State of the Airlines

Friday, March 11, 2005

NEWS: Hawaiian Airlines Plans for Bankruptcy Exit

If all goes according to plan Hawaiian Airlines should exit bankruptcy in early April. A key piece of that plan will be the pilots and flight attendants ratifying their respective contracts. Its been a long haul for Hawaiian who have been in bankruptcy since March 2003. The court has approved this exit plan despite the fact that one of Hawaiian's investors has been charged with conspiracy to commit bankruptcy fraud by the FBI.

I'll admit that I did not think that Hawaiian Airlines would be the first of the island airlines out of bankruptcy. I thought Aloha would beat them to the punch and for a time I doubted Hawaiian would even make it out of bankruptcy. The difficulties they had with their labor contracts looked terminal and other aspects of their bankruptcy were more difficult to deal with. But what do I know. I do still believe that the first of the island airlines out of bankruptcy is going to have an advantage. But...once again...what do I know. Hide and watch.

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Thursday, March 10, 2005

OPINION: Airlines Give till it Hurts

Today's hero is Andres Martinez, who published a simply brilliant commentary piece in the Los Angeles Times. Its absolutely worth taking the time to register to read the article. I'll will steal this excerpt but I swear I was tempted to plagiarize the whole darn thing.

The airline industry's overly clever pricing schemes have also backfired spectacularly. Unlike a movie theater that will usually charge the same amount for a seat, airlines perfected "yield management" systems that amounted to a continuous auction of each seat on every flight. In the late-1990s boom, airlines could often auction off those last few coach seats on transcontinental flights for a couple thousand dollars.

I nearly wept openly...that is such a great statement.

The commentary got me the public ready to see what ticket prices should be in order for airlines to be self-sustaining and not constantly on the brink of bankruptcy. Because that day has to come but I get the sense that it will take longer than anyone anticipates. Fuel prices will continues to increase despite the assurances that "all is well" ...get it..."oil"..."well"...nevermind. Airlines are not going to be able to make back the increase in fuel costs via "fuel surcharges" because its going to get to the point where the surcharges will equal the cost of a ticket. Sooner or later Southwest Airlines is going to run out a fuel hedged at significantly lower prices and will raise their prices to cover costs. And the industry will follow.

My advice? Invest in telecommunication, voice over IP, teleconferencing hardware and anything else that enables users to collaborate in a virtual meeting. Its gonna be huge once airlines regularly charge what it really takes to make money on an airline seat.

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NEWS: Nature Abhors a Vacuum, so does Northwest Airlines

Northwest Airlines is continuing to fill the vacuum left by ATA's big service cutbacks in Indianapolis. The carrier will be adding flights in June bringing them to 52 flights a day. ATA Airlines will be reducing from 41 flight per day to 4 in April.

This could be one of those "careful what you ask for you may get it" moments. Certainly Indy is looking to replace the flight capacity in their fair city. Up steps Northwest positioning themselves to be the new big carrier in Indy. But as the folks in the Minneapolis/St. Paul will tell you having a big carrier dominating your market can lead to higher ticket prices...much higher.

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NEWS: Delta Airlines Plans on Big Losses

Delta Airlines is warning everyone within earshot that 2005 is going to be downright grim. In a statement issued to the SEC, Delta says that the will have a "substantial"loss in 2005. According to the airline they will need to do some pretty agressive financial wrangling to keep themselves out of bankruptcy.

The prospect of bankruptcy does not hold the promise of a new tomorrow for Delta unlike United Airlines or Us Airways. Delta has made a lot of deals with creditors and, as a result, much of their free assets are...well...not free anymore. This means bankruptcy would be very complicated.

Delta's $5 billion dollar cost cutting target will likely not be met until late 2006. No help there.

In any case, we all get to stand by while Delta loses a $100 ka-jillion dollars. OK, ka-jillion isn't a real amount but folks might need to start making up new terminology to express the boatload of money that is going to be lost in 2005. How substantial is the loss going to be? Considering that the Delta lost a whopping $5 billion in 2004 I can only guess that 2005 will be worse than that.

