New Alitalia is looking more and more like Old Alitalia

October 15, 2013 on 2:55 pm | In Airline News, Death Watch | No Comments

One recent development with Alitalia is that they are failing more and more (no, that’s not the new) and now governments are getting involved to provide aid (no, that’s not it either) to stabilize the airline for restructuring (nope, not that) and possible acquisition by Air France /KLM (no, that’s old too) is that International Airlines Group objects.

There it is.  IAG led by Willie Walsh doesn’t want that aid going to Alitalia.

And I agree. Alitalia is comically bad in so many ways  and has been comically bad at regaining a foothold in the European market since it’s “takeover” by Air One forced by the Italian government.

Quick question:  Did you know the “old” Alitalia was liquidated?

IAG is right.  The aid is illegal and, more importantly, it distorts the marketplace in Europe.  Alitalia has been unable to succeed legitimately under any guise for more than 20 years.  It’s time to let go and allow the markets to provide an airline to Italy.

I suggest Ryanair be chosen to take Alitalia’s place in Italy.  Afterall, that kind of failure deserves some kind of punishment.

I haven’t done this in a long, long time but Alitalia goes on my Death Watch starting now.  Although this airline has a habit of rising up from the dead, shaking its hands and saying “I’m baaaack!”

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Consolidation or Competition?

July 7, 2010 on 1:00 am | In Airline Service, Death Watch, Deregulation | 1 Comment

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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2009 and the Past

December 7, 2009 on 8:00 am | In Airline Fleets, Airline Service, Death Watch | No Comments

At the first of the year, I wrote 3 blog posts shown HERE, HERE and HERE.  It was really just my random speculation on what to expect over the next 12 months.  Well, now it’s December of 2009.  Let’s see how I did.

 

Boeing 787:  I guessed at an April 2009 first flight.  It still hasn’t flown although speculation has it flying this month either by December 14th or December 22nd. 

 

Airbus A380:  I guessed they would make their goal of producing 21 aircraft this year.  As of November 30th, 2009, Airbus says they have delivered 7 A380 aircraft this year.  Ouch.  This is a program that is in financial trouble.  No, I don’t think it will be cancelled.  Not yet but please don’t try to tell me this program will make a profit. 

 

My deathwatch had Midwest Airlines going away most likely by a sale.  That did happen and while the airline has essentially evaporated (from its original form), it does remain as a brand being run by Republic Airways.  

 

I speculated that Frontier Airlines would be bought out of bankruptcy but I guessed that jetBlue would be the buyer.  In fact, Southwest Airlines and Republic Airways were the suitors and Republic won.

 

I thought that United Airlines and US Airways would announce a new merger with Continental a dark horse candidate for buying United.  In fact, Continental became a member of the Star Alliance and firmed its relationship up with United but wisely kept its distance otherwise. 

 

I said that Southwest Airlines would maintain its status quo but that Gary Kelly would be under fire from both employees and outsiders and he was.  However, that view is already being reversed again by Southwest’s resurgent strength in the business.

 

I thought that the Middle Eastern airlines such as Emirates, Etihad and Qatar wouldn’t see a bankruptcy or merger but would slow their growth and aircraft deliveries.  That, in fact, has happened and now we see Emirates working hard to distance itself from Dubai World’s financial woes.

 

China:  I said deferred orders.  Pretty much what happened.

 

The Far East:  I said airlines from that region would maintain their status quo, probably would not defer orders and might make new orders to replace existing equipment for greater effiency.  Again, pretty much what happened.

 

Australia:  I saw QANTAS slowing growth, deferring some orders and fighting hard against new entrants.  Again, that’s pretty much what happened.  I also saw two weak competitors on the US-Australia routes:  United and V Australia.  That is pretty much what is happening although V Australia has been pretty smart in working into a relationship with Delta where it appears the two airlines will cooperate with codeshares.  United remains alone and with weakening demand.

 

South America:  I said the Argentine government would take Aerolineas Argentinas back from Grupo Marsans and the airline itself would muddle along or contract rather severely in some areas.  Bingo.  Exactly what happened.  I also predicted Azul would become the jetBlue of Brazil and its not hard to guess that that airline is pummeling its competitors.  A future prediction was for the airline to fly internationally in 2014 with Airbus equipment.  We’ll see.

 

Africa:  I saw Delta continuing to pursue flights to major African cities (true) and SAA (South African Airways) issuing a small RFP for 777 aircraft to replace its rather inefficient A340 aircraft (didn’t happen.)

 

India:  I thought Jet Airways and Kingfisher might merge with the name Jet Airways being retained.  In fact, both airlines continue to exist but both are suffering severe financial problems, deferring aircraft deliveries and generally flailing about trying to find a way to continue.   One of these airlines will still ultimately have to exit the market and I continue to think it will be Kingfisher.  They have the wrong aircraft and the wrong aircraft on order.  However, Jet Airways is suffering badly from labor actions among its employees. 

