Aviation Issues & Insight - The Boyd Group Advantage

gos-sip: 1. A rumor or report of a sensational nature; 2. Chatty talk; 3. Casual discussion of topics based on weak supposition instead of specific information, hard proof or knowledge.

That' s pretty much the definition of a goodly percentage of the current reporting on airline mergers. Not always a lot of hard facts, but instead a flood of trendy not-to-be-questioned gossip, based largely on what was heard, read, or reported someplace else.

If Everybody Says It, It Must Be True. It's the "everybody knows" process - stories that get repeated so often and in so many venues, that the simple volume of the repetition is accepted as the "factual" basis for the statement, with no need for further intellectual scrutiny. It's mob journalism - you're not required to question it.

Over the past week some of the mis-reporting about airline mergers could rival the journalistic excellence of the Pyongyang Daily Bugle.

All that's necessary is that a "fact" is reported over and over again, or some university professor sticks his head up for air and makes an all-encompassing pronouncement that has no earthly connection with reality, and certain things become Tenets of Airline Merger Faith that must not be questioned. Among them, apparently:

Don't Underestimate The Potential For Shotgun Weddings. The fact is that "merger mania" is really "Wall Street mania" - the excitement is driven by the potential for big financial institutions to make big money putting deals together, not any compelling operational or competitive need to glue disparate airline systems together.

And there is a pile of long green that can be made, so there could be some shotgun mergers proposed, regardless of whether they might result in an operational mess or not. They'll cut the deal, take their fees and head off for a celebration weekend in the Hamptons. Meanwhile, consumers, and particularly airline employees find themselves with the bill.

The hub-and-spoke system often tends to be painted as a system of captive markets dominated by Darth Vader-esque evil airlines that keep local passengers in abject travel bondage.

Media champions of the consumer are sometimes heard denouncing, say, US Airways for tossing Charlotte into the Dark Side by "dominating over 80% of the airport's departures" or some other such righteous declaration. Or beating up Delta, which sometime in the 1980s hit the beaches on the Ohio River, then stormed and captured fortress CVG, taking over 80% of the poor airport's passenger traffic.

It's an unfortunate situation when a little bit of incomplete knowledge can lead to a whole lot of ignorance. See, aside from the fact that that evil hubbing carrier also delivers a system that gives the airport a whole lot more nonstop destinations and frequencies than it could ever hope to see without the hub operation, that doesn't mean that the community's O&D traffic is always in a stranglehold.

We ran year to date passenger data through Airports:USA DataMiner, and it's pretty clear that just having a hub is no guarantee that a carrier can completely dominate the local O&D traffic. It varies all over the map - literally. Take a gander at DFW - American has 85% of total enplanements, but just a bit over half of the local O&D. Take a look at Charlotte. Or SLC.

This doesn't mean that the OAL portion of the O&D at every airport has destination distribution that's representative of the community's traffic generation. But the point is that a hubbing operation, aside from being a huge economic generator, does not necessarily result the carrier involved dominating all the local O&D. It varies by airport, the size of the local market, the hubbing airline strategy, and a whole lot of other variables.

So the next time some consumer vigilante comes out with the hubs-are-all-bad mantra, take it with a grain of salt.

It's come to our attention that a press release may have been circulated last week, containing an allegation that The Boyd Group's opinions regarding the DL/US merger proposal were improperly influenced by an undisclosed current relationship as a paid advisor to Delta Air Lines, and that the firm has a direct financial interest in the outcome of the deal.

Alas, such implications are entirely false, although queries concerning actual or perceived conflicts of interest are perfectly valid to ask of a consulting firm that states an opinion publicly, preferably before publishing any negative conclusions or implications of same.

For the record, let's make some facts clear. The Boyd Group has had no communication whatsoever with Delta in regard to the US Airways proposal. In fact, our last contact of any type with 1211.JPG (11250 bytes)

senior management of either Delta or US Airways took place at our annual conference on October 8-10, where Delta CFO Ed Bastian made a presentation, and where a very pleasant and informative fireside chat was had with US Airways CEO Doug Parker.

Aside from two, "gee-how-come-you-said-that-on-CNBC" e-mail exchanges with the PR department at US Airways, no one in this firm has had any contacts, discussions, or interactions with either carrier regarding the merger. Any allegations to the contrary are entirely false.

We're Proud of Our Clients - And We Tell The Media. Our reputation with the media is based on integrity and the fact that we always are up front about our client relationships. Our policy has always been that when anyone in the firm speaks to the media, we disclose any professional relationships we may have that could affect our view. For example, a major network last week asked about our projections for the Boeing 787, whereupon we immediately disclosed that we have in the past done forecast and market feasibility projects for Embraer, which could be considered as a Boeing competitor, and for Spirit AeroSystems, which is the former Boeing Commercial Aircraft facility in Wichita.

Of course, we're proud to have done projects in the past for Delta - just as we're proud more recently to have accomplished work also for the management of what is now US Airways. Fine professionals, all.

We have no financial dog in this fight whatsoever. We do feel the merger would be detrimental to the consumer, and we have stated so - and provided data regarding that position - on an entirely independent basis, even though it may not be something that a past client of our firm might want to hear.

Unlike some other consultants, who wait until they see which way the wind sock is pointing, or until they're on the clock, The Boyd Group really does state things as we see them.

As we predicted, some really great stuff came out this past week, supporting the wonders and benefits of US Airways' hostile take-over bid for Delta. The idea is to confuse the issue, and make the public really believe that cutting service and competition will be the biggest thing since the introduction of the jet airliner.

This is one of the current trendy chants from the same general corners of aviation non-expertise who've proclaimed that comprehensive network carriers ("legacies") are expanding internationally because they are abandoning domestic markets to LCCs. It's patently and provably non-factual, but it sounds good, and it gets repeated a lot in the usual circles.

The latest trendy merger claim is a related one. It holds that if Delta is acquired by US Airways, the combined entity will represent reductions in service that will open up huge opportunities for LCCs to expand. "LCCs will jump in," is the confident claim, "giving consumers a flood of new, cheap fares, increasing competition...".

