Again Dear Richard: You Are Not A Virgin Anymore

This article is a repost of a piece written last October.  As Virgin Atlantic boss Sir Richard Branson lobbies President Obama and the US Congress to reject antitrust immunity for American Airlines/British Airways/Iberia/Finnair/Royal Jordanian - I find myself well ........ blown away that a British company should have any say in US competition policy.  US airlines cannot operate as true global companies because of parochial thinking lawmakers like Jim Oberstar.  In case you did not read before, see below.

One of the more amusing bumper stickers I have ever seen/read occurred at an intersection of Woodland Avenue and Jean Duluth Road in Duluth, Minnesota. I was a senior in high school and had been driving for a year and a half or so. The bumper sticker read: Virgins: Thanks for Nothin’.

Last week, Terry Maxon of the Dallas Morning News Airline Biz blog wrote a piece discussing the data analysis that Virgin Atlantic is using to frame the antitrust immunity application recently filed by American, British Airways and Iberia. We will touch on a few of those issues later and in future posts. But first, I have held a late August 2008 interview with Branson done by Karl West of the UK's Daily Mail that I would like to speak to.

West writes that “he [Branson] believes an alliance of the two giant airlines, plus BA merger partner Iberia, would allow them to dictate the market, charging higher prices between Europe and America." This makes no sense to me whatsoever because if it is high prices you are worried about, then who better than your own Virgin Atlantic, to offer lower prices and show the air travel consumer that you are the answer to their high air fare plight.

Your business model takes you to only the largest metropolitan areas, so your pricing actions will benefit the lion’s share of US – London Heathrow (LHR) demand. Because of your “network’s presence” in these large markets, you have, and will continue to have, a strong voice in attracting these customers because your product offering is very good and even different.

Whether it is the US domestic market or the transatlantic market, mature/maturing airline markets have demonstrated time and time again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. Where there is insufficient capacity, capacity will be sure to find the insufficiency. Simply, if the US - LHR market shows signs of “price gouging” by BA/AA, then surely Virgin Atlantic is among the best positioned to discipline the behavior.

West’s interview was the first one done with Branson following the BA/AA announcement that they would try for an immunized alliance for the third time. Branson believes the 'monster monopoly' will be bad for passengers, bad for competition, and will result in higher ticket prices. “It patently does not make sense,” he fumes. “Monopolies are good for companies, but they are never good for the consumer.” Branson adds: “BA has improved as an airline as a result of Virgin Atlantic keeping them honest.”

First of all where is the monopoly?

To answer that, I turned to Wikipedia for a definition. In Economics, a monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. Monopoly through integration: A monopoly may be created through vertical integration or horizontal integration. The situation in which a company takes over another in the same business, thus eliminating a competitor (competition) describes a horizontal monopoly (and that is what you are talking about I believe).

Surely no one believes that a monopoly would exist, or even be created, by granting Anti-Trust Immunity (ATI) to BA/AA/IB between the US and LHR. Branson’s arguments are LHR-centric and totally ignore the fact that the airline industry is a network business today and not the cozy structure protected by Bermuda II when Virgin Atlantic first flew in 1984. Yes, LHR is coveted, and is served, by nearly every major carrier of substance from around the world. Those US carriers that were not permitted to serve LHR are now allowed to serve the market and provide Bermuda II incumbents with significant new competition.

But fundamentally, today’s airline industry is about networks and not city pairs. It is a simple fact that oneworld cannot sit and watch STAR and SkyTeam grow anymore. Air France/KLM and Lufthansa/Swiss have grown into the world’s largest revenue producing airlines. Delta and Northwest [completed] will alter the ranking once their merger is approved but that will probably only last as long as it takes Lufthansa to get its hands on SAS and/or Austrian. Branson mentions his thirst for British Midland (BMI) and its extensive LHR slot holdings, but what about Lufthansa’s option on those LHR slots? Surely Richard you are not implying that with meaningful STAR alliance presence at LHR a oneworld monopoly would exist?

Branson talks in the interview about how AA and BA are using the current difficult economic and operating environment to accomplish what they have not been able to accomplish in two prior attempts. Quite honestly Richard, the entire world is being forced to transform their business models to adapt to the new realities.

