One Year Ago Today…….No Swelblog.com

One year ago today, I barely knew what a blog was let alone think for a minute that I would own one. I remain amazed at the time it takes to “feed the blog”. The time spent reading, researching and thinking has been time well spent. This new medium is a good one. The diversity of opinion on matters in this industry is what makes it both great and frustrating during this period of change.

In my first post, Swelblog.com Taxiing Into Position, I stated: “I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie”. Well, I know in many cases I did not win friends. And that is fine with me. Did I influence anyone? I don’t know. Do I have some strong opinions based on nearly 30 years of being in and around this industry in a variety of roles? Yes I do.

We have talked about a lot of controversial stuff over the past year: pilot scope clauses; foreign ownership; merger and acquisition activity in the US and abroad; the pull down of hubs; entitlement by labor and other stakeholders in the industry; terms of art in labor negotiations like “put it on ice” and “clear the underbrush”; rejecting comments attacking other commenter’s; sharing with readers my beginnings in this industry; Doug Parker, Glenn Tilton, Richard Anderson, Gerard Arpey, Willie Walsh, Richard Branson, Doug Steenland and other CEOs that are shaping the structure of the industry going forward; Capt. John Prater, Capt. Lloyd Hill, ALPA, USAPA, AFA-CWA, TWU and other unions; labor-management relations in general and the fact the world must be laughing at us here in the US; globalization; air traffic congestion; asset divestitures; nothing to fear from the loss of a carrier; how cool it would be to be the UPS whiteboard guy; Lufthansa and its aggressive, and brilliant, real estate plays; seniority; Lee Moak as I will not put him next to Prater and Hill; the auto industry and airlines; the banking industry and airlines; Jim “Hell NO”berstar; the Business Travel Coalition and its leader, Kevin Mitchell; creative destruction; Bob Crandall and his lost after life; Gordon Bethune; catalysts for change; executive compensation; United – Delta; Delta – Northwest; United – Continental; United – US Airways; Allegheny-Mohawk Labor Protective Provisions; the airline customer; Maryland Terrapins; March Madness; The Masters; US Open golf; US competitiveness in a global industry; wondering and wandering; Force Majeure; “Hush Money”; “A Flying Pig”; Crude oil, the crack spread and jet fuel; words that start with “c”; price elasticity; “Rent Sharing”; yawning; Back to the Future; liquidity and all things cash; unbundling; top 10 lists; STAR, oneworld and SkyTeam; Starbucks; small community air service; naysayers; speculation, consternation and detoxification; union corporate campaigns; labor arbitrage; outsourcing; capacity cuts; interdependencies; virgins; and the memorializing of dates.

WHEW. To name a few.

Not only does today mark the end of year 1 of swelblog.com, it also means that the 2008 golf season for me is coming to a close. And it has been a great year in terms of venues played: Caves Valley in Baltimore; Butler National and Medinah #3 in Chicago; Erin Hills, Whistling Straits and Blackwolf Run in Wisconsin; The Bridges and Torrey Pines in San Diego; and Wailae in Honolulu. A good year indeed. Now if I can only get that chance to play Augusta National before I die, the top 100 list will be largely played. Oh, and I do have some work to do on Long Island. For the next four days I will join dear friends (Jack Ginsburg, Pete Robison, Ro Dhanda, Bill Musto and Greg Lane) and my partner, Dr. Craig Faulks, in our annual member-guest tournament.

Readership has exploded for a blog that does not promote itself. Most cool for me is the growth in the non-US readership. I thank the students at MIT for the multiple challenges posed in answering your questions as your unaffected enquiries often prompt an idea for a blog.

First rate reporters like Susan Carey, Liz Fedor, Terry Maxon, Justin Baer, David Field, Dave Koenig, Barbara DeLollis, Ben Mutzabaugh and others offer great insight to the industry. I never know where to put other bloggers/reporters/columnists like Holly Hegeman but thanks to you as well. Whereas this blog is my own, it is made better and sharper because of people like these that challenge the industry each and every day.

Wall Street analysts like William Greene at Morgan Stanley; Kevin Crissey at UBS; Jamie Baker at JP Morgan; Gary Chase at Lehman/?; and Ray Neidl at Calyon all offer us great insight and analytically supported opinions. The chief economists at ATA and IATA, John Heimlich and Bryan Pierce, have made the trade associations most valuable resources for looking at the industry from a variety of perspectives and supplying us with material that helps to put things into a global context.

