to other parties would raise *your* ticket prices.  They wouldn’t be wrong in that argument. 

Absolutely we should support the troops.  And I (and you) contribute taxes that pay for their travel (as they should) and it should be paid for in full and responsibly.   How would we feel about airlines giving away (for free) services to other public servants?  We would probably be pretty angry and concerned about that.

This may be wholly unpopular but I would offer that Delta is not the villain here.  The US Army is culpable for not making prior arrangements to transport its troops without financial burden. 

It is inappropriate and, frankly, lacking class to make a video, put it on Youtube and turn a company into a villain for something your command structure didn’t identify and take care of.

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Last week, a total of three Muslim imams were denied travel to Charlotte, North Carolina by two different airlines.  One in New York City by American Airlines (who offered no real reason why) and two more by Atlantic Southeast Airlines operating for Delta Airlines (because a pilot felt that some passengers remained uncomfortable with their presence despite not one but two security screenings.)

I’ve already posted about this and I’ve already said shame on Delta.  I’ll say shame on American Airlines as well. 

Focusing on someone’s religion as a security risk is extremely foolhardy.  Ignorance is not an acceptable excuse even where security is concerned.  More importantly, we’ve already experience far too many of these incidents in the past 10 years to excuse flight crew or security personnel behaviour on this subject. 

Denying these people the ability to fly is tantamount to making them second class citizens (whatever their nationality) for no other reason than their religion.   As a nation, we have historically resisted allowing religion to be a reason to persecute someone but in the case of muslims and particularly Muslims wearing traditional robes and headgear, we seem to have suddenly accepted that that is OK.  Just because someone speaks a foreign language (Arabic or any other language indigenous to a Muslim culture), we’ve almost enthusiastically treated those people as security risks.

This is sheer stupidity for two reasons.  First and foremost, it goes against the very grain of our nation and our constitution and the gains we’ve made with respect to civil rights over the past 50 years.  It’s an insult to our national culture and our national laws. 

Second, it shows we aren’t being objective about our security concerns.  Good security comes from good objectivity, not subjectivity.   You can no more point to Muslims as a risk by virture of their terrorist acts than you can point to Catholics as being a risk by virture of the terrorist acts of the IRA.  In fact, I would point out that if that was valid criteria, you would actually be at greater risk from Irish Catholics than you would a Muslim from Yemen because the Irish Catholic can far more easily “blend in” with our national background. 

As far as I can tell, we don’t ban Irish Catholics from flights because of their religion or accent.  Oddly enough, we do not even ban Hindi people because of their association with violent Hindu extremists. 

I blame the government for promoting this behaviour but I particularly blame the airlines for allowing their staff to practice it.   The best and only response to either of the incidents from last week would have been to find a flight crew that has good sense and board these people for their flights.  Tolerating this racism within a company is stupid and bad business.

An abundance of cautiou doesn’t mean you get to give into predjudice.  And let me point out that if we continue to tolerate this, there is no reason that some other class of people can’t be identified in the future to practice this predjudice against.  That class could be white women over 50 or black children or hispanic males over 20 or white men between 30 and 40.  You aren’t immune to this potential.

Then there is Rageh Al-Murisi, the man who banged on an American Airlines cockpit door on a flight to San Francisco.  It’s notable that this man wasn’t dressed in a way that would particularly identify him as a Muslim or an imam and he got onto his plane.

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Richard Anderson, CEO of Delta Airlines, has pointedly and consistently talked about managing an airline for a profit and while that seems like a no brainer, I’m not sure everyone does that. 

Delta has recently announced cuts in capacity and while that, too, seems like a no brainer, I think people miss Delta’s point.  If a route isn’t earning a profit it needs to go.  Few airlines use this as their criteria.   The larger point from Delta is that it isn’t about market share and I agree. 

In addition to capacity cuts, Delta has also announced a program targeted towards early retirements to trim their labor force as well.   This is to match capacity cuts and rightfully so.  Oh, mind you, I think this is also about getting the work force to average a younger age in seniority as well but that is something airlines have to do on a regular basis as their work force tend to stay with not nearly as much “churn” as other large companies experience.

