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Entries in Airline Congestion (2)

Thursday
May152008

Pondering the Next Move; But Before I Do…….

Wednesday’s Hearings: “Forgetting About History”

If there is another “something” in the works, surely no one really believed that anything would be announced before yesterday’s House hearings on Delta – Northwest? Jim “Hell NO”berstar was anything but “Hell No” in yesterday’s hearings. To be sure, he was anything but Hell Yes. He seemed to save his “powder” for the testimony of the Departments of Justice and Transportation. But even that was dry and in the end about all we could do was “take heart” that the investigation would be thorough.

I am not one that is going to give a protectionist much slack. But I kind of felt sorry for him when it became clear that he had not quite grasped that Phase I of the US-EU liberalization deal was in effect and that all six US legacy carriers could fly to Heathrow. But where I really struggled was with the continued pointing to American Airlines and their purchase of TWA’s assets. Remember, not a merger but rather, an acquisition of assets. There was much discussion about how St. Louis was reduced from 500 flights per day to 250 flights per day.

When American made the decision to purchase TWA’s assets, congestion was the rule/industry fear of the day. The “Summer from Hell”, or the Summer of 2000, was in the books. Chicago O’Hare was in the headlines most days during that summer. Delays in Chicago were either based on thunderstorms or Rick Dubinsky choking the golden goose. From American’s strategic perspective, St. Louis could potentially be that reliever of congestion in Chicago as connecting traffic is well connecting traffic and can be accomplished in either city.

But “NOberstar and the Fear Mongers” sang the tune that American sat in the very same hearing room and vowed to keep St. Louis whole. We heard it over and over. If we forgot about Phase I being in place; surely we did not forget about September 11, 2001 and the effects it had on the US domestic airline industry in general and the network legacy carriers specifically. Yes, St. Louis was downsized and most non-hub flying was eliminated. Pittsburgh was carefully eliminated. Atlantic Coast died under its own lack of weight. And an over-exhuberant industry replaced mainline flying with regional flying.

St. Louis was a dying hub. McDonnell Douglas was gone. Its local economy was built on reputation and not on strong underlying economic attributes. American made the only decision that was in its best corporate interest. Remove capacity from a weak point and focus on a strong one – Chicago. Nuff’ said.

Pondering the Next Move

My guess is Jim “Hell NO”berstar is keeping his powder dry until the next move is announced. The next move will face more intense scrutiny based on the “I told you so” line that was most prevalent yesterday. Honestly, I do not know of another deal scenario that is interesting – let alone transformational – and provides the kind of investment thesis that helps this period come alive.

We have United and US Airways merger discussions being tossed around by “those close to the situation”. Now we have a United and Continental alliance in the news. Readers know I like what Tilton says as he talks about the industry from 40,000 feet – and I am in fundamental agreement that the current construct is good for no stakeholder group.

If I lean to one of the two scenarios being painted in today’s mainstream press, I lean to a United - Continental alliance. Gravity takes me there because it differentiates the combination from Delta and Northwest. Delta and Northwest individually, and collectively, are/will be highly reliant on connecting traffic as their hubs are located in smaller population centers. [And this is why their commitment to maintaining the most extensive network possible is absolutely factual] United and Continental would be building around hubs/gateways where core onboard traffic would be largely local.

Now, I understand that the transatlantic onboard traffic mix can be different based on other competitors in the market. We do not have to look much further than Washington Dulles and the fact that Lufthansa carries more Washington local traffic to Germany and beyond than United. United’s airplanes are filled with more behind and bridge traffic based on the connection to its US domestic network at Washington Dulles.

But doesn’t this also suggest intra-alliance competition for traffic that is being bastardized by comments from the fear mongers that the transatlantic will soon face a scenario where barriers to entry are much too high?

LIQUIDITY AND SOUTHWEST AND UNITED

Over the last couple of months, this blogger has written about how liquidity will be back in the headlines just as it was following the events of September 11, 2001. American has looked to relax fixed charge covenants. Delta and Northwest are looking to a combined balance sheet. United has worked to relax covenants in its loan agreements. US Airways balance sheet is actually in pretty good shape for the moment. Southwest recently borrowed $600 million against owned aircraft to bolster an already strong liquidity position. jetBlue has sold aircraft and sold equity to Lufthansa to bolster liquidity. AirTran has sold delivery positions and just completed a convertible to bolster its liquidity. And the market yawns.

