Global airline consolidation has a way to go on some continents but it would appear that the era of big deals is over for a while now.  Alliances have been greatly affected by mergers lately and I’ve begun to wonder at their value.

You often hear of airline CEOs talking of the synergies that exist from alliance partners.  In one example, American Airlines has consistently offered very positive feedback on its alliances within Oneworld over both the Atlantic and Pacific Oceans.

But there are others, particularly in the Middle East, who eschew these alliances in favor of direct “one off” agreements with airlines.  The Etihad, Emirates and Qatar airlines all tend to move towards striking regional deals with other airlines that offer direct benefit on specific routes.  (Yes, I realize that Qatar is now in Oneworld and if you think that means Qatar is going to change its approach, you aren’t paying close attention to who runs Qatar.)

I question the value of the global alliances a lot these days.  For example, I question the value QANTAS brings to the table in the Oneworld alliance at this point.  I don’t question what value they bring to the table with Emirates or even what value Emirates brings to QANTAS.  It’s significant and that’s very clear to me.  But how does QANTAS truly benefit Oneworld members at this point?

I’m not sure it does.

I see the power of the joint ventures between airlines such as Delta and Air France/KLM but do those two airlines need SkyTeam to make such a deal?  No, they don’t.  It’s possible to argue that the alliances allowed airlines to get comfortable with each other and even helped standardize IT systems to a degree.  But the value received within those alliances is really between 2 airlines.

I think that mergers are going to muddy the waters even more for alliances.  People often suggest that alliances drive mergers but I’ve noticed that that pretty much isn’t true.  Sometimes the alliance in a merger is a convenience, sometimes it is a nuisance.  There is no strong correlation.

At this point, why does one of the largest airlines in the world need 10 or more alliance partners to succeed?  Why isn’t it more beneficial to arrange independent deals with partners and benefit only from those who add value to your business model?  The answer is that it *is* more beneficial.  And look for more airlines to do it.

Notice that Delta is no longer strongly focused on SkyTeam but very focused on building relationships with a variety of smaller airlines who do add value.  Airlines such as WestJet and Alaska Airlines are good examples.

People argue that alliances need partners in India.  I would argue that airlines need  partners in India.

And it will go that way through the rest of the world too.

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When Lan of Chile and TAM of Brazil decided to merge and form the LATAM group of airlines, they were told to pick one alliance to be a member of by regulators.  Those reading tea leaves gave the nod to Oneworld and mostly because Lan is really the “leader” of that merger.

I thought so too but I couldn’t prevent that nagging feeling that the Star Alliance might choose to pull a rabbit out of the hat with incentives.  These days, you never know.  Think back to when JAL was considering defection from Oneworld.  Delta Airlines made an offer that seemed almost certain to pull off the unthinkable and bring that airline into Skyteam.

But American Airlines and Gerard Arpey and Oneworld sweetened their deal with JAL and everyone breathed a sigh of relief.

I’m fairly sure that American Airlines went to work with LATAM too.  It’s an essential component to the current success that AA enjoys in South America.  With this decision completed, it’s time for someone to get busy on finding a better China partner and it wouldn’t hurt to figure out how to bring QANTAS back into alignment with the interests of Oneworld either.

Maybe Tom Horton can work that for Doug Parker over the next year.

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Respected airline consultant and research engineer Bill Swelbar has recently taken a swipe at the idea of a merger between US Airways and American Airlines in a blog post.  Swelbar suggests there may be more benefits to a full integration between AA and JetBlue and Alaska Airlines who just as adequately (if not more adequately) cover areas where American is weak (the West and East Coasts).

Swelbar is factual and correct about AA’s weaknesses in these areas with respect to its network and market shares.  He’s also correct in that those two smaller airlines do operate in the weakest portions of American’s network.

I see significant problems for that kind of approach.  First, Alaska Airlines is increasingly under the influence of Delta Airlines these days and enough so that I do not think it can afford to ignore Delta’s desires entirely and Delta would like competition to go away.  Second, JetBlue already has some agreements in place with American Airlines that do bring a benefit but it also has little incentive to cooperate with American Airlines as AA doesn’t bring much to the table for JetBlue.

Both Alaska and JetBlue are working hard to be all things to all carriers in the form of interlining, codeshares and alliance agreements and that works for both airlines very, very well.  Alaska works at this from a domestic perspective and JetBlue plays more on the international side of things but they’re both pursuing the same strategy and it’s a strategy that works well for both.  Why give up success for the risk of fully integrating with AA and under AA’s management?  If I’m a shareholder for either airline, I don’t like the idea.

Furthermore, at this point, this isn’t about what AA leadership wants.  It is already rapidly becoming much more about what AA’s creditors want and what their shareholders want.  And what they want is performance.

A marriage with US Airways can be disrespected over and over but there are two exceptionally important things to be mindful of.  US Airways knows how to run an airline well and earn money despite labor issues.  They also know American’s business pretty well and they’ve got an established track record that didn’t exist in the same form back when they made a bid for Delta.  Creditors will listen to them carefully today.

