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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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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With the news that US Airways and United are in merger talks, the subject of mergers and industry consolidation among US airlines has been reheated to a high temperature again.  For the past several years, there has been a lot of talk about the need for consolidation among airlines in the US in order to return to profitability and there are many advocates (such as Doug Parker and Glenn Tilton of US Airways and United respectively). 

 

New fees seem to have brought in additional revenue but no one can seem to really claim that it has changed the equation for earning a profit for airlines.  Advocates say these new fees are helping airlines find a path back to earning a profit and I certainly think that experimentation with these fees isn’t over. 

 

Oil is always a frequent component of profitability.  Soaring oil prices just two years ago nearly brought several airlines to their knees but also brought huge profits to other airlines who engage in hedging their fuel costs.  I don’t think anyone would disagree that a more stable oil market would not only benefit the airlines but a lot of other industries.  The wide oscillations of fuel prices have brought a big element of uncertainty to many parts of the economy. 

 

I’m not sure consolidation is really the answer, however.  Frankly, I think one big mistake of the 1990’s and 2000’s is that we have permitted airlines to go through bankruptcies (some multiple times) and reorganize themselves rather than being more insistent on a liquidation or two.  It’s politically difficult to do so because liquidating a large legacy airline means tens of thousands of people suddenly becoming unemployed. 

 

Yes, the airline industry is a network business to a large degree and network businesses can do better if they grow larger and capture more market share.  I question how viable that is over the long term without restructuring other legacy costs as well.  I think it is a nice, immediate answer and certainly offers short term (2 to 5 years) gains in share prices but there are other issues that need to be decided as well.

 

Seniority is king in the airline business and I’ve really come to believe that that is a huge obstacle to health for many airlines.  Airlines have to compete on price in the market place but are not allowed to compete on salaries in the employment market place.  Union contracts based on seniority are killing many airlines.  Mind you, that isn’t to say that airline employees don’t have legitimate issues too, they do. 

 

Airline employees are expected to quite literally work for poverty wages for years before starting to earn a real family supporting wage and then finally make it to a level for their last 10 or 15 years of work careers where they earn extremely generous wages for the exact same work that a junior level employee does for a salary that is unable to provide modest life.   This disparity has to stop.  Entry level wages should be higher and senior level wages should be lower.  Airline crew should be able to move between airlines without having to re-set to the lowest wage scale again.  We have enough airlines in this country that it is somewhat absurd to believe that a strike at one major airline threatens the national economy.  It doesn’t.  Airline employees deserve to be able to agree on a contract in a much more timely fashion.  Failing to do this results in an even greater tenacious hold to seniority since it is the only thing that raises wages.

 

LCC airlines have managed to remain profitable and grow but only by keeping their business model flat with respect to equipment and staff.  This allows them to keep productivity high and prevent creeping wages based on a structure that makes weight and distance the prime factor in pay.   Actual work loads and skill sets are secondary in paying flight crew. 

 

No, I’m not sure we need more consolidations and mergers and, frankly, I don’t think such things would substantially raise airfares given that LCC’s are pretty adept at spotting opportunities and entering markets.  Virtually the only thing that keeps them from certain routes is legacy airlines holding monopolies on airport space or slots.   Even then, those LCC’s are very good at looking for ways around those problems to gain a foothold.  Notice how vigorously Delta and US Airways are trying to keep Southwest Airlines from gaining more slots in NYC?

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I just saw this report on a New York Times blog HERE today.  To summarize, supposedly people writing this blog have had it confirmed by insiders that United and US Airways are in merger talks.  Mind you, this wouldn’t be the first time this rumour has gone out although it has been some time since I’ve seen it.

 

It would make sense on several levels.  I’ve always thought that those two companies were more compatible than United and Continental both from a fleet point of view as well as a hub point of view.  It would definitely have some challenges in front of it as a merger in certain markets (Washington D.C. for instance) and labor issues that exist at both companies would kind of worry me about getting a real deal done.

 

I also wonder at who would run such a proposed entity.  Doug Parker of US Airways hasn’t shown much interest (if at all) in being second fiddle to anyone else in any proposed mergers.  United’s Glenn Tilton would likely be amenable to stepping up to a non-executive Chairman role or leaving altogether but there is a firm “second in command” at United in John Tague serving as President already and who likely expects to rise further with some real justification.  Since he and Mr. Parker are essentially contemporaries, they would definitely be in competition with each other to get the top executive job.

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Anyone who follows this industry is well aware of labor problems at many US and European airlines.  There have been at least three major strikes I can think of in the last month in Europe (BA, Lufthansa and Olympic).  American Airlines seems to have had almost its entire operations labor force at the negotiating table for the past 4 years and not a one of them seem to be acting like a deal is soon to be had with several threatening to ask for release from negotiations to begin a 30 day cooling period and one (the TWU) who has asked for such a release. 

 

Even Southwest Airlines has had a couple of snags in the past year with its pilots union and their TWU local.   Delta’s flight attendants are making noise about trying to unionize again and this time they may have the votes for it when you consider that Northwest’s flight attendants were rabidly unionized.  Frontier employees haven’t rebelled yet but I kind of wonder if that isn’t closer to happening than many realize given Republic Airways’ direction.

 

US Airways has problems with its pilots’ unions not being able to get along well enough to come to a consensus on whether or not the sun rose in the east.  I do wonder how long it will be before we see the unions at United Airlines begin to overheat much like American Airlines’ already are. 

 

Sure, there are some airlines who are managing to get along with their operations employees pretty well.  That includes Southwest Airlines, Continental and even Frontier (for the moment.)  However, a pretty vast number of airline employees seem to be simmering just before the boil over point and I’ve begun to wonder if there doesn’t need to be a better industry solution to collective bargaining than what they’ve got now.  With the way things seem to be headed, particularly at legacy airlines but certainly not limited to them, there could be a truly momumental perfect storm of labor actions in the US. 

 

I won’t argue who is paid well, paid poorly or over-paid.  I certainly won’t argue who is or isn’t over worked either.  Frankly, if you think being an airline employee in operations is a cush job, you really don’t have visibility into just what those jobs entail and just how many hours a day they consume.  But if there is this much job dis-satisfaction among these ranks, clearly change is called for and I really don’t think this is all about money.

 

I think this is about job satisfaction.  Yes, the union leadership (such as it is and that ain’t much) expresses the grievances in monetary terms but I really don’t think it’s all about the paycheck.  I think it’s about feeling job satisfaction and feeling some meaningful reward from the job which, yes, includes salary levels.  For airlines, I think this about a need to have greater flexibilty and ways to improve productivity that aren’t constrained by decades old rules. 

 

Who is going to find a better way in this system which is largely based on 1930’s law and habits?  I really wonder if there is any industry leadership who has the ability to find a better way.

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I found THIS little nugget today announcing that Airtran will hold its annual shareholder meeting in Milwaukee on May 18th this year.  At first glance, I might accuse Airtran of just pandering to the Milwaukee market.  On further reflection, this is a bit more than just pandering.  It’s too much effort for just pandering.  It strikes me more as respect quite honestly. 

 

I’m sure most see this as a shot aimed at Midwest Airlines since Midwest is considered Milwaukee’s home town airline.  But I’m not sure it is aimed at Midwest so much as it might be aimed at both Southwest Airlines, American Airlines, Delta and United.  There just isn’t any brand for Midwest even in Milwaukee anymore and to think it might still exist is to not give enough credit to those who live in Milwaukee.  They aren’t fools, they can read newspapers and they’re just as smart as any other market. 

