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Feb232009

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It’s pretty sad when . . .

. . . the reports that US Airways will discontinue charging for water and soft drinks is the best news out there. Not just in the airline industry, but in any industry for that matter. Water for nothin’ and cokes for free.My guess is Southwest was more than happy to have US Airways charging for water and soft drinks. And that is the nature of a competitive market– what is good for someone in this industry may not be good for another.

For me, the best news out there are reports that the government is telling the automotive industry that its turnaround plans do not go far enough in addressing the structural problems of Detroit’s automakers. The Big 3 is about to become the Big 1.75.

What will that mean for the airline industry which already is suffering from a sharp decline in business travel?For one, it will probably throw a klieg light on the fact that U.S. airlines have too many hubs in the middle part of the country. That might provide incentive for the industry to actually rid itself of marginal hubs that have outlived their useful lives. And that could portend well for the underlying economics of the industry once the toxins are extinguished from the macro economy.

In other news, Delta flight attendants have come up with a seniority list they say embraces the important tenets of equity and fairness for the former Northwest flight attendants who joined their ranks following the merger. The problem is that the Association of Flight Attendants, which represents the former Northwest cabin crews, does not yet recognize the combined airlines as a single carrier. It is no surprise that the AFA is digging in its heels – after all, Delta flight attendants are not unionized and in fact twice voted down the union’s organizing efforts -- in 2008 and in 2002. Merging workforces is never easy and anxiety over relative seniority will only grow if further capacity reductions become necessary. Expect a tough battle when the AFA goes back for yet another unionization vote.

Speaking of capacity, we are now seeing more impact from the transfer of industry capacity from domestic markets to international that began in 2004. All trends point to a very tough international environment, particularly for transatlantic services. Deteriorating fundamentals at British Airways have been in the news off and on for the past year. Now even Air France and KLM are cutting capacity. Lufthansa just keeps shopping but being the smart carrier it is – a deal is a deal and they will not pay too much.

Pacific region fundamentals are holding up, but China could change that equation. At a time that the West really needs China to increase consumption, that trend now is on hold as the Chinese economy continues to sicken. Economic problems in India that took route last fall continue to grow. Now the economic weakness is beginning to impact airlines throughout the region. Japan Air Lines is looking to its government for a $2+ billion dollar handout and economic ills already are beginning to hurt financial performance at Singapore and Qantas and Cathay Pacific.

The Middle East is perhaps the only economic bright spot for the airline industry, where both fledgling and well-financed carriers continue to grow and take delivery of new equipment, although not without occasional talk of potential mergers. And while Latin America shows pockets of strength, don’t forget that more than half of that region’s demand is focused on Mexico and Brazil.

In the US, we actually have some labor deals getting done. Earlier this year, Southwest ratified an agreement with its mechanics and announced an agreement in principle with its pilots. This month, Alaska Airlines announced a tentative agreement with its flight attendants with a vote scheduled for March. In each case, the contracts demonstrate the difficult state of labor negotiations in the industry. A prime example is the Southwest pilot agreement that attempts a delicate mix of pay increases, productivity measures and new scope restrictions.

Finally stock prices seem to be suggesting that another round of bankruptcy filings might just be around the corner. It is hard to totally discount what market values seem to tell us. Air Canada finds itself back in the news as a bankruptcy possibility following the financial engineering done in the prior bankruptcy that leaves the airline with nothing to fall back on this time around. At this point it looks like the only potential safety net is the Canadian government, which seems intent on increasing the ownership limit to 49 percent, but it is too soon to say how that will ultimately play.

Maybe the current economic Armageddon will generate interests in increasing the ownership limit for U.S. airlines– which could provide them a source of new capital and the opportunity to minimize expenses and leverage economies of scale. Most important, such a change would force recognition that competition for competition’s sake at home does not make for an industry structure that can grow and prosper.

Last week I had the opportunity to speak to the Aero Club of Washington and addressed the legislation limiting airline alliances that sponsors -- visionary Rep. James Oberstar among them – support based on misguided arguments of anti-trust issues. To make the point, I quoted economist Henry George who said:“What protectionism teaches us is to do to ourslves in time of peace what enemies seek to do to us in time of war”. George is absolutely right when it comes to those regulating the U.S. airline industry, which in their protectionist views have largely done what George suggests.

This time is different. Very different. The past is less prologue. Those companies that revise history will be best served because simply, you cannot do business today with yesterday’s mindset and practices and hope to be in business tomorrow. This will prove to be true in the airline industry over the next 18 months.

 

Reader Comments (4)

You mention there are too many hubs in the middle part of the country. CVG is widely seem as redundant lying between DTW and ATL. In your opinion, which hubs do you see as weakest?

It will be very interesting to see what happens with the Delta AFA vote. AFA is not pursuing a vote at this time. IMO, they fear they do not have the votes at this time and are stalling for time, hoping that EFCA passes, and/or that even more difficult times affect the industry, causing misfortune (layoffs/paycuts) for workers, thereby opening an opportunity for AFA.

As far as labor/mgt. relations, it will also be very interesting to see what becomes of AA and their various labor groups.

02.24.2009 | Unregistered CommenterAndrew A

Andrew

You have to put CVG at the top of the list. I think many have been trying to write off MEM. While the underlying demographics may not be great, Memphis is home to FEDX and there are many vendors visiting Memphis each and everyday. To date the weakest hubs/focus cities have been removed: PIT, STL, CMH.

In addition to CVG I think MKE is vulnerable if for no other reason that Midwest is vulnerable.Will CLE prove necessary if/when UA and CO forge a closer relationship. Should these trends continue, I think we will begin to explore how many hubs can support two carriers and DEN comes to mind. As we cut back capacity, at some point a network becomes increasing reliant on local traffic. There is really no hub that can support all of the service it receives based on local traffic alone.

EFCA may be AFA's saviour I am not sure. But given everything going on in the US and global economies, I hope that there is more for Congress to do than pass EFCA.

AA is the labor relations story to be sure. Apparently the APA is planning some event on March 2 laying out their plans for the end game. What a mess.

02.24.2009 | Registered Commenterswelbar

It is important to note that the Employee Free Choice Act, as proposed, would only affect union representation elections conducted under the National Labor Relations Act. It would not change the current process for airline and rail workers which is currently covered by the Railway Labor Act.

As far as the merged Delta, AFA has already established a significant base of support on Delta as evidenced by their 40% showing in the 2008 election, and it can be presumed that they will reach around the same level of support in the 2nd round among the Delta F/A group. AFA most likely will receive support from the vast majority of the NWA F/As, based on the fact that approximately 80% voted in the 2003 and 2006 representation elections on that carrier. It will be interesting to see how these elections pan out, but certainly not as "interesting" as the unfolding mess at AA.

02.24.2009 | Unregistered Commenterblackbook

Thanks for the clarification blackbook. I did not have it explained to me that it only applied to elections under the NLRA.

I agree with your back of the envelope math on the Delta election and wrote about my view that AFA should move quickly for the reasons you state. Given that the other labor groups have moved forward quickly to resolve integration issues, the longer AFA waits seems to signal that the math may not be what you (and I) suggest.

Yes the AFA election is an interesting sideshow and agree that the story - whatever the outcome - pales in comparison to labor happenings in Ft. Worth.

02.24.2009 | Registered Commenterswelbar

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