 

United States:  I picked United to fail.  It hasn’t happened and while they continue to live, their cash holdings are being reduced, they still have severe labor issues, their service product continues to suffer and I still think they should be the ones to disappear.  I also thought Glenn Tilton would be ousted and, possibly, replaced by Doug Steenland.  That didn’t happen but John Tague has been groomed as Tilton’s replacement.  I still think Tilton should go if United can’t fail.

 

Europe:  I thought we would hear of a surprise from Lufthansa.  I didn’t like their purchase of SWISS and I didn’t like their flying the A340 in competition against the 777 being flown by many of their direct competitors.  They’re still here, still making money and they bought BMI.  I still think we’ll here of misfortune from them but apparently it will take a while longer. 

 

Random Speculations:

  • I thought Southwest might add another aircraft type.  It didn’t happen but I think their interest got perked up when they looked at buying Frontier and saw the economics on the Q400.
  • I thought Delta might order more Airbus A330 aircraft.  Instead, Delta is parking them in the desert for the winter season.
  • I speculated that both China and Japan would defer or drop their regional jet programs.  That didn’t happen but the Chinese jet program appears to be a bad aircraft and unlikely to be used by anyone except Chinese airlines forced to buy it.
  • I thought Bombardier would see a major order (20+) for their Q400 series aircraft from a US customer.  Horizon Airlines did up their orders  for 10 more but there were no other significant orders. 
  • Airtran to form a small midwestern hub.  Yup, that happened.  In Milwaukee where they’ve taken over from Midwest Airlines and now face Midwest (brand owned by Republic) and Southwest Airlines entry into the market.  I think Airtran will hold on here and continue to develop business.
  • Last, I hoped that jetBlue or Virgin America would enter the DFW market.  Virgin’s CEO, David Cush (formerly of American Airlines) did recently speculate about adding flights to either DFW or Austin.   I suspect they’ll choose Austin and DFW will remain a fortress for AA.

 

That’ s it for my 2009 predictions.  I’ll make more at the start of 2010.  On the whole, I probably did as well as anyone in making predictions in this business.

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2009 And The Future: Part III

January 4, 2009 on 10:00 am | In Airline Fleets, Airline Service, Death Watch | No Comments

And now we come full circle back to the United States and Europe.  Both have highly developed, highly competitive airline markets.  Each has both LCC type carriers and legacy carriers (and Europe’s legacy carriers are the former national flag carriers in many respects.) 

 

This won’t be a rebuilding year.  To the contrary, both markets really need one large airline to be removed from the market.  In the case of the United States, I firmly think that should be United Airlines but in Europe that is a harder guess.  If I had to pick an large airline in Europe for the surprise of the year, it would be Lufthansa.  They are, by all accounts, a great airline but I smell trouble in that group.  First, they have been buying into airlines that have been unable to survive on their own.  That lack of survival, in many cases, isn’t because of poor management but just a lack of market share being available to them. 

 

Lufthansa has bought SWISS, for instance.  I’m not sure why and I’m not sure if they can tell us why.  They could have just as easily taken SWISS’ business  and left them in a heap.  Further, Lufthansa has a lot of Airbus A340 aircraft.  Those airplanes just don’t compete on high capacity, long haul routes anymore.  What’s more, they also have orders in for the Boeing 747-8, another large capacity, four engine aircraft.  Their competitors, Air France/KLM and British Airways, have seen the light in buying more and more Boeing 777 aircraft for their long haul, high capacity routes.  It costs less to operate them and they make more money as a consequence.  So, going out on a limb here, I say we’ll discover that Lufthansa is nearly insolvent some time by the end of 2009. 

 

Both markets in Europe and the US will continue to face challenges in costs (fuel and more particularly labor) and LCC competition will continue to press air fares downwards.  The real solution for large legacy carriers won’t be found this year.  Expect more losses (with some exceptions such as SWA and jetBlue) and more merger talk in general.

 

Here are a few more random predictions:

 

  • United Airlines will ask Glenn Tilton to resign and hire an experienced airline executive.  One possibility will be Doug Steenland, most recently Northwest Airlines CEO and now Vice-Chairman of Delta.
  • Southwest Airlines will, for the first time, examine adding another aircraft type to their fleet.  My guess is it will be the Embraer 170/190 series.
  • Airbus will land a major order for aircraft from a traditional Boeing customer in the United States.  My bet is that Delta orders more Airbus A330 aircraft.
  • China and Japan will drop their regional jet programs or, at the least, defer them for up to 5 years.
  • Bombardier will announce a major order (more than 20 aircraft) for the Q400 Turbo-Prop from a US Airline.
  • If fuel prices remain steady, Airtran will seek to form a small mid-western hub.
  • Last but not least, one LCC type carrier such as jetBlue or Virgin America will attempt to fly to DFW Airport (wishful thinking on my part.)

 

 

Happy New Year Everyone.

 

 

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2009 And The Future

January 2, 2009 on 11:57 am | In Airline Fleets, Airline Service, Airports, Death Watch | 2 Comments

It’s always fun to make predictions about the coming year, right?  Of course, I may well review my predictions in December of 2009 and decide against doing it again.

