State of the Airlines

Friday, April 29, 2005

NEWS: AirTran and Flight Attendants Agree to New Deal

The good news for airlines and their unions continues today as AirTran announced they have reached a tentative agreement with their flight attendants. Terms of the agreement will not be announced until the rank and file vote but it goes without saying that it will certainly include a number of consession to help the airline control costs. Voting is expected to be completed in June.

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Thursday, April 28, 2005

NEWS: American Airlines Bumps Fares Up Again

American Airlines announced that it will increase one way fares $5 and round trip $10 effective immediately. American cites fuels costs as the driving factor for the increase...I know...I'm shocked too. According to the carrier fuel costs have increased $65 dollars per round trip over the last five years while the average fare has decreased by $45. That's an impressive statistic but to me it simply points out how ridiculous the airline business model had become.

And let's talk about these fare increases...I can't be the only one thinking that airlines are some of the big pansies in the world when it comes to raising prices. In the face of another year full of massive losses they meekly raise prices $10 bucks a round trip. Come on, at least hit us all up for a $20.

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NEWS: Hawaiian Reaches Agreement With Pilots

Good news for Hawaiian Airlines today as they reached a tentative agreement with their pilots for a new contract. The agreement comes just a month after the pilots rejected the last offer from the airline. Assuming the rank and file approve the contract Hawaiian will have cleared its final hurdle on the way to exiting bankruptcy. The carrier could emerge from bankruptcy by the end of May.

Hawaiian Airlines entered bankruptcy in March 2003 so you can see it has taken them awhile to manuever themselves clear. During this time they renegotiated contracts with all of their labor unions in addition to the leases for their aircraft. If one extrapolates the time it took Hawaiian to get this far we ought to see United ready to exit bankruptcy in another ten years.

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Wednesday, April 27, 2005

NEWS: United Airlines Pension Deal Details Emerge

Further details emerged today regarding United Airlines' plan to dump their pension plan onto the Pension Benefit Guaranty Corp.(PBGC). Everybody take a seat because nearly every number in this deal involves the word billion...I don't want anyone getting dizzy. Seems the deal hinges on United giving the PBGC $1.5 billion in "securities" once they emerge from bankruptcy. I'm not even going to try and understand how getting $1.5 billion in United notes and preferred stock is a fair trade for taking on a pension plan that is $10 billion underfunded. Then there are those tricky words "if they emerge from bankruptcy". But the numbers certainly work for United.

United officials are calling this agreement the "linchpin" in their efforts to get the $2 billion dollars they need to finance their exit from bankruptcy. Some say that number could go as high as $2.5 billion but the Airline Reality Distortion Field makes that seem not so bad...$2 billion, $2.5 billion, hey, what's $500 million between friends anyway.

The immediate effect is that United looks to save $1.3 billion (there's that word again) in 2005 alone by passing their pension plan off to the PBGC. That number will climb to $4.4 billion in savings over the next 6 years.

OK, everybody is free to get up again but please do so slowly.

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NEWS: A380 Makes its Maiden Voyage

OK it was a flight...not a voyage...but one has to admit its almost as big as a cruise ship. Congratulations to Airbus as the A380 successfully completed a 4 hour test flight, its first in an expected 2500 hr flight test regimen expected to stretch into the latter half of 2006. Favorite quotes regarding the momentus occasion are:

Chief test pilot Jacques Rosay, "You handle (this aircraft) as you handle a bicycle. It's very, very easy to fly," ...I'll bet that sounds way better in French.

Boeing Chief Executive James Bell, in his comments congratulating Airbus on the first flight "We always thought it would fly because that's what airplanes do,"...uuuummmm...yeah.

Several articles also mentioned the $285 million price tag for this aircraft and renewed speculation that it may take far more than the 250 orders for Airbus to break even. So far they have 154 orders and "commitments".

It also remains to be seen if the actual performance of the aircraft will support the cost model that they used to get those 154 order and commitments.

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Monday, April 25, 2005

NEWS: Airbus A380 First Flight Planned This Week

The massive Airbus A380 is slated for its first test flight on Wednesday. Airbus claims this behemoth sporting two full decks for seating up to a mind numbing 840 passengers will be the next big thing (my pun...intended of course)to hit the airline industry. If all goes well it will be the first commercial passenger aircraft larger than the Boeing 747 to hit the friendly skies. Airbus expects to spend the next year testing the aircraft...and there are many questions to be answered. Only some of them relate directly to the aircraft.

