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____________Hot Flash - Monday May 12, 2008
More Than A Quarter Century Later... Jet-A May Be Higher
But Management Fundamentals Remain The SameIt's May 12. For several thousand airline people, it's a day that will live in management infamy. It marks the 26th anniversary of the first large airline bankruptcy - Braniff International.
Unlike the more sophisticated leadership that's generally in place in the industry today, bankruptcy at Braniff was pretty much the brick wall chosen by a confused management on which to splatter a once-great airline. This was the final act in six months of poor, "gimmicky" decisions that simply increased the angle of the airline's plunge to point of financial impact.
In a way, the last months of Braniff International are highly instructive for today's airline industry, which is facing high fuel prices, possibly softening traffic, and labor unions whose members are in no mood for concessions. It's a textbook example of what not to
do in a crisis situation.
In 1981, a very troubled Braniff International was actually turning around. It was starting to report operating (although not net) profits. Under newly-elevated CEO John Casey, it was starting to re-structure after three years of willy-nilly expansion, buying airplanes when the prime rate was 21%, and when, like today, fuel was going through the roof.
Then the Board of Directors decided to seek a new Messiah management team that could part the waters more quickly. They made the fatal mistake of going for smoke-and-mirror magic tricks, making some very ill-advised decisions.
The new team danced fast. They solidified control when they encouraged the Board to fire John Casey. Unfortunately and unnecessarily, they couldn't leave it at that, and later on took the sleazy, unprofessional low road of publicly denigrating this respected and experienced airline executive. (Casey went on to a further distinguished career in aviation. Interestingly, after Braniff went glub, most of the folks on the Messiah team weren't much heard from within the airline industry anymore.)
The goal was to transform Braniff into a Southwest clone. It eliminated first class - which was Braniff's main brand-loyalty revenue stronghold with which to compete with arch-rival American. The move also caused Braniff to lose a lucrative route-sharing agreement with Alaska. (It went to American.) It did the amateur-act seat-cost shell game - cram more seats on the airplanes and fly the pants off 'em to show lower ASM costs. Nice, but there were not enough net-new additional passengers sitting in all those new ASMs to cover the costs. As just one example, Braniff was tossing three 727-200s from San Antonio to DFW within a 25-minute period in the middle of the day, when there was virtually no real demand. Definition of dumb.
Braniff shifted to a one-low-price-no-exceptions fare scheme, to look like the best value in town. All American Airlines had to do was open a couple of lower-fare buckets for sale, and, poof!, Braniff looked like the high-priced spread. Cash went out the door fast.
Other gimmicks were really cute. Braniff agreed to sell its South American routes to Pan Am, taking a $7 million non-refundable deposit, only to renege on the deal and keep the dough. There was a $23 million deal with pension funds, too.
Chapter 11 was filed, and Braniff International shut down on May 12, 1982. By late 1983, the Messiah Team was off the property, and in 1984, an entirely new team from the Pritzker empire brought Braniff out of bankruptcy and back to life, at least for a time.
What happened in Braniff International's last six months sends a clear message for today's airline industry: Gimmicks don't work and mistakes can be quickly lethal. Only hard, decisive, professionally-crafted and fundamental operational changes will get the industry restructured to survive the new world of $3 - $4 jet-A.
What this means for the industry: it will need to go beyond just trying to patch-up the system to cover fuel costs. Fees for the second checked bag, or the fee for a window seat may bring in some revenue, but it does nothing to fundamentally adjust the operation to $125 oil prices.
Tighten it. Or plan on joining Braniff International on the slag heap of airline history. Read on...
__________________
Oil: $125+
But It's Not The Major Cost Problem For AirlinesThe price of jet fuel is a dagger aimed at various parts of the airline industry's anatomy. But it's now making more obvious the desperate need for airlines to pay attention to other areas of their operations. And fast.
It may appear a bit cavalier, but the airline industry - as a broad brush whole - is still wasting millions of dollars every day. Millions, for no reason at all, other than failure to consistently execute their operations. Millions that could offset some, and maybe most, of the effects of $3.75 per gallon go-juice.
Easy to say from the outside, but it is absolutely true. That's because while carriers focus on fuel, and on labor, and on fare increases, and on ancillary revenues, most have ignored monitoring and controlling the number one cost metric in the scheduled airline business.
Minutes.
Yes. Minutes - time defined in 60-second intervals. They are the #1 resource and #1 cost-driver in any airline operation. Controlled and skillfully utilized, they can be the difference in profit and loss. Yet, they are squandered by the thousands every day. Or just ignored.
Airline Costs Are Measured In Time. Not Fuel. The fact is that minutes - and how they are monitored and managed - are the baseline metric in operating
an airline.
Everything is driven by how airlines use minutes. Maintenance costs. Labor costs. Fuel utilization. Customer service. Revenue flows - or lack of them. How an airline structures itself to use minutes can be the determinant if it makes money or just produces red ink.
But minute-management is totally ignored in many aspects of the business. Any frequent traveler can see it, if they look. "Yeahbutt," some airlines will protest. "our Continuous Improvement Teams (or some other trendy dimbulb term) look at all aspects of our operations on an on-going basis." Sure they do. About as effectively as Ray Charles directing traffic.
Operations "On Automatic" - Failure To Execute. Too often, airlines operate on the basis of just moving airplanes, which is not the business they're in. They are in the business of moving human passengers from point A to Point B, often with an intermediate connecting point in between. Airplanes really don't care when or how they get someplace. Passengers do. And that means a need for total worship of the value of minutes.
How often does a flight arrive late at a hub with a cabin-load of passengers on very short connections, and there's no additional preparation on the ground to get them and their bags connected?
Example: the flight arrives at the connecting hub 20 minutes late - no news to the folks managing the ground operations. Yet when it pulls in, it's another 4 to 5 extra minutes because when the last 767 left, the numbskull manager on duty didn't have the brains to tell the agent to re-position the jetbridge for the A-320 that's next. Minutes wasted. Passengers mis-connected. Money squandered for no reason other than mis-management. But a lot of airline managers are completely oblivious to it.
Or there's the fun anxiety when one's on a late-arriving RJ and the remaining connecting time to Concourse B is going to require an Olympic sprint. Yet the ground crew responsible for retrieving "carry on" from the rear bin move like they're auditioning for a re-make of The Life of Riley. RJs are very labor-intensive, and that means when one is late, the ground crew needs to move fast, saving minutes so their customers can make connections. Too often, customers are not a part of the thought process. Just gettin' those bags off in an unhurried manner is all that's necessary.
Squandering minutes costs money. It's likely that the "carry-on" delivery process in RJ operations costs airlines millions every year in missed connections and lost customer good will. When a flight's on-time, it's important to move the "carry-on" bags fast
because it eats into the passenger's connect time. And that means when the flight blocks in late, it's an absolute imperative to hustle.
The reality is that the RJ really does not really "arrive" until the last passenger has his roller bag tossed onto the end of the jetway or into the puddle at the bottom of the airstairs.
"Why, that's not us," some airlines will protest. Are you sure? Advice: wander out to one of your hubs and see what really happens - or more correctly, what does not happen - when a flight arrives late. In reality, a lot of these RJ operations involve huge hidden costs to major carriers. Costs driven by wasting minutes.
Gate Management & Sequencing. How often does a flight arrive at a gate and sit for one, two, three or more minutes while somebody decides to saunter out to direct it in? No big deal, see, as long as the airplane gets to the gate on schedule. Sure, and that three minutes of the 737 sitting out there might be an additional $200 - $250 in wasted fuel, crew time, and maintenance. Wasted minutes mean big dollars.
Ground Time Gained - Or Squandered. Airliners are scheduled using minutes as the metric. So, how much effort - again, something that was once called hustle - is applied to getting a late arriving aircraft off the gate a quickly as possible, to get closer to back on schedule? A lot of airline operations are rote and routine. "We get 30 minutes by the book to turn it, so that's what we'll do." That's fine. But don't go blaming OPEC for your high costs.
