State of the State - Airlines are now reeling

The State of the Airline industry particularly in the US market is going to be tough for the next year probably 2. We have a large number of significant problems - structural to the market - that are going to be affecting the commercial environment.

Since we know what a lot of these are - there is probably no point in belaboring the issue. However it is interesting to speculate what will actually be an outcome.

Unlike previous recession cycles - there is very little (if anything) left to cut back. The failure to revolutionize the business model is quite evident now. The Airlines believed they had another full year of strong profits before the down turn. The mortgage mess and the other factors causing the US led recession caught them largely unawares.

Given the large number of chapter 11 failures - there are likely to be more - this means that the industry must reach inside and reform itself. Both individual companies and the industry at large.

There are no easy ways to cut costs. Cutting back flights in the vain hope that you can save yourself to survival is actually bad for the economy. Not letting people fly by pricing the product incorrectly is going to actually exacerbate the recession. Every one dollar that is not spent in direct travel has a knock on effect in the economy. Unlike 9/11 it is not going to be spent at Home Depot and Linens & Things as we are seeing.

I believe ardently that this represents an opportunity for the market to reform and to fix even things that were not fixed during the last round of Chapter 11 filings. In hearings held last week Senator D Inouye (HI) actually postulated that deregulation had not been altogether a good thing.

What an interesting question.

However we cannot indulge in a trip down memory lane. There is a pressing set of issues that needs to be addressed. Regulation is not the cure all. But also complete laissez faire is not good either as the recent events in the Hawaii inter-island market have demonstrated.

The airlines need to take another hard look at what they sell and how they sell it. This requires concerned effort to modify the model to be more efficient. That will not be possible using the old tried and true methods.

There is one fundamental issue that must be addressed. Making the airline revenue match the costs. Perhaps now the notion of a seat mile can be put to rest.

Cheers

Timothy

Frontier makes it 6 since March 31st

Frontier Airlines that has been on every one's watch list joined the queue by filing for Chapter 11 late Thursday night.

The credit card processor demanded a substantial increase in hold back to protect its own position which has necessitated the filing.

Frontier with over $150million in cash in the bank was not in imminent danger but there were substantial risk issues in front of the Denver based carrier.

There are other airlines who are being watched. This is not over yet. The knock on effect will spread as other airlines feel the impact and as the industry in general takes into consideration oil at $135/pbl for the bench mark aviation grade crude.

So keep counting - here is the list:

Aloha
ATA
Skybus
Champion
Oasis Hong Kong
Frontier

Cheers

Timothy

Blogging is being regulated -Perhaps a good idea?

I would not regard myself as a "professional" blogger. The actual business of blogging has come under scrutiny recently and perhaps a good thing. We try to adhere to journalistic standards by separating rumour from fact and fact from opinion. However I am (personally) not a professionally trained journalist. So if we err - we publicly apologize. If we get it wrong then we try and correct the blog where the error has occurred.

It is now an official crime in the UK to publish fake blogs. The UK does not have a 1st Amendment right as the US. So effective May 28th the Sony "All I want for Christmas is a PS3" flog will be illegal. We understand that this would make lonelygirl15 also a crime if there is a commercial element to it. Flogging itself (Fake blogging - gotta love the term) was already outlawed in the European Community effective the first of this month (April) 2008.

There was some stir recently about the adverse health side effects of blogging. Well people need to get over that!

What this shows is that the practise has become so pervasive that it needs to be put under the scrutiny of the legislators. That is not a bad thing. I just hope that the blogging community respond appropriately.

Blogging is not journalism - but it is a valid form of information source. In my case I hope that this leads to enlightenment and that knowledge is gained as a result of what myself and the others of T2Impact have garnered and wish to share.

Cheers

Timothy

PS reminder. The comments expressed here are that of T2Impact who is solely responsible for its content. We promise to deliver as accurate information as we can. We welcome comments. If you wish to use us - please attribute with PRIOR permission. Mostly because I want to make sure that you are fully armed with the appropriate info. We also try not to get on our soap box too often.

HRGs Milky Bar Kid rides off... maybe

Mike Platt is leaving Hoggs - excuse me the HRG Group. After a long and illustrious career in the UK Travel market - he will ride off in the sunset. Most people who have been round long enough will actually remember Mike as the original (I believe) Milky Bar Kid.

Perhaps Mike is getting out at a good time. Last month is was revealed that a sister company controlled by the same owning family as BCD Holdings had grabbed more than 10% of HRG. This could be interpreted as the canny Dutchman JFVV is looking to consolidate again. This may see the reconstruction of BTI. Do remember the last time he took a stake in a competitor it was in Navigant which some say precipitated the tectonic shift in TMCs a few years back.

Mike is coming to join the ranks of the Unemployed (er I mean Consultants) so expect him to start showing up at conferences and the like. Perhaps now he will take the gloves off ;-)

Congrats Mike! Are the Milky Bars still on you?

Cheers

Timothy

Why did AA cancel so many MD80 FLights?

It may seem to be illogical that only AA the world's largest operator of MD80 series aircraft cancelled such a large number of flights operated by these aging aircraft.