US carriers are using this time to make difficult decisions on capacity cuts in order to diversify their route structures away from an over-weighted position in the US domestic market. Maybe you should be questioning whether Virgin Atlantic should be considering something other than LHR. Oh you have with Virgin Blue, Virgin Nigeria (and you might sell your stake in that Virgin) and Virgin America.

Or maybe you should be putting more energy into changing the ownership laws in order that Virgin Atlantic can realize all possible synergies from your family of Virgins. Abstinence from industry realities might be safe in the short-term but potentially lonely over the long term. You talk about the AA/BA/IB’s ability to strong arm travel agents and corporate customers. You are a branding genius and now you are saying that you cannot differentiate your product from AA/BA?

At what point do we take you serious?

Your data arguments are weak as well. It is about the local US – London/LHR market and that does need to be studied just as it is done on other deals. At least AA and BA have performed the best analysis to date using the best data source available to make that assessment. The competition authorities will make the same informed analysis and draw the distinction between local and connecting traffic as well.

So go paint your airplanes and while doing so recognize that Willie Walsh is right. He said broken record and I will not take a shot at another of your brands. What I will say is that your arguments are not virgins anymore and maybe you should be writing letters to Oberstar rather than McCain and Obama [which you have]. If you write to McCain and Obama, the subject should be about changing the ownership laws that stand in the way of allowing the industry to become the global industry that rewards world class competitors like Virgin Atlantic. Because the large and small can cohabitate and as you say, make competitors even better competitors.

Oh and while you are thinking about some new arguments, take a look above London. On a clear day, at 40,000 feet, you will see liveries like Emirates, Ethiad, Qatar and others that do not necessarily believe that a network industry requires London to be the center of the airline universe.

Unless you recognize that 1997's arguments need to change the third time around, thanks for nothin’.

Dear Richard: You Are Not a Virgin Anymore

One of the more amusing bumper stickers I have ever seen/read occurred at an intersection of Woodland Avenue and Jean Duluth Road in Duluth, Minnesota. I was a senior in high school and had been driving for a year and a half or so. The bumper sticker read: Virgins: Thanks for Nothin’.

Last week, Terry Maxon of the Dallas Morning News Airline Biz blog wrote a piece discussing the data analysis that Virgin Atlantic is using to frame the antitrust immunity application recently filed by American, British Airways and Iberia. We will touch on a few of those issues later and in future posts. But first, I have held a late August 2008 interview with Branson done by Karl West of the UK's Daily Mail that I would like to speak to.

West writes that “he [Branson] believes an alliance of the two giant airlines, plus BA merger partner Iberia, would allow them to dictate the market, charging higher prices between Europe and America." This makes no sense to me whatsoever because if it is high prices you are worried about, then who better than your own Virgin Atlantic, to offer lower prices and show the air travel consumer that you are the answer to their high air fare plight.

Your business model takes you to only the largest metropolitan areas, so your pricing actions will benefit the lion’s share of US – London Heathrow (LHR) demand. Because of your “network’s presence” in these large markets, you have, and will continue to have, a strong voice in attracting these customers because your product offering is very good and even different.

Whether it is the US domestic market or the transatlantic market, mature/maturing airline markets have demonstrated time and time again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. Where there is insufficient capacity, capacity will be sure to find the insufficiency. Simply, if the US - LHR market shows signs of “price gouging” by BA/AA, then surely Virgin Atlantic is among the best positioned to discipline the behavior.

West’s interview was the first one done with Branson following the BA/AA announcement that they would try for an immunized alliance for the third time. Branson believes the 'monster monopoly' will be bad for passengers, bad for competition, and will result in higher ticket prices. “It patently does not make sense,” he fumes. “Monopolies are good for companies, but they are never good for the consumer.” Branson adds: “BA has improved as an airline as a result of Virgin Atlantic keeping them honest.”

First of all where is the monopoly?

To answer that, I turned to Wikipedia for a definition. In Economics, a monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. Monopoly through integration: A monopoly may be created through vertical integration or horizontal integration. The situation in which a company takes over another in the same business, thus eliminating a competitor (competition) describes a horizontal monopoly (and that is what you are talking about I believe).

