Reacquainted With A Great Quote

Peter Goodman, writing for the Daily Times in Pakistan, penned a piece entitled: Time to ask Milton Friedman?. Goodman writes: “So firm was his regard for market forces, so deep his disdain for government, that Mr. Friedman once said: If you put the federal government in charge of the Sahara Desert, in five years there would be a shortage of sand.”

Nearly 15 years before the airline industry was deregulated, Friedman was calling for government to take its hands off of the industry. What if there was no government interference with the airline industry when the jet engine was introduced. Would today’s construct be better or worse than it is? So as we begin the process of congressional hearings on the Delta-Northwest transaction this week, I am troubled, concerned and worried for the industry.

On Tuesday night of last week, FOX Business had Robert Crandall, former Chairman and CEO of American Airlines on as a guest to discuss the Delta-Northwest deal specifically and industry issues generally. While it looked like the Bob Crandall we all looked up to as we learned the airline business and how to think about it, the words were more Lou Dobbs. A most disappointing interview with a person I once admired, but a precursor of things we will begin to hear I am afraid.

Just not much to say.

Added on April 21, 2008

When I posted last night and ended with the mention of Robert Crandall’s appearance on FOX Business, I did not know that an op ed piece would appear in today’s New York Times. Crandall pens a piece entitled Charge More, Merge Less, Fly Better - New York Times. For a guy who was admired for being a most aggressive competitor and willing to employ any tactical and strategic action to give his American Airlines an advantage – I just find his words to be, well – you be the judge. For some they will be refreshing, for others they will be anything but. At least he mentions that fares have to go up.

I will take Friedman because many of the issues that Crandall cites have needed fixing since the industry was deregulated.

April 15, 2008: A Day to Remember or a Day to Forget?

End the speculation. We can now begin to debate the facts surrounding the Delta-Northwest combination. I must say that I expected to see significant changes from the deal that wasn't. What appears unresolved today is not much different than what was unresolved yesterday. As this day closes, I am an industry observer that is pleased to see a consolidation round begin in earnest.

Over the coming days, weeks and months we will be hearing about how the sky is falling. I remain steadfast that consolidation is in the best interest of all US airline industry stakeholders in the long run at this juncture. For some, consolidation through merger and acquisition activity means that the sky is falling. For me this type of consolidation is much better than consolidation through liquidation. In that case, airlines are falling from the sky and dislocations are forever.

Over the coming days much will be written. I will write. In any number of conversations I had today, the issue of labor risk; technology risk; and any other risk that could be raised as standing in the way of a successful combination of Delta and Northwest required addressing. And oil, the number one catalyst (read risk) behind the discussion of consolidation traded at levels approaching $114 per barrel of crude. Assuming that the crack spread is similar to last week’s level, then the "in the wing" price for the industry approached $145 per barrel today.

All of us really do need to stop talking about oil in a per barrel of crude denomination. We have to remember to add the crack spread to the cost of a barrel of crude. Me included. John Heimlich, the Chief Economist at the Air Transport Association has made some additions to his presentation on oil and its impact on the industry. Read it as it provides great perspective and why we find the US industry in its current position.

There Was Other News

We cannot have a day with news of promise in the US without a story on the “Flying Pig”: Alitalia. Reuters reported on the ongoing saga and how, and why, newly elected Prime Minister Berlusconi vows to keep Alitalia flying. The article reports, “Alitalia's ready cash is shrinking by about 3 million euros a day and now has funds left only for the immediate future -- a question of weeks or at most a couple of months, observers say”. The article goes on to say, “IATA, the airline industry association, has told Alitalia it must provide guarantees to be able to stay in IATA's system to settle ticket purchases if it were to go into administration”. Time is a tickin’ in Milan.

And finally, as the day really does come to a close, I sit and watch Neil Cavuto interview Captain Sam Mayer representing the Allied Pilots Association regarding their march today on American Airlines’ largest customers and institutional investors. As I have written all too often, this situation of labor suggesting that they join with customers to force American (or the industry) to address internal issues is reckless and has a higher probability of backfiring than benefiting any one stakeholder at American Airlines (or any other carrier). This is about getting a contract. I just wonder if APA told these valued customers and investors about the magnitude of the ask in their proposal and that they claim that only minimal fare increases are necessary to fund their ask. Best I know, fare increases are what customers like to hear. I doubt it.

And Frontier Receives Notice of Delisting. This story for me truly underscores the fragility of the industry today and why liquidity is king. An interesting day indeed.