The route cause is probably a clear miscommunication between the FAA and the airline's maintenance people. Sorry chaps this should not be the case. About half of the world's largest airline's fleet is MD82/83s. So you would think by now they would know what the wiring bundle looks like. If my memory serves me right this is about 1/3rd of the total MD80 fleet.

I checked the other operators in the USA - Delta is the next biggest with over 100 and a smattering of the MD90s also but it has the much newer MD88s as its mainstay. No flight cancellations today. None from either Allegiant or Alaska.

Nor in Europe or anywhere else. The next largest operator I think is Alitalia. They also did not report major problems.

American has always marched to its own tune with regard to maintenance. Some of us remember the unorthodox way they removed CF6s of DC10s with a fork lift truck. Fine until one of the engine bolts sheered as a result and the results were disastrous.

The knee jerk response by the FAA to cover its own short comings with these emergency inspections may have an adverse affect. The hard pressed line engineers at AA have had to endure consecutive weeks of long overtime periods while they inspect the planes and get them back in the air.

I hope the FAA has enough inspectors in place to make sure these inspections occur properly. Not good chaps...


Timothy

Oasis Hong Kong Files for Bankruptcy - stops flying

They just couldn't quite make it.

After a rocky start - the airline built a loyal following but with just 2 routes and the oil price/recession combo - the airline couldn't quite break out of startup mode.

There will be a lot of soul searching this morning as this is the 5 airline in 10 days to bite the dust.

Cheers

Timothy

Its Official - 787 is delayed

They speak in quarters but the truth is - its at least a 6 month delay.

First deliveries are now scheduled for the end of 2009. Symbolically Boeing will try and meet that date.

There will be a lot of unhappy people today who will be lining up outside the Boeing Company's Treasure's door.

Let's hope this comes good now. Realistically the ramp up - as in my note from yesterday will be much slower.

Cheers

Timothy

Another 6 Months for 787 possibly longer

Bowing to pressure and reality - Boeing will tomorrow (Wednesday) announce a further delay to the 787 program. The Seattle newspapers are predicting a further 6 months. Unfortunately we think it will be longer.

Boeing's problems with the plane should not detract from the final product but there will continue to be issues during the early build run. Boeing is going to be under a lot of pressure to open up the key milestones to public scrutiny for the 787 program.

Specifically the following issues will be with the program:

1. Fully automated production services will not be effective until long into the first year of production.
2. There will be a slower ramp up of the production line than was anticipated. This BTW is very wise.
3. Boeing will be bringing more and more of the integration services in-house
4. Fabrication issues remain with key parts of the plane. The most noticeable issue is the wingbox strengthening
5. Weight will be a problem restricting range for ultra long haul traffic.
6. 787-3 will be pushed to the background while more -8 and -9s are added. This means a major headache for ANA. The Japanese airline may indeed start looking at Airbus products to replace its aging 767 fleet. It is the leading contender for the A380 in Japan.
7. Design freeze for the -10 model will be pushed back until the existing major version -8 and -9 are stable.

The cost to Boeing will be significant in penalties and delayed revenue. However in the longer term this should not be an overall issue when considered in the overall scheme of things. For short traders they can make money out of Boeing's near term misfortunes.

As a frame of reference the A380 took an 18 month delay. So far (assuming the 787 is delayed 6 months) and I think my calculations are correct - it will be 14 months in total. If I am right and the delay goes a little longer then we will have a similar situation of overall late delivery for both the Airbus and Boeing flagship programs.

There is a lesson here. The 777 was an aberration rather than the pattern for production and delivery timings. Bear that in mind Airbus and Boeing next time you set dates.

Cheers

Timothy

Oops almost missed the Goopedia story

So this came out on April 1st so we can all be forgiven for this one.

This is completely insane to think that Expedia would buy Google. Dara and crew know that the stock of the target is way down already....... wait.... is it the other way round?

OK - so this is Troogle 2.0. It was a stupid idea then and its a stupid idea now. Rich Barton - my former colleague at Expedia is on the record for agreeing:

"Google does such a good job skimming all of the really high margin profits from the travel media business already via paid clicks that I am not sure why they would want to get their hands so dirty just to get another bit of the margin. They just don't need to. They are at the very top of the pyramid of skimming the profits out of the business because they probably get paid on average $3 a click for a hotel, air, a cruise or a package keyword on Google right now and they don't have to do anything.... It doesn't make a tremendous amount of sense to me unless Google is changing strategies to target deep verticals to get into, which they have not done yet to date."
He continues to speculate its some Wall Street shenanigans

"That happens a lot these days. I may be paranoid and seeing the bogey man, but there is a lot of money in hedge funds that thrive off of short term price changes and I think that is what is going on here."

Amen Rich...

Cheers

Timothy

Empirical Evidence - Q1 was bad - Q2 will be worse

I have just been looking at the airport traffic figures for Q1 2008 and in particular the US market. They provide a somber backdrop to an already falling economy.

Based on the reporting numbers (at least 50%) for the major US airports and airlines - the first quarter of 2008 ended on a down note with a loss (.02%) of total US based traffic. Add to this the boost that should have come from an early Easter - following on from an extra day February and we can still see an ominous downward trend.