 

Boeing 787:

 

This aircraft will finally experience its first flight and I believe it will occur on or about its new scheduled time (early April).  For Boeing, credibility is now at stake and they really do have to begin meeting deadlines.  Financial analysts are becoming too skeptical of the company for comfort and airlines want their airliners.  Boeing does have a reputation for being able to pull itself together and get something done in a crisis and that should serve them here. 

 

I also believe we’ll see both static airframes begin their tests and new build airframes begin to flow from Boeing in about 6 months.  My prediction?  The 787 will prove to be a very capable aircraft and will meet or exceed its performance promises.

 

Airbus A380:

 

Airbus met its revised schedule of delivering 12 A380 airliners in 2008 . . . barely.  Originally it was scheduled to deliver 13 in 2008 and 25 in 2009.  Now Airbus says it will deliver 21 in 2009.  However, it is becoming clear that Airbus is now quickly learning how to build these aircraft and turn them out.  I predict they’ll exceed their 21 goal in 2009 by at least one aircraft.

 

Boeing and Airbus:

 

Both aircraft makers will begin to speak about the future of short to medium haul aircraft again.  With milestones for the 787 and A380 being met, I suspect they’ll become more comfortable in speaking of the future of their aircraft lines.  Look for discussions on both the 737 and A320 aircraft families and what interim technologies might be employed to improve their performance.  I suspect we’ll hear about both weight saving materials being adopted as well as the potential of new incremental improvements on existing engines.  Particularly the CFM-56 engines used by both makers. 

 

US Airlines:

 

First, let’s take a look at my deathwatch candidates.  The sudden and precipitous drop of oil prices allowed each of them to take a breather.  Midwest Airlines, however, continues to speak little, fly only a little and its investors have got to be running out of patience.  I still believe that they’ll ultimately go away.  How they do it is the question.  Rather than bankruptcy, I believe it will either be a sale or as a subsidiary airline of Delta/Northwest with the latter being most unlikely.  Who will they be sold to?  Good question.   Perhaps Airtran will get what they wished for and develop indigestion.

 

Frontier continues to muddle along but faces rather intense labor strife still.  I think their situation improved not only because oil prices dropped but because United continues to offer some of the worst product in the industry and because Southwest slowed its growth and took a breather.  While I firmly believe United will do nothing to improve its product, I do think Southwest will return to its goal of killing Frontier as a Denver competitor some time in the late spring.   I suspect Frontier will emerge from bankruptcy this year but I also firmly expect them to be out of business or acquired by December of 2009.  Who buys them?  I’ll bet on Jet Blue.  The aircraft fleets are compatible and Jet Blue has to start building a hub somewhere else in order to continue to experience strong growth.  Frontier gives them that chance.  The long shot?  American Airlines.  Why?  Because Frontier is working with AMR’s Sabre Reservations system now. 

 

United Airlines, my favorite airline to hate.  The Cranky Flier loves to rag on Alitalia and I love to rag on United.  United has lost a tremendous amount of value over the last year and continues to have some of the highest hourly costs of any US airline.   They’ve done nothing to improve labor relations, their service product or their fleet efficiency.  Glenn Tilton is hated by airline pilots but I predict he is goint to be hated by investors before the end of summer.   What happens?  I’m really not sure.  The best thing that could happen is for them to liquidate.  However, I think some airline will see some value there and attempt to buy United and make use of its assets.  Who?  The logical choice is Continental but I believe they’ll hold on to their independent streak.  So my next guess is a US Air / United V 2.0 merger will come about.  Could it work?  I doubt it but Doug Parker (CEO of US Air) wants another merger and United offers hubs he doesn’t have and some aircraft fleet compatibility.   I’ll go “all in” and bet that we see a US Air / United Airlines merger announcement by December of 2009.

 

Moving on from the death watch, let’s look at other US Airlines for a few minutes.

 

American Airlines will maintain its status quo but will begin to feel pressure to conclude some union contract negotiations this year as financial analysts begin to view their lack of progress less and less favorably.  CEO Gerard Arpey will begin to feel the heat but barring a large mistake on his part, will retain his position as CEO.  One possibility, however, will be bringing on a potential successor as President of the airline.

 

Southwest Airlines will also mostly maintain its status quo but I will predict that by late summer its new CEO Gary Kelly will be under fire from both employees and investors for his shotgun approach to growth.  It is beginning to look like it is unplanned and what people most value in Southwest is its ability to form and execute a coherent plan.   There will be no mergers, no real growth and a sinking stock price by December but I think Mr. Kelly will hold onto his position until 2010 barring a major unforeseen development. 

 

Continental, the best kept secret.  Continental will maintain its status quo with, perhaps, very moderate growth in the international sector while it waits to see what happens domestically.  They’ll enter the Star Alliance (exiting from SkyTeam) but discover it offers little value to them as well.   I don’t think they’ll seek to merge with anyone in the next year but if they did, I’d pick them for going after someone like Alaska Airlines rather than United or US Air. 

