May 272010
 

The House of Representatives Judicial Committee is on the job, busy protecting our interests when it comes to evaluating the merger between United and Continental. 

Unfortunately, it seems that they cannot comprehend much beyond the simple black-and-white issues of whether or not the merged airline would result in job losses or hub closures.  As this article reports, it seems no one wants to wade into issues about any potential impacts on airfare prices, presumably because that would be too hard.  But even the simple issues to do with job losses and hub closures are proving difficult to evaluate, because the two airlines are not providing the information the committee had requested.  Do I sense a feeling of entitlement, and the expectation by the airlines that their request to merge should be immediately rubberstamped?

When it comes to considering hub closures (and why did this become such an important issue anyway) the committee might be well advised to look at what is happening with Delta after its Northwest merger.

The merged Delta has way too many hubs, including many very close to each other.  While Delta has been slow to publicly state that it will close hubs, the numbers speak for themselves.  In particular, Cincinnati is being deemphasized, with Delta to end service from Cincinnati to five more destinations on 7 September.  Some of the canceled services will shift to Detroit, and others will disappear entirely.

Cincinnati was already on the decline prior to Delta’s merger.  Since 2005, some 400 flights a day have disappeared.

Our esteemed congress critters might also want to re-examine the underlying rationale and need for any airline merger.  The airlines’ own lobbying group, the ATA, reports that passenger revenue in April was up 12.5% on April last year.  The average cost per mile for us to fly increased 14% year on year.

That doesn’t look to me like an industry needing desperate consolidation to survive.

US Airways is feeling increasingly neglected and unloved, after United spurned it in favor of Continental.  And so it has been hinting, loud and long, that perhaps it could become American’s new best friend.

Here is an article that desperately tries to signal to American that US Airways would be an excellent merger partner.  Of course, US Airways and the people who support it in the press have to be careful.  They can’t make the airline out to be too amazingly good, or else they argue against any need to merge at all.

The main rationale in this article seems to be the alleged strength and value of US Airways hub in Philadelphia, particularly for the purpose of consolidating people wishing to fly to/from Europe via PHL.

That might have been an advantage ten or twenty years ago when the main way of traveling across the Atlantic was to first fly to a domestic hub, then fly to an international hub, then to complete your journey on one more flight to your final destination.  But these days we are increasingly seeing traffic direct (nonstop) from one secondary airport to another secondary airport, missing out both hubs, or at the least, from a secondary airport in one country to a hub in the other, missing out one of the two hubs.  The strategic importance of Philadelphia (and most other hubs) is diminishing.

There are several reasons why airlines are moving more to a secondary airport to secondary airport route system.  The liberalizing of former restrictions on what routes they could fly has given airlines much more flexibility and freedom in terms of where they fly.  Increasing volumes of traffic across the Atlantic has made it increasingly viable to offer service between secondary centers that formerly didn’t have enough people traveling to support its own direct service.

Longer range planes have made it possible to fly directly to places that formerly needed a stop (e.g. at a hub) due to the limitations of how far a plane could fly.  And these days it is generally true that the most economical planes to operate are not the largest planes (with the notable exception of the A380, which is so big, it can only operate on a very limited number of routes and to a very limited number of airports) but instead smaller planes such as the new soon to fly 787 (and A350) and the earlier 777 (and A330).

An example of this opening up of routes that were formerly impossible (or at least impractical) is Continental’s announcement this week that their first 787 route will be between Houston and Auckland (New Zealand).  This will start in November 2011, and while Continental is not the first airline scheduled to receive 757s, this is the first airline to announce a route on which they will operate the 787.

Until now, Auckland has traditionally been served only via Los Angeles and/or San Francisco, although there was, decades ago, an unsuccessful attempt to open up service from (I think) Dallas.

Continental get their first 787 in August 2011 but need at least two 787’s to operate the route; I guess until they have a sufficient quantity of 787’s to formally use them on a specific route, they will use the 787 on an ad hoc occasional basis here, there, and everywhere.  Certainly it would be a strange situation if they did nothing with their expensive new plane for three months.

Back to US Airways and American Airlines.  Here is an interesting article with a strange premise – if Continental and United merged, that would make American ‘only’ the third largest airline.  The article suggests that would be ‘too small’.

This is both a ridiculous and a dangerous argument.  If the airline which was, until very recently, the largest airline in the world is now in danger of becoming ‘too small’, and if that means it must merge with US Airways or someone/anyone else to regain the number one or the number two spot, what does that then imply for the airline that American pushes down to the number three spot, and all the airlines smaller than that?

Is there only room for two airlines in the US?

Oh – and let’s not forget about American’s pending alliance/semi-merger with British Airways and Iberia for its trans-Atlantic traffic too (hmmm – with all that boost to its trans-Atlantic routes, tell me again how it needs to add the US Airways PHL hub as well?).  And its participation in the Oneworld alliance as a whole.  How much merging and allying does AA need?

In a continuation of the ‘domino theory’ of airline mergers, formerly fiercely independent airline Virgin Atlantic, one of the last major European airlines to remain outside the shield of the three major airline alliances is saying it would be open to the concept of merging if the BA-AA alliance goes ahead.  Not allying, but merging.

