Weekly Roundup Friday 22 July 2011

Good morning

The big news of the week was Wednesday’s announcement by American Airlines of their order for 460 new planes, which I quickly analyzed and sent out a commentary on immediately thereafter.  If you get the realtime or daily updates, you’ve already seen this, otherwise it is available for you to read later in this newsletter compilation now.

With the dust slowly settling from what AA claims to be the largest commercial airplane order in history, a couple of things are clear.

First, Airbus won the lion’s share of the order.  Boeing got an order for 100 current generation 737s, a conditional order for 100 not yet designed 737s with new engines, and options on 100 more planes.  Airbus got an order for 130 current generation A320s, 130 new A320neos, and options on 365 more planes.

Of course, options aren’t the same as 100% locked down orders, but anyway you analyze the numbers, Airbus not only won the lion’s share of the order but furthermore, by switching AA from its proud public claim to be exclusively a Boeing customer, it has also made a major inroad into one of Boeing’s most loyal customers.

Second, in an extraordinary non-eventful way, sandwiched into the announcement was an addendum that Boeing has sort of decided, at long last, how to respond to the Airbus A320neo announcement of seven and a half months ago.

Boeing will try to copy the Airbus strategy and simply re-engine its present 737 airframe with more efficient engines.  But, unlike re-engining the Airbus A320 family, this will be a difficult (ie more costly and time consuming) procedure for Boeing because it will need to extend the plane’s undercarriage to allow for larger size engines under its low-slung wings.

This will mean repositioning the under-carriage further out on the wing, which will mean strengthening the wing further out, which will mean new design issues and weight penalties, and current best-guesses about how and what Boeing will do suggest that maybe the company will compromise with a not full-sized engine diameter so as to save on the worst of the redesign of the wing and undercarriage, but the smaller the engine diameter, the less efficient it will be.

Boeing’s almost silent announcement of its response to Airbus perhaps shows some corporate embarrassment.  It certainly should.  It also shows the fact that while Boeing has reluctantly decided to re-engine the 737, it doesn’t yet have any specifics about how it will do this and what it will mean in terms of fuel efficiency improvements, plane costs, or much else at all.

 Only a few months ago it was proudly and positively saying that its response to Airbus would involve a complete new airplane design, but now the final outcome is that after seven and a half months of indecision, all it has done is make a policy decision that it will simply re-engine the 737 as it currently is – a decision that could have been made in seven and a half minutes rather than seven and a half months.

It seems plain that Boeing was forced into this ‘rushed’ decision by AA.  Many commentators are guessing that AA told Boeing ‘If you can’t get us a better plane than the current 737 family, we’re giving the entire order to Airbus, and we’re not going to wait any longer for you to decide’.  Confronted with such a ‘defecate or get off the pot’ ultimatum, Boeing capitulated and agreed to re-engine the 737, but currently has no idea at all about exactly how it will do this or what the new performance parameters may be for the new plane.

If Boeing had come out with a stunning new airplane design some time this year, perhaps it could have been excused for its lengthy delay in responding to Airbus.  But by taking seven and a half months and then quietly rushing out a decision totally lacking in detail, it has merely exposed its management inadequacy still further.

The cost of Boeing’s lengthy indecisiveness has been massive.  Prior to the AA sale, Airbus had sold 640 planes of all types through the end of June while Boeing had sold a mere 138 planes through the 14th of July.  In the last half dozen or so years, Airbus and Boeing have had more or less similar levels of plane orders each year (in total for the last five years, Boeing has claimed 3791 net new orders and Airbus has claimed 3753 net new orders) and Boeing’s worst year in the last decade – 2004 – saw only a 170 plane difference between Boeing and Airbus’ order totals (see my annual Boeing and Airbus sales and delivery statistics for more on this).

To be 500 planes apart, halfway through the year, is an extraordinary indictment on Boeing.

Here’s a good round up of analysis and commentary about the order and its implications to Boeing.

I wrote last week that perhaps we were reaching the limit of how much we would pay for airfares, and that further increases might see a corresponding drop in travel demand.

Apparently United/Continental disagrees (although I was merely wondering, not stating this as a certainty) because on Friday morning last week they initiated a new airfare increase of between $4 – $10 per roundtrip, making it the 13th attempted airfare increase of 2011.

After the usual sheep-like process where all the airlines watch all the other airlines to see if they’ll match a fare increase or not, it failed and by Tuesday things were back to normal.

Perhaps American Airlines now needs some extra money to pay for its tens of billions of dollars worth of new planes it will be buying, because on Wednesday it commenced a new airfare increase, this time not of $4 – $10, but instead of $10 – $20 per roundtrip.