Surely no one believes that a monopoly would exist, or even be created, by granting Anti-Trust Immunity (ATI) to BA/AA/IB between the US and LHR. Branson’s arguments are LHR-centric and totally ignore the fact that the airline industry is a network business today and not the cozy structure protected by Bermuda II when Virgin Atlantic first flew in 1984. Yes, LHR is coveted, and is served, by nearly every major carrier of substance from around the world. Those US carriers that were not permitted to serve LHR are now allowed to serve the market and provide Bermuda II incumbents with significant new competition.

But fundamentally, today’s airline industry is about networks and not city pairs. It is a simple fact that oneworld cannot sit and watch STAR and SkyTeam grow anymore. Air France/KLM and Lufthansa/Swiss have grown into the world’s largest revenue producing airlines. Delta and Northwest will alter the ranking once their merger is approved but that will probably only last as long as it takes Lufthansa to get its hands on SAS and/or Austrian. Branson mentions his thirst for British Midland (BMI) and its extensive LHR slot holdings, but what about Lufthansa’s option on those LHR slots? Surely Richard you are not implying that with meaningful STAR alliance presence at LHR a oneworld monopoly would exist?

Branson talks in the interview about how AA and BA are using the current difficult economic and operating environment to accomplish what they have not been able to accomplish in two prior attempts. Quite honestly Richard, the entire world is being forced to transform their business models to adapt to the new realities.

US carriers are using this time to make difficult decisions on capacity cuts in order to diversify their route structures away from an over-weighted position in the US domestic market. Maybe you should be questioning whether Virgin Atlantic should be considering something other than LHR. Oh you have with Virgin Blue, Virgin Nigeria (and you might sell your stake in that Virgin) and Virgin America.

Or maybe you should be putting more energy into changing the ownership laws in order that Virgin Atlantic can realize all possible synergies from your family of Virgins. Abstinence from industry realities might be safe in the short-term but potentially lonely over the long term. You talk about the AA/BA/IB’s ability to strong arm travel agents and corporate customers. You are a branding genius and now you are saying that you cannot differentiate your product from AA/BA?

At what point do we take you serious?

Your data arguments are weak as well. It is about the local US – London/LHR market and that does need to be studied just as it is done on other deals. At least AA and BA have performed the best analysis to date using the best data source available to make that assessment. The competition authorities will make the same informed analysis and draw the distinction between local and connecting traffic as well.

So go paint your airplanes and while doing so recognize that Willie Walsh is right. He said broken record and I will not take a shot at another of your brands. What I will say is that your arguments are not virgins anymore and maybe you should be writing letters to Oberstar rather than McCain and Obama. If you write to McCain and Obama, the subject should be about changing the ownership laws that stand in the way of allowing the industry to become the global industry that rewards world class competitors like Virgin Atlantic. Because the large and small can cohabitate and as you say, make competitors even better competitors.

Oh and while you are thinking about some new arguments, take a look above London. On a clear day, at 40,000 feet, you will see liveries like Emirates, Ethiad, Qatar and others that do not necessarily believe that a network industry requires London to be the center of the airline universe.

Unless you recognize that 1997's arguments need to change the third time around, thanks for nothin’.

Back to the Future?

In a comment to my most recent, and only, post thus far in May a reader asked if I was suffering from Airline Fatigue Syndrome? I am thinking yes. I look at the news today and I see that Frontier is going to start flying to Fargo. WOW. And Virgin America is going to start flying to Chicago. WOW again. And Sun Country did Mother’s Day with flowers. Double WOW.

I admit I am hung up on wanting a real transformation of the industry – or at least a sense that one is underway. I want the UPS guy to redraw the lines without labor or political interference and present us with a way to work toward making each of those stakeholders more secure in tomorrow’s rendering of the US and global airline architecture.

I do not remember a time when more balance sheet risk presented itself. In the past there was typically a carrier or group of carriers that you were sure would emerge from the trials of a particular period. This time you give a nod to Southwest given the health of their balance sheet and their current hedge positions. After that, it is clear as mud.

