The Alaska/Hawaiian Deal
A Change In Ownership, Not A True Merger

To cut to the chase and through what will likely be a media-wallow about the evils of a constricting airline system, let’s just hit the bullet-points:

• No significant route overlap with Alaska. Like, only a couple of routes from mainland to Hawaii.
• The two route systems have little in the way of market synergies. They are completely different in scope and traffic base.
• Alaska brings mainly the advantage of combining administrative overhead, reducing the cost structure at Hawaiian.
• Hawaiian faces temporary issues with Pratt & Whitney engines on new Airbus airliners – so do many other airlines.
• Hawaiian under Peter Ingram’s leadership has turned HA into a viable carrier with a carefully-crafted route system optimizing demand for Hawaii vacations.
• No downside for consumers. There are no routes to be cut.
• No major market expansion opportunities due to the combination.
• Hawaiian focuses on one product – Hawaii, which is a very niche market.
• 717 replacement in the near future. A200-300s? Can do inter-island and mainland routes.
• It is a change of ownership and not really a combination of airline route systems. Reportedly, the identities will remain distinct as will the route systems

A positive deal for all involved.

Period

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Quick Recap:
The Thanksgiving Meltdown
That Didn’t Happen

The holiday is over. The scenes of mass confusion and huddled masses yearning to enplane flights massively delayed were not to be.

Every year, without fail, the national media goes into hypercycle – predicting chaos at airports. They stupidly – and I do mean stupidly – assume that there will be a crush of passengers causing gridlock in the skies above America.

‘Course, they don’t bother to understand two basics: first, flights today tend to be close to full just about all year long. Thanksgiving is not the huge bump they mislead people into believing. The second is that there are not materially more airliners in the air over the holiday – certainly not to the extent that will choke the ATC system anymore than it is normally.

Gotta remember – a few years ago one network sent a top correspondent to the FAA center in Virginia, so they would be the first to let the public know when and where Thanksgiving flight delays were developing. She sat there like a potted plant all day.

But do take a look at current media stories. It seems that the new focus is on whether the nation’s in for another Southwest meltdown over Christmas. Understanding the facts behind what happened last year and why isn’t necessary.

Anything for a story.

Boeing Loss – Beyond the Numbers

How Boeing does will affect the USA economy, not to mention the health of the aviation industry.

A $1.6 B loss on $18.1 B in revenue is what Boeing just reported. For the folks spinning things from the stock price side, that is not pretty.

But looking at things from the long-term global airline demand picture, the real issues are not as dire as the numbers might indicate. Bright, actually.

Yes, Boeing is still having teething problems with the MAX, and the 787 program as well. Reportedly, they are locked into big-time loser contracts to build two 747-based Air Force One transports. These are being worked out, albeit expensively.

Re-Entry To China? Plus, it has been an unmentioned issue that Boeing has politically been mostly shunned out of the China market for net-new orders. This may change as Airbus is facing huge order backlogs, even with expansion of production at Mobile, Alabama and Tianjin, China. Airbus will be challenged in meeting global demand for the A-320neo series and the A-350/1000 widebodies.

But further down the horizon, the collapsing economy in China might make a lot of on-the-books orders turn into vapor. Also, unlike Airbus, Boeing doesn’t have exposure to a production line in China. It has a finishing facility only. In the longer term as things in China get more and more dicey, that might not be as much of a disadvantage as it may seem.

Airbus v Boeing Production. Boeing intends of build 38 737s per month by the end of 2023. Airbus is projecting 65 A320s per month in 2024.

The impact of this will go on to affect suppliers – engines, avionics, flight systems, etc. These companies are critical in crafting sales deals with airlines. For example, engine manufacturers like Pratt & Whitney and Rolls and GE come to the party in these agreements, with arrangements where their profits will be from future maintenance and support agreements over time, and not necessarily the sales price of the engines – which often is not completely factored into the airplane prices.

Their play is long term support agreements. With Airbus building more narrow-bodies than Boeing, this could put Boeing at a disadvantage in crafting sales deals in the future.

Nevertheless, Boeing Faces a Strong Demand Future. All this notwithstanding, there are still only two games in town when it comes to global airliner demand. The recent huge commitment from Southwest for 737-7s is an example. In any case, both Boeing and Airbus will have orderbook dance cards pretty much fully occupied into the future.

One observation: production-wise: Boeing can resolve certain supply chain issues and has the ability to go back to levels of 737 production approaching 60 per month.

Tilting At Chinese Windmills. Naturally, we have the internet gadflies warning that this is a real market opportunity for China’s domestic COMAC. Gee, the C919 looks a lot like an A320, so it might be the beneficiary of backlogs at Airbus and Boeing, right?

No way. Write this down: the DC-6B has a better chance than the C919 of breaking into the global airliner market.

The C919 is a performance dog and an embarrassment to China. COMAC has no global base, even if it weren’t produced by a government like the CCP, which makes Nazi Germany pale by comparison. Not exactly a great promotional issue for new buyers.

Like a lot of data coming out of the Middle Kingdom, the fact is that the COMAC orderbook is cooked with supposed demand from financial institutions and captive airlines. The only two airlines physically outside of China to order these planes are actually companies controlled by Chinese entities.

