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Entries in agents of change (1)

Monday
Jun022008

Rambling, Musing and Pondering on Airline Industry Issues

In past years, the industry’s trade associations have not always been strong voices for issues, particularly economic issues, impacting the industry, whether it is the global industry or the US industry. In recent years that has changed. Each respective organization is fortunate to have two very capable Chief Economists: Bryan Pierce with the International Air Transport Association; and John Heimlich with the (US) Air Transport Association. The data and analysis provided by each should be a link on every serious industry watchers favorite list. And watch them daily, as meaningful insight is provided by each man.

The IATA Annual General Meeting opened today in Istanbul and IATA CEO Giovanni Bisignani warned that the global industry is on course to lose $2.3 billion if oil should average $107 per barrel and $6.1 billion if oil should average $135 per barrel. Less than a year ago, IATA was forecasting a global industry profit in excess of $10 billion. Bisignani has been a loud voice on the need for consolidation in the global industry citing important facts regarding this industry’s unhealthy and fragmented state. I really like this guy and I particularly like his call for a clean whiteboard as this blogger has wanted the UPS whiteboard guy to redraw the global map for some time.

United; United-US Airways; American; and Jim “Hell NO”berstar

I don’t know about you, but I am very happy that United said “NO” to walking down a road toward a formal combination with US Airways last week. Something just did not feel right about that one. Yes the labor issues were significant. The IT issues were significant. The combined networks left a bit to be desired from my perspective as the regulators would surely have required some auctioning off of valuable airline real estate. United has more than its share of problems to be sure, but the deal was far better for US Airways’ stakeholders from my perspective as there is little the Phoenix-based carrier could offer in terms of route portfolio diversification.

It took us 30 years to get into this mess and it will take time to get us out.

Despite industry consensus, Tilton did not pursue a deal for deal’s sake. Instead he said "NO" – at least from public reports. The historic US industry leaders – American and United – both began the process of battening down the hatches last week. Each carrier began to make announcements and pronouncements that their respective businesses would be managed in the near-term as stand-alone entities. So Jim “Hell NO”berstar looks less like a soothsayer as the wave of industry deals he suggested has come to a halt.

I like the decisions. I particularly like United’s decision because Tilton has been saying that the industry needs to restructure. Consolidation is part of the restructuring he has suggested. Consolidation has been the operative word used for mergers in the industry – but mergers rarely consolidate much if anything. Consolidation has been the scare word used by the naysayers to signal that consumers will get hurt. Consolidation has been used by labor to extract monopoly rent only to return to the bargaining table to give most of the rent won back to the respective company. Consolidation has been used by those on Capitol Hill to suggest that service will be lost.

Well, we are about to begin a real consolidation of the industry and it cannot be laid at the feet of a merger and acquisition proposal/era. Capacity will be cut because it is not economic to run individual networks of the scope that are operated today. Prices will go up, but not because of a merger and acquisition proposal but rather because a business that needs to pass on the costs of providing the service. Labor will negotiate their next contracts just as they have before, except for the Delta pilots that recognize that certain scope restrictions standing between revenue and principal are not in anyone’s interest. And the condition of the economic environment will be taken into account in either direct or mediated talks or whether the case lands in front of a Presidential Emergency Board.

American and United are, and will be making some tough decisions. Delta and Northwest have made a tough decision to join hands. But that decision is in the best interest of two companies that are so dependent on network scope to maintain service to a maximum number of points. Northwest would be particularly hard-pressed to maintain all of the service it provides. Continental is blessed by geography but still has fragility in its financial position. And the question becomes for the remaining legacy carrier, is US Airways’ cursed?

As for the sectors incorrectly referred to as Low Cost and Other Carriers: Southwest is blessed with capital and well all that is-Southwest; Alaska, jetBlue and Virgin America are arguably blessed with a brand; and AirTran is blessed – in the near-term with flexibility of selling off delivery positions to help it today - but could hinder it tomorrow when the market does make a turn for the positive.

This really is a cool time in the industry’s history. A time that will be embraced by the survivors. The "oil era" will be sure to have its place in history. And for some the slippery slope caused by the commodity will land some in airline oblivion; for others it will end on a path toward something much better than today.

The Price of Oil and Attributes of a “Bubble”

Over the weekend, a number of articles appeared suggesting that the oil chart replicates some of the stock – or shall we call them commodities’ – charts of the late 90’s. One thing I have learned from years in this industry is not to second guess the markets and not to try and predict the price of oil. Do today’s oil prices have “bubble” attributes in the traditional sense – yes. Does history suggest that anything that is market influenced will remain on this trajectory – no. And this is yet another reason why, if I am labor, I would be putting some chips with insurance on the come line. Leverage with the business is the only hope of coming close to replacing a majority of what was given up during the restructuring period. Only it will be in a one-time payment and not a legacy payment embedded in a contract.

CEOs, Policy Makers and Shareholders

I like to refer to today’s CEOs as “Agents of Change”. Popular? – no. Hell bent on change – yes. Standing in the way of preventing the past practice of doing business – yes. Concerned about their place in history – yes. Afraid to get dirt thrown their way in the process – no. Bringing the shareholder into the “virtuous circle” of airline industry prosperity – yes.

With the exception of Delta-Northwest, the litmus test is underway. Each of the legacy carriers is on a path toward restructuring their respective businesses. The naysayers should be happy. Of the six legacy names, the current construct will preserve five. Yet service will be cut and prices will go up – and it will not be because of consolidation in its historic definition. It will be of business decisions necessary to preserve the capital of the day’s stakeholders. Not all of them. But….. Today’s CEOs will do that as their fiduciary duties begin and end with that fundamental charge.

Labor will be tested and will probably say on some Monday morning: “Man, that merger proposal may have been better than riding out a business that has to make these decisions to cut, cut, cut”. Congress will ask: “Maybe this business is not a utility that serves my region’s airport? Some sort of rethinking the emotional issues may have provided my constituents with something better?” Regulators will say: “I knew if we kept our hands off the US market would be better served”. And hopefully the Executive Branch policy makers will say: “this boom and bust is good for no one, so let’s give them a clean whiteboard and if it gets out of hand will step up. But the way we are doing this just does not work”.

And the shareholders will finally say: “the barriers – oh I mean excuses – have been removed and if this guy cannot do it now then let’s find another guy”.