Trends & Predictions for 2010: Part II

As promised, here is the second part of Airline Bulletin's discussion of trends and predictions to examine in the coming year.

Prediction #1: Industry Consolidation, Especially Abroad
While U.S. carriers have made efforts to reduce their capacity and form strategic partnerships with other carriers, it does not appear likely that we will see a full-fledged merger or buyout in the U.S. in the coming year. This is not to say that such consolidation is impossible, rather that it's simply unlikely. There aren't a lot of perennially weak airlines left to consolidate. Frontier (which has recently showed signs of strength) and Midwest have been combined, Sun Country, to my amazement, seems to be hanging on, and small LCCs like Spirit and Allegiant that have defined business models and solid market niches don't appear to be losing buckets of money either. That being said, anyone is a possible takeover target or buyer. Even Southwest, which has historically avoided growth by acquisition (with a few exceptions), has signaled of late that it is open to potential mergers.

US Airways Deals?
One carrier that still mystifies me is US Airways. The airline has been very aggressive in implementing ancillary revenue-generating programs and cutting costs/capacity. CEO Doug Parker seems to know what he's doing in this regard. But, US Airways may not be very poised for future business travel growth. It operates by far the smallest international route network of any of the 5 legacy carriers in the States, and has actually cut some of its European routes recently due to poor loads. Growth in Asia has taken something of a hiatus, as US Airways let its Philadelphia-Beijing route authority expire after the airline wanted to avoid opening the route due to the recession. And the carrier's position in Star Alliance has been weakened due to Continental's recent entry, and due to the announcement of a strengthening of reciprocity between United and Continental frequent flyer programs. The conventional wisdom has been that American would make a bid for US Airways, since American has avoided much of the consolidation activity within the past 7-8 years, and as a result, has watched its market share decline, while US Airways needs an available suitor. But American and US Airways have almost no fleet compatibility--American is mostly Boeing, US Airways is mostly Airbus. And another merger would only further complicate the labor troubles that have hampered US Airways recently, particularly with its pilots union having trouble integrating seniority between old US Airways pilots and former America West pilots. On the plus side, the route networks of American and US Airways would align somewhat, with US Airways having hubs in the Southwest, Southeast, and Northeast, all regions where American lacks hubs (American's Miami hub, mostly geared towards traffic to/from Florida or Latin America notwithstanding). However, both carriers are relatively weak in Asia and the Middle East, areas where they will need to ramp up capacity if they hope to compete in these increasingly important business markets.

What seems to be a more plausible idea, actually, is a buyout of Spirit by US Airways. US Airways as noted above has been very aggressive, perhaps the most aggressive of any legacy carrier in seeking out new ancillary revenue opportunities, and transforming itself into an LCC which can effectively compete against the likes of Southwest, JetBlue, and AirTran on the ultra-competitive routes along the eastern seaboard. A buyout of Spirit would have very strong fleet complementarities--both carriers fly A319 and A321 aircraft, as well as strong route network complementarities. US Airways tried a few years ago to open a mini-hub in Fort Lauderdale--Spirit's biggest base, with routes to Caribbean destinations, but was fended off in part due to Spirit's competition. There is clearly money to be made on these routes, but US Airways lacked the cost structure several years back to adequately compete. Now the carrier has realigned its costs, and a buyout of Spirit would make accessing such routes much easier.

It would also do something else which is pretty important. The two slot swap deals announced earlier this year, which (if approved) will strengthen legacy carriers at slot congested airports while helping to keep out low-cost competitors. US Airways, even though they are starting to act like a low-cost carrier, is not a low-fare carrier, unless it is forced to be through competition. US Airways would rather stifle demand with higher fares (and higher profits) than lower fares which stimulates demand but reduces yields, which is what Southwest tends to do. Keeping slots in the legacy carrier "family" prevents potential low-cost competition at slot-congested airports (see also Prediction #2). Spirit is one of the few LCCs to have slots at both LaGuardia and Washington National (even though it has relatively few slots in both). A buyout of Spirit would help diminish low-fare competition at these airports, and allow legacies to charge higher fares to business customers. However, I still think that this deal is somewhat improbable, only because Spirit is presumably a money-making carrier with a good market niche, while US Airways is a money-losing carrier with lots of problems that could make a merger tricky. It could be an easy buyout, or it could just be an obstacle to US Airways doing what it needs to do to revamp itself to compete against LCCs while expanding its international network.

European Consolidation
In Europe, the picture is much simpler. I don't anticipate many state carriers to go out of business, however I do imagine that governments will work even harder in the next year to privatize or revamp the following state carriers, named yesterday in Part I:
CSA Czech Airlines
Croatia Airlines
LOT Polish Airways
MALEV Hungarian Airlines
TAROM Romanian Airlines

After additional research, I also want to add the following carriers' names to this watch list:
Aer Lingus¹
Air Malta²
Bulgaria Air

Given the obligation of these governments to maintain positive images, it appears extremely unlikely that they will suddenly pull the plug on these carriers' operations, stranding passengers (voters) and angering the public, a la the recent FlyGlobespan fiasco. However, such airlines are definitely at risk of being purchased by larger airline conglomerates or of being privatized. 

Notes:
1. Aer Lingus may be at risk for another Ryanair takeover attempt in the new year. The carrier has struggled to compete against Ryanair, and has gotten push-back from its unions as management tries to contain costs. Efforts have been made to diversify the carrier away from Ireland, opening new routes from London Gatwick. While the carrier may avoid a Ryanair takeover, serious reforms are needed to make the company profitable once again, and these do not appear forthcoming.
2. Air Malta may also be in need of further reform due to the recent arrival of LCCs in Malta after the airport lowered passenger charges. Air Malta had effectively been protected from LCC competition due to these high charges, but this is no longer the case. As a result, the carrier must find ways to diversify and compete. But since the vast majority of Malta traffic is holiday-oriented, and thus, price-sensitive, it appears unlikely that unless Air Malta can turn itself into a bare-bones LCC, the carrier could face extinction. Another possibility would be a buyout, perhaps by another LCC like easyJet, which would reform the carrier, much as it did with GB Airways, while maintaining most of the its routes.

