What Delta and Northwest Need to Change in Order to Thrive

Recently, Delta and Northwest got back to merger negotiations, after having broken off talks due to difficulties concerning the combination of seniority lists if a merger were to take place. The Wall Street Journal reported today that a deal could be announced within a couple days. With airlines suffering from record fuel costs, as well as ongoing maintenance issues, a merger is appearing more attractive to airline executives. Unfortunately, the savings they desire may be elusive. The easiest way to combine carriers would be a holding company combination, where management activities, as well as some airport operations, would be combined, but pilots and flight attendants would operate under separate contracts and probably on separate fleets, at least in the near term. A combination is fine because it allows Delta and Northwest to resolve the two issues that are most important, controlling and adjusting capacity to the realities of $100 a barrel oil, as well as improving the company's customer service.

One of the reasons many managers were looking to merge legacy carriers was in order to consolidate domestic capacity. But a merger wouldn't necessarily allow Delta and Northwest to consolidate a significant amount of capacity in terms of seats. Both Delta and Northwest are in the process of removing capacity from their fleets and there isn't a tremendous amount of overlap on their domestic routes. Internationally, both carriers are expanding, and capacity would increase. However, a combination would allow the carriers to better manage their existing capacity, consolidate some flights, as well as reevaluate service to small markets, that with $100+ oil, may not be profitable. With a combination and a restructuring of the combined carrier's route network, the company could have the opportunity to rearrange its agreements with regional jet contractors, such as Mesa or SkyWest, in order to help the companies reduce costs and capacity to unprofitable markets. Even though the number of seats reduced in the carrier's overall system would be small by the trimming of some regional routes, it could save the carrier a great deal of money.

As the US Airways/America West merger has demonstrated, forcing two sides to a labor agreement that neither particularly likes is a bad recipe for employee morale and customer service. The pilots have still not satisfactorily resolved their longstanding disagreements over seniority agreements. Therefore, instead of a complete merger, a combination of the operations side of the business while keeping Delta and Northwest as essentially separate carriers under one parent company might be a preferable arrangement. Unfortunately, this wouldn't lead to as many cost savings as managers would desire, since larger labor groups, such as pilots, would be covered under separate contracts. But what is critical in this deal, even more than cost savings, is that management cannot force the pilots unions to accept an agreement that one side sees as unfair. Airlines will have to deal with large groups of employees for the indefinite future, and they need to do their best to keep them happy. What legacy carriers especially cannot forget is that with the flying experience becoming increasingly unbearable for travelers in the US, airlines need to ensure that their employees deliver top-notch service. And one of the best ways they can do that is by making them feel valued and treating them with the respect they deserve. This is partly why Southwest is known for its service. Even though the company has more leeway than other carriers in its hiring, because it can select from a broader range of candidates, the airline successfully retains and motivates their employees by keeping them in a work environment that lets their voices be heard. If Delta and Northwest cannot improve their customer service, they will seriously threaten their future viability as businesses.

A carrier modeled under the Air France/KLM combo where the carriers operate separately under a holding company that controls scheduling and pricing for both carriers, would allow Delta and Northwest to adjust their route network to make it more efficient as well as adjust pricing to make the carrier more profitable. Unfortunately, restructuring flights will not do enough for the combined carrier. What airlines in the United States are suffering from is a media deluge of negative publicity. Customers are growing more antagonistic towards the airlines. The recent airline quality survey that came out last week was a typical example of this. Nationwide coverage of increased delays, increased rates of lost bags, and so forth, didn't do much to help the airlines. And Congress has caught onto the act, with front-page hearings criticizing airline executives about safety. To put it bluntly, consumers in this country hate airlines. And with rising prices, customers are getting increasingly irritated with putting up with substandard service that they feel they don't deserve given the exorbitant cost of their ticket.

As a result, the merged carrier needs to re-brand itself, with the Delta name, as a carrier that genuinely cares about service. What we don't know in this market with rising prices is whether there will be sustained demand for leisure travel. Business travel (specifically unmanaged business travel), while perhaps decreasing slightly in demand, is going to be a more important target market for the carrier in the coming years. Moreover, Delta has a very strong presence in large business markets, including Boston, New York, and Washington DC, and by making sure that it offers industry-leading service, comparable with carriers abroad, will help the carrier maintain yields and market share in this turbulent market. Business travelers will otherwise look to LCCs such as Southwest and JetBlue, which are pulling out all the stops by offering business travelers more amenities, better service, higher punctuality, and lower fares. With air travel becoming increasingly burdensome for business travelers, airlines that make the experience as pleasant as possible will be those that will see growth in market share and profits.