AA must think the problem with the previous increase which failed to be accepted was that it was too small rather than too big.  We’re still waiting to see if the new airfare increase will stick or not.  With Delta, UA/CO and Alaska Airlines all having matched so far, it is looking like it might become accepted.

But in the crazy world of airlines and airfares, at the same time that airlines are trying desperately to increase their base fares, they are also initiating more airfare sales (typically for Tuesday and Wednesday departures in the fall time frame).

Is it time to again wish for a more even set of airfares, rather than some that are too high for normal people to afford and others which are too low for the airlines to break even selling?

Reader Cary has some insight into how airlines are making money, even when their ability to charge high fares is being curtailed.  He writes

Here’s how the airlines balance the budget.  I had award tickets on Air Canada from LAX to Montreal in business class courtesy of United.  Had to return yesterday, a day early, due to a family emergency.

Despite many open seats, United could not get Air Canada to open any award seats for exchange; thus I spent C$1700 for a one way seat from Montreal to LAX.  I think I bought the fuel for the whole flight myself!

Air Canada at the airport would not budge on opening any of the empty seats for trade (but were happy to sell me one at an exorbitant price).

Okay, so we know airfares are high, and we know the airlines would love to make them higher.  But when your credit card is charged for a flight, do you really know how much of it goes to the airline and how much to a panoply of assorted taxes?  Here’s an example (somewhat a ‘worst case’ but accurate nonetheless) showing how a $300 roundtrip with four flight segments has a staggering $65.30 in taxes (not $63.50 as the article dyslexically says) – a 21.8% extra cost over and above the airfare itself.

Where does the money go?  Well, start off with a 7.5% federal tax on the $300 ($22.50), then add federal flight segment taxes of $14.80 and federal security charges of $10 and that is $47.30 to the federal government.  Now add Passenger Facility Charges for flying through the various airports ($18) and there you are with $65.30 in total, most going to the federal government and $18 being shared among the three airports you fly through.

This is only the visible tip of the iceberg.  The airlines pay fees, directly and indirectly, to the federal government (they also have to contribute towards security costs, and of course, every gallon of jetfuel has plenty of tax in its price) as well as landing fees and facilities rental costs at the airports they fly through.

Let’s not forget that we have to pay airport parking, which not only has us paying more money to the airport but also taxes on the parking fee too.  If we buy something at the airport, part of the cost of what we purchased goes to the airport.  And so on and so on.

Would it be a cheap shot to conclude with the sad observation that even with this massive tax take, our government still refuses to fund the Next Generation of Air Traffic Control which we so desperately need, both for safety and operational efficiency reasons (let alone balance any other part of its budget or protect our social security contributions…..).

Imagine if you live in a fast growing city and the city refused to build new roads, refused to add lanes to existing roads, and refused to spend money on adding stop lights at busy intersections – what a nightmarish mess that would be.  What you’ve just thought about is more or less what is happening in our dangerously over-congested skies.

Actually, it may be even worse.  In a bit of political infighting that revolves around FAA employees wishing to unionize and politicians trying to eliminate some of the pork-barrel ‘essential air service’ subsidies, there is a danger that the FAA may experience a partial shutdown on Friday.  While this is probably an empty threat, as I write this we are less than 24 hours from it coming to pass.

Details here.

The 7.5% ticket tax is thought to be one of the reasons why airlines are keen to add as many fees as possible, rather than to simply increase their fare and include services ‘for free’.

Currently airlines don’t pay the 7.5% tax on fees, only on the base ticket price.  With almost $6 billion in fee revenue from baggage charges and ticketing fees alone flooding in to the airlines last year, and probably more this year, that represents $450 million that is not being paid in taxes to the government.  When one guesses at all the extra money also being charged for food, drink, priority check-in, better seating, movie rentals, Wi-Fi access, pillows, and who knows what else, the total revenue is probably way higher, as is the tax avoided.

The DoT has asked airlines for more information on the fees they collect from passengers.  Airlines already report data from baggage fees and reservation changes, and the DoT is asking for information on 16 more categories of fees.  This will be used by the IRS to help decide if the airlines are using fee income to hold down their taxable revenue.

Talking about the Department of Transportation, its new airline traveler protection regulations are proving very contentious, not just with the airlines but with some travel agents too (the American Society of Travel Agents – ASTA – saying that requirements to disclose airline baggage fees to passengers would be unduly onerous, although the other travel agent organization, the Association of Retail Travel Agents, ARTA, disputes that claim and says it isn’t difficult to do at all – my money being on ARTA’s side of this argument).

Some airlines have lodged court challenges to the new regulations, and so the DoT has delayed the implementation of some of the more contentious ones until 24 January.  It is a shame that rather than accept new consumer-fair procedures, the airlines have chosen the low road and seek to get a court to remove their obligation to introduce some reasonable measures of fairness into how they treat us.

