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Entries in Global Airline Industry (5)

Wednesday
Jun162010

my testimony on the continental - united merger before the house judiciary committee

Good afternoon Chairman Conyers, Ranking Member Smith and members of the committee.

My name is William Swelbar.  I am a Research Engineer with the Massachusetts Institute of Technology’s International Center for Air Transportation.  Our program is focused on the economic, financial, operational and competitive aspects of the global airline industry.  I appreciate the opportunity to speak today in support of the merger of United and Continental Airlines.  Whereas I have worked with each United and Continental in a consulting capacity in the past, I appear today as an independent expert on the U.S. and global airline industry.

Many see the global airline industry as somehow U.S.-centric.  It is not.  In aviation, the U.S. is but one piece of a big puzzle that is influenced by global economic interdependencies, just as the U.S. economic recovery could be affected by events in Greece, Portugal, Spain and Hungary.

United and Continental presented in their testimony before the Senate Committee on Commerce Science and Transportation an exhibit showing where U.S. airlines have fallen in their ranking among the globe’s largest airlines.  I am bothered by the fact that the U.S. carriers have been surpassed by Lufthansa/Swiss and Air France/KLM.  This fact is but one reason that helps to explain why United and Continental are pursuing this merger.

For the network carriers like United and Continental, this round of consolidation is as much about preparing to compete with the world’s other big carriers for international traffic as it is about competing with low cost carriers (LCCs) like Southwest, AirTran, jetBlue or Frontier in the domestic market. After all, it is the network carriers and not the low cost carriers that serve communities of all sizes. Despite the footprint established by the low fare carriers that is now national in scope, with their share of domestic traffic approaching 40 percent, it is the network carriers that connect the smallest U.S. markets to the globe’s air transportation grid.

I would like to debunk some of the myths I have heard said about the merger of United and Continental.

  • OVERLAPPING ROUTES/HIGHER PRICES:  There are just 15 nonstop, overlapping routes flown by each United and Continental.  None of the 15 would be a monopoly United route after the proposed merger.  Eleven of the 15 overlapping city pairs would have at least two competitors.  Of the four routes that would have but one other nonstop competitor (Houston – Washington, Houston – Los Angeles, Houston – San Francisco and Cleveland – Denver), that other competitor is Southwest Airlines in three of the four and Frontier on the other.  In each of the four routes, the LCC competitor has at least a 25 percent share of traffic. 

In addition to a nonstop competitor, two of the routes have four other carriers providing connecting service; one has three other carriers providing connecting service; and one has two other carriers providing connecting service.  The airline industry is a network industry and connecting options for passengers must be taken into account when considering competitive impacts as they also work to discipline prices.

The U.S. market should not fear the “end to end” network consolidation like Delta – Northwest and the proposed United – Continental merger. The low cost carrier segment of the US airline industry would regale in the fact that network carriers would price well above the market as was the case in the late 1990s and early 2000s as it would serve as the catalyst for growth at the expense of the network carriers again.  The market has demonstrated time and again that where competition is vulnerable, a new entrant will exploit that vulnerability. Where there are market opportunities, there will be a carrier to leverage that opportunity. And where there is insufficient capacity, capacity will find the insufficiency.

 

  • START OF ANOTHER BIG MERGER WAVE:  Some predicted that the Northwest-Delta merger in 2008 would be the catalyst to a big merger wave.   Two years later, we have a second merger announcement.  That hardly seems to be a wave.  Nonetheless, each merger case should be considered on its own merits, not based upon what someone speculates might happen.  Moreover, the concerns are most relevant in highly concentrated industries.  The U.S. domestic airline industry will remain fragmented should the proposed merger be approved as seven airlines will have at least a 5 percent market share. 

When thinking about airlines in a global context, no one airline has a 5 percent share of the global market.  The top 10 firms producing mobile handsets comprise 85 percent of their industry; the top 10 automotive manufacturers make up 76 percent of their industry; and the top 10 container shipping firms equal 63 percent of their industry.  Yet the world’s 10 largest airlines make up only 36 percent of the global airline industry.  These define a fragmented industry prohibited from operating as other global industries, not a concentrated one.

 

  • HUB CLOSURES AND FLIGHT REDUCTIONS:  The fear mongers would have us believe unequivocally that there will be reductions in flying, the dislocation of small communities from the global airline map and even hub closures because of consolidation.  Many use TWA and its St. Louis hub as an example.  American Airlines did not merge with a failing TWA.  Rather it acquired certain assets of a failed TWA.  As a result it is a very poor example of what could happen to a hub. 