In terms of LCCs, there are simply too many out there, and too few of them have such well-defended market niches that they can't be attacked by market leaders easyJet, Ryanair, Wizz Air, and Norwegian. I believe that the following carriers are in trouble, and are at risk of potential sudden shutdown. As a traveler, I would do some research before booking with them, and then only with a credit card:
bmiBaby_³
Cimber Sterling⁴
Niki
SmartWings
Vueling⁵
Windjet⁶

3. bmiBaby is unlikely to engage in a sudden shutdown, now that the carrier is owned by Lufthansa. If bmiBaby is closed, it will likely be in a controlled fashion, or if it is sudden, passengers should anticipate far fewer inconveniences than when FlyGlobespan shut down (ie. Lufthansa will likely offer alternate flights, etc.). However, bmiBaby is under heavy competition from easyJet and Ryanair. And while the carrier is growing--it recently expanded at East Midlands which easyJet vacated due to poor yields--it is unclear whether the airline, with relatively old, inefficient planes and infrequent service on many of its international routes, will thrive in the coming years. Lufthansa may use its recent acquisition of British Midland mostly for its aircraft and slots at Heathrow, taking the airline's good routes and using British Midland to help feed into Lufthansa's long-haul routes, while scrapping much of the rest of the company. As British Midland's low-cost subsidiary, bmiBaby doesn't have very much to offer Lufthansa, and a sale or suspension of services appears likely.
4. Who knows what's going on with Cimber Sterling? The carrier seems bereft of a coherent strategy, flying both business and leisure routes with a bizarre mixture of aircraft. Most of Sterling's core routes were taken over by Norwegian and Transavia immediately after that carrier's demise, and Sterling's new namesake has been left with relatively thin routes and little room to grow. I see Cimber as extremely vulnerable to shutdown.
5. Vueling is probably not going to shut down immediately, but will be increasingly vulnerable to competition from easyJet and Ryanair in Barcelona and Madrid. It is unclear whether the combination of Vueling and Clickair has really made the company more financially stable, and due to this lack of information, I am concerned about the carrier's future. However, Vueling has potential to thrive and grow within the coming years. It has a large fleet, a relatively low cost structure, and by operating from primary airports, including Heathrow, can attract higher-yielding business travelers. Thus, it is less vulnerable than most of the other carriers named on this list, but is vulnerable nevertheless.
6. Same issue as with Cimber. It's hard to know what's going on with this carrier. It's privately owned, not discussed much in the press, and it seems hard to believe that they have a real competitive advantage in the marketplace. Now maybe they're like Spirit Air in the U.S., and have a relatively undisturbed market niche on thin routes to/from Sicily. And given Ryanair's recent announcement that it may close domestic routes within Italy, WindJet may benefit through expansion of services. But without clear evidence that WindJet is a profitable LCC with competent management, I have to place them in the same category as Cimber--extremely vulnerable to shutdown.

Prediction #2: Continued LCC Growth
As the economy continues to suffer, expect more businesses to shop around for travel, and send employees on LCCs when necessary. LCCs will try to respond to this growing demand. In the U.S. in particular, LCCs will likely make more efforts to enter or expand services at airports that are dominated by legacy carriers and which are the few remaining bastions of high fares in the U.S. While virtually every large metro area in the U.S. has low-fare airline service, many large, primary airports in these metro areas lack much low-fare service. Examples include Dallas Fort-Worth, Miami, Chicago O'Hare, Newark, Washington National, Cincinnati, Charlotte, Houston Intercontinental, and Atlanta (obviously, AirTran has a large hub here, which keeps fares lower than they otherwise would be, nevertheless, the lack of Southwest, JetBlue, or other LCCs in the Atlanta area at all is problematic and allows a Delta/AirTran duopoly to set prices). Although some of these airports are more congested and delay-prone, they are often preferable for business travelers, as they are easier to access, are located closer to where companies are situated, have better facilities and connections to other airlines, etc. In the coming year, expect expanded service from AirTran, Southwest, and JetBlue to the airports above. While new leisure-focused service will be added, particularly to/from the Caribbean, don't count out future expansions at these key airports for business travelers. Leisure demand has actually held up better than business demand, and so while LCCs will do well in leisure markets, because they are already strong in California, Florida, and the Caribbean, less of the growth in their operations is likely to be concentrated in those regions, since little added LCC capacity is needed to handle this traffic.

In Europe, while it may seem like business routes would also see expansions in service, this does not seem to be the case. Ryanair has announced minimal service of late that will be attractive to business travelers, mostly because it is concentrated in very distant and inconvenient airports. EasyJet, which has aimed to take business customers away from BA and other full-service carriers, has instead recently announced that it will add new service to a host of leisure destinations next summer, mostly in Turkey. Such moves seem to place easyJet and Ryanair in closer competition with European charter carriers such as Monarch than legacy carriers like BA. It will be interesting to see whether carriers like Wizz Air, Norwegian, and Air Berlin follow suit and concentrate growth mostly on leisure routes, but that would be somewhat counterintuitive, given the growing demand of businesses to trim travel costs.

Prediction #3: Increasing Focus on the Environment
While there are other interesting predictions to be discussed, it's getting a bit late and I need to get this out. So I'll conclude with my third prediction, which is something that will be of increasing importance not just in 2010 but in the coming decade. Expect more airlines to highlight their "green" credentials whenever possible, through marketing campaigns, press releases highlighting environmental initiatives (such as this recent announcement highlighting airline participation in a jet biofuel scheme), and programs to offset emissions. Such efforts will be reinforced as Boeing delivers the fuel-efficient 787 Dreamliner to its first customers next year, and as the U.S. Senate debates a cap-and-trade bill to combat climate change. Although we're in a recession and customers are price-sensitive, more and more consumers are going to make what they perceive to be environmentally-friendly choices, given growing awareness of environmental concerns. While airline efforts to address the issue are mostly greenwashing, since the benefits of getting customers to recycle soda cans on the plane or powering one engine with 50% biofuels aren't diddly squat compared to the effects of contrails fully-loaded commercial jets spew out at high altitudes, such efforts will likely succeed at winning customers over since most people don't know any better. What we won't see, however, are serious efforts to make the industry more environmentally-friendly through new technologies. V-shaped aircraft ("flying wings") or better yet, high-altitude airships would radically alter the airline industry as we know it, but they would also make a substantial dent in the industry's pollution levels. But because such technologies aren't compatible with current air transport infrastructure, are not seen by consumers or regulators as safe, and in some cases are slower than conventional aircraft, don't expect Boeing to announce production of such aircraft anytime in the near future. This is not to say that such technology won't be commercialized, but significant steps aren't likely to be taken within the next year due to the recent air travel slowdown and manufacturers' focus on the latest generation of fuel-efficient planes.

