Travel Industry

Thanks to Holly Hegeman for the tip last night that United has apparently called off its merger discussions with US Airways. If you believe the Wall Street Journal, Continental and United are very close to an alliance agreement, and United likes that option better. But we know it’s not exactly what United wanted. So, what now?

United’s CEO Glenn Tilton hasn’t stopped talking about consolidation since, well, he may have actually been born talking about consolidation. He’s tried to make something happen several times over the last few years, but so far no takers. Continental walked away last time when they decided they didn’t like what they saw, but this time, it was apparently United that walked away from US Airways. Maybe Doug didn’t want Tilton to “groom” him and Tilton wasn’t having it?

No, seriously. He has apparently walked away because an alliance with Continental is very close. This would see Continental leave SkyTeam and join Star Alliance. That’s great and all, but what will it really get them? That’s not going to get either airline to shrink hubs or cut many routes, because they still would rather have people fly on their own metal (unless they are able to get some crazy anti-trust immunity deal). Sure, it may increase traffic flows, but the airlines still need to shrink on their own. Regardless, it will keep them preoccupied for a long, long time. That’s not good.

I would love to see United ground its entire 737 fleet and proudly announce that it will be dropping fees, hiking fares, and focusing on its role as a premium airline. Fares will go up, but with capacity down…. Ok, I’m just dreaming. That won’t happen. But something has to, whether they’re sleeping with Continental or not.

Then there’s US Airways. Oh boy. What do they do now? With United and Continental coming together in the Star Alliance, does that leave room for US Airways? I’m not sure. As Holly mentions, US Airways isn’t ruling out shrinking. I think it’s a safe bet that just eliminating free pretzels onboard isn’t going to save enough to prevent more change. US Airways has made it clear with its actions that it wants to get you there on time and for a good fare but just about everything else will cost you. I’m surprised they didn’t try the first bag fee before American did. We’ll probably see more things like that, but will we see it happen while they’re a Star Alliance carrier?

Talk about poor post timing. Just after I put the post up this morning on Mesa’s woes, sure enough they won a preliminary injunction against Delta’s attempted contract termination. Of course, Delta will appeal.

Assuming this decision doesn’t get overturned, it looks like Mesa will have fought off bankruptcy for now. But that doesn’t mean they’re out of the woods. The airline is still low on cash and is going to have to work hard to keep its head above water.

People will often try to predict when an airline will file for bankruptcy protection, but it’s rare to actually know the answer two months in advance. Mesa Air Group has just taken that step. If the airline loses its legal battle with Delta, we’ll see the airline file for reorganization under Chapter 11 by July 20 at the latest.

It seems so strange to hear that, right? But the writing is on the wall. For those who don’t know, Mesa Air Group operates Air Midwest, Mesa Airlines, go!, and Freedom Airlines. Air Midwest flies small turboprops on routes to places you’ve never heard of, but you don’t need to worry about that. It will be shut down in a month anyway. go! is the upstart Hawaiian interisland carrier that some blame for the demise of Aloha. Mesa and Freedom both fly as regional feeders for Delta, United, and US Airways. Mesa also has a joint venture in China, but the bulk of the airline group’s flying is done as regional feed.

Over the past couple of years, Mesa has faced several hurdles. Much of the recent pain has centered around go!’s fight with Aloha and Hawaiian, and this goes well beyond the money-losing operation itself. There have been multiple lawsuits, and in one, Mesa was forced to pay Hawaiian $52.5 million (reduced from $90 million in a settlement). And there could be more beyond that. To compound the problem, Mesa has a potential $37.5 million payment to convertible bond holders due on June 16. Management was able to raise cash via a common stock offering, but you can see where this is going. There are a lot of demands on their cash, and at the end of 2007, they had less than $100 million unrestricted. The airline still hasn’t released results from the March quarter, and there’s trouble brewing with Nasdaq over this.

So as you can see, things haven’t been stellar for the airline lately. That brings us to the Delta issue. Apparently, this is the one that Mesa says will push it over the edge. In short, Delta claims that Mesa failed to meet operational performance goals that were delineated in their regional feed contract. Because of that, Delta wants to cancel the contract and force Mesa to take back its 50-seat regional jets. Mesa, however, says that’s not the full story:

The alleged failure to maintain the specified completion rate in the contract is due to Delta’s own request of Mesa to remove flights to benefit Delta’s overall operation and/or to accommodate Delta mainline flights. These flights, among others, have always been taken out of Freedom’s performance calculations in the past and Delta acted consistent with this practice and has paid Mesa both its base margin and its incentive margin after crediting Mesa for the Delta mandated schedule changes and /or cancellations.