Taxi Times. It is astounding that carriers seem content to let out-off and on-in times get out of whack. True, airports are congested, but the question arises if carriers could provide better input in regard to which runways are used, and when. True, air traffic controllers are not exactly under-worked, but this is an area that needs to be monitored. Today, as we've noted in the past, airlines largely let ATC run their "production lines" - the time between the airplane's off the gate and when it gets to the next one. That's wasting minutes, too.
Air Traffic Control. Most delays today have at their root cause the FAA's ATC system. The mis-managed, under-staffed, incompetently-planned ATC system costs the US airline system billions annually. Costs start with the need to factor in more minutes (read: expense) into flight schedules to accommodate the fact that a string of FAA Administrators and an klutzy Congress have let the system deteriorate. Even after factoring extra time into schedules, something like 20% of flights are still arriving "late" - i.e., more than 15 minutes off-schedule.
If it's just 16 minutes, this costs an airline a bundle of money. If we figure in engine reserves, fuel, other maintenance items, and crew, $400 - $500 in extra costs are about ballpark. Not including the cascading expenses of customer issues such as mis-connections. Multiply that out for, say, American or United, and we are talking some serious gelt tossed down the ceramic fixture.
Yet, how much outrage has been expressed by the airline industry? Answer, none. Cocktails and mindless repartee with the FAA Administrator at a Wings Club function seem to take priority to the minutes wasted and the losses the agency inflicts on a carrier's shareholders, employees and customers.
Save Fuel. Waste Money? There's been a spate of news stories implying that airlines are almost universally slowing down in the sky to save fuel. Not so.
For some carriers, in some circumstances, that's good planning. But over all, the hard fact is that airlines use fuel to move airplanes, and moving airplanes is what makes money. Missed by most of the media is the reality that keeping airplanes in the sky longer increases other time-delineated costs, such as maintenance and crew time. The point is that airlines cannot survive on saving fuel. They will survive using fuel to maximize operational efficiency.
No, It's Not Getting Better. To be sure, it's easier to sit on the sidelines than to be in the management trenches, trying to drain the swamp while fighting off the alligators. But that doesn't change the fact that tightening up operations is the number one need if airlines are going to get through and restructure successfully.
Airlines can give us a call for an outside, independent review. The Boyd Group has the team and the expertise to assist carriers in identifying "minute-drains" and crafting solutions.
Minutes are money. And they are being wasted.
_______
Hot Flash - Monday May 5, 2008
News Flash! Airline Consolidation:
It's Come & (Almost) GoneThey've parroted each other so much for so long that they missed the very event they've been predicting.
We're talking about certain folks in the media who've been confidently predicting the future coming of "airline consolidation" - an unquestioned bit of dogma in some corners of the Fourth Estate. A lot of the reporting is structured to warn dis-believers of potential ostracism from the mainstream if they disagree. "Everybody knows" or "analysts all agree", the stories go, that airline consolidation is "inevitable", "necessary", and "good for the industry". It's just over the horizon, see. So don't display your ignorance by suggesting that it might not be that way.
Hearsay Source Reporting. The reality is that some of these reporters don't have enough airline knowledge to fill the back of a cocktail napkin. The truth is that "analysts" don't all agree, and the "everybody" some of these reporters seem to rely on
is really nobody in particular.
Or, the favorite now used in some corners of the media: reporting based on info from an un-named and mysterious "source close to the situation" - which makes one sometimes wonder if maybe the "source" is at least partially the reporter's fertile imagination. Or due to the need to be "first to report" on what some have decided is going to happen regardless of the facts.
But it's the bandwagon they've jumped on. Without doing much research. Without doing much in-depth analysis of the dogma-points, like "over-capacity." And without checking out "sources" beyond what some other media outlet reported. But it's the unquestioned Scripture, see, and those that dare disagree are ignorant heretics.
But while these media Pharasees have been looking to the skies, waiting for the arrival of airline consolidation, it's already passed them by.
The Airplane's Left The Gate. Memo to some in the media: do a bit of research beyond just reading what your competitors are reporting. Airline consolidation is already all around us. It's not only well underway, but the conclusion of the process is now clear. It's been missed because it hasn't taken the form the media Scripture said it must take. But it has come, and while the process will continue, it's mostly gone in regard to the main dogma-predicted mechanism for consolidation: airline mergers.
Here's the Sacred Dogma: Airlines must merge to reduce "over capacity." And, if there's one merger, then inevitably, other airlines must do the same in order to survive. It will start a
"wave" of mergers - airlines will all be scrambling for partners like desperate teenagers with an acne problem a week before the prom.
The fly in this intellectual ointment is that the merger process is now essentially over. The writing's on the wall. Delta and Northwest will join corporately (from a marketing perspective, they've been partially joined for years), and in a manner that doesn't reduce a lot of flying. Not that a merger is needed to allow them to do so, contrary to the accepted lore.
Continental has stated it neither wants nor needs to merge. Ditto, American. That just leaves United and US Airways. That means that at most there could be one more major merger. At most - and that's just speculation in the media at the moment.
That "runs the table", as they say down at the pool hall. American won't merge with Continental or United. Or with Delta. A combination of Continental and American isn't in the merger cards, either. Alliances a la NW/CO, possibly. But not full mergers.
What about LCCs? There's nothing left of any size or of any impact should a merger occur. Frontier and jetBlue, for an entirely hypothetical example? Always possible, but there's not a lot of cost savings or revenue synergies there. It wouldn't have much effect on the competitive picture. Alaska and Air Somebody? Maybe, but Alaska doesn't need a merger, and its costs don't make it an attractive target.
The point is that any major airline mergers possible are already in clear view, and this silly "everybody's gonna have to find a partner" is just repeated nonsense.
Probably from "a source close to the situation."
________________More Consolidation In Full Swing...
Just Ask Toledo. And Fargo. And Atlantic City. And...Right under the noses of the cognoscenti predicting airline consolidation, major airline systems have independently and quietly been doing it for months. But since it hasn't been in the form that the Holy Media Scripture has foretold, the Believers have been oblivious to it.
The Smell of Fear From The Airline Planning Department. The new objective for consolidated network carriers ("CNCs" - what some still call legacy airlines) is revenue quality. Demand is still strong, flights are full, and in the case of a downturn, CNCs have the ability to valve-off capacity via retiring older airliners. That's the good news.
The bad news - particularly for some small and mid-size communities - is that a lot of
hub-reach markets are becoming uneconomic. The distance and costs needed to access the local and flow passengers to a hub are now essential considerations in whether a red pencil is applied to a community's service pattern.
There are two key elements determining whether a CNC can continue to toss RJs (as well as larger airliners) into a specific hub-feed market. The first is the quality of the feed - i.e., the system yield the market can provide to the carrier's system beyond the hub. The second is the cost (read: distance) necessary to access the revenue. The longer the distance of the feed route, the higher the bar for system yield.
Quality of Revenue. With system load factors over 80%, spilling business passengers at the hub in favor of low-fare families on their way to see Pirates of the Caribbean in Orlando is, with $3.50 jet-A, an infamnia. Orlando and 'Vegas are great, but they're low-yield, high-competition markets that are of declining value to airlines.
Beijing and Billings are the types of revenue flows that airlines want to have bumping into each other in the hallways at ATL, DEN, and ORD. They're high-yield and tend to have more potential for generating brand-loyal passengers. So, if the feed provided by a smaller city tends to be low-yield beyond the connecting hub, plan on getting the air service bionic winkie - a.k.a. cancellation of service.
Cost Of Feed Traffic. That much said, distance to the connecting hub is increasingly critical. Today, Fargo - SLC no longer works, for example. The less it costs an airline to access strong connecting traffic, the more secure the service is. The nosedive in RJ economics dictates that the mission applications for these aircraft be shortened. Accessing feed revenue within 300 miles is typically more lucrative than having to launch a small jet 500, 750, or 900 miles to get it.