But what are these LCCs supposed to jump into? When it comes to actual, real-world examples, the lightweights who chant this stuff tend to revert to some babble about "opening up" gates for LCC expansion, or just "filling in the vacuum the combined carrier will create." The only vacuum here is a total lack of airline industry knowledge. The concept of actually identifying these mystical new market flows and revenue streams where all this is supposed to take place is light years beyond their expertise.

Here's a fact: This merger won't open up anything material for LCC expansion. First, a combined US/DL entity won't be pulling out of any major revenue markets, no more than have CNCs done so as they've added international service. To do so would be stupid, and there's no regulatory mechanism to force them to do so.

Second, the "gate and facility issue" is, in the grand scheme, a minor one. To be sure, consolidation would free up some gate capacity at a couple airports, but not to any extent that it would allow materially more LCC service across the nation. Possibly at Philadelphia - which has significant ATC problems already - but after that, the "opportunities" get slim. The real hit would be at smaller airports, such as Huntington, Lynchburg, and Gainesville. It's true that they'd have a lot of ticket counter and other space freed up. Probably permanently.

Thirdly, the main function of this merger would be to reduce capacity, not reduce markets flown. At, say, Norfolk, the 18 or so combined round trips that the new entity would initially operate to its Charlotte and Atlanta hubs would likely be reduced to, say, 11 or 12. That opens up zip opportunity for anybody, let alone LCCs.

But Other Carriers Will Benefit. Would a US/DL merger be positive for Southwest, jetBlue, and AirTran? You betcha. But mainly because it would take two current competitors - US Airways and Delta - and tie them up in a messy, energy-consuming merger. For the same reason, this proposed merger would be an opportunity for Continental, Northwest and American. Not as merger partners, but simply because it would allow them to exploit the market, particularly in the Deep South, while the "New Delta" monkeys around with coordinating IT systems, disparate fleets, meshing reservations systems, and having verbal fist-fights across the labor bargaining table.

Point: The folks who'll tell you this merger will lower fares and increase competition are in fantasy land. Consumers will still be living in reality.

If this deal is consummated, it's a near-certainty that either the Delta Shuttle or the US Airways Shuttle will be spun off. The accepted wisdom is that there'll be a feeding frenzy among other airlines to get their paws on that lucrative, high-density DCA-LGA-BOS operation.

One oft-heard comment is that it would be the perfect opportunity for Southwest.

News Flash: From a distance, and to the uninformed, the Delta and the US Airways Shuttles may look attractive, but up close they're operationally as ugly as Pet Rocks. As far as WN goes, Air Zimbabwe has more in common with Southwest than either of these Shuttle operations. swshuttle.JPG (12207 bytes)

Southwest lives on high utilization and operating within as low an operational cost environment as possible. And when they do find it necessary to enter higher-cost markets, such as Denver, Philadelphia, and Washington/Dulles, they can offset some of those costs by cross-feeding new passenger revenue throughout their existing route system.

These Shuttle operations don't even get within a zip code of the Southwest template, and even in the likely event they could be purchased on a turn-key basis, they would be a financial hiccup for Southwest. What some of these analysts miss, is that these Shuttles offer abominable aircraft utilization, obscene sector costs due to ATC and other issues, and traffic flows that are highly irregular throughout the day.

Furthermore, either Shuttle operation would likely be available only on a turn-key basis - with airplanes, facilities, equipment, and employees all in one big happy package. A package that would offer little or no incremental operational synergies to the purchaser.

Add to this recipe the fact that the revenue streams are almost entirely point-to-point, with no incremental cross-feed possible, and the conclusion is that acquiring a fleet of Beech-99s to operate a crop-dusting operation in North Dakota would make only slightly less sense for Southwest than buying one of these Shuttles.

Other carriers? American, maybe, but the cost issues are still there, and the net brand-enhancement in the three metro areas might not be all that great. United? Ditto. Continental? Ditto again, although it's uncertain how much financial interest they may or may not have in the now-US Airways Shuttle terminal, which was originally concepted as a Continental facility.

An Asset Re-Deployment? But there is another potential outcome, one that on paper is entirely possible. It's the who-says-it-has-to-stay-a-shuttle concept. There's nothing from a regulatory point of view to stop Southwest, jetBlue, or even, say, AirTran or Frontier, from buying one of these Shuttle operations, and then redeploy those LGA and DCA slots for nationwide flying, completely blowing off the idea of running high-cost hourly flights up and down the Northeast.

Congress might have an out-of-body over such a deal, but with Iraq, a clumsy President to annoy, and trying to herd in Hillary, in this regard the new Democratic Congress probably will have the attention span of a Rhesus monkey.

The fly in the ointment, with this concept or with a simple take-over, would be operational integration, depending how much actually would have to actually be "acquired." Terminal facilities, okay. Fleets and staffing are a lot more problematic, depending on the acquirer.

It's Our Clients We Want To Thank...
Recognition Of The Boyd Group
By The Rocky Mountain News

We're proud of the reputation we've achieved as a team. Somewhat different, somewhat iconoclastic, to be sure, but we'll match the expertise represented by Mike Mooney, Tim Sieber, Bill Oliver, Marian Boyd and the rest of our professionals against any of our competition. And we do have some pretty good competition, too.

This past week-end, the Rocky Mountain News published an outline of one of our principals, and of our firm. How we got here, and where we're going - warts and all. clientbox.JPG (10397 bytes)

(Believe it or not, some folks might not love us.) All of us feel honored that Colorado's most respected newspaper chose to do a story on the success of our firm.

But just as importantly, it's a reflection of the loyal clients who have seen fit to seek out our services and to work with us over the years. We thought of noting them here, but it was nice to find that there are just too many to list. (You know who you are.) The true measure of an aviation consulting firm isn't just how good its people are, but how good its clients are. And, friends, our clients are the best.

As 2006 draws to a close, this article simply reminds us of who we need to thank for our success.

It's The Most Wonderful Time of The Year!
Ignore Reality. Get In The Spirit of The Season

'Tis The Season.

It's a magic time, when anything's possible. A time when we're encouraged to forget day-to-day realities and to simply accept the fantasy, the whimsy, and the wonder of the season.

And that wonder is, of course, the joy and peace of airline mergers. And, of course, the joy and peace that financial institutions, Martinet "advisors," and various other hangers-on will find in the millions and millions of dollars these deals will leave under the Merger Tree. It's a matter, too, of who's naughty and who's nice. Those that dare question the Merger Wonder are naughty. Those that support it are mostly folks in line to be rewarded with some really nice loot.

