Time to Rethink the Virtuous Circle

You know how it goes in the U.S. airline industry: improved economic conditions lead to increased demand for air travel which leads airlines to grow and increase employment.  And so the virtuous circle goes – ‘round and ‘round.  At various times in an economic cycle certain stakeholders tend to do better than others – usually at other stakeholders’ expense.  Front and center in the airline industry rent sharing game are labor and management.

Dan Reed, writing in the USA Today this week, reminded us of the numerous labor and management conflicts out there.  That much is true. But it was the subtitle that gave me pause:  “Unions want pay, benefits restored,” it said.  Not improved – restored.  Nice dream, but it’s just that: The restoration of wages and benefits to 2001 levels is a dream.  Reed quotes long-time industry observer Mike Boyd saying labor has to walk away with something.  Boyd says: “Labor has been on hold for the last seven years.”

Boyd is absolutely right.  Labor has to walk away with something – and they will.  However the airline industry is no position to write the check that would restore wages and benefits to pre-restructuring levels.  Furthermore, the shape and size of the industry today requires that certain work provisions contained in collective bargaining agreements need to be changed in return for improved wages, benefits and working conditions.  This necessary trade gets lost in the mainstream discussion.

Industry Eyes on American

This past week, three of the employee groups represented by the Transport Workers Union (TWU) at American voted on tentative agreements reached months ago.  Two of the three groups rejected the terms and conditions bargained for in those tentative agreements.  Initial rumblings cite provisions contained in the tentative agreements deemed “concessionary.”  Yes in “non-crisis” collective bargaining you trade one thing for another.

I, however, can make a case that the agreements reached were too rich in favor of the TWU.  American resides in a most fragile position in this round of negotiations because its labor costs already are the highest in the industry, even as it goes first among the legacy carriers to negotiate new contracts following restructuring..  The TWU members walked away from structural pay increases, leaving money on the table many in the investment community might have argued against offering in American’s financial position. And I’m among those critics. And while the company would have got increased productivity in certain areas of the contract in return, any savings generated from work rule relaxation is only as good as it’s ability to implement change.

One group that rejected the tentative agreement was the Mechanics and Related employees – a group that has worked closely with the company over the past decade to improve operations and attract third-party work. In part because of those efforts, AA outsources less maintenance work than any legacy carrier. 

Now look ahead.  Can American ignore that most of their competition is paying far less similar services? And without better productivity, can American bring in enough work to justify the current headcount within the Mechanics and Related group?

Just as with the pilots union at American, maybe some in Maintenance really believe that the company can pay labor costs that far exceed the company’s ability to pay.  Everyone points to the industry’s single quarter of terrific profits and suggest – somehow – that a secular trend is underway.  Has anybody been paying attention to the stock market this week?  The market which serves as the barometer guaging expectations for tomorrow?   Or maybe the mechanics are just taking an old trick out of the hat that was popular in the late 1990’s and in 2000 and 2001 when everyone rejected the first agreement assuming that a return to mediation would pressure the company to enrich the agreement, too often without any expectation of giveback.

If that is what happens this time around at American or at any airline for that matter, then the management team making those agreements have no one to fault but themselves.  Overpaying rent has been tried in the past and while it may help mollify labor for the short-term, it does nothing to promote the long-term sustainability of the agreement. Labor, too, is complicit in this short-sightedness, primarily because unions are not structured to manage the responsibility they possess. Unions are highly simple political organizations that too often have only have a short-term view, with leaders looking only to the next contract negotiation and the next leadership election.  

In his 2010 State of the Air Transport Industry speech, IATA Director General Giovanni Bisignani said, “Labor, out of touch with reality, is the next risk. We cannot pay salary increases with our $47 billion in losses. Pilots and crew must come down to earth and strikes at this time are shortsighted nonsense. Labor needs to stop picketing and cooperate.”

Concluding Thoughts

I am not naïve enough to suggest cooperation is a possibility everywhere.  It is not.  For both labor and management it will be tough to manage expectations set by those with short-term mindsets.  And those expectations collide with the need to manage for the long term.

Yesterday’s virtuous circle was largely predicated on plentiful and dumb capital willing to chase failing companies, jet fuel that was roughly one-third the cost it is today, and a general view that the only way a commodity industry could increase revenue was to add capacity.

