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« Swelblog’s 12 Airline Industry News Items of 2009 »

It is that time of the year again when it is time to put the packages under the tree.  The packages represent my 12 days of Christmas, or the 12 airline industry issues that took place in 2009 that I find important.  I have placed my packages under the tree in descending order of importance.

12.  Captain Chesley “Sully” Sullenberger: 

My blog post and why I don’t rank the story higher

11.  The Environment and Related Issues That Will Impact the Global Airline Industry: 

It is too early to know what the policy outcomes will be. 

10.  NextGen: 

This topic should be number 1, but like the environmental issues, there is just not enough information to know how this much needed technology gets implemented let alone paid for.

09.  Bailing Out the US Auto Industry: 

Did not learn from airline bankruptcies.  Detroit did not go far enough to restructure the industry to lower costs, compete effectively and improve quality. 

08.  Alliance Switching

The new buzz that began when STAR was able to lure Continental Airlines away from SkyTeam following the merger of Northwest into Delta Air Lines.  Now the concept is playing out in Japan where SkyTeam and Delta are looking to lure JAL away from oneworld and American. 

Many smart people I talk to believe that the JAL fight will be the last.  I am not in that camp.  Today’s alliances are nothing more than band-aid fix to a problem that requires a more lasting solution – like global mergers. The global airline industry is amalgam of regional brands. In truth, the global airline industry is an amalgam of sub-regional brands, because anti-trust laws have largely prevented the creation of true regional brands.

At some point oneworld will need something that STAR has; or SkyTeam will need to fill a global network void with something that STAR has.  For these reasons, I believe that alliance switching will be a topic of conversation for much of the next decade.

07.  Republic’s Purchase of Midwest and Frontier

Those of you who are avid readers know that I find these transactions most interesting, innovative and smart.  Why?  Because, the evolution of the US airline market requires the diversification of a regional carrier’s flying portfolio - away from being too invested in one asset class - conract flying - and toward more at-risk flying.  The changing role of today’s regional air service providers is only just beginning.

Whether Republic’s approach to diversification of its revenue structure will work remains to be seen.  I believe that it will.  Republic CEO Bryan Bedford is smart.  He’s got TPG on his Board of Directors as a result of the Midwest transaction.  Few regional carriers are better designed than Republic to take full advantage of mainline pilot scope clause constraints.  The big question for Republic in this round of negotiations is whether the carrier can fly yet bigger equipment for the mainline carriers it serves.

My guess is the mainline pilot unions will make that impossible, despite the fact that it is increasingly clear that the legacy carriers cannot continue to operate under a cost structure that won’t support all the airlines trying to survive in the hypercompetitive domestic US airline business.  Either way, Republic wins.

06.  Oil Prices

The good news:  the US airline industry will spend $20+ billion less on fuel in 2009 than in 2008.  The bad news: the US airline industry will still lose money.  The good news: crack spreads, or the amount that is spent to refine a barrel of crude oil into jet fuel, have returned to their historic norms.  The bad news:  volatility in oil prices is still the rule and not the exception. 

We started 2009, with the price of crude at the equivalent of $1.58 per gallon.  In just 47 trading days, the price had fallen to $1.15 which marked 2009’s low. It took only nine more trading days for the price to rise to $1.53.  By August 5, the price had risen to $2.01.  The price per gallon peaked on October 21 at $2.12.  From the beginning of the year, the price per gallon fell 27 percent to the year’s low.  From the low, the price increased 84 percent to its high. 

Volatile input prices in a low margin business are, and will remain, a toxic mix.

05.  The Economy and Airline Revenue

Getting a smaller piece of a smaller pie is rarely a good combination.  But beginning sometime late in the year 2000, that has been the case for the US airline industry.  For decades leading up to 2000, domestic passenger revenue averaged .73 percent of US Gross Domestic Product.  From the fourth quarter of 2000 through the fourth quarter of 2008, the relationship averaged .57 percent.  Thus far in 2009, the relationship has fallen further to .47 percent.  The difference between .47 percent of GDP and the historic relationship of .73 percent suggests that there is $36 billion less in domestic passenger revenue today for airlines to share.

Some of this decline can be attributed to an industry that is 12 percent smaller than it was in 2007.  However that only explains a portion of the fact that revenue is 22 percent less in 2009 than in 2008.  Despite aggressive capacity reductions originally designed to address the rising cost of oil, the US and global economies have forced the industry to aggressively cut prices charged to consumers throughout 2009.  This is true in the domestic arena where fares are down more than 14 percent.  International fares in 2009 are down nearly 17 percent in 2009 when compared to 2008.