To read much of the media coverage, anybody who'd dare question that maybe airline consolidation isn't a positively joyous thing are just Scrooges. "Consolidation is necessary," is the seasonal mantra by some media types, supported primarily only by the fact that it seems everybody's saying it, and in some cases, with the childlike belief that any capacity taken out in a merger will be wondrously permanent.

It's a short leap to then believing that anybody who'd dare question the Wonderful Wisdom of eliminating one of two major airline systems in the Deep South is, well, just a Bah-Humbug type. "We all know," the song of the season goes, "that reducing the number of airlines is a good thing." Just why, they're not sure, but by golly, that's what they're reading in all the papers.

We Can't Let The Grinches Be Heard. But, in a direct effort to steal the joy of the Season, a lot of Grinches have emerged over the past week. In particular, some smaller communities seem to think that the hostile takeover of Delta by US Airways will leave them with less, not more, service. The stated intent of US Airways to cut capacity should the merger go through seems to feed these communities' silly fears. It seems that the fact that the merger offers very little that addresses either of these carriers' route and market weaknesses (Read: Asia & Latin America) has tended to lead some communities into believing that the net result will be less market strength, not more.

People like these are missing the Magic of the season. Their steadfast refusal to look beyond hard, worldly realities is depriving them of the true Spirit of the Merger Season. Not to mention threatening to deprive folks supporting the deal of millions of dollars. So, starting this week, we can expect to see a concerted effort to disabuse these deluded people of the non-Spiritual notion that 2 airlines minus 1 airline equals less. 'Tis the Season, after all, and it's imperative that, at least until the deal is consummated, these people are not depressed by the reality, but instead, buoyed by the joy and wonder, of Merger Magic.

Special Performances. Starting today, seasonal minstrel shows will be making the rounds in the media, at State Houses, and on Capitol Hill. There will be light and whimsical performances by Wall Street types, solos here and there done by a couple of academics, and maybe an ad-hoc "consumer coalition" or two. For comic relief, they may dredge up some semi-lucid former state governor to do a 10-minute monologue on Merger Magic. And of course, some lovely poetry here and there about how LCCs will fill in the lost service at small airports, performed by college professors who don't have enough real-world experience to boil an egg properly.

The objective will be to simply drown out the Grinches by entertaining the masses with fairy-tale stories of that coming mystical world where airline mergers will bring, somewhere over the rainbow, more service, more jets, more hub access, and more stability for the airline industry. Community Grinches who keep saying that it's bad to take the local airport's 6 US flights to CLT and the 6 DL flights into ATL, and combining them in to say, only 8 daily flights, will be shamed or sidelined into the category of negative non-dreamers.

The Washington Show. Lobbyists will descend on congressional offices like a herd of Santa's reindeer, bringing gifts, promises, commitments, and - like most livestock tends to do - leaving behind a lot of stuff that's best shoveled off the floor.

Don't think for a minute that lots of Congressional dwellers can't be made to see and understand the Magic of the season, even if a merger will leave their district destitute of airline competition. "It's our only chance of keeping air service in the long term," may be one of the protestations, subsequent to a possible indication of maybe a future campaign contribution or two. Or, more likely, it'll be due to the thinly veiled fear that airports in the districts of congressmen that are Nice might get more future consideration from the merged airline than those located on the districts of Naughty congresspeople.

And for Those Who Remain Naughty... But there will be some unreconstituted Scrooges that will not be convinced. Ultimately, these non-believers will need to be addressed using, shall we say, "alternative" strategies.

In short, they will need to be neutralized and silenced. Maybe an intense effort to get certain parts of the aviation and general media to take the position that anyone who criticizes the Merger Season is, well, somewhere out on the fringe. We can probably count on Trojan Horse "studies" done either openly, or via indignant "citizens coalitions" who are outraged at the commercial terrorists who'd dare say anything against the Merger Magic.

Airports and communities that still fail to seek the Light may be silenced by political lobbying that convinces the local politicos that all resistance is futile, thereby having them tell the local airport(s) to simply shut up, lest they offend anybody.

On-Call Consulting Practice Now Expanding

The Boyd Group is now accepting a limited number of new on-call consulting clients.

Over the past five years, the firm has developed a strong practice in providing financial institutions, hedge funds, and investment houses with immediate, up-to-the-minute consulting on aviation industry trends and dynamics.

If your organization from time to time requires briefings, updates, and insights into key aviation industry events and emerging issues, join your colleagues and get the competitive edge from The Boyd Group. Click here for more details.

The US Airways Offer For Delta
The Variety Show Is About To Begin
Small Communities: Get Ready For Less Air Service

This is a holiday week, so we'll probably have to wait until next week for the debut of the circus that is sure to develop from the US Airways hostile offer for Delta.

But, start it will. And it'll have all the wonderful characteristics of a 1950s TV variety show. Sort of a latter-day Ed Sullivan Show - entertainment, big-name acts, appearances by stars from stage, screen, and Wall Street, you name it.

There'll be dancing bears in the form of Wall Street analysts, jumping through hoops in perfect obedience to their handlers. Magicians making data disappear and re-appear in reality-defying forms. Puppet acts, too, with politicians doing routines dictated by whichever way the dollars may go. Wild animal acts, with fierce state Attorney Generals growling the merger blues, at least until they're tossed a service bone to shut them up. Chorus lines of big-name East Coast "advisors" singing whatever tune they're paid to belt out, and bringing in the best back-up orchestras of jive numbers money can buy.

Yup, Ed Sullivan would be proud. So, unfortunately, would P.T. Barnum. That's because no how much glitz, glitter, promises and paid PowerPoint presentations will be spit out to hype this deal, it's still a bad one for the consumer. No matter what good intentions US Airways may have, the fact remains that the consumer won't benefit from this deal.

Much will be made about how the America West acquisition of US Airways is the poster-child for this Delta deal. Nothing could be farther from reality. There is a fundamental difference between an asset-buy and this proposed merger of Delta and US Airways.The hostile takeover offer from US Airways is a full-blown, bona fide, overlay merger - one that, as admitted by US Airways, will result in less, not more.