This company, if it is positioning itself for a future of more competition, especially from overseas, as well as from LCCs on key domestic routes, and a future of high oil prices, needs to discipline itself on capacity and service. The carrier will likely get Delta and Northwest's route networks integrated into a larger whole, and the company will find way to combine operational redundancies to reduce some costs. But, this carrier will not make money if it has too much excess capacity in the market, as well as too little capacity in growing markets. Moreover, it will not make money if it has poor service, because as has been shown in Europe and Asia, customers, and especially business travelers, are willing to pay more for good service if airlines actually deliver it. Now to get good service, management needs to, for lack of a better term, "be nice" to its employees, especially its pilots and flight attendants. That means these labor issues need to get resolved, or at least get to a point where they won't boil over after a combination. If the combined company can focus on these two areas, capacity and service, not only will it be the largest carrier in the world, it will be one of the best positioned for an uncertain future.

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Potential 2008 Merger: United and Continental

If a Delta/Northwest deal goes through, which is looking increasingly likely, then United and Continental may be poised to join forces to create a formidable competitor. The combined carrier would be the combination of two carriers that have been very successful at maintaining relatively high service standards (for US carriers), even during the service downturn that customers have seen in the past several years, and as a result, each has maintained a solid base of business travelers.

What a combination would do is give this carrier dominance in certain international regions particularly in the Pacific Rim and the Middle East. As an increasing amount of business traffic is being directed to these two regions, the combined carrier would have a distinct competitive advantage over even a combined Delta/Northwest in providing high-quality, frequent service to these, and other, parts of the world.

A merger would likely do little to greatly realign the route networks of either Continental or United, with one notable exception. United has five very large hubs, all generating a significant amount of a high-yield origin and destination traffic and all a sufficient distance away from any of Continental's, that none of them are likely to see any major service reductions. But, Continental's Cleveland hub could see a gradual draw down in service, with the elimination of much of its regional service (or a reshuffling of that regional service to Chicago or Washington). Cleveland for Continental is similar to Cincinnati for Delta. Both are hubs that generate a fair amount of origin and destination traffic, and this traffic generates solid yields. But, the sizes of the hubs are dwarfed by others in the respective carrier's route network, and it's simply inefficient to maintain them should Continental and/or Delta merge.

In addition to some flight reductions at Cleveland, some eventual realignments and shifts in international service could occur. For instance, some international flights could get moved from Washington Dulles to Continental's Newark hub or vice versa depending on traffic patterns to facilitate easier connections from West Coast flights to lucrative international flights. It's also possible that some services to the Pacific could be realigned. For instance, Continental has a small hub in Guam, allowing the carrier to serve Micronesia. But, that hub can only be accessed from Honolulu in the US, whereas a much more convenient connection location for customers might be San Francisco or Los Angeles, because there are much more frequent and convenient connection opportunities for customers.   

Moreover, the merger would offer significant benefits in terms of fleet simplification. United has one of the most diverse fleets of any major US carrier, but since its mainline fleet is mostly Boeing planes, while Continental's mainline fleet is all-Boeing, then the combined carrier will yield some significant synergies with maintenance and training costs due to fleet combination.

If the fleets were combined, United may try to reduce the number of older 737 variants in its fleet, but because Continental also has many of these types, they may have to be kept for longer than either airline would like since it would be difficult to eliminate them outright. One of Continental's largest problems in recent years concerning its fleet has been its lack of 777 aircraft to service very long international flights. As a result, Continental has had to delegate its 777s to just a few select routes. United has dozens of 777 long-haul planes, and these could be added to some long-haul routes currently operated on Continental 767s (typically older, smaller planes) to add capacity and lower ASM costs.

Concerning alliances, the biggest thing that could stop this merger is the "golden share" which Northwest holds over Continental that essentially gives Northwest the right to veto any mergers Continental might conduct. But, if Delta and Northwest merge, Continental could purchase its golden share back from Northwest for $100, enabling the carrier to merge as it wishes. However, it's very likely that Continental will have to drop its codesharing agreement with Delta and Northwest if it merges with United, and assuming that United makes the acquisition, Continental will likely become a member of Star Alliance, leaving Delta and Northwest as the remaining two US carriers that are a part of SkyTeam.

Since it appears United will make the acquisition, I suspect the Continental brand could eventually be dropped, and all operations integrated into United. But like with the US Airways/America West merger, the transition period will take awhile, and so customers and employees need to be prepared. United has a team of experienced managers who aren't as ruthless as those who ran US Airways through its transition period, and the cultures at United and Continental are much more similar than at the old US Airways and America West, so there will probably be less resistance from employees to such a deal, provided management treats them fairly. As a result, even though a United/Continental merger is much larger than the US Airways/America West deal, it should be smoother.

This merger could mean good or bad things for business travelers. Both United and Continental have considerable bases of loyal business travelers who will likely continue to fly with the combined carrier. But, as shown a week ago, when United announced a new $25 baggage fee to its non-elite restricted coach flyers (many business travelers, especially those who fly for smaller businesses will travel on restricted coach tickets), one airline is focused on nickel-and-diming passengers while the other is focused on offering inclusive amenities and providing services to its customers. Continental continues to be the only major US carrier to offer free meals, even in coach, on medium-to-long domestic flights, and the company recently announced a new onboard entertainment system to be installed in many of its domestic mainline aircraft. If the two carriers merge, they will need to determine whether to continue down the path many other US carriers are taking, charging customers extra for services that were formerly free, or offering all-inclusive rates. I would argue that the latter option better meets the needs of business travelers, many of whom already pay exorbitant amounts for their tickets, and who make decisions about which carrier to fly based on amenities and service.

