Olympic, Alitalia, American and the Wings Club

And we thought the last 10 days of news regarding financial institutions was interesting. In this industry we have legacy flag carriers dying on many continents. We have continued, and even aggressive, consolidation activity in Europe. In the US we have Delta and Northwest pointing to a date before year end to complete their deal. All that remains a constant, it seems, is the Allied Pilots Association creating press releases that ignore the realities of the world to virtually everyone except Lou Dobbs. But before we go there………

Today, Greece finally announced that it would shut down Olympic Airlines and start anew. The Greek flag carrier has only been going through gyrations of Olympic-sized restructuring efforts since I began to study the industry. Nearly 30 years later, its legacy carcass is finally put to rest.

All the while, the investor group that has been assembled in Italy to rescue Alitalia has given certain unions that have not signed on to their business plan until Thursday to do so. Today, a small union caused the carrier to cancel flights as it struck. The bankruptcy laws in Europe are different than in the US and honestly, they are the kind that should be adopted here. If the investor group were to walk away, there is a high probability that Alitalia could be liquidated. Not that Rome is burning, but maybe a “Flying Pig" Roast is in the offing.

Whereas saving Alitalia has become a front-burner issue for newly elected Prime Minister, Silvio Berlusconi, Rome will not burn; Milan will not burn; and all other markets in Italy will not burn if flag carrier Alitalia does liquidate. The world really will not miss Alitalia. Just like the hub closures that have occurred in the US over the years, replacement capacity will be sure to find the market opportunities that are presented. Lufthansa and Air France and others have already identified markets where they will deploy capacity to address the void left by Alitalia should it exit the space.

So, two more carriers in Europe, each once proud flag carriers, are close to succumbing to the high cost of jet fuel, a slowing economy, a strengthening of the dollar, hyper-competition for traffic flows over European hubs/gateways and high intrinsic cost structures that simply cannot be supported.

Now we turn our attention to the US. Similar pressures are forcing its carriers to engage in gut-wrenching decisions of resizing networks in order to adapt to the new economic order. Leave it to the Allied Pilots Association to cause most interested observers of this industry to scratch our heads yet again. Not only did APA’s President write to the CEO’s of British Airways, Iberia, Finnair and Royal Jordanian advising them not to enter into an immunized alliance structure with American Airlines, they also wrote to the US Government urging them to postpone their review of the application.

When all other carriers, including Southwest, are actively seeking new revenue sources that can only work to bolster the bottom line, the APA continues to act in the most destructive of ways. The revenue sources its company is seeking to participate in are those carried by American’s competitors today. To ignore them only initiates American's walk down the path of Olympic, Alitalia, Sabena, and the many US carriers that have ultimately succumbed to the same fate.

But only APA’s membership can decide if they are being led for the better or ultimately to their detriment. I cannot answer that.

Finally, James Hogan, the Chief Executive of Ethiad, spoke to the Wings Club in New York about a 'New Wave' in Global Aviation. If anyone does not believe for a minute that this “new wave” coming from Dubai, Doha and Abu Dhabi will challenge the European partners of the US carriers in a big way, then you are just not reading the tea leaves.

There are traffic flows that are critical for American and British Airways to participate in that require competitive strength. There are possibilities for Iberia that do not exist today. Today, each of the carriers have a strong position in some markets. Absent a relationship similar to that of STAR and SkyTeam, oneworld’s global market position will only continue to erode and will result in less and less flying for US pilots working under the American Airlines’ seniority list.

Just look at the loss of legacy carrier employment in the US today. American has not suffered the half of what United, US Airways and others have suffered. There is no growth at home and that is precisely why APA’s actions of today just simply ignore the evolution of the global industry and the forces of a global economy. Tomorrow’s world is not about Abilene, it is about Asia. It is not about narrowbodies to Eugene, it is about widebodies to Europe. And it sure as hell is not about Midland/Odessa, it is about the Middle East.

It is also not about 12,000 American pilots that Captain Hill states he represents, it is about the other 65,000+ proud employees of American Airlines.

Thank god for Lee Moak and his counterparts at Northwest. At least they recognized that changes were needed to compete in tomorrow's marketplace.

April 15, 2008: A Day to Remember or a Day to Forget?

End the speculation. We can now begin to debate the facts surrounding the Delta-Northwest combination. I must say that I expected to see significant changes from the deal that wasn't. What appears unresolved today is not much different than what was unresolved yesterday. As this day closes, I am an industry observer that is pleased to see a consolidation round begin in earnest.