One step forward for some and steps back for others. But we will get there someway, somehow.

More to come.

Delta - Northwest Deal Is Real

This link will lead you to information available at this time: http://www.newglobalairline.com

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

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

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

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

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

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

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

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

Is American Airlines Playing the Final Round of the Masters on Thursday?

Some Thoughts for Gerard Arpey

With my mind firmly on Magnolia Lane and the Masters, my mind finds itself drifting from excitement and anticipation to Amon Carter Boulevard. As I do from time to time when I am online, I look to the Dallas Morning News' blog to take the temperature of airline happenings in the Metroplex. And what is going on with AA is no trip down Magnolia Lane. The Masters for me is the culmination of what I call the “Finest 30 Days in Sports Television”. The back nine of the Masters on Sunday provides the fitting bookend to the NCAA Men’s Basketball Tournament Selection Show.

For those of us who relish the tradition of each year’s first major golf tournament, we are familiar with the suggestion that the back nine at Augusta on Sunday is considered the most exciting two and one half hours of golf we will witness. Given the recent happenings at American surrounding the flight cancellations – not from a safety of flight perspective - I am beginning to feel like the company may be playing the final nine holes of the Masters on Thursday. If that were true, then all American could act on under the rules of golf would be to withdraw from this year’s first major. If that’s what the employees want, then the internal noise is equal to the external noise.

American Airlines is not going to withdraw. Or I hope not. But even I have to say it is time for American management to rethink its course strategy after shooting a 40 on the front nine. Tiger did demonstrate that the Masters can be won even after shooting 4 over on the outward nine. Mr. Arpey, I am not trying to put you in the unenviable place of being compared to Tiger, but you are the CEO of the world’s largest airline in terms of traffic and capacity and in some circles that makes you the world’s number one. And just like Tiger has to deal with cameras going off in his backswing, you are going to have to block it out, deal with fuel and an over-zealous FAA and find that will to win.

Mitchell Schnurman of the Ft. Worth Star-Telegram wrote a column this week about the situation at American where he took management and labor to the wood shed in the ongoing saga at American. While Mr. Schnurman and I have not always laughed at each other’s jokes, he does make some good points. My views about the TWU’s action toward Mr. Conley were written two posts ago. But the very idea that transformational change is needed at American, and in the industry can no longer be ignored as the industry’s problems continue to mount. And, if, somehow the foundation issue for your company is how management is compensated then it is time for your Board to consider making changes.

Mr. Arpey, as you make your way to the tenth tee, the bookmakers are starting to bet against you. For the second time in nearly as many days, 24/7 Wall Street mentions AMR as a bankruptcy candidate. Remember it is not about how much money you have made for Wall Street in the past or how many of your decisions and actions have preserved their capital, it is how much money you can make for capital now. With your labor groups, it is not that you have managed your company at a tremendous cost and balance sheet disadvantage because you did not file for bankruptcy; it is because you are deemed to be over-compensated as a result of your Board of Director’s design of AMR’s management compensation system.

I sit on a Board of Directors of a publicly traded company in the airline industry and it gives me a lens into your issues. I know how difficult it is to design a compensation structure that is not only fair and incents the best to stay yet meets today’s rigorous plan design rules. In fact, these rules were put in place to prevent business activities that earned headlines early in this decade. Every plan requires a funding mechanism and yours is stock price from what I can interpret. Other funding mechanisms can be used. But despite what your work groups may think, designing compensation plans today is much more difficult than it might appear.

In theory, stock price is an obvious funding source for a management compensation pool because stock price should be that self correcting mechanism. And that is sound thinking in theory and not always in reality. And that has proven true at AMR. The fault is that stock price reflects expected future earnings and not company performance that has just transpired. Mr. Arpey, your problem is that while you kept your company out of bankruptcy and industry fundamentals started to turn more positive in 2005/2006, your stock price far outperformed the industry. Shame on you for positioning your company that way [and please read this with tongue firmly in cheek].

I want to see this industry change. And change only occurs at the very foundation of how we do business. But, after watching your situation very closely through both good and bad, there is obviously something very wrong at the foundation of American Airlines. I am even more troubled by the public outcry about how this recent inspection has caused dislocations for many. And I am on record and believe fervently that this industry will never knowingly compromise safety. By absorbing tens of millions of dollars of losses for your company to adhere to the Airwothiness Directivenes, I know that you know that. And I will not comment on the unprofessional actions of the APA as I have been down that road way too many times.