Southwest has always managed for a profit and it has proven it can be done.  It’s kept its workforce levels consistent with its business and, more importantly, it doesn’t fly routes that cannot regularly produce profit.  Not for nothing, this is one reason why several cities are worried that SWA will cut Airtran routes currently serving them with subsidies.  SWA doesn’t see subsidies as a sustainable profit model.

There is something that I often remember my father telling me about the airline business (he’s a former EVP from an airline no longer in business and from 30 years ago.  You have to look at ever route between two cities as a small, entreprenurial business.  You have to invest in the business and you have to get a return on that investment in a timely manner.  Failing that, you have to drop it and move on to other opportunities.

This is what Delta is doing.  Instead of managing for surival, they’re managing for profit.  Instead of managing for sheer size, they’re managing for profit.   Instead of managing on the basis of what another guy is doing, they’re managing for profit.   In Delta’s most recent earnings call, Richard Anderson made the comment:  “This isn’t a hobby.” and I think that underscores the proper attitude about being results oriented.

This is not what we seeing American Airlines doing.  It wasn’t my sense that United Airlines was doing this pre-merger with Continental and it isn’t necessarily my sense that even some LCC carriers such as JetBlue are making this their goal.  Notably, I do think that US Airways is doing this and the results show.

So when does someone ask when AA’s management team plans to manage for profit?  I haven’t seen AA manage their route system for profitability.  I haven’t seen them manage their labor force for profits.  I haven’t seen them manage their fleet for profitability.  I’ve seen them managing for the status quo in the hopes that other airlines will return to AA’s fate when it comes to costs. 

The question is, why should you expect that when there has been a fundamental change in your competitors attitudes towards managing their business for profit?

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The latest stats on airline complaints have Delta at the top with 2 complaints per 100,000 passengers and Southwest at the bottom with just .27 complaints per 100,000 passengers.  The legacy airlines (and many of their regional airlines) occupy the worst positions with LCCs and smaller airlines doing the best.  Does that mean that bigger is worse?

No, not really.  Southwest Airlines carries a tremendous number of passengers but it carries them on shorter flights and most flights are “point to point” rather than hub flying.  In fact, the better airlines tend to be more “point to point” flyers and the worst airlines are those with exceptionally heavy hub flying.    Does that mean hub flying is bad?

No, not really.  It’s notable that Airtran which definitely uses hubs occupied a low complaint position despite being heavily hubbed out of Atlanta, home of Delta Airlines. 

If anything, I would argue that it indicates just how much an airline values a customer and their repeat business.  Those airlines holding bad positions sacrifice service to maintain revenue and in many instances that works out OK for them.  However, those airlines who pretty much always show profits in good times and bad are the ones that are occupying the best positions. 

There is a lesson there for airlines:  Value your passengers total experience and they’ll value the services you offer.

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Delta is cutting back 25% of its flights to and from it’s Memphis hub and to anyone who follows the industry, this comes as no giant surprise.   The merger between Northwest Airlines and Delta Airlines resulted in two hubs very close to each other:  Memphis and Cincinatti.  Another hub, Atlanta, was also nearby and everyone was pretty sure that both hubs would see a reduction in activity. 

Cincinatti has already been drawn down significantly and Memphis has experienced some reduction.  The thing about this announcement is how it was couched by Delta President Ed Bastian.  He says this will be good for Memphis.

I do wonder if Memphis feels similarly.  Reduction is probably appropriate but one should call it what it is:  rationalization of the network to provide better profit and other benefits to the company.

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A local friend made a comment to me about Delta Airlines and their mish-mash of a fleet vs Southwest Airlines and their one aircraft type fleet.  His comment was aimed at the success difference between the two.

Well, not so fast.  When you consider airlines 30 years ago and airlines of today, there is one thing that stands out.  Fleet size.  Today’s airlines such as Airtran and JetBlue would be behemoths in the market place in 1980 with 138 and 163 aircraft respectively. 

Let’s take a look at what truly large airlines have in fleet size.  Southwest Airlines, the 800lbs gorilla of LCC carriers, has 547 aircraft of which all are 737s, yes, but which is actually comprised of the 122 passenger -500 and the 137 passenger -300/-700. 