I thank the readers who agree with me and disagree with me. To know me, really know me, is to know that I do not suffer fools well. I turned 50 this year and my guess is that will not be changing much. This blog is about change and it will remain about change. Because this industry sure as hell needs to change. I hope the next 12 months results in writing more about Dubai than Dallas. But damn, Dallas is one fun place to watch, and write about, as it has it all. The good with Southwest – at least for the moment – and the bad with American.

As I close, I want to revisit a quote that I published in January as it seems most appropriate:

"Bubble to Bubble to Bubble"

At the World Economic Forum in Davos, Switzerland, yesterday [January 24, 2008], Stephen Roach, the head of the Asian operations of Morgan Stanley, slagged Mr. Bernanke for being "goaded into action just by what the markets are doing." Mr. Roach described the Fed's actions as "excessive monetary accommodation that just takes us from bubble to bubble to bubble." It is "a very reckless way of running American monetary policy," he said. "I'm quite astonished that they did what they did."

It really is hard to know what is right. For many, my views are wrong, or at least not what you want to hear. Despite many incorrect facts printed about me on this blog and on other blogs by Howard Putnam, APA folks and others, it is nice to know you are reading.

This transition from consulting to thinking has been, and will continue to be, great. I recommend it.

Jill, Sam and Romy - YOU ROCK!

Memorializing Yet Another Date in 2008

Black Monday III (1929, 1987 and now 2008)? Another example of how money and politics just do not, and cannot, mix? I do not like government intervention into private matters. But on this bank bailout I was resigned to the fact that it was/is a necessary action. Was it politicians protecting themselves at all costs? What should be bipartisan becomes partisan? What should be about the good of the American people becomes about what political party is more responsible for success or failure?

I woke up in Jacksonville, FL this morning to the news about Citi and Wachovia. I actually had the pleasure to speak to an enlightened Jacksonville Aviation Authority Board of Directors about happenings in the airline industry and the resultant effects on their business.

By the time I landed back in Washington, the Dow had closed down 778 points, its biggest one day drop in history, or 7%; the Nasdaq was down 200 points or 9%; and the S&P had closed down 107 points or 8.8%. All the while, oil had dropped to $95 per barrel and gold prices surged. The US House of Representatives had voted down the bailout package in a roll call vote of 228-205. The markets, anticipating passage of the bill, were looking for anything to suggest an end to the psychological unease and the resultant turmoil in the US and world markets. The volatility present in the markets when the wheels went up only continued.

Like a lot of things that seem obvious when politics become intertwined with logic, we probably should not have expected a “yes vote” on the bailout package in the first version offered to a vote of the US House of Representatives. After all, it is a presidential election year. A plum job that might be better suited to a resume of a funeral director.

The fallout was not limited to the US. Bailout activity took place in the United Kingdom, Belgium, Germany and Iceland. Asia is not immune. Given less than full information on this region we really cannot know just what might be ahead there. Like in the US, big name banks were in the news around the world. Europe’s stock market suffered its second worst day in trading activity.

Some are declaring Wall Street dead as we know it. I do not know what to make of the elected representatives in the US House. Paul Krugman writes: "So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes."

If it wasn’t so serious, it would be really funny. This is the macro economy’s watershed. People got tired of the airline industry traipsing about Capitol Hill after 9/11. This is much more serious for even the airline industry. You know how it goes, the airline industry is inextricably linked to the health of the US and global economies. Well, with little health in the macroeconomy, we just may not need all of those airlines anyway. Oil remains a concern, but these economic headwinds may be greater than anything the industry has faced thus far.

As for all of those grossly overpaid senior managers in the airline industry, they are looking pretty damn smart for their decisions three months ago to bolster the liquidity positions of their respective companies. The window can be declared closed for the immediate future and as a result of their actions companies can manage their businesses with a focus on internally generated capital because that is all that will be available for awhile.

Nancy Pelosi spoke, but I do not think the fat lady has sung on this one just yet.

“Capital Is Global, Labor Is Local”

The title is not my words but rather those of the International Federation of Air Line Pilots’ Associations (IFALPA). On Tuesday of this week, I sat on a panel with Captain Paul Rice of IFALPA to discuss consolidation at the ACI World Conference in Boston. Captain Rice is a most articulate and passionate speaker when it comes to issues important to labor.