What seems to be at the heart of all the bad news that emanates these days stems from AA’s senior management’s inability or unwillingness to communicate with employees and customers. I see you communicating through your actions to Wall Street and what you have done to your balance sheet is nothing short of remarkable with the lack of legal tools available to others. But now it seems that even capital is growing impatient not only with you but with the industry.

I am, and remain, a staunch proponent of variable compensation for both labor and management. This period of transition in our business will determine winners and losers. Whereas no Masters champion has ever shot over 75 on Thursday and been awarded the green jacket on Sunday, there is one champion who did shoot 4 over on the front nine of the first round. I know that there is nothing that can be done to change the management compensation plan design this time around or maybe even the next time. But it is time for you to urge your Board to consider making changes. And make that a priority because you have a lot of people rooting/depending on you.

Just as it hard to imagine a Sunday at the Masters without a Tiger on the prowl; it is just as hard to imagine a US airline industry without American Airlines.

There is still a lot of golf to play. But your course strategy needs to be rethought or you might be watching Saturday and Sunday on TV with the rest of us. And I am sure you do not want that.

The First Four Out Are Not the Final Four

Memphis v. Kansas

We awaken this morning anticipating the final game of the 2007-2008 college basketball season. And lest you think I’m drifting off topic here, the geographic locations of each school have some relevance to happenings in the US airline industry. Lawrence, Kansas does not have direct air service; residents are dependent on the highway system to access air transportation. With the airlines’ costs for fuel now nearing an "in the wing" $130 per barrel, Lawrence is simply one among many rural/small communities that have little hope of supporting direct air service.

With fuel prices forcing a re-examination of the entire route structure, there are some analysts who believe Memphis – and some cities like it – can’t justify the air service it receives given the city’s modest scope, scale and contribution to the US air transportation system as a passenger air transportation hub. This is particularly true in light of the renewed merger talks between Northwest and Delta as reported by Justin Baer and Francesco Guerrera of the Financial Times. If negotiations are indeed underway, there will be heavy scrutiny on the deal structure, network structure, labor construct and cost containment strategies. Will the hard questions be addressed or deferred?

The only thing we’ll know for certain by the end of today is the national champion of college basketball. For the US airline industry, we are just beginning the journey down the road to the Final ????????

The First Four Out

The first four US airlines out: Aloha; ATA; Skybus and Champion, which announces out on 5/31. Let’s not forget about Maxjet, which exited the market in December 2007. Even before the Skybus exit, some pundits and analysts were writing that the U.S. would not lose any more airlines. That’s not the bet I’d put money on. But the real question is whether any of these exits from the market will have meaningful impact on the structure of the ailing US domestic market. The answer is no.

What is interesting is that each of these carriers was a niche player with presence only in a relatively contained market space. Aloha in Hawaii. ATA, which was arguably the most confused carrier in determining what it wanted to be when it grew up, was best known for its late-in-the-game code share relationship with Southwest to serve Hawaii. With Champion, the airline’s claim to fame doesn’t go much beyond its business as the non-scheduled carrier of professional sports teams. Skybus, a carrier trying to bring the Ryanair model to the US five years too late, focused its operation in Columbus, OH (yawn). And Maxjet built its model on the transatlantic business class passenger.

A game-changing development? Not in my opinion. A start, perhaps, in addressing certain regionally concentrated capacity – but in no way contributing to a meaningful improvement in US airline results. The saga surrounding Alitalia is much more interesting than anything happening in the US right now. There, the sixth largest carrier in Europe is on the ropes, largely due to labor and politics standing in the way of what everyone knows needs to be done. The media this week actually suggested that the airline needs an exorcist as much as it needs a business plan. In my view, the Alitalia story is a precursor to what could be coming in the US. And when this begins to happen, then it will get truly interesting.

Get ready to put yourself in the same mindset the industry adopted after 9/11. The discussion will be all about liquidity (Clark Kellogg of CBS Sports might call it spurtability), assuming that fuel prices remain at this level. Already, 24/7 Wall Street and The Street.com have written that it is not entirely out of the question that American Airlines will follow the path of the other legacy carriers in filing for bankruptcy, even with $4.5 billion of unrestricted cash in the bank. I’d say it’s a little too soon to make the call, but it sure does underscore a rough and tumble environment out there. As a friend in the industry wrote to me last week: “We do live in interesting times.” In China, that’s considered a curse.