When an industry is not permitted to consolidate capacity, fragmented markets produce these kinds of results.  But these results do not produce the profits necessary to reinvest in the business.  You would think an industry that employs over 160,000 fewer men and women today than it did in 2001 would send a message to the government that fundamental change is required.  Nah.

Is this latest decline to .47 percent of GDP a new norm? 

04.  Ancillary Fees

The debate over airlines “unbundling” to charge for things like checked baggage, pillows, and a better seat has produced many news stories this year.  What is sad is that these fees represent how this industry is forced to innovate.   For the most part, US airline innovations over the past 10 years amount to little more than finding ways to maximize revenue within a system of constraints. 

Many news stories speak to the consumer injustice these fees represent.  Thus far in 2009, the industry has realized $4.9 billion in ancillary fee revenue.  But few mention that the economic climate has resulted in $17.8 billion less in passenger revenue in 2009 than one year ago.  Airlines like United have actually demonstrated some very good thinking by rebundling the unbundled.  It is these ancillary fees that may actually be the catalyst to begin the process of differentiating airline products between the legacy and low cost carriers.  Or even differentiating between and among the legacy carriers.

If nothing else we need to accept the fact that air travel is among the best consumer bargains available today.

03.  The National Mediation Board

I have long held the NMB in high esteem.  But maybe I had a blind spot and failed to see all along that the Board operated as a political agent governing labor relations depending on the partisan agenda of the sitting President.  I have been critical in this blog of union leaders like John Prater, Lloyd Hill, Steve Wallach, Laura Glading and others who ran on the platform of overpromise and sure to under deliver.  But when it comes to the current NMB, I am not sure what to think.

It is clear that this administration has made promises to labor that are being carried out by the NMB under Harry Hoglander and Linda Puchala.  That was apparent with the Board’s decision to change the rules by which union representation elections take place in the railroad and airline industries.  But it is not the change in the rule per se that is troublesome.  It is the way in which the NMB went about forcing the change. 

This industry has enough structural instability.  It sure as hell does not need that instability exacerbated by a rogue NMB overseeing what promises to be the most difficult and important round of negotiations in at least three decades.   There are going to be strikes because the industry cannot pay the bill that labor believes they are owed.  What remains to be seen is whether the NMB will live up to its obligations to try to prevent them.

02.  Passenger Bill of Rights (DOT Rule)

Coming on the heels of the recent  headline-making East Coast snow storm, the industry gets an 81-page rule from Transportation Secretary LaHood that will serve as a passenger “Bill of Rights” surrogate until Congress gets around to passing legislation. But only anecdotal evidence and emotion are driving this debate on an issue borne of a single tarmac delay and the media skills of a passenger activist named Kate Hanni. LaHood’s new rule is the product of unsubstantiated evidence rather than serious analysis.

Sadly, it is populist underpinnings that seem to be driving DOT as well.  The agency is all but hiding behind the consumer rights flag – a flag, by the way, that represents only the .01 percent of passengers stuck on an airplane for three hours or more. When flights start getting cancelled before they ever leave the gate in order for the airline to avoid per passenger fines that may exceed the total amount of revenue for that flight, it will be difficult to resist saying that I told you so (and this will be the case for many).

In this regulatory environment, one can only wonder: What’s next for an industry that will lose more than $60 billion this decade?

01. Colgan Flight 3407

To me, Colgan 3407 may be the catalyst for many issues that will play out in the airline industry in coming years.  Even as FAA Administrator J. Randolph Babbitt pledged to address pilot fatigue and flight time/duty time regulations as cornerstones of his agenda, this accident and the subsequent hearings have already signaled rapid change at the often slow-moving agency. At a minimum we can expect more stringent training requirements for regional pilots and stricter FAA standards for training and duty time.

The initial recommendations on flight time/duty time were made by a committee comprised of parochial interests – one that suggested that commuting should not be included in the discussion.  But this industry cannot make sense of the science surrounding fatigue unless a pilot’s lifestyle choices are considered. Babbitt is addressing the issue before changes are made to the existing rules.

Then we have the issue of pilot compensation at the regional carriers driven by news coverage of the Colgan crash reporting what on average a first-year First Officer makes.  Whereas Colgan pilots were not represented by ALPA at the time of the accident, they are now.  Nonetheless, rates of pay are set at nearly every carrier based on the rates negotiated by organized labor.  So how will those unions reapportion the pie between regional and mainline pilots?  On this issue, organized labor will need to accept responsibility for the pay structure that disproportionately rewards mainline pilots at the expense of those flying for regional carriers.