Media: Stop Gazing Into Space. Take A Look At Toledo, Instead. While the media fans of airline consolidation copy each others' stories and look earnestly into the future for signs of the Coming of Consolidation, they might want to consider something a little more mundane and less cosmic: like, Toledo. That's where Delta has announced deletion of service to Atlanta. They may want to take a gander at the reason. Toledo's a perfect example of how airline consolidation has taken place right under their noses.
Airports:USA® has looked at the feed-traffic yields that major carrier systems are accessing at Toledo. It's pretty indicative of what we can expect - and indeed, what we've been seeing - for the last 12 months.
Airline Costs Are Coming Over The Regional Transom. As a basic metric, we can start with Delta having a real-life mainline average domestic passenger yield of about 16 cents. (Airports:USA® data shows the average Delta O&D yield at ATL itself is over 20 cents.)
So, it doesn't take a Wharton MBA degree to figure out that to accept feed traffic at ATL with yields much below system levels doesn't make sense. Unless, of course, it represents incremental traffic. But at 80%+ load factors at connecting hubs, there isn't much room for incremental passengers. And the distance necessary to fly to get that feed also factors in.
Two years ago, ATL-TOL probably was reasonably contributory and profitable for the Delta system. Today, compared to other hub-feed markets, it's a tough call. Delta has to fly 549 miles to get the feed, which is at break-even yields, at best. But Toledo appears to be a very solid market for the other three feed routes. Toledo still has strong connectivity, but due to new airline cost economics, ATL is out for the moment as a gateway.
This is not isolated - it's happening across the nation, and will continue to happen over the next 18 months, at least, as carriers restructure in the face of the new economics of $100+ oil.
This really is "consolidation" - it just isn't the way that the usual-suspect media gurus and Wall Street shamans have been predicting. So, give it about eighteen months. They'll notice.
After it's over.
______________Airports:USA® DataMiner Update
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For qualified candidates, we offer a seven-day trial subscription. If you're using another on-line data source, you'll find Airports:USA® to be far superior. If you're still subscribing
to quarterly printed reports, you'll find that DataMiner is not only more accurate, but also gives you the ability to analyze the information right on the screen. Probably for a lot less than you're paying now.
And unlike some of those printed products, Airports:USA® DataMiner is not from regurgitated O&D data purchased from third-party vendors. We take data right from the DOT and then correct, sanitize, and integrity-filter them. For example, initial 4th Q 2007 data was found to have one major carrier double-reporting 30% of its traffic, and a couple carriers failing to report at all. DataMiner catches these glitches and corrects them. Those printed reports and other on-line sources might not.
The reason Airports:USA® DataMiner is better is that, unlike some other sources, the principals at The Boyd Group have all worked in airline planning departments. So, we know what to look for.
Get the competitive edge. Click here to apply for a free trial subscription to test-drive Airports:USA® DataMiner.
______________
Hot Flash - Monday April 28, 2008
US Airlines, Airports & Air Transportation:
Not Just Shrinking. Morphing Into A New FutureStand by for more feverish reporting about airline bankruptcies, consolidation, and other mayhem this week. The EOS shutdown is just another falling outpost on the shrinking frontiers of the air transportation industry.
As noted a couple weeks ago, the reason is simple: Oil prices have rendered many formerly-profitable uses of flying machines to be hopelessly un-economic. Permanently.
Not Just Airlines, Either. In the cross hairs of this new economic world are any - any - air transportation segments whose revenue streams are at the margins of the industry, and/or which offer services that are in rapidly-declining demand due to costs or due to changes in the customer base. Look for entities whose basic model has been torpedoed by the direct and wider effects of high oil prices. The airline EOS is the latest in the air carrier segment. ATA and Champion were earlier examples. There will probabaly be more bad news from the front in coming weeks.
But, like a nightmare Giinsu Knife ad, there's more. Lots more to come. It's not just secondary passenger airlines like MaxJet, EOS, ATA, etc. that are being tossed into the dustbin, but other businesses that are corollary to air transportation, too. Like, the air cargo business is in for some real change treats. And that includes all sectors, including logistics and distribution businesses tied to air freight.
The range of commodities that make economic sense being transported by air is going to be very different in the future. "Different" meaning less, mostly. The air cargo pipeline's going to get smaller, and some branches may dry up completely. Message: plan for major changes in the distribution of some key commodities. As a result, plan for changes in the type, scope, and application of airport facilities.
Aircraft Leasing & Financing. Then there's the aircraft leasing business - witness the exchange of missives in the SkyWest take-over offer of ExpressJet, particularly the letter from Continental to XJ, which made it more than clear that the current relationship between CO and XJ was on the rocks. The Boyd Group Annual Fleet Demand Forecasts noted in year 2000 that there was a coming glut in small RJs. With $3 jet-A, it's not a just a glut. It's an economic millstone. The SkyWest/XJ deal is just one step toward clearing more Arizona desert for RJ inhabitants. There are lots of entities - including some large airlines - that hold the paper on these now-dog airliners. Hello, write-off sometime in the future.
Even new aircraft financing isn't all that safe. True, slashing fuel consumption is the name of the game, and most airlines have a desperate need to replace large parts of their fleets. In an independent review, The Boyd Group estimates that if American Airlines could wave a magic wand and replace all its MD-80s with 737-700s, the net to the carrier, including ownership costs, would be over $600 million annually to the plus side.
That would indicate that a new A-320, or a new 737-700 would be a slam-dunk perfect piece of collateral of the folks that finance them to airlines.
Not so fast. Today, there are financial entities that are surely getting big-dollar black-eyes with excess RJs and other obsolete jets on their books, the real residual values of which are just slightly higher than a broken Xerox machine. Going forward, they must be asking if there's a similar risk with getting stuck with a fleet of 737-700s, when two years from now Boeing (or Airbus, or Bombardier, or Embraer, or whoever) could announce a new-generation composite narrow-body platform. One, that, say, is 10% cheaper to fly, and makes existing models obsolete.
Airport Planning & Financing. Many communities will need to do a 180 in regard to how they view the role of the local airport. Getting and keeping scheduled air service needs to share some planning time with wider concepts to address, mitigate, and in some cases, take advantage of what high oil prices are doing to all sectors of transportation. $5 diesel fuel is going to fundamentally change how companies view logistics and distribution. A lot of airports can be a part of that change - it means thinking beyond just runways and hangars and taxiways and interminable meetings begging airlines to increase service.
It means going beyond the concepts of "inter-modal" (which does not universally work for air cargo) to "LAJIT" - "Life After Just-In-Time." The economic contribution of an airport can be much more than the revenues contributed by the week-end flyer orthodontist trying to kill himself doing touch-and-go's in his Bonanza. Think about it. We have. And so have our clients.
The point is that $120 (or whatever) oil has not killed off the aviation industry, nor will it. It will simply cause it to morph into something different than in the past. And, particularly for mid-size and smaller airports, it could represent some striking opportunities.
US aviation needs to plan not outside the box, but outside the past. There is life after $2 unleaded.
________
Airports:USA® DataMiner Update
Fourth quarter 2007 Airports:USA® data are now on-line for subscribers.
A couple of airlines - Spirit, ExpressJet, and Virgin American - did not, for varying reasons, report O&D data for the quarter. Airports:USA has provided adjusted estimates for these carriers, and will update the data when it is received and filtered from the DOT.
Interesting Overview...
Even with all the expansion done by Southwest across the nation, nine of ten of their top passenger markets are in the far west, and eight of those involve California destinations.
Almost ten percent of the carrier's passenger traffic comes from just these ten western markets. The number involving LAS would indicate some vulnerability to an economic downturn that would vaporize some discretionary income.
This is just one of the reports available to full subscribers to Airports:USA®. It's on-line, up-to-the-minute, and gives insights available no where else. Unlike other on-line sources, you don't need to wallow through arcane data request formats. Accessing reports is quick and easy.
