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Apr242011

« Pithy Ramblings On The Past 24 Days »

In the 24 days since I last wrote, I have given multiple lectures, participated on a panel at the EU Forum on Transatlantic Competitiveness, prepared to present at Atlantic Southeast Airlines' Spring Leadership Conference and am working with two MIT students, Kari Hernandez and Joe Jenkins, on what I believe will be an insightful and important study on airline industry efficiencies and community access to the nation’s air transportation grid.

The worst NCAA national championship game in history ended three painful weeks made more so by my abysmal picks for the tournament.  And the Master’s golf tournament began and ended with no American at the top of the world ranking, just as no US airline can be said to be atop of the global airline industry.

With earnings and proxy season in full swing, it’s clear that most airlines are scrapping their way to respectable results even as high fuel costs depress their performance and executives continue to get paid executive salaries even at the sharp objections of unions.

And with so many union contracts still under negotiation, labor disputes continue to dog the industry, here and at airlines around the world.  I looked with hope to the pilot negotiations at Air Canada, where it appeared that the union was willing to consider less onerous restrictions on domestic flying in recognition of economic difficulties in the domestic Canadian market.  But rather than put an agreement out to vote, the union instead recalled its Chairman, doing little to strengthen the airline for the future. In response, the Centre for Pacific Aviation said it best: “That Air Canada needs something dramatic to make it sustainable is as obvious as the maple leaf on the national flag.”

I made the same suggestion in my presentation to the FAA's 35th Annual Aviation Forecast Conference.  But in doing so I often feel much like the Chairman of the Air Canada pilots union with plenty of readers who want to recall me when I look economic reality in the eye and recommend dramatic change.  One reader warns of a looming pilot shortage citing the law of supply and demand.  But that law will apply only by depressing the demand for pilots as the industry in the US will get smaller yet before it gets bigger.

At most of the US network carriers, cost structures are still too high to continue domestic flying at current levels.  And those high cost structures make it hard to justify investment in the hundreds of new narrowbodies necessary to replace fleets performing domestic flying today, particularly if today’s managers are truly serious about achieving a return on capital that actually exceeds the cost of capital.

Speaking at a CERA Conference in March, United-Continental Holdings CEO Jeff Smisek acknowledged that United-Continental, the product of the merger of United and Continental, will shrink in the U.S.  “We'll have the domestic [operations] sized solely to feed the international traffic," Smisek said.

Warring words between pilots and management have been increasing in volume in Australia too. Qantas had it relatively easy domestically once Ansett, the largely domestic carrier, was liquidated in 2002. When Virgin Blue grew to replace Ansett, Qantas responded by forming Jetstar, an airline within an airline.  But then came Tiger Airways Australia which now leads pricing in the Australian domestic market.  So legacy Qantas, with a cost structure once supported by a near monopoly in its domestic market, has now lost its competitive way.  Add to that pressure from the Middle East carriers internationally, a route system that is nothing more than a spoke to the world’s hubs is under challenge from all directions.

We can expect to hear similar noise from union halls in Germany, France, the Netherlands and the United Kingdom.  This is a region with social cost structures that look more like that of the state bureaucracy in Wisconsin than what will be needed to compete for tomorrow's global traffic.  I increasingly believe that what is being built in the Middle East will challenge the competitive integrity of each of the three global alliances.  Given that these alliances are nothing more than Band-Aid solutions to maneuver around archaic rules and regulations governing air transport, the bandages will begin to lose their adhesion one by one.  Global airlines built organically, particularly through cross-border mergers that build a brand, will begin to win the day. 

Not surprisingly, the response to the Middle East carriers from Canada, Germany, France and elsewhere has been protectionist at best. First the world wanted to open the skies.  Now that the skies are largely open for some, the talk has turned to restricting access to markets from new, innovative and vibrant competition.  I agree that the new competition should not be allowed to access cheap capital that is not available to all.  But to limit access because of presumed subsidy, cheap fuel, little or no airport costs and whatever other excuse to limit the growth of Middle East carriers is just plain wrong. Until a forensic accounting of Middle East carrier finances is available, it is all heresay to me.  Even Willie Walsh speaking at the EU Forum said he sees nothing abnormal in the numbers being reported today.  