Now, it’s true that airlines do this kind of stuff all the time. When weather gets bad, they’ll selectively cancel flights to keep the rest of the operation running better. And often, regional flights get canceled first because they impact the fewest number of people. So is that what happened here? That’s for the judge to decide. But the added drama of a Chapter 11 filing hanging on this decision makes for a very interesting case indeed.

This sort of reminds me of Game 3 of the NBA Western Conference Finals the other night. There were plenty of people complaining that San Antonio was fouled at the very end of the game, but whether that’s true or not, it sort of misses the point. Had San Antonio played a better game, they wouldn’t have been in position to lose at the end.

Apparently, JetBlue has listened to a warning I sounded on my other blog that airlines need to pay close attention to their environmental impact. Ok, my post had nothing to do with it at all, but the airline did come out with a number of environmental initiatives called “Jetting to Green” last week. Here’s what they’re doing:

• Offering optional carbon offsets via Carbonfund.org for passengers to purchase
• Basic energy saving initiatives that most airlines now do, like taxiing on one engine and using ground power when at the gate
• Eliminating disposable headsets (you can still buy one for $1 or bring your own)
• Not having an inflight magazine (not that they ever did)
• Conserving and recycling things like fuel and de-icing fluid at JFK
• Donating $50 to the Kerzner Marine Foundation anytime anyone purchase a three night vacation at the Reef Atlantis from JetBlue Vacations (Seems kind of narrow, no? What if I want to stay four nights?)
• Partnering with Airbus, Honeywell, and IAE (engine manufacturer) to develop a biofuel that does not take away from existing food supplies. (looking at things like algae)
• Launching a sweepstakes giving away things like a Prius, organic gift bags, etc.

Many of these initiatives are things that airlines have done or been doing for quite some time, but JetBlue is actually doing a good job of packaging them and addressing them for PR purposes. I mean, they’re even trying to say that they’re installing winglets to be green when in fact, they aren’t installing anything that isn’t put there by the manufacturers anyway. But hey, it’s all about branding. That’s something that has been sorely lacking in a lot of “green” initiatives throughout the industry.

Sure, Delta and Continental, for example, both have carbon offset programs. I know Delta has an onboard recycling program, and I’m sure just about every airline now taxies on one engine, etc. But they don’t try to present this overall green image that JetBlue is actively working to present. It’s smart for JetBlue to do this, and I’d expect to see others follow. They’re already being green, why not tout it?

As airlines begin to yank domestic capacity, fares will go up. That combination means fewer people will be traveling, and that’s something we’ve already started to see happen. An additional benefit of this shrinking? Less congestion, of course. But we need to be careful not to get complacent or we’ll find ourselves in the same congested place again soon enough.

This has happened before. Anyone remember the Summer of 2000? It was an absolutely atrocious summer when it came to delays. Sure, United’s pilot labor actions certainly contributed to it, but so did general congestion. For example, look at LaGuardia in August of 2000 vs August of 2007. In 2000, 53.6% of flights landed on time, that’s 4 points worse than in August of 2007. Philly? In 2000 56.5% of flights arrived on time compared to 61.3% in 2007. I use those two airport as examples, because United has a small presence and wouldn’t have severely impacted overall airport performance. But the point is, as bad as things were last year, they’ve been worse before.

So why didn’t we address this 8 years ago when problems were building? September 11. After airlines slashed schedules, guess what? The problem disappeared. It took a few years, but eventually, air traffic levels returned and so did the delays. Now, with fuel prices as high as they are, we’re going to see another improvement in congestion, but let’s not blow this opportunity to fix the problem this time.

Congress continues to squabble over the FAA reauthorization bill, and the delay is going to cause a lot of heartache down the road. One of the large components of the reauthorization is funding for the next generation air traffic control system. We are in a unique place right now and we must take advantage. With traffic declining, we’ve bought a little more time to develop this system and come up with other fixes to ensure enough capacity to handle future growth. Congress must act soon so that we can fix this problem before it actually becomes a problem once again.

There has been plenty of uproar about the pending Delta/Northwest merger, but something happened in the Senate this week that shows just how far some politicians are willing to go to stop it. Though the legislative branch has no legal ability to stop mergers like this, it can try to throw roadblocks out there. That’s exactly what we’re seeing.

Why are they doing this? Well, all politics is local, and they’re afraid their constituents are going to have less airline service if the merger goes through. So, they’re starting to get pretty creative with their tactics.