And if you're still subscribing to one of those printed "quarterly" report services, by all means waste no more time and money. On-line Airports:USA® DataMiner has better information and more incisive information, and it's far more accurate and timely, too. You can have Airports:USA® DataMiner probably for less than you're paying for the un-filtered raw DOT data that most of these "quarterly" publications foist off as accurate.
For more information on Airports:USA® just click here.
(c) 2008 The Boyd Group, Inc. All Rights Reserved
_________________Hot Flash - Monday April 21, 2008
Numbers. Numbers.
Let's take a break and look at some random numbers and what they represent in aviation.
7,100+
Based on an independent Airports:USA analysis, the number of overlapping markets technically represented by the merger of Delta and Northwest, defined as city pairs where a consumer can possibly book either carrier. (Want to see? Airports:USA DataMiner has a download of these markets. Actually, just the top 100. Printing the whole list would wipe out an acre of Minnesota forest.)14
Out of the top 100 overlapping markets, the number (other than routes connecting existing DL/NW hubs) where the combined market share of the new carrier will increase by more than 2 percentage points. The majority are under 1%.0
As of today, the number of airports where combining Delta and Northwest will result in single-carrier monopoly service.Rule 240
The newly "discovered" legal requirement for airlines to re-book passengers in the event of a delay or cancellation. Or, that's what's being reported. Nice, but inaccurate. Rule 240 was a tariff rule covering procedures regarding how airlines would deal with one another from an administrative perspective in the event passengers were involuntarily shifted from one airline to another. It was not, as present lore would have it, a consumer dictum requiring airlines to re-book passengers. But here's a bit of trivia you can drop at the next AAAE convention that'll either make you look brilliant or very old: It superceded Rule 75.12 Cents
At $115 oil prices, the estimated absolute minimum system contribution yield now needed to make feed traffic on an RJ viable for major airlines, particularly on routes in excess of 800 miles into the connecting hub. In short, if the feed passenger is contributing a yield of less than 12 cents per mile to the major carrier's system, it may be a net loss, considering deteriorating RJ economics, hub facility constraints, failing ATC efficiency, and traffic spill at the connecting hub. (Airports:USA DataMiner subscribers have access to a Hub Contribution report that provides this information. Click here for an unabashed plug. But it's one that airports may want to consider to avoid unexpected air service pink slips.)860
The number of 50-seat and smaller RJs expected to come out of US fleets in the next decade, based on The Boyd Group Global Fleet Forecast. The declining economics of the aircraft mean a big percentage of these machines need to get retired toute suite. And that means retired. To the desert, mostly. Probably in even larger numbers, and much sooner, based on where jet-A is headed.250,000
An estimate of the number of passengers who were cancelled off American Airlines flights due to the FAA's sudden change in determining what "compliance" represented on an MD-80 AD. Gotta give FAA management some credit - it sure got the world's attention, and achieved its purpose - screw up a quarter million consumers just to deflect scrutiny from earlier Congressional revelations that at least some of the chain of FAA command is corrupt.14 Days
The deadline given to the FAA and American Airlines by DOT Secretary Mary Peters to investigate and report back to her as to why so many AA flights were cancelled. Like, she must not have been in the office over the last couple weeks. Not mentioned was the fact that the FAA reports directly to her - a stroll down the hall to the FAA Administrator's office should be all the time required. Assuming he has an office at all.$400
The increase in the penalty airlines must pay involuntarily-bumped passengers under a new DOT rule, part of the Administration's grand and sweeping plans to reduce flight delays. (?).0064%
That's six one-thousands of one percent - it's roughly the percentage of enplaned passengers that are involuntarily bumped, and who'll be the happy beneficiaries of the DOT's new rule. That'll unclog the skies, all right.48 Million Miles
The distance to the planet Mars. It's believed that's where the Bush Administration DOT is now located.(c) 2008 The Boyd Group, Inc. All Rights Reserved
_________Hot Flash - Monday April 14, 2008
Frontier: Quote of The Week
"We do not see a future for Frontier as it faces tough competition in Denver from United on the mainline side, and Southwest on the low-cost side."
- Ray Neidl. Calyon SecuritiesYessir, nobody can compete with Southwest, don't ya know. To hear it from these financial "experts" - Frontier has had its head handed to it in Denver. And it got in all the papers, too. Repeated over and over: Frontier is toast. It was on the TV. It was repeated in the Wall Street Journal. It must be true!
It's all yet another reason a Sealy Posturpedic might be a better place for your money than on Wall Street. Bad information spreads fast, and all that me-too reporting - in most cases without a shred of factual research - can destroy both public confidence and creditor trust in an airline. It certainly harmed Frontier.
So, here are some facts:
It's Southwest, not Frontier that's been being hit. Southwest is doing fine in Denver, to be sure. But Frontier has been doing better in markets where they compete. Frontier is not being squeezed to death between United and Southwest, as the above statement implies. It is simply not accurate - and it's appalling that many in the media have just repeated it as if it were.
Unlike some of these Wall Street types, we actually looked at Frontier's market performance. Fuel costs are the problem - it's not revenue nor is it competition from Southwest. In the second half of 2007, the carrier did one whale of a job in competing with Southwest... It gained a 17% revenue premium over Southwest, and filled over 85% of its seats in the process. Southwest was under 80% in the same markets.
United didn't seem to be too bothered by the Southwest effect, either.
Frontier's credit card processor likely took the me-too reporting at its word. But the canard that Southwest is killing Frontier is a lot of slapdash nonsense. But that seems to be the foundation of a lot of the stuff coming out of the financial world these days.
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Congressional Hearings: Just a Show
Safety: Taking A Back Seat To PR StuntsLet's go visit a Third World country. A typical one that's run by friends and political partners of the Prime Minister in power. Let's look at events in that Third World country's Department of National Transportation, also referred to as the DoNT:
DoNT aviation inspectors find that one of the country's fastest-growing airlines is so dangerous, so sloppy, and with such a poor safety record, that they recommended it be shut down immediately.
The higher-ups at the DoNT order inspectors to "bury" reports recommending the carrier be grounded. This airline, see, is a favorite of the Minister of National Transport. In fact, the Minister just published a paper that, among other things, lauded this very airline as being safe and reliable and saving the nation's citizens billions in fares. The data in that paper were, of course, engineered to cover up the truth. But, understand, it was an election year.
One day, this airline had a flight plunge into the jungle, killing all on board - over 100 people.
Upon hearing the news, the Minister of National Transport - a political hack himself with no transportation experience - rushed to the crash site, held a press conference, and, incredibly, declared that the airline, which had just killed over 100 people, was absolutely safe. In this Third World nation, the media doesn't ask a lot of questions that might embarrass high officials, even in outrageous situations such as this.
A few weeks later, the DoNT inspectors - fed up that this dangerous carrier was still being permitted to operate - were rumored to have threatened to go public with a job action, if this airline was not shut down immediately. Under pressure, the Minister's favorite airline is grounded. It was then revealed that the management of the DoNT had been lying to cover the carrier, and the Minister's earlier report on the carrier's safety was also a lie. The airline indeed had been a sloppily-managed, dangerous entity, with a laundry list of consistent, fundamental, and long-term maintenance and safety violations.
The facts were clear: the Minister and the government had knowingly allowed an unsafe airline to operate, and then tried to cover up for it after a fatal crash. The senior chain of command at the DoNT was obviously and blatantly corrupt.
But being a Third World country, there was no outrage. The Prime Minister lauded the Minister of National Transport, who was consistently anointed by the media as being a great leader - notwithstanding doctored data and dead airline passengers.
If it's not painfully transparent from the first bullet point on, we're not talking about any foreign nation. This describes ValuJet, the FAA, Federico Pena, his doctored report "The Low Fare Revolution," and the corruption at the higher levels at the FAA that let ValuJet continue to operate in an unsafe manner until and even after it killed people.
