The Sick Boys Of The Airline Biz

As the world airline industry tries to put on a good front in the face of still falling traffic/revenues in both passenger and cargo, we can now see some trends of players who are going to hurt more than others.

Perry Flint's ATW editorial for August made a big point about the success of the DOT over the DOJ in approving the Continental/United/Star ATI JV. This should have been a collective sigh of relief for the industry. However in my humble opinion this masks a darker side.

The conventional wisdom of the internal airline market seems to be that bigger is better and that consolidation should be the order of the day. I disagree. Consolidation does not result in lower fares and better service. The economies of scale as a result of mergers have in the main been far outweighed by the high costs of integration and the resulting downsize has not led to any consumer benefit save the ability to have a single ticket service.

When the dust clears - the resulting airline hardly ever gets a size boost and the market returns to the state it was previously. Warts and all. Somehow the airlines always seem to expect that the government(s) will ride to their rescue if all else fails. How many shareholders have lost considerable sums in capital write offs due to bankruptcies and writedowns over the past 30 years? The number is staggering.

Michael O'Leary must be a happy person at the moment watching his nemesis Aer Lingus writhe in agony in what its own CFO called an airline "...in trouble".

It is time for the government's to get FULLY out of the airline regulatory (except for consumer protection and safety) business and to stop tampering with the market forces.

So my nominees for sickest airlines of the world and most likely to need "fixing" are as follows:

In the basket case category:
Aer Lingus
SAS

In the deeply troubled category
British Airways
Virgin Blue
Many Chinese based airlines

In the category - in need of a dose of reality
Too many to pick nominees

Strangely enough the US airlines are not immediate standouts here. True they are struggling but this is a comparative game - so I am giving them a break at the moment.

Agree with me or not - I hope this sparks more debate.

However - lets have a truly more honest and open market and let the strong survive on true metrics and let the scrappiest keep them honest..

Cheers

So How Much to Carry That Bag?

Based on today's fuel costs and adding in labor - the WSJ has done a study on the cost of transporting a bag. 15 Bucks!

I always wanted to know how they came up with that number....

Here is the analysis

http://online.wsj.com/article/SB122757025502954613.html?mod=loomia&loomia_si=t0:a16:g12:r4:c0.119603:b0

Smaller sharks still need to feed, new sharks vacancy?

So if there is to be a consolidation then in the normal light of day you expect stronger players to eat weaker ones. For many years this type of activity was off limits to Government owned carriers or even quasi-state owned entities. Seems like this isn't the case any more.

So we have THY acquiring what passes for the Bosnian state carrier - BH Airlines. Air Malawi is being acquired by Comair - erroneously described as a subsidiary of BA - while they have BA partial ownership the team in JNB would be quite miffed if they felt they were regarded as a BA Sub. We also have the Spanish Government asking Iberia to take over Spanair before it collapses completely. We have Air Baltic puffing itself up and saying they would perhaps acquire SAS... Either way - SAS will divest its shareholding in the Latvian based carrier.

And then finally we have a great quote from Tom Horton (not the fast food chain in Canada that is TIM Horton...) on consolidation:

"... I think the entire global airline industry has more consolidation in its future...The airplanes that we're grounding are older generation planes. They burn 35% more fuel per seat than the new generation planes. So, when you ground those planes, it would be very difficult to bring them back, not just in operations cost but also in maintenance infrastructure. So, I would characterize those as permanent capacity reductions,"

Interestingly enough I would challenge that assertion. At pre-$140pp oil pricing SH&E did a study that showed the economics of a 737-700 vs a MD80 on a per seat basis crosses around $105pp. Now with the large number of MD80s AA is shedding and not many people are buying that will drive down the cost of the hardware making that number effectively favor the older plane.

I will say again - I believe the time is right for new entrants in many markets. Finding financing however is another story. The US capacity reductions have created wholesale opportunities in the 100 seater market across the board. You have many markets where a plane of the size of a 737-500 would be ideal in sectors of about 1-1.5 hours where prices have skyrocketed.