Is this a viable aircraft?

Will the cost model prove sustainable for this aircraft?

Will enough airports modify their runways and facilities to take the aircraft?

I've come right out and said that I do not believe the A380 can be a cost effective aircraft and will be relegated to a niche markets much like the Concorde...only slower. Wonder if I'm right? We should start getting a better idea in a year.

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NEWS: Airline Exec Compensation Comparo

I normally stay out of the who gets paid what stuff...there are so many variables...but I couldn't help myself. has posted the top 500 executive compensations for 2005, sans details, and there were a couple of things that struck me as interesting.:

Glenn Tilton, CEO, United Airlines $1.2 million total compensation/yr
Larry Kellner, CEO, Continental Airlines $790,562 total compensation/yr
Gerald Arpey, CEO, American Airlines, $686,295 total compensation/yr
Gary Kelley, CEO, Southwest Airlines, $627,706 total compensation/yr
Doug Steenland, CEO, Northwest Airlines, $523,577 total compensation/yr
Gerald Grinstein, CEO, Delta Airlines, $382,207 total compensation/yr

Notably missing from this group
Doug Parker, CEO, America West
Joe Leonard, CEO, AirTran
Bruce Lakefield, CEO, US Airways

This comment is obvious but does it strike anyone else as odd that Glenn Tilton would top the list? The United's flight attendants have been screaming that management is not holding up their end of the cost cutting the point where they were threatening to throw out the cost cutting measures recently approved by the union members. I'm sure this news will sit nicely with them.

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Friday, April 22, 2005

NEWS: United Airlines Dumps Pension Plan on PBGC

United Airlines has struck a deal the federally run Pension Benefit Guaranty Corp.(PBGC) that will allow the carrier to terminate four pension plans covering around 120,000 current and ex-United employees. The PBGC will assume the obligation for these four plans which are underfunded by...wait for it...$9.8 billion!!!! Here's the kicker...the PBGC wanted to do this months ago for at least 2 of these 4 pension plans? Why in the world would they do that you ask? Are they nuts you wonder? The answer is actually that the PBGC was simply looking ahead and trying to minimize the problem. Had they been able to assume the plans earlier the underfunding problem would have been less. The whole situation has simply fried every logic board in my poor little hamster driven brain leaving me a stammering mess in front of my computer monitor. (and no...that's not my normal nice)

If approved by the bankruptcy courts the pension termination will be the largest in US history. Hey there's something to hang on your wall.

I nominate Jake Brace, United Airlines CFO, for understatement of the year with this quote, "We think this is a very important agreement...". Uhhhh yeah, United figures they can save an average of $645 million annually over the next five years. That would qualify as "very important" at a minimum considering that United's target for annual labor savings is $725 million to exit bankruptcy. Oooo look, another Airline Reality Distortion Field effect, suddenly needing to save $725 million annually doesn't seem so bad.

And finally...I get this inescapable feeling that somehow I am going to end up paying for this. The PBGC is a federally run corporation that...up until now...does not receive tax dollars. But they ended 2004 $23 billion in debt and they just tacked on another $9.8 billion. So my nagging feeling is that sooner later the PBGC is going to collapse like a house of cards and that the taxpayers will end up holding the bag somehow.

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NEWS: American Airlines Gives Everybody a Raise

If you work for American Airlines in the US then congratulations, you got a raise…all 1.5% of it. Don’t get me wrong…its nice to see a little (emphasis on little) ray of sunshine in our grey landscape. But I am thinking that the CEO’s 1.5% raise looks better than the baggage handlers 1.5%.

I wonder how many people got bumped up into the next higher tax bracket by this raise causing them to make less money not more. I speak from experience, it can happen.