 

But Milwaukee is a loyal city and I think Airtran is making the right moves in Milwaukee.  Rather than just showing to offer a good fare, they’re investing in the city and I suspect that Milwaukee will respond to that.  That’s why I think this move is aimed much more at Southwest, American and, yes, even United and Delta.  AA, Delta and United all serve Milwaukee primarily through their nearby hubs and have never shown much respect for Milwaukee as a market.  At least not until Airtran and Southwest showed up. 

 

Southwest is the newest airline to arrive but Milwaukee has courted them for years without success.   Southwest didn’t pay too close attention to Milwaukee until Airtran did.  Only Airtran showed up, grew their presence in the market and now is respecting the city by making it a focus city, an employee domicile and now their shareholder meeting site.  This all is very smart on the part of Airtran and it will get noticed.

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There has been quite a lot of talk in the media about mergers recently.  Financial analysts are high on the idea and two airlines in particular have batted their eyes at potential suitors again. 

 

The CFOs of both United Airlines and US Airways have made recently comments stating they see more consolidation needed in the US airline industry and both said their airlines remain open to the idea of merging with someone.  No big surprise because both of those airlines are arguably the poorest performing legacy airlines in the US.   It’s also no big surprise that financial analysts now want to see another merger because they’ve seen the financial response to the Delta/Northwest merger. 

 

I don’t see it happening myself.  Neither US Airways nor United Airlines happen to be particularly attractive properties for another airline for one.  Neither American nor Continental really have anything to gain by mating up with those two for example.  Well, Continental could benefit from UA’s Chicago hub and its international business.  American already has a nicely balanced business and, more importantly, it needs to focus on its labor problems and get those solved first. 

 

Continental has done better by managing itself and its employees carefully and really isn’t inclined to pick up one of the two airlines with some of the worst labor relations around.  They’re kind of smart over at Continental.  Now that they’re in the Star Alliance, they have the best of both worlds going for them.

 

So why don’t UA and US join together?  Well, their hubs would fit together kind of nice and there would be some nice synergies to be realized in consoldating operations.  Even their fleets kind of work together.  However, UA is headed by Glenn Tilton who isn’t interested in giving up his position to someone else unless they, too, are an airline titan.  He’d benefit from a merger personally but his ego doesn’t seem to want to let him have UA be the “consumed” airline.  He wants to buy and consume someone else. 

 

US Airways is being managed by Doug Parker who has plenty on his hands already with a pilot group that is so dysfunctional that it would make wife-beating appear respectable and his airline is short cash anyway.  He’s got no money to buy anything with and his somewhat anemic route structure isn’t all that attractive to any other airline.  No one wants his labor problems at all. 

 

Besides, I”m not sure consolidation is what this industry needs.  A liquidation could actually be the better answer.  More on that tomorrow.

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It would appear to me that a few airlines are heading for a second set of problems just as their economic situation is improving a bit.   Several legacy airlines have employed  a strategy of delaying negotiations and keeping the dialogue open without really resolving things among their employees.   American Airlines and United Airlines have been particularly bad at this.

 

Southwest, on the other hand, recognized a need to continue to have settled relationships with its employees and made quality of life as much as pay a big issue.  The same is true of a few other, newer airlines.

 

I really believe that offering better quality of life possibilities is the way to get these conflicts resolved.  Everyone focuses on pay but the issues such as health care, time off, flight benefits and even fatigue are the things that can be resolved to the benefit of both sides and lead to more productivity and less conflict (which leads to distractions in running the business.)

 

Healthcare is a big one.  It’s expensive and among airline crew, very much needed.  While companies see it as expensive, in many respects, it isn’t.  $10,000 worth of healthcare per employee can be worth $20,000 in salary and lead to much better loyalty, happiness and productivity.  While it is difficult to tie this to direct savings elsewhere, there is no doubt in my mind that relieving employees of this worry would lead to much better labor relations.

 

Think about how tired *you* are after flying just one long trip in a day.  Imagine how it must feel if you’re “working” 2 or 3 trips in one day.

 

Time off is important too.  All too often, airline crew are seen as having lots of time off because of their schedules.  What isn’t often observed is just how much recovery is required after flying 2, 3 or even 4 very long days in a row.  It takes a few days to recover from the kind of grueling schedules that are required to stay profitable.   Restructuring trips so that employees can maximize their pay while working and, at the same time, have enough time off to recover and be ready for their next set of trips will lead to better quality of life. 

 

Flight perks are a very demoralizing area for many airline employees now.  Yes, they get to fly free . . . when there is space available and, let’s face it, there isn’t much space available these days.  That makes people feel as if those perks’ value has been greatly diminished and, in many respects, it has.  Airlines would be better off to scrap unlimited “free” travel and, instead, offer a limited set of guaranteed positive space benefits.   There would be a great deal more value in the employee being able to count on being able to use those benefits *when* they wanted to use them as opposed to having to live in a state of uncertainty as to their plans.  Modest guarantees have much more value than unlimited perks dependent upon space  being available.

 

Why not allow an airline employee accrue a guaranteed space ticket much like most of us accrue vacation time?  Work so many flight hours, get a guaranteed space ticket.  Let them carry the benefit on the books as long as they like so they might “earn” enough benefits to take their family someplace.   Award them a business class seat at various anniversaries but not at 5, 10, 15 and so on years.  Do it every 3 years of service. 

 

Pay is important and its time for airlines to start looking for a different way to pay their crew.  The pay for most airlines has become too complex and, frankly, rewards seniority far more than the work provided.  30 years ago, flight attendants weren’t expected to make a 30 or 40 year career out of flying.  They generally flew as much as 10 or even 15 years and then quit.   That allowed a great deal of turnover in seniority that became arrested in the late 1970’s. 

 

The truth is, a senior flight attendant for a legacy airline (and by senior I mean 20+ years) is generally able to hold schedule in a city he or she wants to be domiciled in and fly a relatively easy schedule while making a good salary. 

 

By easy, I mean that flight attendant might fly one or two legs a day, maybe spend one night away from home and fly another one or two legs before being off for 3 or 4 days.  A junior flight attendant may be flying 3 to 5 legs a day, staying away from home as much as 3 or 4 nights and have just 1 or 2 days off before doing it again to earn a salary that, frankly, isn’t very much a living wage.

 

Pay and productivity aren’t matched very well.  Airlines need to pay not by the mile and size of aircraft but, rather, by something like the number of legs they fly in a day and the number of nights away from home they endure.   Airlines want more productivity but there is a disconnect from that with the current seniority system. 

 

Keep the seniority systems for allowing a flight attendant to choose their schedule.  But make the pay for a grueling schedule rewarding and the pay for a light schedule less rewarding.  You’ll find senior flight attendants taking on the hard, difficult trips to earn that pay and you’ll find them doing a great job of handling it by virtue of their experience *and* their reward for hard work.

 

Most of all, take care of your employees.  Make it easy for them to get something to eat and drink between trips.  Make it easy for the gate agent to have a brief respite between serving 2 flights.   Find ways to allow more cross-functionality between jobs at the airline so that employees want to help each other get through the day faster and happier as opposed to protecting their jobs. 

 

I don’t see airlines like American and United trying to take care of their employees.  I see them looking at their employee base with contempt and hostility.  After 30 years of this, it’s time for everyone to take a breath and work out something that works for both sides. 

