24 May 2008

The (Non American) big get bigger

While the USA Airlines are being pounded with high oil prices and an economy that is in far worse shape than the waning Bush Administration seems to understand, the larger EU
Air France KLM Group reported a consolidated net profit of €748 million ($1.17 billion) for the fiscal year ended March 31, a 16% decline from the €891 million earned in the prior year as it booked a €530 million provision to cover possible penalties arising from the ongoing antitrust probe into airline cargo activities. Net profit also benefited by €284 million in disposal gains. Excluding the exceptional items, earnings rose 10.8% to €987 million. Revenue was ahead 5.8% to €24.1 billion and operating costs climbed.
German national airline Lufthansa has revealed a huge increase in profits over 2007, reaping the benefits of a successful takeover and increasing popularity of its flight routes.Net profit for 2007 was claimed to have doubled on the previous year. Combined group traffic surged 30 per cent in January from a year previously, with collective passenger demand for European, American, Middle Eastern and African destinations growing fast. A group total of 62.9 million passengers were handled over the year.
British Airways has reported a 45% rise in annual profits but warned that economic uncertainty and high fuel costs pose challenges. BA made a profit of £883m in the year to 31 March, which BA boss Willie Walsh called an "outstanding" result.
Correspondingly the US airlines all reported significant losses for the quarter and will now face annual losses for the period.
So I am a simple guy. If these guys can make profit why not the US airlines? Do the Europeans have a secret ingredient in the water that doesn’t work in the New World?
I believe that there is a collective set of issues that means that rationally speaking the US airlines need to rethink their business models and take a long hard look at their approach to the market. Fixing the current broken US airline model is obviously no trivial task. However the ability to hold onto margins through such tools as Fuel Surcharges, is both a better extrernal way to handle the current oil crisis and a more honest approach to the market. The unbundling approach and using ancillary revenues to prop up the broken US airline business model is a sure fire way to piss of your customers and indeed assure your brand is devalued. Sadly the approach taken (because of the “fear” of transparency to the customer community ) of failing to raise core prices to accommodate the increase in oil or to split out oil based increases through a fuel surcharge is now soundly demonstrated as a failed strategy. For this the US airlines have only themselves to blame for their predicament.
How can we have any sympathy for this behavior? At the very time that the US airlines should have the consumers (that’s everybody) on their side as victims, they are being reviled by their loyal and unloyal customers alike.

23 May 2008

Mesa Air Group teetering?

Jonathan Ornstein's Mesa Group appears teetering on the brink of bankruptcy.

Yesterday (May 22) in a formal filing with the US SEC, Mesa Air Group said yesterday that if Delta Air Lines succeeds in ending its service agreement for 34 ERJ-145s, MAG may have to file for Chapter 11 bankruptcy protection as the loss of business and the resulting cash crunch would make it impossible for the regional to continue operations.

Mesa under the somewhat (I seem to recall) reportedly litigious Mr Ornstein has been a thorn in the side of many people. (His company sued Plane Buzz Blog). Mesa's GO! subsidiary was cited both in US Congressional testimony and in various published reports on the Aloha Airlines Bankruptcy of using "Predatory Pricing" tactics to force the 60 year old Inter Island Airline into Chapter 7 for its passenger operations.

Last night Mesa's stock closed down valuing the whole company at approx $12 million.

You can almost hear those lawyers revving up their engines.

BA doesn't like its ultra premium passengers

Over time BA has slowly diluted the value of its ultra-premium travellers. The most coveted of users.

Gold cardholders represent a class of traveller on the "world's favorite airline" that other airlines would kill for. But BA seems to be somewhat indifferent to them.

On a recent morning in May at LHR Terminal 4 the line for First/Gold check-in stretched into the "hoi Polloi" area. The BAA (yes the airport gestapo) determined that normal bags that would pass muster anywhere else in the world would not pass - not even for a BA First Class and Gold member. So the long trek back to the check in (and subsequent second wait) was inevitable. No help from BA there either.

The BA first class lounge looked positively shabby and decidedly full despite a significant reduction in usage from the flights to T5. At least at T4 there still is a dedicated Gold/First lounge.

Over at the new edifice BA's Ultra Premium passengers don't even get a dedicated area. They have to hang out with the likes of Silver and Club Class types in the new "Gallery" lounges, akin to a cattle car in their own right.

21 May 2008

AA Downsizes domestic operation drastically

The world's number two airline - AMR's American today announced a dramatic cut back in their domestic operations. They will be axing across the board. Here are the brief details:

Aircraft Culled: A300s, MD80s, over 75. This includes some RJs and Turboprops.

