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© 2007-11, William Swelbar.

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« Thank you flyby519 »

Whereas this blog has not matured to the level of others in terms of receiving a large number of comments to my posts, flyby519 has taken the time to respond twice and asks some very good questions while offering very good insight to the industry. While I am thankful for much this holiday season – family, friends, a successful career redirection and a lower handicap – I am truly thankful to this reader for the questions raised. So my Thanksgiving post will respond to each question asked by flyby519.

In a comment to my post, Wondering Thoughts From 5 Time Zones Away, flyby 519 asked the following questions:

Question 1: “I agree that VA [Virgin America] isn’t going to go far just doing transcon service in a saturated market, but do you think there is a future for them feeding the Virgin Atlantic routes”?

Answer: My simple answer is yes I do. But given that Virgin Atlantic is not a large connecting carrier on the London end, and much of Virgin America’s initial service launched in the US has been from the largest gateway markets to London, it will take some time for the Virgin Atlantic – Virgin America connection to play itself out. My struggle with getting excited about Virgin America is its timing into the US market. 5 years ago, I would have a much different outlook and level of excitement for its ultimate success. But if attrition is expected in the US market, then probably a good bet to make by Branson.

Question 2: “Is creating a global brand the ultimate plan for the Virgin Group”?

Answer: We have to acknowledge that Branson is a branding genius and it is hard to suggest that this venture is any different than any of the 200+ ventures he has entered to date. While feed to Virgin Atlantic may develop over time, enhancing the visibility of the Virgin brand in existing gateways, just as the transatlantic is expected to become even more competitive, will prove to be an import indirect benefit to Virgin Atlantic in the near term.

Question 3: “I also am concerned with the aircraft orders coming just from foreign airlines. The weak dollar and sad state of US airlines are forcing them to pass up expansion, which (combined with open skies) leaves room for invasion from the foreign carriers. What will happen with increased competition and reduction of market share internationally for our struggling carriers”?

Answer: Flyby519, thanks for picking up on this statement as I rank this question in the top 3 or 4 points I have made here.

Your point on the dollar v. foreign currency and the effect it has on the “ability to buy” cannot be underestimated. We are about to witness the Boeing v. Airbus strategies (consolidate v. fragment) play out before our very own eyes. I do believe that the US carriers will be disadvantaged by carriers making extensive new aircraft orders and looking to expand their services into existing gateway markets. In addition, if new carriers begin to serve secondary points in the US, – and we should expect some - much like Continental and Delta are doing from the US into Europe, then the game is truly joined. But the US industry should not be alone in this concern.

If I am a major European carrier with an extensive network built to serve all world regions, I am watching with much anxiety what is going on in Dubai, Doha and multiple points in India where competition for global traffic flows is very much in its infancy. And if there is concern over what competitive juggernauts might be constructed in these regions, then some concern is warranted regarding the existing health and architecture of the global alliances built by the largest US carriers and their global partners as well.

Networks can be made vulnerable in many areas and this global network industry is about to get challenged by well capitalized, aggressive competitors like none we may have seen to date. My view is the game is just being joined and why I blogged on the idea presented by Willie Walsh, British Airways’ CEO last month click here. My question back to you is: Are we being naive to think that domestic consolidation is the best means to stave off vigorous competition from another world region that is sure to degrade our current sources of revenue?

In another comment to my post, "Musings and Meanderings Over the Past Week", flyby519 asked the following questions.

Question 1: It seems that Tilton has been jabbering about mergers, spinoffs, and crazy talk for the past few years. Is he just trying to play the "look at me" game to get investors cash?

Answer: The more I read Mr. Tilton, he is consistent in his message regarding the industry needing to restructure itself. His quote that I used in one of my posts click here - “Think of any industry represented in this room; choose any business listed on the Tokyo Stock Exchange; and one can be sure: it looks nothing like it did ten years ago; and looks nothing like it will ten years from now”- really resonates with me.

Whereas he may be trying to play the “look at me” game, my sense is that he understands that creating value for shareholders is going to happen in one of two ways: 1) a slow liquidation (and I use that phrase guardedly); or 2) despite United’s size in the global spectrum and despite deep cost cutting that occurred during its bankruptcy, the business is far from fixed. In a parochial sense United is big, but in terms of how changes in the global airline architecture might play out the second largest carrier in the US is merely a piece of a much larger puzzle. He may get beat up for how he articulates issues but his arrival to the airline industry as an outsider gives him perspective that should not be totally discounted just because some might not like the message.

Question 2: “I also agree that there are way too many carriers of all types, but how can this be reduced when there is always a startup (ie: skybus, virgin america) waiting to jump into the game? Are the regulatory hurdles for consolidation greater than the barriers of entry for newcomers”?

Answer: Absolutely the regulatory hurdles for consolidation are greater than the barriers of entry for newcomers. Great point! And this is precisely the type of backdrop where the industry should be evaluated. Further, it puts front and center a US Government aviation policy that promotes fragmentation. At some point I would hope that the USG would take a look at the industry from a financial perspective and appreciate, that even with consolidation, significant levels of competition will remain – whether it be to Greenville-Spartanburg or to Geneva or to Seoul.