No #16 seed has ever beaten a #1 seed, and at this point all we have lost in the airline tournament is four very low seeds. Hell, we have not even gotten to a meaningful matchup between a power conference team and a mid major. Every year March Madness produces that game and every year a mid major knocks off a power conference team, and when we get there, the tournament gets more interesting.

What makes the NCAA tournament so much more fun to watch than the US airline industry is the fact that there are no barriers to exit and a lot more barriers to entry - you earn your place.

The real airline tournament begins with the next four out of the US market. Enjoy the game.

Fuel Up, Forecasts Down and Labor at American Airlines Drills a Dry Hole

Crude Oil/Jet Fuel 101

There will be a time down the road when we will all stop talking about the high price of oil and thus the high cost of jet fuel and the resultant impact on the US and global airline industry’s ability to sustain profitability. But that time is not now.

I will put the impact of fuel costs in some historical perspective. During the second quarter of 2000, the industry paid 1.25 cents per available seat mile (ASM) for fuel and 3.50 cents per ASM for labor. By the fourth quarter of 2007, the industry was spending 3.50 cents per ASM for fuel and 3.00 cents per ASM for labor. At 1 billion plus available seat miles flown in 2007, you can do the math.

John Heimlich, the Chief Economist of the Air Transport Association, keeps us up to date on ATA’s website, http://www.airlines.org/, on energy/fuel issues facing the US airline industry. For serious industry watchers, if you don’t have a link to John’s work on your list of favorites then I suggest that you add it now.

It Is More than the Price of Crude

On the site, Mr. Heimlich regularly updates the presentation entitled: “Coping With Sky-High Jet Fuel Prices” in which he points out very clearly that the price of crude oil is only part of the cost for the airline industry. Heimlich reminds that the industry pays a premium, known as the “crack spread,” which is the difference between the cost of a barrel of crude oil and what the industry pays for crude oil refined into jet fuel. Until, hurricanes Katrina and Rita, the industry historically paid a crack spread price of $5 per barrel. In his initial forecast for 2008, Mr. Heimlich forecasts a crack spread price of $25 per barrel.

That $25 of crack spread forecast for 2008 is roughly equivalent to the cost of a barrel of crude in each 2001 and 2002. Simply stated, at a cost of $110 per barrel crude oil, the industry would pay an all in, or “in the wing,” cost per barrel of as much as $135. According to Heimlich, just last week the New York Harbor price of jet fuel topped $145 per barrel, including a crack spread nearing $35 per barrel.

So the pain the average driver feels at the pump is even worse for the airline industry. Heimlich points out the difference in his analysis comparing gasoline to jet fuel. Whereas the difference between the two was $2 per barrel in July 2007, today jet fuel is $29 per barrel more expensive than gasoline. Even with the many industry efforts to improve fuel efficiency, Heimlich forecasts that airlines will pay in excess of $55 billion for fuel in 2008 -- more than $14 billion more than the industry paid in 2007, without consuming so much as a single gallon more.

Many believe that raising fares will fix all. Yes, fares have increased some. But Heimlich shows that, all told, fares for the first two months of 2008 are 2.4 percent less than the average fares for the same two months in 2000. Over the same period, fuel costs have risen 198 percent.

Revised Forecast

As Heimlich was updating his fuel analysis, Brian Pearce, Chief Economist for the International Air Transport Association, was revising his 2008 global forecast – for the second or third time. Mr. Pearce’s initial outlook, issued early last year, predicted that the global airline industry would see a profit of nearly $10 billion in 2008. In September 2007, Pearce revised his profit forecast downward from $9.6 billion to $7.8 billion, citing both fuel costs and the beginnings of the credit crisis.

Only a few months later, in December of 2007, IATA revised its global forecast down yet again. But that revision caught many by surprise based on its sheer magnitude: in less than a year’s time, the IATA forecast a global airline profit of $5.0 billion – a 36 percent reduction from the previous forecast. Now, only yesterday, Pearce again revised his outlook downward by another 10 percent to $4.5 billion in his report “Stagflation Threatens The Outlook.” It is worth a complete read, but his first three points are powerful:

Our previous forecast in December projected a downturn in traffic and profitability for the airline industry this year. Since then the situation in the US economy has deteriorated and jet fuel prices have risen sharply. Stagflation has returned, a damaging combination of forces to which the airline industry is highly exposed over the year ahead.

The uncertainties facing us are far greater than usual. If central banks fail to reverse the credit crunch the outlook, particularly for the US industry, could be far worse. Our next forecast in June will be able to take a clearer view on the extent of the economic difficulties. In this forecast we have taken a conservative approach to cutting our profits forecast. We now project net profits of just $4.5 billion this year.