In 2010, as the airline industry globally continues to struggle, it will likely once again continue to make headlines as it tends to do, and Airline Bulletin will be here, whenever possible, to offer commentary on these events. Until then, have a wonderful new year!

Southwest to Serve Minneapolis-St. Paul from March 2009

Southwest Airlines announced its first new destination in more than a year, Minneapolis, from which the airline will begin service to Chicago Midway starting in March 2009. The airline is keeping expectations low, saying that the carrier will begin a "modest" operation at MSP with service only to Midway. This is not in keeping with previous Southwest destination openings, which typically see routes to several cities and at least 10 daily flights. Even a smaller market like Fort Myers, FL received 9-10 daily flights when Southwest first began service to the city. But how the times have changed. Southwest is likely making this a more conservative opening because of the uncertainty over flight demand. Even though Southwest is adopting a bold strategy to attract business customers, who are looking for nonstop flights to a variety of cities, Southwest simply cannot risk too much of Northwest's wrath in this tight market by making a stronger move. Eventually, Southwest will likely add service from MSP to some or all of the following markets, depending on the Chicago route's performance, Detroit, Cleveland, Baltimore, Los Angeles, Phoenix, and Las Vegas, but for now, the company needs to test the waters.

The route to Chicago is a very good test of Southwest's efficacy to attract business travelers with relatively little risk. Northwest, American, and United all operate in the market, and all charge exorbitant fares. AirTran tried to take on these carriers a year or two ago with discount fares, but was forced to withdraw due to lack of demand. Southwest, because of its brand loyalty and reputation in the Chicago market, will likely be more successful than AirTran. Moreover, the carrier is taking a limited risk by flying to a market where the carrier has a strong base of operations, and one which is only a short distance from MSP, allowing Southwest to generate higher yields using less fuel. While Southwest's Minneapolis operations may not become the size of Chicago's (with over 200 daily flights), this is an important announcement in Southwest's push to make itself a more viable option for business travelers by filling in the holes in its network. This could be a signal that Southwest may be getting ready to serve other major markets it does not yet have a presence in, including Atlanta, Cincinnati, Memphis, and most importantly, New York (Regardless of the claims to the contrary, Southwest's Islip operations are not very effective at serving business travelers headed to NYC). Hopefully Southwest will add these destinations in the future in keeping with a more conservative outlook. With $100+ barrel oil, airlines simply cannot add routes willy-nilly, and with today's limited announcement, Southwest's management seems to recognize the necessity to tread carefully.

Using Buses to Transport Passengers Short Distances To/From Hubs

This post discusses an idea I've had for awhile, but been somewhat hesitant to share. After thinking of potential ways for airlines to cut fuel costs, this one struck me as relatively easy with immediate impacts. Throughout our air transport network, dozens of very short routes (less than 150 miles between airports) exist. Most of these routes can be covered by bus with only a modest increase in transport time. While the idea of busing passengers to alternate airports is nothing new, as Ryanair has successfully done at many of its major bases in Europe, busing passengers between destinations in lieu of an aircraft, in order to facilitate connections, it is something untested in the US.

The reason buses are preferable to small aircraft is simple: cost. It's very, very expensive to fuel a small plane traveling such short distances (relative to the amount of revenue generated), in addition to the costs of crewing and maintaining that plane.

There are two different basic types of regional jet contracts that could potentially be affected by a move to buses. One are the contracts, known as at-risk flying, that many companies which operate turboprops on very short routes receive. For a flat fee per flight, the turboprop operator can use the brand of the legacy carrier's regional arm, and the legacy carrier will take care of booking and payment. The company that provides the turboprop takes a risk when providing that flight, and can either make or lose money. Theoretically, if turboprops are not making money with high fuel prices, they would be pulled by operators.

It's unclear whether buses would be effective at replacing turboprops for short flights. Turboprops are designed for use on short routes, and depending on the model, can be significantly more efficient than regional jets. However, because I don't have reliable cost estimates for these aircraft, nor intimate knowledge of the contracts that allow a turboprop provider, like Skywest, to license itself as the affiliate of a legacy carrier, I'm hesitant to say that short turboprop flights should be targeted for replacement by buses. While buses might have advantages over turboprops, particularly for very short flights, buses would arguably provide more advantages over regional jets.

The second kind of contracts, known as fixed-fee flying, typically cover regional jets. The company that provides the regional jet can effectively pass on its cost to its legacy partner. The legacy keeps all the revenue generated from that flight. However, in these difficult times, legacies are eating mountains of red ink, because regional jets are not as fuel efficient per passenger as larger planes, and legacies have faced significantly higher costs in the face of smaller increases in revenues.

As we have seen in the past several months, many legacies, such as Delta, have tried to find any loophole possible in their contracts with regional lift providers in order to cancel them. Delta is simply losing too much money on these deals. Unfortunately for Delta, the company has had difficulty nullifying portions of the agreements. Given these restrictive contracts, the transition to the use of buses on some short services could take awhile, but it is worthwhile from a cost standpoint.

I am not suggesting that buses replace all regional flights. I am not even suggesting that buses replace all flights on a given short route. However, there are flights where it would be far more efficient and cost-effective for carriers if they used buses rather than small aircraft, particularly 50-seat regional jets. The vast majority of passengers on regional aircraft will connect at a hub. Regional aircraft are for getting passengers to and from a hub, not flying passengers point-to-point. Yet regional jets remain a very expensive way to transport passengers to hubs.

