Pithy Ramblings On The Past 24 Days

In the 24 days since I last wrote, I have given multiple lectures, participated on a panel at the EU Forum on Transatlantic Competitiveness, prepared to present at Atlantic Southeast Airlines' Spring Leadership Conference and am working with two MIT students, Kari Hernandez and Joe Jenkins, on what I believe will be an insightful and important study on airline industry efficiencies and community access to the nation’s air transportation grid.

The worst NCAA national championship game in history ended three painful weeks made more so by my abysmal picks for the tournament.  And the Master’s golf tournament began and ended with no American at the top of the world ranking, just as no US airline can be said to be atop of the global airline industry.

With earnings and proxy season in full swing, it’s clear that most airlines are scrapping their way to respectable results even as high fuel costs depress their performance and executives continue to get paid executive salaries even at the sharp objections of unions.

And with so many union contracts still under negotiation, labor disputes continue to dog the industry, here and at airlines around the world.  I looked with hope to the pilot negotiations at Air Canada, where it appeared that the union was willing to consider less onerous restrictions on domestic flying in recognition of economic difficulties in the domestic Canadian market.  But rather than put an agreement out to vote, the union instead recalled its Chairman, doing little to strengthen the airline for the future. In response, the Centre for Pacific Aviation said it best: “That Air Canada needs something dramatic to make it sustainable is as obvious as the maple leaf on the national flag.”

I made the same suggestion in my presentation to the FAA's 35th Annual Aviation Forecast Conference.  But in doing so I often feel much like the Chairman of the Air Canada pilots union with plenty of readers who want to recall me when I look economic reality in the eye and recommend dramatic change.  One reader warns of a looming pilot shortage citing the law of supply and demand.  But that law will apply only by depressing the demand for pilots as the industry in the US will get smaller yet before it gets bigger.

At most of the US network carriers, cost structures are still too high to continue domestic flying at current levels.  And those high cost structures make it hard to justify investment in the hundreds of new narrowbodies necessary to replace fleets performing domestic flying today, particularly if today’s managers are truly serious about achieving a return on capital that actually exceeds the cost of capital.

Speaking at a CERA Conference in March, United-Continental Holdings CEO Jeff Smisek acknowledged that United-Continental, the product of the merger of United and Continental, will shrink in the U.S.  “We'll have the domestic [operations] sized solely to feed the international traffic," Smisek said.

Warring words between pilots and management have been increasing in volume in Australia too. Qantas had it relatively easy domestically once Ansett, the largely domestic carrier, was liquidated in 2002. When Virgin Blue grew to replace Ansett, Qantas responded by forming Jetstar, an airline within an airline.  But then came Tiger Airways Australia which now leads pricing in the Australian domestic market.  So legacy Qantas, with a cost structure once supported by a near monopoly in its domestic market, has now lost its competitive way.  Add to that pressure from the Middle East carriers internationally, a route system that is nothing more than a spoke to the world’s hubs is under challenge from all directions.

We can expect to hear similar noise from union halls in Germany, France, the Netherlands and the United Kingdom.  This is a region with social cost structures that look more like that of the state bureaucracy in Wisconsin than what will be needed to compete for tomorrow's global traffic.  I increasingly believe that what is being built in the Middle East will challenge the competitive integrity of each of the three global alliances.  Given that these alliances are nothing more than Band-Aid solutions to maneuver around archaic rules and regulations governing air transport, the bandages will begin to lose their adhesion one by one.  Global airlines built organically, particularly through cross-border mergers that build a brand, will begin to win the day. 

Not surprisingly, the response to the Middle East carriers from Canada, Germany, France and elsewhere has been protectionist at best. First the world wanted to open the skies.  Now that the skies are largely open for some, the talk has turned to restricting access to markets from new, innovative and vibrant competition.  I agree that the new competition should not be allowed to access cheap capital that is not available to all.  But to limit access because of presumed subsidy, cheap fuel, little or no airport costs and whatever other excuse to limit the growth of Middle East carriers is just plain wrong. Until a forensic accounting of Middle East carrier finances is available, it is all heresay to me.  Even Willie Walsh speaking at the EU Forum said he sees nothing abnormal in the numbers being reported today.  

In my mind, the US network carriers already have faced this type of competitive challenge to their domestic operations from upstart airlines with a labor cost advantage, new, more efficient aircraft and a cost structure that reflects the realities of today’s market in part by doing things like outsourcing ground services.  Why was it OK for the low cost carriers in the US to take 20 points of domestic market share away from incumbents and it is not OK for more efficient operations in other parts of the world to challenge incumbents in Europe and Canada?  Let’s not forget that one of the benefits of LCCs in the US was stimulating new demand that filled airplanes painted with new and old liveries. 

Finally, a few words on the battle between American Airlines and the global distribution systems/online travel agencies. We cannot talk about the airline ticket distribution system without mentioning the Business Travel Coalition – the advocacy group that tells the world it is all about protecting consumers when it is doing nothing more than to ensure the sustainability of its business with cash flows from the distribution duopoly.  In the past month alone, the BTC News Wire put out communications that, among other things, suggested that airlines are lying to Congress, railing against airline fees and urging consumers to write Congress in protest.

As I wrote 24 days ago,  despite the rhetoric from BTC and the constituents it represents, the coalition is doing more to protect an outdated mode of operation and stifle innovation than support a strong airline industry.  The GDS duopoly cannot move fast enough for an industry that sells “time saved” no matter how painful it is for the BTC and the online travel agencies to have the revenue tap turned off.  It’s time for the GDS to recognize they can’t support interests other than their ultimate customer – the airlines that actually do serve the air travel customer.

Much more to come.