As our panel progressed in its discussion, I challenged Captain Rice on his use of his phrase describing events occurring in the industry on consolidation. My basic assertion was: that labor is capital and its flow is being hindered by seniority and other fundamental union rules that probably will not serve tomorrow's work force as currently designed. Restrictions on the flow of capital, or anything, are good for no one. The Boston Beacon reported on our panel.

Yesterday’s Northwest – Delta Shareholder Vote

There is no event currently taking place that highlights the “Labor is Local” mantra more than the pending Northwest - Delta merger. Susan Carey of the Wall Street Journal writes: Northwest's Unions Face Tough Reception at Delta. This comes on the heels of the Association of Flight Attendants – CWA testifying before Congress earlier this week that the rules for union elections at airlines need to be altered. Ah, we are again back to that contemporary law that governs airline labor relations: the Railway Labor Act of 1926 as amended in 1936.

What is interesting to me is that unions negotiate hard to have Sections 3 and 13 of the Allegheny-Mohawk Labor Protective Provisions in their contracts. In February of this year, I wrote a piece entitled: F + E = LPP^DL: Fairness and Equity; Seniority Integration; Union Representation; and Lee Moak Again. Delta had offered these protections to its employees ahead of the announcement of a deal, and they did not have to bargain for it.

There will almost certainly be elections among the IAM and AFA-CWA work forces but now union leaders are concerned that, under NMB rules, a ballot sent to an employee that is not returned is counted as a no vote therefore making a representation election most difficult to win. Just as it has been for years and years.

But like any election, isn’t it up to the union to convince potential new members that being represented by a collective bargaining representative is better than not being represented at all? So, if labor is going to ask that we review only Sections of the Railway Labor Act that serves their local interests only, I say no. If labor is going to ask that an Act of Congress that is more than 70 years old be amended to address issues and concerns that prevent the US airline industry from fully participating in global capital flows because current labor capital says no, then I say yes.

If nothing else, the two mature airline industries in the US and Europe should be able to find common ground that separate continental seniority lists could provide.

These Really Are Dynamic Times

In my most recent blog post, I postulated that we are not we are not out of the woods by any measure as oil had been closer to $90 per barrel than $100 in the past week. I am sure that there were some that scratched their heads over that post. Part of my reasoning for drafting the piece was that the markets had turned their attention to the banking crisis and away from the commodity world. The market's lack of attention typically makes me nervous.

I am not going to say I said I told you so, but today, oil spikes $25 amid anxiety over bailout news. The October contract ultimately settled near $121 per barrel, up more than $16 per barrel, far surpassing the one day record increase of $10.75 in early June 2008. The November 2008 contract is trading at more than $109 per barrel as I write.

Remember, these numbers do not reflect the crack spread price equivalent per barrel that needs to be included when considering the airline industry's cost of jet fuel. At last look it was $24 per barrel since falling from $44 per barrel as the hurricanes made their way toward our shores. Fundamental to the message in my previous post was the concept that this industry, and virtually all industries, will be facing volatile times that require the ability to remain nimble in order to navigate the ebbs and flows that we are sure to face. Remember, we have not started to discuss just how cold, or warm, it might be this winter.

Many of our parents speak about the gold standard. Today the price of an ounce of gold increased more than $44 per ounce for those that doubt the market’s view of our world. In the article linked to above, analysts interviewed cited a weakening dollar and short positions. Sounds familiar doesn’t it?

In my previous post, I suggested that this industry is just not in the position to accept a fixed cost, fixed fare or fixed anything environment given the dynamic nature of input costs that face this industry. I suggested that the boom and bust cycle that has plagued this industry must be addressed as the cycle is not good for any one stakeholder group.

We really do need to think about this.

More to come.

Dynamic, Dynamic, Dynamic; Bless Air Canada; and the Education of Stakeholders

Like Holly Hegeman at Planebuzz.com, I am having my own computer week from hell and as a result I am cranky. In my crankiness, I am actually thinking about the shot-gun wedding of airline labor and airline consumers, destined to fail, first initiated by the Business Travel Coalition.

This post is kinda about international alliances. Moreover, it is kinda about international alliances not being on the same page. I understand that without Anti-Trust Immunity (ATI), carriers are limited in their discussions with one another. But I find that Air Canada’s decision to rescind second bag charges at a time when United announced it would double its fee for a second bag to be a black eye for the STAR Alliance. North America is one thing. Tomorrow is not about North America.