 

Stay tuned for Part II.

 

 

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Midwest Airlines Gets Sued For Aircraft Lease Payments

November 14, 2008 on 10:30 am | In Airline News, Death Watch | No Comments

The Milwaukee Business Journal reported that Midwest Airlines is being sued for lease payments on two jets and their engines.  Wells Fargo, Inc. is asking for some $82,000 in overdue plane lease payments and Polaris Holding Company, Inc., a GE Capital subsidiary, is asking for $14,000 in lease payments for engines. 

 

The interesting part of this is that with dollar amounts so low, these two rather large companies felt they had to sue for their money.  Midwest Airlines is backed by TPG, Texas Pacific Group, and other large minority shareholders.   The backers of Midwest Airlines aren’t exactly cash short, even in these economic times.  It makes me think that those two lessors identified something scary in Midwest and decided to get their claims in first.   It is possible that both lessors (financial giants in the credit and leasing industry) are just trying to raise as much cash as possible too.  It still seems suspicious though.

 

Midwest Airlines remains on my death watch and their prolonged viability is mostly due to vastly reduced fuel prices.

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Midwest Airlines May Ground All Boeing 717 Aircraft

November 1, 2008 on 12:22 pm | In Airline News, Airline Service, Death Watch | 2 Comments

The Milwaukee Business Journal is reporting a quote from a pilot at Midwest Airlines that the Boeing 717 Fleet may be completely phased out in 2009.  The speculation is that all of the existing routes will be flown using Embaer 170 aircraft leased from Republic Airlines. 

 

On the surface, this seems bad.  In reality, I see a gleam of hope for Midwest.  The Embraer 170 seats almost as many people as the 717 but cost much less to operate and its pilots are paid less as well.   It’s actually a comfortable aircraft to fly and it would quite possibly allow Midwest to fly profitably the remaining routes it has. 

 

Fans of Midwest Airlines’ Signature Service will no doubt be upset about losing access to that hallmark service but the reality is that it isn’t profitable and was probably retained way too long. 

 

I continue to wonder what Midwest Airlines wants to be in the future.  A small regional airline with no real connections to any other airline?  That really doesn’t strike me as a recipe for financial success.  They do have connections to Northwest Airlines (Delta) but I firmly do not see them becoming a “feeder” or “connection” airline for them.  Delta / Northwest simply have too many successful regional airlines already under their umbrella and, in fact, Ed Bastian, President of Delta, has already said that Delta expects to pare down the number of regional airlines serving Delta.

 

While I do think Midwest Airlines can make some money flying the E-170, I still don’t think they have a viable long term strategy for success.  They stay on the death watch for now.

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Sun Country Files Bankruptcy

October 8, 2008 on 1:40 pm | In Airline News, Death Watch | No Comments

The Dallas Morning News Aviation Blog reported that Sun Country Airlines has filed chapter 11 bankruptcy citing recent financial trouble caused, in part, by its parent company, Petters Group Worldwide and the just resigned CEO of that firm (who is also being investigated for criminal fraud.)

 

 I wonder if anyone truly believes this company is going to survive in the present aviation climate as a leisure airline flying from a Minneapolis / St. Paul hub?   They would appear to be an unattractive acquisition for anyone who might have the financial muscle and now they get to face the start of competition with Southwest Airlines next March.    Obviously I would feel a great deal of sympathy for workers who are displaced by Sun Country folding but I also have to wonder if Chapter 11 is in the best interests of the shareholder(s) or the creditors.   It might be time for this one to throw in the towel.

 

 

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Frontier Hits A Union Pocket

September 24, 2008 on 1:28 pm | In Airline News, Death Watch | 1 Comment

USA Today’s Today In The Sky is reporting that Frontier Airlines has gone to their bankruptcy judge and asked him to break the Teamster’s contract in order to allow some heavy maintenance to be done off shore (Central America most likely.)

 

 I’ll confess that I have so far been surprised at Frontier’s relatively smooth, up to this date, reorganization.  This latest development seems to indicate that all is not as it seems and they may only just now be working on the hard stuff.  The hard stuff is, quite honestly, renegotiating labor contracts and getting commitments from all the stakeholders to play nice in the emergence from bankruptcy. 

 

They remain on my death watch simply because they continue to be squeezed on both sides by Southwest Airlines and United Airlines in Denver.  In addition, they no longer have any fuel hedges (they had to be given up on going into bankruptcy) and while oil prices are lower than their peak just a couple of months ago, they remain volatile. 

 

Even with renegotiated labor contracts and concessions from lenders, they still have to compete with their system based in Denver and that’s a tough market.  Denver really isn’t large enough to support 3 major airlines battling it out in the long run.  A quick look at what happened in Hawaii between go! Airlines (A Mesa Airlines subsidiary), Hawaiian Airlines and Aloha Airlines (who went into liquidation) is all you need to read the tea leaves.  Whoever has staying power wins and, right now, that would be Southwest and United.

