2008 in Review Part 2

Awards, Brickbats, Comments etc


2008 was yet another year of turmoil in the Aviation, Travel and Tourism space.

We kissed goodbye to the dedicated Biz Class airline concept with Silverjet, Eos and Maxjet Sadly we also saw Aloha disappear the result of bad management and a predatory competitor in the form of Jonathan Ornstein. LCCs were also not immune from failure – Zoom, Skybus, ATA and XL Airways collapsed. The landscape was littered with airline corpses. The price of oil and its dependent fuel prices soared to such a high level that some were predicting $200/ppl. It stopped at just under $150 but the impact stayed with us with several airlines STILL charging fuel surcharges. The GDS world got a little uglier with the unbundled model taking hold. ITA Software still hasn’t delivered Polaris (its new PSS), Altea some will say is still not delivered either but what ever the state – it is not getting installed at any decent rate except in the minds of some PR Hacks. Lufthansa’s PFP set the cat amongst the pigeons. There are many airlines waiting to see if it works. So far it has survived court challenges. The real challenge comes when Amadeus stops picking up the tab at the end of January. Travel has fallen deeper and faster than anyone could predict. Its reduction is impacted everyone. No one is immune. The only bright spot with growth is LATAM with some continued stimulus from the GCC upstarts. Tourism’s decline was faster than anyone predicted. The impact of the global recession coupled with the terrorism acts in India and the unrest of Thailand has had a huge dampening impact. The engine of growth that was China sputtered.

Airlines – Who gets the Golden Arrow? Who gets the Broken Wing Award?

The issues affecting airlines are now well understood. Perhaps not so well contemplated is the impact on the airlines brand of the various changes and fees. Airline loyalty has gone into the toilet. This will be a story in a year’s time where the airlines will be scratching their heads asking why are people not responding to the usual stimulus. There will be tears.

So nominees for the Golden Arrow were – Delta, Ryanair, Lufthansa, Virgin America and Turkish Airways. I have selected Lufthansa. Their innovation is still not legendary.. their product however is the archetype of the FNC. What sets them apart is their focus on winning the bigger battle for dominance. LH will be a contender for World’s largest airline. It will have a seat at the big boys table. With their stakes in Swiss, Austrian, German Wings, BMI and Brussels Airlines together with LH Italia and/or AZ the spread of yellow across Europe strikes a huge footprint. The chaps at Star Alliance better be on their best behavior or LH will be exiting the Alliance in favor of their own operated entities. The footprint in the USA with JetBlue is not to be sneezed at. Several carriers have made a pilgrimage to Frankfurt to see if they can have access to the LH pot of gold and magic.




So who gets the Broken Wing Award? Our nominees are United Airlines (for lots of things) , Skybus (for not listening), SilverJet (for sheer hubris), Alitalia (for opera) British Airways (for giant cockups). Our choice just has to be Alitalia. It was a close thing. Until the middle of the month they were a shoe in… then they managed to complete the re-org, then at the end of December they were back to their old tricks with 3 days of strikes. Gotta love those guys! (Thanks to BA for the view of their broken 777).

I have decided not to award Airport of the year (although BAA/Ferrovial definitely deserves the Old Tarmac award). Nor is there a GDS of the year. I am saving that for 2009.



So what was the seminal event or happening of the year? The Professor’s Flying Fickle Finger Award goes to the Recession. It will have the biggest impact on all of us – more than any other influence.

So stay tuned for my prognostications for 2009 which will be coming up shortly

Cheers

Revolving Doors/Confusion at Expedia EMEA

Expedia EMEA seems to be having a hard time getting it right. After a stellar start and early market share capture almost entirely organic in the UK and Germany - The business seems to be having a hard time finding its way.

Why is this important? Expedia Europe is a major part of the growth for the company. As the US market turns down - the European area has been the source of good growth in recent years. However despite that other than the UK and perhaps another market - the company has nothing like the footprint of its original market.

The departure is the latest in a line of changes at Expedia following a management shake-up in November which saw the departure of Europe president Dermot Halpin and Expedia Partner Services boss Paul Brown. Halpin is due to leave by the end of the year.

So let's see if we can follow the chronology. Early this year we saw a set of changes that following the exit of managing director Caroline Cartellieri (who is now COO for Myspace EU) from Expedia UK (April) as part of the overall shake up also saw long time DE head Jens Parkitny exit after 11 years. The focus was to build a strong platform and then focus on country. At the same time Alex Zivoder was promoted in to SVP Europe. He also took direct charge of the .co.uk biz.