Senator Max Baucus (D-Mont) was quite concerned, but he probably shouldn’t be. Montana has pretty good service from Northwest these days. There are daily flights from six Montana cities to Minneapolis/St Paul and a weekly flight from one (Bozeman) to Detroit. Meanwhile, Delta flies daily from seven Montana cities to Salt Lake and a couple times a week from two cities to Atlanta. So while the service is very strong, there isn’t much overlap. Maybe those couple weekly flights to Atlanta and Detroit could be in jeopardy, but the Salt Lake flights serve the West and the Minneapolis flights serve the East. Sure, there could be frequency reductions, but that’s likely to happen even without a merger considering the current economic situation.

But, Senator Baucus was concerned, so what did he do? He tried to throw some pork on to a flood insurance bill. One amendment would have extended the review period for the DOJ from 30 days to 1 year. Others would have required big impact studies to be conducted by the government. Stalling tactics. Ah yes, these would push the merger decision into next year when Senator Baucus hopes that a less merger-friendly administration (read: a Democrat) would be in the executive branch.

So how did the airlines respond? Well, they sent him a letter saying they will keep all their service and they’ll even add a flight from Atlanta to Billings in 2009. Wow, this doesn’t seem good at all. Even without the merger, these airlines need to cut capacity. To make the merger make sense, they still need to cut capacity even more. Now, I’d be surprised if Montana lost many routes here, but the state will probably lose capacity no matter what happens. Having DL/NW go out there and promise to maintain and even add service is not what they need to hear, because it’s probably not going to be the truth.

Senator Baucus’s efforts ultimately failed, but this may not be the last time we see something like this.

By now, you’ve undoubtedly heard about American’s bold decision yesterday to slash 11 percent to 12 percent of domestic capacity and to add a $15 charge for the first bag you check. You’ll find comments from travelers all over bemoaning the fee, and saying that it’s clearly a bad idea because the airline’s stock dropped nearly 25 percent after the news broke. I take a different view.

First of all, this news is downright scary for the industry. If an airline feels that it’s necessary to cut that much of its schedule, the numbers that management is seeing must be absolutely dreadful. And it wouldn’t surprise me to see further cuts as we go along. Additionally, to have to tack on a fee for checking the first bag makes it sound even more dire. There’s no question about it — this industry is in a crisis greater than we’ve seen in my adult life, and yes, that includes September 11. While September 11 was followed immediately by roughly a 20 percent cut in capacity by American, that was the bottom and it rebounded slowly. In this case, it’s an issue with the fundamentals. High fuel prices and a weak economy are not a good combination, and those don’t look to be changing anytime soon. I’m guessing it’s this realization of how bad things are that tanked the stock yesterday, and not the actual moves that were made to counter it.

At this point, airlines are going to do whatever it takes to keep their heads above water. If that means quick and dirty fees like the $15 for the first bag, then that’s what it’ll take. Are there better ways to raise money? No question. But none of them could have as quick an impact on the bottom line as this move. And right now, speed is of the essence.

Unfortunately, a change like this is going to carry plenty of operational baggage. Will people be charged if they have to gate check their bags? How many more people will try to sneak liquids in their carry on to avoid paying the fee? How quickly will overhead bins fill up now? It’s going to cause a lot of problems.

Ultimately, the collective addition of fees throughout the travel experience is mind boggling. Are these not the same airlines that consider themselves to be “full service”? Now it’s the low cost carriers that offer a far superior experience for the price. But in a time of crisis, apparently airlines don’t have the luxury of thinking about those things. They enter survival mode and do whatever they can. This may end up backfiring on them in the long run when better carriers come into being during the (hopefully) better times ahead. And when that happens, the current legacy carriers, battered and bruised from this experience, will not be able to compete.

Of course, this fully depends upon the economics of this business changing for the better. While the economy will eventually improve, I’m not nearly as confident in the price of oil going down. So for now, the airlines have to continue doing anything they can to increase revenues. Cutting capacity is an important step in doing that. Adding the bag fee? Well, it may make sense right now, but I’m not so sure how it will play out in the long run. It may just create opportunities for new entrants to provide a better product.

Anyone get the license plate of that truck that just ran over Frontier? I believe it had Texas plates. Yes, for the third time in a month, Southwest has announced it will be adding more flights in Denver. This, of course, happens when everyone else is cutting back all over the place. There’s no question about it . . . Southwest is going in for the kill.

Let’s look at the timeline here:

• April 10 - Frontier Files for Chapter 11 reorganization
• April 22 - Southwest announces flights from Denver to Portland and Indianapolis as well as additional flights to Las Vegas and San Antonio, all routes that overlap with Frontier
• May 7 - Southwest announces flights from Denver to Sacramento, Ft Lauderdale, and New Orleans (the latter being the only city to which Frontier doesn’t fly) as well as an additional flight to Phoenix
• May 22 - Southwest announces flights from Denver to San Francisco and Omaha, both Frontier cities

This has been an unbelievably quick ramp-up for Southwest, and when all is said and done, the airline will be up to 95 daily flights at a place that’s only seen Southwest planes (this time around) for a little over 2 years. Why is this happening? Well, Southwest smells blood in the water, of course. With Frontier in bankruptcy looking for financing, Southwest is making its strongest case possible that there’s no need for Frontier to exist any longer.