Like all legacy carriers, United and Continental are both moving forward with international expansion planes, while curtailing domestic flying. That's a fine, smart thing to do right now at this time when the economy is stuttering. But, if United and Continental become more international carriers and less domestic carriers, then to win over business travelers, they can't simply outdo other US legacy carriers with lousy service standards. They have to compete against foreign carriers, which on the whole, offer superior service and amenities to business travelers than US carriers. As more and more foreign carriers expand in the US, legacies like United and Continental will have a tougher time winning the patronage of business travelers, which is why a renewed emphasis on amenities, loyalty benefits for high-yield travelers, and most of all, customer service, will keep business travelers loyal. Many foreign carriers don't win over customers based on price, they win them over based on the experience, and since US carriers have less low-cost competition in foreign markets, they don't need to worry so much about winning on price but instead on delivering an excellent experience to customers. If a combined United and Continental can do this, then they will become the leading US carrier, and have a significant competitive advantage over American as well as combined Delta/Northwest.

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Possible 2008 Merger: Northwest and US Airways

From a fleet and route perspective, a merger between Northwest and US Airways could be a big winner. But from other perspectives, and more specifically, a labor perspective, it could be a major problem. However, if the merger were successful, it would create a company that would offer forceful competition in key domestic and international markets to a potentially merged Delta/United. For more information on the current merger frenzy that's sweeping the industry, see this post.

One of the largest potential problems that analysts foresaw in the US Airways/America West merger that occurred a couple years ago was that it was the unification of two carriers which had very strong route networks on opposite ends of the country, but there would be no central hub to join the two ends of the barbell, so to speak. Given the fact that the new carrier would not have many larger, more cost-effective aircraft for transporting flyers long distances, it raised the possibility of two-connection travel for many flyers, which, given all the potential problems of delays as well as the extra time it requires, could dissuade many travelers. While this hasn't proved to be as big a problem as I or other industry-watchers suspected, with rising fuel prices, operating transcontinental flights has become rather expensive, especially with A320-size aircraft which have higher available seat mile costs than 757s or 767s. Having a central hub, particularly one that can draw from traffic bases both East and West for international service, will be critical to the success of a national carrier, and that's what Northwest brings to US Airways in a potential merger.

And while the combined carrier would retain probably two central US hubs, if a merger were to occur, Memphis as a hub for Northwest would almost certainly be dumped, though the combined carrier might retain a focus city operation in the city to capitalize on business traffic. However, Northwest's exit from many markets from Memphis could open the door for a low-cost carrier, such as Southwest to enter the market. Or perhaps, if Northwest makes a major withdrawal, Frontier will make another attempt to set up a focus city in Memphis, though the company denies that it is planning any expansions of point-to-point services outside of Denver.

The combined carrier, with six remaining hubs in Philadelphia, Charlotte, Detroit, Minneapolis, Las Vegas, and Phoenix, will likely keep all those cities as hubs. However, to simplify operations, some hubs could focus more on mainline traffic to destinations that can support narrowbody mainline aircraft, while other hubs may focus more on bringing in a variety of connecting traffic, including regional jets and mainline planes (both narrowbody and widebody). By doing this, the airline is still able to maintain strong market positions in all six cities, but it makes the company's operations more efficient by simplifying where regional jets and international aircraft are needed (and thus the related crew scheduling and maintenance functions associated with the different aircraft types).

Phoenix, Detroit, and Charlotte will all likely remain hubs where regional jets, narrowbody aircraft, and widebody aircraft have a large presence. Phoenix is a fast-growing business center, and offering regional jet service from the city helps US Airways draw traffic to its expanding array of international flights from the city. As Phoenix grows, the combined carrier will want to offer increased international service, and so it will need a large supporting base of regional and mainline services to support that service. Given Northwest's massive infrastructure investments in Detroit, with its practically new terminal and assorted facilities, that city will need to remain an all-aircraft hub. Moreover, since Detroit is very close to the Northeast, where US Airways currently has a strong presence with regional aircraft, it can take over some of the regional jet flights that currently make their way into Philly. Charlotte will also need to remain an all-aircraft hub for the combined carrier because of its proximity to the South (no other hub in the network, save for Northwest's Memphis, which will likely get eliminated in a merger, can serve many small Southern cities, and only one other hub operated by any carrier in the South (Delta in Atlanta) has the range of regional jet flights that US Airways at Charlotte offers.