Well that didn't last long.

In October there was a big change with the focus back on brands and an end to acquisitions - for Europe the last one being Venere.com based in Italy. This was most probably a counter to the success of Priceline's EMEA brands Booking.com and Active Hotels who have been powering Priceline's top and bottom line growth. David Roche was promoted to be president of the revived Hotels.com (now included Venere). This saw also Paul Brown exit stage left to be head of global brands and shared services at Hilton - IE essentially god of everything. But wait there is more - Dermot Halpin another hi-flyer was also given the boot. There were a bunch of other changes but this was it for now. Halpin was due to leave at the end of the year.

At the end of December - Alex Zivonder quit to become managing director for online ticketing service Viagogo. Expedia has not announced who will take over responsibility for European operations. Nominally Eric Grosse, as president for Expedia Worldwide, the chap and should have overall control when Halpin leaves.

Expedia head honcho Dara Khosrowshahi, is pitching in and running the Partner Services Group until a replacement is found. Also lurking around is Henrik Kjellberg who is now president for Expedia Distribution Worldwide in addition he retains his role as chairman of eLong, Expedia Inc's majority owned Chinese OTA.

Coming up is the potential divorce for the SNCF Voyages JV in France which has puttered along since September 2001.

Confused? Imagine what it must be like working there...

Cheers

Seasoned Greetings

Just a big thank you to all for the support during the past year.

As you can see we are taking it a little easy over at the Professor's place.

May 2009 by wrapped in twine and delivered with a bow - or at least may it be stable and not too bad for all of us.

Cheers

The Professor’s 2008 Closing Blogs Part 1

For our annual 2008 review we are going to do a three parter. In part one we will examine the world order and its potential impact. In part 2 we will look at some specific cases. In part 3 we will look forward to 2009.

Part 1 The world at large.

As Michele MacDonald describes it – this has definitely been an Annus horribilis
The meltdown occurred despite our best efforts to find ways around, through and over it. The market impact is global. This marks the world’s first global recession. We are all in uncharted territory here. As far as travel is concerned we have seen the impact start with softening in the US market and it spread worldwide. I don’t think we can point a finger at a single element – it is a combination of factors that culminates with the inevitability of gravity – what goes up must come down. Yields, Load Factors, Gross Revenues, Employment etc etc are ALL down.

The US market comprising about a third of all worldwide travel transactions saw the good times come to a halt pretty quickly. The sub-prime market mess spread and brought down almost everything in its wake. In hindsight that was the symptom – the result of individual greed, lying – grand larceny even and a laissez faire market management by the outgoing Bush Administration. The bellweather Las Vegas market went soft in the first quarter. While we were hearing rosy reports of continuing traffic growth from the Caribbean – the truth was that everyone got nervous and then cut back. Hawaii took a huge hit from losing about 20% of lift with the failures of ATA and Aloha Airlines.

For the rest of the Americas – only LATAM shows growth. It is still digging out from its own Armageddon in the late 1990s and early ‘oughts. So this is in reality only a correction – positive of course – to where they should have been. I don’t want to however downplay their own success at creating and stimulating demand. More power to them. Mexico’s Tourism has taken a big hit from the failure of 4 airlines in 2008 and in the reduction of the traffic from north of the border from traditional markets. The impact on Chavez’s Venezuela from the collapse of oil will be catastrophic. One positive element might be the future of a brighter and more realistic relationship between Cuba and the USA.

Europe’s travails was a continued shift from the legacy business models to the lower cost and more dynamic sectors. But traffic fell early. How can we forget the disastrous T5 opening at LHR. Clearly some profited from this situation – Lufthansa took the opportunity to open its piggy bank by taking stakes in JetBlue, Brussels Airlines, German Wings, Austrian and finally BMI. The housing market in the UK fell apart with the failure of Northern Rock. People stopped travelling when they realized they didn’t really have any money. Wholesale axing of programs from Northern Europe spread its impact from Thailand to Trinidad as we saw first the Biz Class carriers fail and then XL Airways and Sterling collapse. No sector nor segment of the market was immune.

Russia – a class of its own is now in trouble. The loss of the commodities prices has slammed Russia very hard. The Oligarchs are suffering and trying to dig out behind now massive debts that will have a major impact on the world credit markets. Travel in Russia is slowing and the failure of a third force (Air Union) is clearly going to ripple out ad the transportation market consolidates. However the private airlines – Transaero and S7 are not necessarily in great shape either.