The fundamentals of that system still exist today. To be clear, there is no US airline that is unsafe, like ValuJet was. There are also no apparent political agendas, as there were in the Clinton Administration (that being to convince the public in an election year that Bill, Pena, et al, had engendered a "Low Fare Revolution" that had saved the public billions, even if safety data had to be doctored to prove it.)
Fear Not! Congress Is Holding Hearings. What was once ValuJet, its management, and its entire corporate DNA are many years gone from the scene. Extinct. But the corrupt, cover-your-tail, FAA management system that allowed the ValuJet tragedy is still in place.
Two weeks ago, Rep. Oberstar (D-MN) held hearings on the subject. Two FAA inspectors - Bobby Boutris and Douglas Peters - recounted to Congress how their superiors interfered with the accomplishment of their duties, preventing them from taking enforcement action against an airline. Their testimony clearly and irrefutably indicates that the chain of command at the FAA is still subject to being corrupted, just as it was in the ValuJet case.
Cover Up Failure By Pulling A Media Stunt. The FAA management looked like sloppy buffoons at Oberstar's hearings. Predictably, Acting FAA Administrator Bobby Sturgell and his management team went into full damage control mode to make it look like they're the guys in the white hats, instead of inept yo-yos who can't do their jobs properly.
Sturgell's plan was brilliant: inflict maximum pain on the flying public, make them and a gullible media believe that the FAA is on the case, and do it in a manner so that the airline industry cannot defend itself. This, of course, was the MD-80 affair.
The MD-80 fleet shutdown was not a safety program. It was an attack against the American public, against honesty, and against integrity, all intended to cover up the real facts. The FAA chose to pull a stunt that unnecessarily inflicted substantial disruption on hundreds of thousands of travelers, trying to look tough. The only thing "safe" was the FAA's belief that the public and some of the gullible don't-bother-to-research-anything media would assume that the problem was with airlines. It proves again that the way the FAA is run and managed at the top is indeed a threat to public safety.
Serious Questions About Oberstar. Yet, despite Kabuki-theatre hearings in Congress, the FAA will not likely be touched. Conclusion: The ValuJet system will continue.
Hearings or not, Rep. Oberstar is not particularly credible. This is based on his apparent penchant to
look the other way when it's a Democrat administration that does the safety doctoring. A year from now, if we have a Democrat in the White House, you can take this to the bank: Oberstar's zeal for going after the FAA will evaporate.
True, he spark-plugged and chaired the FAA whistle-blower hearings on Capitol Hill, but let's remember that he's no new arrival to Washington. He's been there for over 30 years. He knew about the Pena corruption, the doctored ValuJet reports, and the interference with FAA inspectors that that killed people. The FAA schlock that's been going on for years isn't anything he can claim not to have known about. But he never made a peep about any of it then, before now, or in between. So, what can we expect he'll really do?
Based on history, nothing.
No Leadership From The Administration, Either. In this scandal, the Administration, in the form of Acting FAA Administrator Bobby Stugell, has behaved disgracefully. One might think, being the new sheriff in town, he'd take the scandal by the horns and be in front of every microphone and every camera possible, outlining his plans to fix things. Instead, he's out defending the un-defendable, and perpetuating a system that needs immediate overhaul.
Don't miss this cavalier quote, intended to mislead the public that a monetary fine on an airline suddenly transforms FAA incompetence into a "commitment to safety":
"For those who question our commitment to safety, I would suggest there's at least one airline today with 10.2 million reasons why those critics are simply wrong."
What's wrong is that Sturgell has the opportunity to clean out this ethical pig pen. Instead, he defends it. If he gets hung out to dry, and not formally confirmed in the Administrator position, he richly deserves it. This is no time for backroom games and playing politics.
Bet on it: Oberstar and his buddies will use this set of events this to put a final nail Sturgell's failed FAA appointment. Right thing, maybe, but for the wrong reasons. The Democrats simply want to put their own button-man into the five-year job. Another loser such as Jane Garvey, for example.
Mob Snitches Get More Respect. One other point. These two FAA inspectors who testified are not just federal employees. They are heroes, because they knew the price they would pay for "ratting out" the corruption they'd experienced at the FAA.
Remember, there is no whistle-blower protection, regardless of what the law may say. They will return to work with zero career future, and likely suffer subtle but painful retribution from the hacks at the top of the FAA.
These two gentlemen sacrificed their job future to bring the truth to light. Oberstar and Congress will use the information for their own ends, but the very second these inspectors left the hearing chambers, there wasn't a lawmaker in the room that gave a hoot about their fate. The nation owes Mr. Boutris and Mr. Peters a huge vote of thanks, and it owes them support. Make no mistake. As of now they are marked men as far as their professional careers are concerned. At least the feds give mob informers protection.
Honest FAA inspectors are on their own. And so's the flying public.
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Hot Flash - Monday April 7, 2008
The Perimeter Is Shrinking Fast
Air Transportation: Economic Outposts Are FallingThink of the air transportation business - i.e., anything that involves making money using airplanes - as the old Roman Empire.
Changing economics and increased attacks by barbarians caused the Romans to pull
back the perimeters of the Empire, giving up territory it could not longer afford to protect. Peripheral outposts were abandoned simply because the cost of maintaining them began to exceed their value. It was the new economic reality: Shrink the empire down to the size that could be economically operated and defended.
That's where air transportation is today. Skyrocketing fuel costs are to the industry what Visigoths were to the Romans. A lot of what used to be viable businesses out on the perimeters of aviation are now uneconomic outposts that are being abandoned or falling to the attack of higher fuel prices.
Last week, more outposts started to fall.
Four aviation entities - each different, but each operating on the outer edges of the fuel-besieged aviation industry - went down.
ATA's been operating on the economic edges of the industry for the last two years. Fuel costs drove it out of most of its scheduled passenger operations, and when it lost a major charter contract, it had no choice but to shut down. (Note that the Southwest code share was mostly the red-headed stepchild WN had to adopt to do the Midway gate deal.)
Aloha's main operations in Hawaii have always been on the edge. High fuel costs only made it worse, particularly for the carriers' old inter-island fleet of 737-200s. True, Aloha was around for over 60 years, but the airline business has made Hawaii a paradise for bankruptcy attorneys. Shut-downs include Mid-Pacific, Discovery, Royal Hawaiian, Mahalo, etc. Intra-Hawaiian flying is going to get even more shaky with $3 jet-A.
Champion Air - a squeaky-clean charter carrier - came to the conclusion that a fleet of 727-200s was no longer a ticket to the financial show. The fuel Visigoth took them out.
Skybus - High fuel prices have eliminated any margin for success of "alternative" air transportation schemes. And Skybus literally defined the term "alternative." But soaring fuel costs only accelerated what was inevitable from the day they started flying. The Skybus business model doomed it from the start.
Skybus was unique - in that it was the only airline in history that tried to make it difficult for customers to do business with them. No phone number to call if there was a problem. Flying out of airports where alternative service was zero. Frequencies that left customers zapped in the event of a
cancellation.
At the carrier's main focus city, Columbus, load factors hovered in the 70% range - lousy by today's airline standards. But when one considers that the first 20 or so seats occupied were sold at give-away $10 and up prices, the "real" load factor was more around 55%.
If oil was at $75 instead of $110, the result would have been the same, only a few more months down the line. It wasn't just fuel, and it wasn't economc factors that killed Skybus. It was an airline outpost way beyond the fringes of the Empire. Or, for that matter, reality.
What's In The Till Is All There Is. The outer perimeters of the air transportation business will continue to shrink in the coming months. It's a fundamental sea-change, not the result of cyclicality.