While Las Vegas, Minneapolis, and Philadelphia could lose some of their regional jet flights, and a select few mainline flights, the core of these operations will not be affected. None of these cities will lose all their regional jet service, and I doubt any will receive even a sizable cut in mainline service. Minneapolis and Philadelphia generate high yields for their respective hub operators, and airlines focused on increasing revenue will want to keep these with a considerable amount of service. Las Vegas is an important market for volume and market share reasons. Even though yields are lower to and from Vegas, it can absorb a lot of excess capacity in these carriers' fleets, and even though it's not the most profitable way to use that capacity, it does get utilized and make some money.

The carrier, like all of the consolidated legacy carriers, will need to have a large emphasis on international routes. And it's likely that Northwest gateway cities along the West Coast will maintain their service to Tokyo. Moreover, many large markets also have nonstop Northwest service to Amsterdam, which will also likely be maintained. US Airways, meanwhile, will likely continue with expansion plans from its Phoenix hub, even if it merges with Northwest, and will add additional flights to Latin America and Asia. Even though some hub flights could get realigned, most international flights in the two carriers' networks will not get shifted. There will be some small adjustments, but most of the hubs, even if they lose some of their regional service, will likely maintain many of their international flights because they offer convenience to business travelers.

This also speaks to the question of alliances. Northwest is part of the SkyTeam alliance, while US Airways is part of Star Alliance. It appears that if the two carriers merged, they would probably join SkyTeam. The main reason for this is the very close marketing and codeshare alliance between Northwest and KLM, two large SkyTeam members. Through this partnership, Northwest passengers gain terrific connectivity to destinations across Europe through KLM's Amsterdam hub, allowing customers to reach destinations they couldn't easily reach with other carriers. Northwest and KLM have received antitrust exemptions on certain transatlantic routes through their partnership, and both seem eager to continue the deal, which has resulted in higher yields due to less competition. If Northwest were to discontinue its SkyTeam membership, it could be very difficult for Northwest to continue its KLM alliance, and instead KLM could choose to partner with one of Northwest's competitors, such as Delta or Continental, both of which are also part of SkyTeam. Since Air France, which is under the same corporate umbrella as KLM, is a major Delta partner, a Northwest/US Airways deal could threaten these precious alliances, and force Air France/KLM to choose whether to maintain close relationships with either Delta or Northwest. Even if the combined Northwest/US Airways were to remain a member of SkyTeam, it could lose the close affiliation it has with KLM and only have the looser frequent flyer affiliations that SkyTeam affords. But, those affiliations are still important, and probably better than those offered by Star Alliance.

Another advantageous asset for the combined company are US Airways' slots at LaGuardia and Washington National. Having slots at these airports will allow the combined carrier to offer a greater frequency of flights than other carriers to critical business destinations, and better serve high-yield travelers. With higher fares imminent, especially for business travelers, this will bode very well for the carrier.

Fleetwise, the big focus with all mergers, and this one is no exception, is about removing regional jets (particularly 50-seaters and below) from aircraft fleets, as well as older, less fuel-efficient mainline aircraft. Like I've mentioned before, Northwest's DC-9s will probably see some sort of accelerated retirement in a cost-cutting deal, but given the size of Northwest's DC-9 fleet, that clearly won't happen for at least several years. Regional jet flying, from Mesaba, Mesa, and other contractors could be reduced. On the chopping block are some of Northwest's CRJ-200s, as well as some of the contracted flying done for US Airways. Turboprops will probably be kept in most cases, since they're more fuel efficient, though turboprop (and especially 19-seater flying) could be reduced by some regional partners, who often operate these flights at a higher risk than their regional jet contracted flying. The reductions in this kind of service will likely depend on what sorts of hub route realignments take place.

Northwest may continue to take delivery of its 787 planes, even though it means the combined carrier could have unnecessary redundancies. In the depth's of US Airways' financial hell several years ago, the carrier received a $250 million loan from Airbus, in exchange for the company agreeing to purchase new A330 and A350 (the competitor to Boeing's 787) aircraft. When the combined carrier receives delivery of these planes, they could become a burden because the two fleets overlap and will generate extra costs. However, depending on Airbus's delivery timetable for the A350, this could be seen as an advantage. While many US carriers wait several years to receive their 787s from Boeing (even more so given the recent production delay announced by Boeing yesterday), which has tightened its production capacity to minimize cost, a Northwest/US Airways combined company could be receiving aircraft from two streams, increasing its ability to provide international service quickly at a lower cost and get a jump on the competition. While this advantage may be short-lived, it could be significant, depending on when the company receives these aircraft, when its competitors receive their planes, and what happens to oil prices in the coming years.

The one major area of difficulty that this merger has is what will be done about the labor situations at both carriers. Employees at both Northwest and US Airways have just cause to be angry at their management due to past failings, and unfortunately, a merger will lead to additional job cuts. What cannot be done, however, is treat employees in such a manner that hurts them more than what is inevitable. For instance, after the US Airways/America West merger, many US Air pilots were very upset by the way the two seniority systems at the companies were integrated, partly due to the questionable decision of an arbitrator. It left the pilots angry, and a similar incident cannot happen again if this merger occurs. Management at both companies need to ensure that the two sets of employees reach amicable conclusions.