Moreover, regional flying, in it of itself, is essential for a legacy carrier, enabling the carrier to differentiate itself from its low-cost competitors, and generate higher yields. In fact, while fuel for regional operations can be rather pricey, labor costs are typically much lower, and this can help offset some of the burden. Airlines are finding that 70-100 seat jets are very efficient for many routes they serve, even to larger cities. Longer regional flights are impractical to target by bus, and 50 and over seat jets will have a place in serving this market.

So hypothetically, if this idea were ever to come to fruition, what would it look like?

The operation:
Ideally, buses would depart from downtowns, or from strategic pickup points in the small city being served, enabling passengers to skip the long drive to the airport. The bus would then travel on the fastest route, nonstop to a gate at the airport terminal. Admittedly, this would require some level of security clearance, and it's unclear whether airlines would be able to obtain this. But ideally passengers could then, at a boarding gate, drop off their luggage into a cart and go through a quick security screening before connecting to their flight. This would require the cooperation of several different parties but if airlines were able to get a bus infrastructure in place, it could enable carriers to make this process very seamless, while preventing passengers from having to wait in long lines at ticket counters.

If the cost savings were not so dramatic, this would not be worth doing, but very loosely estimated costs suggest that if a 55-passenger bus costs $300 an hour to operate and a 50-seat regional jet costs $1500 per hour to operate, the savings generated by using the bus would be very significant. Not only could capacity be added on the route, but at significant savings.

On a hypothetical route, if the bus takes two hours to cover the same distance the regional jet can in one that would still produce a cost savings of well over $500 per trip, not bad when added up over time. It would result in some additional time spent traveling for passengers, but this would be minimal if routes were carefully selected. Whether airlines like it or not, oil prices will continue to increase in the coming years, and this cost burdens regional jet operators far more heavily than it does bus operators, making bus travel increasingly advantageous in the future. 

Consider the Delta route between Columbus, GA and its hub in Atlanta. The route, 83 miles by air and just under 100 miles by road, is serviced most days by 4 flights on CRJ-100 regional jets (50-seaters). To fly the route takes about 50 minutes, to drive, about an hour and 45 minutes. If some of the CRJ flights were replaced with bus service, bus passengers would experience a slightly longer trip, but one that is more comfortable and less prone to delays (mechanical, air traffic control, and weather-related).

Admittedly, a bit of timing would be required; sending a bus out in rush hour would nullify any advantages of this scheme. But given the increase in delays that passengers are experiencing, and the increasing strain on our air traffic control system, exacerbated by more flights on smaller jets, bus service could not only offer airlines cost savings, but passengers a better experience by reducing the propensity for delays.

Like a flight, passengers could board the bus from a boarding gate (on the tarmac), and head nonstop to their destination. And with the lower costs of operating the bus service versus a regional jet, Delta could operate additional services, minimizing connections. Unlike a regional jet, which is extremely cramped and offers very little room for passengers to spread out, a bus, while not extremely spacious, offers more room and comfort for most passengers. Moreover, some bus companies have started to outfit buses with Wi-Fi Internet access, enabling business travelers to be more productive on the road. Like planes, most buses have overhead compartments, and there is ample room in large buses for both carry-on and checked baggage.

And though small regional jets would likely be the clearest targets of this scheme, this does not mean that the markets bus services are used in are necessarily small. Regional jets help provide both capacity, but more importantly frequency. On some high-density, inter-city routes that have a lot of traffic, airlines could offer bus service to replace flights for lower-yielding passengers, adding capacity economically.

American currently flies several times daily between Milwaukee and Chicago O'Hare on 44-seat regional jets. If a passenger needs to travel between Milwaukee and Raleigh-Durham, but purchases a very discounted ticket, then American could bus that passenger to O'Hare, about an hour and 45 minutes away, and then fly him or her to Raleigh, saving the airline a considerable amount of money, and enabling the carrier to offer more reliable service during weather and air traffic control delays.

So this begs the question; why wouldn't a customer merely drive the distance themselves instead of putting themselves in a crowded bus with a bunch of other people? Given the rising cost of airport parking, gasoline, and the hassles driving entails, a strong case can be made for taking the bus. Moreover given the convenience of taking the bus (departing and arriving at a boarding gate in the terminal), and the potential comfort benefits (being able to use the Internet or watch movies instead of driving), many customers would readily take the bus instead of their own vehicles. Does this mean that all passengers will be swayed? No, but as long as most are, then offering bus service seems like a reasonable alternative and can help airlines keep valuable business travelers.

Would buses be an ideal solution? Hardly. They will likely be slower in most cases, and some passengers may find them quite frustrating. Time-crunched business travelers (those who provide airlines with their profits) might choose alternative options if the choice was between a bus and a flight on a different airline, and this is something airlines have to be careful with. If business travelers are strongly against the idea of a bus, then this idea may not fly at all. But, if carriers can demonstrate that the bus would not add a significant amount of time to their trip (this means timing buses with key connections), while enabling them to improve productivity, then some could be swayed.

Given the absolute necessity for airlines to cut costs, short regional flights are a place to start. This will hardly be a solution to the airlines' larger problems with fuel, but if carriers are looking for ways to trim excessive fuel usage, bus service should legitimately be considered.

Airline Bulletin is Back; Two (Re)emerging issues in the Airline Business

I have returned from Ecuador (and will try to post a few pictures within the next few days). In the coming days and weeks, I hope to shine a wee bit of light on some of the controversial issues in the airline industry. Upcoming posts may include Why Widespread Panicking is a Bad Idea, Why Most Airline Managers are Idiots, and Why Most Airline Managers are Idiots (Part II). Poor business decisions helped get the industry into this mess, but that doesn't mean ingenuity and the right decisions can get us out of it.

But to begin, I want to examine a couple of key issues that may emerge in the public debate over the next few months. The fuel issue has obviously dominated the press headlines lately, and justifiably so. However, the severity of the fuel crisis will spur ancillary difficulties for carriers, and the nation, as carriers run out of fuel savings, and begin to turn to the government for help.