Future: Boeing is behind the curve compared to Airbus as far as single-aisle orders are concerned. And they reported some heavy financial losses.

But behind is not being out.

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Touch & Go December 1 2023

The Small Community Air Access Conundrum
It’s Not A Pilot Shortage.
It’s A Fleet Evaporation

Here’s a hard fact:

Too many small communities are banking on recruiting air service for which there won’t be any airliners.

Check it out. Do a media search for” small community air service.”

You’ll find lots of stories where small communities are being convinced that as soon as we get more pilots, air service will be flooding back. Yessir, the studies all show great traffic.” There are 22 bazillion passengers generated in our “catchment area” and all they need is an airplane to get on.” And the usual pablum: “Several airlines are interested… it’s just a matter of having the incentives ready!”

Sounds great. Only problem is that a lot of this is based on facts not in evidence. Or more correctly, airliners that won’t be in existence.

Yup, it sounds like bah-humbug, but it still means that the connective airline Santa Claus isn’t going to show up.

The pilots may be back, but they will be flying much larger airliners. The point that the media misses, and most consultant ASD schemes shamefully ignore, is that the entire category of airliners that once could economically access small community revenues is evaporating.

It’s no secret that 50-seat jets are becoming unable to deliver the financial goods. The average age of the roughly 300 still in USA service is over 20 years. That means maintenance expense heading northward. Pilot pay is now going up. The recent Air Wisconsin ALPA agreement delivers 38% higher compensation over the life of the contract. It won’t be the only one.

Then there’s fuel. When these machines entered service, the cost per gallon of jet-A, adjusted for inflation, was under a buck a gallon. Today it’s three to four times higher. The cost of launching a 50-seater is making the term “ROI” hard to find when the route analysis is done.

Okay, that’s not the end of the world, right? What about larger “small jets?” Be great if they were growing in number, but as for expansion to truly small local airports, the hard fact is that there essentially are none. The CRJ-700s and CRJ-900s are out of production – again, for economic reasons. The only jet airliner under 100 seats still in production is the Embraer E-175, which is at 76 seats.

Okay, lets do the fleet math. There are just over 300 50-seat ERJ/CRJ airliners in service. But the next-up in capacity – the E-175 – only has a trickle of firm orders – firm orders. Like, just under 50 units, spread across American, Delta and United. And this dearth of orders is again due to the march of economics. Even these larger small jets are being affected by the spike in operating costs.

So, there are 300 semi-economic 50-seaters that will be retired over the next 18 months, and other than these 50 or so E-175s, the next capacity step in roughly 120 seats.

Drop the hype. Chico and Topeka and Youngstown are going to have a hard time convincing a major carrier to apply a $70+ million A319 to a small local airport that is entirely unserved. Time to get real. A ULCC to ‘Vegas, maybe. But that is not air service access. Just impulse leisure service. The rest of the flying public are not going to be in the picture… nor at the local airport.

Conclusion: in the near-term future, the capacity floor for network branded service will be 76 seats. But these are already pretty much spoken for already. The next step up will be 120 or so seats. It is time that this be recognized and put into the planning mix. Again: too many communities are banking on recruiting air service for which there won’t be any airliners.

There are two messages here. The first is that a lot of small community air service at the local airport is simply not going work, regardless of the hype to the contrary. That means economic development is the new future.

The second is that the operators leasing lift to major carriers – the misnamed “regional airlines” – are facing a world where they are no longer viable. They are caged into operating airliners that have declining value to their major partners.

Any air service development plan that doesn’t consider this dynamic is like planning to be on the Titanic’s next Caribbean cruise.

Unfortunately, there’s a lot of that going on.

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The “Amateur-Act Airlines” Saga Continues
Commercial Service v Air Access

Red Way Airlines.

Super idea! Nonstop day-of-week service to Nashville, Minneapolis/St.Paul, Austin, Atlanta. No question, this would be a slam-dunk at Lincoln, its planners decided.

Unfortunately, nobody seemed to ask the consumer, who had the option of much better air access options at not-so-distant Omaha. It took this grand Red Way idea just weeks to burn though close to three million dollars in seed money – mostly from public sources.

At least from a financial perspective, it was appropriately named.

Red Way was one more example of how “local service” can only survive if it is has travel-time and cost-effective advantages over alternatives. Just having flights at the local airport won’t cut it for consumers.

So, the whole Red Way shooting match went 86 in short order. Naturally. But this original airline amateur hour continues to affect Lincoln.

There seems to be several hundred consumers who months after this fiasco’s collapse are still due refunds. Incredibly, the amateur act management of the airline is supposedly claiming that Lincoln owes them something like $700K in promised subsidies, and when that comes, so will the refunds. In short, the airline is blaming the airport for consumers getting stiffed.

Oops. As with the marketing analyses, Red Way was also short on basic airline revenue accounting requirements. There is a core requirement for handling “unearned revenue.” This is the gelt paid by consumers and is required to remain in the till – and is not the “property” of the airline – until the flight is operated. It has to do with passenger-derived revenues, and is not dependent on any other sources of income, as Red Way is trying to claim.