So now Frontier finds itself in a very tough spot. How can the team over there convince the money men (and women) that they are worthy? Well, the airline’s plan to fly to smaller cities where Southwest won’t fly can only help. But with the price of fuel going up and demand softening, it’s still going to be very hard to build that case. Sean Menke and the rest of the Frontier team are going to have a lot of sleepless nights this summer. If they can pull out financing, I will be very impressed.

Once again, a new aircraft program has seen delays. The 787 has already been delayed a few times as has the A380. But now, the A380 production schedule has slipped again, and there will be even more of a wait for those shiny new aircraft. Is this a bad thing?

It depends who you ask, but most people would answer that yes, it’s bad. Sure, these are expensive new planes, and with the declining economic situation here in the US, you would think that at least some airlines would be happy to not have to pay for them right now. Besides, they’ll get themselves a break on the final price once they demand compensation. But the picture isn’t that clear.

Often, these planes are planned as replacements for aircraft, some of which are coming off lease. So, if these planes do not arrive in time, the airline could be required to cancel flights until the new planes show up. Other airlines simply need a more profitable aircraft to make some routes work. The 787 may cost a fair amount of money, for example, but its operating costs are much lower than anything else out there. And on longer, thinner routes, it is the only way to make something work.

Case in point, take a look at LOT Polish Airlines. The airline announced today that it would cancel its Warsaw-Beijing route, because it can’t operate it profitably until the 787 arrives. That was supposed to happen this year, but it’s now been pushed to 2010. So, LOT will wait to expand further in Asia until 2010 when it starts to make sense again.

These delays can be quite problematic for planning departments all around the world, but there’s really nothing that can be done. Of course, airlines can try to find short term capacity, but there aren’t many spare widebodies hanging around to do some short term work. At least, not for a reasonable fee. So, as these delays continue to mount, airlines will have to make some tough route planning decisions.

I know, we’ve heard this one before. Once again, the DOT has issued a few changes to try and help reduce delays and generally make traveling better. Most of them are snoozers - not anything new or exciting but rather firming up of old proposals. But there is one in particular that has drawn a good deal of outrage — slot auctions. First, let’s start with a description from the DOT.

. . . all airlines operating at Newark and JFK would be given up to 20 slots a day for the 10-year life of the rule. The proposal offers two options for JFK. Under the first, 10 percent of the airline’s slots above the 20-slot baseline would be made available via an auction. The revenue from those auctions would then be invested in congestion and capacity improvements in the region.

Under the second option for JFK, the airlines would auction 20 percent of slots above the 20-slot baseline and keep all of the proceeds. The Secretary noted that, depending on the option, between 91 and 179 slots would be affected out of 1,245 total slots at the airport.

The proposal also calls for auctioning 10 percent of slots at Newark Airport above the baseline annually for the first five years of the rule. As a result, only 96 slots out of a total of 1,219 slots at the airport would be auctioned over the 10-year span of the proposal.

Ok, this one is a mouthful. In short, a handful of total slots at each airport will be auctioned off to, I assume, the highest bidder. These are slots that airlines currently use, and the government has decided to take them away from those airlines and open them up for bidding by others.

Why would they want to do that? Well, to allow for increased competition. They have this crazy idea that opening up these slots will draw a ton of low cost carriers into the airport and make fares low for all. Not so fast there, DOT.

Now, I don’t know how the mechanics of this proposal are going to work, but I have to assume that it’s a standard auction. The highest bidder gets the slots. The airlines that already hold slots are going to want to keep them, but some can afford to pay more than others. At a place like Newark, you have to think that Continental can pay the most because they have a larger loyal local base as well as a hub to fill those flights.

So, what will we end up seeing? In the end we’ll probably see airlines like Continental bid high for Newark slots so they can keep the ones they have now and possibly even gain some more. The low cost carriers? Well, there’s a reason they’re low cost. They probably won’t be able to afford the price of entry. Even if they can (I’m looking at you, Southwest), I can’t imagine that they’d WANT to pay that much for a handful of slots. No matter who ends up winning the auction, I’d be surprised to see tremendous downward fare pressure. The cost of operating these slots will be much higher than before, I’d assume, so fares will have to support that.

And how exactly does this help congestion? It’s still the same number of slots they’d have without the auction, but they say the proceeds from the auctions will go back into reducing congestion. Yeah, I’ll believe it when I see it.