Subsidies
If airlines continue to hemorrhage cash at current rates, many will run out of cash later this year or sometime next year. As a result, one of the most important issues facing the nation with regard to airlines, is not necessarily how to curb rising oil prices, but how to save the vital airline network that binds our nation together. After 9/11, the airline industry was provided with a government cash infusion to help stave off more trouble, as well as loans to specific carriers to help them survive. Once again, the government may have to intervene, and as cash reserves run lower and lower at many of the nation's top airlines, this issue will become increasingly pressing to politicians, not to mention presidential candidates. Even though corporate subsidies are increasingly unpopular, especially in the wake of the unjustifiable tax breaks that continue to be given to big oil companies, even while reaping record profits, another subsidy infusion may be necessary to the nation's airlines. However, what might be better than a cash infusion, is instead a fuel subsidy that helps limit the exposure airlines have to volatile oil market prices. This could be done by setting a ceiling on prices that carriers pay, and having the government cover the remainder, or by offering a government fuel subsidy per passenger mile. This is far from a perfect solution, as it could disadvantage carriers like Southwest who are less exposed to the volatile oil market, but it would help protect the industry as a whole from its number one enemy at the moment.

Re-regulation
Another issue stemming from high fuel costs is the possibility of some sort of re-regulation. One of the things the airline industry has struggled with since deregulation, unlike many other industries, is the constant struggle of price wars. The airline industry has seen a plethora of new entrants in the past 25 years, and most of them use low fares to draw away customers from the large, network carriers. While competition has its advantages, most notably when Southwest starts service from a new city and lowers fares, it can have very adverse effects when a new entrant enters and relentlessly offers loss-leading fares as a way to drum up new business. Skybus was a prime example of this, using it's lowest fare classes as loss-leaders to help fill planes. Some observers have suggested re-regulation as a way to prevent carriers from offering fares that are simply too low.

Robert Crandall, former CEO of American Airlines, has suggested the idea of a minimum fare threshold on routes, that would help prevent destructive fare wars. Other avenues of re-regulation have the potential to benefit carriers, such as limiting the number of carriers on very high-traffic routes, but in exchange for those carriers operating less popular routes to help appease the demands of airports and the business community. But a full re-regulation of the airline industry is less likely. As Northwest Airlines CEO Doug Steenland said at a recent Merrill Lynch conference "Anybody who looked at re-regulation seriously, I think, has concluded that the genie is out of the bottle, and I don't think it can go back in."

As airlines struggle more and more against the tide of rising oil prices, especially in the fall and winter as the busy summer travel season dies down, more and more discussion will take place about increased government involvement in the industry, either through subsidies or through re-regulation. Aviation is a crucial linkage in our nation's fabric, and the government will do what it takes to preserve it, regardless of which party is in power.

Potential 2008 Merger: American and Continental

This is a merger deal that has been mentioned less often than a potential United/Continental deal, and it's in part because quite frankly, the match between them wouldn't contain as many synergies as the latter deal, due primarily to too much overlap in terms of both carriers' route networks, though there would be important fleet synergies that could offer cost savings. Of any two legacy carriers, American and Continental are most similar in terms of route structure. Both have very large hubs in Texas, as well as sizable operations in the Midwest (American having hubs at St. Louis and Chicago O'Hare and Continental having one in nearby Cleveland). Furthermore, both carriers have strong operations in the NYC metropolitan area, with a wide array of international flights, and neither carrier has a very diverse set of operations in the US west of Texas.

Moreover, while Continental has used its Newark hub to expand to destinations in Europe and Africa, a very large proportion of both carriers' international capacity is concentrated in Latin America, especially between hubs in the Southern US and Latin America. For many smaller destinations in Mexico and Central America, many of which are served by regional jets, a merger by American and Continental would leave very little additional service from US carriers, potentially raising prices for consumers. That would be beneficial from a competitive standpoint, but it could threaten the viability of the merger.

In an American/Continental merger, Cleveland has a very high probability of being sacked as a hub. The same is true in a United/Continental scenario. Cleveland simply doesn't have the yields and the origin and destination traffic levels to sustain the levels of service Continental has there right now. Continental's operation there could be downgraded to a focus city, with regional service being trimmed or eliminated altogether, and service maintained mainly to hubs and large business centers. This could open up the opportunity for Southwest to gain market share in Cleveland, where it already has a presence, by offering competing nonstop service to woo business travelers. Southwest could help lower fares for area travelers, but a reduction in Continental service will almost certainly mean a loss in the number of destinations served from the airport, forcing many travelers to make connections to reach many smaller markets. Moreover, any international flights Continental flies from Cleveland would very likely be eliminated in a merger. As a result of consolidation in Cleveland, most of that hub's traffic would get diverted to American's O'Hare hub. It's unclear how this deal might affect American's operations in St. Louis. Because Continental has no hub within several hundred miles of St. Louis, my guess is that it's operations will likely remain relatively intact, though St. Louis could feel the effects of a further reduction in regional jet usage if fuel prices continue to remain at such high levels, since regional jet flights are increasingly unprofitable due to high fuel costs. Many of American's flights at St. Louis are operated by regional jet contractors.

Of course the real wild card in any American/Continental consolidation is what would happen to the two carriers' Texas hubs, which are very close. It's likely that both hubs will probably remain intact in a form similar to the present, because American and Continental simply have too much to lose by giving up their position in either market, the yields are too good, and the market share is too significant. However, what could get shifted around are the routings of some international flights. Depending on which city has less competition, or has better yields for a given international route, certain international flights could get shuffled between Dallas and Houston. Moreover, flights between Dallas and Houston could be consolidated with larger aircraft and more frequent service, giving a combined American/Continental leverage against Southwest by lowering ASM costs and potentially boosting market share.