And there's no financial cavalry to come and save the day. When the revenues fall and cash runs out, there are very few financial safety nets left for small airlines. Hedge funds and venture capital sources are either tapped out or licking their wounds from earlier airline investments. Reports are that Yucaipa sank over $100 million into Aloha. One of the hedge funds that's been big in playing around with Delta and Northwest stock has told its investors they cannot cash out right now. Nobody knows what the "suitable and sophisticated" Wall Street firms that invested in Skybus are thinking now, except it's a lead-pipe cinch they aren't thinking about doing another airline deal.
The point is that the crisis is not temporary for some of these air transportation firms. It's not even a crisis, really - it's a finality. When the viability of a specific aviation business segment erodes or completely disappears, an infusion of fresh capital only delays the inevitable. It's like tossing money at a company that produces black-and-white TV sets. It may have been profitable in the past, but its product is now economically obsolete. It's the same with some sectors of the air transportation industry.
More Outposts Will Fall. Plan on more shut-downs and bankruptcies on the Outer Rim of the air transportation business. Probably sooner than later. Danger signs: any entities that don't have solid - and deep - revenue streams. Entities with high levels of excess aircraft capacity. And, critically, entities that have limited cash. Cash is time. Time is what's needed to restructure - if it's possible. If that's not possible, cash notwithstanding, the next stop is shut-down or the bankruptcy court.
At risk: Some charter carriers. Some third-tier scheduled airlines. Maybe even a small jet provider or two, what with the increasing glut of 50-seaters. The point is that the range of viable business applications for airplanes is narrowing quickly - and permanently.
Bottom Line: No Huge Consumer Impact. Not at great risk: Comprehensive network carriers. The core of the US airline industry is financially sound for now and the foreseeable future. They have the cash (time) to restructure - and most are doing just that. They have the ability to quickly shrink their operations (and most of the related costs) by parking cheap airplanes and in some cases dumping small jet lift.
At this point, don't expect any huge obvious changes for most consumers. The four shutdowns announced last week are all players on the periphery of air transportation. We'll hear panting reports about the "rash of airline shutdowns" but regardless of veneer stories on TV, there's not going to be major changes in the mainline US air transportation system.
At least, not for a while.
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Docket Finally Issued
Small Community Air Service Development Grant Program
The 2008 SCASD docket has been issued. A few changes this year, including the possibility that the funding could get zapped due to the EAS crisis.Since the inception of the SCASD program, The Boyd Group has assisted its clients in winning more grant funds than any other consultant. In fact, over 22% of the funds have gone to communities who turned to us for help. For more details on this year's program, click here.
(c) 2008 The Boyd Group, Inc. All Rights Reserved
______________Hot Flash - Monday March 31, 2008
Too Bad Congress Wants To Play Politics
FAA ATC Is Public Enemy #1 To Passengers' RightsWASHINGTON (AP) - Congress should stop regulators from spending another dime on a multibillion dollar air traffic control modernization until lawmakers can thoroughly review the program, the controllers union said Wednesday.
If anything illuminates the giant leadership vacuum in Washington, the above story certainly does. The controllers union is entirely correct, NextGen is a $20 billion project (or more) yet it seems nobody has given it any real scrutiny. If they did, they'd find that NextGen is a political Ponzi scheme that makes a 1950s Soviet Five-Year Plan look like a model of efficiency. At least the Russkies limited each such fiasco to just 60 months. Parts of NextGen are pushing a decade late.
Passengers today are inflicted with flight schedules that must be designed to accommodate extra flying necessary reflect the collapsing air traffic control system. Passengers do indeed get held in long take off lines, often unnecessarily, due to the failure of the FAA to have implemented any major and functional ATC upgrades.
Lightweight congress members will blame "airline scheduling practices" - ignoring the fact that airlines are trying to meet the nation's air service demand. Consumer gadflies and self-appointed crusaders against the airline evil, none of whom have ever done any airline schedule or market planning, squeak about those "little jets" that airlines are using, instead of fewer big ones. Experts, all. Just ask 'em.
Airports - particularly smaller ones - are seeing service reduced, in major part due to the high costs of extra flying caused by the ATC system. And, there's no fix on the horizon.
Willing Victims. That begs the question - why isn't the airline industry making the same demand as the controllers' union? They know NextGen is a scam. It's their passengers, their airplanes, and their bottom lines that are being savaged by the air traffic control system.
Airlines feel that controlling labor costs is important. Carriers rail at any increase in airport costs, too. A dollar increase in the price of crude results in groans in every front office. But when it comes to the FAA's bungling of something as fundamental and important as air traffic control, and the billions that it's costing airlines and their customers, the silence of the lambs is the order of the day.
Then, where's Congress - on both sides of the aisle? They're just oh, so concerned about the passenger, and they're lined up to pursue a passenger bill of rights. They conveniently ignore that one of the core reasons for delays on the "tarmac" (as the media calls it) is the air traffic control system.
After all, ethically, NextGen is a close second to all that sniper fire that Hillary, Chelsea, a dried-out rock star, and a comedian had to duck in Bosnia in the name of freedom. Anybody with a grade-school education and a moderate grasp of the English language can recognize that the FAA's grand plan is the equivalent of building a Yugo and telling the world it's a space shuttle. From a schedule perspective, it's no different than an airline arriving six hours late, at the wrong airport, and telling customers that they're on time, because the carrier decided to change the schedule at the last minute.
But, other than the controllers' union, there's not a peep from any other of the "stakeholders" who will continue to get financially impaled by this NextGen fraud.
Airlines: AWOL. The airline industry is reeling under $3 jet fuel, and is desperately looking to cut costs. Their biggest single cost factor is fuel. ATC wastes fuel massively. NextGen will do nothing to substantially change that, simply because NextGen isn't new, "next", nor a solution. Nor is it on-schedule, or anywhere close.
Yet, the airline industry is possibly the biggest supporter of NextGen, regardless of the fact that millions of those pricey gallons of go-juice are being wasted because year after year the FAA can't get out of its own way in regard to ATC upgrades. Conclusion: Nothing's happening here for a fix.The consumer will continue to get abused.
1600 Pennsylvania: Lights Out & Nobody's Home. Where's the Bush Administration? Remember last fall's grand speech by the President? The one where he swung for the intellectual fences, proclaiming, "we have a problem, we know we have a problem, and we're going to fix the problem." Lots of progress made, right?
Then there was his pre-Thanksgiving performance, where he recommended increasing the penalty on airlines for involuntarily bumping passengers - this, he implied, to reduce
flight delays, or so his handlers told him. Conclusion: nothing's happening inside the White House, which seems to have been vacant for months, anyway.
The DOT: Complacent. There's a new DOT Secretary who arrives tainted by none of the intellectual sludge that's been building around the ATC system for years.
Being a lame duck, she had (or may still have) the opportunity to kick some tail and take names, with no fear of retribution by either party. Yet, it appears that Ms. Peters has settled in with "the FAA leadership team" instead of coming in with a flame-thrower and a lot of disinfectant to clean out the place. Conclusion: opportunity, apparently, missed.
Congress: Let's Play Politics With Safety. The acting FAA Administrator, Bobby Sturgell, has a similar opportunity, and being a former airline pilot, is likely well versed on the ATC mess. Yet, not a peep - one reason being that the Democrats are playing politics with his appointment.
Politicians like Charles Schumer (D-NY), after saying nothing about the mind-boggling - and lethal - incompetence of people like Federico Pena and Jane Garvey, and the sheer chutzpa ("bring a good book for your airline delay") of Marion Blakey, has opted to play politics and block the appointment. Even in light of the dishonesty of Pena ("ValueJet is safe!"), and the pre-9/11 bungling of Garvey, Mr. Sturgell's just not good enough for Schumer. Real standards, Senator. Conclusion: Congress isn't a solution, either. No friends for the consumer here.
It gets down to one, and only one, bottom line. There is no cogent, credible air traffic control upgrade program in the works. The FAA, regardless if it's funded, non-funded, re-authorized, un-authorized, homogenized, vaporized or Sanforized, is a non-sequitur. They are, as Captain Michael Baiada illuminated at our Annual Aviation Forecast Conference last October, completely irrelevant to a solution.
