Alaska Airlines merging with Virgin America reminds me of the AOL / Time Warner merger

May 23, 2016 on 12:48 pm | In Airline News, Airlines Alliances, Mergers and Bankruptcy | No Comments

When AOL merged with Time Warner to become an even bigger media company, a primary reaction was a dot com bubble was buying a multi-generational colossus.

But others who paid attention were quite a bit more concerned in the dissonance between the two companies in terms of leadership and culture.  In short, they were incompatible and didn’t understand each other.

I understand the desire for Alaska Airlines to buy an airline.  They are in a “eat or be eaten” world and presently look very attractive as a hors d’oeuvre for a much bigger airline.  So buying someone lets the airline continue to exist rather than become food for another.

Pardon me.  This merger is nuts.

The airline fleets are entirely at odds with each other.  The service products are entirely at odds with each other.  The networks are somewhat at odds with each other and where they aren’t . . . it doesn’t mean Alaska Airlines is going to pick up the customers from a consolidation point of view.

The company cultures are way at odds with each other.  Alaska Airlines has a multi-generational history and a very unionized, very conservative airline culture.  Virgin America is the millenial who just turned 24 and thinks they should be a vice president in their first job.

What bugs me more about this is that no one seems to be calling anyone out on this.  That alarms me.  Analysts and everyone else shouldn’t like this merger at all.  It doesn’t speak to merger synergies and it doesn’t look like a merger that is easily accomplished which means it looks like one hell of an expensive merger.

In the face of incredible and record setting airline profits in the past 2 years . . . no one seems to care very much.

And that’s what scares me about this industry.  It appears to be losing its focus again.

 

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Delta and Alaska in Seattle

November 26, 2013 on 2:00 am | In Airlines Alliances | 1 Comment

Alaska Airlines has been a maintstay in the Seattle area for decades and has always done well by providing above average service combined with competitive fares in the area.  They have built a lot of loyalty in this area.  Over the past two decades, Alaska has also engaged in partnerships with almost all comers.

They have been willing, for instance, to do business with both Delta Airlines and American Airlines (and many other airlines) on the premise that they were too small to ignore anyone and what they had to offer.  That worked very well for Alaska.

A few years ago, after the Delta / Northwest merger, Alaska and Delta formed a more special partnership.  The idea was that Alaska would provide feed in Seattle for a relatively small group of flights that Delta wanted to operate from Seattle.  Flights that, mostly, were to go across the Pacific but which also included flights to Europe and some of Delta’s hubs.

It seemed innocent and very beneficial to Alaska at first but over time Delta grew Seattle into a big focus city that now borders on the verge of being a hub.  Delta treats Seattle much like it treats both Los Angeles and New York:  a good place to aggregate traffic onto international flights.  Since Delta has so many international flights departing Seattle now, it needs more and more feed.

Feed that Alaska can’t provide in total.  Alaska’s feed is more expensive anyways in that it doesn’t give Delta the economies of scale that a focus city/hub require.   So Delta is adding more and more of its own flights and directly competes with Alaska out of Seattle on many routes now.

Each continues to act as if the other is still a great friend.  Neither is really kidding anyone at this point.

At some point, Alaska will have to withdraw and do better at aligning itself with a variety of players again.  Alaska is useful to Delta only to the point that Delta is unable to do for itself in that market.  Delta is doing for itself just fine.

Alaska won’t pick a fight with Delta and probably won’t appear to do much at all until it finds a way out of this relationship that preserves all relationships.  In the meantime, Delta will encroach more.

Competition is alive and well in the United States airline industry and this is a perfect example of the market power a behemoth such as Delta has vs the market power the LCC airlines have.  Delta created a major focus city and did so in a few short years quite successfully.

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Alliances and mergers

April 6, 2013 on 1:00 am | In Airlines Alliances | No Comments

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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Oneworld grabs LATAM

March 8, 2013 on 1:00 am | In Airlines Alliances | No Comments

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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Should American Airlines merge?

December 27, 2011 on 1:00 am | In Airline Service, Airlines Alliances | No Comments

Before and after American Airlines bankruptcy filing, there has been a great deal of speculation on American merging with another airline.  Most often, US Airways is cited as the candidate.