The safe bet is that this issue (Colgan 3407) alone will drive higher costs throughout the industry. There are many markets served today that do not make economic sense for the airlines that fly them.  Increased costs only ensure that there will be more uneconomic markets and more regions and cities that will struggle to maintain existing, let alone get new, air service. It needs to happen, but the change won’t come without civic uproar and certain financial pain.

Just think, if the US airline industry had only grown at a sustainable rate, change would be far less difficult today.

Hopes and Wishes for 2010

I wish for a sustained economic recovery that will serve as a foundation against which the US airline industry can finally see if the difficult and painful business decisions made over the past decade can produce meaningful profits that can and will be reinvested back into the business.  I hope that I am wrong on my predictions about pain ahead for many industry stakeholders.  I hope for an industry that better educates its stakeholders on the rigors of the business and why decade’s old practices need to change.  Finally, and as economic recovery becomes part of the vernacular:  I hope the industry continues along a transformative path and resists the predictable pattern of reverting to old practices rather than making the hard choices necessary to survive in the future.

Happy Holidays

Reader Comments (4)

Sir,

Well sir, you clearly do not have the facts straight on your statistics related to passengers being stuck on the tarmac, nor do you seem to understand the scope of the problem or it's causes. The BTS does not gather statistics for 131 of the 150 (or so) domestic air carrier's in the US for time on the tarmac, nor do they gather that information on international flights which represent 1.2 million throughput annually.

Besides the point that the cause of these incidents is largely due to overscheduling at peak times, and a total lack of willingness on the part of the airlines to follow suggestions and flight caps imposed by DOT in an attempt to curb these incidents. When you allow any corporation to run unfeddered as for so long the airlines have, putting hundreds of thousands of passengers per year in harms way (without ever leaving the ground), then Houston you have a pro...

Your chance of fatal blood clots doubles after 4 hours of immobility in an aircraft. If you are dehydrated your chances of blood clots goes up exponentially.

If youa are interested in exploring another point of view than the airlines position, I would love to share with you the FACTS about this issue so that you may write a more balanced opinion at the very least.

It's not important that we agree, but I believe it's important that you have all of the facts. It's taken 3 long years, I make no income and have no agenda other than protecting the passengers from what have become very regular events on the tarmac where folks suffer in numerous ways both physically and psychologically.

We have a PHD from MIT who has spent his career studying surface delays and is responsible for many of the formulas now being used in the airspace re-design. We have MD's and Psychologists who donate their time and talent pro-bono to help us determine what is "safe".

Please indulge me in a short conversation when you have time. E-mail me at kate@flyersrights.org and I'll give you my phone number.

Thanks in advance for taking the time to consider the "other" side of this conversation.

Kate Hanni

12.23.2009 | Unregistered CommenterKate Hanni

The crash of Flt 3407 had nothing to do with fatigue or lack of training. A pilot with 5500 hours does not suddenly forget how to react to a stall warning. Something else happened aboard that aircraft. Something they are not telling us.

12.23.2009 | Unregistered Commenterstarviego

Ms. Hanni:

I do have the facts straight. And in fact, I probably have overestimated the percentage of passengers affected by this arbitrary rulemaking. I certainly appreciate your helping me to understand that international flights are not included in my estimate. With that said, I am sure to have overestimated the percent of passengers affected by headline-seeking “consumer activists” and politicians trying to apply a quick fix to a complex issue.

I am a research analyst. I focus on the fundamentals of the airline business. You are partly right about over scheduling in certain markets – that is a function of demand. But the fact is that airlines are operating in an environment created by the very regulatory morass you advocate. In no way is this industry unfettered but, rather, it operates within strict regulatory confines in a framework built by the government. If we are going to really fix problems, then we must get to the foundation of the problem (like the air traffic control system) and not address only the symptoms, which appear to be your approach.

As I’ve said, no one wants to be confined on an airplane any longer than they have to, whether that is flying across the Atlantic or waiting out a weather hold in Dallas. And I think I can speak for any airline executive in saying they don’t want to keep their planes on the tarmac and longer than necessary. It is just not an efficient use of a multi-million dollar asset.