But more importantly, they need to do a better job of showing that job cuts are necessary and will not be for temporary financial gain. Job cuts need to be justified, and management needs to make sure that they recognize the importance of providing solid customer service as well as supporting the bottom line. When US Airways had a major fiasco a couple years ago with an inability to process bags at Philadelphia due to a staff shortage, the airline quickly added several hundred additional staff. Those kinds of things can't happen, especially when customers are so irate at the service they're receiving and employees are worried about job security. Quick spurts of hiring and firing need to be smoothed out to give greater consistency and predictability to customers and employees.

Fortunately, if this merger is proposed, it will likely encounter far fewer regulatory hurdles than other potential deals. US Airways and Northwest are both smaller carriers than Delta, making the merger more palatable to regulators. A merger would give the combined carrier a market share not much larger than the current largest carrier, American, instead of a potential Delta/Northwest deal which could make the combined carrier substantially larger than any unmerged competitor. If Congress plans to put up hurdles to merger deals, then a Northwest/US Airways deal may be one of the few deals that can be approved. The merger would offer tremendous benefits particularly for US Airways, which is at risk of losing out in the current merger frenzy, since it's the smallest of the legacy carriers, by linking it to a carrier which can cover the service gaps it has in the Midwest, as well as internationally. Meanwhile, Northwest would get a carrier with a lot of capacity in attractive markets, particularly on the East Coast, as well as additional aircraft to help the company grow. While this deal is less talked-about than a potential Delta/Northwest deal, it would probably be a better matchup for both Northwest and US Airways than a Delta/Northwest deal, but whether it will ever get proposed, given the increasingly advanced state of Delta/Northwest merger talks, is up in the air.

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Four Carriers Best Positioned for a New Wave of Growth

In the United States today, there are three carriers which currently don't fit current parameters. By that I mean that current definitions of carrier size and operations don't fit several medium-sized U.S. carriers. Let me explain. Legacy carriers are becoming more reliant on their hub-and-spoke systems, many non-hub routes which were overall less profitable and more difficult to market have been cut, leaving legacies with their core hub networks. Certainly there are exceptions, as focus city operations from Delta in Boston to American in New York have been kept, but overall non-hub flights simply aren't as common as they once were. This means legacies are refocusing and expanding hubs, and trimming flights at certain hubs. Hubs such as Cincinnati for Delta or Memphis for Northwest are based primarily on the presence of regional aircraft vendors such as Comair or Pinnacle respectively. With regional jets becoming increasingly unattractive for airlines, particularly from hubs, these hubs cannot muster the origin and destination traffic (passengers arriving or departing a city) to substantiate the large presence in a market that can't support that. Consequently airlines are downsizing these hubs but increasing flights at profitable, efficient hubs, just look at Delta's expansion from Atlanta or American's expansion from Dallas/Fort Worth.

Meanwhile, smaller low-cost airlines such as Frontier, JetBlue, and Spirit all follow a different model. Spirit and Frontier are primarily hub-and-spoke, Spirit having some point-to-point routes but are primarily funnel travelers through its Fort Lauderdale hub. JetBlue is primarily point-to-point, but does have connections from Upstate New York to Florida and other destinations (including Raleigh-Durham and Charlotte pretty soon if insider speculation holds up). In any case, these airlines operate either hubs or point-to-point, there is less in between, while legacies are refocusing their efforts on hubs. Yet there are airlines out there, AirTran, Alaska, Southwest, and US Airways which operate a number of substantial focus cities in addition to hubs, but have networks which use the best of both worlds.

These carriers should be squeezed the most in the next few years, but at the same time can be catalysts for growth as AirTran and Alaska have yet to expand nationwide, and Southwest still has many markets to expand to. AirTran, for example, has propagated along the East Coast, similar to US Airways before its America West merger, and is only now expanding to major markets on the West Coast such as Seattle/Tacoma. With the exception of the Bahamas, AirTran has yet to expand internationally, something the airline will likely do in coming years as it seeks higher yields that international routes offer. AirTran also is receiving deliveries of new aircraft, which will help further its expansion. AirTran operates its major hub in Atlanta, but operates a significant focus city in Orlando, as well as smaller focus city operations in Baltimore, Boston, Chicago, Fort Lauderdale, and elsewhere. The airline has successfully combined its hub operations, which link smaller markets such as Pensacola to AirTran's network, while offering the convenience of non-stop flights to/from cities other than Atlanta.

What will create growth in the next ten years are mid-sized markets, populations are expanding in the states, people are spreading out, and airlines must shift to that reality. Believe me, election demographers exploited that in the last election and will in future elections. Some of the most important and fastest-growing population centers are close to major interstate highways, in the Sun Belt, and in the exurbs (beyond the suburbs) where SUVs and megachurches symbolize a dramatic shift in the population and how Americans are now willing to trade convenience for space. The exurbs offer cheap living but that comes at a price, commutes can be 45 minutes or an hour each way to a major city. So, what does all this have to do with air travel?

