05 July 2008

Even Moody's says there is a problem with the US Airlines Model

So finally someone else has the balls to come out and say what we have been saying for some time. The US Airlines model is unsustainable. DUH!!!

Here is the Release that came out via Marketwatch quoting The Times (of London)

Moody's: Many US airline business models 'unsustainable'

LONDON (MarketWatch.com) -- Moody's Investors Service, a unit of Moody's Corp., has described the business model of many U.S. airline carriers as "unsustainable," the Times in London reported Saturday, citing a note from the credit ratings agency.

The agency's analysts said U.S. airlines are particularly vulnerable to high oil prices and even large carriers could be forced into bankruptcy, according to the report.

Moody's said with many airlines seeing a more than 30% year-on-year increase in their fuel costs, with nearly 50% of an average ticket consumed by fuel, they are left with inadequate funds to cover other key costs such as labor, equipment rentals, debt service and overhead, the newspaper added.

"Without an ability to cover costs and earn an adequate return, the business model for most airlines cannot be sustained under current fuel price conditions," Moody's said, according to the Times.

The agency said airlines will not be able to cost-cut or capacity-reduce their way back to profitability, and long-term industry viability will depend upon a pricing environment in which airlines can adequately recover the significant costs of fuel, labor and capital investment.

So ...

What does this tell us. That the model is broken and needs to be fixed. Remember how the US and many other economists "fixed" the Cost of Living index? They took out Fuel and other elements from the basket.

So I have proposed several times now that we need to do the same. Fuel should become - at least for the short term a broken out and payable sum of money to the airlines in any ticket you buy. This then allows us to get round to solving the problem of the airlines business models themselves which are decidedly broken.

Thanks JohnS for the coverage of this note.

Chaps - get with the program - neither the government or IATA should get involved in bailing out the airlines at this point. But by regulating how prices are displayed can really help the issue and will force the airlines to address their real costs and their broken business models.

Its how the rest of the world does it - and they can make money - so I have no sympathy for the airlines just because they refuse to address the pachyderm on the table!



04 July 2008

T2 wishes all its US readers a Happy 4th of July

Normally the Brits - me included in this case - go into mourning on this day at the loss of the American Colonies.

However if you look back at the recent history of the US Leaders - perhaps the outcome was not a bad one for the United Kingdom after all ;-)

Happy 4th



R-r-r-regulation? A Solution perhaps?

The antidote to civilization is back....

The airlines want us to accept that the solution to their problems is regulation. The calls for this come from as different a quarter as the former acerbic CEO of AMR - Robert Crandall (he must have given up smoking because he has been pretty cranky of late), and the US airlines.

Well just like drugs... JUST SAY NO.

However, I have a proposal which just about everyone might buy into.

The airlines all say their woes are caused by high fuel prices. So lets seperate this out and then have a fee that shows the fuel surcharge. This has been successfully implemented in International airfares across the board. So for the sake of transparency lets impose a requirement for the airlines to use the SAME NUMBER for fuel. We could use a formula which in total approximates the real fuel costs. This would be driven by the following factors:

1. Class of service offered F/C/Y
2. Flight time - based on mileage, zones or actual flight time
3. Number of stops made - connections are more fuel inefficient
4. Airport - some airports are more efficient than others
5. Type of aircraft - probably impractical but simply give each airline a factor based on their fuel efficiency of their fleet.
6. Fuel incrementer - as the price of fuel rises or falls the incrementer is reset every month or every quarter as necessary. Peg the number at the price per barrel of $2.00 per avgas and then raise of lower the index.
7. Green effect - this would be a percentage based on certain green effects (eg use of bio fuel).

The Fuel surcharge would then be levied onto each ticket and clearly showed so the airlines can have the charge universally implemented. So it doesn't matter WHO charges the fee - it will be broken out. More efficient airlines would be able to lower their regular airline prices if they are better at handling say Fuel Hedging.

The benefits are self evident. No more will the airlines have to impose silly fees (unless they want to). All airlines will be treated equally on a point to point basis. Consumers would see which flights are more fuel efficient so their choices will be better and thus the airlines will be financially encouraged to operate more efficiently. Each airline can go back to competing on a common basis. The airlines will go back to raising or lowering their prices without the cost of fuel being an opaque item.