The Middle East bubble has burst. But Shhh don’t tell anyone yet. First inflation slammed the market with rates as high as 23 % in some countries. On average the region has seen inflation steady in the teens. The crash in the price of oil won’t hurt too much as the average price of the precious fossil fuel was still above 2007’s rate. But wow betide the 2009 year. The price of oil will not rise significantly. At its current spot price in the 30s for a barrel – we can only expect to see moderating gains. We may not get back to the $80/ppl that Boeing thinks should be the moderated price. For UAE – the building boom must end and the market needs to catch up with the supply. Housing prices are staying still for now but are headed in 2009 for a big drop. I can foresee a degree of panic occurring. The continuing growth cycle being driven by the various governments with their massive projects will benefit and stabilize the region but it will take a while for the equilibrium to prevail. Build it and they will come is not a good strategy.

Africa – well its Africa so no real change there. Unrest and lack of mature government controls will continue to dog the markets. Zimbabwe continues its slide into Oblivion. The once beautiful and among the most prosperous countries on the continent is perhaps the symbol and example of all that besets the region. South Africa will continue its march to a stable state and the benefits of Kulula and 1Time will continue to drive opportunity.

In Asia the optimism from the beginning of the year has given way to mass pessimism.

India’s powerhouse growth came to a grinding halt with first high oil prices and then the psychological blow of the Mumbai bombings has evaporated all sense of well being. The airlines have slashed services and all are struggling and looking for handouts. Massive layoffs of skilled workers from the outsource companies is opaque to the outside world – but believe me they are there. This is cutting discretionary income at a time when the market was reaching some good growth stats.

China’s ill timed controls on the market for the Olympics resulted in at best a dud. The controls have indeed stunted the stellar growth, with the end of the year seeing the central Beijing Government passing handouts to the major carriers. With traffic constrained to Macau – the only bright spot is the Trans-Straits traffic to the “rebel” province of Taiwan. However the impact on Hong Kong and Cathay Pacific is being felt.

For the rest of Asia things are looking bad. Thailand has taken a huge hit. Even in October hoteliers were bemoaning the loss of the traditional European charter market that has just evaporated. The civil and political unrest has resulted in empty hotels the length and breadth of the Kingdom. Elsewhere – countries whose tourism is feeding from the trough of China are experiencing significant softness. Perhaps China should consider reinstating the 3rd Golden week. Australia is doing OK but the turmoil among the airlines will continue for some time.

2008 will go down in history as a turning point and not just a temporary one. I believe we will wake up in a few years time to a world that I believe will be kinder and gentler. Less full of irrational exuberance. Less dependent on growth at all costs. More rational? Nah – who am I kidding…

Cheers

Those Crazy Italians Strike Again

New Alitalia? Think again... its the same one. On Monday "Labour" disputes caused nearly 100 cancellations and yesterday a further 43 were canceled. Today - who knows....

Gotta love those guys!

2008/9 Charity Project Results

Dear All

I received a lot of comments on the charity choices. I would like to thank all the people who sent me comments and suggestions on the choices. If I may I will highlight just a few of the additional choices that I like:

From Professor Stuart: http://www.embraceglobal.org - this really plays to one of my personal strategies in giving, namely helping people to help themselves using simple low cost solutions. check it out.

From Professor Alex who volunteers his time in Miami for Empower Youth. It tries to focus on at risk youths. A very worthy cause.

From Professor Chris - the 1Sky Campaign. Its new so I cannot say much about it other than I like its ideals and I love the name. http://apps.facebook.com/causes/beneficiaries/21473?m=011c4beb

I picked on these 3 as examples for people to look at and stimulate what you can do.

But charity as they say begins at home. I was struck over the last few days to see what happens when our own industry fails itself. I am talking about the massive delays and disruption that occurred in the Pacific Northwest. I witnessed great acts of personal charity that demonstrated how well we can serve our fellow man. My neighbor drove 11 hours to go and fetch his daughter from Spokane and came back with 3 fellow lost souls and got them home. My daughter too brought home a lost soul who has ended up staying with me for 3 days until her next flight out.

So perhaps the next time we see a major system breakdown like this - lets all pitch in if we can. If everybody did just one small thing - gave someone a lift, a bed for the night, a blanket etc... we would all be better off. In these tough times lets all do what we can for each other.