But was it consolidation of the industry that ultimately caused American to downsize St. Louis or was it the events of 9/11 and the changed economics of the industry that followed that ultimately rendered St. Louis uneconomic?  Might the local economy in St. Louis have contributed to the city no longer being an attractive hub city that produces significant local traffic to support the hub carrier?  St. Louis is but one example of hub closures since September 2001 as US Airways/America West has in effect closed it Las Vegas hub and its Pittsburgh hub.  Neither of the closures can be laid at the feet at the carrier’s merger with US Airways.  In fact if America West had not agreed to merge with US Airways it is highly likely that the old US Airways would have been liquidated.

In the case of this merger, there has been much speculation about the future of Continental’s Cleveland hub.  There is nothing that I can see from this merger that would make Cleveland redundant.  Without knowing what the internal data might say but being knowledgeable about airline planning models, I would guess that the modeling would suggest that Cleveland would be made stronger as a result of the merger and not weaker.  The answer to Cleveland remaining a critical point on the combined carrier map will have everything to do with the condition of the local Cleveland economy as well as the price of oil and little to nothing to do with the decision to merge.

 

  • EMPLOYEE/EMPLOYMENT DISRUPTIONS:   Since 2001, the industry has shed nearly 140,000 airline jobs.  But 400,000+ good jobs where wages and benefits average over $81,000 per year per full time equivalent remain.   In fact, the average wage for airline employment reached its high point for the decade during the third quarter of 2009.  This average employee cost comes after the significant concessions granted at each of the five remaining network carriers between 2002 and 2007.  Headcount reductions were significant during the period as well as companies were forced to reduce their size in response to a changed revenue environment and increasing fuel prices.  The reductions continued into 2008 as oil climbed to $147 per barrel and jet fuel to the equivalent of $172 per barrel.  2009 marked the second largest decrease in industry capacity since 1942.

Susan Carey of The Wall Street Journal wrote an article titled: “Airline Industry Sees Pain Extending Beyond the Recession.”  In this critically insightful piece Carey examines the relationship of airline industry revenue to U.S. Gross Domestic Product.  “For decades U.S. airlines could rely on a remarkably stable relationship between their revenue and gross domestic product. Year after year, domestic revenue came in at 0.73% of GDP on average, and total passenger revenue was equal to 0.95% of GDP. For the year ended March 31, domestic revenue was 0.54% of GDP, while total passenger revenue was 0.76% of GDP”.  What this means is that based on the historic norm of the revenue to GDP relationship, there is $27 billion less in revenue today to be shared among the industry’s competitors than there was just 10 years ago.

Consolidation is not the culprit of lost airline jobs or declining airline wages.  Airlines were left with little choice but to restructure given the changed revenue environment precipitated by the growth of the low cost carriers and the transparency in fares facilitated by the internet as a distribution vehicle.

What is clear to me is that no individual airline except possibly Southwest and Delta would have the financial wherewithal to withstand another geopolitical event similar to what occurred on September 11, 2001. Unlike other rounds of consolidation that focused primarily on network scope, scale, revenue and cost synergies, this round is different.  Now the industry is looking at the balance sheet.  Consolidated carriers promise more stability to employees and communities that benefit from the combined strength of the respective balance sheets.

   

  • RE-REGULATION:  Some suggest that re-regulation of the industry will improve the economic well being of certain stakeholders.  Isn’t a goal of policy makers to maximize the number of good paying jobs?  The airline business sells what is best characterized as a highly price elastic product.  Only a segment of the buyers of airline services is less sensitive to price.  Over the past 30 years, the industry has competed away the savings/benefits of nearly every innovation (ex. reduced commission expense) in the name of low and lower fares for consumers.  Some think that reverting back to the days of a regulated industry will benefit certain segments of the industry.  I firmly believe it would harm the industry by causing it to contract further as prices rise as inefficient costs are passed through to the consumer.  A smaller industry would employ fewer workers.

Many government officials and certain industry watchers have instilled fear into the marketplace regarding the impact of current and prospective industry consolidation.  Fears of higher prices, reduced service, more monopoly routes, and labor strife are not well founded.  Their analysis of the industry today parallels an analysis appropriate in a regulated period.

Simply put, the network carrier model of the 1980’s and 1990’s does not work in today’s environment. Consolidation is a logical step to position airlines in a highly fragmented domestic and global industry to better weather the financial challenges that have caused years of economic pain for many stakeholders and a rising tide of red ink.