Rick Seaney and his crew at Farecompare have created a table of Fuel surcharges from the USA Transatlantic. This is interesting as it shows that certain airlines are charging more for fuel surcharges than others. This makes my case stronger because the airlines may or may not be more efficient. We need to know which airlines are fuel efficient.

Have a look and see if you can tell which airlines are better at this.


Clearly this would be a masterful approach to stop the whining by the airlines and the consumer can be better informed to make his decisions.

Of course the chances of this happening are zero because the GDSs wont like the coding they would have to do and the airlines wont like the transparency. They would be much happier to gripe about it than actually DO SOMETHING.

Oh yes and if you think this is bad - look at the taxes which are not being universally charged either!



02 July 2008

A Home for all those 50 Seat RJs - Russia?

Russian authorities have thrown down what should be an interesting offer to anyone who owns and/or operates one of those largely surplus 50 Seat RJs. They are offering to forgo the heavy duty that is currently imposed on all external aircraft imports into the Russian Federation.

Why this and why now? Well the bulk of the Russian fleet of these types and sizes of aircraft are VERY OLD WW2 era AN2 biplanes and the outrageously expensive to operate Yak40/42s. There are no plans to build such a size aircraft in the near future but Russia - in the midst of an economic upturn - is keep to expand regional aviation domestically. Hence the offer.

Yevgeny Bachurin also noted that the proposal of Rosaviatsiya is only a temporary measure, until the Russian manufacturers will decide with the production of aircrafts with a capacity of less than 50 seats.

Interesting no?



OTAs to get reprieve for another year as Hotels hurt

You would think that with the airlines cutting back on flights that the OTAs will be in a world of hurt. Well apparently not so.Humour me here!

The value of the OTAs to the airlines whether content or zero content based has been diminishing over time. Now with capacity in the Domestic US market headed for a major cutback then the airlines "Don't Need No-BODY!!!!"

So they are not going to play ball on giving deals. This is rumbling in contract negotiations throught the market.

However the hotels are in a completely opposite situation. As the airlines cut back they need to fill the vacant rooms. It is a heck of a lot harder to handle cutting back capacity in a hotel than for an airline.

So the hotels will be desperately seeking new channels of distribution... headed straight for the arms of the willing OTAs.

For sure the period from the days immediately after Labor Day are going to be a lot different for the Hotel market than in prior years. First up - lets see what the rates are for Fashion Week in New York. Sure as heck anyone charging like last years rates will look a little silly. (If you are being asked those astronomical rates than contact me and I will give you some options you may not have thought about.

However what happens when capacity comes back in the airline market?

This is going to be interesting as we enter another phase of the evolution of travel distribution



Expedia and Microsoft finally seperate

And so the trend of separating from your families seems to be alive and well in the Travel Industry.

Not content with anything - Expedia has been kicked out of the UK and US portals of MSN Travel.

This has been coming for some time. First Farecast was purchased by Microsoft and now this.

In truth because the value of Expedia to MSN has been played out - this is understandable. Orbitz will do well with this.

Orbitz has become the preferred provider to MSN/USA and eBookers has become the preferred provider at MSN/UK.

So here is a question for you. If vendors and distributors change partners and show no allegiance to each other... how can we expect consumers to be loyal to brands?

That's my question/thought for the day



Biz Class Airlines Model RIP - L'avion purchased by BA

So the independent Business Class Airline Model has now bitten the dust for good. British Airways announced the purchase of the French Airline L'Avion, the last survivor of the class and will integrate into OpenSkies its new subsidiary.

Technically there are other airlines operating such as Al Khayala (now part of Kingdom Holdings) in Saudi Arabia but the model has clearly bitten the dust.

So over the coming weeks I will be looking at why the model failed and if there are other options to revive such a concept.



FOLLOW UP - BA to drop lower class services in OpenSkies

BA's future bookings on OpenSkies have ben strong in the front cabin and the Prem+ second cabin has been garnering rave reviews. However the back is - well same old stuff. So BA is looking to cut the back on offer either a full 2 class service or a single ClubWorld type product.