In the U.S., we should be modeling a better path. Today’s virtuous circle in the U.S. is less about growth and more about making the kind of change and creating a model that will maintain and marginally enhance an airline’s ability to compete globally.

Meanderings on US Open Golf and the US Airline Industry

I started writing this on Thursday as the 109^th US Open golf championship got underway on the vaunted Black Course at Bethpage State Park on New York’s Long Island. At 10:17am on Day 1, play was suspended due to heavy rains that added to the overnight rain resulting in standing water on numerous parts of the course.

As the tournament played out, the weather - and what side of the draw you were on - was as much the story as the winner. For golf fans, the US Open annually represents a most stern test designed by the United States Golf Association to identify the world’s best player.

The US Open is as much a test of mental strength as it is physical skill. There is not one player that would enjoy being subjected to US Open conditions week in and week out. Well, maybe one, and I am not sure he enjoyed this year’s version either.

It seems as if the US airline industry has been playing under this year’s US Open conditions every week since October 2000. But the airline industry does not get play suspended when conditions are less than ideal. Rather, the industry has been forced to adapt to one economic and geopolitical event after another. And there is no end in sight.

There have been a number of good stories over the past few weeks that have looked at individual carrier’s fates. During that time, I have been on a speaking tour where it is clear that, whatever the audience, the question of airlines’ survival is top of mind.

And congratulations to Lucas Glover on winning his first golf major.

Meanwhile, I have just completed updating the 2008 analysis in the MIT Airline Data Project that puts a klieg light into the cost side of the US airline world. At the same time, I got a glimpse of the new revenue report from the Air Transport Association and together, the picture for the industry is pretty ugly.

The ATA report reminds me of the impossible lie David Duval encountered Monday morning on his first shot after Sunday’s suspension due to darkness that led to an undeserved triple bogey.

While the US airline industry has endured much bad luck over the past eight years, it, like Duval, has continued to persevere and take advantage of what the course offers. But in an Open, it is next to impossible to win after making such a score on an individual hole. Fight as he did, Duval ultimately finished two shots out of what would have been a most unlikely – and welcome - win. The same just may be true for some carriers out there that may be near the point where one more misstep – or one more bad bounce - will eliminate any chance of competing as well.

For long-time readers, you know I love the game of golf because of what it exemplifies and what it represents. You can find me glued to a television during any of the season’s four majors. The sadistic side of me appreciates the course set up of US Open’s as it challenges the world’s best players in ways that weekly tour stops rarely inflict.

But you always know that it is only a few days each year that golfers face this brutal test. The US airline industry has endured the unthinkable since late 2000. With rare exception, there is not one year that can be described as a whole, but rather a tale of two halves. Even the year 2000 was that way when the first half had all stars aligned and the second half was the beginning of a revenue decline that still continues.

As fuel marched from $90 per barrel in early 2008 to $147 on July 11, unit revenues were on the rise. Ancillary fees became a part the industry vernacular. Then in late summer of that year, as fuel prices dropped nearly as fast as they rose, unit revenues began to freefall. And they continue.

The Airline Data Project demonstrates that passenger revenue for the airlines covered increased $3.8 billion in 2008 while fuel expenses increased some $11 billion. Year-to-date passenger revenue in 2009 is down some 20 percent thus far, while capacity has dropped 8 percent.

Generally, I care a hell of a lot less about the relationship of traffic to capacity as I do about the relationship of revenue to capacity. The trends defy the usual rule of thumb that a drop in capacity leads to pricing traction. That simply is not happening. And that tells me that this industry should be even smaller than it now is.

The Airline Data Project also shows that legacy carrier capacity is now roughly equivalent to what it was in 1997. But the combined capacity of legacy carriers and “low cost” carriers is 15 percent larger than it was in 1997, and that excludes the affiliated regional carriers like Republic, SkyWest, Pinnacle et al and includes Alaska, Hawaiian and Midwest Airlines. So the industry is not smaller – it is bigger. The legacy carriers simply have a smaller slice of the pie.