United Airlines and Delta Airlines both have over 700 aircraft and American Airlines presently has about 620 aircraft.  Each of those three carriers have a broad range of aircraft types, seating capacities and range capabilities.

A one type fleet works well for the smaller airlines because, yes, it does allow them to save money on maintenance and it keeps things simple when negotiating with unions about how much one is paid to fly what type for what distance.

But as you grow larger, it really is better to have some flexibility.  Even Southwest acknowledges that the Boeing 717 aircraft they’ll gain from Airtran (number over 80) should help quite a bit in matching the right aircraft to the right route.  They’ve gone farther than that, though, by ordering the 737-800, a larger aircraft than they’ve ever operated before. 

If Southwest expects to continue to grow, they’ll have to move into both larger and smaller markets than they have customarily entered in the first 40 years of their life.  The fleet types aren’t what will make their lives complex when it comes to the cost(s) of maintaining them.  What they will have to contend with is the idea that a pilot of a smaller aircraft should earn less than the pilot of a larger aircraft.  They’ll have to deal with scheduling flight attendant crews of two different sizes and that’s something they’ve never had to do before.  Fortunately, the range in size between the 717 and the 737-800 is not so great that they can’t argue that all their pilots should be paid the same (and I would agree.)  The truth is, while their fleet may be different, the missions aren’t that different in terms of distance, turnaround, etc. 

Delta is succeeding with a broad range of aircraft in ways not seen before.  Yes, they have added complexity but an airline big enough to operate more than 700 aircraft should be complex.  Could they simplify?  Certainly.  Should they?  I’m not so sure.  There can be disadvantages to dealing with one aircraft manufacturer instead of two in terms of the bulk of a fleet. 

Neither Boeing nor Airbus can really supply enough aircraft to Delta on a timeline that would make sense to replace, for instance, Delta’s 563 single aisle aircraft.   It would take 40 aircraft a year to replace that fleet over nearly 15 years.  Those manufacturers have to supply a number of other airlines as well. 

Boeing and Airbus can deliver about 32 to 38 aircraft a year in their 737/A320 families.  A Delta replacement order would conceivably consume more than one month’s production capacity in a calendar year and there are a whole lot more airlines out there of size than just Delta. 

By using both manufacturers, Delta would get more flexibility in deliveries and more reliability as well.  This is true for any airline of size.  In addition, by making each manufacturer compete for those orders, the airline is liable to receive a better price on each aircraft and when you are talking about 500+ aircraft, that could well mean savings reaching into the hundreds of millions of dollars.

The days of ordering “just Boeing” or “just Airbus” may well be over for any airline of significant size.  This may be true even for Southwest in the distant future.  Boeing and Airbus are unlikely to remain in the 100 to 130 seat category and will probably cede that to the next generation manufacturers such as Embraer and Bombardier.  That doesn’t mean an airline, even an LCC doesn’t need those aircraft, it does. 

It’s notable that JetBlue already has a two fleet strategy as well as Airtran and Frontier.  Southwest effectively has a two fleet strategy and probably needs 3 different sizes to work with going forward. 

Flexibility is the key.  Routes change over time.  Some routes yield more and more passengers while others are best demoted to smaller aircraft over time.   Southwest wouldn’t be flying 737s to places like Lubbock, Texas if it didn’t need a one-stop location to continue that flight to a larger city from the Dallas area.  Southwest flights to Lubbock and El Paso on 737s continue on to other cities such as Las Vegas, Phoenix and Los Angeles. 

But when the Wright Amendment goes away, the need to fly those one-stop flights goes away.  I actually look for Southwest to start evaluating aircraft such as the Embraer E170/190 series or Bombardier C900/1000 or CS Series in the next 5 to 8 years. 

You’ll find that the one fleet strategy is effective today only for airlines requiring a fleet to fly between mainline destinations.  Once they enter into smaller markets and larger markets, two or more types are not only required but justified.

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With the various mergers and consolidation that we’ve seen over the past 3 years, there is quite a bit of speculation as to who is next in the merger game in the United States.   The truth is, with the exception of some very small players, I see no opportunities.