Routes - cutback and schedule frequency reduction.

Total reduction in flown miles represents a cut back of 12% according to the Wall Street Journal.

American will also charge $15 for the first bag and additional charges will be added. American hopes to raise several ".. hundred million dollars.." of additional revenue in this fashion. Given the $100 million UAL said it would raise from $25 for second bag costs - this will be an interesting challenge.

As I have noted before the airlines are going to park some planes. This will be the winter of discontent for travelers but it looks like summer isn't going to be so hot. As Willie Walsh of BA stated earlier - "Kiss low fares goodbye"



The Professor is aloft again

I shall be away for the next 10 days. Back June 1st. I will try and blog while I am away.



The Herb Show Finally Heads Off To The Bar

From then till now - Herb Kelleher has been the voice and face of Southwest Airlines. Any stunt was a good stunt. But it was always about being different and tweaking the nose of the big guys. Well now his time is up. Herb officially steps down today as Chairman having relinquished the CEO slot a long time ago. His original admin and long time sidekick - Colleen Barratt steps down in July. Both will draw a salary of $400K per year for the next 5 years and remain officially as "employees".

Herb's accomplishments are just too numerous to list. But perhaps the rest of us should be appreciative of one thing. He did his darndest to make flying a better experience. In the end Southwest was very little different from the big boys airlines. Now Southwest flies more passengers than any other US airline. And perhaps that is his legacy. Those who understood that the core metric is the Passenger are winners. Those who stubbornly hang on to Cents Per Mile are born losers.

I only hope one day someone will bring Herb and his nemesis Bob Crandall back for one last performance in the open. They are probably the last characters we have seen in this crazy business called airlines.

Best of luck to Herb and Colleen - you will be missed. I will raise a glass of Bourbon tonight in your honor (not sure if BA carries it!).


ASTA says no alternative to ARC feasible.

ASTA the organization that represents a rapidly shrinking breed of animal formerly known as a Travel Agent, has for the past year been trying to espouse an alternative to ARC - the Airlines Reporting Corp, itself a "not for profit" that manages the commercial issuance of neutral airline tickets and clearing. (For our non-US readers the equivalent is BSP - however due to an anti-monopoly decision in the 1970s, ARC replaced ATC as a commercial enterprise).

No where in the world has such an entity ever been created with ONE exception (Russia and the TKP/TCH which is a whole other story). ASTA should have known that there is no power that they have to even indulge in such an exercise. As their very tall ASTA President and CEO Cheryl Hudak, CTC. said "ARC is a monopoly—it has no competition and accordingly there are no options for an integrated airline ticket settlement system. We had hoped to lay the groundwork for an alternative settlement mechanism, but it has become clear to us that without acceptance by the legacy airlines this, for the present, is an exercise in futility."

Perhaps the understatement of the year. Continuing she states:

"Travel agents today face a quandary when it comes to airline ticket settlement in that the current system is untenable and yet there is no viable alternative."

The task force, formed last year in the wake of ARC's announcement that it would be increasing travel agents' annual fees by 172 percent. The task force met three times over the past six months. This fee increase is the first of a series of fee hikes that will increase by 500% through 2011.

There is a bigger issue here. Are neutral tickets needed at all? I have asked this question for many years and no one likes to give me an answer. With eTicket now mandatory from the end of May, why is it necessary to use a neutral clearing house for what is now an electronic good. ARC itself is an anachronism - just like the system it serves. Airlines would save significant individual sums of money if they accepted that tickets themselves are not necessary. The saving of at least $1 per ticket across the board has to be significant. With interline tickets now less than 1% of all those issued, there are cheaper alternatives out there.

I think there will be a lot of people probably not liking this idea at the moment but it is the inevitable march of time and progress.

Plaxo goes to.... Comcast!

Not usually the point for this Blog - but Plaxo and its evil cousin Linked-in are very useful tools for maintaining BUSINESS relationships.

Anyway - Plaxo has been acquired by Comcast. Not quite sure I see the synergy other than LOTS of homes and LOTS of users.



20 May 2008

The extent of the problem at T5 shows in the numbers

Traffic figures for the month of April show the impact of the debacle at T5. We knew from anecdotal reports that it was bad and that customers were running away from BA (yes I was one and moved at least one flight away from BA. Now the numbers are in.

LHR was down altogether for the month off by -3.8%. Latest report shows BA passengers down by -7.9% Since BA drives around 50% of the traffic at LHR this is about right. OUCH!!!!

