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Apr072008

« The First Four Out Are Not the Final Four »

Memphis v. Kansas

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

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

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

The First Four Out

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

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

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

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

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

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

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

Reader Comments (4)

You say tomato and Mike Boyd says tomoto. Scroll down to “The Perimeter Is Shrinking Fast”

http://www.aviationplanning.com/asrc1.htm

“Bottom Line: No Huge Consumer Impact. Not at great risk: Comprehensive network carriers. The core of the US airline industry is financially sound for now and the foreseeable future. They have the cash (time) to restructure - and most are doing just that. They have the ability to quickly shrink their operations (and most of the related costs) by parking cheap airplanes and in some cases dumping small jet lift.

At this point, don't expect any huge obvious changes for most consumers. The four shutdowns announced last week are all players on the periphery of air transportation. We'll hear panting reports about the "rash of airline shutdowns" but regardless of veneer stories on TV, there's not going to be major changes in the mainline US air transportation system.

At least, not for a while.”

04.7.2008 | Unregistered CommenterChitragupta

Just a matter of time before the cards start falling, baby.

I always wondered about these diaper dandy-airlines and whether or not they could make it in the open market much longer.

It's awesome, baby!

Dick Vitale portrayed by m.e.

04.7.2008 | Unregistered Commenterm.e.

C-

Dude, I have posted all of your comments. Please note that this will be the one and only time I post one that is not your words. I try to keep my blog as an open forum -- thoughtful discussion whether or not you agree with me. If Mike wants to write me, feel fee to pass along my address.

Swelbar

04.7.2008 | Unregistered CommenterSwelbar

Dude!

I don’t have time nor the skills to be a great orator like you but like I said, “You say tomato and Mike Boyd says tomoto.” After years in this industry I’ve learned your Ouija Board or Magic Eight Ball isn’t any better than his in this business. Some are a given, i.e. Skybus with their goofy idea hubbing out of CMH which was doomed from the get go and some are not i.e. will HP and US ever live in harmony?

But you do have a great idea there; get Mike Boyd at www.aviationplanning.com, Bob Herbst at www.airlinefinancials.com, Holly Hegeman at www.planebusiness.com and do a weekly “Click and Clack” type podcast. (you do know who Click and Clack is; www.cartalk.com ?)

You each have a unique flare for this industry, it would make a great quarter hour and they would provide balance to your Chicken Little, “the sky is falling so everyone must work for free so my protégé MBAs can drive their Maybach’s” mentality.

Tilton grand, geeeesh!

04.8.2008 | Unregistered CommenterChitragupta

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