US Airways also has the strengths that are complimentary to AA’s network.  They aren’t the most optimal strengths but they are one hell of a lot better than American Airlines standing alone.  Philadelphia, Phoenix and Charlotte are very complimentary to AA’s strengths.  No, there isn’t much overlap that would result in “synergies”.  I would argue that the so called “synergies” of reducing capacity via a merger are harder to obtain than generally appreciated, overvalued and largely non-existent today as a result of consolidation and capacity restraint that has gone on for the past 4 years.

New mergers will benefit from scale and operational expertise.  They’ll benefit from having a more diverse fleet that permits “right size” flying on routes.  They’ll benefit from international alliances.

There is a great example for that last part.  US Airways is now the awkward partner in the Star Alliance with United filling that role on a far greater scale within the United States than US Airways does.  US Airways could benefit a great deal more from Oneworld than it does Star at this point and a merger with American makes Oneworld very competitive in the United States again.  A great reason for Oneworld partners to stand aside and look at these issues with less emotion and more reason.

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World Alliances

I’m not sure we’ll see much in this territory for SkyTeam or Star Alliance.  They’ll continue to succeed and be smart in their attempts to gain more dominance in more parts of the world.  I think Oneworld is going to be smarting through this next year as a function of health problems at founding members American Airlines and QANTAS.  I also think that gaining the LATAM membership is not nearly as “sure” as they think it is. 

The Middle East

After ordering an insane amount of widebodies in 2011, Emirates will order another insane amount of widebody aircraft and beat up on Boeing about its 747-8i.  This has begun to feel like an addiction problem.

India

The airline industry in India has imploded and we’re just watching the mushroom cloud of debris settle.  For 2012, more explosions and more governmental heads will push even deeper into the sand.   Air India has already become the new Alitalia.

The Far East

Chinese airlines will order more aircraft and I expect we’ll see orders from them for 777s and A380s and possibly some A350s.  Not unlike 2011.  I don’t think we’ll hear about any stunning orders from that part of the world, however. 

China will tout its COMAC C919 even harder and most of us will try desperately to keep from laughing even harder.  Ryanair will back away from this aircraft quietly, I think. 

Japan will find ANA deploying more and more 787s on more and more routes with more and more success with that aircraft.  JAL will take delivery of its 787s and find that they not only work well for JALs needs but actually exceed expectations.  I think we’ll see an order for some more Boeing aircraft from JAL this year and I think it will be the 737MAX and 777-300ER.  No huge numbers but large enough to make a splash.

South America

LATAM got its approval from Brazilian and Chilean authorities (barely) and LATAM will begin consolidating its operations to make more money.  I think we’ll see a largish order from LATAM and it will be for an airliner to replace aircraft on both the Brazilian and Chilean side of the airline.   The aircraft of choice will be, I think, the Airbus A320NEO and I think they’ll bump up orders for the 787 and 777 as well.   TAM has 27 A350-900s ordered and I think that order *might* be at risk.  The strategy of using Airbus for narrow bodies and Boeing for wide bodies seems to be a smart one for airlines in that region.

I don’t think we’ll see more consolidation in South America but I do see South America becoming a bit of a battle ground between airline alliances.  Most see LATAM going with Oneworld and while I can’t disagree with the arguments, I think that SkyTeam and/or Star Alliance might just swoop in with one hell of a package that may be too hard to resist.  If this happens, Oneworld and American Airlines gets kicked in the groin in South America.

Aerolineas Argentinas?  The Alitalia of South America in 2011 and the same in 2012.  Enough said.

Europe:

British Airways managed to get through 2011 without any huge problems and saw Willie Walsh move up to the CEO position of International Airlines Group which means Willie’s still in charge.  Iberia, British Airways’ sister airline, saw Willie stirring things up with plans for a LCC subsidiary.  Iberia pilots decided to strike because shooting onself in the foot can’t be just an Indian thing.   IAG also managed to get a tentative deal to buy BMI from Lufthansa and become the Emperor of slots at London Heathrow . . . maybe.

Virgin Atlantic didn’t die, didn’t find new partners and didn’t extricate itself from the chokehold that Singapore Airlines has on it.  Richard Branson actually didn’t make the news very often except to shout, stamp his feet and act insulted that Virgin Atlantic wasn’t able to do a deal to win BMI.  Expect Virgin Atlantic aircraft to start carrying some message against the IAG deal for BMI.  I actually think that Virgin Atlantic will have to find an airline alliance to join and if I’m right, I would lay very heavy odds on it being the Star Alliance. 

Lufthansa did itself a favor and got rid of BMI and I expect they’ll continue their very conservative mangement of the airline and the subsidiary airlines.  I do wonder how much longer Lufthansa can rely upon its A340 aircraft and somewhat expect Lufthansa to bite the bullet and buy the 777.

KLM/Air France:  I see nothing here at all.  Not in 2012.  I don’t expect a large widebody order nor a narrowbody order. 

I do expect Ryanair to make an order and I do think it will be the 737MAX.  In fact, I think it may well end up being the 737MAX-9 instead of the 737MAX-8.  Instead of repudiating the C919, Michael O’Leary will just quit talking about it.  Instead, he’ll suggest stripper poles could be installed on Ryanair aircraft. 