On the other hand, the acquisition of the original US Airways by America West Holdings was essentially an asset-purchase, and one that represented very little overlap. For that reason, we saw it not as a potential disaster, but as a potential winner, and our analyses were relatively positive about the potential for that combination. Click Here and scroll to May 25, 2005.

First, in 2005, America West Holdings bought a dying carrier that represented very little route or competitive overlap. That's 100% different from this current deal, where there is competitive overlap up the whazoo, particularly in smaller communities that have near zip chances of getting new competition should this merger go through.

Second, in the first US Airways deal, HP acquired a carrier that for all indications was heading smooth out of business, and in the process of doing so, HP preserved enormous amounts of service, and retained enormous amounts of competition on the East Coast. America West Holdings was the cavalry that arrived to save the day, not to mention thousands of jobs in the East. That, too is 100% the opposite of what this hostile take-over of Delta represents.

Finally, it needs to be kept in mind that despite admirable progress, the integration of HP and US is not yet complete. Adding Delta into the mix - well, draw your own conclusions regarding the immediate operational "efficiencies" this might bring.

Amateur-Act Myths. The media should be aware that there are a number of mantra-myths that are the bedrock on which proponents are pushing this deal. They are repeated over and over again, mostly by Wall Street types and academics, to the point that they are rarely questioned, even though they're nonsense.

Myth One: We Need Consolidation. Six months ago these folks were still claiming that the industry had "over-capacity." That being proven nonsense by high demand and 80% load factors, the tune has changed.

Supposedly, these folks now claim, there are too many seats out there to support a "healthy" airline industry, even if, at 80%+ load factors, everything is essentially full, and airlines are now pushing into the black.

More hypothetical nonsense. Not only is the system full, but for the first time in memory, comprehensive network airlines are well positioned for an economic downturn, with parts of their fleets or parts of their capacity mix that can be easily pulled-down. And this time, there's limited amounts of net-new CNC capacity on order.

What these people are really saying is that the merger will reduce competition, and - in paper theory only - supposedly reduce the numbers of seats in the market. That, they opine, will strengthen the industry by limiting production. That means they'll carry fewer passengers, but being able to charge them more. This at a time that major carriers are moving into the black. Not only does history refute this theory, particularly in high-density markets, but Congress and the DOJ will need huge on-going doses of this mind-numbing nonsense if they are going to eventually believe it.

Myth Two: Mergers Will Make Airlines Stronger, Causing More Mergers. Don't buy into the hype that there are huge immediate operational synergies in this deal that will render the New Delta a competitive wonder.

The fleets are the economic equivalent of the Hatfields & McCoys. 777s and A-330s. 737s and A-320s. And a hodge-podge of other aircraft. To the creatures that inhabit some parts of the financial world, this means nothing. But when real-world realities of maintenance programs, training curriculums, parts inventories, not to mention union bid-and-bump issues, are considered, what this entity will represent on the day the merger is consummated will be one big wallowing marketing target for its competitors.

It is a fact, however, that the sheer millions that financial institutions can make in merger deals will likely increase the possibility of some new offers made to combine other carriers. But it won't be as a result of the competitive threat that a combined US-DL entity would represent. That's because the revenue and operational synergies are years away.

The main "gain" would be in cutting the competitive flying that today exists between DL and US. For example, the seven ORF-ATL Delta flights and the seven ORF-CLT US Airways flights might be cut down to some combination of eight or nine total flights. If they can retain the same ridership, they get "synergies" in costs, maybe. But not in increased revenues, except to the extent that the reduced capacity allows fare increases between some city pairs.

Myth Three: This Merger Won't Reduce Competition. The last point above brings up the issue of competition - this merger will decimate it.

Communities, politicians, and state AGs should be prepared this coming week for a Minnesota-denuding blizzard of paper "studies" and analyses, all purporting to represent that combining Delta and US Airways won't result in higher concentrations or in less competition.

There will be references to esoteric "indices" like "HHI" and references to domestic market share, and the claim that LCCs will be there to keep competition at a razor edge.

We'll start with this: when you remove one consumer option, competition is reduced. Trying to claim that the consumer can go to another vendor somewhere else (like that LCC-served airport an hour away) doesn't change the fact that one less airline choice is in the marketplace, and one less choice means a reduction in competition.

Small Airports: Reconsider That Growth Plan. Using macro ASM/RPM comparisons, and generalized market-share analyses is a great way to bamboozle local politicians and some of the media. But when the dust settles, it won't do diddly to change the fact that small and medium size communities are going to take this merger on the economic chin.

Here's just a snapshot of what smaller communities can expect from the grand "benefits" of this merger. The percentages next to the cities in black represent the combined capacity share that this new entity would have in the market.

Sure, it could be countered that the New Delta will reduce capacity, thereby reducing concentration at a given airport. But that just means fewer seats in the market, and there's no guarantee that other airlines would increase capacity. In fact, that's a pipe dream - the other carriers are in most cases feeding their hub banks, and increasing either unit capacity or frequency might not be possible or even in their own best interests.

Note that these are just a few examples, and when actual market shares (as opposed to capacity-shares) are considered, the picture can be a lot worse. Charleston, SC, would see over 70% of its passenger traffic controlled by one airline. Montgomery, 75%.

It gets worse. The cities in red are those that will find themselves with NO competition at all - just the New Delta. Put another way, competition won't be reduced in these markets - it will be eliminated. And, please, don't let your intelligence be insulted when some paid wind-up toy "analyst" or zipper-brained financial type tries to tell you that an LCC will jump into these markets. Southwest and jetBlue don't have a hankerin' to rush into Lynchburg.

Let's stop the jive - silly macro numbers aside, it's smaller communities that will see less competition, less capacity, and in most cases, virtually no chance of other carriers jumping in. That is a reduction in competition, and no amount of shameful number-engineering will change that. Or, replace what's lost.

Enter The Clowns. Remember, there are tens of millions to be made on this deal, so it won't go away, and there will be lots more entertainers brought in...

Politicians. The full-court press will be made on Congress. The promises will be flowing like muscatel at a wino convention to "maintain service, increase service, upgrade service," whatever it takes. Rep. James Oberstar, D-MN is slated to be the congressional honcho overseeing airlines. He's so far made less than favorable comments about this deal, but he may have some personal and/or political vulnerabilities that can be exploited to adjust his "vision" - or at least shut him up.