What good is my STAR Alliance Gold Card if I do not have a clue? And I pay attention. Let’s be honest and frank here, Air Canada, under the leadership of Montie Brewer, has done great things with the internet. They have taught us about simplicity and transparency while teaching the air travel consumer about the concept of “value-added” services when making decisions to purchase an Air Canada product. These include preferred departure times, seats, meals etc.

Further, let’s not let it be lost that Air Canada’s approach, begun long before US carrier’s decisions about ancillary fees, gives them a leg up on the consumer education aspect. So, rather than charge for a second bag, Air Canada will roll its previously stated fuel surcharge associated with buying a seat on a particular sector into the base fare.

Ben Smith, Air Canada’s Executive Vice President and Chief Commercial Officer said: "These initiatives are made possible by the recent relief from all-time high oil prices and even though fares will remain dynamic”. Dynamic is the key word in this phrase. It simply means volatility. We can expect volatility going forward. The fact that a barrel of oil has dropped $55 per barrel in a little over 60 days after rising nearly $60 per barrel in a little over 200 days we should not immediately jump to the conclusion that the global industry is out of the woods. For statistical types: what is the standard deviation?

Air Canada does have it right. If dynamic cost increases are plaguing the industry, then let fares be dynamic. Addressing, and implementing, these processes goes a step further to educate the consumer and labor on the argument that the industry simply cannot sustain a fixed cost, fixed fare, environment that does not produce a profit for those providing the metal. Moreover, dynamic pricing is about addressing the boom and bust cycle that has plagued this industry for nearly three decades. It is about the education of stakeholders.

US carriers are using volatility to create rigidity through ancillary charges. And that is what defines legacy in many ways. Dynamic should be the word of the day. Dynamic is the action that needs to describe the immediate future of this industry as well as the outcome of the next labor negotiations – any airline’s largest controllable expense. Sadly, no US carrier is articulating this point.

Whereas labor continues to assimilate consumer issues into its leverage-grab for higher wages, dynamic base fares versus second bag charges best exemplify the issue describing why we need a flexible labor construct. This boom and bust cycle simply must end. We really need to think about this.

And if we are going to make an alliance argument, let's make one as differentiation is lost.

Olympic, Alitalia, American and the Wings Club

And we thought the last 10 days of news regarding financial institutions was interesting. In this industry we have legacy flag carriers dying on many continents. We have continued, and even aggressive, consolidation activity in Europe. In the US we have Delta and Northwest pointing to a date before year end to complete their deal. All that remains a constant, it seems, is the Allied Pilots Association creating press releases that ignore the realities of the world to virtually everyone except Lou Dobbs. But before we go there………

Today, Greece finally announced that it would shut down Olympic Airlines and start anew. The Greek flag carrier has only been going through gyrations of Olympic-sized restructuring efforts since I began to study the industry. Nearly 30 years later, its legacy carcass is finally put to rest.

All the while, the investor group that has been assembled in Italy to rescue Alitalia has given certain unions that have not signed on to their business plan until Thursday to do so. Today, a small union caused the carrier to cancel flights as it struck. The bankruptcy laws in Europe are different than in the US and honestly, they are the kind that should be adopted here. If the investor group were to walk away, there is a high probability that Alitalia could be liquidated. Not that Rome is burning, but maybe a “Flying Pig" Roast is in the offing.

Whereas saving Alitalia has become a front-burner issue for newly elected Prime Minister, Silvio Berlusconi, Rome will not burn; Milan will not burn; and all other markets in Italy will not burn if flag carrier Alitalia does liquidate. The world really will not miss Alitalia. Just like the hub closures that have occurred in the US over the years, replacement capacity will be sure to find the market opportunities that are presented. Lufthansa and Air France and others have already identified markets where they will deploy capacity to address the void left by Alitalia should it exit the space.

So, two more carriers in Europe, each once proud flag carriers, are close to succumbing to the high cost of jet fuel, a slowing economy, a strengthening of the dollar, hyper-competition for traffic flows over European hubs/gateways and high intrinsic cost structures that simply cannot be supported.

Now we turn our attention to the US. Similar pressures are forcing its carriers to engage in gut-wrenching decisions of resizing networks in order to adapt to the new economic order. Leave it to the Allied Pilots Association to cause most interested observers of this industry to scratch our heads yet again. Not only did APA’s President write to the CEO’s of British Airways, Iberia, Finnair and Royal Jordanian advising them not to enter into an immunized alliance structure with American Airlines, they also wrote to the US Government urging them to postpone their review of the application.

