More Questions Raised About Skybus's Viability

As Skybus prepares to launch service tomorrow, many questions linger about the long-term viability of the airline. While the company is well-capitalized and well-aware of the competitive landscape it faces, it seems to be headed for trouble. History is littered with airlines that have overestimated the viability of certain markets, and I think Skybus will soon be one of them as I doubt that Greensboro, Richmond, Kansas City, and Bellingham have the traffic necessary to support profitable service. Skybus is trying to avoid markets with a lot of competition with its expansion. Fair enough, but in an extremely competitive marketplace, there are very few viable markets where there is little competition, especially since Skybus is launching services from a city – Columbus, Ohio - served by Southwest Airlines. The markets left with little competition carry greater risks, and may not have enough traffic to support a daily flight on a 150-seat plane. Skybus may be able to sell all the $10 tickets it wants to on these routes, but the measure of a successful airline isn't by the number of loss-leading tickets sold, but by the number of profitable tickets sold. And I suspect that Skybus will fail to impress on this measure.

Unfortunately for Skybus, Columbus is simply too small a market to fly from, especially given the amount of service already supplied by Southwest and Delta. Perhaps Skybus will be able to lower fares enough so customers from other markets will find Columbus attractive, but given the distance between Columbus and other markets, that might be a bit of a stretch. Cincinnati is one of the closest major markets to Columbus, and it's 110 miles away. Granted, Cincinnati has some of the highest airfares in the nation, so some customers might find a switch to low-cost Columbus attractive, but how many business travelers or others with time-sensitive plans will be willing to make that trek? If Skybus were to open new bases of operation in Burbank and Portsmouth, which may occur in the not-too-distant future, then those might be more successful because those airports have more populous catchment areas. Until then, I have serious questions about the viability of the Skybus business plan.

Much of what the plan is based on is this notion that people will fly to anywhere if it's cheap enough. According to CEO Bill Diffenderffer, people will fly from "nowhere to nowhere" for the right price (taken from this Columbus Dispatch article about Skybus's launch). Ryanair has been able to market dozens of smaller cities as attractive destinations because the flights are so cheap. That may make sense in Europe, where many of these destinations are popular vacation spots, but most of Skybus's cities, especially its weaker markets, aren't. Moreover, Ryanair has a huge base of people in London to support its flights; Columbus has far fewer people to support flights with similar-size aircraft. Yes, low fares will help stimulate traffic: For example, many people plan on using Skybus's low fares to visit family members. But families visiting each other don't fill planes. Vacationers do, and on most of its flights, Skybus won't be transporting primarily vacationers. Another element of Skybus's dilemma is the number of tickets that it plans to sell as the last minute. Typically, tickets purchased at the last minute are bought by business travelers who need to fly quickly. Business travelers have historically been averse to Ryanair, and I suspect that they will be to Skybus as well, especially given Skybus's menu of far-flung alternate airports. If Skybus offers punctual, friendly service, then I suspect some business travelers will fly the airline and purchase pricey last minute tickets, even with the drawbacks surrounding alternate airports. But if Skybus offers the American service equivalent of Ryanair, all bets are off. Without a good base of business travelers, it's unclear whether Skybus will have the necessary load factors and yields to make money.

But another issue stems from Skybus's use of ancillary revenues to subsidize the cost of flights. Skybus doesn't plan to generate as much of its total revenues from ancillary sources as Ryanair does. Skybus has the challenge of being the only US airline to charge for all checked bags. While Spirit has tightened their policies in recent months, the carrier still allows customers to check one free bag. Not Skybus, which will charge $5 for the first two bags, and $50 for each one thereafter. It sounds like extortion to me, and I think customers who aren't used to the idea will be turned off. Moreover, Skybus may have difficulty enforcing its policy on food. The airline prohibits customers from bringing outside food or drink onto aircraft in a bid to force more customers to pay for pricey onboard refreshments. However, if that policy is enforced, the airline could be faced with a mob of incredulous customers; even Ryanair doesn't prohibit onboard food or drink just yet.

Skybus has started advertising on planes through a partnership with Nationwide Financial, but Skybus's aircraft advertising program will need further development in order to make it a more important and viable component of the airline's ancillary revenues. However, Skybus's biggest ancillary revenue problem is that the airline hasn't promoted its outside hotel and car rental vendors on its Web site as much as it should. Ryanair has demonstrated that hotel and car rental commissions can add a meaningful amount to the bottom line. But many Ryanair travelers fly to vacation getaways and need hotel rooms and car rentals for their vacations. Skybus doesn't have many vacation destinations on its route map, and consequently won't be able to collect the commissions Ryanair does.

If Skybus wants to succeed, the airline needs to focus on marketing itself. For a new airline, marketing is key, especially given the competitive nature of the business. Skybus is adding a lot of capacity to an already crowded market, and if it can't fill planes, it can't make money. I'm not so concerned about Skybus's fares, since the airline seems to have their fare structure well thought out for profitability, but that strategy will mean nothing unless those tickets are sold. Also, Skybus needs to rethink how it is targeting its ancillary revenue streams, and focus more on hotel and car rental commissions. But that may not come until Skybus's route map is restructured with more leisure destinations. Finally, Skybus needs to diversify its routes away from Columbus. Not in a year, because it may be too late by then. Skybus needs to open new bases in some of its secondary airports (such as Burbank, Portsmouth, Oakland, or Fort Lauderdale) very quickly. If Skybus can do those things, it might have a chance. But otherwise, it will be stormy skies ahead for the startup.

More About Intra-California Competition

Why are so many airlines entering the intra-California market?

There are a few reasons, but the first is that the intra-California market is growing. California is one of the nation's fastest growing states, and the population is expected to balloon in the next several decades. While this population increase may be unsustainable and incredibly damaging for the long-term health of Californian society, it means big bucks for airlines. As the population increases, the demand for intra-state air travel will increase, and it's much easier for an airline that is established with significant market share on a route to expand to meet increasing demand than for an airline with little or no market share to meet that demand. Also, with the improvements made to San Francisco International to make it more cost-competitive with other area facilities, and along with the new competition being brought by Virgin America, other low-cost airlines are taking more of an interest in intra-state air travel. Also, LCCs that have to find places for new planes would rather expand on the West Coast where fares are higher than on the East Coast, where competition is even fiercer and yields are lower. But the final reason intra-state air travel is becoming increasingly attractive for airlines is because their revenues have suffered recently. Airlines can make more money on short hops than on transcon flights, since the airline can charge higher rates per mile flown for a short flight than for a long one (due to fixed costs airlines incur regardless of the length of the flight, such as landing fees, baggage handling costs, and the cost of using gate and check-in agents.) But, airlines can fly more short-haul flights with a single aircraft than long-haul flights, and efficient aircraft utilization is an easy way to increase revenues. Even though airlines have fixed costs, when many of those costs have been trimmed, then airlines are fighting for revenue, and the revenue equation is better for shorter flights where airlines can fly more flights in a given amount of time with the same plane.

How will airlines compete in this market?

What airlines will be competing on in the intra-California market are three things. The first is price. Flying up and down the state, even on a low-fare carrier, can get expensive, and customers want to minimize the cost of their travel. That will mean that a fare war of epic proportions may occur if or when JetBlue and Virgin America expand services. I wouldn't be surprised to routinely see $29 fares to the other end of the state during this fare war. It's also likely to be a prolonged fare war since there aren't any weak competitors in this market. This means that a fare war will give Californians some great bargains for many months, but it will also hurt the financial health of the airlines.

The second is convenience. This is both in terms of flight schedule as well as airport location. Low-cost airlines need to ensure that they offer enough flights to accommodate business travelers, who typically want flights very early or very late so they can work a full day. As a result, airlines like Alaska and Southwest, which are already established in many intra-California markets and offer a convenient menu of flight times, will have an advantage over other LCCs like JetBlue or Virgin America, which may only offer one or two flights at a time a business traveler would find suitable instead of four or five. Airlines will also have to win the convenience war with the airports they serve. Now that San Francisco is becoming more popular with LCCs, low-cost carriers will be a more viable alternative for business travelers to the legacies American and United from the San Francisco area. It will be the job of LCCs to ensure that they offer flights to a sufficient number of destinations on either end of the state. This is true especially in Southern California. Right now, the Ontario Airport is most ripe for expansion of service, though it's likely that LCCs will increase service at all the commercial airports in the region (excluding Palmdale, which will need a little more time before it can be attractive to LCCs.) Travelers heading to or from the LA Basin want to avoid driving as much as possible given the horrific state of traffic in the region. As a result, many travelers, leisure and business alike, will be willing to pay a bit more for service to a more convenient airport. That doesn't always mean LAX; Burbank, Orange County, Long Beach, and Ontario all offer convenience to a segment of intra-state travelers, and LCCs will need to cater to all of them if they want to win the revenue and market share battles.

Finally, as passengers expect more from LCCs, onboard amenities won't be the battleground, but frequent flyer amenities will. Airlines will try to fill seats, and especially try to lure business travelers, by offering bonus miles (or credits) for frequent travelers. Southwest requires eight round-trips for a free ticket. I suspect that if competition gets heated, Southwest will give customers 1.5 or 2 times the normal credits, giving them a free flight after six or even four round trips. JetBlue will need to improve its frequent flyer program the most. Right now, customers have to fly 12.5 round-trips within California to be eligible for a free ticket. That must change if JetBlue wants to lure business travelers. TV is a nice thing to have, but it's much better to have more free flights. Similarly, Virgin America will need to ensure that its frequent flyer program is competitive with its in-state rivals. American and United will certainly retaliate against LCCs, offering similar promotions to retain their hold on business travelers, and if they seriously retaliate, a frequent flyer promotion could be very effective. Business travelers would rather stay loyal to their current carrier than move to another, and if American and United offer the right promotions, those business travelers won't be going anywhere. If the competition gets really heated, then frequent flyer miles will be another major battleground (in addition to fares and convenience) on which airlines fight for customers.