 

If this isn’t done, legacy airlines will find themselves being held hostage via strikes just as their situations have improved.  The worst thing you can do is to starve a person and then when you have all the food, fight them for it.  At that point, the starving person has nothing to lose by fighting and everything to gain.

Filed under: Airline Service by ajax
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These three alliances have been forming, growing and shifting for some time now and it is almost fair to say that they’ve reached a certain maturity that lets us take a look at what the future might hold.

 

There will always be shifts between alliances as time goes by but the major structures are now in place and let’s be honest in that airlines are not equal partners in these alliances.  There are bedrock airlines and there are airlines who are really more associate partners. 

 

In the Star Alliance, US Airways has definitely been more of an associate member than, say, United, Lufthansa or Singapore Airlines and with the recent addition of Continental and the close partnership its formed with United, US Airways is even more the redheaded step-child in this organization. 

 

SkyTeam really has the strongest core though.  Formed, in part, from the original Northwest / KLM alliance that began in the 90’s, it now has an extremely strong network that spans both the Pacific and Atlantic oceans.  If it has a weakness, it is in South America among South American carriers and I’m not sure if that is really a weakness right now.  

 

The Star Alliance and SkyTeam have both managed to work among themselves in pretty close partnership and develop strong networks playing on each others’ strengths.  Schedules between those partnership airlines are pretty rational and they do tend to treat affiliate partners as having value in the organizations.

 

Then there is Oneworld.  Oneworld isn’t so much a partnership alliance as it is a looser affiliation of airlines.  To be sure, at one time Oneworld’s members represented a very strong core of airlines who were profitable and very strong on a global level.  To a degree, they still are but this has definitely become the weak alliance over time and with the fight over JAL taking place, its now fighting for its life.

 

Oneworld doesn’t know how to work well with each other.  Partners American Airlines and British Airways have dominated that relationship and because of their obstinance over trans-Atlantic routes and slots at Heathrow, they haven’t been able to work closely together over time and develop those relationships that have been grown in other alliances.  Because of their dominance, other potential strengths in their network, QANTAS, JAL and Cathay Pacific for instance, haven’t really been exploited fully either. 

 

Oneworld is, for most intents and purposes, an old style Anglo-American relationship with AA, BA, QANTAS and Cathay Pacific dominating that alliance.  (If you don’t think Cathay Pacific is Anglo, look up its history and its executive team.)

 

If Oneworld loses JAL, I’m not sure this alliance survives in the long run.  It cannot afford to be an alliance with two dominant partners (AA and BA) and it cannot afford to lose even one trans-Pacific partner.  If JAL moves over to SkyTeam, then I suspect over the next few years we’ll see one or more “majors” in that relationship find homes elsewhere. 

 

No matter what Oneworld does, they lose a major network in Japan if JAL leaves the alliance and they have no hope of luring ANA over to their alliance either.   The best they can hope to do is build their routes systems into Japan with more direct flights from outside Japan.  That isn’t very satisfactory. 

 

They already lack a major partner in China itself (Cathay Pacific isn’t quite that kind of partner) and lack a major partner centered in Korea and Southeast Asia/India. 

 

I suspect we’ll see one or more core partners in Oneworld slip away to one of the other alliances.  It wouldn’t be too hard to attract LAN away from Oneworld, for instance.  Nor would it be difficult to perhaps walk Cathay Pacific away from Oneworld.   That would leave three basic Anglo American core partners who have no harmonized strategy and not much to offer smaller affiliate partners either. 

 

What’s more, JAL doesn’t need their money now that they’ve gone into bankruptcy.  The Japanese government is financing them and will provide all the capital they need at this point since they have little choice to do anything else.  That means JAL is free to consider a long term strategy and if it can get some real signal that anti-trust immunity would be granted to a partnership between Delta and JAL and the rest of SkyTeam, that’s their best deal.

 

It has occurred to me that the reason there hasn’t been more worry about the dominance such an anti-trust immunity would grant is that, maybe, Delta has signaled its willingness to draw down its legacy network to and inside of Japan that it gained in its Northwest Airlines purchase.  Northwest Airlines not only had a strong system to Japan, it also had a strong network system of flights originating from Japan to regional Asian destinations.

 

If Delta is willing to let JAL fly that system on its behalf, that may well satisfy regulators in the United States.

Filed under: Airline News, Airline Service, Airlines Alliances by ajax
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According to the Wall Street Journal Middle Seat blog, American Airlines has decided to match the bag fees recently implemented by Delta and Continental.  You can read more HERE.

 

So, at present, Delta (including Northwest), American Airlines, Continental, United and US Airways are now all charging $25 for the first bag and $35 for the second bag with some of the airlines offering “discounts” if you perform your “bag fee purchase” online.   That would imply that they each see this price for checked bags being a bit more elastic than one would have thought.    Or, at the least, they see it as elastic as long as they all go for the same increases much as the case is with air fare increases. 

 

So far, no low cost carrier has adopted this pricing model or even raised their checked bag fees.  I suspect they won’t either as it gives them an opportunity to show themselves as the good guy while gaining some incremental revenue. 

 

If this rise in fees sticks for the next 1 or 2 quarters, I do think it will put tremendous pressure on Southwest Airlines to institute their own version of bag fees, at least by institutional investors and analysts.  So far, Southwest and its CEO Gary Kelly have resisted these calls to add checked bag fees and, so far, they believe it is resulting in incremental revenue from passengers switching to Southwest to avoid fees.  Since CEO Kelly (and Southwest as a whole) is not one to shade the truth, I’ll continue to believe these claims. 

 

However, with other LCC carriers such as Airtran and Virgin America and even jetBlue (on the 2nd bag) have added fees and do report significantly improved revenues from that, I would imagine that the call for Southwest to add these fees will be defeaning particularly when Southwest could implement a jetBlue or Airtran style program and see improvements to their quarterly results which haven’t been too impressive in the last year. 

 

It is sad but I don’t believe we’ve seen the last of these increases.  I do think that some airline will probe the upper limits of these fees just a bit more yet.  I do think that Southwest will resist the call to add these fees for at least another 6 months but if there hasn’t been some kind of collapse in the price of these fees by then, I would not be surprised to learn that Southwest has begun to make changes to their infrastucture to implement them.   I think the first sign will be the withdrawal of their “no fees for checked bags” advertising.

Filed under: Airline Fees, Airline News by ajax
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Delta Airlines chose to announce they are increasing their checked baggage fees.  If you pay online, your fee goes from $15 for the first bag to $23 for the first bag.  The second bag checked rises from $25 to $32 (paid online).   Continental matched those fees almost immediately.  While it seems exorbitant to me, I wonder if anyone will really notice right now.

 

I suspect Delta did this simply because they have pricing power at most of their hubs (ATL, MSP, DTW, SLC, CVG, MEM) and because they don’t think it is going to affect the consumer’s decision about which airline to fly in most cases.  Delta doesn’t get a lot of LCC competition at its hubs except for ATL and there seems to be a unspoken agreement with Airtran not to get too ugly there.  Besides, Airtran has checked baggage fees too. 

 

The thing is, most online sites that offer booking for airlines in the US do not mention baggage fees when displaying prices for routes.  Delta will continue to appear to be very competitive on routes while likely adding additional incremental revenue through the “gotcha” approach.   Quite honestly, I suspect they’ll get away with it.  At least until there is a healthy recovery in the airline industry and that is likely 18 to 24 months away still.  Maybe more.