The MIT data will show that the legacy carriers spent more than $20 billion in 2008 on their contracts with regional partners – an expense largely contained in transport-related expenses. American spends the least on regional flying, while Delta/Northwest spends double plus 20 percent more than number two on the list -- United. What does this tell me? We have to cut back. We have to cut back!

At least the US Open sets strict boundaries on how many players qualify for a national championship. The same is not true for the US airline industry. As I say often, if you have a dollar, have an aircraft, and find an airport with security, you too can have an airline. There’s a lesson in that data. It’s time for limits on entry unless and until there is real change to the industry’s business model and structure. I am no protectionist, but anyone who challenges – or even suggests– that a lack of completion exists in the US airline industry fails to acknowledge the bottom line.

Unlike the US Open, the open market in the US airline industry does not identify the best. Rather it just keeps expanding the field until someone less than the best is crowned the best because they are younger - if only on a quarterly basis based on our fixation with results. Labor leaders should look at seniority as the only real weapon the upstarts have to whipsaw you. Management must make the best business case it can to stop the madness of continually having to average down labor costs as the only controllable means to manage overall costs.

The US airline industry, like the US Open, should be an examination of competition between the best. Instead it is about luck – and timing. It is about playing the “river.” I don’t know which airlines will survive. But I do care about the integrity of the field – something that is fundamental to the rules of golf. Like in the US Open, the field should be the best. Many are fit but few can deliver the full range of consumer service that established airlines offer.

Lucas Glover, David Duval, Ross Fisher and Soren Hansen earned finishes that may get them named to a Ryder Cup team. In that event, they’ll be required to play team events like 4-ball and Foursomes.

Too bad that, in the US, too many politicians view team events like consolidation and alliances as a threat to competition and the sure path to domination. Who has won the majority of the last two decades Ryder Cup matches? Not the US. And the same will be true of survivors in the global airline industry if we do not change our thinking about global competition.

STEEEEEE….rike 1

It is September and pennant races are in full stride. The “wild cards” are up for grabs too as Major League Baseball works its way toward the playoffs.

In what is starting to be a rather ho-hum event in the aerospace/defense world: the International Association of Machinists and Aerospace Workers (IAMAW) have decided to strike the Boeing Company for the second time in three years. Is this a “yawn moment” or a precursor of things to come as the airline industry begins in earnest the renegotiation of concessionary contracts?

I am thinking this a precursor of things to come. Not quite sure if it is a yawn just yet. Whereas the aerospace/defense industry is quite different than the airline industry, there are similarities. The similarities begin with the simple fact that the manufacturers are a most important stakeholder in the virtuous circle of airline industry success; or failure as they represent an important cost element to the industry. For certain airline class and crafts of employees, a Boeing contract represents a trend.

Boeing is outsourcing. The airline industry is outsourcing. The world is outsourcing.

As J. Lynn Lunsford reports in this morning’s Wall Street Journal: “Resentment over outsourcing has been festering since the mid-1990s, when Boeing began a sweeping campaign to modernize its factories. The company has relied increasingly on contractors across the world to build larger and larger sections of its airplanes. By adopting many of the methods pioneered by the automobile industry, Boeing has been able to reduce the time it takes to build some of its jets by 50%.”

Resentment over Outsourcing - Airlines Too

Beginning in the mid 1990s, US airline industry labor has been festering over outsourcing too. First it was pilots and scope clause restrictions (1995 – 2001) that govern who could fly the first regional jets (50 seats and under for the most part). Those airlines with the fewest limitations placed large numbers of the small jets into service and garnered a “first-mover” advantage to be sure. There should be no mistake as to why US Airways was among the first to file for bankruptcy protection as the carrier had the most restrictive scope clause language and their network was attacked by those with freedom to overfly it. Finally, by 2001, relaxation of the scope limitations, allowing this size jet to fly, had largely been won in return for unaffordable fixed price contracts. Some mainline pilot agreements permitted the flying of 70-seat jets; others did not.

During the restructuring round of negotiations, scope clause limitations on the flying of 70-seat jets by regional partners were significantly relaxed. During that same period, the industry turned to outsourcing more of its heavy maintenance work as carriers looked to find ways to trim costs ala Southwest Airlines that has historically outsourced its heavy maintenance. Well here we go again. I see a pattern. And I do not like what I see because it just simply ignores fundamental issues.

