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Entries in Lufthansa/Swiss (2)


Dear Richard: You Are Not a Virgin Anymore

One of the more amusing bumper stickers I have ever seen/read occurred at an intersection of Woodland Avenue and Jean Duluth Road in Duluth, Minnesota. I was a senior in high school and had been driving for a year and a half or so. The bumper sticker read: Virgins: Thanks for Nothin’.

Last week, Terry Maxon of the Dallas Morning News Airline Biz blog wrote a piece discussing the data analysis that Virgin Atlantic is using to frame the antitrust immunity application recently filed by American, British Airways and Iberia. We will touch on a few of those issues later and in future posts. But first, I have held a late August 2008 interview with Branson done by Karl West of the UK's Daily Mail that I would like to speak to.

West writes that “he [Branson] believes an alliance of the two giant airlines, plus BA merger partner Iberia, would allow them to dictate the market, charging higher prices between Europe and America." This makes no sense to me whatsoever because if it is high prices you are worried about, then who better than your own Virgin Atlantic, to offer lower prices and show the air travel consumer that you are the answer to their high air fare plight.

Your business model takes you to only the largest metropolitan areas, so your pricing actions will benefit the lion’s share of US – London Heathrow (LHR) demand. Because of your “network’s presence” in these large markets, you have, and will continue to have, a strong voice in attracting these customers because your product offering is very good and even different.

Whether it is the US domestic market or the transatlantic market, mature/maturing airline markets have demonstrated time and time 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. Where there is insufficient capacity, capacity will be sure to find the insufficiency. Simply, if the US - LHR market shows signs of “price gouging” by BA/AA, then surely Virgin Atlantic is among the best positioned to discipline the behavior.

West’s interview was the first one done with Branson following the BA/AA announcement that they would try for an immunized alliance for the third time. Branson believes the 'monster monopoly' will be bad for passengers, bad for competition, and will result in higher ticket prices. “It patently does not make sense,” he fumes. “Monopolies are good for companies, but they are never good for the consumer.” Branson adds: “BA has improved as an airline as a result of Virgin Atlantic keeping them honest.”

First of all where is the monopoly?

To answer that, I turned to Wikipedia for a definition. In Economics, a monopoly exists when a specific individual or enterprise has sufficient control over a particular product or service to determine significantly the terms on which other individuals shall have access to it. Monopolies are thus characterized by a lack of economic competition for the good or service that they provide and a lack of viable substitute goods. Monopoly through integration: A monopoly may be created through vertical integration or horizontal integration. The situation in which a company takes over another in the same business, thus eliminating a competitor (competition) describes a horizontal monopoly (and that is what you are talking about I believe).

Surely no one believes that a monopoly would exist, or even be created, by granting Anti-Trust Immunity (ATI) to BA/AA/IB between the US and LHR. Branson’s arguments are LHR-centric and totally ignore the fact that the airline industry is a network business today and not the cozy structure protected by Bermuda II when Virgin Atlantic first flew in 1984. Yes, LHR is coveted, and is served, by nearly every major carrier of substance from around the world. Those US carriers that were not permitted to serve LHR are now allowed to serve the market and provide Bermuda II incumbents with significant new competition.

But fundamentally, today’s airline industry is about networks and not city pairs. It is a simple fact that oneworld cannot sit and watch STAR and SkyTeam grow anymore. Air France/KLM and Lufthansa/Swiss have grown into the world’s largest revenue producing airlines. Delta and Northwest will alter the ranking once their merger is approved but that will probably only last as long as it takes Lufthansa to get its hands on SAS and/or Austrian. Branson mentions his thirst for British Midland (BMI) and its extensive LHR slot holdings, but what about Lufthansa’s option on those LHR slots? Surely Richard you are not implying that with meaningful STAR alliance presence at LHR a oneworld monopoly would exist?

Branson talks in the interview about how AA and BA are using the current difficult economic and operating environment to accomplish what they have not been able to accomplish in two prior attempts. Quite honestly Richard, the entire world is being forced to transform their business models to adapt to the new realities.

US carriers are using this time to make difficult decisions on capacity cuts in order to diversify their route structures away from an over-weighted position in the US domestic market. Maybe you should be questioning whether Virgin Atlantic should be considering something other than LHR. Oh you have with Virgin Blue, Virgin Nigeria (and you might sell your stake in that Virgin) and Virgin America.