 

Will others match it?  I suspect that American Airlines might.   There is no precise harmony among airlines on these fees, not yet anyway.  Continental already had pretty high fees at $18 and $27 for online checked fees (with a $2 and $3 surcharge at the airport).  AA is at $20 and $30 respectively whether you check online or at the airport.  US Airways is at $20 / $30 for online (with a $5 surcharge for checking at the airport.)  United is $15 and $25 for online checking.

 

By contrast, Southwest Airlines has no fees up to the 3rd bag, jetBlue offers the first bag free and $30 fee for the second while Airtran charges $15 for the first and $25 for the second.  In other words, these fees are all over the place.  The truth is, as competitive as airfares are on many routes, these fees can change the equation pretty dramatically in some cases since those fees are for each way on a round trip flight. 

 

These fees have added dramatic amounts of revenue to airlines’ bottom line and I don’t see them going away at all.   I don’t think the fees among legacy airlines will harmonize much at all until and if online travel sites begin showing an “all in” pricing when comparing fares.  Even with such comparisons, I don’t think the fees go away so much as they just begin to merge together among the airlines. 

 

Will anyone else raise their fees?  Well, maybe.  I’m sure it will be tempting to do so among all the legacy airlines.  One or two may even try to raise the ante some.  I kind of  think both United and American Airlines will try some kind of new mix in the future.   I don’t see the LCC carriers playing around with their fees much if at all.  They have the revenue and now this may be their chance to follow Southwest’s strategy in a modified form by advertising lower checked baggage fees. 

 

I don’t think Southwest will change its attitude on these fees based on this new development.  Their strategy appears to be working for them and they don’t have a history of following the pack when something works.   That said, I’m sure it is something they’ll re-examine from time to time and it doesn’t mean they won’t add fees at some point in the future.  Right now, they appear to be capturing customers with their ‘no fees” approach and their aggressive advertising seems to have caught some attention. 

 

As much as I hate these fees for the 1st bag checked, I hate that airlines and travel websites  have done really little to truly show the “all in” price for these trips.  It makes things just that much more murky for the consumer and that is a bad thing.   However, the best thing you can do is learn the fees for the airlines you may be shopping for a trip and do the math yourself.  You’ll be frustrated by it and no doubt resent it but there isn’t a ready made solution at this time. 

 

Frankly, these developments are just one more reason why I wonder about Southwest re-joining the travel agency world.   The world has changed since they left it and, quite honestly, I think they could re-structure their IT infrastructure and re-join those agencies with little incremental costs involved.  At that point, they become the no brainer for many consumers from my view.  Even as aware as I am of airline options and even being located in the DFW area, even I tend to forget about Southwest as an option sometimes. 

 

One strategy for learning these fees is to visit LuggageLimits.Com (also linked in my sidebar).

Filed under: Airline Fees, Airline News, Travel Hints by ajax
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Reuters is reporting HERE that JAL has announced a new CEO.   The founder of Kyocera probably most known here for cell phones, Kazuo Inamori, has been named as the new CEO in place of Haruka Nishimatsu who agreed to step down as part of a restructuring by a Japanese government fund. 

 

I see a few potential problems here.  First, Mr. Inamori is 77 years old and in his statement regarding this new position, he said:

 

“I am old and a full-time job is hard for me, so I would like to work three or four days a week and I will work for free.”

 

That doesn’t inspire my confidence.  The airline business is punishing and requires constant care and attention.  Anyone who will guide a successful restructuring really needs to be making a comittment to long hours for the next 3 to 5 years. 

 

Second, Mr. Inamori doesn’t have any prior airine or even transportation and/or hospitality experience.  His background is in electronics.  I’ve said it before and I’ll say it again, the airline business is a service industry.  One of the things that often confounds outsiders to the business is just how much cash it takes to run an airline even on a *daily* basis.  The amount of money flowing through an airline is staggering and newcomers often believe that simple “tweaks” will yield profit.  They don’t.

 

Yes, there have been outsiders that have come into the airline industry and succeeded nominally.  United Airlines is rather famous of seeking its CEOs from outside the business and most recently with its current CEO Glenn Tilton.  However, many would argue that Glenn Tilton is the perfect example of why it should NOT be done and I would tend to agree. 

 

JAL needs a dynamic leader with excellent ties to the Japanese financial world but who is also capable of leading JAL’s staff through what will be a very painful restructuring.  Jobs will have to be cut.  Routes will have to be restructured and new alliances found.  Japan is in need of an LCC carrier and someone who could identify how to start one would be an excellent candidate for JAL.  Sadly, LCC business models are outside the knowledge of most Japanese airline executives.  (If you think JAL Express is an LCC, read THIS and you’ll find it really isn’t.)

 

JAL also have to figure out its international routes which just boggle my mind at times.  For instance, JAL flies Tokyo-NYC-Rio de Janeiro and offers flights with 5th freedom rights between NYC and Rio.  Now, flying JAL between those two cities might sound attractive but it strikes me as silly.  JAL would be far better off flying to NYC and allowing AA (via the Oneworld alliance) carry their follow on traffic to Rio. 

 

JAL just announced a closer partnership with Oneworld member, Mexicana, for carrying traffic from the US to Mexico.   While there are strong ties between Japan and Mexico, this makes sense for JAL.  

 

At one point, JAL was flying to destinations such as DFW, Cairo, Beirut and Copenhagen.  That kind of flying reflects someone acting as a national flag carrier but not an airline acting in its own best interest.  The new leadership will have to rationlize the routes, rationalize the fleet and figure out which of two major airline alliances to participate in. 

 

The fleet is comprised of a mix ranging from Boeing 737s to Boeing 747Ds and capacity will have to be reduced and aircraft interiors reconfigured to reflect the accomodation of more coach class traffic.    JAL is in the enviable position of having 2 airline alliances, Oneworld and Skyteam, court their membership and offering generous financial packages in return.  But choosing the right alliance isn’t just about how much financial rescue packages offer, it is about identifying who can offer the best revenue improvements over the long term.  I still believe that JAL will ultimately remain with Oneworld if only because fighting anti-trust issues by joining Skyteam is not what an airline should be doing during the fight of its life.

Filed under: Airline News by ajax
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Since Virgin America began operations, I’ve been watching for something sensible to happen.  There have been a few developments that make sense. 

 

In addition to VA’s initial trans-continental routes, they began to add some West Coast service to places such as San Diego, Las Vegas and Seattle.  This let me increase aircraft utilization since those routes from San Francisco and Los Angeles weren’t 6+ hours but, rather, 2 hour (or less) hops.  And having a bit of network to feed into those trans-con flights made sense too. 

 

But this put them into competition with a few very well established airlines as well.  United, Southwest, jetBlue and Alaska Airlines all operate on the West Coast very effectively and on the same routes. 

 

Alaska Airlines, a legacy airline with a very good full service product started to jump on the anti-VA bandwagon and issued a number of objections to their “US Owned” status to the DOT.  Most likely because VA had a product that competed very well against their full service business class product and that was a major source of revenue.   Alaska Airlines had a lot to lose on some of those routes in particular.  Strangely, United remained pretty quiet and probably because their frequent flier program kept their business customer pretty loyal.

 

Speaking of frequent flier programs, that was another area that Virgin America was a bit lax in and that kind of surprised me too.  They had 2 extra years to develop a strong program and have the infrastructure in place to support it.  It was something that, in my mind, would have made sense since the business customer likes such programs and they had a good trans-continental service product to attract those people.  Instead, it was rolled out a tad late and still lacks much of a partnership with anyone. 

