The next round in the subsidy fight between Boeing and Airbus is heating up with each company’s interpretation of WTO findings with respect to Boeing while we await “official translations” of the WTO ruling.  Airbus, of course, says Boeing got tons of subsidides and hurt Airbus by as much as $45 Billion.  Boeing says the ruling is relatively benign and just $2 Billion in subisidies will be noted.

As is usually the case, I expect that neither is exactly right.

However, in my opinion, it will be very difficult for the WTO to find that Boeing has been as competitively advanced by subsidies as Airbus.  At the end of the day, Boeing is a commercial enterprise with real shareholders operating in a country that expects it to commercially succeed.  Airbus?  Well, they would be the opposite of that. 

Like it or not, the world at least accepts and tacitly endorses companies that are competing and being responsible to shareholders to return a profit on investment.  That effort might be helped by subsidies but it’s still a commercially competitive enterprise.  Airbus is competitive but at the cost of inefficiencies as a result of it being a jobs program and a military/aerospace program for France and Germany.  If you removed subisidies from both airlines’ schemes, Boeing still has more than adequate opportunities to succeed whereas Airbus doesn’t. 

Even the Boeing ruling hurts Airbus with its timing.  This expected ruling once again, highlights even more egregious behaviours on Airbus’ part and that is concentrated into arguments against its parent company, EADS, in the KC-X tanker competition.  It’s a right line that EADS has to walk because, politically, they can’t afford to be seen as a fully subsidized effort to win business from the US government that inherently does take away both jobs as well as economic development from these shores.  On the other hand, EADS need to be a player in this kind of competition at some point or its political masters will find less and less incentive to advance its causes. 

The DoD continually refuses to make allowances for subsidies.  In fact, it almost gleefully rubs its hands over the idea that EADS might “buy” its way into the program which does yield savings for the DoD but also comes at a huge political cost on both sides of the aisle.  At the same time, no politician can quite afford to be seen making Boeing a sole source for this either. 

It’s a mess with no great solution.  One solution promoted is a split buy.  Politically, this makes sense.  Operationally, the only good choice is the Boeing in that it allows the military to project force in the way only the US Air Force can manage to do. 

I think this latest round makes the KC-X tanker competition even more toxic and I fully expect further delays in its award while DoD masters wait for things to settle enough to determine the political winds.

Note:  This writer works for a major US aerospace company that is a full partner on both programs.

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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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Trans States Holdings,  a regional airline holding company operating the Compass Airlines (newly acquired), GoJet Airlines and Trans States Airlines, has firmed up its order for 50 Mitsubishi MRJ regional jet aircraft and has options for another 50 aircraft.  This is a huge order for Mitsubishi who has just one other order from ANA for just 10 aircraft (15 options).

In fact, one has to wonder about the viability of the MRJ if it doesn’t soon gain a few more orders.  The 70-90 seat aircraft promises everything else that other new regional jets are promising.  This aircraft is using the Pratt & Whitney GTF engine for meeting its performance goals as well.

This aircraft has risk in it.  This is the first Japanese developed airliner since the YS-11 in the 1960’s and while Japan does have a nice aerospace industry serving Boeing (and Airbus to a lesser degree), it has little experience in building whole aircraft on its own.  In addition, the Pratty & Whitney GTF engine is still an unproven engine in the eyes of most people.  It may well perform as promised.  Then again, it may prove to be a maintenance nightmare too.

Trans States order is a bit of a vote of confidence but I also wonder at their plans for these aircraft.  They’ll obviously be used for 70 seat flying on behalf of a variety of airlines but that only becomes possible if more airlines’ pilots unions permit more 70 seat regional jet flying.  Ask United how that is working out with the Continental pilots.  American is doing no better with American Eagle either. 

It’s a gamble for both parties and both need a win in this deal.  If this airliner doesn’t work out, Trans States may well be finished as a company.  If Trans States is unable to deploy these aircraft into flying for various airlines, Trans States may well be finished as a company.  If Mitsubishi doesn’t land more customers soon, there may not be a business case to continue developing this airliner. 