I lectured today on issues confronting the industry and its evolution. We talked about the current actions being undertaken that feel like recycled ideas. We talked about Phase I of the US-EU deal and its lack of transformational attributes – unless Phase II is successfully negotiated. We talked about Delta – Northwest and the revenue synergy concept that they are employing -- and how it looks and feels a bit like the combinations of Air France/KLM and Lufthansa/Swiss. We talked about a potential United – US Airways deal and asked if the third time might be a charm?

We talked about the fragility of networks. At some point, the downsizing of a network collapses under its own weight. We talked about the dollar versus foreign currencies and the competitive advantage currently being enjoyed by our non-US competitors in reinvestment, growth and in the purchase of fuel. We talked about the need to raise fares, cover input costs and the need to emerge from the long-term value destruction cycle that has described this industry. We talked about the drive to find the inelastic demand component.

We talked about the difficulty of placing meaningful raises into the pockets of labor given all of the externalities impacting the industry – and we barely talked about the infrastructure. We talked about politics and their impact on the current industry structure. We talked about how the US does not have a strong bearer of the flag in foreign markets. We talked……..

Back to the Future

Maybe we do need to look back before we can go forward. Remember when we talked about yield and not RASM? Remember when we had turboprops with limited range that married them to a geographically centered hub market? Remember when we actually talked more about operating profits than EBITDAR? Remember when load factor was a data point and not the mantra?

Not that there was ever structural stability during these points in time either, but fuel is the real deal. It just might be that catalyst for change that has been missing during the deregulation experiment. And if the change causes an industry to be disciplined enough to charge the passenger "all-in plus some return on capital", then we just might look back and call this time the best thing that happened to the US airline industry.

Let's get smaller (whether by commercial choice or by market forces); focus on yield and not RASM; get rid of duplicative hub feed (whether by commercial choice or by market forces); and forget about load factor that is won largely by not charging anywhere near enough for those final 10, 20, 30 or even 40 seats. Surely these actions would lead us to some capacity level less than today and approaches an economic level.

As cp5000 commented on the previous post: “And assuming the industry is successful in raising fares (which they must), what alternatives will benefit? More teleconferencing, more driving, more conference calls? I don’t know. That question at least is new and fresh. Better than the same old, same old”.

“The market place is working. It is not pretty, nor should it be. More change has to come – hard to say what it is going to be. Stay tuned”.

Putting a Few Packages (of Airline Industry Issues) Under the Tree for Readers to Unwrap

Labor

In an industry that is associated with 3-letter identifier codes and with labor’s expectations that “concession recovery” is right around the corner, we should start to think about replacing NMB with PEB. Oh I know that a PEB requires time with the NMB, but …… I never remember a time where neither labor nor management has any meaningful leverage entering a negotiating cycle. I open with this one because trains and Christmas trees are synonymous.

Along those same lines, and with labor’s “one trick pony” leverage point being executive compensation, maybe we should be questioning whether the seniority system really works for airline labor and management. Imagine a real free market where individual airlines actually bid for individual labor's services? Would this type of a "free market" cause airlines to rethink their individual approach to invest in product similar to that provided by the global elite carriers? Free agency has generally been good for compensation levels – average and otherwise.

Isn’t it interesting to see AMFA being challenged on multiple fronts? Most observers expect them to lose their challenge from the Teamsters at United. It seems to me that this is nothing more than a story coming full circle. Just as AMFA challenged the IAM and won at each United and Northwest, by making promises it could not keep while exploiting situations where concessions could not be avoided. It is most interesting to note that by early 2008 AMFA could be gone from its two largest properties. OverPromise and UnderDeliver will be a term discussed more and more over the coming 3 years.

US Economy

With nearly $1 trillion in mortgage resets coming in 2008, doesn’t consumer spending have to be affected at some point?

It has been a long time since I remember reading so many stories and analysis which offer the mixed signals du jour on the direction of the US economy. From recession to inflation, the gamut is covered. The job market and manufacturing have each cooled which suggest a slowdown. Yet the consumer continues to lead the way as retail sales remain strong. But profit margins are less suggesting costs are exceeding the ability to price. Go figure. There is always demand at some price – the US airline business sure captures that concept.

US Government

With New York JFK and Newark operations capped by the US government, and the industry applauding the actions, which major US market will be affected next? What exactly does “new and real” capacity mean when considering a leasing of capacity program?