US consumer confidence slumped in March to levels consistent with a serious recession. The bursting of the housing market bubble leading to falling house prices and sub-prime mortgage defaults has led to a deepening crisis in the financial sector. The resulting credit crunch is now damaging the wider economy.

Now Let’s Turn to American Airlines’ Labor Issues . . . Yet Again

At this point, AA is in negotiations with all three of its unions, so it’s no longer only the Allied Pilots Association attracting news coverage. This week, it was Transport Workers Union, which represents maintenance, ramp and other workers. Yesterday, Trebor Banstetter of the Ft. Worth Star-Telegram reports on his blog that the union placed John Conley, Air Transport Division Director, on administrative leave. This questionable decision apparently stems from a comment Mr. Conley made at an aviation conference in which he suggested that the meteoric rise in the cost of fuel might impact the negotiating outcome in contract talks between the TWU and American.

I have met Mr. Conley and have listened to him in other public forums. I have always been struck by his thoughtful approach, his knowledge of the industry, and the care he shows for the people he represents. In this case, he simply stated the obvious. The reaction by TWU International President Jim Little is unfortunate, but it is likely one we will see more of.

Tracking the news and managing the expectations of the workers they represent is what union leaders do, or should do. But that has not been the case of late in the airline industry, where zealots and ideologues have set completely unrealistic expectations in their rhetoric surrounding contract talks. The TWU’s overheated reaction to Conley’s comments may have more to do with an ongoing campaign by a rival union, AMFA, to organize AA’s M&E shop. But if that’s the case, workers will face the unappealing choice between one union that attempts to silence one of its key officers for speaking the facts, or another that did a less-than-respectable job in representing its members at Northwest and United.

It has been said in the comment section on this blog a couple of times that I have a disdain for airline employees. As a former airline employee (and union steward) myself, nothing could be further from the truth. But I don’t have much patience for union leadership that overpromises and thus sets unrealistic expectations for members when the industry is under enormous financial and competitive pressure. Actions like this are precisely why I believe that this will be the toughest period in labor history since deregulation.

Since posting this piece this morning, I note that Holly Hegeman of Planebuzz.com wrote on the subject of John Conley’s demotion last evening. It is well worth a read.

Watch Alitalia as it is a precursor. In the US, we are witnessing happenings at Aloha and ATA. And we are still on the A’s.

Still Pondering a Northwest – Delta Combination

Swelblog.com: The First 183 Days

Time flies. Never did I think I would write anything with a title, “A Flying Pig”. Never did I think that this year’s four number 1 seeds would make it through the Regionals only to meet at the 2008 Final Four in San Antonio. Never did I think that it was possible for one man to dominate the game of golf as we get to witness Tiger Woods’ rewrite of the record books before he is 35. Never did I think that writing could be this much fun as it comes quite hard for me.

I did think that some of what I would write would not be popular with all. I did think, and do think, when I began to write this blog that we were about to embark on one of the most important and necessary journeys along the path of change since the industry was deregulated.

Still Pondering a Northwest – Delta Combination

Pardus Capital, the activist hedge fund, arguably started the consolidation ball rolling with its expressed interest in seeing a Delta and United combination. Today, $2 bln hedge fund Pardus suspends withdrawals just as we begin to think about a Northwest – Delta combination yet again. Capital preservation.

Where to start when pondering a Northwest – Delta combination sans an agreement on pilot seniority? And speculation of a reworked pilot deal? And announced capacity cuts in the face of oil price realities and macro economic weakness? And with CEOs that have spent considerable amounts of personal and political capital since this deal first became news in January 2008? Capital preservation.

I simply do not know where to start on this one. It made sense before and it makes sense today. My thoughts concerning this deal have me stuck on the negotiating positions of all involved. A lot has been said by the CEOs and the MECs that is going to be – and I am assuming that there will be another attempt to revive the deal – most interesting this go around. Some compromise will be necessary.

Labor versus Capital

Just as the Pardus play was summarily dismissed by Captain Moak, Pardus’ interest along with the interest of all capital are watching this deal. The patience of many was tested as Delta and Northwest tried to forge a deal along the path of least resistance and give labor the say that they demanded following the Pardus play last fall. Well labor had their shot to act in the shaping of the deal and there were many cheerleaders, including me.