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NEWS: United Hires AAR for Maintenance

United Airlines has awarded a 5 year contract to AAR Aircraft Services to perform heavy maintenance on the carriers 737 fleet. AAR will perform the maintenance in their new facility in Indianapolis. Anybody but me get an overwhelming sense of irony in all of this. See AAR is leasing a portion of the Indianapolis maintenance facility originally built for United's maintenance division (with $300 million in public money by the way) which subsequently shut down only to contract with AAR to do maintenance at the same place...pause...breath.

But this is terrific news for Indianapolis which has been reeling from a string of airline bad news. First United Airlines closes their maintenance facility taking 1200 jobs with it and idling a $300 million dollar investment. Then home town airline ATA goes bankrupt and later drastically reduces their service taking even more jobs out of the economy. Now they get a ray of sunshine in that AAR will be adding another 200 jobs bringing their total headcount to 400. Oh yeah...its pretty good news for AAR as long as United pays the bills.

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Tuesday, March 08, 2005

NEWS: American Airlines Looks for Profit in Maintenance

On the heels of my post on outsourcing maintenance comes news that American Airlines is looking to position its massive Tulsa maintenance facility as a profit center. Airline management and the union workers are looking to streamline the operation and reduce costs. The point is to compete on a level playing field with the 3rd party maintenance facilities that are waiting in the wings. The idea is not novel, nearly every major airline with a large investment in maintenance staff and facilities has tried this at one point or another. None had any lasting success with turning those money sucking cost centers known as maintenance into wonderlands of profit. But this should not dissuade American Airlines from trying it.

Just because no major airline has ever managed to evolve their maintenance division into a profit center does not mean that American can't do it now. The prognosis for the labor force at American is grim. Find a way to compete with 3rd party maintenance or lose your job to them. That's hefty motivation. But the labor force should feel good that the airline is committing the resources to the effort. It would be just as easy to start using 3rd party maintenance.

Timing may work in their favor as well. The increased interest in 3rd party maintenance is going to soak up existing capacity. Now American has the opportunity to become a provider and offer up some 3rd party capacity. All they need to do is find a way to compete.

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NEWS: Outsourcing-Demon or Savior?

Back in February I posted an opinion about my expectation that airlines will increase the amount of aircraft maintenance outsourcing. Now CNN has put up an article that illustrates nearly every boiler plate argument that has ever been offered up for and against outsourcing maintenance. On one side you have the airlines citing the need to control costs and pointing to improved overall safety records as proof that using outside maintenance is not a problem. On the other side are the unions claiming that the maintenance being done is substandard and waving around their list of things 3rd party maintenance facilities have done wrong. In the middle you have the Dept of Transportation questioning the FAA's ability to oversee these maintenance facilities. So who is right? Most likely the answer is some degree.

Have the airlines saved money with outsourced maintenance while showing improved safety trends? You bet. Are the two connected? Maybe.

Has some maintenance performed by 3rd party maintenance been wrong or substandard as pointed out by the unions? Simply put...yes. Have the union's subjected their own work to the same scrutiny? If they have then they are not going to share because it would show some of the same types of mistakes.

Is the FAA staffed to oversee new burgeoning 3rd party airline maintenance industry? Doubtful, they are chronically slow to move on industry trends. But it is mitigated by the fact that, no matter who performs the maintenance, the airline is ultimately held responsible for the maintenance performed.

The way I see it outsourced maintenance is here to stay. Not every airline can afford to keep their maintenance in house. But I put a challenge out to every major airline that has a large maintenance force and facilities. Why is it that your airline is looking to outsource? Why is it that a 3rd party maintenance facility can do things more efficiently and with less expense? Answer those questions and you keep your jobs. Continue to put all your efforts into spreading FUD (fear, uncertainty and doubt) and watch your work continue to get outsourced.

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Thursday, March 03, 2005

NEWS: Ted is Growing

Ted, the low fare spawn of United Airlines, will be growing soon. United will be converting 9 A320 from its "mainline" fleet to Ted bringing their total aircraft to 56. There are lots of statements in the press release from United about how pleased they are with Ted's performance but zero information on whether or not Ted is carrying its own weight financially speaking. Regardless, these aircraft are being added to the Ted fleet to bolster service out their hubs in Denver, Washington Dulles and Chicago to markets in Florida, Mexico and the Caribbean.