Merry Christmas Virginia - yes there is a Santa Claus and he doesn't have to live at Macys!!!

Cheers

The Long Tail Is Officially Dead

Thanks to Professor Joe for this link. I will admit that I am late to this part of the debate. I also have to say I have never been a big fan of the Long Tail idea. It goes against the grain in my head that says:

few big customers = good
small, lots of customers = difficult and bad.

Oh yes and I am a big believer in the Pareto 80/20 rule

So it seems that that on November 17th 2008 Anderson (the editor of Wired Magazine and writer of the now infamous book on the subject) finally gave up the ghost with his end comment in an article in the Wired Blog that appeared that day:
http://www.longtail.com/the_long_tail/2008/11/does-the-long-t.html

"I'll end by conceding a point: It's hard to make money in the Tail."

At which point he got skewered royally around the web for the volte face. For example:
http://www.theregister.co.uk/2008/11/21/anderson_long_tail_fail/

So the idea has finally fallen prey to reality. Hey it was nice while it lasted.

For more from Professor Joe go to his blog:

http://buhlerworks.com/wordpress/2008/12/03/so-the-long-tail-is-dead/

You might also want to go and look at a rather stimulating debate going on here:

http://blog.highlandbusinessresearch.com/2008/12/16/death-of-the-long-tail/comment-page-1/

There are a lot of people out there making money from trying to persuade people that the Long Tail is a good idea and those who are actually trying to make money out of the Long Tail itself. Just Google "Travel+Long Tail" and you should get between 650-700 hits. You will see what I mean. Both categories need to have a serious re-think.

As Eric Schmidt of Google put it (and this is probably what really sparked the debate):

"And just to be clear, it’s a 90/10 model. We love the long tail, but we make most of our money in the head, just because of the math of the powerlaw."

He does however hold out some hope (and if nothing else it is an OK self serving statement):

"But you need both. You need the head and the tail to make the model work."

So another myth debunked, a dream shattered, another dose of hard reality.

These are sobering times

Cheers

EI's new religion - LGW

Aer lingus - the little Irish Airline that tries quite hard to be nice - is doing a dramatic about turn and going after some new business by setting up a base at LGW.

In the past year LGW (Currently for forced sale by BAA under UK competition rules) has lost a lot of business. The US carriers have largely shifted their operations to LHR and BA has downsized. On the other hand Easyjet which picked up a nice chunk of the former GB Airways has expanded its presence big time at the Sussex based airport.

So EI is going to base 4 A320s there initially and then hopefully expand to 11. Following the FR model - they will build a minihub there flying to existing EI spots where service has declined.

Interesting huh?

Cheers

Airlines Execution Tool - The ADM

For many of you who follow the Professor - there is an interesting sense of some of the arcane nature of the distribution business for ATT- Aviation, Travel and Tourism.

One of the weirder tools the industry uses to self-regulate is the ADM - Agent Debit Memo.

The concept is simple. If you fail to issue the ticket correctly no matter what the airline can issue a chargeback. FOR THE FULL FARE + Additional charges. BTW the full fare is what ever the airline charges for that class of service many times this is equivalent to the price of a small fortune. Somewhat akin to that price you see behind the door of a hotel room which bears no relation to the price you paid. Oh yes and you have usually only 30 days from the moment the airline finds the error (not when they notify you) to respond.

Voila, the airlines become Judge, Jury and Executioner. It is really hard to get one reversed... I know from bitter experience.

Interestingly you would think that the GDS would protect you if the reservation "autoprices". Just another quick explanation about GDS pricing and ticketing.

There are three types of pricing/ticketing. Note they are different processes and both have to be done according to the book.

Type 1: Autoprice and Autoticket. This is when the Reservation automatically prices at the fare the agent quoted to the passenger. Then the automatic entry to ticket is also used.
Type 2: Forced or Assisted pricing and ticketing. This is when you price and ticket with a small override. Since there are so many fares - you can tell the GDS to 'PRICE AND TICKET AT FARE TYPE YXW28). The system does your bidding and prices but at this point you have overridden the fare rules even though they might be accurate.
Type 3: Manual. I will enter the price manually and then ticket using my created entries. There is no protection if you do this.

Now the airlines protect the GDSs with a contract called a PCA - or Participating Carrier Agreement. In this the airline holds the GDS harmless from incorrect Type 1 pricing and ticketing. Well that's the theory. There is no such protection for Types 2 and 3.