Details here.

Second quarter results are in for many airlines.  Notwithstanding sky-high jet fuel costs, the results seem to be better than earlier predicted.  United reported a net profile before special items of $557 million.  Passenger revenue was up 10.1% compared to the same time last year, while fuel costs were up 45.2% ($1.1 billion more).

US Airways had a $106 million net profit.  Alaska Airlines had an $89.6 million profit before special items (trading losses on fuel hedging).

Delta has yet to report its profit but says it expects to be soundly profitable with a prediction of about $400 million profit.  Southwest also has yet to report but analysts are projecting about a $166 million profit.

But what about American Airlines?  Not such a good result.  A $286 million loss.  Ooops.  I guess it needs those shiny news planes urgently quickly – and, more to the point, the massive fuel savings they promise compared to some of their old clunkers currently burning up jet fuel at almost twice the rate the new planes are promised to do.

One seldom feels sorry for the airlines, but here’s a story that almost pushes me over the edge.  A federal appeals court has ruled that the administrators of UA/CO’s pilot pension plan must accept all pilot divorces at face value.  It had been suggested that some pilots were getting divorced on paper only so that their (ex-?) wives could cash out a large part of their pension plan value.

The case involved nine pilots and their spouses who got divorced in states where divorce laws assigned all or nearly all of the retirement plan to the ex-spouse, and the airline had to pay out some $11 million in pension funds that the pilots had assigned to their spouses.

The court ruled the airline couldn’t investigate to see if the divorced couples continued living together as man and wife, and/or if they subsequently remarried.

Sometimes justice truly is blind, isn’t it.

Here’s an amazing item :  Although in this country, airlines rate about as low as it can get on the trust and respect barometer, an annual New Zealand study of corporate reputation has placed Air New Zealand at the top as being the most respected and admired organization in the country.

Further evidence of how different things are in New Zealand has their version of the USPS (New Zealand Post) coming second, and a bank in fourth position (third position goes to a manufacturer of white goods such as washing machines, dishwashers, etc – some of which are even now being exported to the US).

Well done, Air New Zealand.

Here’s an interesting list of the top ten countries with the fastest trains – although some of them are experimental rather than fully operational in a commercial setting.  The country with the tenth fastest trains is Russia, followed by (with successively faster trains) Taiwan, South Korea, UK (the Eurostar trains), and Italy at number six.

Fifth in position is Spain, which has the most extensive high speed rail network in Europe, totaling 3,433 miles of track.  With six high-speed train lines and several more under construction, the Spanish government aims to have 90% of its population within 30 miles of a high-speed station by 2020.

 Germany is at number four, followed by China, and France, with Japan at the number one position, having a 361 mph experimental train.  To put these speeds in context, this is almost exactly twice the top speed of the Russian train down at tenth place.

These trains are not only faster than anything Amtrak could dream up (and our government would choose to pay for), they are much larger too.  The various different trains hold up to 989 passengers on each train.

The traditional excuse given for why the US has no decent passenger rail service is because the country is too spread out and ‘too big’ for trains.  So it is interesting to see that the world’s largest country – Russia – is also one of the world’s top high speed rail innovators.

The US is the third largest country in the world; Canada is very slightly larger, and China is very slightly smaller (Russia is almost twice the size).

If Russia hints at the ability of high speed train travel to compete in a large country, how about China, a country of similar size?  China has the world’s largest high-speed rail network with over 6,000 route miles of track already in service.  It also has the world’s longest high-speed rail route – the 820 miles between Shanghai and Beijing, an engineering feat that required, amongst other things, 60 million cubic meters of concrete – twice the amount in the Three Gorges Dam.

The service between Shanghai and Beijing opened just three weeks ago, on 30 June.  Trains reached 302 mph on earlier test runs, but have a rated speed of 210 mph and a scheduled nonstop journey time between the two cities of four hours.

Four hours is the ‘magic’ target that planners aim for.  It is the generally accepted point where, for journeys of up to that time, trains are faster than planes, and for journeys longer than that, planes become faster than trains.  In actuality, with the time it takes to get from downtown Beijing or Shangai to the airport, a two hour checkin, almost a two hour flight, then baggage collection and heading in to the other city, it is more like a six hour journey by plane, giving the train a decided time advantage – as well as a huge comfort advantage.

To be fair, there have been some teething troubles on the new line, and the trains have been slowed down to a 186 mph (300 km/hr) max speed until some issues are resolved, but even at that speed, travel times are comparable and when the trains get back up to full rated speed, it will be a slam-dunk choice to travel by train not plane between these two cities, which have between them a population of perhaps 40 million people.