AirTran as well as Alaska, and to a lesser extent US Airways and Southwest can exploit markets which are close to exurbs. People may be willing to drive an hour to work, but with the kids in tow, may not want to drive more than 20 minutes to the airport, particularly with low fares nearby. AirTran has exploited low airport costs at many airports and its efficient 717 aircraft which are a critical asset to the airline and enable it to serve these medium-sized markets. Take a city such as Sarasota, Florida. The airport was desperate for an airline that would bring low fares to an airport previously controlled by high fare monsters such as Delta. AirTran stepped to the plate and its success was phenomenal, in short, not only have they expanded Atlanta service since they started serving Sarasota, but they also have started serving other cities, including Baltimore, Chicago, and Detroit. Travelers in the area would have been forced to consider the larger Tampa airport if low fares hadn't come to town. Not only that, but other airlines have started service at the airport, trying to pick up some of the AirTran business. If Delta comes to town, they will most likely serve Atlanta and nothing more. With JetBlue and their Embraers, you may get service to a couple of important markets, most likely New York and Boston, but if you don't want to fly there, then you are most likely out of luck with the airline. With AirTran, Alaska, Southwest, and US Airways, you get the best of both worlds. These airlines can connect mid-sized destinations to larger focus cities in addition to hubs. Certainly there will be a place for the JetBlues of the world and the Uniteds, but here you get the best of both worlds. These four airlines that are well-positioned to access midsized markets will get a revenue boost, airports will want new service to complement in many cases regional jets which are the only other aircraft many of these airports get, passengers who live nearby will want the low fares, and in many cases will be willing to pay a little more for a nonstop. But at the same time, having the best of both worlds also leaves you to be squeezed which is a real possibility.

While AirTran, Alaska, Southwest, and US Airways are the best candidates to exploit these markets, they also are vulnerable as well. If JetBlue expands to some of the AirTran, Alaska, Southwest, and US Air focus cities, they could have a product advantage over any of these four carriers. Also, none of these airlines is perfectly positioned to exploit these new markets. AirTran is the best positioned, but with a lack of service in the Southwest or on the West Coast in general, they could miss out on a number of the big growth and revenue opportunities. Alaska doesn't seem interested in tackling medium-sized markets outside of California, but could effectively capture smaller markets in California, Arizona, and Nevada with its regional aircraft, which could prove to be an advantage over other carriers like Southwest which can't access those markets. Southwest's two largest operations are in the Southwest (duh!), in Las Vegas and Phoenix, and even though it may not be able to access many of the medium-sized markets which are attractive these days, it can net some, just look at their success in Texas, even though most of those markets were there from the early days of Southwest, they could replicate their success throughout the Southwest, and potentially in the Midwest. But with the relatively large size of Southwest's planes and Southwest's desire to have new markets which can support a minimum of ten daily flights, Southwest may have a tough time accessing this revenue. US Airways has grown substantially with its latest acquisition, but still can access many of these markets, from convenient hubs across the South and in the Sun Belt, from Charlotte to Phoenix. US Airways also has international service, which could be a boost, but unfortunately, is in the process of consolidating service to/from hubs, not to/from focus cities, so if US Airways keeps growing, it could become just another legacy. However this plays out, this is the most important growth story for air travel in the next five to ten years and we've already seen airlines address this with new planes. Did anybody think JetBlue would purchase another aircraft type within four years of its launch? Nobody I heard of, including the CEO for that matter. These markets have already come to define our politics for better or for worse, and in the long run airlines must change routes to meet this demographic shift. AirTran, Alaska, Southwest, and US Airways are the best companies for the job, but let's see how many actually take full advantage of their opportunity.

America West and U.S. Airways Complete Merger

Today, America West and U.S. Airways officially completed their merger. The new, combined carrier will be America's fifth largest. They will maintain almost all of the routes that the separate carriers operated, and plan on expanding to more international destinations, especially in Asia, after the carrier gets A350 aircraft. The new carrier will be even larger than Southwest, overtaking them as America's largest low-fare carrier. However, this new low-fare carrier will have a first class seating option, just as the two separate carriers did, and they will be part of a major international alliance, Star Alliance, which U.S. Airways was a member of before the merger. U.S. Airways will also continue to provide the lucrative shuttle service between Washington D.C., New York, and Boston. The airlines will be able to cut costs by merging their resources, and they will be able to cut costs further, if needed, to react to high fuel prices. This is a carrier positioned for the future and ready for the future. They can only go up from here.

The New U.S. Airways Taxis for Takeoff

America West and U.S. Airways continue to move closer to a new life together - the new joint company could be operating as soon as October.  On Tuesday, investors from America West will vote on the merger, and analysts predict they will approve the plan. Furthermore, on Thursday, a bankruptcy judge will hold a final hearing on U.S. Air's reorganization plan, a key part of which is the America West merger. The new, combined airline will have 51 fewer planes and fewer employees, however, the personnel number remains unclear. The levels of many airport-based jobs such as gate agents, maintenance personnel, flight attendants, and pilots will remain roughly the same. However, the airline expects to cut some jobs through attrition, and redundant management positions appear headed for the chopping block. As the merger proceeds, business areas such as training, policies, and so on will be quickly consolidated, but other areas such as flight crews and maintenance and safety procedures may continue separated for up to two years.