Whereas the Boeing business/economic climate has been quite good and has produced significant profits of late, let’s not forget that the order book is full. Some say until 2017 and some say 2020. Whatever it is, profits can be forecast as the revenue stream can be calculated with some measure of certainty. Adjustments will need to be made to account for pre-strike delivery problems. And there may be some adjustments to be made for strike-related delays. But if the supply chain has been the issue, doesn’t a strike possibly allow certain suppliers to “catch up”? No matter, with the revenue stream reasonably certain it becomes a cost issue just like it did for the airline industry beginning in 2001.

Labor Arbitrage

This is what is at play for each Boeing and the US airline industry, isn’t it? As I turned to the financial dictionary online for a definition of labor arbitrage, this is what I found. Outsourcing: A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally.

Notes:
Outsourcing is an effective cost-saving strategy when used properly. It is sometimes more affordable to purchase a good from companies with comparative advantages than it is to produce the good internally. An example of a manufacturing company outsourcing would be Dell buying some of its computer components from another manufacturer in order to save on production costs. Alternatively, businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant.

Damn, that outsourcing word again.

Where is the Crux of the Problem? Or Begin to Really Think About It

This is what few want to explore it seems. This round of negotiations simply needs to be a continuation of the transition/transformation period for the US airline industry and the contractual relationships with its labor force. I am not going to perfume the pig here. This is about a different set of wages and rules for the new workers that will comprise tomorrow’s industry that will be increasingly impacted by the ebbs and flows of global trade. The airline and aerospace industries can do better than the automobile and steel industries who acted much too late to protect the many good-paying jobs that remain.

And yes, there does need to be something in it for those that make up the industry today as well. The crux of the problem for labor as I see it is a lack of appreciation of the delicate balance between pay and productivity. Boeing is looking to balance an economic offer with flexibility if the business cycle requires it. Without recognition that balancing the formula is critical, the industry, and individual carriers, will continue what has become known as the "September Swoon" and miss the playoffs altogether. The “spiral down” - read job loss - will continue, strike or no strike. Markets will continue to be successful in finding the most efficient provider - they always are.

The simple question: why are job losses among the legacy US carriers approaching 200,000?

Or maybe the real crux of the problem is the seniority system. Ever wonder if tomorrow’s workers will really want such a system because it stands in the way an individual’s right to participate in the free market?

So I do think we will see strike 2. And probably a high, hard one that produces a swing and a miss that will cost someone the opportunity to continue on in the chase for the title of World Champion.

We are going to be bringing up many issues over the next couple of months.

More to come.

Grab a Big ‘Ol Cup of Jo, and Let’s Talk Airline Service Cuts

Starbucks, Airlines and Air Service Cutbacks

This morning’s headline in the Wall Street Journal on B1 reads: Starbucks to Shut 500 More Stores, Cut Jobs. The story by Janet Adamy offers many insights as to what is plaguing the airline industry, at least from this observer’s perspective. The announced shutdowns will occur throughout the remainder of 2008 and will continue into early 2009. The 500 store closures announced yesterday are in addition to the 100 the coffee proprietor announced earlier this year. I will highlight some of the points made by Adamy in her story:

· “The pullback is a sign that the Seattle-based coffee giant is continuing to see weak sales as high gas prices and other pressures on consumer spending prompt Americans to cut back on extras.”

· “It also shows how badly the specialty-coffee business is struggling just as mainstream companies, such as fast-food giant McDonald’s Corp., are beginning to invest in it.”

· “Starbucks didn’t disclose which of its about 11,000 stores U.S. stores it will shut, but said the affected stores are spread across all major U.S. markets. About 70% of them have opened since the Fall of 2005, it said”.

· “The purpose of its rapid expansion (2,500 stores globally during the last fiscal year) was to boost sales growth and siphon traffic away from some of its stores where long lines were driving away customers. Also fueling the push was company research that showed people sometimes weren’t willing to cross the street to buy a cup of coffee.”

· Last year, as Starbuck’s sales began to soften, it became clear that the company’s expansion was cannibalizing its sales in a way that was threatening the chain’s success, as well as causing the quality at its existing locations to slip”.