Or maybe you should be putting more energy into changing the ownership laws in order that Virgin Atlantic can realize all possible synergies from your family of Virgins. Abstinence from industry realities might be safe in the short-term but potentially lonely over the long term. You talk about the AA/BA/IB’s ability to strong arm travel agents and corporate customers. You are a branding genius and now you are saying that you cannot differentiate your product from AA/BA?

At what point do we take you serious?

Your data arguments are weak as well. It is about the local US – London/LHR market and that does need to be studied just as it is done on other deals. At least AA and BA have performed the best analysis to date using the best data source available to make that assessment. The competition authorities will make the same informed analysis and draw the distinction between local and connecting traffic as well.

So go paint your airplanes and while doing so recognize that Willie Walsh is right. He said broken record and I will not take a shot at another of your brands. What I will say is that your arguments are not virgins anymore and maybe you should be writing letters to Oberstar rather than McCain and Obama. If you write to McCain and Obama, the subject should be about changing the ownership laws that stand in the way of allowing the industry to become the global industry that rewards world class competitors like Virgin Atlantic. Because the large and small can cohabitate and as you say, make competitors even better competitors.

Oh and while you are thinking about some new arguments, take a look above London. On a clear day, at 40,000 feet, you will see liveries like Emirates, Ethiad, Qatar and others that do not necessarily believe that a network industry requires London to be the center of the airline universe.

Unless you recognize that 1997's arguments need to change the third time around, thanks for nothin’.


Back to the Future?

In a comment to my most recent, and only, post thus far in May a reader asked if I was suffering from Airline Fatigue Syndrome? I am thinking yes. I look at the news today and I see that Frontier is going to start flying to Fargo. WOW. And Virgin America is going to start flying to Chicago. WOW again. And Sun Country did Mother’s Day with flowers. Double WOW.

I admit I am hung up on wanting a real transformation of the industry – or at least a sense that one is underway. I want the UPS guy to redraw the lines without labor or political interference and present us with a way to work toward making each of those stakeholders more secure in tomorrow’s rendering of the US and global airline architecture.

I do not remember a time when more balance sheet risk presented itself. In the past there was typically a carrier or group of carriers that you were sure would emerge from the trials of a particular period. This time you give a nod to Southwest given the health of their balance sheet and their current hedge positions. After that, it is clear as mud.

I lectured today on issues confronting the industry and its evolution. We talked about the current actions being undertaken that feel like recycled ideas. We talked about Phase I of the US-EU deal and its lack of transformational attributes – unless Phase II is successfully negotiated. We talked about Delta – Northwest and the revenue synergy concept that they are employing -- and how it looks and feels a bit like the combinations of Air France/KLM and Lufthansa/Swiss. We talked about a potential United – US Airways deal and asked if the third time might be a charm?

We talked about the fragility of networks. At some point, the downsizing of a network collapses under its own weight. We talked about the dollar versus foreign currencies and the competitive advantage currently being enjoyed by our non-US competitors in reinvestment, growth and in the purchase of fuel. We talked about the need to raise fares, cover input costs and the need to emerge from the long-term value destruction cycle that has described this industry. We talked about the drive to find the inelastic demand component.

We talked about the difficulty of placing meaningful raises into the pockets of labor given all of the externalities impacting the industry – and we barely talked about the infrastructure. We talked about politics and their impact on the current industry structure. We talked about how the US does not have a strong bearer of the flag in foreign markets. We talked……..

Back to the Future

Maybe we do need to look back before we can go forward. Remember when we talked about yield and not RASM? Remember when we had turboprops with limited range that married them to a geographically centered hub market? Remember when we actually talked more about operating profits than EBITDAR? Remember when load factor was a data point and not the mantra?

Not that there was ever structural stability during these points in time either, but fuel is the real deal. It just might be that catalyst for change that has been missing during the deregulation experiment. And if the change causes an industry to be disciplined enough to charge the passenger "all-in plus some return on capital", then we just might look back and call this time the best thing that happened to the US airline industry.

Let's get smaller (whether by commercial choice or by market forces); focus on yield and not RASM; get rid of duplicative hub feed (whether by commercial choice or by market forces); and forget about load factor that is won largely by not charging anywhere near enough for those final 10, 20, 30 or even 40 seats. Surely these actions would lead us to some capacity level less than today and approaches an economic level.

As cp5000 commented on the previous post: “And assuming the industry is successful in raising fares (which they must), what alternatives will benefit? More teleconferencing, more driving, more conference calls? I don’t know. That question at least is new and fresh. Better than the same old, same old”.

“The market place is working. It is not pretty, nor should it be. More change has to come – hard to say what it is going to be. Stay tuned”.