What I do know is that “causes” like you own too often overlook root problems and in finding legislative “solutions” will undoubtably harm and inconvenience far more passengers than the occasional airport delay. The next time one of your flights to Washington is cancelled, you may ask yourself whether you would have rather risked a delay than missed your meeting.

And as fares increase – an inevitable result of further restrictive regulation, you may well find that others are asking you whether you actually won much of anything in the three year publicity campaign you have waged.

Swelbar

12.23.2009 | Unregistered Commenterswelbar

Bill,

Your blog comments and further, direct comments to Kate Hanni are spot on.

After watching Ms Hanni's charade march forward under the guise of "public interest", I am reminded of a simple snowball rolling down hill until it becomes too large to stop and eventually destroys the village at the bottom of the mountain.

I am confident history will mark her efforts and forced "legislation" by -politicians that do not have a clue about airline operations- as one of the worst rules to ever be applied to the airline industry. The actual unintended consequences of this rule are going to create a disaster for major airports and tens of thousands of future passengers when normal weather events disrupt the flow of airline traffic.

Happy Holidays and thanks for all of the useful information you share with your readers.

Bob Herbst

Below is something I previously wrote on how the airline industry works in real life:

There is no argument from anyone involved in the airline industry that there are real problems that must be fixed. And the "problems" go far beyond delays on the tarmac!

I have been a commercial pilot for over 40 years. It has been a frustrating career as I experienced politicians and meaning well activist groups push rules and policies that while fixing one issue, directly caused more and worse problems.

Let me explain this 3 hour (delay) issue from a pilot's and airline operation's perspective.

I'll use Chicago O'Hare's (ORD) airport as an example.

ORD airport has 7 runways, approximately 200 gates and on average, close to 2,500 aircraft departures per day. Airlines from around the world operate smaller jets to the largest jumbo jets into ORD.

I have personally operated aircraft into ORD hundreds of times going back into the late 60's. My opinion is that; ORD airport is one of the world's best and if I ever have a major mechanical problem, ORD is where I'd like to be landing.

On a decent weather day, ORD will typically use 3 runways for landing and 3 others for take-off. Note: Aircraft have to take-off and land more-or-less into the wind and for safety, must be adequately spaced from each other. On clear days, aircraft can be spaced a couple of minutes apart. When aircraft have to navigate through thunderstorms and/or need more time on icy/foggy runways, for safety, that couple of minutes can increase to 10 minutes. Consider 2,500 departures/day with most of those between 6am and 11pm.

When the weather is OK, ORD operates without many delays. However when MOVING thunderstorms close down arrival and departure corridors and/or snow/ice/fog make half of the runways and taxiways unusable, ORD becomes a delay nightmare. Over the years I have left the terminal being #50-70 for departure many times, unfortunately this can take hours to taxi a jet to the one or two usable runways.

Consider just what snow does at ORD as runways must be closed for plowing and your aircraft is taxing out for take-off and still must go through a time consuming deicing process (deicing a large jet takes hundreds of gallons of deicing fluid and up to a half hour to have snow & ice removed).

When snow/ice blocks taxiways, there is no way for transporters to get to a line of aircraft. Nor may there be turn-offs to return to the terminal. Until aircraft at the gate leave, there is no place for the landing aircraft to park and deplane arriving passengers.

Consider a mall parking lot on a busy shopping day that gets several inches of snow and the mess it causes for parking your car. In order to be cost efficient, airports have a limited amount of facilities (gates, ramp space, runways, airport equip etc.) which are planned for normally good weather days.

An airline does not have expensive aircraft sitting around at every major airport and employees just waiting to be used on those bad weather days.

This maxed out "productivity" is what has allowed air fares to stay relatively unchanged for the past 25+ years.

From the side-lines it is very easy to put blame on airlines and flight crews. Politicians and activists can push through all of the rules and laws they can think of to make something change.

From my perspective after 4 decades of direct involvement in the airlines: The industry from labor to finance to the air traffic control system has been stretched to the absolute limit and the only thing left to sacrifice will be safety.

There is no airline in this country that is going to risk $hundreds of thousands in fines and penalties by risking a ~3 hour taxi delay. As such, this new rule will cause numerous flight cancellations stranding thousands of passengers in airport terminals.

The question Miss Hanni and her supporters conveniently ignore is: "What will be the new options for these thousands of stranded passengers caused by the inevitable cancellation of flights 100% caused by this new rule?"

Robert Herbst
40 years as a commercial pilot
and founder of AirlineFinancials.com

12.23.2009 | Unregistered CommenterRobert Herbst

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