Remember when jetBlue was lauded as the best capitalized startup in US history? If something were to result in jetBlue failing, what would happen to those JFK slots “given” to the carrier?

Was Virgin America late to the party, or is their timing right? I am intrigued by their recent city pair market choices.

Is it really possible that Singapore Airlines will be serving the New York – London market and the Houston – Moscow – Singapore market in addition to New York – Frankfurt, Los Angeles – Taipei, Los Angeles – Tokyo, San Francisco – Hong Kong and San Francisco – Seoul by the end of 2008? Yes -- the signs of what lies ahead. Where is the home country?

Miscellaneous

Wouldn’t it have been ironic if the New England Patriots went 19-0 and won the Super Bowl, when in the same year the Miami Dolphins went 0-16? Well we know half of the story.

Aren’t you just tired of the same voices making statements that it just cannot be done because it hasn’t worked in the past?

Happy Holidays,

Swelbar

Thank you flyby519

Whereas this blog has not matured to the level of others in terms of receiving a large number of comments to my posts, flyby519 has taken the time to respond twice and asks some very good questions while offering very good insight to the industry. While I am thankful for much this holiday season – family, friends, a successful career redirection and a lower handicap – I am truly thankful to this reader for the questions raised. So my Thanksgiving post will respond to each question asked by flyby519.

In a comment to my post, Wondering Thoughts From 5 Time Zones Away, flyby 519 asked the following questions:

Question 1: “I agree that VA [Virgin America] isn’t going to go far just doing transcon service in a saturated market, but do you think there is a future for them feeding the Virgin Atlantic routes”?

Answer: My simple answer is yes I do. But given that Virgin Atlantic is not a large connecting carrier on the London end, and much of Virgin America’s initial service launched in the US has been from the largest gateway markets to London, it will take some time for the Virgin Atlantic – Virgin America connection to play itself out. My struggle with getting excited about Virgin America is its timing into the US market. 5 years ago, I would have a much different outlook and level of excitement for its ultimate success. But if attrition is expected in the US market, then probably a good bet to make by Branson.

Question 2: “Is creating a global brand the ultimate plan for the Virgin Group”?

Answer: We have to acknowledge that Branson is a branding genius and it is hard to suggest that this venture is any different than any of the 200+ ventures he has entered to date. While feed to Virgin Atlantic may develop over time, enhancing the visibility of the Virgin brand in existing gateways, just as the transatlantic is expected to become even more competitive, will prove to be an import indirect benefit to Virgin Atlantic in the near term.

Question 3: “I also am concerned with the aircraft orders coming just from foreign airlines. The weak dollar and sad state of US airlines are forcing them to pass up expansion, which (combined with open skies) leaves room for invasion from the foreign carriers. What will happen with increased competition and reduction of market share internationally for our struggling carriers”?

Answer: Flyby519, thanks for picking up on this statement as I rank this question in the top 3 or 4 points I have made here.

Your point on the dollar v. foreign currency and the effect it has on the “ability to buy” cannot be underestimated. We are about to witness the Boeing v. Airbus strategies (consolidate v. fragment) play out before our very own eyes. I do believe that the US carriers will be disadvantaged by carriers making extensive new aircraft orders and looking to expand their services into existing gateway markets. In addition, if new carriers begin to serve secondary points in the US, – and we should expect some - much like Continental and Delta are doing from the US into Europe, then the game is truly joined. But the US industry should not be alone in this concern.

If I am a major European carrier with an extensive network built to serve all world regions, I am watching with much anxiety what is going on in Dubai, Doha and multiple points in India where competition for global traffic flows is very much in its infancy. And if there is concern over what competitive juggernauts might be constructed in these regions, then some concern is warranted regarding the existing health and architecture of the global alliances built by the largest US carriers and their global partners as well.

Networks can be made vulnerable in many areas and this global network industry is about to get challenged by well capitalized, aggressive competitors like none we may have seen to date. My view is the game is just being joined and why I blogged on the idea presented by Willie Walsh, British Airways’ CEO last month click here. My question back to you is: Are we being naive to think that domestic consolidation is the best means to stave off vigorous competition from another world region that is sure to degrade our current sources of revenue?

In another comment to my post, "Musings and Meanderings Over the Past Week", flyby519 asked the following questions.