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Fuel Hedges Hurt United Airlines

September 17, 2008 on 2:05 pm | In Airline News, Death Watch | 1 Comment

The Dallas Morning News Aviation Blog just had this post.  United Airlines has just made it known that they expect some rather heavy losses in their fuel hedging program.  Fuel hedge are common practice among airlines to make fuel prices predictable (rather than necessarily always cheaper) and therefore allow airlines to financially plan for their needs.   Southwest Airlines is arguably the most successful at this strategy.

 

A fuel hedge is a kind of bet.  An airline purchases contracts and options to buy fuel oil (not jet fuel but fuel oil which tracks in line with jet fuel prices) at a specified price.  If an airline thinks fuel prices will go up, they will buy options and contracts for these fuels for a current market price for delivery some time in the future.  If in fact the prices go up, they sell these contracts for a profit and use the money to offset their jet fuel costs.   If the prices go down and the airline bets that they’ll go up, they suffer additional losses and the cost of their fuel goes up against their plans.

 

Since hedging is a risky business, a wise airline only hedges a portion of their fuel costs per quarter so they are not completely exposed to the risk of having bet wrong.  In addition, they’ll bet conservatively on prices so that the risk they expose themselves to is minimized as much as possible.  To manage all of this properly requires an army of financial analysts and hedging experts. 

 

The problem with hedges is you can both make and lose a lot money with them.  When you make a lot of gains, it becomes intoxicating to any airline.   The temptation is to hedge more and more and bet on directions that seem pre-ordained.  Just 1.5 months ago, everyone was betting that oil might go as high as $200 / barrel.  Just this last Monday (September 15, 2008), oil was trading at $97 / barrel.   United bet wrong and now has to report that they have had both real and unrealized losses involved with the trading.  Unrealized losses require them to hold cash in reserve to meet those potential costs.   That is “restricted” cash.

 

Lately you hear airlines talk about how much unrestricted cash they have on hand.  Southwest Airlines, American Airlines and others will have quite literally billions of unrestricted cash.  That is the money for which there are no real or potential obligations attached.  Going into a period of economic uncertainty, having a large amount of unrestricted cash is good because you can suffer short term losses and still operate sensibly.  If you have too little, you’ll quickly be forced to constrain your operations which quite often leads to a cycle of contraction for an airline.  Because they don’t have the cash, they become smaller and because they’ve become smaller, they have even less cash.

 

American Airlines continues to survive these industry contractions because they have a huge amount of unrestricted cash held in reserve.  It gives them maneuvering room and they are probably the best in the business when it comes to managing their finances.  That is one reason why they did not have to go into bankruptcy in the post September 11 industry crisis.

 

To return to hedges.  A hedge becomes risky when you are buying contracts that approach the forecasted market price of the fuel.  Ideally, you want to have options and contracts that are substantially lower than your current year’s price of fuel.  That way, if fuel prices drop your contracts will still realize a gain.  If you buy too close to market prices, particularly in a volatile market such as what oil is experiencing, you run a very real and damaging risk of being obligated to buy those commodoties at prices that are higher than the current market rate.

 

Hedges have often been described as an insurance policy against high fuel prices.  They aren’t.  They are a way of smoothing the peaks and valleys of fuel prices.  If you smooth those peaks and valleys, you can more accurately plan your financial obligations and that potentially allows you to make more money available for purchasing goods and labor.

 

The losses reported by United Airlines are just one more reason why I watch them carefully.  You can’t suffer those kinds of losses very often and, once again, it appears that their business plan is not accomodating the current market conditions in the airline industry. 

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Midwest Airlines Late On Gate Fees

August 22, 2008 on 9:26 pm | In Airline News, Death Watch | No Comments

The Milwaukee Journal-Sentinel (newspaper of my birthplace), has this report on Midwest Airlines being late in paying over $1million in gate fees.  Midwest is on my death watch list and this news doesn’t improve their standing at all.  The story mentions that they are contemplating bankruptcy and I should mention that because of changes in the US bankruptcy law, bankruptcy isn’t an easy choice to make anymore.  Those changes in the law are, in part, what drove both Northwest Airlines and Delta Airlines to file bankruptcy in September 2005 on the same day.

 

Updates to the bankruptcy code now make it more difficult for an airline to file bankruptcy, continue flying and weather debt and fare wars.   Until October of 2005, most airlines used chapter 11 bankruptcy to essentially buy time when competitive pressures put them at a severe disadvantage.   However, Midwest has likely been weighing the chances of obtaining DIP financing (Debtor in Possession) and given their high labor costs, vastly reduced network and fleet, most would not view this as a healthy choice for investment.  In addition to high labor costs, the airline is headquartered and based in Milwaukee, a city known for strong union influence. 