All in all, I think it will be a tough year for European airlines.  The financial crisis on that continent will make it very hard to earn an honest profit and Middle Eastern airlines will continue to erode the long haul traffic that European airlines have enjoyed for decades.

Tomorrow, a summary of what I see for 2012 and the world airline industry.

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In light of American Airlines bankruptcy filing and its status as a founding member of Oneworld, I thought about alliances in general and wondered if Oneworld isn’t in real trouble at this point. 

American Airlines won’t be engaging in any serious growth or aggressive strategies for some time to come now.  Every real move they make will be under the scrutiny of bankruptcy stakeholders and their attention will be focused on re-scaling the airline to fit the new realities for success. 

To me, that means that AA won’t have much to offer its partners in Oneworld.  It doesn’t mean they won’t benefit from AA but it does mean that working in concert with these partners to achieve a more aggressive growth for the alliance is probably off the table for now.

Furthermore, QANTAS isn’t exactly shining with success these days either.  They cannot use their A380s as they want and they have as serious labor problems as American Airlines does.   More and more, QANTAS seems at real risk to serious competition from both within Australia as well in the South Pacific/South Asia markets.  I’ll point out that QANTAS is also a founding member of Oneworld.

So, two of the Big 3 in Oneworld are currently hampered by their problems.  That’s kind of serious, I would think.  How does one make a strong business case to LANTAM for their alliance when that situation exists today?

In the meantime, SkyTeam and Star Alliance are racking up new partners and, more importantly, they are planning strong growth with a strategy that continues to seem far more coherent than Oneworld.  They question I ask is this:  Is there some scenario under which existing Oneworld partners start scattering to other alliances?  If one bolts, will others follow?

I don’t see British Airways / Iberia leaving anytime soon but what about the lesser partners such as Cathay Pacific or JAL or LAN says “Buh Bye”?  I think we would see several others looking for new relationships.  (It’s notable that Oneworld is so clueless as to still have Mexicana’s name on their website.)

The other scenario is that both Oneworld and other alliance partners separate and form a new alliance that displaces Oneworld.  More possible than one might think since Star and SkyTeam are clear dominated by just a handful of airlines.   Some partners in those alliances may be chafing to play a bigger role in an alliance and with enough world partners, creating a new alliance may well be not only possible but smart.

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Chilean regulators have tentatively approved the LAN / TAM merger (which is really LAN buying TAM) with the usual provisions and conditions that frequently come with these deals.  The big one is that LANTAM must pick one airline alliance to go forward with. 

Right now, that means choosing between Oneworld or Star Alliance.  LAN is associated with Oneworld and TAM is associated with Star Alliance.  The choice means that one or the other kind of gets shut out of South America so the stakes are big.

Expect both alliances to make captivating pitches for being the winner and both will likely promise exorbitant revenues (via guarantees) to the airline group but who is the best choice?

For LANTAM, either could be good but I think Star Alliance might look just a little bit more promising in terms of synergies.  Oneworld won’t be shut out with a fight but you have to evaluate that alliance on performance and its “majors”.  American Airlines, British Airway, QANTAS and Cathay Pacific run that group and none of those airlines is the picture of health or innovation.

Star Alliance might offer more synergies, more partners and, more importantly, more money going forward.  It’s an alliance that works well and which is more egalitarian in its treatment of smaller partners than Oneworld.

On the other hand, Oneworld fits the Chilean portion of the airline very well already and several partners service Brazil with high frequency too.  If LANTAM is smart, they’ll extract promises to cooperate and a seat at the big boys’ table.  That would give them the leverage they need going forward.  If Oneworld appears unwilling to acknowledge them as a player, you can bet that Star Alliance will be happy to make room for them.

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Air India’s inability to meet its minimum entrance criteria set by its contract to enter the Star Alliance means that the two parties have mutually agreed to “suspend” the integration of Air India.

Or have they?  One person speaking for Air India says Air India received notice from a Star Alliance project manager that all the minimum critieria had been met. 

Some say that this is about politics and, specifically, about India protecting the market share of Air India by being very cautious (to use the politically correct saying) in granting traffic rights into and through India.   It’s no surprise as many airlines have indicated a desire to fly more to India.  In addition, no airline with the A380 has yet been able to fly to India with it because airport authorities say the airports aren’t ready (while airport managers scratch their heads and say “Yes, we’re ready.”) 

Air India is owned by the Indian government and entry into the Star Alliance was a part of its plan to have Air India stand on its own and, eventually, become a private airline.  This hurts Air India far more than India’s refusal to grant flights into its country hurts other airlines.

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

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

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

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

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

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

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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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I think just about everyone was at least a little surprised at the announcement of the QANTAS flight between DFW and Brisbane, Australia.   It was a subject that would pop up on the radar now and then but generally dismissed with skepticism of it ever happening.  Particularly with the equipment that QANTAS had for making the flight, namely the 747-400ER.

Flights between the United States and Australia have been the domain of west coast cities such as Los Angeles and San Francisco and the primary equipment has been the 747-400.  The aircraft available to make such a flight has already changed and is due to change a bit more in the future.  The 747 got used more because of its range and ability to haul a passenger load with a strong load of cargo.  Generally, long flights like that work best if there is enough demand for a 747 because seat costs go down.