The only progress in evidence is the controllers' union call for a investigation of NextGen. They are right: it should be stopped in its tracks. as they suggest. NextGen isn't a solution, so it makes no sense to squander any more money on the scam. Doing the wrong thing is worse than doing nothing.
NextGen is both - nothing and wrong. And it's passengers "rights" that are taking the hit.
_________________
Okay. Let's Grab The Third Rail With Both Hands
Firearms In The CockpitThe gunshot-in-the-cockpit on a US Airways flight got played, re-played and re-played again all week in the media. Even late night shows did comedy routines on it.
But there's nothing funny about a gun going off in a cockpit. Worse, there's nothing funny about the attitude taken by some in aviation about the incident. "It's no big deal," some doth protest too much. "There was no chance of a major catastrophe, so everybody chill out...Stop scaring the flying public..." was one disgusting refrain heard widely, often angrily.
Point: a firearm discharged in a cockpit of a commercial airliner in the sky. Point: regardless of the outcome of this specific event, the fact is that there's nothing minor about the potential - which this incident suggests is entirely possible - of a gun going off in a cockpit at 40,000 feet. Sorry, but being an airline pilot is not a required pre-requisite to conclude and state such a failure could result in catastrophic results, depending on the situation. Even in this case, the bullet, regardless of altitude of the aircraft, apparently missed the captain by inches. Safety?
Using the FAA's definition of "safety" - which is simply an event where nobody gets killed - is not acceptable. The fact is that a deadly weapon was discharged in a cockpit. That, plus the plethora of angry apologists downplaying the potential the event could have represented, is indeed a very real threat to passengers.
Don't bother with the indignant e-mails. This event does represent a situation - a failure, a weakness - that threatened the public. And, given some of the comments from some corners of aviation attacking any such suggestion, it continues to do so.
(c) 2008 The Boyd Group, Inc. All Rights Reserved
___________Hot Flash - Monday March 24, 2008
As Long As Nobody Calls 'Em On It..,
Aviation News: Flash Reporting v Hard InformationWhile most of the media does a superb job trying to make sense of what's going on in aviation, some of the stuff recently coming over the air waves is starting to resemble the buffoon newsroom run by Ted Baxter on the old Mary Tyler Moore Show.
It seems that doing background research to get at least a modicum of understanding of the subject matter is something not felt to be important in a few corners of the Fourth Estate.
Some recent examples would do Ted proud:
Heating Oil Getting Low? Call Southwest Airlines. According to a piece broadcast on one business show, Southwest apparently is branching out into other lines of work. "Southwest is doing well," the business-anchor stated, "because they've pre-purchased most of their fuel oil..."
Yep. Fuel oil - it was used throughout the report. And he added, "they did it last year, too." Having any idea about the subject matter, like the difference between jet-A and the liquid goo that heats a lot of homes on Long Island, isn't, apparently, a high
criteria.
This is the same source that last December recommended consumers go out and book on Pinnacle Airlines for their holiday travel, because according to DOT data the reporters didn't understand, Pinnacle supposedly had a really, really good on-time record. No telling how many poor schlemiel viewers went nuts trying to find the Pinnacle reservations number.
High Fuel Costs Are Forcing Airline Mergers. On the face of it, it's ridiculous. Hugo Chavez isn't going rush out to lower oil prices if a couple carriers merge.
The basis of these reports, of course, is that a merged airline will supposedly have lower costs (facts not in evidence, by the way) which would offset fuel costs.
Sounds good. But it leaves out the fact that mergers take a lot of time and money, and don't do diddly to reduce the price of a gallon of jet-A. And at the end of the day, the merger "savings" in reduced overhead will be close to zip in reducing the ASM costs of tossing that 737 from Omaha to Chicago. A little bit of research on the part of some media folks would be nice before this stuff gets repeated over and over again.
High Fuel Costs Are Cooling Demand For Airline Mergers. Never mind the contradiction with the above, this is being passed around in some media circles like a hot tip at the track. It's been repeated sufficiently to have achieved the status of one of those things "we all know" but don't need to investigate from a factual perspective. Fact: fuel costs are not a major consideration, in that mergers won't bring those costs down, nor - despite lore to the contrary - are mergers a guarantee of higher unit revenues. Most potential mergers are about doing a financial transaction to shed resources and make some quick dough (the DL/NW deal a notable exception) - regardless of fuel costs.
Hedging. It's Just Like A Discount Gas Station. Here's the deal: carriers just need to go the the fuel hedge store, and get some of that cheap jet-A. Or, at least that's what the mental bantam-weight analysts in some media corners would have us believe.
One network recently had its in-studio "airline industry contributor" - some guy most people in the business have probably never heard of - pompously railing about how stupid airlines are because they haven't hedged fuel properly.
Accessorizing his rant was the comment
that it's now the law (?) airlines hedge fuel. What country's law was not made clear.
He boldly revealed that most airlines are hedged less than 20%. At what price, which carriers, and over what period, were factoids of which he had no clue. But don't question him. He's a "contributor" - mostly to misinformation, but a network contributor nonetheless.
He then looked into the camera to scold airline executives, with the same sneering tone an overweight beer-soddened fan in the bleachers uses when he yells at the quarterback after a botched pass. "Twenty-percent, guys, isn't enough!"
How hedges work wasn't in evidence with this supposed expert. Having done any airline fuel management analyses isn't likely in this "expert's" resume. But he's read in all the papers that hedging is good, don't 'ya know. True, airline executives wouldn't likely pay any attention to this guy. But it's being postured to the public as industry expertise. And he is the network's "industry contributor."
Wooden nickels gone electronic.
The Turboprop Comeback. This is the latest in the me-too reporting cycle, where one reporter gets a little bit of information and then proceeds to put it in context somewhere far out in the Klingon Galaxy.
See, Bombardier and ATR are now planning to build 140 airliners this year. Up from 100 last year, and less than 30 in 2002. That sends some in the media into trendline-induced rapture, with stories implying that airlines across the globe are going to be lined up to order new turboprops.
The mix of the current order book, and the trends behind them, point to no such conclusion. The hard fact is that the global demand for large turboprops over the next ten years hardly shows up on the radar screen. In fact, in the US, additional demand for such airliners is estimated to be around 80 units over the next ten years - peanuts in comparison to the total new fleet demand. That's according to our Global Fleet Demand & Trend Forecast, which is a document that does review airliner demand trends region by region. A chunk of these will likely be replacements - not net new units - for long-in-tooth ATR-72s operated by DL/ASA and AA/American Eagle.
Nevertheless, the story's on the wire, and it's probably going to turn into one of those non-factoids that'll be confidently repeated as if it were Sacred Enlightenment, faxed-in direct from Buddha sitting under the Holy Banyan tree. Accurate or not.
Unions Are Single-Handedly Stopping Airline Mergers. Some talking heads have reported that the proposed Delta-Northwest merger has been killed off by those intransigent pilot unions failing to agree on a seniority deal.
Earth to TV network: Union contracts often contain something called a Management Clause. It outlines what management clearly can do in, as the name seems to indicate, managing the airline.
To merge or not to merge is a management decision, not a union one. Management can do a merger deal and let the union chips fall where they may. In fact, that's been the M.O. with mergers in the past. If NW and DL management want to go forward, without any pre-agreement from labor, they can do so.
In the case of NW-DL, management took the position - wisely and unilaterally - that the deal wouldn't have the necessary value unless it could be done without the historic and traditional post-merger, Hatfields-And-McCoys labor strife. After months of meetings and discussions and analyses, Delta's pilots union determined that it wasn't possible. To hear some of the media commentators, that union is remiss for simply looking out for the best interests of its members.
Bottom Line: McNews tends to be the format of choice in some sectors of the media: easy to swallow, served out fast, packaged with pretty colors and a few laughs. But too often, without a lot of hard preparation.
