AirportBusiness Blogs

… in Denver, uncertainty is in the air but the mood is upbeat. If there’s one message that rings through loud and clear it is that the current airline operating model is broken. Some thoughts from a day of sessions that had a heavy focus on Wall Street, airline mergers, and airline/airport agreements …

When it comes to the airlines, capacity is the issue. Consolidation is one way the airlines will address this problem. One Wall Street analyst suggests it’s the only way the airlines will ever get a handle on charging prices that turn a profit.

The airline industry, like many, is cyclical. In decades past, the airlines reaped great profits in the ‘up times’ to offset the coming losses in the downturns. After the airlines recovered from 9/11 and high demand returned, the carriers failed to realize the boom in profits of past cycles. That put them in a precarious position for this downturn. The good news is: In past up cycles they ordered airplanes – not this time. That, says one analyst, should put them in a good position for profitability when the industry rebounds. Of course, we’re not exactly sure who those airlines will be in the next ‘up’ cycle.

Expect more mergers.

The legacy carriers are working feverishly to get out of the regional jet business because of the fuel inefficiency of the aircraft. Regional aircraft were the rage of the ‘90s because for smaller communities served traditionally by turboprops they were a perception issue. People like the idea of flying jets. The impact of this trend is that alliances between legacies and regional carriers are changing or being eliminated, and small communities could be in for a shock when it comes to air service.

The problem with old airliners is that they don’t go away. It’s what has allowed various upstart carriers since deregulation in 1978 to get a leg up on the legacy carriers by buying older airplanes and entering the marketplace. That start-up model pro forma is probably gone forever with the high price of fuel.

Last Friday’s move by the U.S. Senate to finally get the aviation reauthorization bill moving through Congress is good news, especially for the Airport Improvement Program, but issues remain. For airports, at the top of the list is whether or not the cap (currently $4.50) on the passenger facility charge (PFC) will be increased. Airports argue that the current rate, at the least, hasn’t kept up with inflation.

Thanks for reading. jfi

The Greater Northern Alabama Lying Pilots Hangar Flying & Coffee Drinking Society (GNALPHF&CDS) met on Wednesday, Thursday, and Friday, April 23, 24, and 25, 2008 at Mullins Restaurant in Huntsville, Alabama.

A little background is in order…

Jack Montgomery and I formed the society in 1986. Jack and I shared an office in Huntsville, and we started meeting for breakfast. Jack was a genuine retired rocket scientist and experienced pilot; I was a recovering aircraft salesman and brand-new professional public speaker and writer. Soon thereafter, Bill Broadway, high-time pilot and owner of a genuine high-tech aerial photography business,joined us. We were off and running.

Over the years the group waxed and waned, with a crowd on some days, just two of us on others. We shared information, knowledge, experience, rumors, and outright lies. Then Jack retired to Florida. Later, in late 2006, wife Gail and I moved to east Tennessee to be closer to Gail’s aging parents. That was a setback for the society—I’d like to believe it was because I was the leader of the pack, but actually it was because the society was more important to me than to the others.

This past week I had a speech in Huntsville, so the society met three days running. It was sorta like a reunion. On one day or another participants included FedEx pilot and LSA distributor Don Langford; USAir pilot Bob Hall; the good doctor Clyde (who has owned Bonzana, Baron, Mooney, Cessna, and Diamond aircraft); Matt Rainey, the guvmint employee who just helped put together the purchase of several hundred military helicopters; Bill Broadway and I; and a good time was had by all.

We also argued, discussed, and griped about the state of the aviation industry; rejoiced in the unbelievable current safety record of the airline industry; and worried about the likelihood of its continuance. We solved most of the problems, then opined, laughed, and lamented a myriad of brand-new problems.

All in all, it was business as usual.

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… or at least becoming a very difficult economic environment. This week’s U.S. airline financial news for the first quarter is all bad – JetBlue loses $8 million; United $537 million; Delta $6.39 billion; Northwest $4.1 billion; AirTran $34.8 million. It’s reported that United’s stock dropped 37 percent this week. Much of the financial pressure, of course, comes from the high price of fuel.

Delta alone says its first-quarter loss was driven by a $585 million year-over-year increase in the cost of fuel. Yet, according to the U.S. DOT’s Bureau of Transportation Statistics (BTS), the average air fares in the fourth quarter of 2007 were up 4 percent from the fourth quarter of 2006. It would seem that the carriers need to get a clearer handle on covering their costs. AirTran executive Robert Fornaro, in the Atlanta Journal-Constitution, comments, “This is creating a situation where all carriers must react." He predicts that many airlines will have to make steeper capacity cuts if fuel prices stay at current levels.