 

Although VA positions itself as a low cost carrier, it really offers a 2 class service product that is comparable to any legacy airline and, in many cases, it is a service product that is much better. 

 

Aircraft are equipped with a two class cabin (first and coach) called, oddly enough, First Class and Main Cabin.  There is a Main Cabin Select product but that’s really access to Main Cabin seats that have a bit more legroom (exit aisles and bulkhead seats) with some of the First Class service product (meals, beverages and premium tv channels are free).  It’s an economy plus plus or semi-business class product. 

 

I believe all airlines could stand to offer more service products through their cabins and this was an area that I thought VA was kind of smart in.  I still think a lot of airlines could stand to differentiate even more but I liked what VA had there.   It was more “business” than “coach” than a lot of airlines’ economy plus products and even competed very well against a similar offering from jetBlue.

 

jetBlue really took things to aother level with their LiveTV offering on their aircraft.  Virgin America took it to yet another level by offering a full entertainment system (including TV) that even allowed shopping and the ability to order food and drink from a menu, thus eliminating the traditional beverage and meal cart services.   The system, called Red, worked pretty well although some reviews had it not always working or in need or a re-boot from time to time.  Such systems do take time to work out bugs and time for staff to learn to work with. 

 

VA also got aggressive and was the first US airline to offer GoGo inflight Wifi on its aircraft.  With accomodations like power ports at each seat and the existing entertainment offerings, this was likely adding whipped cream to the ice cream.  All of their aircraft are equipped with it and Virgin says they’re doing OK with it.  Probably more so than some airlines. 

 

All of these offerings cost a lot of money to both purchase and maintain and VA continued to see red ink as time passed by.  (It is difficult to get a very good picture of VA’s finances because it continues to be a private company instead of a public corporation.)   At one point, rumors that its US investors wanted out spread around and Alaska Airlines filed yet another objection to VA with the DOT who, recently, yet again ruled that VA was more than sufficiently US controlled.  (Read THISfor more info.)   CEO David Cush did continue to speak publicly that their revenues were improving monthly and that he did think VA was edging closer to an operating profit.

 

In fact, VA did manage to eek out a small third quarter operating profit as reported in December which, frankly, surprised a lot of people.  I know I was.  It was a 59% improvement (according to VA) over the previous year’s third quarter and they managed to make it happen in what has been arguably one of the worst economic climates for airlines ever.  This got my attention.  Frankly, the climate hasn’t been good for VA since they started to improvement during those times is impressive, to me anyway.

 

Virgin America is also a bit unusual for the airline industry in that it has a number of women in senior leadership positions.  Their SVP for Inflight Services, VP – Marketing, SVP-CFO and VP – Planning & Sales are all women. 

 

Also curious is the rather interesting Canadian influence in their leadership.  The Chairman of Virgin America is Canadian Don Carty, former Chairmen and CEO of American Airlines.    Frances Fiorello, SVP – Inflight Services has had a long career with Candian airlines such as Canadian Pacific, Canadien Airlines and Air Canada.   Bob Weatherly, SVP of Flight Operations, has a similar Canadian history. 

 

And then there is the American Airlines connection which kind of puzzles me at times.  Don Carty, David Cush, Diana Walke,  and Ross Bonanno each have a history with AA.  Virtually all their senior leadership has extensive with experience with previous airlines.  In fact, after looking into their biographies, it made me realize just how VA might be managing to make it despite all predictions against them. 

 

It’s a strong team with a strong background in successful airlines that, for the most part, have reputations for good cost control and good service products. 

 

Virgin America has been on my death watch for at least a year.  Now, a lot of my inclination towards that has been based on routes.  Yes, they’ve grown and, yes, they’ve added routes.  But they don’t seem to want to really compete except where there is really low hanging fruit against their service product. 

 

They recently opened up routes between, of all places, Fort Lauderdale and Los Angeles and San Francisco.  Obviously they saw some opportunity there but I don’t get what the attraction is in adding those two routes before a lot of other opportunities.

 

VA doesn’t have an East Coast network at all.  They have destinations in NYC, Boston and Washington, D.C. (in addition to the Fort Lauderdale routes) and that’s OK.  Competing on the East Coast is brutal and those three main destinations have enough originating traffic in them that they don’t necessarily need network traffic feeding in on the West Coast yet.

 

David Cush has, at times, talked of adding routes from the West Coast to Chicago but he wants O’Hare airport and claims there are no gates to be had.  This isn’t exactly true.  There are gates but VA doesn’t want to pay the price to get entry to them.   There were, at one point, gates available at Chicago’s Midway airport but VA doesn’t like that idea either. 

 

More recently, Mr. Cush dropped hints of adding a route possibly to Austin or Dallas / Fort Worth.  Most agree that Austin might happen (there is a strong tech connection between Austin and the West Coast) but doubt the DFW possibility. 

 

You see, my problem is that VA seems to be ignoring the possibities in the middle of the country.  With their service product, they could compete very well against AA on routes between DFW and San Diego and Los Angeles.  They could compete well with AA and United on routes between Chicago and Los Angeles and San Francisco.   There is a strong connection between Denver and Los Angeles and despite the back alley fight going on in Denver, it has possibilities. 

 

They’ve by-passed Portland, Oregon which has strong ties to both LA, Seattle and San Francisco and Alaska Airlines, who owns a lot of that traffic has already proven to be susceptible to VA’s service product.

 

Indeed, if you look at their route map right now, they have every appearance of avoiding any destination that is a real hub for a legacy airline. 

 

I can’t think of a market that is more need of a real competitor in service product to destinations on the West Coast than DFW.   Completely dominated by American Airlines, the service product and prices to West Coast destinations is weak and expensive respectively.  Atlanta could stand a bit of competition on routes to the West Coast too.   The same is true for Miami, Minneapolis / St. Paul, St. Louis, Detroit, Kansas City, Cleveland and maybe even Philadelphia and Baltimore. 

 

It’s always a nice strategy to enter airports where the barriers to entry are easy and cheap when you’re getting started.  But VA is more than 2 years old and clearly has a product that, like jetBlue, can compete against major airlines and win.   In any of the major hubs I”ve named above, they are dominated by one or two airlines on those West Coast routes that are flying old aircraft with little new service product and who have much higher costs than VA.  It isn’t going to get easier to compete with these guys with time. 

 

That’s why a part of me continues to view VA with skepticism.  New airlines don’t win by being afraid to compete.   Airtran and jetBlue are perfect examples of airlines who were willing to go up against major legacy airlines and beat them on both price *and* service.   Airlines who weave and duck from their opponents tend to lose.  Skybus was a great example of that. 

 

There are often moments that are ripe for smaller businesses to make a commitment to going against their major competitors and, if you wait too long, those moments go away and never come back.  I’m starting to sense that Virgin America is beginning to lose those moments. 

 

Would I fly VA?  Sure.  I’d love to enjoy their service product.  However, they fly nowhere I want to travel so it is going to be a long time, if ever, that I get to try them.  Would I suggest them?  Absolutely.  At least for now.  They aren’t going to go bankrupt any time soon.  They’ve managed to get past that infancy stage now and kudos to them.  They offer some fantastic prices on their routes and I doubt anyone would be disappointed by flying them.

Filed under: Airline History, Airline News by ajax
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I tend to ignore Virgin America often even when they do make the news.   I’ve had a lot of trouble figuring out what this airline is supposed to be and even more figuring out whether or not they are really going to succeed. 