But the UK was off all over the place. Mancheter, Gatwick, Stansted etc etc. Interestingly enough - Ryanair who is STN's largest single airline had an increase of 15% for the month of April indicating they are doing a good job of diversifying the revenue base. Just following on the Southwest model.



Farewell Jacques - Welcome the new guy (Italian)

So its a good night from Jacques Barrot. Jacques Barrot is to be complimented on his performance in the job. Best of luck in the new position M. Barrot. He is moving onto bigger and better things. And I have refrained from commenting until now - this is just too good an opportunity to pass up.

So formally, the situation is EU Transport Commissioner, Frenchman Jacques Barrot, is to relinquish his post and formally take on the position he has been temporarily holding, as Commissioner for Justice, Freedom and Security. This is an upgrade as he is now a full commissioner. This results from the resignation of former Justice Commissioner, Franco Frattini, to become Foreign Minister in the new Berlusconi government in Italy. As a consequence, the Italian Government will now appoint a replacement Transport Commissioner, reportedly likely to be Antonio Tajani, a strong Berlusconi supporter and currently a European Parliamentarian.

OK - this is part of the convoluted EU politics. So let's see if I can get this straight without bursting a gut and rolling on the floor laughing.

One of the first tasks of Sr Tajani will be to tackle the issue of illegal state aid to airlines. The ongoing investigation was sparked to urgency by the recent decision by the outgoing Italian Government of Prodi to grant 300 million Euros in continuing state aid to Alitalia.

So the chap who gets to adjudicate and if necessary prosecute the Commission's case against Italy and Alitalia is.... (drum roll please)... an Italian who is best buddy with Berlusconi.

OK - I knew you couldn't keep a straight face either. Even if you are part Italian.

Cheers - I am off for some Grappa.

So Willie gives up his bonus

I may have been too hard on the gentleman from Ireland.

He has foresworn the proposed GBP700,000 bonus he would have received this year based on BA's performance.

BA's record profits do not mask however a number of fundamental issues facing BA. The airline as I have noted before faces tough times ahead and much of this of BA's own making and therefore it is Willie's Watch.

The airline faces several immediate challenges. The (in my view) short sighted approach to the new daughter company "OpenSkies" airline is stirring labour unrest at a time when the airline does not need it. The loss of core low cost regional markets with GB Airways and BMED leaving the fold is hurting BA. It is almost to the point of asking yourself what is left of the old BEA?

There will be more blood.

Perhaps the airline should revert back to its old moniker - British OVERSEAS Airways Corp - BOAC.



Alternative EC GDS Proposal supported by Consumer Groups

Several groups representing users' interests are throwing their weight behind the so called Kirkhope Amendment.

For the uninitiated or newcomers to this blog here are some of the background to the issue.

The European Commission (EC) is proposing to change its current CRS rules. The current regulation: Council Regulation (EEC) No 2299/89 of 24 July 1989 on a code of conduct for computerized reservation systems [Official Journal L 220 of 29.07.1989 can be found at the following URL: http://europa.eu/scadplus/leg/en/lvb/l24080.htm

The EU doesn't like the term GDS Global Distribution System and prefers CRS - Computer Reservation System. The old rules in essence were a different approach to fairness in displays on a travel agency terminal to those taken in the USA. ( For the US regs go here: http://www.dot.gov/affairs/Computer%20Reservations%20System.htm) Over time the importance of the GDS screen has lessened and issues of bias and control have taken on new forms as a result of the growth of the Internet and the global airline Alliances.

The new regulations are somewhat convoluted. But there has been a big issue raised over the definition of control. Essentially the EC has been under pressure from one of the GDS companies to eliminate the requirement for equal representation in all GDS if one of the players has an owner who is an airline. The only player to whom this effectively applies in Europe is Amadeus. Who just happens to be the dominant player in GDS across Europe. They currently have an ownership structure which is approx 44% airline owners (AF-22%, LH-11% and IB 11%) the balance is from two private equity firms. The debate is over the possible control.

Rightly or wrongly it would be a stretch of anyone's imagination to assume that these airlines do NOT exert a significant amount of influence on Amadeus to the benefit of the company. That said - some of the recent behavior demonstrates otherwise.

I fall firmly on the side of the level of ownership indicates a level of control. Consequently the airlines should play fair across the board and the regulations should reflect that. This so called proposed amendment seems to be a reasonable way of addressing the issue. I highly recommend that our readers go and review the current regs and the proposed changes. Get involved in the debate.

You be the judge!

Here is the text of the PR release issued today on the subject.