For airports and air service development managers, the world has turned upside down. For most, the focus has turned from attracting new service to just hanging on to the service that’s in place.

Meanwhile, Congress is threatening to get back into the airline regulation business. Congressional Quarterly Today reports that during a House Transportation and Infrastructure hearing on airline delays and consumer complaints, chairman James L. Oberstar (D-MN) says the industry is on a short leash. CQ quotes Oberstar: "I can’t pass through the House floor without each week one, two, or three [members] from both sides of the aisle saying, ‘When are we going to reregulate the airlines and fix these problems?’"

The DOT Inspector General is also getting in on the act, relating that an analysis shows that there are times when the carriers schedule twice the amount of flights out of an airport than the facility can handle. DOT Inspector General Calvin L. Scovel III says airlines and airports have more to do. He says an analysis of 15 airports found three major reasons for delays: airspace bottlenecks in New York that affect the entire system; chronic airline over-scheduling; and controllers in New York allowing too much space between planes on landing. Scovel says that out of 20 airports examined, only three keep track of planes that are experiencing long on-board delays. He thinks all airports should track delays at their facilities.

The airline model obviously needs rethinking. It’s highly doubtful, however, that the answer will come out of Washington, D.C.

Thanks for reading. jfi

Last week I finally wrote about something that really did happen. Amazing. Usually if I write about anything that’s as good as a death knell. But not this time.

This week Delta and Northwest announced that they really will merge.

They will, that is, if they get through the maze of bureaucratic red tape set up by the guvmint, which has to decide things like will this merger reduce competition? Delta has, it is said, arrived at a working arrangement with their pilots, but that leaves the NWA pilots somewhat disgruntled. That has to be settled.

In the meantime, some financial guru has announced—yet again—that the airline industry cannot work as a business. Said they can’t make money unless the guvmint takes it over—then, I suppose it would run as smoothly and as profitably as AMTRAK—or the guvmint leaves it in private ownership, then just regulates the daylights out of it.

This argument has reared its ugly head for decades. In fact, for decades the guvmint really did try to regulate the business end of the industry. They were involved in routes and prices. Everything ran smoothly, but prices were so high—as one flight attendant of the era told me—that nobody flew except businesspeople and people going to funerals.

Warren Buffet himself—the sage of Omaha and one of the very richest people in the world—sold his airline stock a few years ago, saying that there is no way to anticipate the industry.

Others wonder why the industry can’t reliably and dependably make a profit. For example, why can’t they raise fares in the face of horrendous fuel prices?

I will ride NWA roundtrip from North Carolina to Indianapolis this week, so will come back an expert just as everybody else is.

In the meantime, I hope everybody will remember how well the guvmint has run everything else over which it has had control. Things like Social Security, Medicare, and, for that matter, Congress itself. Pitiful!

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… the topic turned to air service development. In today’s airline environment, it is not a pretty subject – or line of work. The most recent example of how not to start an airline, Skybus, replaces Independence Air as the carrier on the poster. Both were quite popular with consumers (and air service development managers) but had the flaw of not being able to make a profit. ATA and Aloha, at least, had history and some experience with profitability.

At Austin, Ron McNeill, a senior consultant for Mead & Hunt, told the audience that more and more, airlines are looking for shorter haul markets to stand on their own, rather than letting “system revenue” subsidize stage-length revenue. He echoes what many are saying – that it is the smaller communities that have the potential for being hit hard by airline bankruptcies and mergers.

All is not lost, however. More and more, says McNeill, communities are getting aggressive in putting together support packages to attract new air service. One challenge: Smaller regional jets are leaving the market and the new Q-400 turboprop seats 76, a passenger count that is too large for some communities to sustain. One answer, he says, is to get communities together to promote a region. Besides a broader demographic, a regional strategy brings the potential to tap more financial resources such as economic development agencies. “You have to be on the airline’s radar,” says McNeill, “and sometimes money can do that.” Before a community or region gets to that point, he advises that those making the pitch know well their market.

He concludes: “The Small Community Air Service Development Program and the Essential Air Service programs cannot solve all small community issues.”

Thanks for reading. jfi

The bidness news is full of rumors, reports and SWAGs about the possibility of a Delta/NWA merger announcement as early as next week. The Wall Street Journal is in on the reports, so I’m paying attention.

You might remember that this was talked of big time in past months, but the two airlines backed off until their respective pilots could work out an acceptable plan to merge pilot-seniority lists. That hasn’t changed—the pilots still can’t get together.

However, Delta, as I understand it, says the merger might be necessary anyway. Jet fuel is as high as a young fellow after his first six beers, and some say it is a situation of merger or perish. Bankruptcy does seem to be—as AIRPORT BUSINESS editor John Infanger tells it—the fashionable thing to do in the airline industry right now.