State Attorney General Offices. Every state AG is going to try to manipulate this into something they can wave around like a political scalp in exchange for not opposing the deal. A promise not to drop service to one city or another, or a promise to toss an RJ here or there. Whatever it takes to get the AGs back into their cages.

Academics & "Coalitions" - In the case of the proposed United - US Airways merger back in 2000 - 2001, we were entertained by any number of jive-time reports, studies, and gravely-serious "coalitions" formed specifically to be Trojan Horses to promote the deal.

Follow the money. In some cases we found that it was one of the merger partners that quietly paid for a supposed "independent institution" to do its "independent study." Watch for former governors or other ex-politicos to get "involved" - in exchange for a check or two. And, as always, be skeptical of any group hiding behind the term "coalition." It too often is used like the Wizard of Oz - sounds big and impressive, but behind the curtain there's something really small and insignificant.

In any case - when a report or study is issued, it's not who did it or who paid for it. It's whether the data makes sense.

Yeahbutt, These Guys Are Smart. The argument will be made that the management team at US Airways is at the top of the airline game, are proven visionaries, and are incredibly good at what they do.

None of that is hyperbole. All of it, based on historical, provable and factual results, is entirely accurate. Maybe even an understatement, particularly when one considers the state of America West when Mr. Parker assumed CEO and where it is today in its present form.

But that doesn't mean that visionaries can't make mistakes, nor that visionaries can't find themselves needing or wanting to do deals they might not otherwise do, simply due to the sudden emergence of perceived or real market "opportunities." The open question is whether a hostile takeover of Delta is an "opportunity" that fits the current US Airways.

Windows of Opportunity? Not If They're 40 Floors Up. Even the best management has been vulnerable to mistakes. There are lots of examples. Remember Bob Crandall's "Value Pricing?" When that fiasco finally played out, American was out somewhere north of $300 million in lost revenue.

Back in ancient airline history, in 1978, the whiz-kid in the business was Harding Lawrence of Braniff. He had taken what was essentially a small relatively unfocused carrier, and transformed it into a high-profile potential international juggernaut. Banks were throwing money at Braniff, based on the track record of Mr. Lawrence. In the late 70s, Braniff was minting money, with break-even load factors well under 50%.

Then came some huge mis-steps subsequent to deregulation - caused by this visionary concluding that Braniff just had to jump through a window of opportunity. Three years later, Harding was history, and a year after that, after a dalliance with bringing in a "messiah" CEO who flashed-and-danced what was left of the airline smooth into the ground, Braniff International was gone.

More recently was Independence Air. The management team there was one of the most respected in the industry, again, with a brilliant track record. It is hard to believe that, once this team found the I-Air plan didn't work, they would stick to it until the airline had blown through $300 million or more and ran out of money. But they also saw a window of opportunity that they just had to take advantage of.

This, unfortunately, could be the situation at US Airways - they feel this is an opportunity they can't pass up. It could be a dangerous one.

Series Debut: November 27. The Thanksgiving Holiday will likely delay the start of the PR Circus to hype this deal. But after next Monday, the show will begin. Just remember, it's entertainment, and not necessarily a reality show.

DUBAI (AFP) - A two-year-old Emirati boy was briefly held at Dubai airport after he appeared on a list of wanted terrorist suspects... The infant was eventually allowed to fly "after making sure that he was travelling with his parents"...

Dumb, maybe, but across the globe there are a lot of parents of 2-year olds who might tend to agree about the terrorist thing.

Less than a week after the Newark Star-Ledger reported major security screening and supervisory failures at Newark Liberty International Airport, the Transportation Security Administration has swung into action to avoid a re-occurrence.

They've launched a full scale investigation to find out just who leaked that information to the press. Not, mind you, an investigation into a 90% failure rate of screeners, or of the political yum-yums who are managing the TSA at EWR. Or how to improve the sloppy screening at the airport.

No, they want to make sure that the truth doesn't again get out to the flying public.

Enplanement Growth: Flat Through 3rd Quarter. Probably Slightly Up For The Year

Airports:USA� forecast data indicate that the US should end 2006 at just under .5% absolute enplanement growth.

Within the traffic data at the 146 airports covered by Airports:USA� (representing over 96% of all passenger traffic) there's clear proof that 2006 was a year of readjustment back to reality. When 2005's artificial traffic bubbles are factored out, 2006 was fundamentally a growth year. Not strong growth, but growth nonetheless, of about 1.5% to 1.9%.

The year 2005 had more than its share of traffic-distorting lunacy inflicted upon the airline industry. On the top of the wacko 2004-2005 hit parade, of course, was Independence Air, which proved beyond any doubt that pricing seats way below costs can stimulate new traffic, not to mention the incomes for dozens of bankruptcy attorneys.

The year 2006 also reflects the end of the Delta experiment with Simplifares, which had spiked CVG traffic into the stratosphere, although it had less than cosmic effect on the carrier's bottom line.

Then there was Allegiant's entry and exit at some smaller airports across the country, which yo-yo'ed traffic, at least on a local percentage basis. For example, Toledo's fundamental traffic generation remains strong, but the deletion of some low-fare service sent thousands of temporary 2005 passengers back to spending their discretionary dollars at Wal-Mart, instead of on a 'Vegas vacation. And in the case of Katrina's effects on MSY, that traffic didn't disappear entirely, but much of it showed up at BTR and Jackson. It is now starting to return, albeit slowly due to lack of capacity.

The TSA Is Now A Factor In Air Traffic. Going forward, the forecast for 2007 indicates 3.0% to 3.5% growth over 2006, with relative stability in the market, at least when compared to 2005-2006. Wildcard: the damage done to the industry by the TSA's clumsy and idiotic responses to the events in the UK last August continues to have some effect on traffic. There's no telling what additional amateur-act stuff Kip Hawley might dream up. The TSA's knee-jerk activities over the past six months have done more to kick airlines in the financial tail than to deter terrorism, and there's absolutely no oversight or control over Hawley and his Junior Security Rangers to prevent another TSA attack on our transportation system.

New Entrants: Talk About Really Bozo Timing. Another wild card is capacity. Comprehensive network carriers have no apparent plans to add lots of seats - in fact, most don't have the aircraft on order to even consider major capacity jumps.