The Ubiquitous Airline Industry

Adamy mentions ubiquity in her story and it absolutely applies to the US airline industry as well. You know: the seeming need to be present everywhere. As we have written here many times: presence everywhere and pricing power nowhere. Ubiquity is synonymous with fragmentation. Fragmentation best describes the US airline industry’s domestic market. [In fact, IATA suggests that fragmentation describes the construct of the global industry’s marketplace.] The US airline industry’s domestic market lies at the heart of the US airline industry’s woes. Hyper-competition has led/contributed to the non-economic prices that persist. So if fragmentation is present and structurally undermining your performance, consolidate around your strengths – right?

Based on the story about Starbucks closing stores let’s talk about the US airline industry and the planned capacity cuts that are known and those that might not be known. We have heard about some airlines either discontinuing service altogether or reducing frequencies to large markets like Ft. Lauderdale and Oakland. Will Ft. Lauderdale and Oakland passengers suffer as a result? My answer is NO as they will have other options available like Miami or on other carriers, mainly those with the outdated low cost carrier moniker, continuing to serve the market. Will Oakland customers suffer? My answer is NO as they will have access to remaining service at OAK and will have a menu of offerings available at alternatives like San Jose and San Francisco. So customers will continue to have options, and options with low cost carrier presence, just as they have before.

Just like Starbucks realizes it cannibalizes traffic with certain store openings, the US airline industry cannibalizes itself with nearly every new service in some way it seems. My numbers may be off a bit here, but hear me out. At one point I was looking at the Greenville-Spartanburg, SC (GSP) to Los Angeles market. At that time there were 100 passengers per day each way (PDEWs) in that market. Those 100 passengers had a choice of 24 nonstop flights to access the air transportation system over 15 different hubs.

So I have 24 nonstops competing for four passengers per flight. As oil skyrockets, how can I possibly raise fares enough to cover the cost with that many consumer choices in the market? Simply, you cannot. Another question should be: how many choices is too many choices for a mid-size market like GSP?

To make matters worse, it can actually be said that carriers competing in that market actually compete with themselves. Delta carries traffic in this market over each its Atlanta and Cincinnati hubs. There are a multitude of examples just like this one where consumer choices to get from A to B are much more than the market can economically support. Unfortunately, it has taken the price of oil to demonstrate that the choices provided air travel consumers over the years cannot be economically sustained in many instances. So just like Starbucks, the US airline industry will pare back choices and consolidate that demand around markets that are, or can be made, economic by consolidating traffic.

So as the Business Travel Coalition paints the landscape with scare tactics, their back of the envelope analysis tells us very little. The BTC fails to mention that in the vast majority of service reduction announcements thus far, passengers demanding service to a particular destination will still be accommodated albeit by fewer frequencies or over fewer hubs – and few will be disenfranchised from the air transportation system.

Another Question I Have: Why Is It OK for Southwest and No One Else?

You know the story. Everything Southwest does is somehow the best and always in the best interest of the consumer. Southwest, circa 1995, enters a market. Fares go down and significantly in some cases. Traffic at that airport market is stimulated. Southwest’s success in entering a market had much to do with expanding the catchment area of that airport market. So while the carrier still only serves less than 65 airport markets in the US, if one were to draw a circle equivalent to a 2-hour drive to that airport, the carrier impacts more than 90% of US domestic air travel demand.

But the question should be: how much of that demand is/was created because air travel was made affordable to some new segment of the population and how much is/was diverted from airport market(s) located within that 2-hour catchment area? It is some combination of the two. Is that stimulation or diversion? The answer is diversion.

There are many examples of airport markets that have suffered as the Southwest’s, jetBlue’s and AirTran’s and other “bottom fishers” entered markets across the US. Their lower costs at the time allowed them the “freedom” to price aggressively while exploiting the bloated cost structures at the legacy carriers that existed. The low fares worked to stimulate new demand all the while diverting traffic from smaller airports with higher prices enveloped by the catchment area. It is the sum of the two - not one or the other.

But why is it OK for Southwest to offer service at an airport and rely on the highway system to be the first leg of access to the air transportation system – all in the name of low fares?