I’m not sure the MRJ is big enough.  It seems to me that the right size airliner might be more along the lines of the Embraer 190/195 and CRJ900/1000 as it would attract airlines who need a smaller aircraft for mainline flying.  There is a lot of uncertainty among regional airlines in the US at present because there are fewer customers to fly for and those customers are squeezing their partners even more today.

How many new regional jets do we need?  With Russia, Japan and China all working on similar aircraft to compete with two other companies who have a mature product (Bombardier andEmbraer), it would appear all of these new aircraft are, at the least, somewhat at risk.  Russia’s Sukhoi SuperJet actually looks more “right” for customers than the MRJ since it has more lift and range.  China’s effort is an exercise in learning how to build a plane more than a real commercial effort to succeed.

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American Airlines has sued Travelport to get a permanent injunction forcing Travelport to show its fares without bias in the Galileo reservations system.  No doubt the small amount of success in forcing a stalemate with Sabre has caused American to think that it can achieve similar results with other global distribution systems.

Maybe. Maybe not.  Achieving some relief in court only lasts a short time.  At one point or another, AA has to either walk away from the GDS companies or it has to do a deal.  A deal won’t get done in court.  Doing a deal requires both parties to work things out and the fact that AA is suing is a signal to the GDS companies that they are having some effect on AA’s bottom line.  Continuing to show solidarity among themselves can only result in putting more pressure on AA than the GDS companies.

And just because you sued doesn’t mean you’ll win.  If AA loses the latest battle, they’ll be on even worse footing than before.  All of this over something that will save just tens of millions for an operation that is generating more than $23 billion in revenue.

If I were  a shareholder in AA, I would be much more interested in the company resolving labor issues and raising productivity which could generate hundreds of millions for the company.  I would want to see the company heavily engaged in hedging its fuel costs and making them more predictable which could save hundreds of millions of dollars.  I would want to see growth into profitable long haul routes which can only be done by working things out with pilots. 

I would not want to see a public fight with GDS systems who can have a real and measurable effect on AA’s ability to sell tickets.

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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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There has been talk recently of a phase 2 expansion of Chicago’s O’Hare airport and now there are calls for expanding both JFK and Newark airports in the New York City area.

No doubt that the latter two could certainly stand some better planning and a revision of runway strategy.  I would also be wholly unsurprised to find out that others will argue for a new airport serving the area.  Then they will point to White Plains as the next NYC airport again.

I’m all for airports getting revamped and better plans and runways.

But what I would like to see more of is rapid transportation to and from these airports.  A big part of the problem with using many of today’s airports is the inability to get to them in timely manner as well as the parking fees that resemble mob extortion.

Everyone knows the challenges in accessing most of the New York’s airports.  It’s much the same at many other airports around the country including my own home base in DFW.  I can drive 40 miles and pay a minimum of $13/day to park at DFW (anything somewhat close to the terminal is considerably more) and I don’t have much in the way of choice in doing that.

We have a rail system now and it’s actually a pleasant one.  You can get kind of close to DFW via the rail system but you still have to transit from a rail station to the airport via shuttle at the cost of at least 15 minutes more time and often more. 

Why I can’t ride a rail right to the DFW airport terminals and their new rail system is completely beyond me and a sorely neglected option.  It’s coming, they say but it’s about 10 years overdue in my opinion.

And these conditions aren’t much different at other major airports.  We need to do a better job of planning access to these airports in addition to building a new runway here and there.

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For the uber-airline geek, Bader models is making USB flash drives with the tail of your favorite airline.  You can see more HERE.  Among their samples, I’ve noticed iconic airlines such as Eastern and PanAm and I’ve noticed the distinctive tail of an L-1011.  Bader says you can order any aircraft and color you want. 