The truth is, there isn’t a perfect candidate at this point.  Prior to the Delta / Northwest and United / Continental mergers, American Airlines was vastly larger in size by any measurement you would care to use.  Now there are 3 airlines roughly the same size in the United States and a larger number that are greatly inferior in size to those.

A merger should add value before anything else.  How it adds value is subject to debate.  American Airlines acquisitions never really added value so much as they eliminated nuisance competition.  American, in a sense, bought airlines more to pay off people from competing with them.  To be fair, Southwest Airlines has done this as well.

With the state American Airlines is in today, a merger doesn’t add value.  The first order of business is to get the house completely in order.  Unfortunately, this means quite a bit of pain for everyone involved and I include the executive management in this as well.  If anyone thinks they come out of this bankruptcy unscathed, they are kidding themselves.

US Airways might be a candidate for merger with American Airlines but where US Airways adds value is in conflict with the very people who are running AA today.   What I mean is that US Airways has the management team (and I do mean team, not just Doug Parker as CEO) that knows how to run a competitive, revenue positive airline in today’s marketplace.  Unfortunately, the current management team at American Airlines shows no evidence of knowing how to do so thus far.  They know how to manage money and an airline is a whole lot more than money. 

The only conceivable situation where US Airways adds value to American Airlines in a merger is if most of the executive team at AA is let go. 

Are the systems compatible?  Frankly, I think so.  Far more than I think many appreciate.  US Airways is in possession of a system that is fairly complementary to AA’s system.  US Airways has strengths in marketplaces where AA is weaker (the Southeast and Southwest) and in cities that are weaker in the American Airlines system (Philadelphia, Washington D.C., Phoenix come to mind.) 

Must the fleets be compatible?  To some degree, yes.  They need not be perfectly compatible.  Frankly, I think American Airlines could use the A330 in its system and I think US Airways could use the 777 in its system.  Both will have Airbus A320 series aircraft in a short time. 

The real challenge is labor.  Can you take one airline that has yet to see its pilots and flight attendants integrated into one system (US Airways) and merge the seniority lists with an airline’s employees that are viciously disappointed in its own company (American Airlines)?  I think that is a very, very tough job for anyone. 

In short, I think we won’t see a merger with AA and anyone else for the next 2 to 3 years.   Over that time, it is quite possible that circumstances will have evolved considerably and a candidate for merger with AA may appear.  It is entirely likely that US Airways may be that candidate.  But to expect those two to merger over inside the next two years is, I think, unreasonable.

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Alliances

December 17, 2011 on 1:00 am | In Airlines Alliances | No Comments

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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International Airlines Group: Future targets

May 10, 2011 on 1:00 am | In Airline News, Airlines Alliances | No Comments

The name International Airlines Group, holding company for both British Airways and Iberia and managed by BA’s Willie Walsh, couldn’t have a more appropriate name.  Or more bland.  But that is the stated purpose since IAG is about managing brands across the world rather than conquering the world with one brand.

That kind of makes other airlines and industry watchers wonder who the next target is.   Many considered QANTAS a target but that almost seems illogical to me despite the close ties between QANTAS and BA.  It doesn’t get them much more in QANTAS’ part of the world.  But it is true that it is a strong brand.

Instead, I think IAG is looking for strong brands in parts of the world that they want more access to.   I think that means Asia and I think that means North America.  Those are the two centers of commerce that Europe does business with and adding a brand in each of those areas only helps grow the business. 

The challenge is adding a brand from another country because most countries still have laws governing ownership of their airlines.  So that, to me, means targeting brands in countries with liberal, commerce centered laws and/or in British Commonwealth nations. 

It’s the Cathay Pacifics, Air Canadas and Air New Zealands that would, to me, appear to be more attractive on a global basis.  Strong brands with strong customer loyalty. 

It won’t be about access to facilities or fleets.  It’ll be about identify brand strength with a service product that harmonizes reasonably well with IAGs current brands.  It will be about getting strong executives who’ve crafted strong business plans for their regions.  It won’t be about getting a firesale price on airline because, frankly, those airlines have nothing to offer but a few assets and assets are easy to buy.