The Red Way system was apparently founded on what appears to have been a Pollyanna assumption that if the plane parked itself at the gate, the passengers would come a runnin’. The concept of competition from well-served and nearby Omaha was ignored in the planning.

It was not ignored by the consumer.

This is a poster child for what is massively wrong with a lot of air service development programs. The assumption is that the goal is “commercial flights” instead of defined and planned air travel access. Red Way gave no such access, just point to point flights to a few destinations. The options at OMA – even with a drive time – had much more value to Lincoln consumers.

The soap opera continues as both the airport and the state of Nebraska do audits of Red Way.
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Just A Reminder:

In our work, we rely on Cirium for aviation data.

The future is going to be very different, but that requires a strong understanding of the core dynamics and economics of all areas of the industry.

Capacity, tracking airline trends, projecting strategic shifts all demand market and aviation support. Cirium is our choice.

The End of The “Regional Airline” Sector
Is Now In Sight

Summary: The costs at small lift providers (a.k.a. misnamed “regional airlines”) are going up beyond levels that the fleets they are allowed to operate can economically support. That means these operators need to find revenue streams other than leasing jets to large carriers, or they simply will cease to exist.

A reported 38% increase in compensation.

That’s over the life of a new pilot contract negotiated by ALPA at Air Wisconsin. In general, it tracks with recent contract trends at major carriers Delta, American, and United.

While the Air Wis contract is positive and solid news for employees, it is also another factor that most people in the industry refuse to recognize: the value and role of small lift contract carriers, still mischaracterized as “regional airlines,” now have a very short half-life.

The raw economics of the model no longer work. Between changes in operating costs and the retirement of the airliners they fly, the facts can no longer be ignored. Operators whose business is restricted to small jets have a limited future. In its current form, maybe five years. Maybe less. In any event, the role of these operators will be far less than today.

Stuck In A 76-Seat Cage. The hard fact is that entities such as this one, and SkyWest and particularly those owned by major carriers, such as Piedmont and Envoy, are locked into a market limited mostly to flying airliners of 76 seats or less, give or take, and doing so strictly as part of major carriers. They have no route system of their own. They are leasing companies, and the airliners they now lease will continue to have less and less economic contribution to major airlines.

The nonsense implied by the Regional Airline Association notwithstanding, these operators have almost zero stand-alone business. Again, to be clear: they are essentially leasing airliners and crews to larger airlines. As pointed out in the past, this is fundamentally no different than what AirLease or Jackson Square, or BOC or ILFC does with larger airliners.

However, what is missed by the RAA and most of the media is that the entire economic role for small jet airliners is disappearing. Actually, those fleets physically are disappearing – both in numbers and in operating economics. The aircraft that these small lift providers are leasing are becoming of less value to major airlines.

Applying Labor Costs To Gain Maximum Return. Small Jets No Longer Qualify. Point: The labor costs of levitating an airliner – pilots, flight attendants, maintenance, fuel, ground handling, airport costs, etc. are going up. That means the aircraft involved need to have sufficient revenue-generating capacity to cover these increasing expenses. If there is a limited number of pilots, that means the highest and best use is in operating an airliner with more seats, not less.

It is no secret that 50-seaters are going out for specifically this reason. Next are 65-76 seaters, which in reality are getting older, and the only one still in production – the E175 – has only a trickle of deliveries.

It does not take a degree in astro-economics the tumble to this one.

That Small Airport “True Market Study” Is Now Fiction. Draw your own conclusions. Because of the naked economics of air transportation, network air service will be dependent on larger capacity airliners. That not only paints a picture for the companies who are in the “regional airline” business, but for a whole lot of airports across the nation.

If the local demand can’t support frequency with 100+ seat jets that is competitive with other consumer air access options, even with a drive, that means a number of small communities need to review other economic development options for the local airport. Scheduled passenger service is problematic.

We’ll deal with this aspect in the coming weeks. A lot of the consultant ASD jive being fed to small airports is skirting closer and closer to edge of professional ethics. Or beyond, by implying there is potential for new service operated with airplanes that will no longer exist.

In the meantime, small lift providers need to scramble to find future revenue streams. Mainline airline labor unions are not likely to relax any current scope clauses, and that locks these operators into flying planes that have declining contributive value to the majors now leasing them.

One example of moving on is Mesa, which is expanding into cargo 737 operations.

Lots of fallout from this one. Stand by.

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Client Pow Wow

The fourth quarter Boyd Group International Client Pow Wow will be on October 18 at 11:30 ET.

We’ll be covering some key trends that need to be watched. A number of them are positive, such as the continuing strong demand for EU and Caribbean capacity, give or take a war or two.

Airline strategy shifts will be reviewed, too, including some interesting fleet changes.

Another point will be how airports need to assure that airline ground service is delivered professionally. Today, the interface during the airport processing is largely automatic, with no need for one-on-one interaction. That is unless there is a major operational issue. The point is that an abused passenger is also the airport’s passenger.

Clients who have not yet registered can do so by hitting the contact button above and we’ll get the Zoom invite out.

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