As competition increases on California intra-state routes, airlines will fight harder than ever for passengers, and in six months to a year is when the results will finally start to show. When they do, there will likely be clear winners and losers. Southwest and United are the two airlines best positioned to succeed, and JetBlue, Delta, and Virgin America, are taking the most risks. But given that this is California, anything can happen, and after the first stage of this battle is over, Southwest and United may be in much worse competitive shape than when it began.

See the post JetBlue Considers Bolstering Intra-California Service for more information on the topic.

JetBlue Considers Bolstering Intra-California Service

In light of recent announcements that competition may be heating up on intra-California routes, JetBlue CEO David Neeleman announced at the company's annual shareholder meeting today that JetBlue is considering adding additional flights on routes within California. While Frontier has announced its intention to withdraw from the San Francisco-Los Angeles market, Delta announced additional flights from its Los Angeles focus city today to Oakland, Sacramento, San Francisco, and San Jose. The new Delta flights will be operated with regional jets by a feeder carrier, ExpressJet. Moreover, Virgin America is also set to enter the intra-state market within a few months with new flights between San Francisco and Los Angeles as well as San Diego. Southwest, Alaska, American, and United are also major players in the intra-California market.

As the competition in California heats up, JetBlue is making a choice whether to size up its operations or whether to withdraw from the intra-state market. In a competitive environment like this, customers must know which airlines carry passengers within the state. Even though JetBlue is a well-known brand, many Californians don't know that JetBlue currently offers intra-state service. With increasing numbers of flights on more and more airlines, passengers are increasingly less likely to choose JetBlue unless the airline offers more flights and attempts to grab a larger slice of the market. JetBlue currently flies between Long Beach and Oakland as well as Sacramento. JetBlue is considering starting intra-California flights between other airports, and will need to do so in order to survive in the competitive market. JetBlue has an advantage over some of its competitors, since its Embraer 190s, which might be used if the airline expands in California, enable the carrier to offer greater frequencies on many routes, making JetBlue more attractive to time-sensitive travelers. But if JetBlue can't expand on routes within California, it needs to withdraw from the intra-state market entirely, because otherwise JetBlue will end up like Frontier, with a solid brand, but with little awareness among customers that it flies intra-state.

But this convenience must be carefully thought out. JetBlue is also entertaining the possibility of starting intra-state flights at Los Angeles International. While this would help JetBlue attract some business travelers, it would also put JetBlue into direct competition with Southwest, which is something JetBlue has tried to avoid during its expansion. Southwest already has a very large operation at LAX, and it might be difficult for JetBlue to gain a foothold at the airport. Competition, combined with the difficulties some airlines have had with the airport authority about significantly higher terminal rental costs, may keep JetBlue away from LAX, at least for now.

However, if JetBlue does expand intra-California service, the airline will inevitably face competition from Southwest, due to Southwest's massive presence in the state. JetBlue can compete with Southwest, since JetBlue offers more amenities and comparable fares, but given the convenience Southwest offers customers (flights on many intra-California routes are often every hour), and the fact that on a one hour flight, amenities aren't too important, customers may stick with the established carrier. It's not just JetBlue that will have trouble breaking into the intra-California market, Virgin America, even with its amenities and flashy brand, will have difficulty attracting customers.

As a result, JetBlue will have its hands full if it decides to expand into more intra-California routes. However, the rewards for success will be lasting, since the market has a lot of long-term potential. JetBlue needs to be careful if it expands in California, but the airline has the potential for success if it exploits its strengths (like its Embraer 190s), and minimizes its weaknesses (like its frequent flyer program, which needs to be improved to be made more attractive to business travelers). There is no reason why Southwest should dominate the low-fare market in California, and JetBlue may exploit the opportunity it has to change that.

See the post More About Intra-California Competition for more information about this topic.

Delta Exits Bankruptcy and Rebrands: Can the Airline Now Compete Freely?

Delta Air Lines formally exited bankruptcy today, ending its protection from creditors. But the airline exits bankruptcy when the industry is still experiencing difficulties, particularly with regard to fares that are still too low and potential overcapacity with two new competitors coming on line this year. Delta's restructuring has focused on reducing costs, and the company has done a fair job of that. Delta will continue to face uncertainty in several areas, but particularly with regard to its hubs. Right now, much of Delta's profits are being made with customers flying to or from a hub, and that will inevitably change in the future, given the expansion of low-cost carriers in this country. As a result, Delta will need to focus more on connecting traffic, especially to higher-margin international destinations for a greater share of its profits.

One of Delta's largest profit centers is in Cincinnati, where according to the Department of Transportation, the airport has the highest average fares of any major airport in the country other than Anchorage (which for geographical reasons is likely to have very high fares). Cincinnati even has higher average fares than Honolulu! And while Delta has a virtual monopoly in Cincinnati, that probably won't last. I suspect that in the next couple years an LCC, most likely AirTran or Frontier, will add service to Cincinnati (although Southwest and JetBlue are reasonable possibilities as well), and Delta will try to drive its new competitor out of town, a tactic that has worked in the past and may work in the future.

However, if an LCC can maintain an adequate foothold in Cincinnati, especially one that offers connections to many business centers across the country, then fares in that market will decrease, and the massive profits Delta is making in the city will decline sharply, which could spell more bad news for employees at Delta's regional subsidiary Comair, who have already had a tough time accepting significant pay cuts during Delta's bankruptcy. It's important to note that since Comair operates an all-regional jet fleet, its costs have skyrocketed in the past few years, since regional jets are more fuel-hungry than larger planes, and as a result, its competitiveness has decreased. Pay cuts, which have damaged employee morale, were necessary to help stabilize the company (though it's debatable whether Comair management made cuts that were too steep). Since Comair does much of Delta's flying in Cincinnati, an LCC could force employees at the subsidiary to sacrifice even more, and Delta's network at the hub may shift, since additional regional jets may get trimmed from the network in order to reduce Delta's costs. Those changes may be necessary soon if low-cost competition enters Cincinnati, and in any case will eventually be within 5-10 years in order to modernize Delta's hub there and lower its costs. These changes could make Delta's overall transformation strategy more difficult, especially if yields from Cincinnati decrease substantially.

Delta's other two hubs in Atlanta and Salt Lake City may also face changes, but not nearly as many as Cincinnati will. Atlanta and Salt Lake both have low-cost competition, and Delta has adapted nicely to the competitive climate in both markets. Both Delta and AirTran are struggling to figure out how to add capacity in an East Coast market which is oversaturated by low-cost competition. As a result, Atlanta will see mainly a boost with international flights in the next few years. The number of domestic services may increase, especially if Delta increases frequencies on routes where larger 767 aircraft are being replaced with smaller 757 or 737-800 aircraft, but the amount of capacity will not change substantially. AirTran will likely focus on building domestic operations in focus cities outside of Atlanta (as I will discuss in a post to be added within a day or two), while Delta will concentrate on adding service from Atlanta to a growing number of destinations, particularly in Latin America and the Caribbean, Europe and the Middle East, and depending on the DOT's decision in 2008 concerning China route authorities, Delta could add additional service to Asia to complement China flights.

Salt Lake City is a bit harder to analyze, because the West will become increasingly important for Delta, as the airline tries to target additional traffic to Latin America as well as in the growing Southwestern United States. Salt Lake City will be an important connection point for Delta destinations in the West, but its importance in the Delta network could diminish if Delta cuts regional services to many smaller cities due to high costs. Right now, Delta doesn't seem to be heading that direction, in fact, the airline seems to be using its massive regional jet fleet (much of which is service Delta contracts to SkyWest Airlines in Salt Lake City) to serve a growing list of destinations, including Yakima, WA and Salem, OR. However, much of Delta's future depends on the viability of regional jets as a cost-effective means for transporting passengers. If fuel costs skyrocket, then Delta's transformation plan could get derailed, and the effects in Salt Lake City and Cincinnati would be disastrous. Let's hope Gulf War III doesn't start anytime soon.

However, the future importance of Salt Lake City could also depend on how Delta's expansion in Los Angeles goes. Delta seems to be using its reoriented international focus to turn its Los Angeles focus city into a small hub, adding to the list of cities it serves from Los Angeles in both the US and Mexico, partly through a new regional jet contract with ExpressJet Airlines for ten regional jets to serve cities on both sides of the border. Delta plans on offering convenient connections between major cities in the US and destinations in Mexico. If Delta's Mexico flights don't attract sufficient yields and loads, then the entire Los Angeles operation could be downsized, and the importance of Salt Lake City could grow. However, if the Mexico operations in Los Angeles succeed, then Delta could place a renewed focus on Los Angeles, adding flights from the city to other key markets in South America, the Caribbean, and possibly Asia.

Delta's focus cities in Washington DC, New York, and Boston will continue to be important for the airline in the near future. This is especially true in New York, where Delta has a sizable presence at JFK with transcon and a growing menu of international flights as well as at LaGuardia with a profitable mix of flights popular with high-yield business travelers. Boston and New York will continue to receive point-to-point flights from major US cities in the near future, even though Delta has reduced its presence somewhat in Boston due to low-cost competition. Business travelers are very important for Delta from all three markets, and will be courted even more aggressively as Delta continues to improve its amenities and services on shuttle, transcon, and international flights. Moreover, the Delta Shuttle operation is still a very profitable enterprise, even with new competition from JetBlue, and it will continue to be profitable unless demand from business travelers slows significantly. There is no reason to believe that Delta will want to realign capacity at its hubs and engineer a pullback from its lucrative business markets in these three cities. As a result, Delta's focus city operations from the three major East Coast business centers will continue for the time being.