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Team Play: BA, AA and IB

March 24, 2011 on 1:00 am | In Airline News, Airlines Alliances | No Comments

British Airways, American Airlines and Iberia Airlines received trans-Atlantic anti-trust immunity to cooperate on routes between the United States and Europe late last year.  Since that time, all three have been maneuvering their operations to prepare for this cooperation.  Now it begins.

Previously, flights between JFK (New York city) and Heathrow (London) on AA and BA frequently left within minutes of each other.  Now, the two airlines will form a kind of “shuttle service” between New York City and London with departures from London to NYC in the afternoon leaving once every hour and flights from NYC to London leaving as frequently as every 20 minutes in the afternoon. 

Frequency is good.  Choice is good.  And I would be tempted to criticize that much frequency except that a quick check of schedules reveals that all of these aircraft are either BA 747-400s or AA 777-200s.   I do wonder if I haven’t identified where at least one British Airways A380 will fly routes.   It also makes me speculate that AA’s recent order of 777-300ERs might not be for quite as distant routes as we once thought. 

The airlines are also cooperating on other flights to between other cities.  Iberia will fly to California from Madrid.  Schedules between Miami and Spain will be coordinated going forward.  A check of flights between Dallas / Fort Worth and London Heathrow show 3 coordinated flights a day with 2 AA 777s and 1 BA 747.   There are 7 more connections (several at cheaper prices) available between those cities with stops in Chicago, Boston and Washington D.C.

Chicago to London flights as non-stops are a bit more frequent although all operated on 777s.  Chicago gets 6 evening departures to London and when you consider the connections that AA has in its Chicago hub, this should be good for everyone in Oneworld. 

I am struck by one thing now.  The biggest argument against such an alliance was the dominance both BA and AA would have between London and the United States.  Both were already dominant players by any measure.  The new schedule for these flights show real muscle flex and I wonder how any other airline competes against this partnership into London. 

This will be a very interesting alliance to watch for the next 2 years as it  grows and blossoms.  You have to wonder if Star Alliance and SkyTeam aren’t just a bit concerned at how this network unfolded on a global basis. 

One example:  QANTAS will soon be flying to DFW airport regularly from Australia.  It will be possible to leave Sydney, Australia on QANTAS at 1:25pm on a Monday, arrive at 1:50pm in DFW that same Monday ( I love how the international date line makes that possible) and then depart DFW at 6:05pm on British Airways to London Heathrow arriving at 9:00am the next morning.   Then one could hop a QANTAS flight from London Hearthrow at 12:00 noon and fly to Sydney, Australia via Singapore (fuel stop) arriving at 7:30pm the following day and thus completing a roundtrip flight on some of the longest flights in existence.

And you can book all of that through American Airlines’ website.  This is some real market power and it will be very interesting to see how people respond to the offerings these Oneworld partners will have arranged between themselves.

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Consolidation in 2011

March 17, 2011 on 1:00 am | In Airline News, Airlines Alliances | No Comments

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

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

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

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

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

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

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

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

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

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

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WestJet and Delta

February 12, 2011 on 1:00 am | In Airline News, Airlines Alliances | No Comments

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

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

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

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

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Texas and Australia

January 17, 2011 on 1:00 am | In Airline News, Airlines Alliances, Airports | No Comments

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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Welcome to the New Year – Part 2

January 7, 2011 on 1:00 am | In Airline News, Airlines Alliances | No Comments

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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Barriers to Entry

October 12, 2010 on 1:00 am | In Airline History, Airline News, Airline Service, Airlines Alliances | No Comments

Airlines have spent a lot of time talking about how consolidation has helped the industry raise air fares and begin earning a profit.  It is constantly promoted as a very positive development and that is generally not refuted by anyone out there most of the time. 

But let’s take a look at the landscape and see what is going on.  In 2004, we had as major airlines the following:

  1. American Airlines
  2. United Airlines
  3. Delta Airlines
  4. Northwest Airlines
  5. Continental Airlines
  6. Southwest Airlines
  7. Alaska Airlines
  8. jetBlue Airlines
  9. Airtran Airlines
  10. America West Airlines
  11. US Airways

These are in no particular order but each of the above could be described as viable operating entities that served large regions of the United States if not on a national basis.   Of the 11 listed, 5 were really completely national airlines, 3 were semi-national and 3 were regional. 