But we do have the bright-eyed flower children out there that in one form or another are planning to start airlines with the claim that they're going to be "different" - in a revolutionary way.

As noted below, even some of the usual financial-industry airline analysts have noticed that the LCC "model" isn't working so well, yet it's this segment that's still adding airplanes and capacity. Nevertheless, there are at least two paper "low-cost" carriers - one allegedly trying to look upscale (Virgin America) nov6box1.JPG (19010 bytes)

and another purporting to be a RyanAir look-alike (Skybus) - that have a very distant potential to toss more seats into the skies. Just when the LCC model is starting to hit a brick wall, it's really brilliant to add more LCC capacity.

While this is not likely to be seen until the end of 2007 (if at all) it could be another destabilizing factor that may artificially - and temporarily - spike traffic in some regions.

In passing, note that today, concept carriers often aren't Southwest wannabes. Sorry, but it appears that Herb Kelleher is being replaced by Michael O'Leary as the low-fare matinee idol. Now, instead of Southwest, often we hear RyanAir as the "model" for these proposed paper airlines. The reason is that RyanAir has seen a lot of press over the past two years, about eliminating things like window shades, reclining seats, and seatback pockets. And how they're selling stuff - on board and off - to underwrite revenues.

Unfortunately, there are those who confuse the EU with the US - the dynamics of the travel support infrastructure are very different here. Then there's the concept - vaguely suggested - of flying to secondary, un-used or under-used airports, just like RyanAir does in Europe. In this country, that's another good path to get up close and personal with Chapter 11.

Bottom line is that 2007, barring another attack from the bureaucrats at the TSA or entry of a lot of desperate LCC capacity, is likely going to be a stable year for air traffic. This week's Wednesday Airports:USA� Forecast Flash covers some of these dynamics.

The set of challenges that LCCs are now obviously experiencing has suddenly become the prediction du jour among the usual suspects in the financial and consulting world.

Now that the data are clear, with declining profits at LCCs and strong results from CNCs, it's very safe for these alleged analysts to "forecast" that comprehensive network carriers, a.k.a. "legacies" are the ones to bet on, and that LCCs are seeing some clouds in their futures. Nothing is more certain than forecasting what's already taken place.

Particularly on Wall Street, it's become the latest dogma to "predict" the problems with LCCs and the "LCC model." (Something, by the way, they'd have a hard time defining, since "the LCC model" really doesn't exist in the first place, at least not as an easily-identifiable monolithic business plan common among more than one carrier. Compare Frontier to jetBlue. Compare Southwest to AirTran, for just two examples.)

They Weren't Predicting This A Year Ago. Or Six Months Ago. It's accurate that the LCC sector is in some difficulty. Nevertheless, this shift in LCC fortunes didn't happen overnight. So the question is, where were these brilliant financial analysts and East Coast consultants six months ago? A year ago? Some of these folks, who not more than weeks ago may have been parroting the wonders of LCCs, have done opinion pirouettes that would leave Baryshnikov in the dust. POLLY2.jpg (5745 bytes)

Remember last year, when DOT Secretary Norman Mineta, unsupervised and on the loose in China, made a speech noting that LCCs had higher aircraft utilization, and based on that one factor, it was they, not those sloppy legacies, that were the carriers of the future. The CNCs, he expounded, would need to circle the wagons and merge to survive.

It got a lot of press, yet not one major Wall Street wunderkind analyst raised a voice to point out that the good Secretary was shooting from the hip and obviously didn't know diddly about the subject matter. The reason, primarily, was it was their dumb dogma Mineta was spouting.

But that's now passe. A particularly cute example of 180-thinking from this past week...

Deeply Insightful Analyst, October, 2006, Washington Post: "They're (Southwest & LCCS) running out of [markets] that fit their model. As a matter of fact, you could say they've run out."

The same Deeply Insightful Analyst, three months ago in USA Today: “There’s an opportunity for lower-fare new entrants in the U.S.”

Forecasting Means Analyzing Trends - Ahead of Time. Our clients, and attendees at our Annual Forecast Conferences, were aware of this emerging trend more than two years ago, when these shamans were gravely intoning a Gregorian Chant over what they saw as the carcass of legacy carriers. We outlined the dynamics of diverse revenue streams, diverse fleets, and on-board revenue premiums - all of which are areas where LCCs are relatively vulnerable. Back then, some of the usual suspects in the aviation cognoscenti sneered, sometimes quite openly, at us. We weren't part of "the consensus." At least about that, they're quite right.

Bottom line: Beware. Trend forecasting means looking over the horizon, not doing a Google search to find out what everybody else is saying. As for some of these financial analysts, taking their advice and "insight" is like a sucker bet on the outcome of an instant replay.

The comprehensive 2007 Boyd Group Annual Global Fleet Forecast will be available November 15. As with all of the forecast work we do, it is accomplished entirely independently, with no input (or, for that matter, concern) for the ambient industry "consensus." We believe that "the consensus" is nothing more than an intellectual dodge used when people don't have the courage to state facts that might not agree with ambient beliefs.

Small Is Out. Super-Big Is Dicey, Too. Several of our forecast findings vary materially from other sources. One of these is the demand for more "regional jets" - our forecasts, not to mention the order books for CRJ and ERJ airliners, show that there's more global demand for stray cats than "regional" jets. Demand for Embraer E-Jets, yes, but they are not "regional" in any sense of the word, and the demand will mostly be for the larger versions of this platform. Bombardier will see some residual orders for the CRJ-900 (which is simply a stretched RJ) but the writing's on the wall for the CRJ platform.

Another variance - although one that's closing fast between Boyd Group forecasts and those from other sources - is our projection for the A-380. From the beginning, the best we could see for this aircraft was 450 units. Today, we're even less optimistic, with global demand indicated to be 350 or less. Both of these forecasts varied widely from those of either Airbus or Boeing, but, regardless of production delays, other forecasts are gravitating downward toward a number closer to ours. This isn't to imply that there isn't demand for the A-380, nor that Airbus might eventually be able to make some money on the project. It's the scope of the utility of the A-380 that's in question.