As part of the announcement today, Delta announced an agreement with Pinnacle to fly 16 CRJ-900 aircraft in a 76-seat two-class configuration to help feed Delta's operations. This should enable Delta to add frequencies on routes to select midsize markets while still being able to cater to their premium class customers. But in addition to this minor announcement, Delta plans other announcements throughout the week, as it celebrates its emergence from bankruptcy. These announcements may include a major new aircraft order. Delta has dozens and dozens of older 767 variants that need replacement in the next ten years, and the airline has been rumored to be considering the 787. It's entirely possible that Delta and Boeing have negotiated an agreement for new aircraft, and are waiting to announce it until after Delta's formal emergence from bankruptcy protection for legal reasons. A Delta 787 order is a rumor, but one that makes perfect sense given Delta's need to transform into a more cost-effective carrier with an international focus. Within the few years, Delta plans on transitioning from using many of its widebody aircraft from routes within the lower 48 to international routes, where they are needed more. Delta is launching service to more and more international destinations, and has been strained to use 767s on some longer routes, such as to Lagos where the aircraft needed to be retrofitted with special crew rests. Delta needs aircraft other than 777s (of which Delta may order more as well) for its longest international routes, and since some variants of the 787 can fly farther than comparable 767s, it may make the plane even more attractive to Delta as a partner for 777s on very long routes. It's also possible that Delta will order additional short-haul aircraft, most likely Boeing 737-800s, which Delta will need as it upgrades frequencies on domestic routes when additional 767s are replaced. However, Delta may wait until Boeing or Airbus release a new 737/A320 variant before making a large purchase. Even though this is pure speculation, given the opportunity Delta has right now, a major widebody aircraft order makes sense. 

But what Delta needs even more than new aircraft is a new way to target travelers through amenities and services. Delta is upgrading its amenities on transcon and international flights, but it's still not enough if Delta wants to compete with international carriers. Delta needs to invest more in upgrading its amenities in all classes of travel. One key service that Delta needs to improve is its frequent flyer program, SkyMiles. Even though the program partners with Northwest and Continental, offering its members hundreds of ways to earn or spend miles, it is still considered by many business travelers to be one of the more mediocre frequent flyer programs in the US. Delta, and all airlines for that matter, need to make a renewed effort to increase award availability for its business travelers. Because planes are fuller than ever, airlines have trimmed the number of seats that can be redeemed with the lowest number of frequent flyer miles. Delta needs to ensure that its most frequent flyers are given preferences when searching for available award seats, but Delta also must enable those who fly less frequently to still have a realistic shot at redeeming miles. With rising ticket prices, frequent flyer miles are becoming a more important source of tickets for travelers and a more important component in a traveler's decision when choosing an airline. Because of this, Delta must do what it can to maximize availability without sacrificing revenues. If Delta doesn't take the lead on this issue, then it will hurt the airline's reputation with business travelers, which will only diminish the airline's yields and the overall effectiveness of its transformation plan.

Another service Delta plans to offer is carbon offsetting, a first for a US carrier. This is a brilliant move by Delta that I believe will serve them well in courting many younger, more environmentally aware travelers, who typically flock to low-cost carriers. Carbon offsetting is gaining popularity in Europe (though not necessarily respect, as the Guardian discusses here), and it's an important service that airlines will be expected to offer their customers within the next five years. By getting a jump on the competition in this area, Delta is preparing for a long-term trend in the industry of environmental awareness and action. Delta appears to be approaching this issue, and the other pressing issues facing the company with a long-term focus, which is exactly the kind of thinking that will keep Delta out of bankruptcy long into the future. Even though Delta will continue to encounter difficulties from all sorts of pressing issues facing the airline, now that Delta has had an opportunity to restructure, the company seems to be better prepared for the challenges it will face in the future.

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How Changing Airline Demands Will Transform Regional Jet Utility

Now that Midwest Airlines and ExpressJet have made new commitments with regional jets which differ from traditional hub-small market routes, other airlines may have to be more creative with how they deploy their regional jets (or those of the regional lift providers they contract with). Airlines have been cutting regional jets from their fleets, specifically 50-seat and below jets, in an effort to cut costs. 70-seat regional jets, however, are still popular with airlines because they have better economics than 50-seaters, and it's unlikely many will be redeployed in the next couple years. Many of the 50-seat and below regional jets which remain will be used to fly traditional hub-small market routes which are still profitable, even with high fuel prices. However, some of the jets may also be used to start new point-to-point routes, similar to what ExpressJet is doing. Regional jets are well-suited for a couple of applications which will become more important to revenue-conscious airlines in the coming years.

First, regional jets offer a good way to deliver small amounts of capacity to in order to facilitate connections at focus cities. For example, Delta is building their Los Angeles operations, and has been adding an increasing number of flights to Latin America. And while Delta has a sizable operation in Los Angeles, and nonstop flights from LAX to many cities, particularly on the East Coast, Delta has stayed away from competing with the three big boys on the West Coast routes, Alaska, United, and Southwest. But Delta announced new regional jet service to begin June 7 from Seattle and Portland to Los Angeles. The new service will be operated by the former Delta subsidiary ASA (now part of SkyWest Airlines). Both flights depart early in the morning and return in the evening, timed perfectly for connections. Why did Delta add these flights on a regional jet which is far more inefficient to operate than a 737 which Alaska, United, and Southwest all operate? Primarily in order to facilitate connections at LAX for Latin America flights. Delta recognizes that in order to be successful on any route, it needs to maximize the amount of potential traffic that can utilize it. And while LAX has a lot of origin and destination traffic which will help sell tickets, O+D traffic alone won't fill planes. But LAX is a poor connection location, particularly on Delta's route network, since most of Delta's services from LAX are to the East Coast. With Delta's large Atlanta hub, passengers on the East Coast can easily connect to most of the same Latin American destinations they serve from Los Angeles nonstop from Atlanta. These passengers don't need to travel to Los Angeles. And so as a result, Delta needed to find ways to get passengers onto their LAX-Latin America flights, and connections to the Pacific Northwest made perfect sense. Delta isn't trying to compete for market share with Alaska, United, and Southwest on the Seattle/Portland-LAX route, that would be lunacy with a 50-seat regional jet. Delta is simply using some regional jets which would otherwise sit empty on the ground to expand their route network and to gain market share on routes to Latin America. The regional jet flights themselves may not be profitable, but Delta should make money because most of those passengers who travel from Seattle or Portland will continue on to Latin America, enabling Delta to charge a higher fare and make a profit overall. Finding niche applications for regional jets can be tough, but Delta's idea to use the aircraft to add capacity between large markets in order to facilitate connections should work well, provided there is sufficient demand for travel to Latin America, especially during the upcoming hurricane season.

Secondly, regional jets can also be used for starting point-to-point service, in the spirit of ExpressJet, to build up service from various markets. The excellent characteristic about regional jets is that they can be used to quickly build up service in a market to gain market share, and can be used to operate nonstop flights to many different cities, although its costly to do so, especially when competing against an airline using mainline aircraft. For example, in a city such as Omaha, regional jets could be used effectively by a lift provider contracting with a major airline to add service to a variety of cities unserved by mainline carriers. Service from Omaha to cities such as Seattle, Portland, San Jose, Austin, Raleigh-Durham, Indianapolis, and Richmond could enable an airline such as Northwest to build market share in Omaha without using precious mainline aircraft. Granted, Northwest would probably sell tickets at a premium to other airlines offering connecting service, but it would offer loyal customers more options for point-to-point service. And since those who are most likely to need nonstop service are business travelers, who already pay a premium for tickets, it could be a win-win situation, provided routes are carefully selected, and flights are timed to the needs of business travelers. This kind of service wouldn't facilitate many connections, it would simply offer nonstop service where none currently exists. Actually, Northwest has tried something similar to this in Milwaukee and Indianapolis, with mixed results. Both of those cities lacked nonstop service to many major business markets, and Northwest filled some of the gaps with mainline aircraft (mainly 100-seat DC-9 planes), and other gaps with 50-seat regional jets. Northwest has continued some of the routes, but had to cancel some as well. Unfortunately, Northwest tried to do to much in both markets. Northwest has had to pull most of its point-to-point flights out of Milwaukee because Midwest Airlines offered competing service with a better product than Northwest at a competitive price. Consequently, Midwest was able to dominate many of the point-to-point markets Northwest entered. Northwest's Indianapolis operations have been more successful, and the airline has retained many of its point-to-point flights from that city. If Northwest or any other airline wants to use regional jets to build market share, they need to do it in a location which is relatively free of competition on nonstop routes, and which offers the traffic levels to sustain point-to-point flights to multiple destinations. There are markets out there which fit this description. Omaha is only one example; Colorado Springs, Lexington, and Buffalo are all examples of markets which could benefit from the introduction of regional jet point-to-point service.

These are only two examples of how airlines can try to redeploy 50-seat and below regional jets. If airlines can find the right niches for these planes, then they will find a new life, because while their economics may be poor, there are still markets and routes where a regional jet is required and where that level of capacity isn't a competitive disadvantage (as many airlines with bloated regional jet fleets are now finding), but rather a competitive advantage. Airlines may find that because regional jets enable them to closely tailor capacity to market demands and to grow focus cities and other markets slowly, they will become assets. But, airlines must ensure that the routes they do start will be able to sustain themselves with higher fares, so airlines won't have to have sell seats at fire sale prices like Independence Air, an expedient way to failure. Airlines that fail to find ways to effectively redeploy their regional jets will find them increasingly costly and burdensome.

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Is Midwest’s 50-Seat Plan Really Aimed to Stabilize the Airline?

Midwest Airlines launched new flights today on 50-seat regional jets, operated by SkyWest Airlines. Midwest decided to launch the new service supposedly in response to demands from customers for new and expanded service from Milwaukee. However, Midwest's launch of 50-seater service comes at a time when no other American airline wants to even contemplate new 50-seat regional jet service; the planes are simply too inefficient for their needs. However, Midwest is an airline that is not only expanding, it's also one that's in the midst of a turnaround to profitability, and the company has demonstrated that it can turn itself around, as Midwest reported profits of $5.4 million last year. The 50-seat regional jets will supplement (but not replace) regional aircraft already flying for Midwest, making some routes cheaper to operate, since a 50-seat aircraft is cheaper to operate per passenger than the 19- or 32-seat aircraft which are currently flying for Midwest. However, regional jet flying, especially on 50-seat and below aircraft, seems to be a threat to any airline's profitability, even with trimmed costs. Midwest is one of the few US carriers that can command a price premium for its services, and its new regional jet service will offer convenience to business travelers who now won't have to connect to fly between certain markets. However, even with that price premium, regional jet flying is still a very risky, low-yield business, and Midwest is gambling that regional flying isn't dead. They may be right, and the shift in how airlines view regional jets may help Midwest. More and more regional jets are being placed on routes, not to small markets, but between intermediate and large markets which lack significant or any nonstop service. ExpressJet is testing whether this model will work, and whether business travelers are willing to pay a premium to fly nonstop. Midwest seems to be doing the same thing too, after all, Midwest's first routes with the jets will be service to large markets. Midwest's 50-seat planes will fly first from Milwaukee to Columbus, Ohio, as well as supplement existing service between Milwaukee and Minneapolis/St. Paul as well as Philadelphia. With the recent rise in airfares, this makes perfect sense, as regional jets are a convenient and flexible, albeit expensive, way for airlines to add capacity in small doses. This way, Midwest can slowly gain market share on routes to and from Milwaukee and become a more significant airline in the Midwest and East Coast.