Now, if we consider recent mergers and the recently announced Southwest Airlines – Airtran merger, we have:

  1. Delta Airlines
  2. United Airlines
  3. American Airlines
  4. US Airways
  5. Southwest Airlines
  6. jetBlue
  7. Alaska Airlines

Of these listed, 5 are national airlines (With Southwest moving from “semi national” to “national” in my opinion) and 2 which are really regional airlines primarily.  The 2 which I call “regional” do have flights outside of their core strengths but you can’t really call them even semi-national. 

I see 2 problems arising from this new landscape.  First, the top 3 airlines range in annual revenues between $23 Billion to $29 Billion.   US Airways had about $11 Billion in revenue, Southwest earned about $11 Billion and Airtran enjoyed roughly $2.5 Billion in revenue.  In other words, going forward US Airways and Southwest Airlines will be roughly half the size (in terms of revenue) that the top 3 enjoy.

Alaska Airlines, generally a good performer, earned about $3.5 Billion and jetBlue, also generally a good performer, earned $3.3 Billion.  They are each roughly 1/3 the size (in revenue) of the tier above them. 

My point is that there is a great inequality between the now extremely dominant SuperLegacy airlines and the tiers below them.  Between US Airways and Southwest, US Airways clearly remains an “at risk” airline due to the markets it continue to try to be dominant in.   Indeed, with the Southwest-Airtran merger, US Airways will see yet another market (Washington D.C.) finally being intruded upon by Southwest.

 There is little left to challenge the largest airlines in a region.  They will compete with themselves and it will take many years before you see Delta trying to encroach on American territory or United encroach on Delta territory.  Each of these SuperLegacy airlines needs to settle down.

My second point is barriers to entry.  Airlines have grown both in revenue and network so much now, there is a barrier to entry for new airlines or even existing airlines to enter new markets.  A 2nd tier airline has some chance of competing regionally but 3rd tier airlines are now faced with competing against SuperLegacies that can quite literally bury them with both capacity and staying power. 

In other words, going forward, it will be very difficult for airlines to be started that have any hope of competing in marketplaces because any marketplace that may have high air fares is also going to be dominated by SuperLegacy airlines that can fight off that competition with capacity and the ability (via revenues) to stay the long course with that strategy. 

Starting and operating an airline is a highly capital intensive affair.  It is possible to start an airline and build a network inside a region with fast growth.  jetBlue did it in a market that was highly competitive just 10 years ago.  However, while going from zero to 50 aircraft is somewhat doable still, growing beyond that is very expensive and difficult.  It’s hard to find investors willing to capitalize airlines with enough money to sustain that growth to a network that is served by 150 or more aircraft.

Furthermore, it’s difficult for airlines to make that leap from small to medium and keep their operations stable.  It often requires entire systems changes that stop growth and start a period of mediocrity that is often difficult to work past.   (Hello jetBlue)   In addition, it’s difficult to imagine the required resources to make the leap from medium to a truly national player because, so far, it really hasn’t been done except via mergers and that resulted in an airline (US Airways) that remains tied to cities that aren’t the most attractive for being a major player.  Just look at where US Airways isn’t a player such as New York City, Atlanta, DFW, Chicago, Denver, San Francisco (and arguably Los Angeles.) 

That means that SuperLegacies and major nationals are likely to go unchallenged for the foreseeable future.  Unchallenged airlines usually mean air fares that are high enough to slow economic growth in areas and service levels that will continue to be reduced over time.  It’s not good for customers and it isn’t good for the United States.

I wouldn’t argue that we need 6 SuperLegacy airlines (in terms of size) but I do think we need more national airlines (a la US Airways or Southwest) so that competitive pressure remains in place.  Even new regionals in the form of a jetBlue or Airtran would be good but . . .