Question 1: It seems that Tilton has been jabbering about mergers, spinoffs, and crazy talk for the past few years. Is he just trying to play the "look at me" game to get investors cash?

Answer: The more I read Mr. Tilton, he is consistent in his message regarding the industry needing to restructure itself. His quote that I used in one of my posts click here - “Think of any industry represented in this room; choose any business listed on the Tokyo Stock Exchange; and one can be sure: it looks nothing like it did ten years ago; and looks nothing like it will ten years from now”- really resonates with me.

Whereas he may be trying to play the “look at me” game, my sense is that he understands that creating value for shareholders is going to happen in one of two ways: 1) a slow liquidation (and I use that phrase guardedly); or 2) despite United’s size in the global spectrum and despite deep cost cutting that occurred during its bankruptcy, the business is far from fixed. In a parochial sense United is big, but in terms of how changes in the global airline architecture might play out the second largest carrier in the US is merely a piece of a much larger puzzle. He may get beat up for how he articulates issues but his arrival to the airline industry as an outsider gives him perspective that should not be totally discounted just because some might not like the message.

Question 2: “I also agree that there are way too many carriers of all types, but how can this be reduced when there is always a startup (ie: skybus, virgin america) waiting to jump into the game? Are the regulatory hurdles for consolidation greater than the barriers of entry for newcomers”?

Answer: Absolutely the regulatory hurdles for consolidation are greater than the barriers of entry for newcomers. Great point! And this is precisely the type of backdrop where the industry should be evaluated. Further, it puts front and center a US Government aviation policy that promotes fragmentation. At some point I would hope that the USG would take a look at the industry from a financial perspective and appreciate, that even with consolidation, significant levels of competition will remain – whether it be to Greenville-Spartanburg or to Geneva or to Seoul.

Oh I digress as that same policy has permitted a carrier like Korean to access multiple points in the US and carry significant levels of US traffic to China because of the route rights it owns on the other end. But in the interest of competition we will promote a policy of what is good for one is good for all and everyone should have rights to China even if the divvying up of service results in a duplication of services in a developing market. What is wrong with a few strong carriers carrying the flag to compete against direct and indirect competition?

Happy Thanksgiving to all. The readership of this blog has grown to levels I never imagined when I undertook this labor of love.

Wondering Thoughts From 5 Time Zones Away

The underpinning of this blog is that change in the US airline industry is underway -- whether some like it or not. Over the past week there were some stories that grabbed my eye and are listed in order of importance from my point of view. There were many stories that warranted discussion like the orders coming from the Dubai Air Show, another meeting between US Airways CEO Doug Parker and Senator Arlen Specter, oil prices testing $100 per barrel, airline stocks getting beaten down, schedules at JFK, United suggesting it might, and could, put up to 100 airplanes on the ground given the changing economics and the list goes on that further underscore change.

Speaking of the Dubai Air Show and the aircraft orders being placed there – doesn’t it bother US readers that the orders are not from US carriers but rather from previously obscure points on the map that have every plan to change the shape of global aviation? It sure does me. Is the US being relegated to a supporting role in tomorrow’s global aviation market? I sure hope not.

These Are Not “Competitively Virgin” Markets

Holly Hegeman in Planebuzz ran a great piece last week where she summarized a research note from Gary Chase at Lehman Brothers click here. In his note, Gary finds that Virgin America is pulling down capacity in its transcon markets without any noticeable shift of that capacity to other markets.

The markets where the low cost sector has chosen to operate have generally been the densest US domestic markets. You would have thought that Virgin would have learned something from jetBlue and others that the competitive profile of the network carriers is vastly different today than just 4 years ago. The days where the legacy carriers that are most dependent on transcon revenue, whether from nonstop or connecting flights, are going to stand idly by and see further market share and revenue degradation take place are over.

In a Spring 2003 MIT forum, I did a piece on the Low Cost Carriers, subtitled “Thou Shalt Not Inherit the Earth” click here. LCC growth was the talk of the time. This piece was shared with mainstream press but largely ignored. Now it is mainstream, and even “futurist” by some, to talk about the revenue generating difficulties faced by the LCC sector. Whereas, Virgin America is well capitalized and arguably has a brand, it further underscores the point that the opportunities are limited for this sector to grow at previous rates.