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OPINION: Delta Precariously Perched on the Precipice of Bankruptcy

Delta wasn't kidding when they warned us all that they are expecting substantial losses this year. I must need my "substantial meter" re-calibrated because their $1.1 billion loss in Q1 was just a tad bigger than I expected. My only point in all of this is that Delta cannot survive too much longer outside bankruptcy if conditions stay the same (high fuel costs, low fares)

And its really too bad because I think Delta has done the most towards creating a business plan that works (Simplifares, Operation Clockwork). But the fact remains they are increasingly cash poor and are unable to stem the bleeding. Cost cutting measures and operational improvements are just about maximized for them...few options remain...revenue has to improve and that means fare increases. Delta is on bankruptcy watch

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OPINION: United Airlines CEO and Foreign Ownership

United Airlines CEO Glenn Tilton has stated more than once (and as recently as yesterday) that the US needs to loosen up on foreign ownership rules for airlines. He goes on about how US airlines have "stood on the sideline" as international alliance formed left and right. He is worried, nay..."alarmed", that the US is not leading this charge. But I'm not here to talk about his quotes and noble concerns about the industry...I'm here to stir the pot with a lot of conjecture and speculation. Why is Mr. Tilton so vocal about foreign ownership laws? Think exit funding, Virgin America and Richard Branson and you'll have a hint of what I'm on about.

Reason 1: United needs money.
United needs cash to fund its exit from bankruptcy and my guess is they are having trouble finding this stateside. What leads me to say that? Hmmmm...maybe its the 3 years in bankruptcy and the continual exclusivity period extensions.

Reason 2: United is looking to merge globally
I've said before that CEO's normally don't make public statements without an agenda. Is it possible that United already has some ideas about who a possible suitor could be? I'll offer up the possibility of Virgin America, the start up airline struggling to start up backed by none other than Mr. Deep Pockets Richard Branson. (A) Branson has lots of money (B) Branson is struggling to find enough US funding to start a US airline because ironically he can't use his own money because of foreign ownership laws in the US!! Is he looking for a loophole via a merger with United?

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NEWS: United Airlines Gets More Exclusivity...Time that is

Back on April 11 I posted that United Airlines was asking the bankruptcy court to extend their deadline for developing a re-org plan without fear of a competing plan being presented...its called the exclusivity period. Today the bankruptcy court has once again agreed to extend this period. I say once again because a quick Google pops up news from June 2004 regarding exclusivity extensions and its already been done once this year...and that's what I could find without trying much. Need I remind you dear reader (all 14 of you) that United has been in bankruptcy since 2002? How many chances do they get?

I just want to know how long the bankruptcy court is going to keep granting extensions...when is it enough? I'd bet the story would be a hell of a lot different if United did not get the bet is a competing bid would be on the courts doorstep the day exclusivity expired.

But mostly I want this to stop so that I can quite typing "exclusivity"

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Thursday, April 21, 2005

OPINION: Airline Reality Distortion Field Strength Increase

The already formidable Airline Reality Distortion Field (yes, capitalized because it exists...I swear dammit)appears to be gaining strength. I've warned you in other posts about its amazing effect that make things like losing $174 million dollars seem ok. Consider what happened today as the airlines announced Q1 losses left and right.

Delta Airline stock rose today despite racking up over a billion dollar loss in Q1 all on the "strength" (pause...don't laugh...don't even smile) of the possible relief coming their way via the pension bill introduced in the Senate yesterday. You know...the bill that hasn't even been passed into law yet. The distortion field was so strong the Northwest stock also rose.

America West Airline stock fell today despite the fact that they posted a Q1 profit. Where's the love people?

Airlines continue to say a combination of low fares and high fuel costs are crushing them. The reality distortion field is so strong it has apparently caused airlines to forget that they are the ones who actually control fares. I'd remind them that they could agressively raise fares to cover costs but I fear the Airline Reality Distortion Field would focus its objectivity sucking ways on me. Soon I'd be telling you that all is well in the industry. Must...resist...the...p o w e r

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NEWS: Airline 1st Quarter Results - Second Verse Same as the First

Overall Q1 results for the airlines are...well...dismal. Northwest, Continental, Delta , American, Alaska...ok almost everybody...lost money in the 1st quarter. Numbers range from the mere millions to a lovely $1 billion loss for Delta. Ouch! All these carriers remain incapable of finding a way to make money with fuel costs at their current level. New flash guys, find a way to cope or find your way out. Fuel costs are here to stay.