Now the 777-300 is plying trans-Atlantic routes between the US and Australia and soon will be on routes between the US and New Zealand.  It’s a good aircraft for the trip because of the 777’s ability to fly it non-stop, carry a load of cargo and a fairly large complement of passengers.  We’ll see these West Coast to Down Under flights fracture a bit more in the future when the 787-8/9 come online with airlines.

So why the 747 and DFW?  Well, it’s notable that SFO is losing its flight with QANTAS but that makes sense now.  San Francisco is the domain of United, not American Airlines and QANTAS is partners with AA via Oneworld.  Los Angeles remains and it should remain as a Western US departure point between for Oneworld. 

Until now, Oneworld has had to feed all its traffic from all over the United States to either Los Angeles or San Francisco and while LA is a Oneworld focus city, all other Oneworld focus cities are east of the Rocky Mountains.  They are Dallas/Fort Worth, Chicago, New York and Miami.   In that group, there was only one city that made sense with the aircraft available today:  DFW.

The other thing that has changed is the new anti-trust immune cooperative agreements that are forming in Oneworld.  First there is the trans-Atlantic Oneworld partnerships and second is the trans-Pacific(Japan) Oneworld partnership.  Next is logically AA/QANTAS. 

With DFW and Los Angeles as that “hub”, Oneworld can feed traffic to DFW from points east of the Rocky Mountains and from points in Mexico, Central America and South America all to DFW.  Yes, AA can feed that 747 nicely.  And if they do it well enough, you can bet on seeing an Airbus A380 being switched into that route. 

DFW gets a nice boost from all of this as well.  It’s already started to transition back into a more “international” airport than it has bee in some time.  British Airways is now using a 747 on one of its flights to DFW and AA is using more 777s for its flights to Europe.  It will continue to grow as a Oneworld “hub” both because of its good location (not nearly as affected by weather as other potential hubs) as well as the availability of room to grow. 

I would be completely unsurprised at the addition of another direct route to Tokyo and a direct flight to China in the near future.   Currently AA has 2 flights to Japan via 777s and I think we may see one more or, alternatively, we may see JAL start flying one of those flights with its own 777.  AA has wanted to fly direct to China from DFW (and it should) but has so far been blocked by its pilots over duty time rules that AA wanted a variance for from the union.  The flight they wanted to do ultimately went to Chicago instead.  Expect AA to make another run at such a route.

One thing I don’t think we’ll see is a lot of additional routes from Los Angeles to Oneworld destinations.  It’s a crowded airport with limited room to grow.  Delta/Sky Team has a strong base in Seattle and United/Star Alliance has got strength in San Francisco.   Dallas / Fort Worth offers the growth opportunities now with the ability to fly longer range flights using the 787 and 777 and I think we’ll see more and more long haul flights from DFW.

I have to say that I’m very pleased for DFW and I see this as a very good development for American Airlines as well.  It’s nice to see opportunities created like this within Oneworld and on AA’s part, too.

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SAS is a difficult airline.  Actually, it’s a good airline with a lot of difficult problems in its future.  Formed as a consortium of the flag carriers of Denmark, Sweden and Norway, it continues to be 50% owned by the governments of those three countries.  All three countries have a strong social policy for employment as well.  But despite the relative wealth of its citizens and their desire to travel, it has been losing money regularly.  In part because its clientele also enjoy a good deal and have chosen low fare discounters such as Ryanair and Norwegian Air Shuttle.

The governments have made noise about about selling off their stakes but that’s a tricky business.  Each government needs to agree to that in order for that to work well at all and in order for it to be an attractive sale to potential purchasers.  The airline deals with a huge number of unions and unions with quite a bit of political power. 

This airline needs what many European state owned airlines have needed:  privatization and a merger. 

It’s fleet is rather broad for an airline of this size and that could use some rationalization.  It should be an attractive property for an airline like Lufthansa if a purchase is desired because it could benefit from Lufthansa’s purchasing power and the ability to give it a rational fleet as well as flexibility.  And it’s already a member of the Star Alliance.

If a merger is what’s called for, I think this could be a very attractive deal for British Airways / Iberia Airlines.   While this is a Oneworld group, it is a group that could allow SAS to maintain its identity much easier and offer it some long haul route rationalization but, at the same time, offer SAS the opportunity to continue some long haul flying as well. 

This would be a group that, in Europe, would have Northern Europe, the British Isles/Ireland and Southern Europe covered very well.  The problem is, you would have to pick just one Nordic city for a hub and who gets that?  Stockholm?  Oslo?  Copenhagen?  Each country wants to maintain its links to the world.  Stockholm is the most rational choice for a hub in that area since it offers a large O&D market, strong business ties and quick hops to all of northern Europe.  Oslo could remain a focus city and so could Copenhagen.

But the trick is the unions and the strong socialist social policy in that country.  I don’t see things changing for this airline because of that.  Sadly, those countries political power is based on such ties to labor unions and disrupting those unions or even causing them to lose out on what are exceptionally well paid positions is political suicide. 