American Airlines has a very simplified fleet structure for an airline of its size. After 9/11, the company reduced the number of aircraft types in its fleet from 14 to 6, and this has produced tremendous operational efficiencies for the carrier. Continental, which has a range of 737, 757, and 767 variants, will complicate American's fleet. However, these aircraft, even those variants which would be new to American's fleet, would bring efficiencies in maintenance and training. But what's even more important, is that increasingly, US carriers have resorted to regional jets and smaller aircraft to fill the roles larger aircraft used to play, in order to increase load factors and revenues per available seat mile. Because of its relatively uniform domestic fleet, American cannot easily tailor capacity to certain markets at certain times. The company has a large capacity gap between its MD-80s, which seat over 140 passengers, and some of the 70-seat regional jets its American Eagle subsidiary operates. Continental, while not an ideal carrier to help fill this capacity gap, helps give American some flexibility. Continental operates a large amount of smaller 737s, including some that seat around 120 passengers, and Continental recently started contracting to use 78-seat turboprops on certain routes out of its Newark hub, that have allowed the carrier to better time capacity to meet the needs of business travelers, as well as reduce unit costs. With a more diverse fleet of 737s, the combined carrier will be better able to time capacity to certain times of the day in certain markets, giving it leverage over Southwest which only operates 122- or 137-seat planes.

Like a potential merger with United, a merger with American would help Continental realize its international potential. Continental is constrained due to its lack of 777 planes, but American has 47 which will help the combined carrier add new lucrative long-haul international routes in the coming years. With the exception of American's A300s, which are very useful aircraft for carrying large amounts of cargo on Caribbean routes, both carriers' long haul fleets are Boeing 767s and 777s, allowing the combined carrier to reap additional cost savings.

Strategically, the argument can be made either for or against a merger. On the one hand, because American and Continental are such similar carriers, with similar fleets and route networks, relative to other legacy carriers, then a merged carrier would not be a diversified one, but instead one with many more eggs in fewer baskets, than a Delta/United merger. Strategically, this could work out, but it will focus the carrier on hub-and-spoke domestic routes, international travel in certain regions, and certain products and service standards, all of these being much less varied than those of other carriers. If the carrier is focused on the right markets with the right levels of capacity and the right product, then it will have a tremendous advantage over the competition. It's a gamble, and one that I think will not pay off well for the combined carrier in the long-term because the market is changing too quickly to have a narrower strategy. A diversified carrier, like a combined Delta/United, has strength in virtually every location US carriers serve, as well as the ability to attract key groups of corporate flyers and leisure travelers. A combined American/Continental might be very, very strong in Texas and elsewhere, but its service frequencies to key business markets such as San Francisco, Los Angeles, Boston, and Washington DC might pale in comparison to a Delta/United combo, making the carrier less attractive for high-yield business flyers.

This merger is less likely to be approved by lawyers at the Department of Justice than a United/Continental deal. American and Continental would simply have too much market power in Texas, especially between Dallas and Houston which is one of the busiest air travel routes in the country. Moreover, American and Continental are the only two carriers for many smaller communities in Texas, Oklahoma, and the surrounding states. If these two carriers merged, higher fares and less frequent service would likely result for communities that have struggled to maintain precious flights. The last major regulatory conflict concerns whether the DOJ would examine how American/Continental consolidation would affect fares to certain international destinations, that the two carriers dominate from the US, particularly in Latin America. These are all hurdles that can be overcome, but they may be tougher ones to climb than what a combined United/Continental would have to face.

While some of the recent difficulties in securing the Delta/Northwest merger have made an American/Continental deal even less likely, it's still a scenario that should be considered. Even if legacies aren't able to spark consolidation this year, this deal may be one to watch for in future years.

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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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Lufthansa Adds Seattle-Frankfurt Service

Lufthansa, the German Flag carrier, announced new nonstop service between Seattle/Tacoma and Frankfurt, starting spring 2008. The new service is just one of several new international flights to be added to Seattle, a city that has arguably experienced a shortage of nonstop, international flights. Air France launched service from Seattle this past summer, just in time for the peak summer travel season, and AeroMexico also recently launched service between Seattle and Mexico City. The Lufthansa service announcement also comes at a time when carriers are rapidly expanding their international flights, particularly to European destinations.

The possibility of Lufthansa coming to Seattle had previously been discounted by some, due to the fact that the airline currently operates successful flights from nearby Portland, with convenient connections to Seattle via shuttle flights. While Seattle will likely benefit from the move, it could start pressuring carriers, especially US carriers, to quickly add capacity in the market before the market saturates. While Seattle has experienced a shortage of European flights in the past, the recent additions in nonstop services, as well as an expanded array of connecting flights make it easier than ever for customers to travel to Europe.

With the US/EU Open Skies agreement coming into force next year, it's likely that additional point-to-point nonstop flights will be added between major US cities and points within the EU. That means markets which previously had no service or only one carrier could now find themselves with two or three competing carriers. This benefits cities in the West in particular, which have a harder time than many East Coast cities recruiting European service. Cities that could benefit from expanded European services include Portland (OR), San Jose, San Diego, Phoenix, and Denver, in addition to San Francisco, Los Angeles, both of which already have a considerable number of European flights.

With the US West Coast-EU market still lucrative, US carriers, most notably Northwest and United, may try to cash in before it's too late. London is a market of particular interest. United currently operates successful international service from Seattle (to Tokyo), making it more likely that the company will expand further from Seattle. United also recently announced service between London Heathrow and Denver, United's last remaining hub without nonstop service to London. With Seattle being one of United's largest non-hub markets, and United having operated the Seattle-London Heathrow route in a previous era, it's possible that the route may be reinstated.

Moreover, Northwest Airlines plans on expanding the number of cities with nonstop service to its Amsterdam hub. Northwest recently announced new service from Portland to Amsterdam, and the carrier may add Amsterdam service from other large Western markets. It's unlikely that Northwest will add point-to-point service from any European destinations other than Amsterdam. However, aside from United and Northwest, the US West Coast will see relatively few new European route announcements from other US carriers. American is focusing most of its international resources on expanding into Asia, Delta targeting international expansion from its hubs in Atlanta and New York, Continental is focusing most of its international expansion from Newark and Houston, and US Airways appears to be adding little new European service due in part to the unavailability of long-haul aircraft.