Boeing: Can It Actually Cash-In On The 787 Technology? The most pressing question for the future is that represented by the Boeing 787. Not the airplane itself, but the technology it represents. As outlined by Loren Aandahl of Northwest Airlines at our 11th Annual Forecast Conference three weeks ago, the 787 is in fact a breakthrough airliner. Not incremental improvements in efficiency, but outright breakthrough improvements. It's an airliner half the size of the 747-400, but with the same ASM costs. Unless there are major unforeseen delays or glitches in the program, the 787 is going to allow Boeing to do a summersault over Airbus.

But this gives Boeing two hot-potato issues to deal with. The first is capitalizing on hfoct30a.JPG (28527 bytes)

the current product line confusion at Airbus, which is working hard to unravel the problems with the A-380 program while attempting to develop a clean-sheet airliner to belatedly take on the 787. The second issue is, simply, how can Boeing expand the technology advantage represented by the 787 into other airliner platforms.

Putting this into the context of global airliner demand, this means Boeing almost certainly has to consider a composite follow-on to the 737 series, because it's in that general size category that the majority of new fleet demand will manifest over the next decade. If they can translate the 787 operating cost advantage into a 737-size platform, and do it before Airbus (or, possibly, someone else) it's a home run for Boeing.

Composite Technology Is A Threatening Technology. Even For Boeing. Composite technology is much different that that of metal fabrication. So, too are the operating efficiency characteristics of a composite aircraft platform. Theoretically, the limitations in stretching or shrinking a given aircraft platform are much less daunting with composite manufacture than with metal. Offering a range of metal 737s, such as the -600 through the -900 series, carries with it significant operational trade-offs on the far ends of the size spectrum. Again, theoretically, composite technology offers fewer limitations in this regard. Therefore - again, in the cosmic world of magic theory - a next-generation composite 737 could be a platform offering excellent economics in versions from, say, 90 seats through 170 seats. That could encompass 50% or more of the demand categories for new airliners over the next decade. And if it's an airliner with materially lower operating costs, the opportunities are obvious.

The conundrum for Boeing (assuming 787 technology can really be down-scaled) is what the announcement of a next generation composite 737 would do to their order book. If we can assume that the new airliner will be 15% more efficient than existing 737s, it's logical that it'll be a stampede of airlines to Boeing's door to place orders. For starters, American has over 300 MD-80s, plus a system seat capacity gap between 70 and 140 seats. This is tailor-made for a huge AA order for composite 737s. (Forget the issue of AMR's corporate debt. If they want 300 airplanes, Boeing, not to mention the dragons on Wall Street, will find a way of getting them financed.)

Then there's Southwest. It needs to get costs down and is looking hard for new advantages to exploit. Importantly, it has options for 250 current-generation 737s, which could be switched in a heartbeat into orders for plastic 737s.

On paper, then, it's conceivable that within minutes (okay, days) of announcing the composite 737, Boeing could have over 500 immediate orders on its books. Toss in other potential customers, and it's fat city for Boeing.

Or, is it? First, to justify the enormous investment in new production capacity (either in-house, or with supplier partners) they would need to pre-announce the new airliner three to five years in advance of its first flight, and demonstrate huge demand that can cover such costs. Clearly, that they could do. But this being a breakthrough airliner, it's a leadpipe cinch that demand - including options already on the books - for current generation 737s would drop to the level of a used Yugo. The danger is that Boeing's production line of current-generation 737s (and the cash flow it produces) could grind almost to a halt, as potential customers opt to wait a couple years for the new model. Since the 737 is the manufacturer's current cash cow, even a Wharton MBA could conclude that there's a very real and dangerous minefield that Boeing would need to navigate in bringing out any new-generation 737 platform.

A Technology That's Too Financially Dangerous To Exploit? The point is that maybe Boeing can't afford to take the risk of producing an entirely new, super-efficient 737. The true market costs of bringing it out could be onerous in the near term, regardless of the potential demand. The alternatives for Boeing are to simply soldier on hfoct30b.JPG (23274 bytes)

with the current generation, which entirely squanders the technology advantage gained via the 787. Or, Boeing could do incremental upgrades to the current 737, if indeed that's possible. But the fact remains that at some point, Boeing's advantage will evaporate, and there's no guarantee that another manufacturer (don't discount Embraer or a Chinese manufacturer) won't pursue such an aircraft, leapfrogging Boeing in the process.

It's clear that Boeing has a technology advantage. What isn't so clear is whether Boeing can afford to take advantage of it.

This and other emerging trends are discussed in detail in The Boyd Group 2007 Annual Global Fleet Forecast. To order, click here.

__________

From The Why Bother, Nobody Cares Department
90% Screener Failure Rate? TSA Says That's Great

The Newark Star-Ledger has reported that screeners at Newark Liberty International Airport succeeded in failing over 90% of recent tests with various prohibited items.

As usual, in Washington, there's more concern about whether the Redskins will win this weekend than over the fact that the TSA has again been shown to be a total failure at what it was created to do.

"...screeners failed to use hand-held metal detector wands when required, missed an explosive device during a pat-down and failed to properly hand-check suspicious carry-on bags. Supervisors also were cited for failing to properly monitor checkpoint screeners..."

Clearly, this was indicative of widespread systemic and functional security failure. The type of failure that puts the nation at risk. This type of failure, which has been seen consistently across the TSA, is what only total morons or people with their snoots in the TSA money trough (or both) would find to be less than a national scandal.

The Sounds of Silence. But not a word from Kip Hawley. Not a comment from the usual hacks at Washington alphabet groups who supposedly are on the job to represent airport interests, at least one of which is busy raking in the dough selling services to the TSA. Not a peep from Senator Lautenberg. Congressmen Mica and DeFazio: sorry, no comment.

Let's stop the charade: aviation security is comfortably back to pre-9/11 status. Screening is a raging failure, but, well, that's no big deal. Nothin's been hijacked, so everything is A-OK.

Of course, we can always rely on the TSA at some level to come out with a Kafka-esque statement or two that succeeds in offending anyone with an IQ above the proof number on a bottle of Mad Dog 20-20. In this case, it was Mark Hatfield, the Federal Security Director at Newark, the guy under whose incompetent, inept direction this latest failure occurred...

"... Test results are not a grade or a scorecard; they are a road map to perpetual improvements; any other characterization is simply misleading."