It happens over and over again.  Does the airline want to survive?  Or do the owners want to avoid political problems today at the cost of even having an airline tomorrow?

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Next up:  World Alliances

There is never that much revolutionary change in alliances.  Last year, there was a fight over JAL between Oneworld and SkyTeam and Oneworld won but they really were destined to.  It made sense for JAL.  The alliances worked a bit to get better access to areas they were deficient in and to a large degree, they were successful.  I don’t expect much change, if any at all, this year.

The Middle East:

Emirates did what Emirates does:  it ordered more aircraft.  I did what I do:  failed to see how they’ll use all those A380s and 777s.  The financial scene in the Middle East and, in particular, the UAE continues to be weakish and while I suspect it will recover somewhat this year, I think the area no longer carries that gleam it once did.  I don’t see any failures in the near future but I don’t see any airlines really blooming either.  Success there is, as is true for most businesses there, fairly dependent upon oil prices.

India:

Nothing astonishing happened there but it was already pretty mucked up.  It remains mucked up and will likely stay mucked up this year.

The Far East:

China did kind of force their airlines into agreeing to buy Chinese aircraft as I predicted.  In fact, Chinese aviation is suddenly acting very Chinese in that it is being required to toe a more obedient line.  Face is everything there and I don’t like it when airline businesses are operating on the basis of “face” rather than good decisions.  It’s notable that in the launch orders for the COMAC C919 aircraft, each airline took up just 5 aircraft orders each.  They don’t want that airliner any more than anyone else.

JAL has done OK for the year.  They’ve made progress with their finances and they did make some hard choices.   They did have to file for bankruptcy protection and no one should have been surprised about that.  The new CEO, Kazuo Inamori, and President, Masaru Onishi, are succeeding and making hard choices.  Frankly, more so than is characteristic of a Japanese company and they deserve credit and support.  This airline isn’t fixed yet but it is on its way.

Oceania:

QANTAS got hit pretty bad by the Rolls Royce failure on its A380.  United Airlines is still on the US-Australia routes but badly needs to upgrade its product and it doesn’t appear positioned very well to do so.  Perhaps Jeff Smisek & Company will address that better this year.  Delta and V Australia didn’t get to form an alliance and they’re trying again.  Someone has to give in this area and it will be either in the form of a codeshare alliance between Delta and V Australia or in the form of an airline withdrawing from the market (United or V Australia).

South America:

LAN, in fact, did continue to succeed in South America.  So much so, they bought TAM to create LATAM and then bought AIRES (a Colombian airline)covering both the east and west coasts of South America.  LAN is, in my opinion, now a SuperLegacy of South America and that’s a bit dangerous for them.  South American governments are more protective of their countries airlines that is the custom in other parts of the world.  

Curiously, LATAM is now operating airlines in two different alliances:  Oneworld and Star Alliance.  While there is speculation that they’ll continue this with LAN brands in Oneworld and TAM brands in Star, I think they’ll have to pick one and this may well mean a big battle among all three alliances.   This is an area where SkyTeam could do well for itself by gearing up for battle now.

Aerolineas Argentinas:  Well, what can I say?   Well, I’ll say exactly the same I did last year. 

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 / Central America: 

Avianca TACA is doing fine and I look forward to seeing how they’ll compete against LAN. 

Venezuela:  Bah!

Europe:

British Airways accomplished a few things.  They got into a royal battle with their flight crew that remains unresolved today in part by being petty.  Their flight crew union, Unite, furthered that argument by being petty.  BA did get their merger with Iberia accomplished and after many, many years they have their anti-trust agreement for trans-Atlantic flights between its European Oneworld partners.

Look for the BA/IB union to do OK in its first year and they may even start looking for another partner as soon as possible.  The anti-trust agreement between Oneworld partners should also add to the bottom line.  However, it’s time to settle this fight with Unite and it’s time for Unite to get real.

Lufthansa is moving along and did do something with their BMI purchase.  I don’t think it did them any good when its CEO, Wolfgang Mayrhuber, started complaining about its ability to compete with the likes of Emirates.  Whether or not he had a real point (and he probably did), it also did signal just how hard a job they’re having with the task of competing with the Middle Eastern airlines.

They also still have their A340s and their plans to add the 747-8i.  They got their first A380 and all I see is fat, fuel consuming airplanes.  This is going to be a problem for them if oil prices rise much more and when you consider that much of their competition is flying fuel efficient A330s and 777s, it makes you wonder about their long term strategy.

KLM/Air France:  More of the same.  I think this airline will need to make an order for new widebody aircraft soon.  Because it remains, essentially, a French airline, I see a large order for A350s and a small order for 777s.  I do not see the 787 in Air France’s future.

Airlines will earn profits and even earn great profits throughout the world.  Many will be “record breaking” but as much from inflation as a recovery.  Those profits will soon start to burn a hole in someone pocket and that is when I think we see capacity growth.  I think that capacity growth will start with the Middle East airlines pursuing more revenue lucrative traffic from Europe and North America.  But we’ll see it happen in the United States, too. 