It doesn’t come cheap though.  The 4GB model is $53 and the jumbo jet version in 32GB is a whopping $120.  But you get to be one of the cool kids on the block with that sticking out of the side of your computer. 

I’m tempted myself.  I wonder if they’ll do a 727 tail with the first generation Braniff logo on it in white?

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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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Boeing’s CEO, James McNerney, reiterated Boeing’s view that re-engining the 737 even in light of Airbus’ A320NEO announcement is not the pathway to success for Boeing.  They continue to believe that if a new 737 replacement is forthcoming in the 2019/2020  timeframe, customers will wait.  I agree.

However, if customers are asked to wait until 2025, I’m not so sure.  There is only so much more additional performance that Boeing can get from either the airframe or the engine on the 737.  Let’s not forget that, in many respects, the current 737 lineup continued to perform well against the A320 in part because of the development of the winglets and the evolving refinement of the CFM engine.  Additional gains are going to be increasingly difficult to find.

Also of concern is McNerney’s announcement that research and development will be going down over the next couple of years and that they intend to cut back on some of their engineering resources which are extraordinarily high (say McNerney) at present while retaining their core capability.   While I understand the cravings for normalcy, this worries me. 

To really get a 737 replacement out in the 2019/2020 timeframe, it’s time to get started now.  You have effectively just 8 years to redesign another technically innovative aircraft that will compete for 20 years or more.  Schedule is more critical in accomplishing this than budget is.  It takes time to design innovative technology and implement it into a product that must be 99% reliable “out of the box”.   Boeing’s schedule for doing so is, in some respects, already eroding.

I think there is more time to consider options for the 777 line than there is for the 737 replacement.  Enough airlines and, in particular, 737 customers have signaled the very strong desire for a better airplane. To act as if you have all the time in the world or even little competition for these people is a bad idea.  Even Southwest acknowledges that they can handle transitioning to a new type and they don’t mean just transitioning to a new Boeing. 

There are 3 SuperLegacy airlines who’ll be shopping in the next 1 to 2 years for fleet replacement and 2 LCC carriers who need to find new efficiency gains in their fleet (Southwest and Ryanair) who could literally place enough orders to pay for the 737 replacement.   Having something that will significantly beat the A320NEO in the stated time frame that also provides for future efficiency and a product line capable of lasting 20 years is almost a necessity rather than something to study for another 2 years.

The 737 replacement won’t be an evolution of the 737.  It will be much more a revolution for single aisle aircraft much as the 787 is for medium capacity, twin aisle aircraft.   Furthermore, I think you would want to have that program on firm footing and about to produce new aircraft as you begin to enter into engaging on a 777 evolution or replacement later in the decade.

So what’s the hold up?

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American Airlines and Sabre have decided to enjoy a truce while negotiating a new contract until this summer.  Is this war between AA and the GDS systems over?  No, not yet. 

I think AA needed some of the heat to die down in the public given their most recent financial results and this was a way of moving one of 3 major problems off to the back burner and getting their revenue stream back online with the largest GDS system.   They can continue to play chicken with Expedia and Orbitz in the meantime and see if they can get any traction at all. 

But it begs the question as to why AA is choosing to fight this right now when it so obviously has a large pile of other problems to solve first.   They are the only legacy/SuperLegacy airline to lose money for 2010 and while they have some promising developments in their favor, they continue to fall further behind other airlines when it comes to earning a profit. 

If you compare the problem of fees with respect to GDS systems vs the problem of labor unrest and productivity, I know which one I would want to get solved first.  I wonder when AA’s board of directors and shareholders begin to be unsatisfied with AA’s financial performance relative to the rest of the industry.

In another development, Virgin America has inked a deal with Sabre to provide reservations systems and to continue its GDS relationship going forward in a multi-year contract.  Several airlines have reaffirmed the GDS model (US Airways as well) and American continues to stand alone in this conflict although I do think Delta is paying close attention. 