In my opinion United is looking to add some capacity to Ted so it can keep pressure on their competition, both low fare carriers and majors. It may also help them take advantage of opportunities where US Airways scales back operations. My continuing question is regarding the purpose of it a low fare hammer used by United to bludgeon competition out of markets or serious airline to be spun off eventually (perhaps even the future look of the "new" United).

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Wednesday, March 02, 2005

NEWS: America West's Unconventional Revenue Search?

Doug Parker, CEO for America West, revealed to the Arizona Republic that the airline recently considered charging for checked baggage...and not just oversize or overweight bags...ANY bags. The airline looked quite seriously at charging $5 per checked bag implying that only thing that ultimately stopped the plan was the difficulty to implement it. Parker admits that the carrier expected backlash from its customers but firmly states that "We have to be creative and figure out ways to generate enough revenue to cover the costs of running the business."

I agree, in principal, but this is one of the more half baked ideas I have heard from an airline. Ideas like this are born out of the incredible difficulty airlines have addressing increased costs directly via fare increases. There is no doubt that the airlines need to generate more revenue to cover their fuel price inflated costs. Furthermore, airlines need to come to grips with the fact that fuel prices will likely stay at this level for the foreseeable future. They need permanent solutions. Charging for normal checked baggage is not and should never be part of the on Read More! for my reasoning.

Has anyone who backed this idea been on an aircraft lately? Have they seen the folks who attempt to cram all manner of bags underneath seats and into overheads? Did they even think about how much worse that situation would get?

Did anyone consider how the family of four who booked a 7 day, six night Mexico vacation package through the America West Vacations website are going to feel about getting nicked an additional $5 a bag? A little mental math tells me I'm out $20-$25 bucks before my toes every hit the sand. I'd be more than a little upset. I think your flight crews will tell you its not a great idea to upset the passengers before they even get to the aircraft.

I've got no issues with charging for food, beverages or inflight entertainment. Those are all costs that I can mitigate by bringing my own stuff.

I understand that airlines need to charge for overweight or excess baggage. Too much baggage can equal too much weight which means either people of baggage need to come off the aircraft because heavy aircraft don't like to fly which ultimately increases handling costs for the airline. That's fine...I get it.

However, when I buy a ticket I DO NOT expect to pay extra to get my normal everyday baggage to come with me. If my baggage does not meet the FAA mandated carry on requirements then I have to check it and someone at America West thinks that would be a good revenue stream!?!? What's toilets on the aircraft?

Its not like the airline is going to be surprised by me bringing a certain amount of luggage. On the contrary, when the airline takes my money the FAA tells them they must make a standard weight allowance for my luggage. So if I play by the rules and stay inside that weight allowance then I don't think the airline should charge me for it, checked or not.

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Tuesday, March 01, 2005

NEWS: Airline Levels Looking Up in February

If I am to judge by two early reports the airline are continuing to see increased levels over last year. Both AirTran and Continental Airlines are already reporting increases in both load factor and revenue passenger miles for February. Its a good trend but as we all have learned more butts in seats do not equate to profits.

UPDATE: Southwest is reporting Feb. was up for them too

In my opinion airfares are still not high enough to counteract fuel prices. Airlines continue to have problems getting airfares to normalize due to continuing overcapacity. The situation marginalizes all of this great news about more people wanting to fly.

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NEWS: Comair Pilots Set the Bar

Comair pilots, represented by ALPA, approved modifications to their current contract that will include a pay freeze. The approval margin was 61%. The crux of the deal is that the pilots will give up their scheduled 4.5% pay increase this year as long as the airline agrees to turn that money around and start bringing new jets on line no later that June 22. Comair has said that they would like to bring up to 35 new jets into the fleet. The airline is still negotiating with its flight attendants and mechanics. The mechanics recently turned down a deal that would have given them a small raise.

Its always a good thing when an airline can get at least one of its unions to see the logic of the situation and come to an agreement. The first deal struck often sets the bar for the remaining unions. I wonder if the mechanics are calling their union reps asking for another look at the pay raise they just turned down.

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