I would dearly like to see the 787 enter into service with someone and I think we will see it do so.  But Boeing has got to get a rein on itself.  The failures in the 787 program are as much about poor management as they are about stretching technology.  There is too much accountancy going on there and not enough visionary leading.  It’s time for them to start winning and they could do so by winning the KC-X tanker program once and for all.  But it is also time to start talking about what’s next. 

The demands of the 787 program *will* decrease as will the demands from the 747-8 program.  Will it be talk of a 737 replacement or an improvement to the 777?  I think the airlines would like to talk about the 737 replacement and that seems sensible.  Rather than play cautiously, reach again, I say.  Push engine manufacturers to come up with something to raise the game and push technologies again.   It’s also time to talk about the 787-10 and I think there are more than a few airlines who would like to be a part of those discussions.

Airbus is going to muddle along denying any real problems with the A350 until the end of this year.  Then we’ll hear about something delaying the entry into service date by a considerable amount.  John Leahy will insult Boeing and claim the A350 will put the 787 to death but it won’t.   Airbus might well buy the KC-X tanker program but I question the wisdom of this in light of their ongoing A380/A400/A350 problems as well as their announcement development of a new engine option for the A320 series.  When do they earn money the proper business way?

It would be nice to see Embraer make a move into the 130 seat market and I think those guys could do it very well.  Bombardier gets bashed by everyone but I still think they have something with their CS series and I think it will be taken up by another airline soon.

I think we’re going to see another round of fees.  Just as soon as airlines can identify what other parts of their service they can de-couple from the basic flight.  I think we’re going to see airlines put a price on early boarding and we’ll probably see fuel surcharges amounting to tens of dollars.

But let’s hope we see an interesting and prosperous year in the airline industry.

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Virgin Atlantic and Sir Richard Branson has hired Deutsch Bank to look at all strategic options available to Virgin Atlantic and that includes what the company is potentially worth.  Virgin Atlantic is already 49% owned by Singapore Airlines and 51% by Sir Richard.  Singapore Airlines has reportedly indicated its dissatisfaction with its investment’s performance in the past.  Branson indicated last May that in light of the industry consolidation taking place, it may no longer be possible for Virgin Atlantic to remain an independent entity.

Some of the questions to be answered is whether or not Virgin is an attractive property to another airline and whether or not there are other airlines out there that might be attractive to Virgin.  Virgin had been intensely interested in purchasing the airline BMI which was ultimately bought by Lufthansa who are heavily engaged in restructuring it back to profitability.

Virgin’s problem is that of no network.  It continues to be a great value to those who wish to fly its long haul flights but it has no “feed” from destinations within Europe (and in particular the UK) to provide passengers for its long haul flights.  In addition, it does not closely cooperate with its cousins at Virgin Blue and Virgin America so that it is not accused of violating laws governing ownership and competitiveness in Australia and the US. 

One has to wonder at this point why Virgin was so against joining an alliance.  They did, at one time, have quite a bit to offer various alliances but they are a property that has already lost quite a bit of shine.  Since only one alliance has substantial penetration in the UK (Oneworld), it’s possible that Star Alliance or Sky Team could still be interested on some level.  The Star Alliance actually feels a bit more like a fit and would potentially put BMI in place to offer that necessary feed to Virgin Atlantic. 

However, this is a case where Virgin really needs to pursue this rather than the alliances.  European partners in those alliances already have the opportunity to operate in the UK as a function of being part of the European Union.  In other words, Virgin needs to sell itself if it goes this route and it can.

Virgin Atlantic is an airline that really may be running out of runway very soon.  This isn’t a move out of desperation but it is a smart move to make on their part as they could benefit from a point of view that isn’t so closely tied to the Virgin hype.

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American Airlines and WestJet Airlines have announced an interline agreement yesterday and, once again, I didn’t see this coming.  If anything, I would have expected this to develop between WestJet and Delta, not American Airlines. 

The agreement will allow customers to connect seemlessly (with one ticket) to 25 new Canadian destinations with American Airlines (and American Eagle) feeding that traffic to six gateway cities in Canada.  Presumably it will work both ways (Canada to the US) and it is notable that the press announcement mentions a “phase 2” which will feed traffic back and forth to WestJet flights from the US to Canada as well. 

This is a pretty good win for American.  It gives Oneworld (via AA) an entrance into Canada where they’ll compete against the Star Alliance and Air Canada.  It leaves Delta sitting out in the cold with no other airline in Canada for them to connect with.  That, alone, is a bold move.

It also kind of swats at Southwest and its original intentions on Canada via an earlier codeshare agreement it had with WestJet but which was terminated earlier this year after a disagreement with WestJet. 

That sound is the door slamming shut. 

This will sting other carriers in the US and it’ll force them to access Canada through a much more expensive pathway:  flying there themselves. 

With both this agreement and the earlier one AA did with jetBlue, it’s clear that there is some innovative thinking going on at American suddenly and now I wonder what comes next.  I’ve been pretty hard on AA this year but I have to say that I like this move and I think it will benefit them and WestJet a great deal.