Oh I digress as that same policy has permitted a carrier like Korean to access multiple points in the US and carry significant levels of US traffic to China because of the route rights it owns on the other end. But in the interest of competition we will promote a policy of what is good for one is good for all and everyone should have rights to China even if the divvying up of service results in a duplication of services in a developing market. What is wrong with a few strong carriers carrying the flag to compete against direct and indirect competition?

Happy Thanksgiving to all. The readership of this blog has grown to levels I never imagined when I undertook this labor of love.

Reader Comments (4)

Reguarding the 'look at me' game being played by Mr. Tilton over at UAL, he should be hiding under his desk if someone is actually looking at UAL, especially investors. Mr. Tilton has not lifted one finger to grow United, no 787 Dreamliners on order, no merger opportunities taken, he has yet to dump the failed attempt at a 'low cost airline within an airline', namely 'Ted', no takers on purchaseing 'Mileage Plus', little interest in the SFO Maintenance facility, no cutting edge ideas re streamlining the current airline to further reduce costs. Mr. Tilton came to UAL to do the bankruptcy and he should now leave the airline to someone who cares about growing the company both internally and by merger and/or other means. Other than cutting employee saleries and pensions he hasn't a clue of how to run the business.

11.24.2007 | Unregistered CommenterThomas Boston

While I agree with your comments regarding Tilton & Brace's overall scheme of merging or selling UA, he has to be held responsible for the poor execution of cleaning up UA beyond the labor cost issue and dumping the pensions.

By any measure UA's "other" costs lead (a dubious honor) the industry. UA's infrastructure is horrendous and has seen little or no investment in the last 15 years. By infrastructure I mean everything from computer systems to the chairs employees sit in every day.

Those "other" costs are as high as they are because the engine inside the company that could drive these costs down is broken. They have no means to fix this problem. Secondly there isn't a culture of cost-cutting at UA and that culture starts with Tilton & Brace.

Tilton & Brace may be right on the merge/sell point, but I believe it comes from a selfish position of being able to cash out and not from a place where it might be the best thing for United.

11.25.2007 | Unregistered CommenterAnonymous

Dear Anonymous

Thank you for raising the all important point of labor v. non-labor costs. This comparison is certain to be a future blog post here at swelblog.com.

I agree with you on the face of the data, that UAL does not compare well to the industry on non-labor costs despite the well noted 3 year blanket of bankruptcy protection. As you will note and I refer you, there are a number of charts and graphs on the MIT Airline Data Project site which look at this issue.

First, given the level of outsourcing undertaken at UAL, there is a transfer of expense from labor to non-labor unit costs. So we must take that into account before wide proclamations are made. But if I am labor at United, I would certainly point first to the distinction between the two cost areas.

You are clearly more in tune with the culture issue at UAL as well as having knowledge about internal mechanisms to address cost and decisions to invest in the infrastructure than I. What has been difficult over the past 5 years is the lack of non-aircraft capital expenditures made by all airlines in the infrastructure area you mention. I do believe the company recently talked about investing up to $5 billion in the business/product over the next 4-5 years I believe.

One concern I have as a shareholder of UAUA, is the fact that historically Brace has caved to the pilots particularly when the cloak of bankruptcy protection is not there. Even at the expense of other important stakeholders.

I am steadfast in my belief that consolidation is necessary to address many of the insightful and important issues you raise. If only we could move the mentality of other stakeholders to a proactive place rather than the reactive stance on this topic.

11.25.2007 | Unregistered CommenterSwelbar

Thanks for the kind words Bill, and in response to your question I do not think that consolidation will stave off foreign competitors. Foreign carriers have many amenities that we dont offer. New aircraft, better comfort, in-flight entertainment, meal service, attentive crews and real customer service. This article in the WSJ (http://online.wsj.com/article/SB119612001772904529.html)
says it all in terms of what passengers are willing to do to get a better flight. If a passenger is flying from Chicago to Peoria then they are willing to be herded like cattle into a cramp a/c in order to save 10 bucks, but the opposite is true when it comes to international service.

Our domestic market is saturated with newcomers waiting to pounce. Someone is always waiting to do the job for cheaper and for this reason I dont think consolidation will raise our revenues domestically. Lets pretend there is only 1 US airline that flies internationally. Will Singapore/Lufthansa/British be afraid of this? Doubtful. They can offer a better product with less competition from the US airlines in this instance.

For US carriers to stay competitive internationally they need to offer a better product and service. This isnt as easy as investing capital into new planes and in-flight entertainment systems. The US airlines need a complete overhaul of their corporate cultures to return to the days of real airline service.

I am very interested in the carriers such as Eos, MaxJet, SilverJet to see how they perform since their models are closest to what I imagine as being a successful international carrier.

Once again, keep up the great work!

11.27.2007 | Unregistered Commenterflyby519

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