But not everyone was a fan of the deal cut, including me. I am all for employees having a piece of the deal as it gives them skin in the game and begins to mitigate some of the us versus them mentality that is all too prevalent in the management and labor worlds today. I am not for negotiating significant fixed increases in rates of pay that will stand in the way of capital appreciation. Particularly in today’s economic world where revenue generation is sure to be challenged.

I am encouraged by the decisions of respective players in the industry to begin the process of cutting capacity. This was another area of the first deal that was troubling. But again, economic forces prevail.

The catalysts driving consolidation have been identified and all remain. But another catalyst, capital, is about to emerge and retake the top spot. And on a day when Pardus Capital is in a capital preservation posture.

Just another irony in this deal. And on a day where we liquidate the first US airline in this cycle. And on a day when Champion Air announces it will cease flight operations on May 31, 2008. And.......

Northwest – Delta Back On?

Susan Carey and Paulo Prada report: Northwest Reworks Plan For Merger With Delta - WSJ.com.

Clearly, more to come.

“A Flying Pig”

Eric Reguly of the globeandmail.com writes a cutting and provocative piece on the situation at Alitalia. I have been looking for an excuse to write about the Alitalia story as it provides a bit of a reflection of US airline industry tendencies. Particularly when politics and labor stand in the way of economic forces that demand change. Fighting an industry’s evolution seems to ultimately result in the failure of the very entity the entrenched believe somehow will flourish in its status quo state.

Whatever date will decide Alitalia’s fate is nearing. Mr. Reguly writes: “Alitalia, with some 18,000 employees (far too many) and 174 aircraft (far too old and fuel inefficient), has been a flying pig for as long as anyone can remember. It was plastered with bandages when radical surgery was required. Between 1999 and 2005, it lost €2.6-billion. In 2002, it was kept alive only by the emergency injection of €1.4-billion from the government. The bleeding still continued. The airline lost €605-million in 2006 and another €364-million last year. The politically motivated strategy of flying from two hubs - Milan's white-elephant Malpensa airport and Rome's Fiumicino - unnecessarily deepened the losses. Alitalia is too small for a two-hub operation (to its credit, the airline was slowly downgrading Malpensa in favour of Fiumicino)”.

The US airline industry is fast approaching a date where something is going to have to give as well with high oil and an economy in recession on a collision course. Whether consolidation or liquidation, the next 12-18 months promises to be the most challenging period in the industry’s deregulated life cycle. The barriers to exit that have historically existed will be challenged. My guess is that they will not provide the same safety net that has been experienced in the past.

Today, Alitalia is Europe’s sixth largest carrier in terms of revenue. The Big 3 in Europe (Air France/KLM, Lufthansa/Swiss and British Airways) are beginning to dwarf numbers 4-6 in terms of size. It would certainly seem that for Alitalia, being part of the world’s largest airline group is its best case scenario. But when parochial interests get in the way, somehow it becomes an all or nothing game rather than to preserve as much of the legacy as possible.

The US airline industry seems poised to experience some similar scenarios. Maybe the best path for the US is consolidation through liquidation? A path of lesser resistance? Some will say to me in various ways: Swelbar, this will only happen when pigs fly. What we are seeing in Altialia is that pigs can’t stay airborne forever – even in Open Skies.

Pigs don’t fly and neither will an industry that refuses to adapt.

Not Time For “Hush Money”

The Status Quo Is the Issue; Not Firing CEOs

Today I received a comment from Carmen on my latest blog post. Carmen is a frequent reader here, student of the industry and a person that is not afraid to say and write what he believes. Even if it means that he is not the first person other pilots seek out in the crew room when he checks in for his trip. He suggests that invoking force majeure might incite a revolution – and I paraphrase.

Carmen is not a current member of his union and his philosophical differences with his union have been written here and on multiple blog sites that cover the industry. Carmen, like others, point to the lack of a people element in the US airline business today is what stands in the way of a successful and sustainable industry when contrasted to the industry we know that perpetually teeters on the edge.

I Said I Would Not Acknowledge

Regarding Carmen’s comments, I responded in a pretty matter of fact tone. After responding, I started thinking back to Bob Reed's piece in Business week last week entitled: It's Time for United's CEO to Go; UAL should keep United Airlines in Chicago—but send Glenn Tilton, its deal-hungry CEO, packing. OK, for those that know me, you know that I have an affinity for Tilton. Do I agree with everything that has been done at United under his watch? No, I do not. Where I absolutely agree with Mr. Tilton is that the status quo does not work for any stakeholder group. Period.