America West provided a nice surprise by putting up a $33.6 million profit for the first quarter joining the ranks of Southwest and JetBlue. Like Southwest, America West says strong fuel hedges carried the day. JetBlue still clings tenuously to its string of profitable quarters turning in a slim $7 million in Q1, over 50% lower than last year despite more traffic.

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NEWS: America West Merger Murmurs

Way back in February America West CEO Doug Parker made it known he saw mergers coming up for several airlines. It goes without saying that CEO's don't normally make those kind of statements unless they have something on their mind. Mr. Parker made his feelings on mergers even clearer when he was quoted on April 20 saying "We believe consolidation is inevitable. We intend to look aggressively at transactions as they arise."
So the merger rumors between America West and US Airways should not surprise anyone. But the questions about a possible merger abound.

Historically airlines mergers are drawn out costly affairs. Does America West really want to take this on? And what is America West after anyway? They don't need all the capacity that US Airways has...some yes, but not all. They certainly don't want to absorb a large portion of their ever-so-happy work force. So it comes down to route structure, facilities and maybe some aircraft. Seems to me America West is just trying to be first in line for all of US Airways' "stuff". Seems to me that this merger would be tantamount to a liquidation for US Airways.

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NEWS: Senate Bill for Airline Pension Help

Senator Johnny Isakson from the great state of Georgia introduced the Employee Pension Preservation Act of 2005 late Wednesday. There's lots of details but essentially the bill is designed to do two things. First it will save the airlines millions a year by allowing them to spread their pension fund obligations over 25 years instead of 4 years. Second it limits the obligations of the federally run Pension Benefit Guarantee Corp(PBGC) You will recall that US Airways had already dumped their heavily underfunded pension plans on the PBGC and United Airlines has also started the process...and that trend was going to continue.

This legislation was inevitable. It doesn't take a genius to look out across the airline landscape and see more airlines lining up at the bankruptcy entrance. The common thread is that each one would be looking to use bankruptcy to dump their pension plans onto the PBGC. The painful reality is that this load would cause the collapse PBGC requiring a massive (think of billions...lots of billions) bailout.

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Monday, April 11, 2005

NEWS: United Airlines Asks For Re-Org Deadline Extension

United is requesting an additional two months to complete and gain approval of its reorganization plan. And why shouldn't the bankruptcy court grant the extension because trying to get all of this worked out over the last two and a half years is really too much to ask isn't it? Anyway, this is another one of those extensions to the exclusivity period for United to present it re-org plan. During this period no other competing re-org plans can be presented.

You should really click on over to this article in the Rocky Mountain News because it has an good laundry list of all the reasons that the deck is stacked against United's successful exit from bankruptcy.

Here's the Cliff Notes version:

Leases: Still wants to renegotiate lease rates on about 100 aircraft
Pensions: United say cutting them saves $640 million/year. Unions are greatly opposed to the move to the point that they may strike if it happens
Concession: Mechanic (AMFA) and Machinists (IAM) still have not come to agreement on cost cutting deals with the unions. Just because the airline can terminate their contract via the bankruptcy court doesn't mean that its the best move.
Exit Financing: Estimates are $2-$2.5 billion to support their bankruptcy exit. The fact that anyone, no...strike that..., at least four investors are considering putting this kind of money into United leaves me speechless.
Business Plan: Airline consultant Michael Boyd says it best
"What United doesn't have is a morale problem or a service problem," said Mike Boyd, an Evergreen-based aviation consultant. "They excel in those areas, and even people at other airlines would probably tell you that. But their strategic direction is as weak as can be."

Thanks Michael...well said.

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OPINION: 1st Quarters Ends with No Major Liquidations

OK, I was wrong. Not one of the airlines on my death watch went out of business, merged or otherwise ceased to be in the first quarter. United Airlines, US Airways, Hawaiian and Aloha are all still some fashion. Heck even Independence Air is still in the game. I still maintain that it will happen but I severely underestimated the glacial speed at which airlines grind to a halt.

United and US Airways are still first on my list of airlines to give it up this year. I think United is sinking faster at this point...they are still pedaling hard to come up with enough cost savings to convince one of its potential financial backers to throw down $2.5 b-b-b-billion to facilitate their exit from bankruptcy. I just don't see any momentum. But make no mistake, US Airway's situation is still pretty grim.