Sun Country is actively looking for a purchaser and I think it will find one but it won’t be for Sun Country’s business nearly as much for Sun Country’s Minneapolis / St. Paul gate space and, perhaps, a few routes.  Two candidates as buyers come to mind in this area:  Southwest and Frontier.  Both should find the opportunities in MSP attractive and Southwest is liable to also be attracted to the staff and equipment Sun Country is flying.  Sun Country flies the 737-700 and -800 and getting their hands on the -800 of which there are 10 available could help SWA get a jump start on an aircraft it needs.

Frontier has a little bit less incentive for MSP.  The aircraft fleet doesn’t match and they already have hubs and/or focus cities bracketing MSP in Denver, Kansas City and Milwaukee.  But getting to compete against Delta in MSP where it is by far the dominant airline could be attractive to Frontier. 

As far as other airlines go, I just don’t see it for now.  Airtran will be going away this year.  JetBlue is doing OK and while I think it could stand to grow, nothing is available and an attractive fit in areas where it could grow.  There is the ever so slight chance that JetBlue could make a bid for Frontier but Frontier’s new management hasn’t had very long to make a go of it with that brand and it doesn’t seem like they would want to be consumed.

Alaska Airlines is very profitable and doing very well with its multiple relationships with various legacy and international airlines.  They could be attractive to purchase but I think they would seriously resist overtures unless the economics just made their shareholders rich. 

American Airlines has too many labor problems and is busy coordinating with its OneWorld partners at this time.  This is an airline whose house is not in order and whose leadership is not really interested in acquisitions and who is not very visionary to begin with.   Without new and radically different leadership, I presently see AA maintaining the status quo.

US Airways is pretty profitable and has their act together in many ways operationally speaking.  They, too, have labor problems but somehow management manages to sit back and let labor fight among themselves while earning profits.  This is another airline that could stand to grow and the most attractive place to grow would be internationally.  The bad news is that they don’t have any long haul aircraft on order except the A350 and that isn’t due for quite some time.  What’s worse, there is no internationally strong airline for them to target for another purchase.   Obtaining long haul aircraft isn’t financially easy to do presently due to constrained credit markets and the popularity of their choice in long haul equipment (the A330.) 

In addition, in light of the uncertainty that fuel prices and the economy present, I think that any growth that airlines choose to do will be slow, methodical and very cautious.  It will be organic and through upsizing aircraft rather than many new routes. 

The merger game of this decade is still undecided.  Certainly Delta appears to have done well although their profits still seem very dependent on fuel prices.  But United is far from complete and they’re already experiencing more problems than Delta ever did.  Southwest and Airtran are working hard to consummate their relationship but Southwest has stumbled as much as they have succeeded in the past 2 years.  There is nothing to say that SWA will execute their merger with Airtran smoothly so far.   We hope they will but we don’t know they will.

Look for it to be quiet in the merger and acquisition game for the next 12 to 24 months absent the possibility of a few small acquisitions.  I expect well see the alliances spark up a bit more in the near future, however.

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Last week, Delta announced that it had agreed to buy 9 Boeing (McDonnell Douglas) MD-90 aircraft from JAL.   After these aircraft are refurbished, they’ll start entering Delta’s fleet next January.  Delta’s President, Ed Bastian, refers to these aircraft as “capital efficient” for Delta and it does simply add to Delta’s existing fleet of 19 aircraft.  In fact, Delta now plans to add a total of 39 MD-90 aircraft going forward.  These will primarily replace aging and inefficient DC-9-50 aircraft.

Capital efficient means that the cost to acquire these aircraft combined with the remaining lifecycle costs including fuel makes them worth operating for Delta.  In addition, these aren’t your grandfather’s DC-9s.  These aircraft have current generation IAE V2500 engines that are fairly fuel efficient compared to brand new aircraft presently.  They also replace fuel guzzlers and represent a net gain going forward as long as fuel prices remain somewhat stable (and by stable I mean out of the $4/gallon territory.)

Delta has so far pursued a strategy of making do with what it has and employing older aircraft longer and this is somewhat in conflict with most other airlines’ strategies.  As fuel has climbed in price over the past 4 years, airlines have, if anything, accelerated their purchases of newer, more efficient aircraft.