Holly Hegeman of Planebuzz.com asks the question: PlaneBuzz: Follow up on Southwest Nuts: Why Do They Need More? If she had not written before I had a chance, I would have asked the same question but probably not as eloquently. Me thinks, Southwest plays a meaningful role in the next move. These guys – and sorry Laura – are smart. Based on their model, there are just simply not many markets left in the US.

Now, I have no clue as to what the plans are – or if there are any - as I am not a source close to the situation. But I am willing to bet that the next move involves Southwest purchasing assets. Whether they are Washington National assets; Laguardia assets; or something else they are the only name that can assure “NOberstar and the Fear Mongers” that competition will remain robust. If Southwest is involved, the strategy is brilliant. And I am not one that will discount Tilton.

I am the guy that has lived a life liking and rooting for: Illie Nastase; Jimmy Connors; Derek Sanderson; Craig Stadler; well you get the picture.

As I have said, this time is cruel but it will lead to something better. Simply because the current construct just does not work for anyone. So for the consumer groups: you will pay more and it is not because of a changing industry structure, rather it is an industry that must simply charge at least as much as it costs to produce the product. And for labor, the best bet to recapture what you think is entitled is to bet on the future. It just might be good.

Thursday
Nov152007

Dear Mr. President (and Congress): These Short-term Solutions to Congestion Gives Me Indigestion

As I am doing my afternoon browse of aviation news, I find myself struck by another press release issued by the White House Press Office entitled “Statement by the President on Aviation Congestion” click here. Certainly, some of the short-term actions being undertaken make sense and are being applauded by industry click here. But the final suggestion offered is as follows:

“Finally, the Department of Transportation and the FAA are working on innovative ways to reduce congestion in the long run. While short-term improvements in flight operation and passenger treatment can help, they do not cure the underlying problem: In certain parts of our country, the demand for air service exceeds the available supply. As a result, airlines are scheduling more arrivals and departures than airports can possibly handle. And passengers are paying the price in backups and delays.

The key to solving this problem is managing the demand for flights at overloaded airports -- and there are a variety of tools to do this in a fair and efficient way. For example, fees could be higher at peak hours and at crowded airports, or takeoff and landing rights could be auctioned to the highest-value flights. Market-based incentives like these would encourage airlines to spread out their flights more evenly during the day, to make better use of neighboring airports, and to move the maximum number of passengers as quickly and efficiently as possible.

This concept is called "congestion pricing." It has shown results in other areas of our economy -- in other words, other parts of our economy use congestion pricing. Some states offer discounts to drivers who use EZ-Pass, which reduces long waits at the toll plaza. Phone and electricity companies balance supply and demand by adjusting their rates during peak usage hours. Applying congestion pricing to the aviation industry has the potential to make today's system more predictable, more reliable, and more convenient for the travelers. Over the past seven weeks, federal officials have raised this idea with airlines and airport representatives in the New York area. I've asked Secretary Peters and Acting Administrator Sturgell to report back to me about those discussions next month”.

Whereas I will never suggest that I am an expert on the air traffic system, I do understand the economic drivers of cost to the airline industry. The “Fathers of Deregulation” envisioned the masses flying at significantly lower prices. This industry has evolved and adapted and delivered on the economic experiment undertaken in the late 1970’s. Consumers have benefited through significantly lower prices while shareholders, employees, and other vital stakeholders in the industry have suffered to varying degrees.

Now, nearly 30 years later – because you did not keep your promise to provide an infrastructure that could accommodate the goals and objectives of government policy that was so important in 1978 – you are going to turn the tables on the consumer and make it more expensive for them and somehow - I am sure - will find a way to blame it on the industry that delivered consumer choice and lower prices. And while the consumer is certainly impacted by delays in the system, have you ever thought about the direct cost to the airline industry stemming from delays that are not of their own making?

Market-based incentives are not necessarily going to change the clock that dictates the demand by consumers for air travel at certain times of the day and I do not read that possibility in your release. Further, your inaction on this issue is yet another catalyst to consolidate an industry that destroys capital rather than creates it. But I am sure that when the industry is forced to discuss the very real need to consolidate, the costs imposed on it by government actions/inactions – both direct and indirect – will be forgotten by you and your friends on Capitol Hill.

And all of this discussion at a time when the US signs an open skies deal with the EU that offers promise to an industry struggling to find new (read profitable) flying opportunities. The industry has made it known that at $100 oil it will surely consider cutting capacity. When we cut capacity, the least profitable markets will suffer (read small community air service Congress and President Bush). When we cut capacity, labor is disenfranchised. We could go on.........

There is just not much adhesive left on this band aid.