However the airline shoots first and asks questions later. This process is the reverse of the "presumed innocent" logic. An agent is ALWAYS assumed to be a bad person and is guilty until the Agent proves himself innocent.

As you can see it can be quite hard to fix these situations where an agent does everything by the book but the fare is wrong in the mind of the airline. The GDS is supposed to protect the airline and that protection is supposed to extend to the agent in a Type 1 case. However you are long dead if you try fighting it.... Oh yes and did I tell you how the airlines collect the money from you? They take it from your tickets and commissions issued during the next cycle. So for example if you issued say 100 tickets and earned commissions and fees worth $10 per ticket. That would be $1000 total net revenue to you. Lets say you issued one ticket the airlines didn't like. For lets use a very small amount $10. But the ticket's full fare was $1000 plus a $100 fee. Then the total add collect of the ADM would be a net $80 you owed the airline and all your revenue would be wiped out.

Here is the math:

Revenue basis
Total gross revenue to agent $1,000

Cost of chargeback.
Charge back amount $1000
less amount of commission already paid $10
less amount of ticket already paid ($10)
Total = $980
Add $100 fee
Total chargeback value to airline = $1080.

Final calc +$1,000 - $1,080 = You owe the airline $80.

So you can see its not nice.

Here is a salutatory tale from an Agent in Florida - courtesy of a story in Travel Weekly.

http://www.travelweekly.com/article.aspx?id=184064&ad_id=5732

Thanks Professor Scrooge for this story.

Air Berlin - seeking cash looks to Etihad

Air Berlin which has big ambitions but far less stellar performance than its fellow members of the big 3 LCC club. (AB+FR+EZ)

It market cap is actually quite low - be far the lowest of the 3. While its hybrid model has great potential - it remains largely a reverse camel - a committee organized by a bunch of donkey largely from the acquisitions.

So to address its perennial lack of capital - it has started discussions with Etihad to create a liaison - dangerous or otherwise - to shore up its balance sheet.

This would mark the second time in as many weeks that Etihad's name has been linked to a major European carrier - the other one being Olympic.

I didn't see the synergy then - I don't see it now.

Would some one care to enlighten me?

Cheers

Alaska Air's Schedule falls apart under pressure

Alaska Airlines recently made the decision to lay off 1000 workers.

Could that have been the reason that the schedule fell apart beginning on Saturday December 20th?

That morning a mechanical delayed then canceled their first flight to ORD. The next 48 hours have been a text book case of how not to handle things. While Southwest was able to operate a skeleton schedule - AS literally canceled most of their flights. 47 on saturday and the vast majority into and out of Seatac on Sunday.

With flights being diverted to Spokane and then being stranded there (at least 7 flights at last count - not to mention the flights that didnt go today). at 5PM today the arrivals board showed on one flight of AS operating normally. Yet all the other airlines managed to operate some kind of schedule to their points. So why not AS?

At present it looks like it will take over 5 more days to right the ship. Alaska's legendary superior customer service has totally failed. I watched an arriving passenger from a 10 hour international trip only to have to wait for MORE than 8 hours before she would reach the AS desk for assistance.

Clearly - the AS outsource model should be reviewed. Additionally why a reduced schedule should fall apart so easily indicates that there is something fundementally wrong that they need to fix.

Bill Ayer and his crew better be working late tonight to make this go away and fast.

Cheers

So really SEATAC what does $1.5 Billion get you?

Seattle Tacoma International Airport (ICAO: KSEA, IATA: SEA) recently opened its famous 3rd Runway. The justification for which was to enable difficult operations in bad weather and to allow full ops all the time.

OK so this past few days has seen it put to the test... and it well - to the pax who have been left stranded - it seems to have failed.

The travel conditions in the Puget Sound area covered the gamut from high winds to snow and sleet with freezing rain - but as one United Pilot was overheard saying to his colleague - I thought we were supposed to get two operational runways at all times...

And that is true - the whole point of the 3rd runway was to make the airport support better irregular ops. That was the story sold at the funding stages and definitely sold to the 400 plus residents who were turfed out of their houses. Total cost for the project $1.5 Billion plus.

The local marketplace is rife with rumours of kickbacks and poor contract process and management. The local Seattle papers have been having a field day with the shenanigans going on at the authority - Port of Seattle.

So it would seem that the voters got a pig in a poke.

Cheers