How do they get started?  How do you make an argument to investors that capitalizing an airline with the intent of competing even on a regional level is a sound business investment at this point?  It was hard to do before the last 3 years but now it is almost ludicrous to enter a conference room an argue that you can sustain a bruising battle for market share on a profitable route with the remaining top 5 airlines.

In addition, we have tacitly endorsed airline systems that are inherently economically inefficient.  The hub and spoke systems just got a shot in the arm but they do not lend themselves to lean operations and high aircraft utilization.   But the sheer size of the networks we have agreed to now make it possible for those same inefficient operations to enjoy new life for a decade or longer now.

I do think airlines should enjoy profits.  I do not think they should enjoy profits just because they say they should.  The argument that airlines couldn’t enjoy profits in the US anymore without consolidation is refuted by the very performance of other airlines operating under a different model:  Southwest, jetBlue, and even Alaska Airlines and Airtran.  I just named 4 airlines who did enjoy profits on a pretty consistent basis over the last 10 years by not engaging in the SuperLegacy hub and spoke (only) operations systems.

I ask myself where innovation may come from to challenge existing airlines in the next 10 to 15 years and I presently don’t see any encouraging developments.  I don’t see any new David Neeleman’s looking at these conventional systems and thinking outside of the box when it comes to aircraft, routes or labor.   How does a brand new airline argue for competitive prices when shopping at Boeing or Airbus when compared to the SuperLegacies who can make a “top off” order larger than a new airlines’ initial order?

Airline fans can shout about the renewed prospects for earning money presently but I do wonder what we, as a country, have to shout about when we discover that lack of innovation in a few years.

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The Next Merger

September 30, 2010 on 1:00 am | In Airline News, Airlines Alliances | 5 Comments

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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Not Approved: Delta & Virgin Blue

September 11, 2010 on 1:00 am | In Airline News, Airlines Alliances | No Comments

The Department of Transportation has decided to recommend against anti-trust immunity between Delta Airlines and Virgin Blue airlines Virgin Blue and V Australia.   This decision caught many by surprise and I’ll confess to being somewhat suirprised but pleased as well.

The DoT seems to say that they don’t think Delta has worked to establish itself in the trans-oceanic market and hasn’t done a very good job of showing the benefits to the consumer.  There is some truth to that.  Delta and V Australia are both new entrants to the US-Australia routes and neither has really done that well so far but neither has seemed to have invested in developing that business all that well either.  The efforts made seem more pro forma than with enthusiasm. 

I also think that both parties felt that with two very established carriers between the two countries, an alliance between two new entries would just be automatically supported.  An assumption that I would have said is likely just a day ago. 

I think everyone could stand to take a moment and breath on these alliances.  Yes, they grow the network and they offer greater potential for profit but is an oligopoly of 3 really better than an oligopoly of 2?   The public good isn’t just served by profitable airlines.  The public good includes what is generally good for the consumer such as competition that offers varying levels of service and price. 

If you want an alliance across the ocean, prove you can be a player on that same set of routes first.  Better yet:  be creative and open up some new business rather than just continuing to try to compete on the ubiquitous California – Australia routes. 

Alliances are fine but let’s not forget the purpose of business and competition and what it has to offer.  If you want to be in business on a particular route, the preferred pathway should be making a long term investment and working for the traffic.  We should desire to start seeing *more* competition between these alliances, not a continued effort to stake out their “just share” of business in a particular market.  Carving things up into 3 equal shares serves no one’s interests at all.

Good on the DoT for doing the unexpected as well as doing it for a good reason.  I would like to see a bit more of that attitude in other future decisions.

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Trans-continental Airlines: Do we want them?

August 27, 2010 on 1:00 am | In Airlines Alliances | No Comments

With the latest mergers acquisitions of the past few years such as Delta/Northwest, Lufthansa and its European purchases, Continental/United and now TAM/LAN, a new discussion on multi-national airlines has emerged.  Many are predicting that airline mergers that cross borders such as a US airline merging with a European airline is the next wave.  Airlines see more synergies and more savings available to them and, more importantly, an even bigger network to take advantage of.

A number of countries as well as the IATA are advocating that countries such as the US (but certainly not limited to it) drop their laws permitting, at best, only 49% ownership by a foreign carrier.  I’m not so sure that is a good idea. 