One point I'll respond to briefly is the notion of a new partnership structure between US and EU carriers, specifically the deal between Delta and Air France, which enables Delta to enter London Heathrow and gives customers of the two carriers more schedule options. This alliance will help both carriers maintain pricing power and attract business customers. Air France has been less aggressive in expanding into the United States than British Airways has, making Delta a good partner in enabling the company to generate more US traffic. Meanwhile, Delta desperately wants to enter London Heathrow and expand its European presence, which the deal allows for. Arrangements similar to this one can realistically be expected between American Airlines and British Airways, as well as United and Lufthansa, though it's difficult to place a time frame on when that could occur.

But the larger question, of whether a full-on merger between a US and EU carrier will occur is still up in the air. A well-thought merger would help both carriers tremendously, as it would give the new carrier unparalleled leverage with airports, aircraft manufacturers, and customers through pricing power. However, it's unlikely that a deal could be reached, especially with the thorny anti-trust issues raised as well as the unjust protectionist policies of the US to minimize foreign involvement in the airline industry. If the Open Skies deal succeeds, and passengers see more service and lower fares, then regulators will be more receptive to the notion of a merger, but if airlines are quick to consolidate their pricing power and drive out competition when the new deal is in place, then that behavior will only exacerbate under a merger scenario.

JetBlue Looks to Latin America

JetBlue recently filed for authority to fly between Orlando and Bogota, Colombia, as well as Fort Lauderdale and Bogota. The daily flights, which JetBlue hopes to start next April for the Orlando route and next October (in just under a year) for the Fort Lauderdale route, would represent a change in the airline’s strategy, which has been to avoid the Latin America market. While JetBlue has expanded its presence in the Caribbean, offerings flights between New York and more than a half dozen destinations in the Caribbean, JetBlue hasn't made the leap to Central or South America, save for a daily flight or two to Cancun. JetBlue has done that in part because not only is Latin America a difficult region to break into, but the carrier that dominates traffic between the US and Latin America, American Airlines, is one that has a very significant presence in key JetBlue markets: New York and South Florida. American has near-monopoly status on many Latin American routes, and as a result, has been able to charge very high fares and drive away competition. However, with low-cost carriers searching for ways to diversify themselves, American will face a new round of competition on some of its Latin American routes. For example, American has been recently pressured by Spirit Airlines, which has discounted fares considerably on routes between South Florida and the Caribbean and Latin America.

JetBlue recognizes that a significant market opportunity exists to offer an intermediate standard between American and Spirit. JetBlue would offer lower fare service than American but with more amenities (though perhaps not with the generous loyalty program and other features that business travelers demand). Many businesss travelers would continue to fly American, but JetBlue could attract a significant share of the leisure market. If JetBlue is able to get the requisite slots, it could be a major boon for South Florida residents, who don't want to have to choose between Spirit's ultra-low-fare and even lower quality service or American's sky-high prices.  However, there are issues stemming from whether JetBlue can get the necessary authority, due to the fact that American holds the rights to some slots which it has chosen not to exercise until recently, and so it's not a sure thing that JetBlue will be able to fly these routes.

However, even if JetBlue doesn't get the necessary authority, this move signals that the company is serious about expanding into Latin America, and will likely continue to take more stabs at the idea in the future. If not Colombia, then Costa Rica, Panama, Ecuador, Peru, and even Brazil are definite possibilities for JetBlue, as these are all relatively high-yield markets dominated by American. American and Spirit will fight hard to keep JetBlue out of Latin America for as long as possible, and could likely succeed in the short term, but if JetBlue is able to enter these markets, it will enable the carrier to make substantial profits while diversifying itself away from lower-yield, competitive routes along the East Coast.

American Airlines Looks Toward Wi-Fi

American Airlines announced a major step today towards equipping its planes with Wi-Fi internet access. The company announced that it has signed a memorandum of understanding with AirCell to offer high-speed broadband wireless Internet onboard some of its aircraft. AirCell is the company that won the auction from the FCC last year to operate airline Internet service over a certain radio spectrum. American will first test wireless Internet on its fleet of 767-200 aircraft, which primarily fly transcontinental routes starting in 2008. The service will be available for a yet-to-be-determined fee in all classes of travel, though some pundits, like my acquaintance Glenn Fleishman, suggest that pricing could be $15 on flights of four or more hours, $10 on flights less than four hours, or $5 an hour on a pay-as-you-go basis.

This is a long way from Connexion, the Boeing service that was introduced on several foreign carriers, such as Lufthansa, All Nippon Airways, Japan Airlines, and Scandinavian Airlines. AirCell is different from a satellite-based system like Connexion, which required much more equipment leading to heavier and more fuel hungry aircraft, as well as up to two weeks to install the equipment on the plane. Given how precious aircraft time is (since widebody aircraft often lease for several hundred thousand dollars a month), that was very costly to the airline. The estimated investment airlines made to install Connexion on their planes was $500,000. Since the system cost so much to install, many passengers had to use the system at a high cost (often between $25 and $30 per flight) in order for the airline to recover its costs.

AirCell claims that its system can be installed on a plane overnight, enabling the aircraft to stay in service, generating revenue for cash-strapped carriers. The AirCell system carries much smaller antennas than Connexion and uses cell towers instead of satellites to link to the Internet. This is a much easier and cheaper way for airlines to deliver Internet access. But what’s really interesting is this. I talked with a representative of the company this afternoon, and he said that interminability shouldn’t be an issue with the system. Even though most flights travel over areas with limited cell coverage (since much of the country, particularly rural areas, lack cell coverage), the system will only need to connect to less than 100 cell towers on the ground for an entire transcontinental flight. This is due to the high altitude of the aircraft. As a result, over virtually every part of the country, customers should be able to obtain Internet access.