When all other carriers, including Southwest, are actively seeking new revenue sources that can only work to bolster the bottom line, the APA continues to act in the most destructive of ways. The revenue sources its company is seeking to participate in are those carried by American’s competitors today. To ignore them only initiates American's walk down the path of Olympic, Alitalia, Sabena, and the many US carriers that have ultimately succumbed to the same fate.

But only APA’s membership can decide if they are being led for the better or ultimately to their detriment. I cannot answer that.

Finally, James Hogan, the Chief Executive of Ethiad, spoke to the Wings Club in New York about a 'New Wave' in Global Aviation. If anyone does not believe for a minute that this “new wave” coming from Dubai, Doha and Abu Dhabi will challenge the European partners of the US carriers in a big way, then you are just not reading the tea leaves.

There are traffic flows that are critical for American and British Airways to participate in that require competitive strength. There are possibilities for Iberia that do not exist today. Today, each of the carriers have a strong position in some markets. Absent a relationship similar to that of STAR and SkyTeam, oneworld’s global market position will only continue to erode and will result in less and less flying for US pilots working under the American Airlines’ seniority list.

Just look at the loss of legacy carrier employment in the US today. American has not suffered the half of what United, US Airways and others have suffered. There is no growth at home and that is precisely why APA’s actions of today just simply ignore the evolution of the global industry and the forces of a global economy. Tomorrow’s world is not about Abilene, it is about Asia. It is not about narrowbodies to Eugene, it is about widebodies to Europe. And it sure as hell is not about Midland/Odessa, it is about the Middle East.

It is also not about 12,000 American pilots that Captain Hill states he represents, it is about the other 65,000+ proud employees of American Airlines.

Thank god for Lee Moak and his counterparts at Northwest. At least they recognized that changes were needed to compete in tomorrow's marketplace.

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’.

The Global Airline Industry and Its Interdependencies

It Is Not Just the U.S. Anymore

As this blog approaches its one year anniversary, I have written about many topics. While much of my writing thus far has been US-centric, we have often written about airline happenings around the globe. We have written about the forces of globalization and how US carriers have lost competitive traction when compared to the global elite carriers like AirFrance/KLM, Lufthansa/Swiss, Singapore, Cathay Pacific, Qantas and others. Yesterday, I wrote about the falling price of fuel and concern that announced capacity cuts might not become actual capacity cuts.

When it comes to fuel though, it is global forces that impact its price and they range from demand by rising industrial powers to the relative strength of currencies to market activity. As I do my lunchtime reading, I ran across a must read article written by Derek Sadubin, the Chief Operating Officer of the Centre for Asia Pacific Aviation in The Australian entitled: Deflation in price of oil not all good news for airlines.

Sadubin does a nice job of intertwining economic, competition, currency and oil events from around the globe to discuss the immediate future. He talks about a bear market for oil; business travel stalling; a difficult economic environment proving difficult for the weaker players; competitors rising to challenge incumbents in many parts of the world; a mention of Emirates and their plans to fly through the current difficulties and grow at the expense of other’s weaknesses; and the shift in the relative strength of currencies and the impacts on certain carrier revenues. This references only a few of his points.

But I suppose I liked the article also because he shares my view that the Boeing strike may not be a bad thing for the global industry. In an interview I did with Ted Reed of The Street.com last week, I was quoted as saying that a Boeing strike is not a worse case scenario. You know how it goes in this industry; we order planes in the up cycle and take delivery in a down cycle. It is not the US carriers that hold control over the order book, it is the international carriers. And maybe, the time may not be right for them to expend capital on new equipment to fly to new markets as the global economy slows.

If nothing else, the read reminds us of the global fundamentals that govern this industry and the interdependencies the many forces have that dictate this industry’s successes and failures.

More to come.

Horton Says American Means It

Last month, in a blog post Begging ……. The Questions, I wondered aloud if the US industry, that had announced capacity cuts in July as crude touched $147 per barrel and jet fuel approached $180 per barrel "in the wing", would rollback their capacity cutting plans as oil prices have dropped nearly $40 per barrel since.