Is this the right strategy for Delta?  Well, as an interim strategy, it works.  These aircraft are good for a variety of routes that can largely transit 3 timezones out of 4 in the continental United States.  There are a finite number of them available (only a bit over 100 were ever built) and in the near future I suspect that many won’t be worth buying when considered against a new Boeing or Airbus aircraft.  From a financial standpoint, these are good buys for Delta and should work for them well over the next 4 to 8 years.

Delta’s fleet is pretty varied since its merger with Northwest Airlines a few years ago and while they have made an excellent show of managing this fleet, there are a number of types that could be pared down over time.  Reducing the number of fleet types would allow Delta to be even more flexible with its crew resources and more cost efficient when it comes to maintenance needs.  Remember that every fleet type requires an inventory of parts and employees trained to service that fleet type.

This doesn’t mean that I advocate that Delta buy Boeing only or any other manufacturer exclusively either.  With its fleet size, it could quite rationally settle on both the Airbus A320 and Boeing 737 aircraft and operate them simultaneously.  The same is true for long haul aircraft.   It could probably employ both Embraer and Bombardier regional jets as well.   However, for each category (regional jets / single aisle / medium to long haul aircraft), there should be at most two basic fleet types. 

In fact, by working with multiple manufacturers, it can speed deliveries, fit the most perfect aircraft to a variety of routes and maintain efficiencies in maintenance and repair at the same time.  What I don’t see happening is Delta operating Boeing and Bombardier CSeries as mainline aircraft.  I think Delta will play it smart and use the manufacturers that have proven products in each category. 

I think that over time, we’ll see Delta order Airbus A320NEO aircraft to replace existing aging Airbus A320s.  I think we’ll see an order for Boeing 737 replacement when and if Boeing offers a replacement officially.  I think we’ll see Bombardier CRJ900/1000 aircraft come online to replace older CRJ700/900 aircraft and I think we may well see Embraer E170/190 jets for other areas of the country such as shuttle-like operations.  In the long haul category, it’s not inconceivable to see 787 orders pulled forward again but for a mix of both 787-8 and -9 aircraft.  I think we’ll see them pick either Airbus A350s or 777s for their larger trunk and long haul routes.  I might give the 777 an advantage here to become a single type for that category as Delta could very efficiently operate both 777-200LRs and 777-300ERs in a nice mix.  They’ve already got very new 777-200LRs (and ERs) that are using the same GE engines the -300ER would use.  I’m not sure the Airbus A350 quite fits in as well as one would like it to when it comes to the trunk route / long haul category.   I do believe firmly that the 747s will ultimately go away and not be replaced.

Look for Delta to be making more and more announcements about its fleet over the next 2 years.  I believe its strategy will be incremental rather than huge orders for a particular family of aircraft and it will be done with strong emphasis on preserving its capital going forward into the next few years.

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Virgin Atlantic engaged an investment bank (Deutsch Bank) to advise on its possibilities going forward as an airline after British Airways merged with Iberia and finally consummated its close partnership deal with American Airlines.  The objective was to find a path going forward for the airline and determine if a sale was in order.

Since then, a number of airlines have paid attention to the possibilities.  It’s reported that Etihad is interested and that both Star Alliance and Sky Team may make overtures to the airline.  Delta was reportedly expressing an interest early on as well.

The latest rumour is that Air France and Delta want to explore a purchase of some kind.  Both airlines are industry dominant and both lack something that many other airlines (and airline alliances) have:  Great access to London.

In Europe, this access is pretty important going forward and in the United States, Delta could do with a bit more London Heathrow access as well.  Will they succeed?  That depends largely on just how interested Richard Branson is when it comes to a sale.  Make no mistake:  this will not be a partnership.  Neither airline can afford to spend time working with a niche airline without greater control over its destiny.

And Singapore Airlines also owns a 49% stake in the airline as well.  While they are rumoured to be interested in being rid of their investment, I suspect Singapore Airlines is more interested in yielding a profit from their investment and protecting their own position in Europe as well that of their alliance (Star Alliance.)  Such a sale to SkyTeam members could be very detrimental to Star Alliance in the long run.

Finally, this raises the question of what becomes of the other Virgin airlines?  Does the mother of the brand go away leaving these other players orphans?  Or is their a consolidated move to bring the brands along in some fashion?  If I were sitting at Virgin Blue or Virgin America, I would be concerned for the future of my brand.

