Will Restrictive Foreign Ownership Finally Lose Its Virginity?

Sky News Online reported that Sir Richard Branson’s Virgin Atlantic Airlines is assessing various merger and/or tie up proposals.  While there is no formal process underway, US carrier Delta Air Lines is rumored to be among the interested.  Sky News City editor Mark Kleinman has learned that “Delta's interest, while at an early stage, may have gone as far as recruiting investment bank Goldman Sachs to advise it.”

Just last week, I was addressing the ACI-NA International Aviation Issues Seminar on the very topic – that we should expect to see a serious push, and hopefully a meaningful discussion among stakeholders, to consider changes to the archaic restriction that limits foreign ownership of airlines.  Whether or not this Virgin – Delta story has merit, I am confident that it will not be the last headline we read regarding tie-ups of airlines with different nationalities in the coming years.  The motivations for mergers or tie ups with various airlines will vary depending on strengths and weaknesses of the carriers involved.

The financial case for this merger activity is quite compelling.  In my presentation, Emerging Markets and Evolving Models: Challenging the Industry’s Structure, I questioned whether the alliance structure is the best operating model to compete with the emerging airline models in Latin America, the Middle East or China.

Some Numbers for Context

Consider earnings.  In 2010 the global airline industry is expected to report a $15 billion profit.  While impressive in absolute terms it represents net earnings of 2.7 pennies for each one dollar in revenue.  This is paltry when compared to other businesses that earn on the order of 6-7 cents and more for each dollar of revenue.  Even with a slow recovery underway, profits for the industry are forecast to decline by 40 percent in 2011, which means that industry earnings are forecast to fall to 1.5 cents for every dollar of revenue generated.  Surely 2010 is not as good as it gets? 

Such slim profits cannot support the 1,500 or so airlines out there for long.  The industry simply needs to be able to consolidate shares of a disparate and a highly fragmented global structure just as steel and autos and shippers have done.  Those industries would certainly not be happy earning 2.7 cents on the dollar if that was as good as it gets.

It is not the mature economies that are expected to grow at high rates, but rather the emerging economies in Asia, the Middle East, Africa and Latin America.  Moreover, it is the emerging airline models serving these regions that are certain to pose serious threats to iconic names like Lufthansa, Air France/KLM, Alitalia, Air Canada, British Airways/Iberia and the alliances of which they are members. 

Just as there is consolidation activity within the US and European airline industries primarily, traffic is consolidating around and among the largest metropolitan centers on the global map.  Competition for this traffic is already vigorous.  Strong brands and strong balance sheets will be required to mine this traffic.  Can alliances be brands?  I think not given the large numbers of airlines that make up these alliances.

According to Airbus, Asian demand is highly concentrated around 11 points on the map:  Tokyo, Osaka, Seoul, Beijing, Shanghai, Taipei, Hong Kong, Bangkok, Kuala Lampur, Singapore and Jakarta, with nearly half of the demand in the Asian-Pacific market traveling between these cities and 91 percent flying to and from these cities.  Given the rapid growth of the low cost carriers in Asia and the Middle East carriers targeting traffic from each of these points, it is clear that individual carriers cannot possibly compete with the emerging low cost juggernauts. So the next question becomes whether the alliances as they now stand could do so either?

Just as capturing and retaining connecting traffic is driving consolidation activity in Europe, flow traffic is the necessary ingredient in making the Middle East airline model work.  The geographic advantage to the Middle East carriers to compete aggressively for global flows is staggering.  Within 2,500 nautical miles of the region lives 36 percent of the world’s population and 16 percent of the world’s GDP.  Within 4,500 nautical miles lives 86 percent of the world’s population and 63 percent of the world’s GDP.  Move the distance to 8,000 nautical miles – the distance where new aircraft technology can and will fly – and the world is virtually captured on a one-stop basis.  North American and European carriers cannot make the same claim.

Today, Emirates’ route map alone covers Asia, Europe, China, the Middle East, the commodity-rich African continent and Commonwealth of Independent States. Ethiad and Qatar serve many of the same points as well.  Will the Middle East airline models under construction be the catalyst for the first global airline merger?

A Financial Case for Global Mergers

Why can industries that serve the airline industry consolidate – often across borders – and the airlines cannot? 

1. Air Traffic Control:  One per country
2. Aircraft Manufacturers:  Two to four providers with 95+ percent market share
3. Aircraft Leasing Companies:  Two providers with 45 percent market share
4. Global Airline Industry:  More than 1,500 providers.  Top 10 have less than 40 percent market share
5. Ground Handling:  Less than three providers at deregulated airports
6. Catering:  Top two providers have 40 percent market share
7. Airports:  Arguably are natural monopolies
8. Maintenance Repair Organizations:  Top five companies have 50 percent market share
9. Global Distribution Systems:  Top three providers have 85 percent market share

The global airline industry’s response to limited foreign ownership has been to create more and more elaborate relationships with partner airlines.  In the "Alliance Phase", we have gone from interline agreements to special prorate agreements to sales incentive agreements to codeshare and blocked seat arrangements to the free sale of code sharing.  Today the industry has evolved into an "immunized joint venture phase" either sharing profits or revenue.  Assessing the level of synergies that can be realized by either a JV or an outright merger, a joint venture only captures 50 percent of the financial potential.