Advocating that bigger is always better has a flaw in it.  It might only be better for airlines.  It might not be better for consumers or their respective governments.  With the current alliances we have, we’re already seeing strong dominance by airlines on many routes.  Yes, competition still exists on most routes but that isn’t true on every route.  With the new anti-trust agreement between American Airlines, British Airways and Iberia (as well as smaller Oneworld partners), one alliance now completely dominates the DFW-London route.  They have pricing power over that route at a level that is rarely seen.  And there are others that are trending towards that development.  Take a look at who dominates Atlanta-Paris, for instance.

I don’t think we’re ready for that yet.  I think we need 10 to 15 years before we can see how this latest round of growth affects consumers.  If these new SuperLegacy airlines start competing with each other at hubs that were previously dominated by one airline, perhaps more mergers would work.  If, however, airlines continue to treat each others hubs as “home turf” not to be invaded, I would be skeptical of the benefits to the consumes from multi-national mergers. 

In fact, I think our current state is probably just about right for the world markets at present.  Consumers are being served pretty well in areas such as price and service.  At the end of the day, it’s important to remember that airlines are publicly traded businesses that do have a duty to serve the public as well as earn profits for their shareholders.  We offer the ability to organize that way in return for obtaining benefits to the consumers. 

In addition, I think foreign ownership of airlines still has national security questions that need to be answered.  In times of conflict, airlines are often involved as both cargo and transport service providers to a nation’s military.  Having the interests of the airline aligned with national interests a la corporate ownership still seems like an important strategic objective. 

What happens if Air France buys Delta and then a US conflict arises where we need transport capability but France decides that it is against their interests to serve that role and forbids Air France from providing that capability?  That potential question is a troublesome one for any nation with a national airline system today.  Preserving our national interests when it comes to these mergers is, I think, a very important objective. 

We need to time to let things settle into a new market pattern and we need time to answer these strategic questions as well.  Until we can see things more clearly, I think it would be best for countries to limit their foreign ownership to less than complete control of one of their airlines.

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Walking the line: Continental and United

August 23, 2010 on 1:00 am | In Airline History, Airline News, Airline Service, Airlines Alliances | No Comments

The airline industry is a funny place to work.  Once you’ve worked inside it or lived inside it, it gets into your blood.  It’s hard to walk away from because airlines really are families and one doesn’t walk away from a family very often.  Even the industry is a family.  Two people from different airlines might disagree vociferously on something inside the industry but if an outsider offers a different criticism, you’ll see those two band together like brothers to fight back.  Sound familiar?

Despite the fact that we know most consumers buy on price, there is a strong brand liability that exists out there too.  A customer might choose to fly American Airlines to Europe but if he or she is a Continental fan, you can bet they’ll have nothing but criticisms and comparisons to what they think Continental is.  That customer loyalty, I think, derives from an attraction to the company DNA that was established over 40 years or more. 

American Airlines was always a bit more of a no nonsense airline that appealed to the conservative businessman.  Delta was about southern hospitality.  Northwest Airlines was attractive to that stoic Midwesterner since it mirrored their values.  Continental was always a bit of flash and upstart which attracted the entrepreneur.  Braniff was somewhat similar although there was a certain Texas adventurer to it.  TWA was Hollywood and Pan Am was blue blood.  Those airline personalities attracted similar people and although that has been diluted to a fair degree today, that DNA is still there.

I have to admit that I marveled at how readily people accepted the Delta / Northwest merger.  It was, in my mind, a clash of cultures.  It was as if the Southern Dandy went to Minnesota and married a solid, conservative blonde Swede.  Part of me expected neither family to accept the marriage.  Yet, they made it work.  They not only made it work, they made it look like true love.  I was,  and continue to be,  impressed.   Now and then there is a marriage that works out like that.

But, historically, mergers among airlines don’t often work out like that.  There are still former Republic Airlines employees who will give you a bit of an earful over Northwest Airlines purchase of Republic.   Until TWA’s demise, there were Ozark employees who would still privately confess great irritation at TWA purchasing their home.   Look into Delta and you’ll find Western Airlines employees who feel the same.  It’s usually more a marriage of convenience than a marriage of love. 