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Delta has made what I think is a pretty significant change in its SkyMiles program: They’ll no longer expire after 24 months with no account activity.

This, and other changes coming, is about improving its SkyMiles program and one focus is on communicating with its customers better. Ultimately, as an airline, you do want those miles used for something because it enhances value.

You just don’t want them used when it is inconvenient for the airline.

Over the years, I’ve never really seen much good said about Delta’s frequent flier program. The mile chasers don’t value their program very much at all and my own cursory analysis is that their program appears to be about par for the course on first glance but the award availability is something south of atrocious.

Of course, you could wise up and start buying tickets based on best price, service and convenience instead of being a vassal to a mileage program but that’s another post.

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Delta Airlines is going to introduce its own version of “premium economy” seating on its international flights.  In this case, it’s called Economy Comfort.  Users will get the same seat economy has but more leg room and some extra amenities such as no charge for drinks. 

Often when I consider what to write for this blog, I find myself wanting to be an advocate for the passenger as much as the airline geek as well.  The truth is, airline geeks can be a vicious bunch when it comes to understanding or embracing what the common passenger is experiencing. 

I think the common passenger experience on legacy and SuperLegacy airlines is appalling.  Sadly, so much of the improvements that would improve that passenger experience could come at little or no additional cost.  At the worst, they could come from legitimate fees designed to offer a better value proposition.

Seating is one of those value propositions that I think is horrific on most US airlines.  Seat pitch is terrible and we all know that it often is only reduced more and more.  We’ve even seen airlines introduce new “thinner” seats to to cram more seats onto an aircraft.  One consideration few ever gave to that proposition is that “thinner” really does equate to less comfortable as well.

When I consider how far we have come with respect to first and business class vs economy, I’m gravely disappointed.  It astonishes me that airlines will spend a fantastic amount of resources (and it really is fantastic) on what can amount to maybe 10 seats on a large widebody aircraft but will completely ignore challenging their seat supplier to supply a better seat for those in the economy section.

Make no mistake, while those in the front of the bus might represent real profit, it’s those in the back of the bus that make or break the airline when it comes to meeting its expenses.  Without those economy passengers, the airline would sink quickly.  Notice that all business class airlines have never thrived?

There have been tiny little improvements and changes over the years.  I actually like and enjoy the Airtran Recaro seats on their 737s, for instance.  But isn’t kind of shameful that Southwest Airlines offers what is arguably some of the best economy seating in the world?  Great leather seats with good seat pitch that, in many cases, exceeds legacy airlines pitch now and those same seats are not “thinner” or “harder”.  They’re comfortable.  Genuinely comfortable. 

But here’s the thing, it’s not that Southwest improved so much.  It’s that everyone actually got so much worse, really.

I”m not going to argue for more seat pitch.  If you’ve got 32″ of pitch, you win in my book.  If you’ve got 30″ of pitch or less, I consider you a chinchy airline with zero class.  In between, you’re lackluster and have no argument for purchase of a ticket except, possibly, price.  But I won’t even argue for more than 32″ of pitch. 

But don’t tell me that we can’t challenge seat designers to come up with a better seat that is cost effective to install, practical to maintain and which offers a better seating experience.  We can, we should and the airline who does will have a real and tangible value proposition to offer consumers.  Build it, advertise it and they will come.

In the meantime, I’ve no problem with charging for more seat pitch and a free drink (which I’ll point out wasn’t free but simply included in the increased price as in the days of old.)  I’ll often pay for such an amenity myself. 

However, let’s not get carried away lauding airlines for seat designs that, for the most part, reside solidly in 1970’s thinking.

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WestJet and Delta announced a signed interline agreement between the two airlines last Monday.  WestJet already has a number of interline agreements with other airlines and it appears to be behaving in the Alaska Airlines model more than anything else.  In other words, it will do a deal with whoever makes sense.

This is a great deal for Delta as it gives me them some access to the Canadian market that its alliance, Sky Team, lacks so far.  Only Star Alliance has some penetration in Canada via Air Canada.  I expect all both Sky Team and Oneworld to pursue WestJet as a candidate for their alliances in the attempt to lock out their competition from what is the only real “national” airline in Canada other than Air Canada.