Thank You.

Tuesday
Sep302008

One Year Ago Today…….No Swelblog.com

One year ago today, I barely knew what a blog was let alone think for a minute that I would own one. I remain amazed at the time it takes to “feed the blog”. The time spent reading, researching and thinking has been time well spent. This new medium is a good one. The diversity of opinion on matters in this industry is what makes it both great and frustrating during this period of change.

In my first post, Swelblog.com Taxiing Into Position, I stated: “I did not start this blog to win friends or influence anyone. I’m a data guy, and I’ve been studying the industry long enough to come up with some strong opinions . . . many of which aren’t popular in either boardrooms or union halls. My approach is analytical because, in my view, the numbers don’t lie”. Well, I know in many cases I did not win friends. And that is fine with me. Did I influence anyone? I don’t know. Do I have some strong opinions based on nearly 30 years of being in and around this industry in a variety of roles? Yes I do.

We have talked about a lot of controversial stuff over the past year: pilot scope clauses; foreign ownership; merger and acquisition activity in the US and abroad; the pull down of hubs; entitlement by labor and other stakeholders in the industry; terms of art in labor negotiations like “put it on ice” and “clear the underbrush”; rejecting comments attacking other commenter’s; sharing with readers my beginnings in this industry; Doug Parker, Glenn Tilton, Richard Anderson, Gerard Arpey, Willie Walsh, Richard Branson, Doug Steenland and other CEOs that are shaping the structure of the industry going forward; Capt. John Prater, Capt. Lloyd Hill, ALPA, USAPA, AFA-CWA, TWU and other unions; labor-management relations in general and the fact the world must be laughing at us here in the US; globalization; air traffic congestion; asset divestitures; nothing to fear from the loss of a carrier; how cool it would be to be the UPS whiteboard guy; Lufthansa and its aggressive, and brilliant, real estate plays; seniority; Lee Moak as I will not put him next to Prater and Hill; the auto industry and airlines; the banking industry and airlines; Jim “Hell NO”berstar; the Business Travel Coalition and its leader, Kevin Mitchell; creative destruction; Bob Crandall and his lost after life; Gordon Bethune; catalysts for change; executive compensation; United – Delta; Delta – Northwest; United – Continental; United – US Airways; Allegheny-Mohawk Labor Protective Provisions; the airline customer; Maryland Terrapins; March Madness; The Masters; US Open golf; US competitiveness in a global industry; wondering and wandering; Force Majeure; “Hush Money”; “A Flying Pig”; Crude oil, the crack spread and jet fuel; words that start with “c”; price elasticity; “Rent Sharing”; yawning; Back to the Future; liquidity and all things cash; unbundling; top 10 lists; STAR, oneworld and SkyTeam; Starbucks; small community air service; naysayers; speculation, consternation and detoxification; union corporate campaigns; labor arbitrage; outsourcing; capacity cuts; interdependencies; virgins; and the memorializing of dates.

WHEW. To name a few.

Not only does today mark the end of year 1 of swelblog.com, it also means that the 2008 golf season for me is coming to a close. And it has been a great year in terms of venues played: Caves Valley in Baltimore; Butler National and Medinah #3 in Chicago; Erin Hills, Whistling Straits and Blackwolf Run in Wisconsin; The Bridges and Torrey Pines in San Diego; and Wailae in Honolulu. A good year indeed. Now if I can only get that chance to play Augusta National before I die, the top 100 list will be largely played. Oh, and I do have some work to do on Long Island. For the next four days I will join dear friends (Jack Ginsburg, Pete Robison, Ro Dhanda, Bill Musto and Greg Lane) and my partner, Dr. Craig Faulks, in our annual member-guest tournament.

Readership has exploded for a blog that does not promote itself. Most cool for me is the growth in the non-US readership. I thank the students at MIT for the multiple challenges posed in answering your questions as your unaffected enquiries often prompt an idea for a blog.

First rate reporters like Susan Carey, Liz Fedor, Terry Maxon, Justin Baer, David Field, Dave Koenig, Barbara DeLollis, Ben Mutzabaugh and others offer great insight to the industry. I never know where to put other bloggers/reporters/columnists like Holly Hegeman but thanks to you as well. Whereas this blog is my own, it is made better and sharper because of people like these that challenge the industry each and every day.