The reason so many airlines, including American, Southwest, and JetBlue, are looking to offer some sort of onboard Internet or email access is because business travelers are starting to demand it. With increased pressures on their time, business travelers are striving to be more productive, and airlines are trying to capitalize on that. Since business travelers are the most coveted airline customers, providing most airline profits, airlines are eager to listen to business customers’ needs, especially since the competition to gain business traffic is so fierce. With Southwest now trying to compete seriously for business customers, legacy carriers are trying to up the ante on business amenities.

Adding internet connectivity will do three things for airlines. It will make a given carrier more attractive to business travelers, but it will also make flying in general a slightly more attractive experience. It also offers the possibility for airlines to generate much-needed cash. Airlines can do little to control security, weather, and air traffic control delays, and they haven’t done a good job controlling some other issues such as airport staffing and lost luggage rates. But if business travelers feel that their travel experience will be more productive, then flying will be more attractive and they might feel less pressure to host meetings over the Internet or simply forgo business trips. And while business travelers need to fly on transcontinental routes, internet access will really come in handy for airlines like Southwest that are trying to keep business customers off trains and buses for short distances. Trains and busses are in most cases more comfortable and more convenient than flying, but they aren’t necessarily faster. However, business travelers can be more productive on trains and buses (some bus lines on the East Coast even offer Wi-Fi, and Amtrak offers tables and other areas where business travelers can meet with colleagues.) Airlines hope that adding Wi-Fi will close the productivity gap between air travel and other forms of transport.

Moreover, depending on what the fee structure is, airlines could make a lot of money off of the service, however, it remains to be seen whether customers will be willing to pay upwards of $10 a flight for Internet access when they already have to pay nearly that much for a sandwich. Business customers might be willing to, but for the majority of customers onboard, it might just be another frill that they'll shun.

The question of whether adding Wi-Fi will be an effective customer loyalty tactic and an effective revenue generation tool for airlines is still up in the air (no pun intended), but given the enormous potential it offers business travelers, it could be just what airlines need to keep business travelers if not happy, at least content.

 

US Airlines Offer Bids in Fight for China Flights

Several major US Airlines offered bids a week or so ago for route authorities to China. The DOT will award up to six route authorities over the next two years, and the rules and process for which airlines can bid for which are obtuse to say the least. The most sought-after one enabes carriers to start service in 2009. American has applied for a route between Chicago O'Hare and Beijing. The airline already operates a route between Chicago and Shanghai which has been very successful for the airline. If successful, this route would be a major boon to the city of Chicago, which currently has no nonstop link with Beijing, and could use one as America's third-largest city. The route would likely be quite popular, given the amount of business traffic between the two cities, as well as the connecting traffic that American could generate from points in the Midwest and the Eastern US. Chicago is perhaps America's most important air traffic hub, and facilitates a great many connection opportunites. But while American's Chicago-Beijing route has a strong chance, I think Continental has an even better chance with its Newark-Shanghai application. The New York-Shanghai market is critical for business travelers, yet it has no nonstop service on a US Carrier. Continental applied for the route last year, but lost out to United's Washington DC-Beijing application. This time, I think Continental has a much better shot because the market is so underserved, yet so vital.

Another prominent route application has been filed by Delta. Delta wants to fly between Atlanta and both Beijing and Shanghai. Delta has previously applied for rights to fly between Atlanta and Shanghai, but the airline's application has been rejected. This time around, the airline has a much better shot on the Shanghai route, since it will be bidding for a route authority that's designated for carriers that don't yet serve China. However, the Beijing route will face much tougher competition in 2009. The economy has been booming in the South, with a great deal of new foreign (and especially Asian) investment, most recently with the announcement of a new manufacturing plant by Honda in North Carolina for its HondaJet aircraft. The DOT is very interested in adding new flights to regions which lack China service, and the South is a major underserved area. While Delta will have a tough fight to convince the DOT that it should be given route authority for China, it has a good shot at winning the Beijing rights. I think that Delta's odds are about on par with Continental's, and better than those of any other carrier for the 2009 slot. There's also a good article about Delta's bid in the Atlanta Journal-Constitution. 

Other airlines applying for the route authority include US Airways, which has applied for a Philadelphia-Beijing flight. While the DOT looks favorably on carriers which currently don't operate flights to China, US Airways has some very tough competition. Philadelphia is a very important business center, and certainly needs a nonstop China flight, as the city lacks nonstop service to China on any airline, but I don't think the route authority now up for grabs in 2009 will belong to US Airways. Philadelphia needs to develop its Asian market before it gets China service (the city currently has no nonstop service to Asia). Also, Philadelphia offers limited connection opportunities to points east (primarily for geographic reasons) and connections to the Northeast might be better faciliated by a flight from New York or Boston. Philadelphia has a shot, but the city may have to wait a few years.

United wants to add new service between Los Angeles and Shanghai starting in 2009, the first on a US carrier. While this service will eventually get added, given that this market is already served by a foreign carrier, and that United recently won a route authority, I don't think this bid is as likely as most others. However, United is also bidding for an authority to start service between San Francisco and Guangzhou starting in 2008. I think this one is much more likely, since United claims that San Francisco is the metro area with the most traffic to Guangzhou that lacks nonstop service to the city. Moreover, few other carriers are seriously looking at serving markets outside of Beijing and Shanghai, and adding nonstop links to additional points in China might be very beneficial to increasing US-China ties.

Northwest is also looking for rights to serve Beijing and Shanghai nonstop from Detroit. Northwest already has considerable service to China (for a US carrier) through its Tokyo hub, and service through Detroit would greatly expand the number of single-connection markets from which Northwest could offer China service. I think these bids are less likely, because although Northwest has experience flying to China, these routes simply aren't what's needed right now. The Midwest is receiving some new foreign investment and could use the flights, but Chicago has already positioned itself as the Midwest's Asian gateway, and since the city offers more connections to more places, it would make more sense for Chicago to get the route. However, it's very unclear what will happen as the DOT starts to make its China decisions. The DOT could be strongly influenced by politicians backing the China campaigns of various airlines, and political influence and hand-wringing may have more to do with an airline's success than the route's merit. However, in the past, the DOT has done a satisfactory job of keeping politics out of the decision-making process, and I suspect that the routes with the most potential for success will be the ones awarded.

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