Ringing Out the Old, Ringing In the New. NOT

It is the last day of 2007, and as I prepare to write my final blog post for the year, I want to say something positive about where I see the industry – particularly the US industry. There are plenty of encouraging things happening in Latin America, Europe, Asia and the Middle East with carriers like LAN, Air France/KLM/Alitalia, Lufthansa/Swiss, Singapore, Cathay and the Chinese airlines. The global marketplace is where it is happening

In the US, however, we seem stuck with the old and little hope for new – with only a few exceptions.

While CEOs are speaking to the structural deficiencies plaguing the US airline industry, there is little “public” effort being exerted to address those deficiencies. I am encouraged at what seems to be the beginnings of US carriers like United and American, who have been sitting on the sidelines for too long, again investing in their product. But my excitement is muted by the endless news accounts of poor customer service and flight delays that work only to chase travelers away.

There should be a connection between product and customer and revenue – right? Gary Kelly at Southwest sure seems to be focused on product; the one word that never leaves the LUV vernacular is “customer.” Many are questioning Southwest’s recent actions to expand its customer base. Not me. This is a great story unfolding– the low cost leader and low fare provider now openly discussing its need to change. This means a need to find new revenue and a need to make its product attractive to a wider range of customers. And they are actually doing something about it.

I encourage readers here to visit the Dallas Morning News’ blog click here and read Terry Maxon’s take on the top 10 aviation issues in 2007, and the Air Traveler’s Association’s Top 10 issues for 2008 click here. Finally, click here to read an interview with Herb Kelleher, Southwest Airline’s departing Chairman, in the Southwest Economy published by the Federal Reserve Bank of Dallas. Kelleher’s comments on globalization are particularly interesting.

For another barometer of how the financial markets view the US airline industry, consider select carrier’s stock price performance over the course of this past year. As of December 28, 2007, US Airways, jetBlue and American share prices have dropped by more than 50 percent; Continental, AirTran and Alaska shares have all declined between 30-50 percent; and Frontier, Southwest and United shares have fallen between 20-30 percent.

In the six months after coming out of bankruptcy, Northwest shares are down 36 percent, while Delta’s shares fell 26 percent.

Suffice it to say that I’m joined by many other industry watchers in failing to find many positives in the US airline industry space. Let’s hope that in 2008, the US industry makes some positive steps toward reclaiming a leadership role in this critical sector.

2007: Looking Back.

1. Crowded Skies: This was the (another) year of air traffic congestion and its troubling impact on airlines. Authorities have now enacted limits on air traffic in both New York and Chicago – an approach that can only be viewed as a Band-Aid solution to a much more serious problem. It’s time for Washington to get serious.

2. Consolidation: US Airways’ “hostile” play for Delta took talk of industry consolidation from a murmur to a roar. It was the right idea for the right reasons, only to again be thwarted by labor, the regulators and the legislators. At what point are the naysayers going to accept the fact that the current industry structure does not serve the best interests of the airlines, employees the transportation infrastructure or any stakeholder for that matter?

3. Fuel: The eye-popping price of fuel underscores the ongoing need for the industry to identify ways to cut fixed costs, despite the fact that most of the low-hanging fruit is already plucked. And that’s before we even begin to calculate the price tag of anticipated environmental mandates on an industry already groaning from the weight of taxes and fees.

4. Labor Voice: Lee Moak, Chairman of the Delta ALPA Master Executive Council, emerged as a new voice in the industry labor front with his nod to the need for structural change in the industry. Because he combined straight talk with a serious commitment to representing his pilot members when faced with an unwelcome advance to Delta from Pardus Capital, Mr. Moak demonstrated real leadership by suggesting that he will play a significant role in structuring any deal that impacts his constituents when his carrier is put in play.

5. Foreign Capital: Lufthansa’s investment in jetBlue appears pretty benign on the surface. But Lufthansa, with this investment, has put its money behind carriers housed in two of the most important airport markets in the world – jetBlue at JFK and bmi British Midland at LHR. At the end of the day, this business is nothing more than a real estate game connected by sexy things with wings. No real estate, no access. Ultimately, foreign capital in US carriers only ensures that the weak market structure surrounding the US industry remains intact. These investments are no different than the good money chasing bad business plans that allowed US carriers to fund their exits from bankruptcy.