Travel Groups Support Kirkhope Amendments on CRS Reform
Rejects others that fail to close the Parent Carrier loophole
London, England, 20 May 2008--London, England, 19 May 2008--Ahead of political group meetings in Strasbourg this week to formulate positions within the European Parliament Committee on Transport and Tourism (TRAN) on the Kirkhope report on the CRS Code of Conduct, and in anticipation of a TRAN vote in late May on the report, the International Airline Passengers Association (IAPA), the Institute of Travel Management (ITM) and the Business Travel Coalition (BTC) late last week provided their initial reactions to the key amendments tabled. The letter as transmitted to the MEPs follows.
15 May 2008
Re: Consumer Organisations Voice Strong Support for Kirkhope Amendments and Urge Rejection of Amendments 44, 46 and 47
Dear Transport Committee Members:
Ahead of the Transport Committee vote on Mr. Kirkhope’s report on the CRS Code of Conduct, the International Airline Passengers Association (IAPA), the Institute of Travel Management (ITM) and the Business Travel Coalition (BTC) (the “Consumer Organisations”) would like to provide their initial reactions to the key amendments tabled. A more complete amendment endorser will follow once full translations have been released.
First and foremost, the Consumer Organisations would like to express their strong endorsement of Mr. Kirkhope’s proposed amendments to the Commission proposal. Of major significance is his solution to address the dangerous legislative loophole exposed in the Commission’s draft under the definition of ‘Parent Carrier’ (Article 2 (g)), by establishing CRS ownership as a fully independent criterion when assessing parent carrier status. The introduction of this test takes into account the incentives for abuse which exist for airlines meaningfully participating in the capital and governance of a CRS and limits the discretion of the Commission which had previously declared its intention to designate parent carriers on a case-by-case basis using ‘effective control’ as the only critical criterion . Mr. Kirkhope has the consumer’s best interests at heart and we heartily commend his approach.
A number of constructive amendments have been submitted calling for full divestiture by airlines with stakes in system vendors over time. Whilst airline divestiture would ultimately be the best solution for the Consumer Organisations, since it would completely eliminate the airline ownership problem that necessitates CRS rules, in the near term Parliament’s priority must be to ensure that any ambiguities are eliminated with respect to the existing Code of Conduct.
Mr. Kirkhope’s amendments in our view represent a significant and workable compromise in this respect. Failure to apply strict ex-ante rules to airline-owners of CRSs immediately will result in the reinforcement and creation of dangerous monopolies in a number of European countries. In our letter to Parliament (with additional signatories) of 3 April 2008 we wrote that since the Commission’s declaration of last November, which made it clear that the CRS Code of Conduct applies to no-one, airline owners have been free to discriminate in favour of the CRSs they own and CRSs have been free to discriminate in favour of their owning airlines. Travellers all across the EU and beyond are, as a result, at risk of being subjected to higher fares, less choice and poorer service.
Given the market conditions described above, we have grave concerns in relation to amendments 46 and 47, which provide the Commission with the continued competence to confer parent carrier status on the basis of ‘effective control’ alone. In a similar vein, amendment 44 eliminates the ownership test entirely, leading us directly back to the status quo and the same flaws exposed within the Commission proposal. These amendments are absolutely the wrong approach, since they disregard the consumer’s voice in order to give a regulatory free hand to a handful of national airlines which are free to abuse their CRS ownership positions. The notion advanced that the CRS rules should be harmonized with the effective control standards in the merger setting misses the point. In the interest of millions of dispersed European travellers, we strongly urge you and members of your group to reject these three amendments.
Our representatives remain at your disposal ahead of Parliamentary deliberations on the report.
Jonathan French, Industry Affairs Spokesman, International Airline Passengers Association
Paul Tilstone, Executive Director, Institute of Travel Management
Kevin Mitchell, Chairman, Business Travel Coalition
CONTACT IAPA || Jonathan French | +44 (0)208 253 5052 | jonathan.french@iapa.co.uk
CONTACT BTC || Kevin Mitchell | 610-341-1850 | mitchell@BusinessTravelCoalition.com
About IAPA
The International Airline Passengers Association has been representing the interests for frequent travellers for more than 45 years. With offices in Dallas, London and Hong Kong, IAPA speaks for 400,000 travellers throughout the world.
About BTC
Founded in 1994, the mission of the Business Travel Coalition is to bring transparency to industry and government policies and practices so that customers can influence issues of strategic importance to them.

When the Commission Proposal was released on 15 November 2007, a DG TREN spokesperson explained that an airline with an ownership stake in a CRS in their view was not a parent carrier unless it also effectively controls that CRS