 

VA has made some news in the past couple of months, though, and I figured it was time to talk about them. 

 

Virgin America began as a concept annunced by the irrepresible Richard Brandon (founder of Virgin Atlantic and the Virgin Group) and it went through quite a few iterations before it launched.  It changed its announced name from Virgin USA to Virgin America, for instance.  Ownership structure was fiddled with several times to meet US restrictions on foreign ownership of airlines.  Business leaders changed and their original CEO, Fred Reid, was eventually removed to satisfy the DOT and gain permission to launch. 

 

Their approach to finding a home was weird to me and kind of reflected a European viewpoint that led me to believe they weren’t necessarily looking at the US market properly.  After leading a kind of competition to find a home, Virgin America settled on San Francisco as its “operations” home and New York City as its “corporate”  home.   Neither location struct me as particularly wise because NYC and California are expensive places to operate and they’re no more representative of the United States than a lot of other locations.

 

While they went through the start up process, Virgin America faced a lot of criticism from other airlines.  Flatteringly, it was quite a bit more than many startups have received over the years.  On the surface, the objection was always to the perceived foreign ownership of Virgin America.  My own sense was that other US major airlines saw another potential jetBlue starting up and given jetBlue’s success, yeah, it would worry a few airlines. 

 

Strangely, at the end, some of the loudest objections came from Continental Airlines who, from my point of view, had the fewest reasons to fear Virgin America’s competition.  Continental had a strong 2 class operation that was highly favored by businessmen for both its service, comfort and frequent flier program.   From my perspective, American Airlines and United Airlines had the most to fear from this upstart’s trans-continental plans.   Even jetBlue had some reason to be worried since VA’s product most closely competed with jetBlue’s and had the biggest chance of nibbling away at jetBlue’s customers.

 

I think the biggest concern from existing airlines was that, once again, a well financed 2 class airline was entering the market that had low labor costs and brand new efficient aircraft.  Startups always have low costs because the airline industry is based on seniority.  A new airline with all new employees quite naturally has some of the lowest labor costs but that does change over time and it really depends on the airline on whether or not those costs rise dramatically or not. 

 

jetBlue has been able to keep its labor costs relatively low by being pretty good at taking care of their employees, for instance.   By having such low costs, airlines like jetBlue and VA, are able to compete very hard on those trans-continental routes that are many airlines bread and butter. 

 

When VA agreed to remove CEO Fred Reid from the operation after no more than 9 months of operation after the certification was awarded, they had to go find a new CEO.  Now, Fred Reid never had the kind of reputation that I would expect an operation like VA to need or want.  Formerly of Delta, Fred Reid performance at Delta was mixed and he certainly wasn’t a charismatic leader which I thought would help VA quite a lot in the US.  Richard Branson’s kind of bravado has never played nearly as well in the United States as it has elsewhere in the world.

 

My thought was that VA would seek a more personable, charismatic leader who would not only have a strong airline background but who would also be a good public figure for this venture.  VA, apparently, felt otherwise and found their next CEO at American Airlines in the form of David Cush.  

 

Mr. Cush certainly fit the bill when it came to having a strong airline background.  He had 20 years of airline experience in a wide variety of positions and a great education too.  The thing is, Cush did it all at the most conservative of airlines, American Airlines.  Huh?  Yes, Cush had youth going for him and he does present himself rather well but it still didn’t mesh in my mind.

 

I suspect VA’s investors, most particularly its US investors, wanted someone who had a very strong financial background and who understood just how important it was to preserve cash and operate with strong controls in place.  They had, after all, funded VA with more money than had ever been put together for an airline startup in the US when VA began.   He did most recently work as Vice President of Alliances and Chief of Sales for American and this hints at Mr. Cush’s ability to access corporate clients.  With VA’s transcon strategy, this kind of made sense.

 

Virgin was so delayed in getting permission to start up, it leased several of its delivered Airbus A320 aircraft to the late Skybus Airlines.  When they did begin to operate, they were hindered in fully starting up operations because some of those aircraft were occupied until Skybus failed miserably. 

 

But . . . operate they did.  Finally in August of 2007 and fully 2 years delayed, they began flights between San Francisco and NYC and Los Angeles and NYC.  This wasn’t a bad start in that they were connecting major business centers with lots of traffic but it didn’t allow them to really get high utilization of their aircraft and pricing on those routes has always had lots of competitive pressure so they lost lots of money operationally. 

 

Every airline loses lots of money in its first months and years.  Airlines really operates lots of small businesses.  Each route is really its own business and it takes time to grow those routes into profitable operations and it takes varying time to do it for each route.  It is an investment that takes time to go profitable and much more time to provide a good ROI (return on investment.) 

 

VA was off and running and I was still scratching my head.  There were still many parts to this airline that defied rational thought in my opinion.  Tomorrow, more on VA and its service and routes and where it is today.

Filed under: Airline History by ajax
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USA Today’s Today in the Sky blog is reporting that Mesa Airlines has filed (voluntarily) for bankruptcy reorganization today.  Read the story HERE.

 

I can’t say that I find this surprising in any big way.  Their financial situation has been somewhat dire for a while and their stock prices positively abysmal.   In many respects, Mesa is the perfect example of  a company that is rough on its employees, rough on its customers and abrasive in its own PR.   That really isn’t a recipe for success in *any* industry.

 

Mesa operates flights for Delta, United, US Airways and under their own grand in Hawaii as go! airlines in partnership with Mokulele.   They fly the CRJ100/200 (47 aircraft), the CRJ700/900 (58 aircraft) and the Dash 8-200 (12 aircraft).  With a desire to shed aircraft from their fleet, my guess is that they’re wanting to rid themselves primarily of the CRJ100/200 aircraft primarily and mostly by breaking leases.

 

It’s also notable that both United and Delta have worked to end their relationship(s) with Mesa and Mesa is currently in litigation with Delta over the attempt to break the Delta contract.  The Delta contract was operated by Mesa subsidiary using ERJ-145 aircraft (numbering 34) and Delta sought to terminate the contract on the basis of poor performance by Mesa.  Mesa contends the real motivation behind breaking the contract was to cut capacity rather than performance. 

 

With this new development, I do wonder if Mesa hasn’t just become a candidate for being purchased by another airline.

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Let’s talk alliances before anything else.

 

There is a huge battle taking place over who gets to have Japan Air Lines (JAL) business.  The financially struggling airline has suddenly become a hot property and American Airlines (OneWorld) and Delta Airlines (SkyTeam) are fighting over JAL like it’s a supermodel.   Both airlines are offering hugely attractive financial packages to JAL and I suspect the poor airline has no idea of who to nod their head towards. 

 

Ultimately, I think JAL will stay in Oneworld.  There is more at stake here than what is offered as a financial rescue package.  Japan is still a very nationalistic country and keeping the identify of what is, for most purposes, its flag carrier will be important.  It has a solid relationship with Oneworld and American Airlines and compared to the risk of joining with SkyTeam and the possibility of being a second tier player in that relationship, JAL has a safer bet with Oneworld. 

 

In addition, I don’t think JAL can afford to wait for anti-trust immunity to act with airline partners and it won’t have to by staying with Oneworld. 

 

The Middle East:

 

I continue to think that the major international airlines (Emirates, Qatar, Etihad) of the Middle East are more at risk than they claim.  Yes, they’ve experienced phenomal growth and, yes, they continue to purchase aircraft like a 5 year old buys candy but what’s next for them and their route systems? 