However, there may be ulterior motives to Midwest's recent regional jet expansion. The expansion may be geared in part to stave off a takeover bid from AirTran Airways. Even though activity surrounding AirTran's takeover bid has died down in recent weeks, AirTran is trying to keep the bid very much alive, even if the takeover takes years to accomplish. AirTran has been mum about what exactly it would do with Midwest's regional operations if it were to take over the airline, however, it's likely that AirTran would eliminate certain, more costly, parts of Midwest which deviate from AirTran's core business model. Midwest's baked-onboard chocolate chip cookies may stay, but some of Midwest's regional routes and some of their older aircraft will likely be eliminated. But by adding new service that Milwaukee travelers will use, even if it's not very profitable service, Midwest can attempt to diversify itself enough such that AirTran will either lose interest in Midwest, because the compatible synergies between the two companies will not be sufficient to necessitate a takeover, or, if AirTran is still interested in a takeover, it will be more difficult for them to eliminate elements of Midwest they don't find suitable. It remains to be seen whether Midwest's 50-seater service will succeed, but Midwest's definition of a successful regional jet operation may be very different from ExpressJet's. For Midwest, successful service won't necessarily make money, but it will likely delay AirTran's takeover efforts.

Midwest's 50-seat regional jet operation raises some important questions about the future of third-party regional jet contractors, including SkyWest and Mesa, and whether their planes may have new missions, now that higher fares and growing demand from business travelers for nonstop service may necessitate expanded 50-seat regional jet service from some airlines. This industry is facing consolidation, and it's possible that further consolidation could ensue if Delta spins off its regional subsidiary Comair, whose fleet is primarily composed of 50-seat jets, before Delta's April 30 date to exit Chapter 11 bankruptcy protection. But I plan to discuss more about this next week, so stay tuned.

There are two interesting articles related to this post, one article about AirTran's plans to nominate three candidates for Midwest's Board of Directors at their upcoming annual meeting in order to gain influence over Midwest's business decisions, and another article about AirTran's attempts to purchase a strip club near the Milwaukee Airport from Midwest. (I lack the creativity to write a funny April Fools article on Airline Bulletin, but these writers do a good job).

US/EU Open Skies: Benefits and Drawbacks

The much-anticipated US/EU open skies agreement was approved in Europe today. The agreement has been heralded as a triumph of cooperation between the two sides of the Atlantic which will bring increased competition to transatlantic routes and lower fares to passengers. The big winners in this agreement are EU carriers (aside from British Airways) because most of them have excess long-haul aircraft that they can readily deploy to new routes to the US. American carriers are also winners, but to a lesser extent because they will probably take less advantage of the agreement than their European counterparts. The first important thing the agreement does is opening up Heathrow to competition. American, United, Virgin Atlantic, and British Airways are the only airlines currently allowed to fly to the United States from London's prized and popular Heathrow Airport. Now, the airport is open to any EU or US carrier that wants to fly to the US, provided that carrier is able to obtain slots at Heathrow. British Airways, in particular, has lobbied intensely for a rejection of the agreement because it threatens British Airways' monopoly on many routes to and from London Heathrow which has enabled the carrier to maintain high fares on many of its routes. However, the agreement will do much more than open up Heathrow. The second thing the agreement will do is that it will enable any US carrier to serve any route to the EU and any EU carrier to serve any route to the United States. This will open competition on more international routes and likely increase traffic and lower fares simultaneously.

But some EU carriers are in a most advantageous position to take advantage of the agreement. This is because these EU carriers have more flexibility with their international fleets. For most US carriers, the bulk of their long-haul aircraft are already committed to other routes. And many US carriers are finding that they have an insufficient number of long-haul aircraft in their fleets and on order for future international expansion. Because of that, US carriers will have more difficulty accessing new markets, including those recently opened to them through open skies, and those carriers which lack planes will probably try to lease them, causing long-haul aircraft lease rates to soar. While some of these US carriers may pull aircraft from their current commitments because opportunities in Europe are more lucrative, it will be difficult for them to do so without giving up market share on another route. Some carriers may be willing to replace large widebody aircraft with smaller narrowbody aircraft on some Latin America or Hawaii routes and shift those aircraft to Europe routes, but other carriers may not want to make that tradeoff. The US carriers most likely to benefit from open skies are American, United, and Delta. American and United both have 777 and 767 aircraft that they can spare, although they may have to make some minor cuts on some routes in order to free up those aircraft. These two carriers have the loyalty of many business travelers who fly overseas, and they have the best chance of attracting customers for new European routes of any US carrier. Delta also has plenty of 767 aircraft that it can use for international flights, but in order to use those, it would need to shift some of its 767s from flying domestic routes to international routes, something that Delta needs to do with caution to avoid giving too much of an opportunity for low-cost carriers, such as AirTran, to encroach on their market. The airlines that lose, Northwest, Continental, and US Airways, have the same handicap, a lack of long-haul aircraft, which prevent them from fully utilizing the open skies agreement. Northwest has most of its long-haul fleet tied up in lucrative Asian routes, Continental has been overstretched for some time, due to its lack of 777 aircraft, and has many of its long-haul aircraft flying on attractive routes to Latin America, and US Airways, which only started service to Europe less than ten years ago, is unlikely to utilize open skies significantly because they too lack sufficient aircraft, and would rather let their Star Alliance partner United do most of the flying on European routes. The best way those three carriers can utilize this agreement is to use 757 aircraft which can barely make the transatlantic hop, but which would be great for serving point-to-point routes since they are smaller than widebody 767 and 777 aircraft. But even for American, United, and Delta, finding ways to make the agreement work will be a challenge. These three will need to find ways to shuffle their long-haul aircraft in order to free up aircraft for Europe flights, and they probably won't find a way to please all parties. These carriers will likely focus on developing their hub-to-point routes further, instead of developing point-to-point routes. Already US carriers have announced that most of their new Europe services will be comprised of additional flights from hubs. This will improve connectivity for passengers and lower costs but, it could put them at a competitive disadvantage if business travelers choose European carriers that offer nonstop service. The flights that aren't opened from hubs, will probably be opened from focus cites. Delta, for example, has expressed an interest in starting nonstop Europe flights from Boston, an important Delta focus city. Focus city flights will probably be more convenient to business travelers, but might be more difficult to market to leisure or other types of travelers, increasing the risk of failure for airlines that start them. However, EU carriers seem intent on starting new point-to-point flights.

Virgin Atlantic, once a staunch opponent to open skies, has now resigned itself to making the best of the situation, and the airline recently announced that it is considering adding flights from European business centers to major US cities. Virgin Atlantic, like many EU carriers, has many new long-haul aircraft on order, and needs to find new routes for them all. As a result, they will benefit more from the agreement than US carriers which don't have many or any spare long-haul aircraft currently in their fleets or on order. Other EU carriers, including Lufthansa and Air France, which each have dozens of long-haul aircraft, some of which are underutilized, will also find point-to-point opportunities to the United States. EU carriers are exploring nonstop service opportunities from markets in their respective countries, but also from other lucrative markets. The notion of a state airline being the only option for travelers to and from a given nation is over. In some cases, the new service that EU carriers add will be the only nonstop service between two markets. Aer Lingus announced today that it will serve three new destinations in the United States, enabling travelers in San Francisco, Orlando, and Washington D.C. to fly to Dublin nonstop, something they cannot do currently. These new point-to-point routes will command higher fares, as business travelers seek convenience over cost. Moreover, they are even more attractive to business travelers because EU carriers typically have higher service standards than US carriers, enabling business travelers to be more comfortable in the air. This commitment to serving more point-to-point routes, combined with the greater comfort levels that most EU carriers offer, will make EU carriers more attractive for travelers than US carriers overall. For these reasons, EU carriers are likely to profit off of the open skies pact more than US carriers, but some US carriers, such as American and United, have the capability to profit enormously from the agreement because of their current competitive position. Expect more route announcements in the days and weeks to come, as airlines scramble to take advantage of the most lucrative opportunities that open skies offers.

Will Skybus Ever Leave the Station?