At least in Ft. Worth, announced capacity cuts will be actual capacity cuts. Tom Horton, American’s CFO said the domestic capacity cuts are permanent in an interview with the Associated Press. Horton touches on two important cost benefits that will be realized by the decisions his company is taking: 1) the fleet being retired is not efficient from a fuel consumption perspective; and 2) older aircraft require much greater expenditures to maintain.

American Airlines has been aggressive in its capacity planning and has been joined by United and others. Airports around the air transportation system will certainly point to the fact that oil has dropped significantly in the past two months. But we cannot lose sight of the fact that the price of crude oil is only part of the equation; remember the crack spread or the cost to refine crude oil into jet fuel.

The industry is still paying roughly a $140 per barrel equivalent for jet fuel. On average, the industry spent the equivalent of $90.93 per barrel for jet fuel in 2007. It is the difficult management actions that are being undertaken like capacity reductions, ancillary fees and additional employee dislocations that are giving Wall Street some hope that the industry just might be profitable in 2009. But, that all depends on the actual condition of the economy doesn’t it? And I am not sure we can even get an accurate temperature read today.

A Demand Prism?

Let’s not lose sight of the important guidance the cargo side of the business gives to the passenger business despite the fact that they are very different business models. It was the cargo sector that first warned of a slowing economy earlier in the year and the effects it saw on its business outlook. The cargo business addresses more traffic that is demanded on a just-in-time basis and as a result is less price-sensitive. The cargo business is a more leading indicator of things to come. The passenger business sells a significant level of its product well ahead of the actual delivery and tends to be more price-sensitive for a majority of its demand.

Last night, William Greene of Morgan Stanley wrote a piece on Federal Express. It was entitled: Weak Guidance Highlights Cyclical Pressures. And I quote: "Cyclical headwinds clearly a challenge for earnings. As we noted when we downgraded FDX shares back in late July, we struggle to find a compelling reason to own parcel stocks. Although lower fuel prices have pushed off some of our secular concerns about a permanent modal shift, a global slowdown is undermining one of the few remaining areas of strength – international. Moreover, air fuel surcharges are still high from a historical perspective and domestic volumes remain under pressure."

A couple of things in closing. Oil is down but still 50 percent higher after the fall than the average price paid in 2007. And, passenger airlines now face the reality of economic forces and the actual health of consumer’s pocketbooks as the peak travel season just completed was sold in February and March of this year. Fuel coming down is good for all of us, but its fickle nature should not be ignored. Nor should it suggest that the hard decisions made by the industry earlier in the year to park capacity are no longer necessary.

Interesting too is Greene’s assessment that international markets might be weakening. Does the cargo sector offer a prism for the passenger side of the business? I think so and you do not have to read aviation news from around the world everyday to reach that conclusion.

I must say I am amazed that I have not read any uneducated and uniformed reporting to date that suggests that the capacity cuts are not needed given the fall in crude oil prices – but I am sure that I will. Maybe even one written in 2002?

More to come.

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.

Autos and Airlines: 30 Years Later - No Time for Bailouts

I can hear it now, time to bail out the US airline industry. After all, the US economy and the US airline industry are inextricably linked.

As we were deregulating the US airline industry thirty years ago, the government was bailing out Chrysler. Hell, this industry went back and hired a CEO from that period as a savior and that sure as hell did not work. And thirty years later Chrysler is first on the list of potential casualties in the auto industry just as US Airways, United and American are for legacy airline companies.

We have talk of propping up Freddie and Fannie. We have propped up Bear Stearns. We have talk of the need to prop up at least one other financial firm. We have negative real interest rates that have contributed to speculation in the oil and other commodity markets. We have a weak dollar relative to other currencies. From this blogger’s perspective, we have unhealthy everywhere. Airlines, Autos and Steel = Yesterday. Heidi Moore of the Wall Street Journal writes tonight Deal Journal - WSJ.com : Auto Makers & Washington: So Who Isn't Too Big to Fail?. Answer: No One.

Steel has found its way: many, many fewer employees but a much healthier industry. But to buttress that analysis, it must be recognized that the steel industry ultimately won the regulator’s permission to allow a structural construct to be held in the hands of a few firms. Autos: many, many fewer employees who finally negotiated a contract that emulates the times where employers cannot be responsible for all things Roosevelt-like. But is it too late? Airlines: an industry not asking for a bailout but an industry, through bankruptcy, that made it abundantly clear that the costs of pensions, retiree health and work rules written when the jet aircraft was first introduced could not be afforded under the anti-trust-created destructive competition that persists. Yet there is no sign of leadership that is willing to embrace change - despite the harsh lessons taught by autos and steel.