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About 24 hours after the Southwest Airlines / Airtran announcement, rampant speculation on who American Airlines should partner with started up.  The truth is, while I can make an argument for them to merge/acquire US Airways, I think they’ll shy away from a merger.  If they do go shopping for an acquisition, I don’t think it will be oriented towards a real “merger” a la Delta/Northwest or ContiUnited. 

There are a couple of targets left.  Alaska Airlines strikes me as one that should interest Southwest, American Airlines and Delta.  I think it’s pretty hard to get a deal done with Delta because of regulatory issues particularly in the Seattle area.  I think it’s pretty hard to for AA to get a deal done with Alaska because both parties have high labor costs and AA just won’t know what to do with the rather unusual operations Alaska performs in Alaska. 

I don’t think anyone is going to buy jetBlue at present and jetBlue’s CEO says they’re going to grow organically.  I would be happy to see jetBlue just get outside of its NY/Florida comfort zone and stop treating the midwest like it has the plague.

Frontier could be an interesting proposition for jetBlue, I think.  Sadly, I also think that Republic Airways is going to hold on to Frontier for dear life given what’s going on in the regional airline world.  Nevertheless, I do think that jetBlue could harmonize Frontier’s service and routes to the jetBlue way and make something of that airline. 

US Airways?  Well, they are the somewhat pretty girl who never gets asked out anywhere except to make some other guy jealous.  Until they get their labor house in order, I think it’s going to stay that way.  Their executive corps, however, ought to be attractive to someone.  Despite all of US Airways weakenesses and their “East/West” style of ops, those guys make money.  There is a lot to be said for that. 

I think they are more attractive for bringing into a new alliance.  Currently, US Airways belongs to Star Alliance but ContiUnited kind of makes them look superfluous.  SkyTeam just doesn’t need them either.  Oneworld aka American Airlines/British Airways,  on the other hand, could perhaps take advantage of them.  The deal would have to be a bit sweet because US Airways, if nothing else, is enjoying a nice “under the radar” ride on Star Alliance right now. 

I can’t think of anyone who could find a use for Virgin America at this point except, well, the Virgin Group.  Even the Virgin Group seems to have a hard time seeing a real value for working with Virgin America.  If they had any money, I would point them to Frontier but I think Republic Airways would just laugh out loud.

The truth is, I think there is suddenly some opportunity out there to start a new airline.  I would look for weak airlines who have major hubs and very little competition.  Some place where business customers and leisure travelers alike are dissatisfied with their current offerings and restrictions.  Some place that has a history of embracing the airline industry and where you can hire experienced people to kick that venture off.  That would be a great place to start something new.  I wonder where such a place might be?

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The merger between TAM of Brazil and LAN of Chile offers some interesting possibilities for the new airline group that will be operating under separate names in South America.  One big question is which alliance will the group adopt.  Currently, TAM belongs to the Star Alliance and LAN is a member of Oneworld.  

This new airline will have a bit more bargaining power when it comes to alliances and they have a few choices to make going forward.  The first is to participate in both under the respective brands just as before.  I’m extremely doubtful that that will happen. 

The second is to pick an alliance between Star Alliance and Oneworld.  In this scenario, I would give Oneworld the upper hand simply because in this merger, LAN will control more and it is the Oneworld partner.  American Airlines won’t want to let them go since they fit nicely into the AA system.  In addition, TAM might offer Oneworld quite a bit of access to other parts of South America it really doesn’t have at this point.  However, the Star Alliance has a lot to lose and a lot to gain.  Especially with the Continental United merger going forward.  One could see the Star Alliance attempting to bring the LAN system over to the Star Alliance with some incentives.

Finally, there is SkyTeam who has a lousy representation in South America presently.  SkyTeam a la Delta lost a big fight on the trans-Pacific side when it failed to win over JAL.  A TAM/LAN entry into SkyTeam would be a huge win for that alliance and I suspect we might just see this dark horse try to bring them over to their side.  This is exactly the right time for SkyTeam to woo such a company because there will already be integration efforts going on between the two as they consumate their merger. 

In now way does this new merged company go ignored as a participant in an alliance.  I do think it will be a fight and I do think all 3 alliances will be offering significant incentives to win LATAM over.

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American Airlines is in discussions with its transatlantic Oneworld partners, British Airways and Iberia, to consolidate in Terminal 8 at JFK airport.   This would be a good counter-move to Delta’s intention to renovate and expand at the same airport.

It’s about market share in New York and now we find the SuperLegacy airlines moving to own the most they can in that market.  AA (Oneworld) and Delta (SkyTeam) at JFK and ContiUnited at Newark.  It’s a fight that is sure to get bloody over the next few years.

If AA can move to bring its partners under the same banner and make things even more convenient for connections, it may have a grip on JFK that resembles British Airways’ at Heathrow Airport in London. 

It also makes me wonder what ContiUnited might do at Newark.  While Continental plainly dominates at Newark Airport, it also presently stands to have the least pleasant facilities and since it’s new to the Star Alliance, it may take quite some time to bring its Star Alliance partners under its umbrella at Newark. 

While a number of Star Alliance carriers to have flights to Newark, a number don’t.  And things aren’t well organized at Newark for Star Alliance.  Will they be?  I don’t see how ContiUnited can afford *not* to get their act together at Newark to compete. 

