Swelbar on Airlines: Just Thinkin’; Just Sayin’

Southwest Airlines’ Media Day – All “Green”, All of the Time

I attended Southwest Airlines’ Media Day last week.  Prior to this, I had not witnessed a “Southwest Show” personally, other than occasional Congressional testimony.  My takeaways are many, but the main one was the pride the management and the employees have in their company.  That point resonated with me in a big way. 

The theme of the day was INNOVATION.   The morning was painted “green” and focused on the investments Southwest is making in aircraft interiors, engine washing, blended winglets and other programs that have an environmentally friendly end game.  Then the program moved on to describe how Southwest is investing in new air traffic technologies as they come available - putting their own money where their mouth is.  Of course, savings in flying time saves fuel, which contributes to helping the environment.  Southwest presented itself as an industry leader in promoting this agenda.   

The afternoon began with Southwest announcing its 68^th destination, a “green” field airport serving Panama City, FL.  The innovation here was a unique financial arrangement made with St. Joe, a company that owns hundreds of thousands of acres in Northwest Florida, to backstop any losses up to agreed amounts.  Under the terms of the deal Southwest is assured of at least breaking even during the first three years of the service.   There is an environmental angle to this story as well as the new airport is among the very first LEED rated, Leadership in Energy and Environmental Design, terminal buildings in existence.

While it was grey outside, the Southwest message was innovating with green technologies.  I could only think how other airlines would be green with envy that Southwest is planning and investing in tomorrow while so many carriers are busy simply try to stay alive so that there is a tomorrow.

Another Thought on That Agreement between Southwest and St. Joe

One of the unique aspects of the deal between Southwest and St. Joe is an agreement that Southwest will not start air service within 80 miles of the new airport during the term of the agreement.  Should Southwest launch service at an airport that is between 80 miles and 120 miles away from Panama City, the terms of the agreement can be renegotiated.

I think the 80/120 mile bands accurately define the primary and secondary catchment areas around individual airports.  Service at one location impacts service at another when airports are located within a reasonable driving distance.  If one airport in a catchment area has lower fares, then it may prove to be the airport of choice for more air travelers. If a passenger chooses the lower fare rather than the closer airport, then that passenger is diversion within a region.  New demand is not created; rather a region’s demand is being accommodated by another airport with attributes the customer finds more appealing.

Herein lies the rub:  How many airports do we really need?  By my count, there are 451 airports receiving commercial air service.  100 of these accounts for 81 percent of all commercial air service seats.  200 of these (44 percent of the total) comprise 97 percent of all domestic origin and destination traffic.

Stated another way, should 56 percent of the airports – those that account for only 3 percent of US domestic traffic -- really be competing for funds that are needed at more congested airports?  The more congested airports lie in the nation’s population centers.  This is where air service providers need to be, not in Hays, KS or Joplin, MO or other points on Transportation Committee Chairman Jim Oberstar’s map.

oneWorld and Immunity

Where to start?  I just love it when regulatory authorities point to individual nonstop routes when evaluating commercial combinations ignoring the network architecture that describes the airline industry in 2009 versus 1969.  They cite fears about consumers being gouged.  But when exactly in the past 30+years has the airline consumer really been gouged?  

For the first nine months of 2009, passenger revenue on transatlantic routes for US carriers is down nearly 24 percent.  On those routes, passenger yield, or the amount of revenue the air travel customer pays per mile, is down 20.5 percent.  According to the Air Transport Association, to date, US carriers are earning 10.77 cents per mile -- only modestly more than the 10.50 cents the US carriers earned per mile in 1997.  And that’s not adjusting for inflation.  No competition?

Now Brussels is apparently stating concerns that American Airlines and British Airways, with their market power at London Heathrow, would raise first and business class fares if granted immunity to operate a Joint Business Agreement.  Well, I sure as hell hope that is the case because, without some increases in the price of premium travel, many of the iconic names in the sky today will land in the airline graveyard.  A monopoly in an Open Skies regime?  Sounds to me like Virgin Air Chief Branson and the Fear Mongers are trying to take a page out of the old playbook to take away slots from the incumbents.  Because that, after all, is the way it has always been done.  Money for nothin', slots for free. 

My bet is if first and business class fares were to get too high on BA/AA, the big winner would be Branson and his Virgin Atlantic as he is positioned in every major US gateway offering service to London Heathrow.  No one else has the same ability to impose discipline on the fares charged by two carriers than he does.  Or maybe he would be just as happy to raise Virgin’s fares too.  But, no, instead he will have us all believe that his sole concern is the customer and there is nothing mercenary in his opposition.  Just sayin’.

And before I leave this one, let us not forget that it was these first and business class fares and full Y fares that drove revenues (and helped keep wage rates high) in the past.  Now no meaningful yield premium exists in the US domestic market.  And we all know that the rapid deflation in first and business class revenue has been a major contributor to the global industry’s loss of $80 billion in revenue.  Yet certain US airline labor unions oppose the transaction-based on consumer issues?   

Third Quarter Earnings Calls

Given my travel schedule, I  did not get to listen to as many earnings calls as I normally do - that is why they have transcripts.  That said, was there a major theme?  We have said ad nausea that any recovery will be uneven – for carriers and geographies.  I did not read/hear much about a specific recovery, just that the worst may be behind us.  And I am encouraged by the good signal in the freight sector.  But if that’s a leading indicator, is the passenger sector recovery still 6-9 months away?  After all, it was nearly 9 months prior to the recession that plummeting traffic and revenues in the freight sector served as a warning.

By now,and unless you have not read a thing on the airline industry the past few years, there is little need to talk about revenue or rehash the direction of the price of oil or try to predict when a macroeconomic recovery might begin.  But what did catch my attention during the earnings season was the reference to items “below the line,” namely interest income and interest expense.  Think of all of the borrowing that has taken place at relatively high interest rates.  Net interest expense is going to take on a more important meaning.

With that said, it is time to perform a calculation that we should have been making for some time:  CASM including net interest expense and excluding fuel and transport related expenses. Just thinkin’. 

Concluding Thoughts

I am thinking I am ready to put 2009 in the books if for no other reason that the industry would lose less if the year were only 10 months.  What is there to say about the various happenings in the industry that hasn’t been said before?  So many recent events (labor squabbles, immunized alliances, failure to pass a FAA reauthorization bill, a passenger bill of rights, and how much liquidity is sufficient, to name a few) are cyclical reruns.  These are not long-term changes but rather predictable events based on history and the direction of the wind.

I am thinking it will be fun to see this industry finally recover from this economic malaise.  I am thinking that 2010 will be a lens through which we will be able to begin to evaluate which airlines have made the right moves in remaking themselves and which carriers have not.  Finally, I am thinking that nothing has really changed other than that a new administration is in place and some surface transactions transpired that hold promise only in theory.

If we are going to charge fees, when are we going to charge for the convenience of carry on?  Just sayin’.

After all, there are still two months before I can close out 2009.

Boo! And Happy Halloween.