 

Northwest’s 47% stake in Midwest also makes the airline an unattractive target for a merger to other airlines.  It is possible that Northwest will be ordered to divest itself of its holdings as a condition of approving its merger with Delta but it is not in their interest to do so one day earlier than mandated.  By holding onto Midwest, they make Milwaukee a kind of “fortress airport” that rebuffs other airlines attempts to enter the market such as Airtran.

 

If Midwest were to go into bankruptcy, it would be very difficult for them to make a case for proceeding alone.  They would have to look for a buyer and while Airtran could be interested, they have already begun to establish Milwaukee as a focus city and other than some assets (namely the B717 aircraft), I’m not sure what else they have to gain by buying Midwest now. 

 

 To survive, Midwest Airlines would have to enter into Chapter 11, break its labor agreements and obtain enough financing to purchase new (to them) long range aircraft that would support its original network all the while fighting off Northwest, Airtran and any other airline that smells blood.  That’s a tall order for any management team in this industry.

 

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United and BoB

August 20, 2008 on 9:48 pm | In Airline News, Airline Service, Death Watch | No Comments

United just announced a new Buy on Board food program for both their domestic and international flights.  You can read all about it here.

 

The basic summary is that snacks will be eliminated on domestic flights in favor of selling Buy on Board food in economy.  In domestic business class, beverages remain complimentary but now they will charge for food.  In addition, meal service on international coach service will, on many trans-atlantic flights, be reduced to Buy on Board as well.  Best of all, Buy on Board prices will be going up too.

 

What’s more, flight attendant staffing will be reduced to FAA minimums on such flights. 

 

So, United Airlines is reducing service in business class (coach already gets FAA minimums), reducing or eliminating more food service and charging more for their Buy on Board product while having fewer fight attendants available to sell the over-priced product.  This stunning and bold new move has earned United 1st place on my death watch because any airline stupid enough to do such things to their service product and particularly to their business class customer deserves to be out of business by Christmas. 

 

I’d say this was too painful to watch but it isn’t.  I’m going out to buy popcorn for this one.

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United Airlines and UnFriendly Skies

August 17, 2008 on 1:29 pm | In Airline Fleets, Airline Service, Death Watch | No Comments

United Airlines, an airline that has offered spotty-at-best service for more than 10 years, seems to have the 9 lives of a cat to most people.  Unfortunately, of all the legacy airlines, it is the one that should have melted away some time ago.   It emerged from bankruptcy in 2006 after spending 3 years and over $300 million reorganizaing itself to operate in a world with $50 / barrel oil without a realistic plan to deal with contingencies.

 

The problem is, oil was already at $60 / barrel when it started fresh.  Since 2006, United has been the one airline that always manages to arrive to the party in rumpled clothes and only a $5 bill to pay the door charge.   Those rumpled clothes are an aging fleet (although all of the truly old Boeing 737s are now being withdrawn from service to cut capacity) of aircraft that do not match the interior quality or service level of most of its competitors. 

 

The management team, most importantly CEO Glenn Tilton, has spent more than 2 years maneuvering to merge this airline with another and, yet, has been rebuffed by all potential candidates such as Continental, Delta and US Airways.  Indeed, they took a particularly condescending attitude towards US Airways’ offer to explore mergers when Glenn Tilton implied that he and his team would remain in place and “mentor” the US Airways management team including Doug Parker. 

 

Say what you will about US Airways but it isn’t the company we knew in the 90′s or even 3 years ago.  Doug Parker and team are really America West and they’ve been better at executing to plan than virtually any other management team at a legacy airline.  If anything, Mr. Tilton would be well served by Mr. Parker’s mentorship. 

 

Now the marriage dance in airline mergers is essentially over.  Delta and Northwest are walking down the aisle, Continental has chosen to stand alone (wisely in my opinion) and American Airlines has decided to pursue trans-atlantic partnerships with British Airways and Iberia Airlines.  There is no one else left for United to pursue a merger of equals and they lack the cash and operating plan to purchase a smaller airline as well.  Indeed, Continental Airlines is joining the Star Alliance (of which United is a founding member) and that may benefit United but if they think they will remain the shining star in the US market for that alliance, they are sadly mistaken.

 

Continental’s management team is stable, smart and agile in this market.  They are uniformly the choice of airline among business travelers (and that is who pays the bills) and possess a young, modern, harmonized fleet of aircraft that serve the routes efficiently.  Continental has hubs that will serve that alliance well in both NYC, Houston and Cleveland and offer Star Alliance members excellent codeshare options throughout the United States.

 

United Airlines has a fleet of 747s that are some of the oldest -400 models and by all passenger accounts they are in desperate need of refurbishment (unplanned for 3 years and not recognized for another 2 years while United showed its legs to potential suitors).  They possess a large 777 fleet which, on the surface, would imply some modernity there.  However, about half of that fleet are early model “A” market 777s powered by the less powerful and efficient Pratt & Whitney engines.  No lip gloss found there.  The other half are 777-200ER models that would at first glance appear to be more modern intercontinental aircraft.  They aren’t, really.  They’re what Boeing originally referred to as “B” market 777s and, once again, they are powered by the less reliable and efficient Pratt & Whitney PW4000 series engines.  I would point out that every other operator of this aircraft in the US is using the more powerful and efficient Rolls Royce Trent or GE90 engines (American Airlines, Delta Airlines and Continental Airlines.)