In my mind, the US network carriers already have faced this type of competitive challenge to their domestic operations from upstart airlines with a labor cost advantage, new, more efficient aircraft and a cost structure that reflects the realities of today’s market in part by doing things like outsourcing ground services.  Why was it OK for the low cost carriers in the US to take 20 points of domestic market share away from incumbents and it is not OK for more efficient operations in other parts of the world to challenge incumbents in Europe and Canada?  Let’s not forget that one of the benefits of LCCs in the US was stimulating new demand that filled airplanes painted with new and old liveries. 

Finally, a few words on the battle between American Airlines and the global distribution systems/online travel agencies. We cannot talk about the airline ticket distribution system without mentioning the Business Travel Coalition – the advocacy group that tells the world it is all about protecting consumers when it is doing nothing more than to ensure the sustainability of its business with cash flows from the distribution duopoly.  In the past month alone, the BTC News Wire put out communications that, among other things, suggested that airlines are lying to Congress, railing against airline fees and urging consumers to write Congress in protest.

As I wrote 24 days ago,  despite the rhetoric from BTC and the constituents it represents, the coalition is doing more to protect an outdated mode of operation and stifle innovation than support a strong airline industry.  The GDS duopoly cannot move fast enough for an industry that sells “time saved” no matter how painful it is for the BTC and the online travel agencies to have the revenue tap turned off.  It’s time for the GDS to recognize they can’t support interests other than their ultimate customer – the airlines that actually do serve the air travel customer.

Much more to come.

Reader Comments (7)

What should a domestic narrow body captain be earning? A narrow body pilot for the legacy carriers currently makes much less than a pilot for Southwest. Rates at Alaska and Airtran and Jetblue are also above rates at Delta, UAL and AMR for like equipment. Southwest is almost totally unionized, all domestic and makes money.

04.25.2011 | Unregistered Commenterairwolf

FUPM.

04.26.2011 | Unregistered CommenterJoe Diffey

Wow, how much does Emirates pay you as a consultant? Just free gas on the outbound leg probably, maybe they pick up your rent, landing fees, and taxes too?

04.26.2011 | Unregistered CommenterJLo

How are all your buddies at ATA doing?

04.26.2011 | Unregistered CommenterJohn

No amount of Labor cost reductions will ever achieve your mythical strengthening of our companies; the very ones we are all indentured to due to the seniority system. FUPM

04.26.2011 | Unregistered CommenterJoe Bobby

I read your 4/24 Swelblog post, and was very interested in your comments that, “cost structures are still too high to continue domestic flying at current levels” and that airlines sell “time saved”.

I agree, but for a different reason than most.

Sadly, although not measured, many individual airlines:

• have a load planning process that routinely delays flights,
• have a crew scheduling process that routinely delays flights,
• have a gate management process that routinely delays flights.
• have a boarding process (D0) that routinely leaves revenue at the gate, and,
• have a fuel policy to save fuel, yet wastes 10s of thousands of gallons of jet fuel daily.

Unfortunately, after decades of effort, airlines still deliver over 30% of their product late, even after adding upwards of 15% schedule buffer to "protect" on time performance, which severely diminishes the benefit with the “time saved” sale. And it is this schedule buffer that is the primary reason many domestic routes are unprofitable and why they are being chased out of the domestic market.

Not fuel, not the hub and spoke system, not labor contracts, but block time buffer is the airline’s largest controllable cost that puts them at a severe competitive disadvantage around the world.

And this “block time creep” (Boeing term) is not limited to the network airlines. Smaller airlines have the same problem, but it is much less pronounced. The advantage smaller airlines have is less complexity, since more unmanaged complexity (network model) exponentially increases the negative outcomes. In other words, it is not that airlines are poorly managed, it is that they are ALL unmanaged in real time, and the bigger, more complex the airline, the larger the bottom line hit.