 

The Middle East doesn’t offer a good connecting point for North or South America.   Airlines in North America can reach their markets non-stop with existing aircraft and why would a passenger choose to connect via an airport in the UAE (United Arab Emirates) when they can fly non-stop at a competitive price.  Better service product won’t attract these customers.  

 

There is very little business between South America and Africa, India, The Middle East or Southeast Asia and, so, South America isn’t a place that could serve as a growth area for those airlines. 

 

Emirates, Qatar and Etihad have succeeded by offering a hub between Europe and the Middle East, India, Southeast Asia and (to some extent) Australia/New Zealand.  However, even European airlines are adding longer range aircraft and are able to reach each of those destinations non-stop  more and more with the exception of Australia and New Zealand. 

 

In addition, each of those airlines is bankrolled to some extent with oil profits and the uncertainty of those profits and the uncertainty of other investments in the Middle East has to raise the risk for that continued bankrolling.   I don’t see any of these airlines failing in the next year but I do see them perhaps deferring orders and re-organising their fleets. 

 

India: 

 

What a catastrophe!  No airline in India will do well for now and there has to be some consolidation in this market in the near future.   Kingfisher and Jet Airways are both excellent candidates for takeovers and, perhaps, they are excellent candidates for each other.  Kingfisher bet on Airbus by ordering A330 and A340 aircraft first.  Their A330 fleet doesn’t quite have the range it really needs to expand outside of its current markets and the A340 was a terrible choice for long range flights.  So much so, it got rid of the aircraft on order. 

 

Now, Kingfisher has a few A350 and a few A380 aircraft on order for deliveries starting in 2014.  While it could desperately stand to have the A350 now, I don’t see how it can wait until 2014 for the aircraft.  I also seriously doubt it will ever take up the A380 both because of cost and an inability to fill the aircraft enough for regular flights. 

 

Jet Airways also has a great service product but bought too big of an aircraft for the routes it needed to compete on.  Jet Airways purchased the 777-300ER when it really needed the 777-200ER/LR for the international routes it proposed to serve.  Now 4 of the aircraft are leased to Turkish Airlines and 3 are going to Royal Brunei leaving just 3 for Jet Airways. 

 

Both Kingfisher and Jet Airways have a great service product and good networks across India and neighboring countries.  They would be better served by merging and using one brand for their national service and another for their international services.  Kingfisher for India and Jet Airways for international service. 

 

The Far East:

 

China has a lot of problems coming to roost with the inevitable decline in their economy which is heavily dependent on North America and Europe.    Look for some consolidation in this market.  I do think that Chinese airlines face potential issues from government mandates to purchase indignenous aircraft being developed now.  There is little chance that the aircraft being built will be competitive internally or externally.  At least for this first round of development.

 

While JAL is suffering and ANA (All Nippon Airlines) isn’t performing that great at present, I see no major changes in the Japanese markets.  This is an area that will bounce back but only after a long fight.    The same is true for Korea. 

 

Oceania: 

 

Australia will be interesting to watch.  I’m tempted to guess that the status quo will remain in most cases.  The competition between the US and Australia only continues to grow more fierce and something has to give.  I still think that United Airlines may well be the airline to withdraw from this market and only because of the rather unique market relationship formed between Delta and V Australia (and Virgin Blue). 

 

 QANTAS will continue to own a large piece of all air travel from its home nation and they could be helped along with some deliveries of the 787.  At some point, QANTAS must grow and growth means a lot of long and thin routes to be added. 

 

South America: 

 

I don’t think there will be any major news from this continent over the next year.  LAN will continue to succeed by operating smart and honest.   Brazilian airlines will continue to fight things out but there is enough international business for each of them and their real threat comes from Azul on a domestic basis. 

 

Look for Azul to consider adding a larger aircraft to its fleet and don’t count Boeing out on that deal.   It would be easier for David Neeleman to add the Boeing 737 to his fleet in Brazil because he could outsource maintenance more easily. 

 

Aerolineas Argentinas:  Well, what can I say?   This disaster is much like the country itself.  It won’t go away but it won’t perform either.  No outside airline will consider taking it over after what happened with Grupo Marsans’ ownership.   They lack an appropriate fleet for their flying, a strategic plan for stabilizing their revenues and no clear plan for future growth.  But the Argentinian government also won’t let them go away.  It is a matter of national pride.

 

LAN Argentina is growing in Argentina but somehow I remain skeptical that it will be allowed to succeed too well.  Why?  For one reason, the government of Argentina owns Aerolineas Argentinas and it has a vested interest in that airline earning money.  For another reason, LAN Argentina is owned by the LAN Group of Chile.  Look up how Chileans and Argentinians feel about each other.

 

Colombia and Venezuela: 

 

Avianca Airlines has joined hands with Grupo Taca and I suspect that will be a good thing for both airlines.  Avianca could benefit by the exellent managment of Grupo Taca and Grupo Taca could benefit from greater access to South American markets.   Its almost certain that the two will harmonize their fleets and service products for greater economies while maintaing the two identies for greater acceptance throughout Central and South America.

 

Venezuela:  All airlines erode further due to the increasing interference of the Venezuelan government and, more specifically, Hugo Chavez.  I lost hope for Venezuela’s airline industry when they forced Conviasa (in partnerhsip with Iran Air and originally using an Iran Air 747-SP) into a route between Caracas and Tehran with an intermediate stop in Damascus.  This is the ultimate in “this route makes no sense.”  If the government can do that, then they’ll do other things to damage the industry.

 

Europe:

 

The European continent’s airlines are hunkered down just as much as the US based airlines.   There isn’t much to be expected in Europe for the next 12 months but let’s look at it anyway.

 

British Airways is kind of the American Airlines of the UK.  They’ll always somehow manage to survive and generally pretty well.  They have their own labour troubles but, again, they seem to be capable winning these for now.  British Airways needs to cut costs a bit more so I wouldn’t be surprised at some order deferrals and/or hastening the exit of the 747-400. 

 

The one airline I continue to wonder about in Europe is Lufthansa.  While they have a good service product and an excellent reputation, they also seem to have some weaknesses.  Lufthansa continues to purchase weaker sisters in Europe such as SWISS, Brussels Airlines, Austrian Airlines, Lauda Air and, now, BMI.  

 

20 years ago, this would seem reasonable in that European countries were pretty nationalistic.  Now, not so much.  Yes, there are some pockets of nationalism that exist but I wonder at maintaining so many different brands, fleets and networks now.  It would seem that the brands could be pared down to 2 or 3 mainline airlines and 3 to 5 regional airlines.   BMI wasn’t an airline that was succeeding in any great way and what does Lufthansa get for their purchase?  I see little of value.   I don’t know that BMI gets Lufthansa an entry into the UK that is of any more value than the Lufthansa brand itself.

 

I also wonder about their fleet.  They have a large fleet of A340 aircraft serving medium to long haul routes and that cannot be very efficient or profit enhancing.  Yet, Lufthansa has made no real move to correct this problem.   Their one major aircraft order in the past several years was for the four engined 747-8i.  They have no orders for the 787 (although Boeing would no doubt happily accomodate them with early delivery positions) nor the A350 (and I’m certain Airbus ould love to add them to the order book as well.) 

 

This puts Lufthansa into competition with British Airways who has moved towards operating more twin engine, long haul aircraft (777 and 787) as well as KLM/Air France (777).   Yes, they do own some A330 aircraft but their true long haul equipment is the A340 and 747.