Over the coming days, weeks and months we will be hearing about how the sky is falling. I remain steadfast that consolidation is in the best interest of all US airline industry stakeholders in the long run at this juncture. For some, consolidation through merger and acquisition activity means that the sky is falling. For me this type of consolidation is much better than consolidation through liquidation. In that case, airlines are falling from the sky and dislocations are forever.

Over the coming days much will be written. I will write. In any number of conversations I had today, the issue of labor risk; technology risk; and any other risk that could be raised as standing in the way of a successful combination of Delta and Northwest required addressing. And oil, the number one catalyst (read risk) behind the discussion of consolidation traded at levels approaching $114 per barrel of crude. Assuming that the crack spread is similar to last week’s level, then the "in the wing" price for the industry approached $145 per barrel today.

All of us really do need to stop talking about oil in a per barrel of crude denomination. We have to remember to add the crack spread to the cost of a barrel of crude. Me included. John Heimlich, the Chief Economist at the Air Transport Association has made some additions to his presentation on oil and its impact on the industry. Read it as it provides great perspective and why we find the US industry in its current position.

There Was Other News

We cannot have a day with news of promise in the US without a story on the “Flying Pig”: Alitalia. Reuters reported on the ongoing saga and how, and why, newly elected Prime Minister Berlusconi vows to keep Alitalia flying. The article reports, “Alitalia's ready cash is shrinking by about 3 million euros a day and now has funds left only for the immediate future -- a question of weeks or at most a couple of months, observers say”. The article goes on to say, “IATA, the airline industry association, has told Alitalia it must provide guarantees to be able to stay in IATA's system to settle ticket purchases if it were to go into administration”. Time is a tickin’ in Milan.

And finally, as the day really does come to a close, I sit and watch Neil Cavuto interview Captain Sam Mayer representing the Allied Pilots Association regarding their march today on American Airlines’ largest customers and institutional investors. As I have written all too often, this situation of labor suggesting that they join with customers to force American (or the industry) to address internal issues is reckless and has a higher probability of backfiring than benefiting any one stakeholder at American Airlines (or any other carrier). This is about getting a contract. I just wonder if APA told these valued customers and investors about the magnitude of the ask in their proposal and that they claim that only minimal fare increases are necessary to fund their ask. Best I know, fare increases are what customers like to hear. I doubt it.

And Frontier Receives Notice of Delisting. This story for me truly underscores the fragility of the industry today and why liquidity is king. An interesting day indeed.

One step forward for some and steps back for others. But we will get there someway, somehow.

More to come.

“A Flying Pig”

Eric Reguly of the globeandmail.com writes a cutting and provocative piece on the situation at Alitalia. I have been looking for an excuse to write about the Alitalia story as it provides a bit of a reflection of US airline industry tendencies. Particularly when politics and labor stand in the way of economic forces that demand change. Fighting an industry’s evolution seems to ultimately result in the failure of the very entity the entrenched believe somehow will flourish in its status quo state.

Whatever date will decide Alitalia’s fate is nearing. Mr. Reguly writes: “Alitalia, with some 18,000 employees (far too many) and 174 aircraft (far too old and fuel inefficient), has been a flying pig for as long as anyone can remember. It was plastered with bandages when radical surgery was required. Between 1999 and 2005, it lost €2.6-billion. In 2002, it was kept alive only by the emergency injection of €1.4-billion from the government. The bleeding still continued. The airline lost €605-million in 2006 and another €364-million last year. The politically motivated strategy of flying from two hubs - Milan's white-elephant Malpensa airport and Rome's Fiumicino - unnecessarily deepened the losses. Alitalia is too small for a two-hub operation (to its credit, the airline was slowly downgrading Malpensa in favour of Fiumicino)”.

The US airline industry is fast approaching a date where something is going to have to give as well with high oil and an economy in recession on a collision course. Whether consolidation or liquidation, the next 12-18 months promises to be the most challenging period in the industry’s deregulated life cycle. The barriers to exit that have historically existed will be challenged. My guess is that they will not provide the same safety net that has been experienced in the past.

Today, Alitalia is Europe’s sixth largest carrier in terms of revenue. The Big 3 in Europe (Air France/KLM, Lufthansa/Swiss and British Airways) are beginning to dwarf numbers 4-6 in terms of size. It would certainly seem that for Alitalia, being part of the world’s largest airline group is its best case scenario. But when parochial interests get in the way, somehow it becomes an all or nothing game rather than to preserve as much of the legacy as possible.

The US airline industry seems poised to experience some similar scenarios. Maybe the best path for the US is consolidation through liquidation? A path of lesser resistance? Some will say to me in various ways: Swelbar, this will only happen when pigs fly. What we are seeing in Altialia is that pigs can’t stay airborne forever – even in Open Skies.

Pigs don’t fly and neither will an industry that refuses to adapt.