So Mr. Reed, my question to you: are you singling out Tilton or are you joining hands with certain industry stakeholders that are looking for any leverage to maintain the status quo and perpetuate the self-imposed gridlock toward change which afflicts the US industry? It seems to me that any question you asked in your article could have been asked of Richard Anderson at Delta, Doug Steenland at Northwest, Doug Parker at US Airways and yes, even Larry Kellner at Continental. And I am going to include Gerard Arpey of American and I will discuss that later.

And Mr. Reed, I am sure glad you mentioned Continental and its transformation. From my read, about the only thing in your article that comes close to even describing the competitive reality that faces this industry each and every day is the fact that Continental survived the “controversial and oft-despised” Frank Lorenzo era. And I quote further: “the airline survived his tenure (along with two bankruptcies) and eventually morphed into one of the country's most successful large carriers. Now Continental is enjoying solid financial returns, improved customer satisfaction, and stronger employee relations. What's more, its CEO doesn't want to merge and is even ordering new planes”.

Pretty bold statement on the intentions of Continental’s current CEO who has done anything but rule out merger efforts should other carriers in the industry decide to join hands. Then again, it is hard to talk about joining hands when you are encumbered by a golden share that also serves as golden handcuffs. And even bolder to insinuate that other airline CEOs would not want to achieve the same thing that took Continental 10 years to begin fully realizing. And for that matter, that type of success is what CEOs want to be paid for. But the type of transformation that continues at Continental is more akin to a marathon than a sprint.

Where This Whole Post Started

Like today, the industry then was engaged in a shakeout and survival of the fittest when Continental began its transformation. For any Continental, PEOPLExpress, Frontier, New York Air, Texas International (see comment section) and Eastern (did I leave any carrier out?) employee of the time there are plenty of horror stories. But 20+ years later, we continue to witness the legacy carrier that first underwent necessary quadruple bypass surgery to transform itself to a US industry leader.

The only thing different today is that the transformation is more difficult. In the 1980s it was important to build a network, with a cost structure, that gave a carrier some form of presence/dominance within a particular US geographic region. Today it is about building an entity that maintains is preeminence in the US domestic market while spreading its reach to all world regions with a cost structure that allows it to compete where external forces are increasingly complex. Mr. Reed, airline labor, airline consumer activists and Rep. Oberstar would all have us believe that today’s airline world should remain focused on Altoona rather than Auckland; Duluth rather than Dubai.

Carmen in his comment to me mentions pandering and appeasement against a backdrop of a leadership void. Where I am stuck, is that I think there is finally leadership within the industry and there is a vision as to where this industry needs to morph to. When there is leadership and vision, there will be reasons to say no. And today’s CEOs are saying no to a return to the way things have been. They are saying very clearly and in their own way, no to the various issues that led each of their respective entities into bankruptcy or restructuring.

Definitely Not the Time for Hush Money

I asked Carmen in my response: “but isn't what labor wants is an historical return to pandering and appeasement? Throwing good money at the age old problems only makes people happy in the short term. Then the industry has to return and ask for concessions because they can no longer afford the hush money that was negotiated. I am all for saying no and trying to find a way to break this age old pattern. And I think finally this industry has a group of CEOs that can and will say no rather than push off the tough decisions that have been deferred over the past 3-4 negotiating cycles. Popularity contest -- NO. Necessary action – YES”.

It seems that the Northwest employees were more than willing to vote Steenland out in the event of a Northwest – Delta deal. And apparently he was willing to drop his “ego” and step aside in the event of a transaction that he and his board deemed in the best interests of all stakeholders.

My bet is Mr. Tilton and others would/will do the same in return for a deal that satisfies a vision. United has been out front in the consolidation view to be sure. But, United has been out in front suggesting they would put down capacity in the event of high oil prices also. And that simply sounds like managing the business to me. Mr. Reed pleads with United’s Board to “give Tilton his due, provide him fair compensation for time served—and begin the hunt for an executive who can build on his accomplishments and take an independent airline to greater heights”.

But Tilton’s work at United is not yet done and therefore the United Board should no more pay Tilton his hush money to walk today anymore than the prior United administration should have paid the United pilots the hush money to end the dreaded “Summer of 2000” that ultimately landed the carrier in bankruptcy. And certainly Mr. Arpey should not be paying his pilots, flight attendants or any other employees the amounts of hush money they are seeking over an executive compensation plan designed by American's Board. A compensation plan that could have been altered by the Board, not by Mr. Arpey and his management team.