Any way you cut it, labor has played a huge role. All of this talk of lost jobs is just a legacy industry doing what it has done historically - and that is compounding the inefficiencies deemed efficient in the up cycles. Leverage can be good; leverage can be painful. There is nothing bad about this. Yes, it hurts. But through all of this recent history, many bountiful, well-paying jobs remain in the airline industry.

But, if labor is more concerned about jobs, then isn't it about time that we start to differentiate between those employees that remain today and the industry of tomorrow? There will be another day – just not today. For unenlightened leaders and their blind followers there is history to read – and not to be forgotten.

Maybe the steel industry is the model. Maybe the regulators will appreciate that an industry where market strength is held in the hands of a few will employ more people; and even Americans.

Begging ……. The Questions

I don’t know about you, but the Air Transport Association’s prediction of a 6 percent slump in Labor Day travel caught me a little off guard. Sure I did expect a decline, but not on that order of magnitude. Demand is impacted by both price and service. Moreover, we will not begin to feel the reductions in service until after Labor Day. Is this a sign of things to come and why most of the US’s largest carriers are targeting capacity reductions in the 10-13 percent zip code?

If this is the case, can we as an industry not lose sight of some very fundamental and important issues during this slowdown as we have in the past?

1. Immediately after 9/11, somehow we all forgot that the nation’s air traffic system was a national embarrassment and remains so. What should be transparent in its role everyday was made a daily headline. When capacity was being reduced and demand slowed, there was an opportunity to continue work to address this fundamental issue. This is not about slot auctions and other band-aid approaches; it is high-time that we address what is fundamental to the efficiency of the nation’s commercial airline industry that impacts nearly every cost center. Embedded inefficiencies that burn more fuel can no longer be ignored - let alone tolerated.

2. Just because the price of oil has come down off of its July 11, 2008 high, does not mean that the network surgery planned for the fall and winter should become an elective surgery. Rather it is mandatory surgery that has been put off too long. I share Bill Greene’s [Morgan Stanley’s airline equity analyst] concern that the oil price drops will somehow cause some airlines to vacate the announced capacity reduction intentions.

3. The US airline industry has been forced to address multiple macroeconomic issues throughout its deregulated history. This time, can we put the customer at the top of the list and make air travel a value proposition again? It is not just about price and now is the time to demonstrate that fact and begin the process of affecting consumer attitudes and expectations – in the right direction. Simply, make them feel that they are getting more for more, not less for more.

4. In keeping with that theme, can we please recognize that the air travel experience begins and ends at an airport. We talk ad nauseum about airline alliances. Shouldn’t there be an unstated airline-airport alliance? If airlines are going to reduce service, then the service at the remaining airports should match the product that the airline(s) serving that airport market are trying to sell. It will increasingly be in the best interest of both the airline and the airport to make the customer experience the very best it can be otherwise accept the fact that the customer will access the air transportation system via the highway and fly another airline.

5. Whereas I understand the need to be judicious with cash and liquidity, non-existent non-aircraft capital expenditures by the US industry need to exist again. Honestly, if there was going to be foreign capital employed in any of the transactions being considered, it was my fervent hope that the capital would have been dedicated to upgrading the product. If the industry is to justify higher prices, then we really need to invest in the product. Sitting in a ratty airport holding area to board a flight with coke for sale and no movie to watch just does not seem to be the long-term solution.

As demand slows, it is a perfect time to assess the passenger experience from beginning to end. Different approaches and processes can be tried in a less-taxed environment. Airlines could even begin the process of differentiating their product from another. Maybe we could even begin to recognize the difference of services and amenities in a STAR alliance-dominated airport from a SkyTeam-dominated airport from a oneworld-dominated airport from a Southwest-dominated airport.

I do not pretend to have all of the answers because I do not. But I do believe in the adage that says where there are problems, there are opportunities. In the past, opportunities have been missed. This time, any opportunities missed may result in something significant being lost. No matter what we do, it all comes back to the fundamentals. The fundamental product this industry sells is the seat that carries an air travel consumer from A to B.

So, I guess I am begging that we address the fundamentals while facing the problems at hand - and there are many and my short list is not intended to be exhaustive. But, without customers there is no industry - or at least one that we can all be proud of.