August 23 A New Day In Aviation

America West and U.S. Airways will release their new livery (paint job on the aircraft) on the 23rd. This symbolizes a further commitment to the merger, and to a new nationwide low-cost airline. This is a very important aspect of the merger as it shows what the new brand is going to look like. This is only one of many steps of the merger, but certainly one of the most public. Good luck to them in their quest to merge two very different companies.

Second Quarter Profits And Losses

Four different airlines reported numbers for the second quarter, 2005. The results for some were promising, and for others, worrisome. Some carriers have been able to cope better with the higher fuel prices, and others are just struggling to get to December. Here's the scoop:

Alaska reported, in my view, a mixed quarter even though it's an improvement on last year, which was a $1.7 million loss. Alaska reported a net income of $17.4 million in the quarter, which, granted was marred by ludicrously high fuel prices, is paltry compared to Southwest's profit. The reason that this isn't all good is that Alaska had by far, some of the worst on-time and completion numbers in that quarter. In addition, on today’s news about Southwest's move to Boeing Field, Alaska is calling for equal access to the airport, where Alaska is hoping to start as many as 100 daily departures from the airport. Alaska should be worried about its future, since Southwest is here for the long haul, and even though load factors at mainline Alaska (not Horizon) were 77.9%, passengers will not tolerate late flights. Not at all.

America West is doing a terrific job before of its upcoming merger with U.S. Airways. America West reported $13.9 million versus $10.7 million last year. America West, which doesn't exactly operate the world's most fuel-efficient fleet, was able to cope with the higher prices and still improve their profits, without significantly cutting their labor costs, like Alaska did with its baggage handlers, pilots, flight attendants, etc. Clearly, America West has been able to pass at least some of the cost of fuel onto its customers with an increase in revenue over last year of 20%! America West is looking good, and should have a successful merger with U.S. Airways. America West is getting better at making money, but they still need to cost-cut significantly, or else America West will lose its edge.

Thestreet.com was right on when it titled a piece on its website "Delta and the Red Ink Factory". However, I must congratulate Delta for reducing its quarterly loss in the second quarter 2005 by $1.6 billion. Not bad but that still leaves nearly $400 million, $382 million to be exact in losses. Delta's Fuel expense was up 57.5%, but even with that, Delta was still able to get cost cuts, and got its mainline unit costs, as in what it costs to fly one seat one mile, down 3.9% including the higher fuel costs. However, if they are losing money now, there will be bigger losses, significantly bigger losses in the third quarter. No wonder Delta's stock DAL was one of the biggest percentage losers on the market today.

Finally, we come to JetBlue, which has been warning recently that it will make a smaller-than projected profit, and that its margins will decrease to single digits because of high fuel costs. That's just what happened, as JetBlue's profit decreased $6 million to $39.1 million in the second quarter. Its operating margin, decreased 5% to 9.1%. This quarter, JetBlue will take delivery of its first Embraer 190 aircraft, which is bound to begin a new wave of growth for the airline. The aircraft should start service in October or November, and it will probably help JetBlue's earnings, as JetBlue will be flying to smaller cities with less service and higher fares, so although they will be lowered when JetBlue arrives, JetBlue can really set anything it wants to, as long as it's not exorbitant, so JetBlue might be able to find higher margins on those routes. This will be exciting, and will trigger moves by other U.S. carriers, as they might spring for the plane. It will be a fun third quarter ahead, full of losses, and new beginnings.

America West Heads To Hawaii

America West Airlines announced new service to Hawaii today, which is part of a plan to expand the carrier prior to its merger with U.S. Airways. The flights will start as early as December 16, 2005 when America West will launch once daily non-stop service to Honolulu and Maui from Phoenix. On March 1st, America West will launch non-stop service from Las Vegas to Maui, a second daily non-stop flight between Phoenix and Honolulu, as well as a four times weekly from Phoenix to Lihue. On March 2, America West will start three times weekly service between Phoenix and Kona. All these flights will use 757-200 aircraft, which seat 14 in first class, and 176 in coach.

These new flights will help expand the carrier to be truly coast to coast and will set America West up for a merger with U.S. Airways which is designed to give passengers greater connectivity throughout the country. However, America West will face a great deal of competition with these flights, even though many of the passengers will be connecting. ATA Airlines currently has non-stop service between Phoenix and Honolulu and Maui on 757-200 aircraft. ATA also has non-stop service between Las Vegas and Honolulu. Hawaiian Airlines also offers non-stop service between Phoenix and Las Vegas to Honolulu on larger 767-300 aircraft, which creates a great deal of pricing power in the market. This is in addition to the great deal of connecting service offered to Hawaii by most other major airlines. America West will have very tough competition on these routes, but if they are able to fill seats, which they can do more easily if they sell many vacation packages, which they are planning on doing. It's a tough market, but if they get the connecting traffic like ATA is doing through Southwest, they will find success.