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NEWS: United Airlines Targets Pensions and Contracts

Clear back in February of this year United Airlines was rumbling about wanting to cut its pension plan and throw it to the already overburdened Pension Benefit Guaranty Corp. United CEO Glenn Tilton has reiterated that desire today. But wait...there's more! The carrier also made it clear that contracts need to be replaced to cut costs and that current conditions have left no room for "compromises" or "half measures". Psssst...The mechanics are the odd man out right now.

United's mechanics are in a tough spot. The union is trying to work the best deal they can for their members but the delay has weakened their position. United has put them on notice telling them that they have until a hearing on May 11. If no deal has been reached then United will have the court terminate their contract. Tick tock tick tock.

Frankly it would not surprise me to see United to make another pass at cost cutting across the board including another look at labor contracts. But they will have to be careful. The flight attendants are threatening a mutiny as they are under the impressions that perhaps management is not giving back in equal measure.

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Wednesday, April 06, 2005

NEWS: Happy Birthday JetBlue

Hard to believe that JetBlue is five already and still bucking every trend in the industry. I was struck by the fact that JetBlue rated among the best in customer approval despite fairing poorly in on-time performance recently. Obviously they are doing something right. Read more for what's next onthe JetBlue horizon.

There are interesting times ahead for JetBlue. They are currnot only preparing for more shiny new A320's but a whole new fleet type...the Embraer 190. In an interview with USA Today, JetBlue's CEO Dave Neeleman, say he expects the airline to grow rapidly into smaller markets with the addition of the 100 seat Embraer. Every regional airline in the eastern half of the country must be cringing.

I am fascinated by JetBlue. They have become a big player in the low fare carrier segment yet they continually break the mold prepared by Southwest. Southwest offers no frill service, JetBlue offers high end perks and amenities. Southwest prides itself on measured growth, JetBlue has thrived on rapid expansion. Southwest takes advantage of the cost savings associated with a single fleet type and now JetBlue is plunging ahead with plans for a new fleet type. It still seems like a high risk proposition...but so was starting an airline 5 years ago.

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NEWS: AirTran Promoted to Major

Kneel AirTran while I bestow upon thee the title of Major Airline with all the rank and privilege that comes with this storied title. Well maybe it didn't go quite like that but the DOT has elevated AirTran to major airline status based on the fact that its revenues now exceed $1 billion dollars. Its a reflection of AirTran's success in expanding their operation growth especially in the east. Really the only blemish is being outbid by Southwest for ATA's Chicago-Midway gates. Nicely done AirTran.

In case you have forgotten AirTran is the airline formerly known as ValuJet. Many folks, experts and mere mortals alike, had written this airline off after their horrible tragedy in Florida. But they have managed to rebuild themselves steadily over the years to become a formidable low fare competitor and a thorn in more than one legacy carrier's side (ahem Delta...US Airways). AirTran's growth is not lost on the likes of JetBlue and Southwest either.

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NEWS: Air Fares, Traffic, Oil and Pay

Legacy airlines continue to inch up airfares pretty much across the board and traffic continues to hit all new levels. This is normally news that will cause even the most staid bean counter to dance with least a little. Unfortunately, the school yard bully known as oil cost continues steal everyone's lunch money and generally leave little room to celebrate. So what's next? You guessed it...salary reductions, benefits cuts etc. Many airlines like United, US Airways and Delta are already looking for more ways to cut costs. The question in my mind is how many more times can they go to this well before coming up dry?

The legacy carriers absolutely needed to tighten up their operations and trim costs. Things were just a wee bit out of hand. But after 2+ years, reducing staff levels, chopping pay rates, cutting benefits and outsourcing work its time to move on. You've done about all you can do here without doing permanent damage to your ability to provide an acceptable level of service.

I do not feel that the airlines have been aggressive enough with trying to increase airfares. Seriously, I have never seen such a sheepish lot of big businesses. A $10 dollar increase in fares is news. Annoucing a fare increase makes these guys more nervous than a teenager trying to ask someone out for the first time. Make with the revenue already!

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Back blogging...finally!

Its been a brutal schedule simply left me with no time. Hoping that I can get back into the swing again. Hang on to you hats...there's plenty of cannon fodder out there.

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