Alliance relationships capture more than two-thirds of the revenue potential from new domestic and intercontinental origin and destination traffic.  The alliance JV’s capture nearly 70 percent of the benefits to be derived from the frequent flyer plan.  But the JV mines very little in terms of cost synergies, arguably deriving only 20 percent.  In addition a merger would permit a full network redesign that would benefit both the revenue and the cost sides of the equation.

While it is true that the size of the three alliances is increasing, the top five carriers in each alliance drive the strong majority of the synergy benefits.  The four immunized JV STAR alliance carriers generate 75 percent of the traffic share across the North Atlantic; the immunized JV carriers in SkyTeam garner more than 85 percent of the North Atlantic traffic; and the immunized JV carriers in oneworld are expected to carry nearly 100 percent of that alliance’s traffic.

Branson Has Reason to Explore His Options

The North Atlantic market is now hyper competitive as all three alliances have anti-trust immunity.  And while Virgin Atlantic is unaligned at this point, I can make a case that Virgin Atlantic’s value increased after AA and BA were granted the ability to form an immunized transatlantic joint business agreement.  Why?  Just like there has been a mad scramble among the three alliances to bolster their respective competitive positions at New York and Tokyo, London cannot be ignored given its importance on global airline map.  And Virgin has slots and a meaningful presence at London’s coveted Heathrow airport.

When you think about it, oneworld is in no position to increase its share of slots at LHR without inciting the envy of its rivals and the harsh scrutiny of regulators, while STAR has British Midland’s slot holdings through Lufthansa.  That leaves SkyTeam.  Delta has been exhibiting a thirst for new Heathrow flying from Miami and Boston (both important oneworld markets).  Delta has also enhanced service to Heathrow from each of its important gateways at New York, Atlanta and Detroit.  But there is only so much Delta can do on its own at LHR.  And there is only so much SkyTeam can do given its slot portfolio.

SkyTeam does not need a hub at London as it already has two of the finest connecting hubs on the European continent in Amsterdam and Paris Charles deGaulle.  In order to compete fully, airlines need to be able to sell on both sides of the ocean. Assuming that there is a modicum of truth to the Delta-Virgin Atlantic rumor, a Delta play at Heathrow is no different than what has been taking place in New York/Newark and Tokyo over the past year.  London’s importance in each alliance’s portfolio is no different.

Singapore Airlines owns a 49 percent share of Virgin Atlantic.  Singapore and Delta have had a long relationship, with both carriers having a cross 10 percent equity stake in a prior life.  Or, Branson may be feeling like he would like to monetize some of his 51 percent holding given the changed competitive dynamics taking place across the North Atlantic and the new and potential competition coming from the Middle East.  Imagine if he were to sell an equity piece to a Middle East-based airline?

The United States and the European Community still have the ownership issue to negotiate per Phase II of the original US – EU Open Skies Treaty.  The Europeans are interested in expanding the ownership levels while the US wallows in labor and Defense Department concerns.  In the past, the US has played catch up with global metamorphosis.  Now is the time to be proactive, not passive, as competition from the Middle East gains ground.

If:

• If vendors serving the airline industry are allowed to consolidate into dominant positions with few border restrictions, and . . .
• If other industries like steel are permitted to consolidate market power around 4 global providers, and . . .
• If the global airline industry has not one dominant player, and . . .
• If Joint Ventures only capture 50 percent of potential synergies, and . . .
• If the five biggest alliance members produce 60 percent of the benefits, and . . .
• If the new and emerging competition is obvious,

Then....

• Why should airlines be hamstrung in their ability to maximize financial performance?
• Why should airlines be forced into Band Aid solutions like alliances when new and emerging competitors are building truly seamless, organic and homogenous products?
• Why should companies that are, or are certain to be, under attack from new competition be prohibited from joining hands to mount the strongest possible competitive reaction?

A far flung alliance formation has less chance to build a global brand than the new and emerging competition.  Imagine a day when the carriers involved in today’s JV schemes are allowed to invest in one another and use the equity capital to homogenize service offerings.

Imagine a day when decades old protectionist thinking gives way to an understanding that the airline industry is a global industry.  Imagine a day when US flag carriers are able to adapt their business plans to the reality that the business is not domestic but rather how the domestic market interacts with the international market?  

Imagine . . .

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. 

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’.

Stuffing Romy's Thanksgiving “Turkey”

Over the past month, news emanating from Wall Street has muted some of the stories taking place in the airline industry. So on this Thanksgiving morning, I thought I would stuff the bird with some stories that leave me scratching my head...

Click to read more ...

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’.

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.