Yes it will, and sooner than many have anticipated. It appears that Skybus will essentially copy the Ryanair model in the United States from its base in Columbus, Ohio. Skybus, which will fly 150-seat A319 aircraft, predicts that their startup operations will commence May 1, although this depends on when they get final approval from the DOT and the FAA. The Columbus Dispatch wrote about Skybus' wait for government approval in a recent article. Initial flights will likely be from Columbus to leisure destinations in Florida, California, Nevada, and Arizona (since most of the customers who want bargain-basement tickets are flying for leisure), and tickets will be priced in the $10-$40 range each way. As the company has hinted at before, Skybus will copy the Ryanair model in many ways. Like Ryanair, the exterior and interior of Skybus aircraft will be covered with advertising, no free food or drink will be provided, flight attendants will sell a range of products on board, much like a retail store, and customers will need to pay to check luggage. Right now, the airlines most similar to Skybus in the United States are Allegiant Air, which makes around $15 per customer in ancillary revenues, and Spirit Airlines, which prides itself on its $.05 cost per available seat mile (excluding fuel), which is far lower than available seat mile for most legacy carriers, which can hover around .08-.10 cents per available seat mile (including fuel). Ancillary revenues are a critical component of Allegiant's revenue stream that helps subsidize Allegiant's low fares. These revenues come from the commissions generated by vacation package sales, revenues from on board food and drink sales, and commissions generated by the sale of other services, such as travel insurance. Skybus, like Ryanair and easyJet, will also try to use alternate airports whenever possible. It's likely that they will initially serve airports such as Orlando Sanford instead of the primary Orlando airport-McCoy, St. Petersburg instead of Tampa, and Fort Lauderdale or another nearby alternate airport instead of Miami. But while this airline seems to be adopting many proven cost-cutting features of the Ryanair model, they are also adopting some dangerous, unproven features which could hurt the airline's reputation. The most notable unproven feature is that the employee payscales will be comparable to a regional airline (in other words, very low). One individual writes about his experiences interviewing for a Skybus flight attendant position here (and some of the information in this post is taken from his accounts). Even Ryanair and easyJet pay salaries in most cases competitive to their legacy peers, and the airline their business model is copied from, Southwest, is one of the highest-paying carriers in the United States (which has enabled the company to retain quality employees, but it could be a liability for the carrier down the road). However, unlike Southwest, Ryanair and easyJet outsource most of their ground and maintenance staff, and their contractors may pay low wages, but the employees who actually work for Ryanair and easyJet (mostly flight attendants and pilots) get paid decently.

The other main concern about Skybus is that they will start services from a relatively small market, and given their rapid and extensive plans for growth, they will be unable to use all 65 of their planes on order from Columbus. Ryanair has been successful in part because its bases are at such large cities that suffer from high fares and poor service by legacy carriers. Not all travelers in a given market will fly Ryanair, but Ryanair has the ability to find their niche in such large markets. Columbus is America's 54th largest market in terms of passengers embarking and disembarking at the airport according to the DOT. (These figures can be somewhat misleading, however, because they include connecting traffic, and some cities like Atlanta, with large hubs but substantially lower origin and destination traffic can skew the figures, but nevertheless, Columbus is still too small a market to be starting an airline in.)Skybus' low fares may be able to stimulate the market and increase passenger numbers, but not as much as many believe. If Skybus were flying from Chicago, they may be able to find more of a niche for themselves, even though they would endure more competition. However, with a market where the largest carrier is Southwest, which already offers relatively inexpensive fares, Skybus may be up against a tough competitor with a strong base of loyal customers in the area. At least on Southwest, you will be able to pay a bit more than Skybus and receive a free beverage and snacks and a free checked baggage allowance, without the pain of being hounded by flight attendants selling cheap goods. Columbus is somewhat underserved by the carriers that currently serve the city, including Southwest, in part because the market in Columbus is so fractured. No carrier has more than 25% of the market in the city (Southwest has about 22.75%), and consequently, there is no hubbing airline to offer nonstop service to many destinations Columbus origin and destination traffic cannot support. And unless Skybus plans on a hub-and-spoke operation, and they haven't given any indication of this so far, then they will serve many destinations from Columbus unsustainably, because even with ultra-low fares stimulating traffic, Skybus cannot sustain service to too many smaller destinations that currently lack nonstop service from Columbus because ultra-low fares can only convince so many people to fly. However, if Skybus is able to deploy their aircraft at other bases, such as Cincinnati, Chicago, Minneapolis, or Dallas, all of which are hub markets that have relatively high fares, then Skybus may be able to survive.

Take one example, Cincinnati. Delta and its regional partners dominate Cincinnati, with over 90% of the passengers that come through the airport. If Skybus entered Cincinnati, they could substantially lower fares in a market with more opportunities for growth than Columbus. If Skybus provided low-cost, punctual flights, then they could potentially capture a share of Cincinnati's lucrative business market as well. There are, however, three big challenges that Skybus will face in Cincinnati, or in most hub markets they enter, for that matter that they don't face in Columbus. First, because Delta has such a large share of the market, they have tremendous pricing power, and if Skybus enters the market, Delta will fight tooth and nail to retain its market share. Skybus may be able to gain some market share, but Delta will pressure Skybus by adding flights and lowering fares in markets where the two airlines compete. This is the most important reason Skybus is staying out of hub cities. Skybus will be attractive to passengers on fare alone, and if a legacy carrier with more amenities matches their fares, passengers will most often fly with the legacy carrier. Moreover, as a startup, Skybus cannot sustain a prolonged fare war for as long as Delta. If Skybus is successful in Columbus, then they may have the awareness among many Ohio consumers, as well as the financial capital necessary to sustain a long fare war, to enter Cincinnati. But, the formation of another base won't be for at least a year after Skybus launches services in Columbus. Second, because Delta has such a large market share in the region, it has a lot of brand loyalty from travelers in the area, particularly business travelers. Skybus' business model doesn't seem conducive to the needs of many business travelers, and as a result, Skybus may struggle to get many business travelers on board. Third, the Cincinnati airport, like many hub airports, is unattractive to low-cost carriers because it gives those carriers higher costs. The Cincinnati airport has high fees for its users, and they may be too high for Skybus' ultra-low-cost business model. But on the upside, Skybus would face no low-cost competition whatsoever, since no low-cost airlines currently operate from Cincinnati. Not Southwest, not AirTran, not JetBlue. I think those carriers have missed a big opportunity; with Skybus adding 65 planes to its fleet, Cincinnati is a good location to use them, but only after Skybus has developed a market in Columbus. In hub cities like Cincinnati, Skybus would certainly face challenges, and possible difficulties implementing their ultra-low-cost business model, but they would find markets with greater growth potential, and with greater monopolies that are keeping fares high.

But if Skybus' management believes that its growth can come mostly or entirely from Columbus, then they could be another Independence Air. Remember, Independence Air thought they had lower costs and more of a market that could be stimulated by low fares in smaller cities than they actually did. Because Independence Air believed this, they offered fares that were too low, which drove their company into the ground. Without more information, I can only suspect that Skybus will head the same direction. However, Skybus could become immensely profitable like Ryanair, if they successfully stimulate a strong customer base with their ultra-low fares and are successfully able to develop their ancillary revenue streams. If they can do those things in Columbus and in other underserved, high-fare markets, then they can be successful, but if they can't, then they will burn their cash and go the way of Independence Air.

As AirTran Expands, Longer Point-to-Point Flights Will Become the Norm: Baltimore to Seattle Was First, Orlando to San Diego May be Second

AirTran's recent announcement of service from Seattle/Tacoma to Baltimore was a surprise given AirTran's neglect to the Seattle market. However, it wasn't a surprise in that AirTran wants to open longer point-to-point routes. In the past few years, AirTran's business model has been focused on primarily short-haul flights up and down the East Coast, because their new, efficient 717 aircraft allowed the airline to open routes to smaller markets, and offer high frequencies to larger markets, making the airline a serious competitor to Delta with low fares and a strong route network out of Atlanta. However, AirTran isn't receiving any new 717s any more because the plane is no longer being built. Consequently, the only way AirTran is growing is with new, larger, 737-700 aircraft, that unlike the 717s, have the capability to fly transcontinental routes. AirTran first used its 737-700s to expand on longer routes from its Atlanta hub. AirTran recently started serving Phoenix from Atlanta, and this summer the airline will commence service to San Diego also from Atlanta. But AirTran now seems to be shifting their focus from serving Western markets nonstop from Atlanta, since the airline now serves, or will soon serve all the major markets on the West Coast (except Portland, Oregon, which will eventually be announced). Instead of opening new transcontinental routes from Atlanta or boosting capacity on existing transcontinental routes from Atlanta, AirTran is focusing on linking its major East Coast focus cities, including Baltimore, Orlando, and Fort Lauderdale to select markets in the West. Seattle lacked nonstop service to Baltimore, and up until AirTran's announcement, Baltimore was by far the most popular market that lacked a nonstop flight from Seattle, with over 600 passengers traveling the route daily. But just as Seattle needs service to Baltimore, San Diego needs service to Orlando. There are rumors (and like the ones I mentioned in an earlier post about new service to Portland, Maine, which turned out to be true, these appear to be plausible) that suggest that AirTran will launch new nonstop service between two of America's most popular vacation destinations. But not only is the leisure market significant between the two cities, there is also demand from business travelers in the defense and space industries. Although San Diego has had nonstop Florida service in previous years, airlines have pulled out because the yields can be too low (since most of the passengers are leisure travelers), and the demand wasn't satisfactory. AirTran knows how to survive in the low-yield Florida market, and has succeeded even with pitiful load factors. Moreover, AirTran won't be flying 200-seat 757s or other very large aircraft on the route, which is what some airlines tried to do years ago. Instead, AirTran's 737-700s hold 137 passengers, so AirTran can cater to the moderate demand for the route. Also, AirTran may try to cut costs further, by making the flight five days a week like the Seattle to Baltimore flight (most likely Thursday-Monday) even though that could reduce the number of business travelers AirTran attracts on the flight. Also, if AirTran makes the flight a red-eye, it will increase aircraft utilization, allowing the aircraft to fly other routes during the day.

If these rumors are in fact true, and AirTran announces Orlando to San Diego service, it will likely be a profitable route because there is sufficient, but not necessarily significant demand for a nonstop flight on the route and AirTran has such low costs that will reduce the breakeven load factor for the route. Moreover, the new route will be indicative of a pattern in AirTran's expansion. Future nonstop routes from various AirTran East Coast focus cities could help the airline work its way to profitability, as the airline can diversify its route network, increase aircraft utilization, and even charge a premium for some of these nonstop flights. AirTran may be starting some new point-to-point transcon flights in order to get a jump on Southwest, which is expanding on longer routes, especially from some of AirTran's key focus cities in Baltimore and Philadelphia. As AirTran continues to receive new 737-700s, they will likely start new nonstop transcontinental routes, probably from Florida (including from Orlando, Fort Lauderdale, Tampa, and maybe even Fort Myers), as well as Baltimore, and possibly Akron/Canton, Boston, Philadelphia, or even Charlotte. One thing is clear; AirTran will try to use at least some of their new capacity for longer routes in order to strengthen their market share in key focus cities, and to diversify themselves from expanding merely on cutthroat short-haul routes to and from Florida.