US Airways/America West-They've Made A Committment, Now What?

America West and US Airways have now officially agreed to merge, however, there is still much work, and one of the most important pieces of which is creating a nationwide route system to create a competitive airline.

United is liked by many business travelers since it has hubs in many major cities, especially business centers. In addition, United has hubs across the country geographically, San Francisco and Los Angeles on the West Coast, with Denver and Chicago in the Midwest, and Washington D.C. Dulles on the East Coast. In addition, United has a comprehensive international network, especially in the Asia-Pacific region, which is helping retain business travelers to the airline. These travelers are declining and are paying for convenience over cost. With a shift in the business community towards finding lower-cost alternatives to the major airlines, the new America West/US Airways carrier plans to be a "nationwide, full-service, low-cost carrier". That sounds pretty attractive for businesses and business travelers. The convenience will be there, however, since they will have hubs in major leisure markets and be operating in markets with persistent overcapacity, they will have low fares.

What the point is here, is that the US Airways/America West carrier can be very attractive for both leisure travelers, like the carriers are now separated (serving Las Vegas, Florida, Mexico, and the Caribbean heavily), they can also become the next United, very attractive for business travelers. However, the route systems as they stand currently are disjointed, and to be successful, they need to be integrated. For example, with the current route structures of America West and US Airways if you want to go from Portland, Oregon to Portland, Maine you would have to fly to Las Vegas or Phoenix, connect on US Airways or America West to Philly, then connect to Portland, Maine, that's tedious, especially flying all the way down to Las Vegas or Phoenix then make a double connection to get to your final destination. If the carrier is to be truly nationwide, then it needs to eliminate the possibilities for many double connections, which are very time consuming and unattractive, their focus must be on midsize markets, which are the future. In mid-sized markets, where growth and pricing power is (not the large markets such as Phoenix or Las Vegas who are very sick with overcapacity), US Air/America West can make it work, and Portland-Portland is a good example. Here's the other problem, the route structure of both US Airways and America West is more or less North-South (Boston/NYC/Washington D.C.-Florida for US Airways) and (Seattle/Tacoma, Portland, San Francisco Bay region, Los Angeles-Mexico or elsewhere in the Southwest for America West, however America West is better at providing east-west connections). Two parallel lines don't create a nationwide route system, and that's what's needed to woo over business travelers.

Southwest and AirTran also might get into the fray here. They might try bidding on some of US Airway's assets to make the deal unattractive for America West. Keep in mind, America West made money last quarter, US Airways was flooded in red ink, thus America West can keep doing what it's doing, US Airways can't. Southwest might be interested in some of the 737-300 jets owned by US Airways as a way to grow their fleet quickly and effectively, while AirTran may be looking at slots in LaGuardia, Logan, and Regan. The bankruptcy judge that has to approve this merger is looking for the best deal for the creditors. Southwest might decide to do a similar play to what it did with ATA, outbid the competitor, but in this case, for much fewer assets. It's not out of the ballpark to think that.

Finally, if this carrier is going to be truly nationwide and low-cost, then it will need to serve midsize markets, however, it remains to be seen whether they can do this effectively without too many regional jets. Midsize markets without the presence of Southwest, JetBlue, or AirTran can give America West/US Air pricing power, which it desperately needs in this volatile industry, however, many of the larger markets, including hub cities such as Philly, Las Vegas, Pittsburgh, and especially Phoenix, are infected with Southwest syndrome, a disease that has been cured in only a few cases, and the prospects for curing it in these markets looks doubtful. Thus, the carrier must, must keep its costs down to a minimum if it wishes to survive. Now, what about the regional systems in smaller markets? Are they needed to bring in customers, and will they make money? Although many major carriers use regional jets like crazy, there will have to be a serious reduction in the number used in the merger. The 200+ that were proposed to be used in the merged airline is crazy and will result in many higher costs. Many people in these markets served by RJ's are now driving to bigger cities, not necessarily the biggest markets, but mid-sized markets to get lower fares. This is really a win-win situation, since US Airways can afford offer lower fares in these markets than in tiny markets with RJ's, and customers are benefiting from lower fares. Regional jets will not disappear from the system, absolutely not since the management is taking a different direction. However, there will be a reduction, especially 5 or 10 years down the road. New jets, such as the Embraer 170, which is now in service for US Airways by one of its vendors, Republic Airways will be the wave of the future, and they can serve these markets. These mid-sized markets are the future now that the age of the regional jet has ended. JetBlue has realized it with its order of 100+ 100-seat Embraer 190 jets, and US Airways/America West have the potential to profit from it hugely too, but do they have the foresight to do that? Personally, I think not, but I challenge them to prove me wrong!