 

Their 767 fleet, a large one comprised of 767-300ER models, shows the same flaws as their 777 fleet.  While some were built as recently as 2001, they are all powered, once again, by the less fuel efficient Pratt & Whitney engines.  I’m sure a theme is beginning to reveal itself here. 

 

The same also remains true for their 757 fleet in that they are powered by the lesser Pratt & Whitney engines while other airlines are utilizing the real rocket of that type, the Rolls Royce RB211 powered 757 that, with winglets, is capable of ETOPS trans-atlantic operations.

 

Ignoring the soon to be gone 737 fleet (which is old and dingy but not powered by Pratt & Whitney for once), the remaining aircraft are various Airbus A320 types.  While they are not old by airline standard, most are more than 10 years old and some are approaching 15 year of age now. 

 

An old airplane is not an unsafe one but, in United’s case, it is an uncomfortable one.  While other airlines have paid attention to maintenance, comfort and even tuning engines, United has spent its time navigating bankruptcy and its management team has bet their golden parachutes on a merger.  With no other really suitable partners, they are now faced with operating an airline that by most standards, is not competitive.  What’s worse, they have lost 2 years time that could have been spent executing a service plan that might work.

 

If the cost pressures airlines are facing continue for another year, they (United) will be faced with another potential bankruptcy and, this time, it should be a liquidation.  There is no argument for this airline continuing its operations under the present regime nor is there an argument for it continuing to operate simply to support air transportation in the United States or abroad.  There are plenty of air carriers that can take up the slack and operate more coherently than United.   In fact, the only part of United ceasingly to exist that I find distasteful is that it potentially offers American Airlines an even greater lock on Chicago’s O’Hare airport.  Since I experience that kind of fortress here in the DFW area, I know just how expensive that can be for a consumer.

 

Successful airlines share a few qualities that I’ve noticed over the years.  They generally possess a young, fuel efficient and harmonized fleet.  They buy the airplanes configured for performance on a variety of routes.  They have leadership rather than just executive management.  They focus on a clean, comfortable flight experienced that is defined by the service provided by its employees.  Such an airline also carefully watches its money and nurtures its finances to avoid running cash short on the wrong day.  It takes care of its employees not by offering the best salaries but by offering a living wage, a hospitable workplace and with fair treatment in both hard times and good.

 

That is the antithesis of United Airlines and, so, they go on the Death Watch.

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Northwest Writes Off Midwest

August 9, 2008 on 12:59 pm | In Airline Fleets, Airline News, Death Watch | No Comments

The Milwaukee Journal Sentinel has this story today.

 

Northwest Airlines has disclosed that it has written off its $213 million investment in the partnership with TPG Capital (Texas Pacific Group) that owns Midwest Airlines. Not only does it reflect Northwest’s view on the survival of Midwest Airlines, such a move also likely influences other investors views of both Midwest and the airline industry.

 

Texas Pacific Group is not in the habit of investing in companies and letting them fail but without new leadership and a new strategy for attracting traffic, Midwest has a very poor outlook. TPG does have leadership that is famliar with the airline industry such as David Bonderman (founder) who acquired Continental Airlines in 1993 and who was instrumental in bringing Gordon Bethune into the company from Boeing (trivia: Gordon Bethune worked for Braniff as VP of Maintenance at the same time my father was EVP of Marketing.)

 

However, at this point TPG would have to look seriously at acquiring another airline and merging it with Midwest. That would difficult given Midwest’s fleet (Boeing 717 and now grounded MD-80), its hubs (Milwaukee and Kansas City) and its expensive labor force (as much as 40% more expensive than industry average.)

 

Midwest has been unable to define itself as either a premium service or low cost airline and its struggle to be all things to all people is bleeding it of cash and opportunity. It would have been much better off merging with Airtran when that airline began making offers in December of 2006. Airtran already operates a large fleet of Boeing 717s and Boeing 737 aircraft and could have brought more long haul routes to Milwaukee and increased traffic at Kansas City as well. Even Midwests strategy of Signature and Saver service (effectively a 4 abreast business class and 5 abreast coach service) mates very naturally to AirTran’s own service product.  In fact, it continues to defeat me why Midwest so ardently defended against the merger in favor of TPG and Northwest except that, perhaps, the senior executive staff saw a chance to remain in power.

 

At present, there are no other airlines that make for an attractive partner with Midwest except AirTran and AirTran is now expanding its presence at Milwaukee with both short and long haul flights on its own.  In short, AirTran doesn’t need Midwest anymore and the only business case for acquiring them is to shrink capacity on Milwaukee routes its either operating or plans to operate.  Indeed, AirTran operates on a business model that fits nicely inside the MKE Airports strategy of being Chicago’s 3rd Airport by offering high value, low cost service to a wide variety of destinations.