It's a fun format, maybe. But from an informational point of view, its got no nutritional value.
Caveat Viewer.
__________Airports:USA® Traffic Snapshot
Hub Concentration - A Quick OverviewThe common belief is that the hubbing carrier has a strangle-hold on local traffic at a given hubsite community.
Not necessarily so. An Airports:USA® review of traffic trends at key airline hubsite airports tends to moderate that belief.
Based on a full-year, 4Q2006 through 3Q2007, only seven of the 21 major hubsites have the hubbing carrier capturing over 60% of locally-generated passenger trips using the airport. The table below outlines the percent of total enplanements (local and connecting) the hubbing carrier represents.
More telling, however is the percent of the locally-generated passenger trips initiated at the hubsite airport which the hubbing carrier (or carriers) actually capture. (This is not local traffic, per se. It represents the passengers starting their trip itinerary at the hubsite airport.)
Let's take Detroit/Metro. A review shows, for example, that Northwest captures less than 55% of DTW-generated consumer trips. Delta at SLC is less than 50%. Northwest at Memphis captures just over half of the trips at MEM that are locally-initiated.
Of interest is Chicago/ORD. True, between American and United, the hubbing carriers capture about 83% of the locally-generated passengers. But AA has almost an equal share of the locally-initiated ORD passengers with United, even though its share of total ORD enplanements is materially below that of United.
Southwest: More Indications Of Danger For Competitors. Not shown on the chart is the new Southwest dynamic. Airports:USA® data shows that WN traffic at DEN and other airports represents a disproportionate share of locally-generated passengers. This indicates a strong drill-down of brand-loyalty for the carrier in the local market.
Attention Airports:USA® Subscribers. The new-technology DataMiner is being rolled out over the next two weeks, with entirely new and expanded features. The depth of analytical tools, as demonstrated above, is now more comprehensive and easier to use than any - and we mean any - other data source.
All current Airports:USA® DataMiner subscribers will be upgraded by April 1st.
____________
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Hot Flash - Monday March 17, 2008
At $110 Oil - There's No Easy Way Out.
Airline Market Planning Hits The Rewind ButtonTumble to it: from every financial and strategic perspective, the airline industry's just gotten nuked.
The reality is that $100+ oil is not going away. A lot of airplanes and a lot of markets are now well below the financial waterline. That by itself means that much of the air transportation system - as currently structured - is essentially non-economic.
Going forward, a lot of things are going to be different. Schedules, market flows, and fleets need to be re-structured... and fast. There's no time for airlines to form vapid task
teams and engage in backroom political posturing. The bomb's been dropped, and the financial neighborhood they've known for the last 20 years has been vaporized. This is not a cyclical change. It's one that dictates a whole new approach to the US air transportation system.
Add to this the possibility of a consumer downturn (albeit at least partially created by sensational media reporting with no basis in fact) and one thing is clear. It's DEFCON 1 time for the US airline industry.
One key competitive factor: leadership and vision in the airline front office. Just as doing nothing can be lethal, so can doing the wrong things. Airlines with the strongest, most decisive and most focused CEOs are those which have the best chances of crafting solutions for the future.
Those few carriers with CEOs who wait to get cribsheets from outside advisors before making a decision are essentially deer in the financial headlights. And they'll probably make the wrong decisions, anyway.
Air Transportation System: Shrinking. The point is that constriction, not consolidation, may be at immediate hand.
That's because at $3+ a gallon jet-A, the number of communities that can be economically served - regardless of the number of airlines in existence - is going to drop like a baby grand off the 43rd floor. As our Global Fleet Forecast has noted, not one airliner in the US skies was designed with $100 oil in mind.
Consolidation of airlines may or may not occur. Eventually. What is certain, however, is
the near-term reduction in air service levels. What's also certain is that several cost components of the airline business will need to change very quickly, or we're going to see not just less flying, but less airlines - mergers or not.
One of these, as we pointed out last week, is the imperative to shed large numbers of RJs that are being leased on a fuel-cost-plus basis. Delta has already announced the end of RJ service to SLC from BLI and FAR, as well as ATL RJ service to ISP and ACY.
And these are likely just the warm-up act to one whale of a chainsaw application to the air service network as we know it today.
Another outcome may be the acceleration in retirement of older, paid-for mainline aircraft that were previously expected to remain in-fleet for the next several years.
Running Full Airplanes And Bleeding Cash. The fact is that fuel costs have come over the transom in many markets that may have until recently been system-revenue contributors. An Airports:USA® flow analysis of ISP-ATL directional traffic and revenue indicates clearly why Delta has no choice but to dump the route as quickly as possible. These data are from analyses of 3Q 2007, factoring in estimates of current fuel costs.
Thin is the only way of putting it. Considering that almost two-thirds of the ISP-ATL passengers are connecting to other flights, the system contribution is microscopic, if at all, particularly when spill is factored in.
When the ASM costs may be pushing 17 cents or higher, even with an 83%-plus load factor, the combination of escalating fuel prices and the fact that much of the flow traffic is connecting on to other high-cost flights, we have a conclusion: the ISP-ATL market's become a threat to Delta, not an asset.
It's not just Delta. American, for example, is saddled with a fleet of 37-seat and 44-seat ERJs, which enjoy most of the sector costs of their larger 50-seat siblings.
High fuel costs can be lethal to markets in all sectors of a comprehensive network carrier (CNC) system. That in turn is threatening to undermine one of the key advantages the comprehensive network carriers have had compared to LCCs: the flexibility to access stronger and more diverse revenue streams.
Much of the new business-travel revenues are being generated from emerging secondary cities in the Midwest and the Deep South. They have small populations that are not supportive of larger units of capacity, but have new industrial plants that generate strong incremental domestic - and strong international - traffic. As smaller jets become increasingly non-economic, the ability of CNCs to access these revenues starts to go south, and fast.
Then there's the "servo effect" of cutting hub spokes. There's less feed, and that means some diminution in revenue to other, currently-viable hub spokes. It weakens the entire system to one degree or another.
After 50-Seaters, The Next Plane Up Is 130+ Seats. Maybe. There's no question that RJ economics have been going in the wrong direction for years. The Boyd Group accurately forecast a glut of these machines well before OPEC and hedge funds started to get frisky with oil price games. But the real danger now is that most US carriers are stuck with the "100-seat capacity gap."
Take American. As 50-seat (and smaller) jets gravitate toward the operational dog
pound, the smallest pieces of iron AA has are 140-seat MD-80s. (Give or take the miniscule Eagle fleet of 25 CRJ-700s.)
That describes a decision conundrum that's pretty ugly. AA can operate markets with RJs that provide negative system margins, or operate them with airliners way too large and too sector-cost expensive, or drop such markets entirely.
This also points to the possibility of AA retiring a number of MD-80s (nee "Super-80s") from its fleet to cut costs. Or NW suddenly slashing out the last of its DC-9s from its fleet. (Note that these are the mainstay of the NW focus operation at IND, along with CRJs. Conclusions can be drawn.)
Air Traffic Control Hit: Time Just Ran Out. The airline industry is not entirely the victim in this mess. The industry has known for decades that the deteriorating ATC system was costing it billions annually - excess costs that today are contributing to the need to slash flying.
In 1994, The Boyd Group testified to Congress regarding the enormous excess cost burden being inflicted on airlines due to the obsolete and deteriorating ATC system. The bottom line then was $5 billion in excess costs, all up. Internal studies by United and American indicated around $1 billion being drained just from those two carriers. Along with the ATH Group, we noted that airline CEOs should "form a conga line" into the FAA Administrator's office, demanding action. Their companies and their passengers were being materially harmed by the lack of ATC progress at the FAA.
That was 14 years ago. Nothing - yes, nothing - has been done to substantively address the ATC issue. It's gotten worse and worse year after year. And far from a conga line, the airline industry took the role of cheerleader on the cocktail-party circuit