You'd think Hatfield would be embarrassed. You'd think he'd outline his plan to address this major shortfall in screening competence. But no, this was just a "test."

After all, "testing the system" is what the terrorists did on 9/11, resulting in 3,000 people going on to a perpetual death, jumping out of the flaming WTC, getting crushed in the Pentagon, or crashing into a field in Pennsylvania. In a normal world, one might think these victims deserve better than a 90% failure rate at a TSA directed by political appointees who have no plan, and even less accountability for failure.

The flip, cavalier attitude of the TSA, congress, the Administration, and people like Hatfield in regard to continued major security failures, spits on the graves of those who died on 9/11.

And Finally...

BANGKOK, Thailand (AP) -- Authorities in Thailand said Wednesday they will triple the number of toilets at the newly opened Bangkok international airport following a flood of passenger complaints.

2007 - 2012 Forecast Highlights

We've posted the highlights from this year's Aviation Forecast Conference, including a synopsis of the presentation of each speaker, and key points from each forecast presented. Click here.

It's now clear that The Boyd Group Annual Aviation Forecast Conference is the industry's premier event of its kind - the one that aviation leaders clear their calendars to attend.

This year had not only record attendance, but an extraordinary line-up of forecast presentations from both The Boyd Group as well as from airlines, aircraft manufacturers, and suppliers. The Stein Eriksen Lodge didn't disappoint, either.

We again thank our sponsors - Embraer, Northwest, Delta, Salt Lake City Department of Airports, Adam Aircraft, AirIT, Airline Weekly, and Airline Revenue News.

And we were honored to hear from industry leaders, including Doug Parker of US Airways, Jeff Potter of Frontier, Jerry Akin of Skywest, Ed Bastian of Delta, Mark Hale of Embraer, Loren Aandahl of Northwest, and John Knudsen of Adam Aircraft. This year, we were honored to have presentations from Simon Pickup of Airbus, and Richard Wynn of Boeing - with a great deal of illuminating information and without bloodshed. A really exceptional fireside chat session was experienced with Karen Zachary of Continental, John Jamotta of Southwest, and Scott Tyra of Allegiant.

Jim May, president of the Air Transport Association, outlined the airline industry's stand hf16oct.JPG (26198 bytes)

on FAA re-authorization in his un-Washingtonlike manner of direct and blunt talk. John Armbrust of Armbrust Aviation reviewed the looming challenges in the area of jet fuel, not only prices, but supply and delivery.

We are proud that this line-up is indicative of the value and industry prestige of The Boyd Group Forecast Conference. No other event can even come close, including those that involve Washington Alphabet organizations. As promised, this conference focuses on real forecasts, not policy speeches by patronage-appointee DOT officials.

Emerging Trends. Several new trends were outlined at the conference, including the coming labor challenges at US airlines - i.e., attracting and retaining qualified professionals within the current compensation structures. We also noted how trends first illuminated at prior Boyd Group Conferences are now fully in play, and being "predicted" by the usual suspects on Wall Street. These include the now-obvious downward spiral in RJ demand, the glut of 50-seaters, and the emerging barriers to LCC expansion.

We're still sorting out the pictures and the presentations. As a result, highlights and forecast summaries will be published next week, along with photos of the event.

The pre-conference data workshop was essentially oversold, and we found it necessary to shift to a larger meeting room. We covered several areas of aviation data sources, including DOT Form 41, FAA Aerospace Forecasts, FAA Terminal Area Forecasts, and The DOT O&D Sample. We also reviewed the declining value of MIDT-sourced data.

It's been widely reported about the passenger in Milwaukee that was harassed by the TSA for expressing his opinion with the words, "Kip Hawley Is An Idiot" written on the now-required clear plastic baggie in which we good citizens must put our toiletries.

Based on that written comment alone, the man was pulled out of line, and TSA staff demanded to know what he meant. The gentleman, according to the reports, noted that he was simply exercising his first amendment rights. Whereupon, the local law enforcement staff were called and he was interrogated for 25 minutes.

Yessir, that TSA is really vigilant. Sure, they have no clue about what's going on in the air freight facility, or the fueling facility, or the catering kitchens. Sure, their program is so professional that undocumented, illegal aliens have been found working for vendors in secure areas at Washington Dulles. Sure, they fail test after test, like the 60% of screeners who failed threat identification tests last summer at Orlando.

Based on the stellar security performance of the TSA under the strong leadership of Mr. Hawley, comments such as those made by that passenger could only come from, shall we say, elements whose loyalty may be in doubt.

Wow, this oughta once again prove that all those naysayers who criticize the TSA are wrong. The TSA can identify subversives, particularly when those subversives openly advertise it on a transparent Glad Bag containing shaving lotion and toothpaste.

One might think the TSA would go into damage control after an outrageous event such as this. But, no. When confronted by the media, the TSA said that the passenger was "free to express his opinion" and that there is no prohibition on writing on bags. She left out that there is retribution for writing the wrong things on bags, however.

Then the TSA spokesperson, Yolana Clark, protected America by doing what the TSA does best in their efforts to counter terror. She lied. She told the media,

"The passenger was never detained by TSA. Local law enforcement briefly interviewed hf0ct2a.JPG (21528 bytes)

him and determined he had not broken any laws and he was allowed to fly." Ms. Clark left out the part that it was the TSA that called the Sheriff to detain the man, as they would do in any case where a threat was found. Lying and misleading the public is a hallmark of the TSA.

Be Kind. Now maybe Kip Hawley isn't an idiot. But he is a coward, because he hides behind the skirts of his staff when failures are found. And, he most certainly is a demonstrated incompetent at his job, proven time and again by major structural and management failures at the TSA.

Hawley does have an organization under him that is so poorly trained in security that his screeners equate free speech with a threat to society.

Think about it. Here we have a free citizen harassed by a federal agency for expressing his feelings about the government, and instead of having remedial action taken by the TSA, that agency sends out one of their PR wind-up toys to lie about it. No, Kip Hawley isn't an idiot.

Russian News Agency, September 19, 2006: A Tu-154 belonging to KrasAir crash-landed in Krasnoyarsk airport at 2.23 p. m. of Moscow time. The landing passed without any accidents, no victims or injured reported, as Siberian regional center of Ministry for Emergency announced.

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