 

Fans of Midwest Airlines celebrate its cookies and high quality service.  Unfortunately, what Milwaukee really requires is a low cost airline that connects to a variety of destinations important to Milwaukee businesses. 

 

AirTran has the fuel efficient equipment to operate the soon to be discontinued Midwest routes of MKE-SFO, MKE-SEA, MKE-LAX and MKE-Florida.  In fact, it already operates flights into all of those areas and has the ability to feed far more traffic into those routes than Midwest was able to do with its relatively small network.

 

Look for Midwest to continue to be squeezed by both AirTran and Northwest in the next few months with little space to maneuver.

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Etihad, Emirates, Qatar and Alliances

August 4, 2008 on 2:40 pm | In Airline Fleets, Airline Service, Death Watch | No Comments

Etihad, Emirates and Qatar all have massive orders for massive aircraft.  Each is betting on the UAE (United Arab Emirates) becoming *the* international hub for global travel.   It is certain that each of these airlines is well funded largely from oil profits.  Nothing wrong with that.

 

But what happens when that funding gets tight?  Further, can these airlines really sustain themselves on what is really a global hub model given that most markets are fracturing into point-to-point missions?

 

Aircraft no longer need to fly one-stop between the US and India, for instance.  The 777-200LR makes it possible for an airline to fly a full passenger and cargo load between these two countries.   Why is it better to connect in the UAE when traveling to Australia as opposed to Singapore?  And what happens when we really do have aircraft capable of flying London-Sydney non-stop?

 

These airlines are clearly attempting to build a global network but how does that serve someone in Europe, North America and South America when we can already fly direct in most cases and fly on airlines that reward us with frequent flier perks for doing so?

 

So far, each of these airlines has not really embraced the alliance model either.  How will Emirates, for instance, ensure that they can fill A380 aircraft daily flights from JFK to Dubai without having some assurances of feed from the US domestic market? 

 

I smell a market crash coming one day. 

 

It seems the next step in airline network strategies is to further embrace the major alliances.  The three major alliances have worked diligently to craft networks that are global in reach.  With anti-trust immunity, they can begin to cooperate more closely on schedule and pricing too.  At what point do these alliances become a new kind of airline? 

 

It seems that the Big 3 in alliances could one day become the Big 3 airlines in all but official name.  It may  be possible that even airline identities will be blended into the alliance identity rather than the participating airline.   What I’m suggesting is that we may one day see OneWorld 777s and Star Alliance A330s instead of AA / BA 777s and Lufthansa A330s. 

 

It seems that closer ties and participation in each other’s planning might just result in these kinds of identities.

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Critical Condition

July 28, 2008 on 7:04 pm | In Death Watch | No Comments

I got asked today what airline(s) I thought might be in real trouble.  Thinking about it for a few hours, I’ve come up with a sort of “death watch” list.

 

First on my list is Midwest.  They just announced they’re grounding their MD-80 aircraft and, as a result, cutting several important routes while expanding their codeshare with Northwest Airlines (who now owns a “passive” 47% stake in Midwest.)

 

Giving up routes such as Milwaukee – Los Angeles does not bode well.  With only Boeing 717 aircraft, they have limited themselves to routes that are “heartland” oriented.  For instance, the 717 can’t make it from MKE to LAX.  It can fly from Kansas City to Los Angeles (that route stays for now) but who wants to fly from MKE to LAX via MCI (MCI stands for Mid Continent International by the way)?  The airline business is, first and foremost, a network game and Midwest just cut 40% of its network putting itself below the critical mass in my opinion.

 

The proposed merger with Airtran would have saved them but they made a deal with the devil (Northwest) and Northwest has no interest in Midwest surviving really. 

 

Next up is Frontier.  Their hub is Denver and they have already cut back their focus cities.  While their fleet is new and fuel efficient, part of their business model counted on being the only LCC (Low Cost Carrier) game in town.  Not so true anymore. 

 

They have United Airlines above them as a legacy carrier operating a substantial hub in Denver and offering a nicely segmented set of seat choices and a global frequent flier program.  Below them is Southwest Airlines.  Southwest has entered that market with a vengeance and contrary to denials on te part of Southwest, it is crystal clear they intend to put Frontier out of business.  Much of Southwest’s growth has been focused on Denver and their CEO has already stated their intention to put more capacity into that city.  Denver can support two airlines, not one.  Since Frontier is already in bankruptcy, they’re my pick for going away. 

 

The only saviour is an airline that fits into their network and I can’t identify one that really meshes well with both their route network and their fleet. 

 

My third pick is Virgin America.  This is an airline that doesn’t quite know what it wants to be.  On the one hand, they want to be a trans-continental, high value, high service airline.  On the other hand, they want to be perceived as the west coast version of Jet Blue.   Trans-continental flights can’t make money using the equipment they have (Airbus A319/320) and their base, SFO (San Francisco) can’t support a real hub operation with good traffic given the competition they have from both legacy carriers and established LCC’s.

 

 

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