We talk about consolidation with respect to the legacy sector of the industry when in reality the more interesting plays may be in the LCC sector – a sector that is highly dependent on revenue in the largest US markets. A capacity shift here, a capacity pulldown there and ………

Say It Ain’t So Joe

AirTran Chairman, Joe Leonard, sells his remaining stock holdings a week after stepping down as CEO click here. As for AirTran, it is unfortunate that their bid for Midwest fell apart. This company has performed admirably, but remains badly in need of diversification of its route portfolio and Milwaukee, along with Minneapolis, remain two of the largest markets without meaningful LCC presence.

While Northwest suggests it is only passive in its partnership with TPG, you have to look at that partnership and wonder what TPG sees other than to know an exit strategy is there for them at any time. Midwest’s recent performance does not warrant that kind of interest from a TPG and its business plan is circa 1999.

Do these changes at AirTran signal something?

This Is Not Bill Nyrop’s Airline: At Least Today?

Following a wrenching summer of customer and labor strife after emerging from bankruptcy, the external messaging we hear from Northwest is quite different from what we have ever heard in Minneapolis? In an article by Liz Fedor in the Minneapolis Star-Tribune: NWA Puts An Emphasis on Service click here highlights comments from the Board’s new Chairman, Roy Bostock, citing his desire “to create a better environment for Northwest's employees and customers and develop more sophisticated techniques for measuring customer experiences”.

Is this real or will Northwest realize the same fate that is playing out in Ft. Worth between labor and management after an attempt to find a new way? Given the contentious nature of the labor-management relationship that has historically been the norm at Northwest, this would at least appear to be a good start. It is always easier to begin these programs when amendable dates are years away. However, with Northwest in the center of consolidation talk (click here and click here) we will be watchers of the airline’s progress on service and employee relations.

Maybe This Time, “Delta” Really Does Mean Change

In an AP story covering Delta’s President and Chief Financial Officer, Ed Bastian called consolidation a “front burner” issue for the carrier click here. And as the company discusses consolidation, its message to all stakeholders has been consistent. But while the company suggested it would like to answer the consolidation question before it makes any decisions regarding spin offs, it made an agreement last week that would grow its internal maintenance operation click here.

This on top of its transatlantic deal with Air France and KLM and a decision pending on whether to sell Comair suggest that this company is doing anything but managing its enterprise for the future. I could not have been more wrong on my views of this company. I have spoken publicly about an airline with presence everywhere, pricing power nowhere and generally lacking a plan and direction. We will not know for sometime whether or not their international strategy is the right one, but the results since emerging are impressive.

Business Week made a case that the logical acquisition target for Delta should be Northwest click here. This story is a good read, not so much for the combination case it makes but more to the references made about an industry badly in need of continued restructuring ….

American and the TWU: Talk of gAAin v. pAAin

Trebor Banstetter of the Ft. Worth Star-Telegram did a nice summary of the TWU’s remarks as it presented its Section 6 opener to the company last week click here. If there is a union at AA with a substantial opportunity, and a competitive platform, to discuss “gain sharing” with the company it is the TWU. But I would argue it is not the entire TWU membership that is in the same position. It is the mechanics, the skilled workforce, that have this substantial subject matter to discuss.

One does not have to read too many articles to realize that American has chosen to invest in its maintenance organization – obviously a profit center that warrants the use of internal capital to fund an operation that has been successful in bringing in new work – and new revenue. The TWU suggests that they would like to return to 2003 levels of pay and work rules (not likely given the industry’s profit position). The company seems open to linking earnings to performance and productivity goals click here (an opportunity to make at-risk compensation a reality).

Whereas the AP story suggests a union “less friendly” – that may be true. But at least on its face, there is an understanding that preventing an environment that has caused significant pain for their co-workers at other carriers that filed for bankruptcy is a better path to follow. My hope is that the TWU and AA find some inventive ways to proceed that can reward the skilled workforce that is making Tulsa a new revenue source.

I further hope that the TWU does not use the skilled workforce to cross-subsidize the other members it represents as the sub-labor markets are quite different. There are too many lessons to be learned from the IAM on this subject ….