Airlines have a huge flow of materials problem that they are trying to solve through “policy” and “labor” actions. This will not work.

Further, contrary to conventional wisdom, the ATC system and weather represents only 20% of the airline’s delay, congestion and block time problem. Nor is the problem, again, in opposition to conventional wisdom, a lack of runways or over scheduling.

And while everyone recognizes the importance of FAA's NextGen and Eurocontrol's Sesar programs, currently, their focus is primarily on the technical part of the solution. What is needed first and foremost is the "process" side of the solution, i.e., the required process to put the right aircraft at the right place, at the right time.

Conversely, 80% of the problem resides within the airlines themselves, and is the direct result of the lack of a tactical management process from a system perspective by the airlines. Airlines don't have a process to track aircraft, don't manage aircraft in real time and mostly just wait for their curb to curb production process to play out day to day.

And while a fire and forget process may work for a military missiles, it is disastrous for airlines and the ATC system. Interdependent Supply Chain and system wide logistical processes are completely foreign to the operational side of the aviation industry, i.e., the airline’s curb to curb production process, especially when it comes to the movement of the aircraft.

Not only does this have a huge financial impact on the airlines (increased block time), the resultant chaos and variance, is also the biggest part of the delay, environmental and ATC problem.

In other words, while most believe that it is an ATC problem that is at the root cause of the airline problems, it is in fact the opposite - it is an airline problem (no real time tactical asset management from a system perspective) that is at the root cause of the ATC problem. And much of the airline problem is fully in control of the airlines to mitigate.

This is a system problem that everyone is trying to fix locally using new technology. Not going to happen.

My points, which no one verbalizes, include:

1. Airlines are content to deliver upwards of 30% to 40% of their product late.

2. Airlines spend 10s of millions of dollars each year to schedule their flights, schedule their crews, schedule their gates, schedule their airport operations and build their daily flight plans, yet spend little to nothing on the real time execution of those schedules and plans. And of course it shows. i.e., the 30% 40% defect rate mentioned above.

3. Airlines lose upwards of 15% to 20% of their productive utilization by buffering their schedules. This drives costs through the roof, and the lost opportunity cost on the revenue side is in the Billions annually for each airline and represents the airline industry's largest recoverable cost.

4. The airlines revenue problem is quality, which is so poor (again, 30% to 40% late), consumers have been taught to incorrectly believe that the airline seat is a commodity. It's not.

5. In the last 30 years, with 10s of Billions spent and lots of people working very hard, airline operations and ATC process have seen little, if any change. 30 years of effort and huge sums of money spent and no significant change, which, by itself, should raise a red flag? This is no way to run a business in today's Six Sigma, Supply Chain world.

The solution - Operational Excellence, must be driven, first and foremost, by stabilizing the movement of the aircraft by the individual airlines.

Airlines have within their internal control the ability to rapidly decrease defects (i.e., delays) and costs within 2 to 3 years. The benefit of Operational Excellence, as an operating model for all airlines, is that it simultaneously produces the following results.

• Significantly increases airline profitability (lower cost, higher revenue)
• Mitigates most delays and congestion
• Reduces weather problems
• Significantly reduces ATC complexity
• Makes NextGen technologies very valuable
• Significantly improves employee morale

Simply put, there is no other single solution that can be produce such across the board benefits so quickly.

Finally, the solution to most of the airline’s problem can be found in 2 areas - quality and block time. As is required for success, Operational Excellence provides much more of the first, and much less of the second.

--
Michael
xxxxxxxxxxxxxxxxxxxxx
R. Michael Baiada
ATH Group, Inc.
Tel - (303) 674-0229

04.26.2011 | Unregistered CommenterR. Michael Baiada

Michael,

Congratulations ! Your post was pure consultant blather! Are you a former McKinsey associate? Seriously, your post is even worse that Swelbar's typical nonsense.

Greg

05.4.2011 | Unregistered CommenterGreg

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