Trying to get a nonbiased version of the story is harder than cracking Brazil nuts with a damp sponge. It’d be easier to find out which of the neighborhood kids really broke your window. In fact, the kids would do a more dignified way of stating their case.

Pilots point out that merging the seniority lists this way or that can change their lives forever. I have a friend who has flown for USAir for 21 years. He is not now a captain and never will be. He says this is because of the merger of USAir and America West. He can explain it so I can understand it, but not well enough for me to explain it to anyone else.

On the other hand, many say that pilots are holding up the entire merger which, they say, is absolutely necessary to avoid bankruptcy. Pilots come back saying that’s not really true, it’s just management’s way of abusing pilots.

It goes on and on. Who is right? I’m not at all sure, but I bet I’m fixin’ to hear from both sides of the argument after this posting.

WAIT: HOLD THE PRESSES–UH, I MEAN THE COMPUTER. JUST MINUTES AGO IT WAS ANNOUNCED THAT DELTA HAS CUT A DEAL WITH ITS PILOTS. GO HERE.

Now, if NWA can do the same with their pilots, there might really be a merger.

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Following are headlines from page one in Tennessee’s Johnson City Press yesterday…

FINANCIAL FIX IN WORKS

Fed plan would overhaul regulatory system

Heaven help us!

Now let me state up front that this plan is not law, and may never be. In fact, the plan worried me so much that I called a top-drawer Clemson University economist with my fears. He said perhaps the best part of this whole plan is that most of it will never be passed. Treasury secretary Henry Paulson has a plan, it is true, but that doesn’t mean we’re stuck with the whole thing.

One wonders if this is just another of those election-year plans that pop up every four years as needed. Some of them are proposed, argued over until November, then quietly skulk off into the sunset after the election.

The scariest part of this plan is that it would put the guvmint “in charge of financial market stability.” Holy cow!

The guvmint is in charge of Social Security and Medicare already. Why would we put them in charge of anything else, much less “financial stability?” The guvmint dabbles in the medical market now in a jillion ways. Did you know the guvmint influences the number of doctors who enter the marketplace? Also, did you know that the guvmint limits the building of new hospitals—and even major equipment purchases by existing hospitals? You can’t just go build a hospital because you think it might be a good business. You have to get a guvmint permit, and that is not a rubber-stamp permit. Many are turned down, not for quality reasons, but because the guvmint decides the community does not need another hospital.

Holy cow again. In any other field it is realized that decreasing supply raises price (if you don’t believe it, ask OPEC) and that more competition lowers prices. The guvmint, however, will very politely explain why this is not true in the medical field.

Look around and you can find many examples of how the guvmint interferes in the marketplace in order to provide “financial stability.” As a nation our citizens still pay twice the world price for sugar because the guvmint decided we should. This was back in WWII, but the law still exists and is enforced. Didja ever wonder why most of our major candy manufacturers moved out of the country?

Please save us from any more guvmint protection.

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… and now they’re bringing in FedEx to help sort out the crisis. That’s the word from the new $8.6 billion Terminal 5 at London’s Heathrow, which opened amid great fanfare (including the Queen) which has been nothing short of a nightmare since. Interestingly, the PR folks handling the T-5 opening have been hawking the media for coverage for several months. Haven’t heard a word from them since the opening.

It’s also interesting that a search of press releases of BAA, the airport operator of Heathrow, reveals nothing about the debacle. Not a mention. British Airways, the airline which is attempting to operate out of T-5, has “We’re Sorry” pasted on its home page. That’s a start.

According to British Airways, “We are operating the vast majority of flights to and from Heathrow Terminal 5. We continue to work towards increasing the number of flights we operate in the days ahead and plan to fly 92 per cent of our flying programme to and from Terminal 5 by Thursday 3 April.” It’s reported that thousands of bags are being shipped to Milan for sorting.

According to www.airport-technology.com, the T-5 baggage system is the largest in Europe for a single terminal, which it says was designed by an integrated team from BAA, BA, and Vanderlande Industries of the Netherlands. It is intended to process 70,000 bags a day.

Opening a new airport or terminal is of course a significant undertaking. There’s a book in there somewhere. It took the new Denver International nearly an additional year and a half to open in the mid-90s, again due to a high-tech baggage system that never did work and is now being dismantled. At Austin-Bergstrom International, officials first opened the airport to cargo operations to get the airfield bugs out before opening it to passenger service – probably a good idea. Yet, they did the same thing at the new Hong Kong airport and it still had issues upon fully opening.

There are lessons to be learned from the T-5 experience. We just have to find out what they are first.

Thanks for reading. jfi