Breaking the boom-bust cycle is much more important than perpetuating the status quo. Maybe we should invoke the force majeure clause on the self-imposed gridlock toward change which afflicts our industry …

To call for one CEO's head when an entire group of industry CEOs recognize that the status quo just does not work is well.......unfortunate.

More to come.

Ironical Catalysts; Seniority No More?; and One Last Comment on Force Majeure

Ironical Catalysts

Isn’t it ironic that the number one catalyst cited as driving a consolidation phase for the US industry is now being discussed as the number one reason that consolidation is being put on the back burner – or even being pulled off of the stove? Ted Reed of the Street.com writes a column offering the Northwest pilot’s take on the industry at $110 per barrel oil as well as their views on how oil might stand in the way of executing what the pilot leaders termed as “an aggressive business plan” by the other carrier [read Delta even if not mentioned by name].

On the surface, Mr. Reed’s story might be read as the Northwest pilots pointing to anything and everything rational that could provide cover for not reaching agreement over an emotional issue. On the other hand their counterparts at Delta, whether ALPA or management, are not suggesting much compromise, let alone capitulation, either. So we have a stand off. The Northwest pilots have a bird in the hand, assuming that no adjustments are made to the terms of the single collective bargaining agreement, versus Section 6 negotiations in 2011. And as I have written here, only the MEC can decide that issue.

What is encouraging about the industry today is its willingness to address some difficult issues with swift and decisive actions – like making the hard choice to further reduce capacity. But these decisions are not limited to Delta. We now have CEOs in the industry that are willing to address these tough issues that prior management teams would have decided to “fly through”. And in the last week, jetBlue, AirTran and Frontier have all sold aircraft or delivery positions largely to augment their respective liquidity positions.

When I first read Mr. Reed’s column this morning, fresh off of a 24 turn between Los Angeles and Washington, I interpreted it to suggest that consolidation is dead. That is not what he is saying at all. But US Airways sure views the lull in the action as a potential entry point to get back in the game as Mr. Reed reports.

Seniority No More?

Let’s segue from seniority integration into seniority. Today, the Washington Post’s Steven Pearlstein writes in his column about industry woes, commercial airline pilot careers and questioning seniority generally.

He concludes with the following two paragraphs: “The reason it's so hard for airlines to find a fair and rational way to combine pilot seniority lists is there is nothing fair and rational in the way seniority is used. It causes a disconnect between performance and reward, discourages movement of employees between and within companies, creates a corrosive caste system that breeds resentment among junior employees and an overblown sense of entitlement among those who are most senior”.

“Airline customers, employees and shareholders would all be better off if the industry spent less time and energy figuring out how to combine seniority lists and more time on how to eliminate them”.

Back in December, two days before Christmas in fact, swelblog.com questioned whether seniority worked for each airline management and labor. Now two days before Easter, a similar question is being raised by Mr. Pearlstein. While some of what Mr. Pearlstein suggests is impossible given equipment qualifications, he raises a fair issue. It is fair particularly when an industry is in serious need of a total overhaul.

While I am confident that any suggestion of seniority will raise the ire of organized labor, this is the time to explore such issues. It is time because many of the legacy constructs within this industry are prohibiting it from moving forward – and seniority is but one. And based on the many issues burdening the industry that are not of its own doing, everything should be on the table and everything explored.

A Little More on Force Majeure

Clearly my prior post generated some comments and most were not in agreement with what I had written. I knew that when I wrote the piece it would not be embraced by all. I certainly expected the note from the American pilot. I did not expect the “call out” by Blackbook, who is one this blog’s most astute commenters. Blackbook's fair questions and comments, and my answer to Blackbook, are available for all to read in the comment section.

While Force Majeure has many, many legal issues surrounding its use and I, admittedly, am not qualified to answer those questions, my intent was to raise a number of issues out there that bother me and to look at pools of expense that could be explored for cost savings. On Thursday of this week, Suzanne Marta of the Dallas Morning News blogged on research notes written by Kevin Crissey at UBS and Jamie Baker at JP Morgan.

Mr. Baker writes: "We would note that with the exception of the immediate aftermath of 9/11, the only time the industry even approached a single-year capacity correction of this magnitude was during the Gulf War I recession - and it required the failure of Eastern, Midway, Pan Am, several discount airlines, and bankruptcies at America West, and Continental to get there."

Immediately following 9/11, certain force majeure clauses were invoked. While force majeure may not be the effect - or even the right action - stemming from today’s environment, the macro environment has many attributes of a cause.