6. Staffing Woes: The Northwest Airlines system breakdown that followed its emergence from bankruptcy was the fault of productivity changes that were too fast, too aggressive, and resulted in a staff shortage that wreaked havoc on its flight schedule. The only good news was the negotiation between ALPA and the company that provided incentives for flight crews as a way to man the planes. This may be one of brightest spots in the labor arena in 2007.

7. Capacity Chokehold: The sharp slowdown in capacity deployed by the low cost and regional sectors offers important perspective for regulators as consolidation talk continues. Too bad Congress remains convinced that every congressional district is entitled to air service, no matter whether the industry can fly all of these routes profitably.

8. Labor Leading with its Chin: The extraordinary opening proposal made by the Allied Pilots Association as it begins its Section 6 negotiations with American Airlines sought pay increases some estimate at more than 50 percent -- and that is before we even try to incorporate the headcount increases with the remainder of its initial demands. While the aggressive proposal underscores the deteriorating relationship between labor and management at the airline – and in the industry overall -- the question remains whether the APA’s gambit will be a bellwether for the industry or the first in a long line of mediation cases making their way to a Presidential Emergency Board.

9. Capital Connections: In an administration that has not had much to cheer, the US Department of Transportation has served the airline industry well under the leadership of Assistant Secretary’s, Andy Steinberg and Jeff Shane. Unfortunately, these two soldiers of change will be moving on this year at a time when their skill and expertise will be sorely needed.

10. Detroit’s Deal: The agreement forged between the United Auto Workers and the Big Three automakers click here, illustrates the many similarities between the auto and airline industries. Will we see these kind of talks at the airlines? No sign of it yet. Leaders please step forward.

11. Integration Frustration: That US Airways' East pilots believe a new, independent union will right the wrongs of an arbitrator’s decision and do better by pilots than ALPA, demonstrates the triumph of hope over experience. Experience shows us that there is no entitlement clause that applies in these situations. Under globablization, there will be fewer and fewer entitlements left in an increasingly competitive marketplace. But there is opportunity, and the US Airways' pilots should be working together to figure out how to make their airline stronger, and their members better off, rather than fight among themselves.

A Toast to the Customer

Some readers may interpret my views as unrealistic – that I’m looking for some incarnation of Air Nirvana without any of the usual industry friction – but neither is true. I know that structural change will inevitably lead to friction. And some of that friction will come as part of the reality that the airline industry will look very different in a few years, with some carriers no longer in the picture.

My real fear is not the loss of a carrier or carriers – it is the complete loss of customer confidence in an industry that relies on its reputation. Both labor and management should stop pointing fingers regarding customer issues and instead focus energy there first.

Richard Branson Gets the Final Word Here in 2007

As Virgin Atlantic faces a potential job action by its flight attendants, Richard Branson, the carrier’s flamboyant leader writes the following letter to his employees click here. The closing paragraphs state very clearly where I think we are headed and the words that will need to be spoken.

“There comes a time in any negotiation when a good management team has to draw a line in the sand and I agree with them that time has come. To go further would result in unacceptable risks and would set a dangerous precedent to the company as a whole. It would be irresponsible of our management and they, rightly, are not going to take that risk.

For some of you more pay than Virgin Atlantic can afford may be critical to your lifestyle and if that is the case you should consider working elsewhere. For the vast majority of you, the pay rise you were offered was the best in the industry this year, which is why the union strongly recommended it. I’d urge you not to put at risk our ability to solve this dispute by messing up our customers’ travel plans.

We all want to resolve this situation and give the best pay increase that the business can afford. The best way to achieve this is by keeping all of our planes flying and delivering what we do best - making sure that all of our passengers leave with a smile”.

Thank you for making Swelblog.com a read for you. Much more to come as the final chapters are a long way from written.