AirTran Transforms its Baltimore Focus City Into a Small Hub

AirTran really surprised me yesterday. This was because AirTran announced new flights between Baltimore and Seattle/Tacoma, a route that is grossly underserved but one that I doubted AirTran would serve. Even though over 600 passengers a day fly between the two cities, up until now, there was no nonstop flight. AirTran will fly five times a week (Thursday-Monday) between the two cities with their 737-700 aircraft. AirTran's expansion from Seattle is surprising, given that flights to Atlanta are been seasonal, indicating that AirTran lacked a strong enough competitive position in the Seattle market for year-round service. With such a weak position, particularly because of the distance of AirTran's major hubs and focus cities (Baltimore, Atlanta, and Orlando) from Seattle/Tacoma, it's surprising that AirTran felt they could find a market in the Seattle area, but because the route is so underserved, I think it's possible that AirTran will be able to tap into the Seattle market, even though the airline is only known by very few people in the area. AirTran also announced new flights between Baltimore and Dallas/Fort Worth, Milwaukee, and Charlotte. While the Seattle service is surprising, the rest of the flights aren't. The flights to Dallas/Fort Worth and Milwaukee are only the return of seasonal service, while Charlotte is receiving only one additional flight, which is well-deserved given the dearth of low-cost service at Charlotte. But this new service does signal that AirTran is determined to make Baltimore more than simply a focus city, AirTran wants to make Baltimore a small alternate hub to Atlanta.

While there are many reasons for AirTran's refocus on Baltimore, I will try to outline a couple. First, Atlanta is growing increasingly crowded, and while AirTran has been able to hold its own against Delta for years, there are certain markets where AirTran is struggling because it's not a fair fight. For example, even though AirTran is the second-largest carrier on the Atlanta to Orlando route, AirTran only operates 717 and 737 aircraft, which hold 117 and 137 passengers respectively. But Delta operates approximately the same number of flights per day (around a dozen) primarily with 767 aircraft with which can carry 250 or more passengers, depending on the variant. But because Delta operates such large aircraft, it's difficult for AirTran to make money because their costs are much higher than Delta's on that route in particular. Also, this massive amount of capacity from both airlines easily satisfies the demand from Atlanta passengers, so AirTran feels that it should reposition their aircraft in another strong focus city market that has less competition and the capability to expand when AirTran enters. If AirTran wants to fill their planes, they need a healthy mix of local and connecting traffic, and AirTran may not be securing enough local passengers in Atlanta. But the Baltimore market, and that of the greater Washington DC area, still has room to grow, and AirTran's new service into Baltimore will spur local demand and allow AirTran to steal passengers away from the myriad of other carriers in the city. Moreover, in Baltimore, AirTran won't face pesky nonstop competition from Delta, and instead face Southwest, which has similar-sized aircraft and higher costs compared to AirTran's.

The second reason AirTran is expanding into Baltimore is that it allows the carrier to compete with certain low-cost carriers (Southwest and JetBlue) on routes these carriers are vulnerable on. AirTran wants to battle Southwest on certain routes to Florida. Most of AirTran's passengers connecting in Baltimore will connect on routes to Florida, a very low-yield market, but because AirTran has lower costs than Southwest, AirTran can absorb lower fares. The Baltimore to Florida market is a Southwest stronghold, but AirTran has lower costs and some higher-yield connecting traffic than Southwest (from destinations such as Milwaukee, Rochester, or Portland) which will make AirTran more competitive in an otherwise hopeless competitive situation. Also, in addition to service that competes directly with Southwest, AirTran has a mixture of cities that lack Southwest service, and consequently, AirTran can charge higher fares on these routes, allowing the carrier to truly profit from their Baltimore operation (and perhaps subsidize their fight against Southwest on Florida routes). AirTran also is trying to tackle JetBlue with this latest round of service expansions. AirTran's new service to Portland, Maine, announced on Wednesday, competes indirectly with JetBlue's, since both airlines offer convenient connecting flights to the same Florida destinations through different hubs. Even though JetBlue has a lot of capacity in Portland, they have not started nonstop service to Florida, and the same is also true from Rochester (both Portland and Rochester are served by AirTran from Baltimore). With connecting service through Baltimore, AirTran can compete with JetBlue on many Florida routes, and a larger Baltimore operation also gives AirTran a launching pad from which they can expand to more JetBlue destinations in New England. AirTran has the capability to expand to JetBlue cities such as Albany, Syracuse, and Burlington. But with connecting service through Baltimore, AirTran can make a smaller commitment to the markets, but offer more to customers. AirTran would only need to start two or three daily flights to Baltimore if it wanted to compete with JetBlue from these markets. For example, Portland, Maine will have three daily flights to Baltimore. But AirTran offers more cities in Florida to connect to for less. AirTran serves Daytona Beach (a market JetBlue doesn't serve) nonstop from Baltimore. Also, AirTran offers more flights and more convenient connections to passengers traveling to other Florida markets such as Sarasota or Tampa. Even though AirTran lacks amenities some travelers desire, such as television or assigned seating for all passengers at the time of booking, AirTran can still offer a superior value to customers than JetBlue or other carriers, and that is true on routes to Florida, as well as on routes to other cities like Charlotte. There is one final competitor AirTran is targeting with their new service: Midwest Airlines. The return of Milwaukee seasonal service allows AirTran to claim that it is committed to the Milwaukee market and desires to expand its operations there. This is in order to promote a takeover of local Milwaukee carrier Midwest Airlines by AirTran. AirTran's new Milwaukee to Baltimore service will link Milwaukee to an important AirTran focus city, offering customers inexpensive nonstop flights to a major destination, or convenient connections to another market. This new route will also improve AirTran's visibility in this market, which is something AirTran needs if it wants to execute the takeover.

These new flights should enhance AirTran's connectivity in Baltimore, helping the airline to build an important alternative hub to Atlanta. Some of the new flights (such as service to Seattle or Dallas/Fort Worth) are designed to offer point-to-point service to underserved markets, but most of AirTran's new flights aim to offer passengers more choices when traveling to the Southeast with connecting service. The new flights should be successful for the most part, and I predict that at least one route (Baltimore to Milwaukee) may be made year-round. If AirTran can hold its own against Southwest and JetBlue in these markets, then their new Baltimore flights should thrive. But if AirTran faces over competition and lower yields, or a shortage of demand due to a particularly strong hurricane season, then AirTran may be forced to make some cuts in Baltimore in the short-term. But in the long-term, AirTran's flights should succeed, because they exploit demand in an underserved but growing market, and the new flights currently offer the best value for most passengers on these routes, and ultimately in the airline business, just like any other commodity, passengers are looking for the best value.

Delta's New Lagos Service: Indicative of Future Legacy Carrier Growth on Intercontinental Routes

Starting December 3, 2007, Delta will offer daily nonstop flights between its Atlanta hub and Lagos, Nigeria. Delta's new service will be the only scheduled nonstop service between the United States and Nigeria, and it's likely to make a lot of money for Delta. The service will target primarily business travelers working for oil and gas companies that operate in Nigeria. This service should save business travelers up to six hours from flights that require connections through Europe. Continental explored Nigeria service a year or so ago, but was unable to launch its flights due to regulatory issues between the United States and Nigerian governments. However, those seemed to have been resolved, and Delta is taking advantage of the void in service to launch new flights.

There are some interesting points about this new service that may be indicative of whether it will be successful. First, is the date the route commences. December 3 is a long ways away, and while international routes are typically announced farther in advance than domestic routes, for an American carrier, announcing a new route more than nine months ahead of time is unusual. Often, airlines avoid announcing routes too early in order to prevent a competitor from starting the route themselves sooner and gaining an advantage. But because it's unlikely any competitor will move in directly on this route in the short-term (although it's possible Virgin Nigeria may commence service to New York City), Delta is smart to announce the route very far in advance to build publicity and to give itself ample time to fill planes. The second factor that could make this service successful is daily flights. In truth, it's a double-edged sword, if daily flights force excess capacity onto the Lagos-USA market then it could lose Delta millions of dollars very quickly. However, daily flights provide consistency and flexibility to business travelers. Instead of servicing the route four times a week, like Delta's service between New York and Accra, Ghana, daily flights give business travelers flexibility to travel whenever they need to, and it should help cement loyalty to Delta for travelers who need to travel between the US and Nigeria. If Delta decided not to offer daily service, then business travelers might take British Airways instead, because they offer daily service on the route. If a business traveler wants to fly a round-trip where the flight in one direction isn't offered on that day by Delta, then he would gladly take British Airways on the round-trip, since the business traveler wouldn't want to deal with (or pay for) flights on two different airlines. The third thing that should make this route successful, at least from Delta's perspective, is that it's not utilizing a 777 aircraft. Flights to Lagos will be flown with 767-300ER aircraft, of which Delta has 59 in their fleet. The 767-300ER is able to make the trip between Atlanta and Lagos, which is important for Delta, because Delta is facing a shortage of long-haul aircraft, and the only aircraft that are available are 767-300ERs, which often run transcontinental domestic flights in addition to some international routes. In fact, one of Delta's only other suitable aircraft for international long-haul flights is the 777, of which Delta only has 8, and all are being committed to other routes. If Lagos was further away from Atlanta and required an aircraft with a range longer than the 767-300ER, presumably the 777, Delta simply couldn't serve the city because there are more lucrative international routes that Delta serves with the 777, such as flights from New York to Mumbai and Tel Aviv. Delta is considering servicing other international markets from Atlanta and New York, including flights to currently unserved markets on US carriers including Cairo, Nairobi, Bahrain, Doha, Bangalore or other markets that are of growing importance economically. However, service to those markets will depend on availability 777 aircraft, and unfortunately, Delta may simply be unable to expand to certain regions until it obtains more aircraft, which is unlikely in the short-term.