Newark is actually a bit more convenient to Manhattan and that is, after all, where the high dollar traveler is going to or coming from.  It makes sense for the Star Alliance to cooperate and consolidate and ensure good feed to those international flights but they’re going to have to get some airlines to move over, I think.  Airlines such as ANA.  

Others, such as Lufthansa and SWISS and Singapore Airlines are all in Terminal B.  Continental has Terminals A and C.  What ContiUnited really needs is a revised Terminal C and/or a portion of B while giving up A to others. 

But will the other airlines cooperate?  Don’t bet on it.  Keeping Newark in disarray would be a good thing.

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It’s been a bit over a week since American Airlines, British Airways and Iberia (along with Finnair and Royal Jordanian) received anti-trust immunity approvals from both the EU and the DoT.  What it means is that each of those airlines will be able to cooperate closely with each other on a variety flights between the United States and Europe. 

What closely cooperate means is that these airlines will start marketing their respective flights between cities under the various brands but each airline will be responsible for certain flights.  For example, British Airways may begin operating more of the capacity between DFW and London while American Airlines retasks the aircraft they were using for some of those flights to other flights.  Iberia Airlines may begin operating the flight(s) between Miami and Spain.  BA, AA and IB will be selling seats on all of those flights as their own just as you already see done as codeshares.

The difference is that now these airlines will also begin cooperating on scheduling.  In other words, American Airlines might start scheduling its “feed” for a British Airways flight from DFW to London.  American Airlines might do the same for an Iberia flight from Miami to Spain.  On the other side of the ocean, British Airways might schedule its “feed” for London to Chicago to mate up with an AA flight.   These airlines will start acting almost as if they are one company so to speak.

Is that good or bad?  If you ask the airlines, the customer will get to see more choices to more destinations on Oneworld flights and that choice is good.  In most cases, it is good and air fares are likely to be unaffected on many routes because of competition from other alliances such as SkyTeam and Star Alliance. 

However, in some cases, I think this is bad.  For instance, American Airlines already effectively “owned” the DFW to London market and really the DFW to Europe market.  So much so that previously they weren’t allowed to code share with British Airways on such routes at all.  There is very little competition in the DFW market to Europe.  Some exists, yes, in the form of flights by KLM and Lufthansa to Amsterdam and Frankford respectively.  One flight each a day.  Now, with even closer cooperation allowed, I do fear that KLM and Lufthansa may find such flights simply uneconomical.  There is no real Star Alliance and/or SkyTeam presence at DFW anymore. 

In the short term, I do think there are markets that are going to see much higher air fares for non-stop flights to Europe.  As with all things, those higher air fares may one day drawn in more competition, though.  It is conceivable that if the fares rise considerably, another alliance may target such a market for competition.  For instance, the Star Alliance may decide that Dallas needs some competition and suddenly we may find ContiUnited or US Airways providing some feed to that destination in order for a European carrier such as Lufthansa to justify a route between Dallas and Germany. 

I think such developments are a good 5 years away at least.  Fundamentally, I think these alliances are bad for consumers and bad for the industry but they were instituted a long time ago and that genie is out of the bottle now.  Since it would be nearly impossible to break up those alliances, it is fair that Oneworld be permited to establish their own now.  SkyTeam pioneered such things and Star Alliance is also far ahead of the curve. 

Regrettably, now we have to manage competition between alliances rather than companies.  I think that is bad because those alliances potentially let airlines that would otherwise go out of business remain in the game longer.  We need to see this industry periodically purge itself of the weaker players.  If you think that didn’t happen under regulation, you’re wrong.  It did.  Airlines did file bankruptcy and if they didn’t, they were forced into mergers of convenience by the CAB.  In any case, the weaker players still went away.  All too often, we don’t allow that to happen anymore and that hurts us more than helps.

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Continental Airlines and US Airways have gone from red to black in their latest 2nd quarter earnings reports and it’s a remarkable performance for both airlines.  Continental wobbled a bit in the 1st quarter but came back with a strong report of $233 million report and when you combine that with United Airlines earnings, you see a potential competitor to Delta that is the equal if not superior. 

Delta Airlines, American Airlines and the proposed ContiUnited merger all will result in airlines with revenues between $23 billion and $28 billion and it just strikese a yellow highlighter across American that it had a gap of over $400 million in profit this past quarter.

US Airways’ result, however, is even more impressive.  In fact, US Airways in general is becoming more and more impressive.  Operationally, they’re hitting high numbers on completing flights on time, losing baggage and just generally making people feel good about their choice.  This is not the airline you saw even 2 years ago and if I were asked about flying them today, I would highly recommend them at this point. 

US Airways came in with a net profit of $257 million this quarter and they did this with the least relevant hubs in the industry.  They did it despite the fact that after nearly 5 years their pilots still haven’t decided upon a union and negotiated a contract.  They did it despite becoming the third wheel among the Star Alliance’s US based partners.  They did it despite making Las Vegas, at best, a focus city instead of a hub. 

I would love to see some of that DNA move over to American and get things sorted for once.

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

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

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

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

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

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

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