Why is it not OK for the remainder of the industry to cutback frequencies that may result in the highway system being the first leg of access for some – in the name of preserving as much of the network architecture that has been built and can be made economically viable?

The existing network architecture has provided more than sufficient choice for air travel customers in cities of all sizes, not just the largest metro areas that have secondary airports that are the backbone of Southwest, and its LCC brethern, service.

There Is a Lesson Found In Starbucks’ Decisions That Apply

At some point Congress, BTC and others may actually realize that the industry has grossly overbuilt through the over exuberance in the use of regional jets. For many markets it means you will still not have to walk across the street to get a cup – or access in airline vernacular. For others, it will mean having to walk three blocks for a cup. But in any case, you will pay the “all in” cost of that cup. Like Starbucks, you will go for that first or even second cup. The trick for the US airline industry will be the demand for that third cup or the iced cup that lies the heart of the demand equation and the ultimate decision on how much capacity to cut is right.

More to come.

The Elastic Induced Ride to Inelasticity

I do not know what you have been doing this morning, but I have been listening to the earnings calls at AirTran Airways and United Airlines. Last week I listened to both American Airlines and Continental Airlines talk to the analysts. It is an accepted principle that volatile prices are most unsettling on commodity industries – and the US airline industry has become a commodity industry.

Beginning in late 2000, volatile prices came in the form of decreasing fares. Today, volatile prices come in the form of rising oil prices.

The initial ride down in fares resulted in the growth of the low cost carrier segment of the industry. That sector's rise occured commensurately with the shrinkage of the network legacy carrier capacity in the US domestic market. The new world of lower ticket prices forced necessary cost changes on the network carrier segment, altered the demand calculus and led many observers to conclude that high load factors demonstrated that there was no overcapacity in the market.

Ah, that elasticity of demand thing. The notion that an airline could fill every seat – but at some price that does not cover the cost -- underscores this shallow approach to the analysis of overcapacity.

Well, the rubber band is about to snap.

In a post last week,: This Week’s Conversation Will Be In Words that Start With “C”, I discussed capacity issues and a whole lot of other “C” words we’re going to be hearing more of as US airlines unveil their financial performance for the first quarter of this year. Covenants; credit card holdbacks; cash; capacity cuts; capx spending plans . . . all are being discussed as liquidity concerns are again top of mind for the industry just like they were in late 2001 and 2002. And I’m not even including consolidation. Based on the market’s embrace (or lack thereof) of the proposed Delta and Northwest merger, there are bigger and more fundamental questions to answer.

And every company has been asked how they might raise cash down the line if needed.

The unhealthy revenue environment that began to form in late 2000 is simply not capable of offsetting the daily spikes in fuel costs that began in 2004. Therefore the industry is left with difficult decisions regarding capacity reductions – a recurring theme as carriers announce additional cuts and slowdowns. Today United, keeping with its aggressive posture, announced the most aggressive capacity cuts of any carrier reporting to date. But say what you will about aggressive management actions, United’s first quarter numbers are hard to swallow.

Capacity reductions will ultimately lead to finding that demand which is inelastic. An elastic demand is one in which the change in quantity demanded due to a change in price is large. An inelastic demand is one in which the change in quantity demanded due to a change in price is small. Volatile changes in price need to be addressed/minimized for this industry to be healthy again – or at least produce that level of supply where costs can be passed on to the consumer. That is where we are headed and it is the right direction. Furthermore, I heard United make it clear on their call that unitary elasticity is not in their interest until it applies to a much smaller segment of their ridership.

Concluding Thoughts

Believe as we might, this industry is not impervious to outside influences that impact every industry. Those influences come in different ways. There will be some consumers displaced by some of these necessary pricing actions. There will be some consumers put out by the sense that they are being nickled and dimed for a change policy, a preferred seat, a second bag that consumes fuel by its weight, or even a meal. There is no free lunch as life teaches us everyday. And for the US airline industry, finally we are saying that no one is entitled to a free ride or at least a ride where the consumer does not pay for the cost of that carriage.

And I wrote this without mentioning force majeur or the need to craft a Failing Industry Doctrine.