One good thing that may come from this is the GDS providers doing a better job of accomodating the a la carte fee structures and upselling.  That would not be a bad thing.  In addition, it may well spur the GDS systems to invest in new technology that not only will accomodate future needs as well as lower fees.  That, too, would not be a bad thing. 

Right now, I would say the GDS systems have a slight upper hand in this fight.

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Mexicana says it has made significant progress with its creditors allowing it to go forward with its debt restructuring and it now planes to start operations in the near future with seven aircraft and eleven routes.  Agreements with labor unions have been reached and Mexicana says it has 39 pilots, 80 flight attendants and 846 maintenance techs ready to go when they re-start.

If that 846 maintenance techs number is correct, I think I know who “won” among the labor unions.

Current plans call for Mexicana to start international routes to Los Angeles, Chicago, San Antonio, and Havana, Cuba and domestic routes to Guadalajara, Monterrey, Cancun, Oaxaca, Tuxtla Gutierrez and Veracruz.  Although Mexico City isn’t named, I presume that these routes will be centered upon Mexico city itself.

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Sounds like a really dull airline, no?

That’s British Airways and Iberia Airlines under their merged company name.  British Airways and Iberia will continue to operate under separate brands while enjoying the synergies of a merged company in the background.

Willie Walsh becomes CEO of the combined company while Antonio Vázquez Romero sits as non-executive Chairman of the group.  Why isn’t Willie the top guy?  Because in this case, the CEO is who gets to run things.  Chairman just gets to run the board of directors.

The new company hit the stock exchanges yesterday with a new fleet of just in excess of 400 aircraft and anticipated annual revenues exceeding $19 Billion.  They’ll sit as the 3rd largest airline in Europe but let’s put things in perspective:  American Airlines has 620+ aircraft and $22 Billion.  However, IAG should earn a profit and AA has yet to show a profit despite most airlines of its size already doing so for 2010.

Look for the new company to start targeting other purchases.  Willie Walsh has already stated their intent to go on a shopping spree for other airlines.  Who is anybody’s guess but an international airline purchase is always difficult given ownership rules that generally exist from one country to another.

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I mentioned in a post a few weeks ago that I had started collecting diecast aircraft.  One commenter asked why no BAC 1-11 aircraft.  Well, here it is:

From 2011 01 22 Fleet Additions

See the rest of the additions HERE.

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Virgin America has had a great experience with its new flights between DFW and Los Angeles as well as San Francisco.  So much so, they’re adding one new frequency on each route by terminating its LAX – Toronto flights. 

This is what I mean by it being time to compete with American Airlines.  That big bully that everyone sees in the DFW area is a lot more vulnerable than it may look at first glance.  AA has fought back some on those routes but with VA’s load factors running in the 80 percents and their advance bookings running about 70 percent, it’s clear that a new, service oriented entrant can compete with AA.  Especially on routes that have been traditionally dominated by AA over the past 10+ years. 

Once VA gets these flights settled and tweaked and finds itself satisfied, look for new flights out of DFW.  I see opportunities for them on DFW to New York city, Boston and Seattle.  All three routes are the non-stop domain of AA and all three have relatively high fares.  Just like the DFW-LAX and DFW-SFO routes had.  Virgin has a presence in each of those cities which would make it easier to integrate routes from DFW to those destinations as well.

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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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Vision Airlines is a new entrant into the Florida leisure markets suddenly and I don’t see this going anywhere anytime soon.  Vision is a charter company that owns a number of 737s and a few 767s as well.  The truth is, they do a bit of everything.  Vision runs a tour operation using Dornier aircraft out of Las Vegas.  They do charter flights to Cuba.  They work for the United States government transporting spies for a spy trade.  And now they’ve decided to find a way to use their 737s a bit more and they’re going to operate scheduled services.