Delta's announcement is another positive step in improving service between the US and Africa. Delta has been a leader in USA-Africa flights, offering service to Dakar, Accra, and Johannesburg. But hopefully as individual economies in Africa grow and mature, demand for air travel will accelerate and competition will lower prices for travelers. Right now, fares are very high because most travelers heading to Africa are traveling for business, and can afford to pay the very high fares that airlines charge, but as more leisure travelers start to fly to Africa, and more airlines become interested in the continent, then fares should fall. Delta's new emphasis on international flights is also indicative of the changes American legacy carriers are making to shift their focus from serving a wide array domestic routes and a limited array of international destinations to serving a more limited array of domestic routes (trimming service to smaller markets while still offering plenty of choices for consumers) and offering a more varied range of international destinations. British Airways has done the same thing, strengthening its intercontinental network in order to diversify itself from European low-cost carriers. British Airways has one of the most complex long-haul route networks of any airline worldwide, and as US carriers start to expand their own international networks, hub cities will become centers of international travel. However, New York City, which will continue to see the most variety in international destinations, won't be dominated by one American carrier like London is with British Airways. However, three airlines, Delta, American, and Continental, will continue to strengthen their respective hubs in the city, Delta and American at JFK, and Continental at Newark, in an attempt to create truly global hubs in the city. These three carriers will continue to add service to five continents from New York City, and it will strengthen their position against foreign carriers which traditionally have had more varied international route networks. However, unlike in Britain where one city dominates the market for intercontinental flights, New York won't be the only city within the next decade to offer extensive international service from both US and non-US carriers alike in the coming decade. Hub cities such as Chicago, Dallas, San Francisco, and Atlanta will all see significant growth in the number and variety of international routes. But the growth will come in different places. Regions that are already saturated with flights will likely see some additional service, because some hubs are better-situated geographically to handle traffic to different regions, but new routes will be announced as well that will challenge geography. Atlanta will likely receive nonstop service to more cities in Asia while San Francisco will see improved connections to Europe, Africa, and South America.

While Lagos may seem like an exotic destination, it's only one of many destinations to receive new nonstop service to the United States in the past couple years. Moreover, Lagos, like many other new international destinations, will be highly profitable for the carrier involved because of the makeup of traffic on the route (business travelers who travel in a highly profitable industry, oil and gas), as well as the lack of competition on the route. United's new thrice-weekly service from Washington D.C. to Kuwait City, that has enormous flows of highly-profitable business traffic with military contractors and oil executives, as well as a very lucrative cargo market, demonstrates that new, targeted international flights to previously unserved destinations (at least by US airlines) can result in huge profits for struggling legacy carriers. International destinations are the answer, but all too often, the focus seems to be on the "hot" destinations with booming economies, such as cities in China. However, flights to other markets that are in important economies which aren't simply talked about as much, such as Nigeria or Kuwait can be just as profitable as flights to China. Expect more flights to unserved or underserved cities in some economies that have important trade links with this country throughout South America, Africa, the Middle East, the Indian Subcontinent, and Southeast Asia. There are a lot of opportunities for legacy carriers to expand their global reach without going to China, and the question is which markets will be chosen by which carriers.

AirTran's Changing Competitive Position on the East Coast

AirTran Airways today announced new service to Charleston, South Carolina. AirTran will bring much-needed relief to the travelers of South Carolina who have had to endure Delta's high fares for many years. AirTran will offer two daily nonstop flights between Charleston and Atlanta, starting June 7, 2007. The service is indicative of one of AirTran's many survival strategies on the East Coast. With so many new jets coming online, AirTran has been trying to figure out how to place them, and the airline has developed a few different tactics that allows them to compete effectively against larger carriers. One strategy is simply a head-to-head fight with Delta in Atlanta. Since both airlines share a hub in Atlanta, they operate many of the same routes to/from the city. And in the past, Delta has been able to offer high fares because it had a monopoly on many routes to/from Atlanta, but AirTran's new competition, particularly to small or mid-sized markets relatively close to Atlanta, has lowered fares considerably. This is what is happening in Charleston. It's a city close to Atlanta that will benefit enormously from AirTran's connection opportunities, opportunities that many passengers have lacked because of Delta's high fares. AirTran has lowered fares substantially in other small markets around the Southeast that had previously been dominated by Delta including Pensacola, Mobile, Savannah, and Gulfport/Biloxi, and AirTran seems to have succeeded in gaining market share in these cities. They should be able to do the same in Charleston. By targeting markets that are smaller than ones typically targeted by low-cost carriers such as Southwest and JetBlue, AirTran has been able to avoid competition from other low-cost carriers in smaller markets while at the same time making an easy target of legacy carriers like Delta that charge high fares. This strategy has proved successful for AirTran in the past, and I predict that it will again prove successful for AirTran in the future. Other markets in South Carolina such as Colombia or Greenville/Spartanburg could probably support two daily AirTran flights, depending on fares and the amount of capacity Delta and other airlines add to compete with AirTran. When AirTran recently announced service to another small market, Newburgh, New York, Delta retaliated and added new service to the market simply to compete with AirTran. While due to the nature of the capacity additions (service on high-cost regional jets), Delta's new service likely won't have a major effect on AirTran's loads, it does demonstrate that Delta is willing to fight back when AirTran tries to take market share, which could make it more difficult for AirTran to enter markets that are Delta strongholds. If Delta retaliated by adding new flights on regional jets in a market Delta doesn't care about, think about the retaliation Delta could inflict on AirTran if AirTran expands into a Delta stronghold in the Southeast. So far, AirTran has survived, but AirTran has plenty of unserved markets in the Southeast because of a fear of Delta retaliation that could make the route unprofitable to operate.

But a head-to-head battle with Delta isn't AirTran's only tactic. AirTran is one of many airlines trying to take on JetBlue. Unlike other airlines, such as Delta's former Song brand, Southwest, Continental, US Airways, and others, AirTran has a reasonable chance of damaging JetBlue. Instead of trying to copy JetBlue with many attractive amenities and a hip style, AirTran has consistently offered lower fares than JetBlue's. And given that AirTran has the lowest cost structure in the industry, (I cannot overemphasize this point) AirTran is still able to break even or make a profit, even with load factors under 70%. AirTran has done a remarkable job of taking away market share from JetBlue in markets that they once dominated. In Rochester, for example, AirTran has expanded to offer nonstop service to Tampa, Orlando, and Fort Lauderdale in addition to flights to AirTran's Atlanta hub. JetBlue only offers service from Rochester to New York City, and hasn't added Orlando flights like they have in Syracuse (where AirTran doesn't fly) because AirTran has forced prices down so much on Florida flights. AirTran is not only trying to target smaller markets that are dominated by Delta's regional jets (or those of their outside regional jet contractors like SkyWest), but they are also trying to target mid-sized markets that are inhabited and in some cases dominated specifically by JetBlue. AirTran has tried to battle JetBlue in as many markets as possible, and AirTran will continue to announce new routes from the Northeast, especially from smaller markets such as Newburgh or White Plains. AirTran may add further service to upstate New York, including service to Albany or Syracuse. But AirTran may also soon enter another market that JetBlue is dominant in. With great fanfare, JetBlue started service to Portland, Maine last year with four daily flights on large A320 aircraft. With 600 seats a day in a mid-sized market, JetBlue made a large commitment and took a big risk in Portland, but so far their service has been a hit with passengers. However, other low-cost airlines like AirTran may be able to lower fares further and offer more convenient service to customers.

There are rumors, and I want to stress that these are only rumors, but ones that are plausible nonetheless, that AirTran is considering adding service between Portland, Maine and Atlanta as well as at least one Florida destination (likely Orlando), which the company will announce within the coming weeks. Portland service would make a lot of sense for AirTran. It would allow AirTran to disrupt JetBlue's low-fare monopoly in Portland, and it would also give the airline a foothold in a market that doesn't simply attract passengers from Maine, but also some from New Hampshire and to a lesser extent Massachusetts. Just over half of the passengers departing from Portland are bound for Florida, yet there is no nonstop service between Portland and Florida. AirTran could change that, because its 717 aircraft are small enough to allow AirTran to add at least one daily Orlando flight, and possibly service to Tampa and Fort Lauderdale as well. AirTran could profitably offer Portland customers lower fares and more convenient flights than what JetBlue is offering, or even what Southwest is offering from nearby Manchester. Portland would be a perfect AirTran destination, and even if the airline doesn't announce new service soon, it will eventually announce service because Portland is in danger of becoming a JetBlue stronghold, and AirTran wants to keep JetBlue on its toes, because the last thing AirTran wants is the ability for JetBlue to have pricing power and significant market share in a midsize, New England market. It would make it difficult for AirTran to then lower fares or raise fares when it needs to, and it could ensure JetBlue's profitability in Portland for years to come. While it's entirely uncertain whether Portland will become AirTran's newest city, I believe there's enough evidence to suggest that it's a definite possibility.

The third AirTran strategy that it uses against its East Coast competitors is its focus on Florida, which ties in to both of the earlier strategies. Because AirTran has such low costs, it can pass those savings onto leisure customers bound for Florida. Combined with AirTran's convenient nonstop service to many Florida cities, not just Orlando, from a variety of midsize and large markets in the East, it makes AirTran's flight offerings very attractive for vacationers. While JetBlue has been able to gain many customers through its use of innovative entertainment, AirTran consistently offers the lowest fares. AirTran doesn't necessarily offer the lowest fare on every flight to every city, but overall, AirTran's flights are cheaper than JetBlue's or Southwest's. AirTran will continue to focus on Florida in the coming years because it's an increasingly popular destination for vacationers. AirTran must be careful when it expands to Florida markets, that it targets flights carefully. A Tuesday flight between Milwaukee and Orlando probably won't make the airline much money, since the plane will likely be half-full. But a Sunday evening flight between the same two cities will probably make AirTran thousands of dollars. AirTran has too many daily flights when it should instead focus Florida flights on Thursdays through Mondays. If AirTran freed up more of its aircraft on Tuesdays and Wednesdays, it could conduct additional maintenance and add flights between major business destinations, instead of simply flying those aircraft on a daily basis when it's unprofitable to do so. Outside of that issue, AirTran has done a good job pricing, targeting, and timing flights to Florida, and Florida will become an increasingly important for destination for AirTran as it continues to battle with JetBlue.