But this was only through Monday of last week. With 3 airlines out taking with them a large number of passengers - the month of April will be brutal when the traffic numbers appear.

The rest of the world is not so hot either. While not actually showing a down turn we are seeing softening in EVERY major region. The UK with the loss of at least one whole day of schedules in March from its largest airline (British Airways) is going to be leading the way in bad news for Europe. Should Alitalia fall or Olympic - then additional numbers will be off. We don't believe that there will be a corresponding boost based on the new 18 flights out of LHR to the USA.

Airline stocks will be taking a tumble even further than they have already. Airports in the public arena will also take a hit. The ripple effect across all the major economies will start to be felt way beyond the Aviation, Travel and Tourism sectors. This will only provide more evidence and to magnify the overall global economic slowdown.

Belt tightening time.

BALPA and BA - Its getting very ugly. Are we headed for a summer of discontent?

BA's pilots as represented by BALPA today issued an open letter (see below) questioning the current management of the airline. Without directly calling for Irishman - Willie Walsh's resignation- they are clearly a bunch of unhappy bunnies. Their main beef with BA's management is over OpenSkies (the airline) whch it was announced today will start service in June 2008.

The current sentiment ties the debacle at T5 (still hasn't had a full day) to BA's management and as a symptom not necessarily an accident.

This is going to get ugly before it gets better. Lets hope the two can kiss and make up or else we will have another summer of discontent. Then BA will have a real "Annus horribilis".

Cheers

Timothy


http://www.balpa.org.uk/Media---Pr/Open%20Letter.htm

Jafri at it again files another patent that will cause grief

NOTE: only read this post if you are a true believer in the US Constitution's First Ammendment protection of Free Speech.

Sometimes it is easy to see how the patent system has become such a mockery of Intellectual Property protection.

The following Patent PCT/US2007/003275 SYSTEM FOR AND METHOD OF PROVIDING TRAVEL-RELATED SERVICES was filed by CFARES in February 2007 - a Jafri Company. It was published in August last year. The public abstract should immediately give you clue as to its intentions: A traveler provides parameters (e.g., origin, destination, price, date, departure time) for purchasing a ticket. The price may be below the established airline price. A calculation is provided of parameters (e.g., prices, dates, time) of flights of airlines traveling between the origin and the destination. A comparison is made between the parameters of the traveler and parameters of the airline flight. When the comparison matches or almost matches, the traveler is notified, and is given a specified time (e.g. 24-hours) to accept the flight The traveler may pay the airline's established price. The traveler receives a coupon or voucher for the price reduction. The traveler redeems this coupon or voucher at an airline ticket office or at agencies identified by the airline.

Someone needs to challenge this as a prime example (in my humble opinion) of the poor manner in which the US patent system is being used. You have been warned.

To see the whole filing use any patent system viewer or go here:

www.freepatentsonline.com/WO2007095030.html



You have been warned.

Correction - G2 goes to Travelport not Amadeus

Despite earlier rumours to the contrary - my sources were not completely accurate. The deal for G2 which includes winding it up - goes to Travelport. Apparently there was a discussion between Amadeus and G2 but it didn't conclude.

So the G2 workstation will become the standard replacement now for both the Worldspan and Galileo solutions. This represented a significant portion of the development of G2 but much more went into the back end. Sadly this means those assets will likely fall by the way side.

The biz team has been largely dismissed and the tech team will be shrunk. As it is now an asset sale rather than a take over it is unlikely the airlines will see their investment recovered at all. The investors too are unlikely to get anything when the company is wrapped up. For Alex and crew this is sad.

For the Airlines this is even sadder. It shows that they have been thwarted again by the GDS in their efforts to control distribution. I will take a bet that says the total GDS bill for a legacy carrier will actually INCREASE in 2008 over 2007 and prior years.

With 3 of the 4 original GNEs, Patheo, G2 and ITA out of the GNE business - Revelex will still be there for Tour Operating but basically Farelogix is the sole surviving player of the original group.

GNEs RIP 2008

A comment on Alitalia

With the Italian basket case's losses accelerating there are but days away from either an orderly assumption or a catastrophic failure.

The election on April 13/14 will likely result in a Silvio victory but not with a sweeping mandate. This process often takes weeks to resolve before a viable Italian Government is formed. During this time the airline will continue to bleed red ink.

the options in front of the assembled parties are now pretty stark. As I have noted before the Government cannot put more money into the airline without risking EC sanctions. A full bankruptcy is political suicide. So that leaves the so called "Parmalat" reorg option or a modified version of the AF-KL deal.

It is unlikely that any of the original bidders would be interested - TPG has its hands full elsewhere, Mattelin Patterson is smarting from the grounding of ATA, surely the AirOne guys cannot be serious, and Aeroflot - well its Russian. Lufthansa would be mad to take it on - but it just might. British Airways - not a good time for them right now, esp as they just put a little cash into Iberia. Nope - I think I will stick with the two options above. KL/AF or a modified bankruptcy.

The unions were extremely foolish in holding out this long. It has only made matters worse.

Good luck though!