Now we have Continental and United marrying.  United, arguably the oldest legacy airline of the United States and certainly of blue blood in the US, is marrying Continental Airlines, a western frontier upstart of a far greater checkered past.  Continental employees are chagrined because they see themselves as proud and independent and the airline who survived the worst and came out of that as one of the best airlines in the world.  United Airlines employees are feeling a sense of loss because despite the fact that their name and headquarters exist, Continental is really the daddy in this union and that just doesn’t seem right to them.  That became clear when John Tague didn’t make the cut in the marriage.  Nor did several other prominent and, quite frankly, strong performing United executives.  It might be United’s name but it’s Continental’s leadership that is going to go forward.

Continental employees wonder why they need United given their success for the past 15 years.  What does United bring to the table that they don’t already have?  United employees speculate that these upstarts are going to be overwhelmed faced with the prospect of running a “real” airline.  The truth is, neither concern is really valid. 

Customers seem to sense the same issues and certainly the home cities of each airlines’ headquarters.  It’s a problem for this merger.  Not an insurmountable problem and I do believe that once the merger is consummated and has time to settle, many of those fears really will go away. 

What airline is a United customer going to be flying after this merger is done?  What airline is a Continental frequent flier going to be a member of when it’s done?  I’ll wager that the average customer just can’t answer that based on the way things have gone so far.  I’m a relatively dispassionate observer to this and I can’t answer that question. 

The problem is that people can sense this fear and they’re reacting to it on many different levels.  It’s a fear that is almost palpable at this point and I think that comes from the somewhat mixed message that the new “brand” is sending.  People see a Continental airplane with a United name and I think that strikes them as an attempt to be all things to all people.  Notice that Delta and Northwest avoided that mixed message. 

You can change the typeface of the name United but you can’t change the mixed message.  Brett Snyder of the Cranky Flier is quoted HERE in the Chicago Tribune as saying:

“I’m a huge fan of making a clean break, unless you’re planning on replicating the service. . . ” and “”I don’t know how you meet expectations from both sides when you’re not really making a clear brand statement.”

Bingo.  He’s dead right.  Expectations aren’t getting met on either side.  This is much more an old school airline merger.  I actually agree that a new brand would have been a far better approach.  Even adopting an old brand that neither had history with would have been better if it set expectations for both sides.  Imagine the reaction if this new union decided to call themselves TWA or Braniff or even National. 

Even a new brand incorporating some elements from both would have sent a better message.  What if they called themselves Flagship Airlines with a new logo designed to evoke the service they intended to deliver?  It would have delivered a much more clear message either way. 

Here is an interesting observation:  Both airlines do have some distant genetic heritage in common.  Walter Varney who founded airlines that were direct ancestors of both United and Continental.  I’m not proposing the name Varney Airlines but I do wonder if there isn’t something in that history that would lend itself to a good name.

The problem is that it’s hard to walk away from the legacies each brand offer.  There are decades of branding invested in the names United and Continental.  There are decades of history behind each name and decades of family history in each name.  Even airline executives have some sort of emotional attachment to their airline and they aren’t immune to being influenced by that despite the belief they are cold blooded people focused on profits.  They just aren’t.  Not even Glenn Tilton who has relatively little history working in the airline industry.

They problem inside each airline is that the employees haven’t been given something to rally around.  How does a Continental employee rally around the idea that their company is losing its headquarters and name?  How does a United employee get excited about seeing his proud airline re-badged in the image of Continental?   A new name would have evoked some rebellion but it would have sent a message about this being a marriage of equals and I think employees and customers might have been vocal about the change but I also think they would have come to accept it relatively quick. . . especially if the new name was a good one that evoked something real. 

You couldn’t introduce a name like “Acura” or “Lexus” or “Lucent”.  That’s why adopting the name of a no longer existing airline might have been better.  It would have given an instant history and acceptance to the name and, yet, signaled a new start.  There are lot of defunct names out there to rally around.  And there are a lot of possibilities when it comes to new names. 