Bottom line – it is time for the regulatory bodies to say ‘Enough, already’ and impose a moratorium on all future airline mergers, alliances, and everything else.  Otherwise, and as the Department of Transportation has itself conceded, each past merger anoints each future merger with a pre-ordained concept of appropriateness and even necessity.

A couple of weeks ago I wrote about a passenger who was asleep when the airplane landed, and stayed asleep while all the passengers got off and the plane was towed to a hanger for the night.

It happened again on Tuesday this week when a United plane landed in Philadelphia.  A cleaning crew that went to the plane at 4am discovered the woman still asleep in her seat.  United Airlines and the TSA are both investigating.

A Canadian attorney is suing British Airways over BA’s referring to some of the fees it adds on to its ticket price as ‘taxes’.  The attorney is also in the process of bringing suit against 12 additional carriers, who do the same thing.

The attorney says that the ‘taxes’ are not taxes charged by governments, but fuel surcharges and other fees added by the airlines themselves.  He claims this is deceiving the public, and also against the BC Consumer Protection Act.

Of course, if he wins, the net amount we paid to travel will not reduce.  But at least the airlines will have to ‘fess up to exactly how much of the total ticket price they are keeping for themselves.

Good news on the volcano front.  At least at present, the Icelandic volcano is not emitting any significant ash, just steam.  There is no activity in its crater, the volcano is contracting in size, and crater temperatures are below 100°C, compared to 1000° C a few weeks ago.  Earthquakes are also massively reduced in quantity, from 27 a day down to one a day.

On the other hand, if you are a pessimist, you would probably note that back in 1821, the volcano erupted, quietened down, erupted again, quietened down again, and so on, for more than a year.

Here is an interesting article about the recent Air India crash.  In particular, I suggest you read the stories of the survivors.  It helps to give you an appreciation of what could happen, should you have the extreme misfortune to find yourself in a similar dire situation.

The most salient point that I take from these narratives is how an apparently ordinary normal safe landing suddenly goes wrong without warning at the last possible moment.  You can’t relax or let your guard down until after the plane has landed and decelerated to a slow normal taxi speed.

If you haven’t looked at it recently, now might be a good time to refresh yourself with the contents of my series on how to survive an airplane crash.

Talking about airline crashes, it is 10 years since the Air France Concorde spectacularly crashed on takeoff from Charles de Gaulle Airport.

But only now is the French government bringing criminal prosecutions against an unlikely cast of characters which the government has decided to blame for this accident.  Read my report here.

And talking about airline accidents, the annual world’s best airline awards have just been announced for 2010.

These are strange awards, because although they celebrate good airlines, there is no admission made that some airlines may not be good, and with so many awards being given to so many airlines, it seems a bit like a summer fair sideshow where ‘every player wins a prize’.  Read my report here.

To continue reading the weekly roundups, click here to visit the Miscellaneous Roundup.

  2 Responses to “Dinosaur watching (This Week’s Airline Roundup)”

  1. I saw an airline analyst on CNBC say that US Air and American had no choice but merge. He argued that a shotgun merger was better than Chapter 7 for US Air and Chapter 11 for American.
    His arguments why AA needed to merge were:
    1. Labor costs are too high, and the unions want them to go higher.
    2. Too much money is owned to to the pension funds, leaving too little money for capital expenditures.
    3. Management with no game plan.
    Yet, other analysts say that AA doesn’t need to merge. It’s the dominant carrier in the Caribbean and Latin America. It has anti-trust immunity with BA, Iberia, and JAL. It has a substantial presence in 3 of the major U.S. populatin centers, New York, Chicago, and Los Angeles. For waht AA has going for it, it doesn’t need the headaches of a merger to gain additional positives.
    Further, while the argument that Philadelphia gets more feed from the Northeast for trans-Atlantic flights that American gets at JFK, the inter-line agreement with JetBlue will bolster feed into AA’s international service at JFK.
    The only appealing aspect of US Air is the Charlotte hub. AA never did well with its Raleigh and Nashville hubs, because there were a number of hubs in the Southeast that pre-dated AA’s hubs.
    Having a hub at Charlotte would allow AA to connect traffic into Florida without sending it all the way down to Miami, and many connections to and from the Southeast would be easier at Charlotte, rather than DFW or Chicago-O’Hare.
    But is it worth the hassles of a merger, just to pick up one hub (Charlotte), while getting more hubs (Philadelphia and Phoenix) that don’t fit as well, as well as the problems with merging seniority lists and a bunch of Airbuses?
    No.

  2. It amazes me how analysts can get it so very wrong at times.
    Let’s look at the three reasons advanced by this analyst :
    1. Labor costs : A merger won’t reduce the AA portion of labor costs in a merged carrier. If anything (and with AA being the larger part of a merged entity) it will drive US’s costs up rather than drive AA’s down.
    2. Pension fund indebtedness : That’s not going to magically disappear in a merger.
    3. Bad management : They’re not likely to improve after merging. And unless there is a way US can buy AA (AA’s market cap = $2.6 billion, US = $1.6 billion, so it is unlikely) probably we’ll see AA’s mgmt with the upper hand in a merged carrier.
    There is seldom if ever any sensible argument in favor of merger. These three points are definitely not sensible reasons to merge.

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