Wall Street analysts like William Greene at Morgan Stanley; Kevin Crissey at UBS; Jamie Baker at JP Morgan; Gary Chase at Lehman/?; and Ray Neidl at Calyon all offer us great insight and analytically supported opinions. The chief economists at ATA and IATA, John Heimlich and Bryan Pierce, have made the trade associations most valuable resources for looking at the industry from a variety of perspectives and supplying us with material that helps to put things into a global context.

I thank the readers who agree with me and disagree with me. To know me, really know me, is to know that I do not suffer fools well. I turned 50 this year and my guess is that will not be changing much. This blog is about change and it will remain about change. Because this industry sure as hell needs to change. I hope the next 12 months results in writing more about Dubai than Dallas. But damn, Dallas is one fun place to watch, and write about, as it has it all. The good with Southwest – at least for the moment – and the bad with American.

As I close, I want to revisit a quote that I published in January as it seems most appropriate:

"Bubble to Bubble to Bubble"

At the World Economic Forum in Davos, Switzerland, yesterday [January 24, 2008], Stephen Roach, the head of the Asian operations of Morgan Stanley, slagged Mr. Bernanke for being "goaded into action just by what the markets are doing." Mr. Roach described the Fed's actions as "excessive monetary accommodation that just takes us from bubble to bubble to bubble." It is "a very reckless way of running American monetary policy," he said. "I'm quite astonished that they did what they did."

It really is hard to know what is right. For many, my views are wrong, or at least not what you want to hear. Despite many incorrect facts printed about me on this blog and on other blogs by Howard Putnam, APA folks and others, it is nice to know you are reading.

This transition from consulting to thinking has been, and will continue to be, great. I recommend it.

Jill, Sam and Romy - YOU ROCK!

Wednesday
Sep172008

Olympic, Alitalia, American and the Wings Club

And we thought the last 10 days of news regarding financial institutions was interesting. In this industry we have legacy flag carriers dying on many continents. We have continued, and even aggressive, consolidation activity in Europe. In the US we have Delta and Northwest pointing to a date before year end to complete their deal. All that remains a constant, it seems, is the Allied Pilots Association creating press releases that ignore the realities of the world to virtually everyone except Lou Dobbs. But before we go there………

Today, Greece finally announced that it would shut down Olympic Airlines and start anew. The Greek flag carrier has only been going through gyrations of Olympic-sized restructuring efforts since I began to study the industry. Nearly 30 years later, its legacy carcass is finally put to rest.

All the while, the investor group that has been assembled in Italy to rescue Alitalia has given certain unions that have not signed on to their business plan until Thursday to do so. Today, a small union caused the carrier to cancel flights as it struck. The bankruptcy laws in Europe are different than in the US and honestly, they are the kind that should be adopted here. If the investor group were to walk away, there is a high probability that Alitalia could be liquidated. Not that Rome is burning, but maybe a “Flying Pig" Roast is in the offing.

Whereas saving Alitalia has become a front-burner issue for newly elected Prime Minister, Silvio Berlusconi, Rome will not burn; Milan will not burn; and all other markets in Italy will not burn if flag carrier Alitalia does liquidate. The world really will not miss Alitalia. Just like the hub closures that have occurred in the US over the years, replacement capacity will be sure to find the market opportunities that are presented. Lufthansa and Air France and others have already identified markets where they will deploy capacity to address the void left by Alitalia should it exit the space.

So, two more carriers in Europe, each once proud flag carriers, are close to succumbing to the high cost of jet fuel, a slowing economy, a strengthening of the dollar, hyper-competition for traffic flows over European hubs/gateways and high intrinsic cost structures that simply cannot be supported.

Now we turn our attention to the US. Similar pressures are forcing its carriers to engage in gut-wrenching decisions of resizing networks in order to adapt to the new economic order. Leave it to the Allied Pilots Association to cause most interested observers of this industry to scratch our heads yet again. Not only did APA’s President write to the CEO’s of British Airways, Iberia, Finnair and Royal Jordanian advising them not to enter into an immunized alliance structure with American Airlines, they also wrote to the US Government urging them to postpone their review of the application.

When all other carriers, including Southwest, are actively seeking new revenue sources that can only work to bolster the bottom line, the APA continues to act in the most destructive of ways. The revenue sources its company is seeking to participate in are those carried by American’s competitors today. To ignore them only initiates American's walk down the path of Olympic, Alitalia, Sabena, and the many US carriers that have ultimately succumbed to the same fate.

But only APA’s membership can decide if they are being led for the better or ultimately to their detriment. I cannot answer that.