It’s not that I don’t think that this merger will succeed.  I do think it will succeed.  I just don’t think it will go very smoothly and I don’t think people will adjust to it very easily for the next 5 or 6 years.  That leaves them at a disadvantage to Delta and American Airlines. 

The next best thing CEO Jeff Smisek could do is get that entire fleet painted in the new colors faster than anyone could believe possible.  Get those operations consolidated quickly and get the customer facing side of the company unified in appearance asap.  Get something out there that people both inside and out of the company can rally around and accept.  Get the Continental executives up to Chicago as soon as the day of the legal merger and by up to Chicago, I mean have them living there on day one, not commuting.   That’s an important overture to make to the United employees.  Similarly, embed your best Continental managers into United hubs and so that the Continental employees see their influence day to day and don’t feel abandoned. 

This merger is a long way from being done smoothly.  The two entities have to make nice with their union employees and get them to agree on a transition to one contract and none of those employees have a reason to buy into this so far.   One thing is certain:  If the employees don’t buy into this merger and cooperate, this will be a long and painful merger resulting in a huge loss of opportunity in the market place.  The synergies won’t be realized and the financial markets will voice their disapproval fairly quick, too.

Branding is more than just communicating with a customer.  It’s a united front (no pun intended) for employees to work under and without a strong brand to connect to, those employees won’t know who they’re fighting for.

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TAM / LAN: Which Alliance

August 18, 2010 on 1:00 am | In Airline News, Airlines Alliances | No Comments

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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AA, OneWorld and JFK

August 17, 2010 on 1:00 am | In Airline News, Airlines Alliances, Airports | No Comments

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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Virgins get a little closer

August 14, 2010 on 1:00 am | In Airline Fleets, Airline News, Airlines Alliances | 1 Comment

The Virgins of Sir Richard Branson are now growing a little closer together. 

Now a member of one frequent flier program can earn their miles/points on other Virgin branded flights and will soon be able to redeem miles for flights on various Virgin brands too.  The only question is why did it take this long?

Virgin Atlantic appears to be set to be the “leader” of this consortium and well it should be.  With the various Virgin brands in place around the world, one would think this kind of linkup would have been fully integrated a long time ago.   Yes, Virgin America has been leery of being too closely associated with Virgin Atlantic but I think we can be done with that silliness now.

There are some synergies going on that, I think, could not only be expanded upon but which could lead to more growth for all.  Codeshares are one thing, I say start the Virgin Alliance and get cracking on linking up to the rest of the world.  Can’t you just see the marketing?  “Do you want to be a Virgin?”

The fact that Delta is courting Virgin Blue for codeshares in Australia is proof enough that that the Virgin products are good enough but they aren’t being tied together very well.  This latest announce is a good step towards fixing that.

Sir Richard Branson has pointed out the challenges in competing on a route like DFW-London against British Airways and American Airlines, the two airlines who own that route and have done so for a long time.  He’s right.  Even when they were supposedly not cooperating, that route was “owned” by BA and AA alone.  Not only does that remain so but now the two airlines can cooperate on the route. 

But now Virgin America is going to fly to DFW.  Imagine what happens if Virgin America is able to add a few more flights to DFW from other destinations.  Suddenly, there might be enough feed for a Virgin Atlantic flight.  Especially one utilizing an A330 or 787. 

The Virgins need to cooperate and work with each other.  They’ve got a great brand to work with, especially in English speaking countries, and it’s the best choice in fighting back against the alliances.  The latest mergers and new alliance anti-trust agreements now should make it possible for the Virgins to argue on their behalf for close cooperation, something they’ve been somewhat reluctant to do for fear of anti-trust issues. 

Virgin Atlantic needs to grow, as well.  It’s time for them to push past their traditional routes and that’s going to require some different aircraft.  Sir Richard Branson’s Airbus strategy hasn’t worked well for that airline and the 747 fleet is starting to get a touch old.  4 Engines 4 Long Haul sounded great but wasn’t the way to go.  It’s time for Virgin Atlantic to start purchasing a 787/777 or A330/A350 fleet not just for economy but for flexibility. 

Flexibility in that fleet should open up some opportunities for Virgin Atlantic worldwide.

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