China is not standing still, either.  In less than four years – ie, by the end of 2015 – it plans to have grown its high speed rail network a further 22,000 miles, to a total of 28,000 miles.  That is an addition of almost 20 extra miles of track every day.

Other countries are also embracing high speed rail, but are not yet on the ‘top ten’ list.  Even Iraq is planning to add a high speed line between Baghdad and Basra (probably slightly more than 300 miles).

China is the world’s fourth largest country.  The next biggest country – Brazil – also has high speed rail ambitions, although a bidding process to get construction started failed to get any bidders this week.  The country continues to hope to have a 320 mile line between Rio and Sao Paulo open in time for the 2014 Soccer World Cup.

Here’s an interesting list of countries with high speed rail projects.

If China, Spain, Brazil and even Iraq can build high speed rail systems, what is our problem here in the US and Canada?

More cruise line nickel and diming.  Norwegian Cruise Line is instituting a $3.95 fee for room service orders between midnight and 5am.  In a manner reminiscent to hotels and their faux claims to wishing to save the environment by not changing our towels, NCL says this will reduce the amount of food that is wasted when people order food but don’t eat it all.

NCL already charges $5 to deliver a pizza to your room.

Royal Caribbean is raising the fees in its ‘premium’ restaurants.  You now will pay a $30 per person supplement for their Chops Grille restaurants, and their Rita’s Cantina (formerly an ‘all you can eat’ for $7.95 restaurant) and Seafood Shacks (formerly offering soup, entree and dessert for $8.95) charge you a la carte for all the food you order, plus a $3 service fee too.  Oh – a 15% gratuity is not included.

These are annoying moves away from the one-time distinctive feature of cruiselines – a totally all-inclusive vacation.  Okay, so alcohol wasn’t included (and these days it can be close to impossible to even bring your own bottles of spirits on board with you – the ‘security’ screening of your luggage is remarkably adept at finding them!), and then of course, you pay over the odds for shore excursions, plus ridiculous fees to go on a tour of the ship, and then there are the annoying ship’s photographers trying to sell you photos at every turn, but at least the food was all included.

(As a side note, I remember when alcohol on the QE2 was appreciably cheaper than what one would pay for the same drinks ashore, and bottles of good vintage champagne in their finest Queen’s Grill restaurant were priced about the same as I’d pay for them at a local supermarket here.  Those days, too, are now little more than a fond memory.)

Little by little, food too is now being charged as extras.  First there were nominal extra sums for special restaurants, but $30 is no longer a nominal extra sum.  Yes, I know you can pay a great deal more than that for a steak ashore, but that isn’t the point – you’re on a cruise where excellent food is supposed to be included for free.  Show me the cruise brochure which says ‘includes canteen quality food, decent food costs more’.

Besides which, you can surely not consider Rita’s Cantina or a Seafood Shack as a ‘special’ restaurant at all, and while it is true that the prices for their food are modest and less than you’d pay ashore, the fact remains that it is getting harder and harder to enjoy the traditional cruise concept where you eat way too much from a choice of food outlets, and all ‘for free’ (as in ‘included in the base price’).

My sense is that one of the reasons for the extraordinary growth and success of cruising over the last ten – twenty years is due to it being a remarkably good value vacation experience, and with not too many annoying ‘extras’ running up your shipboard bill.

Are the cruise lines going to outsmart themselves by transitioning to this nickel and dime approach?  Will they destroy their core appeal to their core cruisers?

From time to time I’ve been in a hotel room and to my annoyance, late at night, I’ve heard someone snoring in an adjacent hotel room.  But my annoyance has never been at the snorer – I’ve been known to ‘saw a few logs’ myself.  My annoyance has been at the paper thin walls that allow the sounds to travel from one room to the next.

Now you might think the obvious solution to this is for hotels to build better walls between rooms.  Because it isn’t only snoring late at night that disturbs us.  The sound I dread the most is the television set, in a situation where the person watching it has clearly fallen asleep, leaving the tv playing way too loud, all night long.  One doesn’t have to think too hard to come up with all sorts of other sounds that are sometimes clearly passed through the walls of adjacent hotel rooms (and their associated bathrooms too).

But, as reported in this article, the Holiday Inn Crowne Plaza chain in the UK has a different solution to the problem caused by it spending too little on decent sound insulation between rooms.  It has ‘Snore Monitors’ roaming the corridors late at night, listening intently for any sounds of people snoring.  If such sounds should be detected, they will knock on the door and ask the person to sleep more quietly (a strategy that seldom works as surely everyone already knows).

I wonder what they will do if hearing other types of more amorous noises emerging from rooms late at night?

Lastly this week, why is it I think that English is not the native language of the person who wrote the description of this hotel?

Until next week, please enjoy safe travels

David.