This announcement also has to sting Southwest Airlines.  Southwest was set to enter into a similar agreement with WestJet but that crumbled apart when WestJet pulled out after waiting 2 years for that partnership to be enacted.  It was an ideal connection for Southwest and a big loss as well.  There won’t be another opportunity like that in Canada for a very long, long time. 

While Southwest Airlines hasn’t signaled any moves towards Canada yet, I actually expect them to do so but only after they are firmly capable of international flying in their IT systems.  They have a lot of their plate presently so I wouldn’t expect this in the next 2 years but I do expect it.  I also hope that Southwest learns from that experience and realizes that being a bit more agile when partnering with people is a good thing and waiting years to make it happen may well result in changing circumstances that put them out of the game.

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Delta President Ed Bastian says that air fares have to go higher to counter fuel costs even as it plans to add capacity in the next quarter.  And it isn’t just Delta that is adding capacity.

Air fares might need to go up to counter fuel costs but making that argument while you lose your capacity discipline and start chasing market share is just a different verse of the same song we’ve seen played out in the airline industry for the past 30 years.

Think the airlines learned their lesson?  I don’t and I think this is more evidence of that fact.  Load factors are very high and airlines think that means they can poach traffic from their competitors.  In fact, they can.

For the right price.

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V Australia and Delta Airlines have been fighting to enjoy anti-trust immunity with a mutual capacity agreement on routes between the United States and Australia.  So far, regulators are unconvinced that this would be a good thing for consumers and see it as an opportunity to gain market share only. 

To a degree, that’s true.  V Australia and Delta Airlines are the new boys on the block when it comes to US/Australia routes.   Their direct competitors are QANTAS and United Airlines who enjoyed near monopolies on those routes for years.  In addition, the lion’s share of the market belong to both of those airlines today as a result of their strong alliances (Oneworld and Star Alliance). 

I was glad that new competitors entered that market and I think we need more competition than just two airlines who want to behave as flag carriers.  On the other hand, I never thought that those routes could stand 4 competitors either.  Allowing an agreement between V Australia and Delta will help preserve the competition, I think, more than harm it. 

Both airlines promise not to reduce flights between the two countries and I believe that is true.  Instead, I think we would see the aircraft redeployed on other routes between the two countries to provide more coverage to both nations.  This would be a good thing.

In light of QANTAS’ move to switch its route to Dallas / Fort Worth from San Francisco to link up better with its Oneworld partner, it’s time for the regulators to calm down and get their assurances and allow Delta to make this partnership happen. 

If anything, a link up between these two airlines could result in better service for consumers.  V Australia can feed passengers over to its Virgin Blue domestic market whereas United Airlines has no such partner in Australia.  Since many of the objections come from Australian regulators, one must assume that there is some unequal treatment towards QANTAS going on here. 

I think reality will set in and we’ll see this agreement approved some time soon but not without certain guarantees and I think the two parties will have to make a move to show that they don’t want to harm QANTAS too much at the end of the day.

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In the latest financial results, most underperforming airlines attributed their lack of success to rising costs and specifically fuel costs.  Fuel costs did rise but let’s return to early fall when airlines were gleefully setting expectations for the winter season. 

Many airlines were so confident that they actually raised prices and talked confidently of record profits.  The problem is, the traffic didn’t materialize in many cases and I would attribute that to the fact that demand for the winter/holiday season is very dependent on price.  A few airlines did see that and held their prices or even had some sales.  Notably, Southwest Airlines kept a close eye on their demand and lowered prices were necessary. 

But the development that no one has talked about much but which is showing up is a rise in capacity.  That rise in capacity isn’t showing up in great numbers with new routes or increased frequency nearly as much.  Instead, it is coming from an increase in the size of aircraft on some routes.  Airlines are upsizing some routes and also increasing capacity through the aircraft they’re adding to the fleet to replace older aircraft.

Delta, for instance, has retired its smallest DC-9s in favor of Airbus A319 equipment.  American Airlines is replacing MD-80s with 737-800s.  Southwest is adding 737-800s to its fleet in about 1.5 years.  US Airways is adding A321s to replace 737-400s.  At first glance, these “replacements” are perceived to be a 1 to 1 exchange but in reality they’re often as much as a 10% increase in capacity per aircraft. 