 

KLM / Air France:  Not much here.  I don’t see an order for aircraft coming from them unless Airbus magically announces a GE engine for the A350-1000.  Otherwise, I seem them holding their cards close to their vest and waiting to see what happens in Europe.

 

The BA/Iberia merger:  I never saw the attraction myself.  It’s a low rent copy of the KLM/Air France union and I suspect there are many issues to resolve before the two really combine.   Personally, I think the odds of this merger actually taking place is, at best, 50/50. 

 

 Their alliance with AA over the Atlantic will continue to be a strong issue for the US Justice Department.   The BA/AA strength on the US/UK routes and the the IB/AA strenght on the US/Spain routes is really a bit too much.   I think the DoT/FAA is willing to let this alliance go forward but I think the DoJ is going to speak loudly and force a request for concessions.   Concessions that I think, this time, BA and AA may meet with some negotiation.

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Now that it is 2010, what can we expect?

 

Unlike this time last year, probably not much.  There was some momentum for change last year that really doesn’t exist this year.   Airlines will continue to fight to hold their own in the marketplace and with the reduction in capacities, even the worst of the lot will likely cling to life this year.

 

North America:

 

Major airlines of North America have made all the changes they can and all are managing their businesses and cash very closely right now.  I don’t expect much, if any, change to develop in the next 12 months but let’s take a look anyway.

 

American Airlines has some labor issues to address but with the current economic climate, they have been getting away with their efforts to defer those issues.  Labor unions would like to push a few issues with American but they’re smart enough to realize that now isn’t the time.   Most likely they’ll continue their face saving efforts at making a point with their members but I don’t expect any real labor action at this airline this year.  Perhaps, if things get better, we’ll see some movement in the 4th quarter.

 

United Airlines, my least favorite legacy airline, has similar issues that American has with labor but, again, those labor issues aren’t likely to see much movement either.   I suspect that United will continue to move more of their flights over to regional airline partners because its worked (for now) and their customers will find themselves on more and more regional jets.  Since price is the prime driver for customers right now, they’ll accept that move and hate the flights as much as they always have.

 

Delta/Northwest should see more of its operatioins combined and, possibly, a unified single operating certificate by the end of the year.  That doesn’t mean much for their customers since Northwest aircraft are being painted into Delta colors at a furious rate.  The service product is already being harmonized to a fair degree and it’s a good one already. 

 

I don’t see any major aircraft purchases and I remain interested in whether or not they’ll keep their 787 orders.  There has been rumour and innuendo that they won’t but I kind of think they will keep them.  Their 767 fleet is old (except for the 767-400) and I can’t think of a reason why you wouldn’t want to have the 787 begin filling the role of those aircraft.  I’ve wondered if their hints aren’t just an opportunity to get Boeing to get interested in offering a better deal for more aircraft. 

 

US Airways needs two things in this next year.  First, they need their pilots to get together and start operating as a single group.  As dangerous as it is to try to interfere with a union group, I wonder if US Airways won’t wade into the problem in an attempt to have a final resolution.  Certainly they could argue that they’ve been patient enough. 

 

They also need to manage their cash very, very closely.  Cash is blood to an airline and US Airways has a bit of risk in this department.  Should cash holdings be depleted more, they’ll have to start seeking that merger partner again and no one appears interested in marrying with them.  This is another reason it needs resolution for its labor problems.   That said, I don’t see US Airways disappearing or filing for bankruptcy again. 

 

Continental Airlines has felt the hurt this past year and its unlikely to feel much better this year.  Their business model depended a bit more on business class travel and the economy hurt that demand the most.  That said, I can’t imagine a better group of managers for keeping that airline on track through the rest of the downturn.  Things will hurt and belts will be tightened a bit more but I don’t see the service product changing.   When the economic downturn does really turn the corner, Continental will be better placed to succeed than many. 

 

Despite their recent move to the Star Alliance, I do *not* see Continental getting any closer to United Airlines whatsoever.

 

Low Cost Carriers / Regionals:

 

Southwest Airlines continues to manage itself to the tune of its own drummer and the results of their long(er) term thinking are showing left and right.   They’ve managed to make solid overtures to business clientele in areas that, I suspect, count more day in and day out.  

 

I don’t see a merger partner in the future for them except,  possibly, for Sun Country Airlines.  For some reason, I see this as a real winner for Southwest in that it gives them space and routes in Minneapolis / St. Paul, a labor group that is accustomed to delivering Southwest style service and which can be harmonized into the Southwest labor groups relatively easy.  There is no rumour of this purchase but Sun Country has its own problems and it’s a match that fits the Southwest acquisition model. 

 

I think Southwest will remain persistent in its Denver expansion and will work hard to create a network in the upper midwest states of Wisconsin, Minnesota, Illinois and Missouri.   The wild card, in my mind, is the Washington D.C.  area and the NYC/Boston areas.   Shuttle type service is what Southwest knows very well and I wonder if they won’t try very hard to organically grow their flights in these areas.  If so, Southwest needs to find an “in” at Washington Reagan airport.  To do this, they would need to buy a shuttle operation from US Airways and/or Delta.  Perhaps US Airways will be interested in such a sale if their cash holdings erode more. 

 

Frontier/Midwest/Republic:   I don’t know what happens here.  Midwest really isn’t an airline anymore.  It really isn’t even a brand anymore.  It’s a name for selling tickets.  Frontier remains an airline and a brand and Republic seems to want to continue caring for both.  Since Republic is managed by very smart people, I kind of think that they may look for a way to wind down the Midwest name over the next 12 to 18 months and make Frontier the primary airline.   A tasty cookie isn’t a good reason to keep the Midwest name around.

 

Airtran deserves some applause.  This airline has managed to grow itself some, find new markets and earn some money during one of the worst downturns in the airline industry.  

 

Their move into Milwaukee has succeeded and promises to continue to succeed.  Milwaukee is a loyal city, to be sure, but it is a city that appreciates value even more.  Airtran has managed to offer great value, good service and appeal to a city that just a couple of years ago was kind of anti-Airtran.   The one obstacle in their way is the arrival of Southwest, another airline very good at offering value and appealing to the Milwaukee kind of customer.   I think Airtran has the upper hand but they are by no means the sure winner in this market.  Southwest may be able to beat them with frequency.

 

Virgin America keeps showing up and usually right after I become convinced they’ll disappear.  I still don’t know what this airline does best and I still don’t see them as being a scrappy enough operation to fight their way into the cities it needs to be in.   Virgin continues to dance around Chicago (claiming they can’t get space but if they wanted it bad enough, they could).  Their product would servce cities such as Dalllas, Denver, Houston, Chicago, Atlanta, Baltimore, Philadelphia, and, perhaps, Cleveland/Cincinatti very well.  

 

Instead, they added flights from the west coast to Fort Lauderdale and talk about adding service to a Texas city such as Austin.  This is too timid.  The CEO, David Cush, seems afraid to compete against his old employer (AA) and that is a shame since they have a very competitive and attractive trans-continental product.   I would speculate on VA being bought by another airline but . . . why?  They just don’t have much there and seem to have little interest in exploiting real advantages that they do have.   Maybe they’ll just run out of money and get shut down.

 

Alaska Airlines has felt the heat from Virgin America but they continue to do pretty well with their little airline and they continue to do it without being aligned with a major.  I don’t see much changing for Alaska Airlines.  They’ll continue to be a scrappy airline with good service to a limited number of destinations.  And, somehow, that seems OK when it comes to Alaska.

 

Next up, the world.

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