These scheduled services are primarily to the Destin, Florida area although there are a few flights into Gulfport/Biloxi.  Their flying routes from places like Macon, GA and Asheville, NC and Shreveport, LA to Destin/Fort Walton Beach Florida.  They do have some flights from Atlanta, Orlando, Tampa, and Miami but not because they have other flights to those cities feeding traffic. 

Frankly, I see this going nowhere in a great hurry.  The smaller destinations aren’t going to originate enough traffic for 737 flights and the larger destinations have, you know, real airlines like Southwest and Airtran serving them. 

In New Mexico, I read THIS interesting story about New Mexico Airlines.  New Mexico Airlines plans to offer service between Clovis, NM and Albuquerque.  Currently, that route is serviced by Great Lakes Airlines using Beechcraft 1900D aircraft twice a day during the week and once a day on the weekend.  A quick look at the Great Lakes Airlines’ website reveals a non-refundable fare of about $89/each way and a refundable fare of about $189/ each way.  This service is subsidized by EAS (Essential Air Service). 

New Mexico Airlines (a division of Hawaii’s Pacific Wings)  intends to come in with an even smaller, unpressurized aircraft and charge $600 round trip between the two cities.  But they’ll offer 1 more frequency each day.  They’ll have to since their Cessna Caravan’s can seat 9 people and the Great Lakes Airlines’ Beechcraft can seat 19.   NMA’s President said:

“There has to be more to your business model than collecting subsidies,” NMA President Gabriel Kimbrell said. “Otherwise, it’s just airline welfare.

“It’s the only sustainable approach.”

And I find that attitude interesting since they themselves were established in New Mexico by EAS contracts.   The truth is, New Mexico is sparsely populated and it will be decades before some cities grow enough to justify unsubsidized service.  While I’m no fan of EAS in general, it would appear that this is working OK in Clovis and at what appears to be an economically efficient price. 

If New Mexico Airlines really thinks it is going to succeed by doubling prices, well, I don’t.  I think they’ll fail miserably.  For anyone wanting to travel beyond Albuquerque, they can drive to Amarillo or Lubbock which are just 100 miles away and fly on Southwest Airlines.  Don’t kid yourself that they won’t.  If Great Lakes Airlines goes away and New Mexico Airlines takes over at those prices, people will simply drive.  It is the only economical thing to do.  If they’re traveling beyond ABQ, they’ll drive to Amarillo or Lubbock and fly from there.  If they’re going to ABQ, they’ll drive the 220 mile trip. 

Then New Mexico Airlines will fail and Great Lakes Airlines will come back under the EAS program.

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Lately, it seems like QANTAS has all kinds of engine failures all over its fleet.  Is it because they’re not maintaining them?  I seriously doubt that.  You have to consider how QANTAS uses its 747 and A380 fleets. 

QANTAS is somewhat unique in that many of the routes it flies are not just exceptionally long but also exceptionally full.  This means the aircraft are being operated at their maximum performance far more often than virtually any other airline is required to do.  These aircraft are fully loaded with people and fuel and then must use maximum take-off performance in order to loft themselves into the sky for flights that have durations inexcess of 14 hours. 

That puts a lot of wear on engines that other airlines just don’t suffer.

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Since Southwest Airlines announced its re-vamped Rapid Rewards program, it has taken a lot of flack both from long time program members as well as in the press.  Undeservedly so, in my opinion. 

Southwest needed to do something badly with that program and orient it towards the customer of tomorrow as opposed to the customer of the early 1990s.  These changes do that and while, yes, some people who have been reaping the rewards (pun intended) from short haul flights will do a bit worse, customers who will drive their business going forward will do a bit better. 

It’s all about rewarding those who spend more and travel more.  It’s scaled to mostly reward the people who are driving profits the most and that is what a rewards programs should do. 

I do hope that Southwest holds its course on this program and resists the temptation to change or revise their new plan.  Doing this now corrects a strong imbalance that has existed for some time and ensures that Southwest is competing nationally when it comes to this kind of program.  People will settle down in time and members will buy into the changes but it will take time as no one likes change.