Finally, James Hogan, the Chief Executive of Ethiad, spoke to the Wings Club in New York about a 'New Wave' in Global Aviation. If anyone does not believe for a minute that this “new wave” coming from Dubai, Doha and Abu Dhabi will challenge the European partners of the US carriers in a big way, then you are just not reading the tea leaves.

There are traffic flows that are critical for American and British Airways to participate in that require competitive strength. There are possibilities for Iberia that do not exist today. Today, each of the carriers have a strong position in some markets. Absent a relationship similar to that of STAR and SkyTeam, oneworld’s global market position will only continue to erode and will result in less and less flying for US pilots working under the American Airlines’ seniority list.

Just look at the loss of legacy carrier employment in the US today. American has not suffered the half of what United, US Airways and others have suffered. There is no growth at home and that is precisely why APA’s actions of today just simply ignore the evolution of the global industry and the forces of a global economy. Tomorrow’s world is not about Abilene, it is about Asia. It is not about narrowbodies to Eugene, it is about widebodies to Europe. And it sure as hell is not about Midland/Odessa, it is about the Middle East.

It is also not about 12,000 American pilots that Captain Hill states he represents, it is about the other 65,000+ proud employees of American Airlines.

Thank god for Lee Moak and his counterparts at Northwest. At least they recognized that changes were needed to compete in tomorrow's marketplace.

Thursday
Sep112008

The Global Airline Industry and Its Interdependencies

It Is Not Just the U.S. Anymore

As this blog approaches its one year anniversary, I have written about many topics. While much of my writing thus far has been US-centric, we have often written about airline happenings around the globe. We have written about the forces of globalization and how US carriers have lost competitive traction when compared to the global elite carriers like AirFrance/KLM, Lufthansa/Swiss, Singapore, Cathay Pacific, Qantas and others. Yesterday, I wrote about the falling price of fuel and concern that announced capacity cuts might not become actual capacity cuts.

When it comes to fuel though, it is global forces that impact its price and they range from demand by rising industrial powers to the relative strength of currencies to market activity. As I do my lunchtime reading, I ran across a must read article written by Derek Sadubin, the Chief Operating Officer of the Centre for Asia Pacific Aviation in The Australian entitled: Deflation in price of oil not all good news for airlines.

Sadubin does a nice job of intertwining economic, competition, currency and oil events from around the globe to discuss the immediate future. He talks about a bear market for oil; business travel stalling; a difficult economic environment proving difficult for the weaker players; competitors rising to challenge incumbents in many parts of the world; a mention of Emirates and their plans to fly through the current difficulties and grow at the expense of other’s weaknesses; and the shift in the relative strength of currencies and the impacts on certain carrier revenues. This references only a few of his points.

But I suppose I liked the article also because he shares my view that the Boeing strike may not be a bad thing for the global industry. In an interview I did with Ted Reed of The Street.com last week, I was quoted as saying that a Boeing strike is not a worse case scenario. You know how it goes in this industry; we order planes in the up cycle and take delivery in a down cycle. It is not the US carriers that hold control over the order book, it is the international carriers. And maybe, the time may not be right for them to expend capital on new equipment to fly to new markets as the global economy slows.

If nothing else, the read reminds us of the global fundamentals that govern this industry and the interdependencies the many forces have that dictate this industry’s successes and failures.

More to come.

Wednesday
Mar052008

Yet Another Prism from Swelbar to Think About US Carrier Competitiveness in the Global Airline Industry

The one thing I have definitely discovered since introducing swelblog.com is that once you write, there is no where to run and hide. Following my November talk to an ACI-NA audience in Washington DC, I penned an article that appears in the March 2008 edition of Airline Business where I discuss the competitiveness of the US airline industry in the face of increasing global competition.

The many themes that run throughout piece have been discussed over the past five months here. So on a day where there are reports that the Delta – Northwest talks have been restarted, I continue to believe that a resolution can, and will, be found. Assuming that is true, then it will be off to Washington to discuss, and defend, the combined carrier. This article was written with the mind that the regulators must also consider any consolidation attempts in the context of US carrier competitiveness in the global airline industry.

Anything short of this consideration ignores the economic realities of globalization and the direction this industry is taking. And I sure hope that we do not spend inordinate amounts of time discussing how air service in the middle part of the US is made less competitive. Rather, I hope it is recognized that the regulators need to focus commensurate time considering how the middle part of the country will benefit from increased access to markets around the globe. Just as deregulation of the US domestic market has taught us, more than sufficient competition will remain.

One can hope.