The creeping rise in capacity shows that the industry isn’t necessarily in agreement on capacity restraint going forward and that could foretell a collapse in prices as these airlines chase customers to fill their aircraft.  I don’t think we’ll see huge losses in the next year but I do think we’ll see an erosion of profitability.   The airlines who possess fleet flexibility should fare better than those who are largely locked into large blocks of fleet types.  Think Delta vs American Airlines. 

Mergers didn’t solve an excess of capacity.  Not really.  They did bring some costs down but neither of the two big mergers had much overlap and capacity was therefore not really reduced much in that sense.  Since there are no merger candidates with much overlap in existence right now, I don’t think this problem is going to go away very soon.  The real solution is to actually let an airline go out of business.  The only candidate for that is American Airlines and they have lots of maneuvering room left presently. 

Look for capacity to be a bigger talking point among financial analysts over the next 3 months and particularly at the end of the next financial quarter.

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I wonder if I am the only one grossly underwhelmed by airline performance in the 4th quarter.  American’s performance is, at this point, embarrasing to the company’s leadership in my opinion and they hold on, in my opinion, only because of an ever thinning smokescreen.   Delta only managed to eke out $19 million and for an airline that had charged through most of 2010 with impressive profits, you have to ask “why” it was so dismal.  Even if you allow for weather disruptions, it still kind of stinks.

ContiUnited (I’ll stop using that moniker one day soon) managed to beat expectations but still posted a significant loss and let’s not forget that both of these airlines were performing exceptionally well prior to the consummation of their merger.   Even Southwest remained guarded abouts its prospects going forward despite a reasonably decent fourth quarter result.

Are rising fuel costs a problem?  Certainly but they aren’t a problem anyone was unaware of.   The same is true of labor productivity.  These are pretty well known variables and if you don’t know how to manage those effectively at this point, it is time to leave the business.

When US Airways manages to stand out among our airlines given the inherent weakenesses they have in the US marketplace, you have to ask who isn’t doing their job, no?  Alaska Airlines even shined and that is an airline who has all the costs one would associate with any of the legacy US airlines. 

It certainly points out that mergers aren’t the solution to everything and capacity management doesn’t necessarily ensure profits.  In fact, I wonder if this excess of restraint isn’t effecting demand in general and driving customers to other options secondarily.   There is a reason why Southwest keeps running up its revenue score. 

At some point, you have to go out there on the playing field and compete.  Competing isn’t just offering the best price, it’s earning that customer for more than one particular flight.  With all that the airlines have implemented to enhance their revenues, are we finally seeing the results of that behaviour towards consumers?  I certainly think its a important part of the equation.

It’s time to put on the pads and get out on the field ready to play rough and compete.

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Delta is introducing a program where upon check-in, you can bid to be bumped from certain flights.  The customer will name how much they want in order to be bumped.  The low bidder(s) get bumped for that compensation.  The passenger can opt to change their mind and if there are no bidders, the airline will have to involuntarily bump someone and compensate them accordingly.

I like this idea.  It is economically efficient by prioritizing bumps according to those who have the least to lose as opposed to the most to lose.  It also drives down the cost of bumps which inherently means the airline’s costs are driven down as well.  The current system for seeking volunteers bids upwards instead and passengers know that waiting before volunteering will drive up the offer of compensation.  In fact, frequent fliers know that they can game the system for high compensation that doesn’t necessarily go to whoever paid for the ticket:  their businesses.

If someone is on a leisure trip and they’re willing to be bumped in return for $200 in travel voucher plus a guaranteed booking on the next flight, that means those who really need to get to their destination have a far higher probability of doing so and at the least cost to the airline.  Remember, higher costs = higher air fares.

Yes, if you are in voluntarily bumpbed, you can get far higher compensation in the form of real cash, hotels and positive space on another flight.  However, the idea here is to bump those who have the least to lose, not the most.  It also means less probability of angry passengers as well. 

Other airlines could stand to adopt this system and, frankly, I think it should be deployed so that at a certain overbooking point, airlines solicit these people *before* they arrive at the airport.  And if this works as Delta believes it will, I suspect that will be the next step.

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