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American Airlines announced an order for (2) 777-300ER aircraft during their earnings call today and I don’t think anybody saw that coming.  It’s a notable order for several reasons.  First, it’s the first order by a US airline for that aircraft.  Second, it’s the first airliner for AA to add that is for growth rather than replacement.  Third, it’s a new engine type for AA since the -300ER uses GE90 engines instead of the Rolls Royce Trent engines that AA has on its -200ER aircraft.   Finally, AA plans to receive these in 2012 and that’s pretty quick. 

Although these aircraft come with slightly better range than the -200ER, I think these are about capacity growth on some particular long(ish) routes.  These could be for any of 4 basic areas:  DFW or Chicago to London (I doubt this), DFW or Chicago to India (maybe), DFW or Chicago to Japan or China and, finally, NYC or Miami to South America (I doubt this.  My bet is on flights to India, Japan or China with India or Japan being a higher probability.  Time will tell.

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Virgin America has announced its intentions to order 60 new Airbus A320 aircraft with 30 being the A320NEO (New Engine Option) with deliveries taking place until 2019.  That means Virgin America will triple the size of its fleet (or more) over the next 8 years. 

While VA already signaled that they planned to buy 40 new aircraft, an additional 20 reflects a certain confidence that it is going to be earning solid profits going forward.  I’m sure that some of the new aircraft (probably the last ones) will replace some original aircraft in this scheme but it reflects a plan for heavy growth between now and the end of the decade.

Let’s put that growth in perspective.  jetBlue has about 160 aircraft presently serving 63 destinations after being in business for about 11 years.  In that fleet, there are about 115 A320 aircraft (with no orders on the books) and 45 Embraer E-190 aircraft (with an additional 60 aircraft).  I use jetBlue as an example because they are somewhat similar airlines with similar service products. 

So, Virgin America thinks it can grow its mainline fleet to about the same size as jetBlue over about the same period of time.   However, jetBlue got to its size in part by using the E-190s to “feed” traffic into their system from smaller destinations.  This would seem to imply that VA will have to think about a similar strategy. 

I suspect VA will start looking at how to build its network around its focus regions.  There is some opportunity on the West Coast but I think they’ll have to look to feed their system in other places as well.  Places such as DFW, Chicago and on the East Coast into New York City and Washington D.C.

Why order now?  Well, Virgin America is solidly in the Airbus camp and now they know what Airbus will be doing with its product line for the next 10 to 15 years.  With that knowledge in hand, it was an opportune time to make that order since Airbus will be very interested in getting airlines onboard with their decision to re-engine the A320 series.  In other words, they probably got a good deal. 

Why the A320NEO?  That goes to efficiency.  Again, VA knows what Airbus’ strategy will be for the next decade and a half and that means they know what kind of efficiency will be offered.  It only makes sense to get the most fuel efficient aircraft possible when competing here in the United States.  Even those that aren’t NEO aircraft will give VA an advantage in that they’ll be new engines with the latest upgrades available and that translates into money saved against the competition.

And they get one more advantage:  They’re at the head of the line when it comes to other potential buyers in the United States such as Delta or United airlines.   Virgin will be receiving the best, most efficient aircraft available as soon as or even sooner than most of its competition.  American Airlines has no new plans for aircraft other than to keep taking on 737-800s at present.  So on VA’s transcontinental flights, it will likely have the most fuel efficient aircraft available and having that advantage in that competitive marketplace means a greater chance of profitability and competitive advantage when it comes to fares.

Virgin has 2 or 3 years to go when it comes to considering how to feed its network with smaller aircraft.  I wouldn’t look for an order in that area for some time to come.  However, when they do start looking, I suspect the Bombardier CS series will be strong contenders for that airline if VA selects the new Pratt & Whitney GTF engines since Bombardier is offering a similiar engine on that aircraft product line.

Filed under: Airline Fleets by ajax
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