This Week’s Conversation Will Be In Words that Start With “C”

It is Sunday afternoon and before I sit down to watch the Masters and what appears to be a five player chase for the green jacket, will the week ahead produce any eagles and birdies for the US airline industry? Or will bogeys or worse continue to dominate the headlines? Earnings season kicks off this week. And with earnings season, there will be a theme or two that will emerge as airlines talk about the business going forward.

As I ponder the week ahead, I am thinking the conversation about the business will be dominated by a lot of words that start with C. Yes CONSOLIDATION will remain top of mind. But that C word will be joined by others like: CREDIT CARD holdbacks and who might be next; COVENANT COMPLIANCE that might trigger a CREDIT CARD event; CREDIT CONDITIONS generally; CASH and more importantly, unrestricted cash; CAPITAL expenditure plans, whether aircraft or non-aircraft, and what adjustments to those plans are likely; COMPLIANCE with airworthiness directives and maintenance requirements; COMPENSATION and yes that will be executive compensation; CHAPTER and you pick the number; CAPACITY reductions and how much more can be expected or gaining more insight into plans; and CASH BURN rates are likely to be the new concern and hot topic.

Talk in oil denominated terms will likely continue. Something like: that was $20 a barrel or so ago. Assuming that Delta and Northwest finally announce something this week as is widely expected, then I am sure that changes to the deal structure will be discussed in those terms. But come to think about it, we never ever really knew what the structure of the deal that wasn’t really was. But while all the original CATALYSTS for CONSOLIDATION remain, at what point do we begin to hear that CAPITAL is emerging as the real CATALYST driving CONSOLIDATION as the industry searches for a more stable operating platform – or as capital makes it clear that a bigger platform is necessary in the new world of high oil prices for the US industry.

But if the conversation does turn to CASH BURN, then talking in oil denominated terms is right. Based on what we know about expected capacity reductions largely taking place after the peak summer season, it is important to remember that while bookings for the summer are strong, those tickets were purchased some $20 per barrel ago. So while fare increases have been put in place, only some of those increases will be realized over the coming months. Simply, the industry will be carrying those passengers throughout the summer that purchased tickets earlier in the year at fuel prices that are much higher today. This is a primary reason for citing CASH BURN and liquidity as the hot topic.

So while there are lots of interesting topics that start with C that we could write about, I am going to end with the situation at Frontier. I read a news story that had a title something like: Frontier Pointing Its Finger at First Data. Yes the credit card company may have been the catalyst that caused the filing with very little notice, but is Frontier’s filing really a surprise? It just seems to me that this underscores the fragility of the industry today at nearly every corner.

If I am a credit card company and am concerned about customers defaulting on obligations, and I have a lot of exposure to a very risky industry I am probably going to make some very hard decisions. Do I think that this chapter filing will go the way of the others we have seen thus far. No. But then again, if we have not yet seen the bottom then maybe there will finally be a capital aversion for this industry or at least for business plans that just do not make sense or offer promise of solid returns for investors. A couple of posts ago we talked about how the historical barriers to exit just might not be the safety nets that they once were.

Well I think the Frontier story is the first test of those traditional barriers to exit. And not the last.

Yet Another Prism from Swelbar to Think About US Carrier Competitiveness in the Global Airline Industry

The one thing I have definitely discovered since introducing swelblog.com is that once you write, there is no where to run and hide. Following my November talk to an ACI-NA audience in Washington DC, I penned an article that appears in the March 2008 edition of Airline Business where I discuss the competitiveness of the US airline industry in the face of increasing global competition.

The many themes that run throughout piece have been discussed over the past five months here. So on a day where there are reports that the Delta – Northwest talks have been restarted, I continue to believe that a resolution can, and will, be found. Assuming that is true, then it will be off to Washington to discuss, and defend, the combined carrier. This article was written with the mind that the regulators must also consider any consolidation attempts in the context of US carrier competitiveness in the global airline industry.

Anything short of this consideration ignores the economic realities of globalization and the direction this industry is taking. And I sure hope that we do not spend inordinate amounts of time discussing how air service in the middle part of the US is made less competitive. Rather, I hope it is recognized that the regulators need to focus commensurate time considering how the middle part of the country will benefit from increased access to markets around the globe. Just as deregulation of the US domestic market has taught us, more than sufficient competition will remain.

One can hope.