AirTran is well-positioned to deal with competition both from legacy carriers such as Delta, but also from low-cost competitors such as JetBlue. AirTran will continue to face challenges in the coming years, as it tries to increase its yields as well as its load factors, but overall the airline has positioned itself well, and is adding a reasonable balance of transcontinental flights to larger cities like Seattle/Tacoma and San Diego as well as short flights to smaller markets like Charleston. If the buyout of Midwest Airlines goes through, it will mean even more benefits for AirTran, but if it doesn't go through, AirTran will still be a competitive airline nonetheless. With Delta and JetBlue diversifying themselves and adding new flights to avoid competition from AirTran, AirTran appears to be making headway against these two giants, but they still have a long way to go, considering they have dozens of new aircraft on order that need to find a home in their network, and that means AirTran will continue to expand its timetable for many years to come.

Two Airlines Up the Ante on Mergers: Will it Help Push the Deals Through?

Yesterday, US Airways increased their bid for Delta Air Lines to $10.3 billion, an increase of about 20% over their previous offer of $8.5 billion. Today, AirTran increased their bid for Midwest Air Group to $345 million, an increase of nearly 18%. While both mergers might result in cost savings, the merger between US Airways and Delta will create a new company that is less competitive not more competitive, because the merger involves two carriers where there aren't as many potential route, fleet, and labor synergies as the AirTran/Midwest merger, for example. Without those synergies, mergers are pointless. The AirTran/Midwest merger, on the other hand, will create a lot of synergies through the integration of the two distinct, but combinable products, route networks, and fleets. I believe that while there may be significant local opposition to the AirTran/Midwest merger, it is the merger more likely to succeed because the smaller size of the carriers involved makes it easier for the two airlines to integrate their systems and their labor pools. Larger mergers like the proposed deal between US Airways and Delta typically run into more stumbling blocks due to the added complexities of running larger carriers, such as more complex labor agreements, routes, and fleets. If those three elements cannot be integrated successfully, there is no point in conducting a merger, and the Delta/US Airways merger proposal simply doesn't contain worthwhile synergies needed for merging two carriers of that size. But the question remains, will the added cash help push either merger to fruition? Let's take a closer look.

The new US Airways bid for Delta will offer the airline's creditors, which have a significant amount of power given that the airline is in bankruptcy, $5 billion in cash and 89.5 million shares of US Airways, which is a step up from the previous bid of $4 billion in cash and 78.5 million shares of US Airways. However, even with this bid coming out to about $10.3 billion, this is still not close to what Delta believes the company is worth as a stand-alone carrier. Delta estimates that it is worth between $9.4 and $12 billion as a stand-alone carrier. A nine-member panel of some of the airline's major creditors, representing pensioners, employees, and other companies including Boeing will help decide on how Delta's reorganization should proceed. This panel will examine all of Delta's options, and isn't partial to a merger, all they are interested in is getting as much money returned as possible. The increased bid will help, but if Delta believes that it is worth up to $12 billion by itself, then a higher bid may be needed. Unlike the AirTran/Midwest deal, cash is going to be main reason this deal goes through. Most Delta employees are adamantly against this deal, and US Airways will have difficulty getting it through without a substantial bid. Delta employees are simply fed up with wage and benefit cuts at their current employer, and they are frightened at the prospect of having to take their hard-earned deal to another company that could easily undermine it. The biggest problem with the new US Airways offer, however, is the increased debt it brings. The new offer would increase the debt of the combined company by a staggering $1 billion. With Delta beholden to its creditors, more debt is the last thing both carriers need. The offer might be good for debt holders, however, Delta's bonds rose in trading today, but is the offer good for the company? That remains to be seen. This latest offer will be carefully but quickly considered, and could be accepted by Delta creditors. US Airways has set a deadline of February 1 to accept the offer, which is partly a strategic move by US Airways. US Airways is trying to prevent Delta from making too many changes to their business model that might make the airline a less attractive takeover target. One example of this was a request to the bankruptcy court by Delta last week to purchase 30 regional jets, jets which likely wouldn't be needed if the two airlines merged and are seen as a liability by US Airways. When Delta is being run by Wall Street and the bankruptcy court, as it is now, investment banks and others are going to do whatever makes the most sense financially, even if the company and its employees suffer in the process. That's part of the reason why there is a merger frenzy going on; investment banks that don't understand the airline business are trying to make decisions that only work on paper. A US Airways/Delta merger looks good on paper, but in reality, it could be a nightmare for employees, and for customers who will see packed planes and higher fares.

With the AirTran/Midwest merger, money is important, but so is identity. The main challenge for AirTran is to try to convince Midwest management as well as the flying public in Milwaukee and Kansas City that a merger won't destroy many of the perks Midwest offers. These perks make Midwest unique, and have generated a strong, loyal customer base in Milwaukee and Kansas City that could evaporate unless AirTran keeps some Midwest amenities. AirTran CEO Joe Leonard has made several trips to Milwaukee to talk with Midwest management about the deal. He has also tried to persuade Midwest customers that a merger with AirTran would bring benefits for both companies. AirTran has taken out ads in the Milwaukee area, including in the Milwaukee Journal-Sentinel, the primary newspaper in Milwaukee, to help persuade Midwest customers and investors that a merger with AirTran is the best option for both parties. The new bid, $345 million compared to their previous offer of $290 million doesn't provide a significant premium on Midwest's stock price. The new offer is for $13.25 a share of Midwest a mere 3% premium off of Wednesday's closing price of $12.90. Midwest's stock closed at $13.40 today, above the offer price. The rise in Midwest's share price indicates that many investors feel the company is still undervalued, and AirTran's new offer won't help close the deal. But, perhaps the AirTran offer isn't intended to be a deal-closer. The new bid helps AirTran buy time; it keeps the issue of a merger in the news and allows the airline to make its case. AirTran has a reasonable case for a merger, one that if presented correctly can certainly persuade many in Milwaukee and Kansas City. Since the main hurdle to a merger is one of public relations, not cost or labor agreements, a new bid keeps publicity alive. However, AirTran cannot ride a wave of free publicity forever, eventually, within the next couple months, Midwest customers and management will have made up their minds. If AirTran wants to secure Midwest, it should submit its final bid soon, because many investors who are unsure about the merger will likely decide against it if it undervalues the airline. Many undecided customers will not support the deal if AirTran tries to undermine the Midwest brand and product that people in the region love. If AirTran makes a fair final bid, and includes information about how the new carrier plans to incorporate elements of Midwest's product, then Midwest customers and investors can make an accurate judgment, and a judgment that is more likely to swing AirTran's way if AirTran places a fair value on Midwest Air Group and is honest about the goals of the combined carrier. That won't guarantee AirTran's success by any means, but it will certainly help AirTran's PR battle. Money is important to this merger, but reputation is more important. This intermediate bid that AirTran submitted today will enable AirTran to keep pressing its case before making a final bid for Midwest. If that final bid is rejected (and I predict that the next bid AirTran makes, if there is a next bid, will be the final bid), the AirTran/Midwest merger will be dead at the departure gate, at least for the time being. If the loyal Midwest customers and investors in Milwaukee and Kansas City don't want this merger, then it won't happen because so much of the combined carrier's success in these two markets will be dependent on loyal Midwest customers flying on the combined carrier. AirTran simply can't afford a prolonged fight. The synergies for this merger are attractive, and if AirTran's offer is rejected now, it could appear again provided Midwest's business plan doesn't change radically in the next few years. AirTran can afford to wait, but Midwest has to make their move now. After six straight years of losses, Midwest Airlines is undergoing a major expansion that the airline hopes will reverse its fortunes. If Midwest's major expansion this year to six new cities fails, then Midwest may be much more willing to merge. However, Midwest and their loyal customers probably want this one last try as a stand-alone company; they don't want to merge with AirTran just yet. With Midwest's new expansion plan that involves adding a regional jet feed and as well as expansion to new cities on mainline aircraft such as Seattle/Tacoma, this last shot just might work if Midwest's loyal customers actively support the airline during its expansion.

Unfortunately, these two mergers aren't the only ones being discussed. According to the Wall Street Journal, Delta has started merger talks with Northwest as a way to counteract the pressure to merge with US Airways. United and Continental have been in merger talks for a couple months, and that deal, as well as the success of other potential mergers could hinge upon the Delta/US Airways deal. It will be interesting to see which mergers go through and which don't. But what is clear is that many of these proposals simply won't work, for customers, for employees, and perhaps even for investors. They may work for the investment bankers who try to push the deals through for themselves, and for the investors and bondholders they represent. But merging airlines is simply too laborious in some cases to make the potential synergies worthwhile.

United Receives New China Route

The DOT didn't surprise most observers when United announced that the DOT awarded the airline the new U.S. route authority to fly between Washington D.C. and Beijing nonstop. After the DOT gives the final order, United plans to launch daily flights between the two cities within 90 days. The nonstop flights will be operated with a 347-seat Boeing 747 aircraft. United's proposal made the most sense and will help shorten the distance between two key capital cities. The only downside of United's proposal is that United is the airline offering it. United already has a strong foothold in the China market, with nonstop flights to San Francisco and Chicago as well as connecting flights to several U.S. cities through its Tokyo Narita hub. It would have been ideal if a weaker airline in the China market, such as American or Continental, made this bid because this new flight will certainly be immensely profitable and a great competitive foothold for future China service. United's new service will also help connect the Southeast U.S. to China, a region that is quickly expanding ties with Asia through manufacturing and industrial growth by Asian companies. Delta's bid to serve Beijing from Atlanta was rejected earlier in the process, although that would have been an important flight to help strengthen trade ties between the two regions. Delta's proposed Atlanta to Beijing will eventually be approved, but it may take a couple more allocation cycles for it to be approved.

The next China route is set to be allocated in 2008, and already airlines are gearing up for another long fight. Without going too much into speculation, the DOT will likely decide one of two main paths. The route could be allocated to an American carrier that proposes to fly a route in order to directly compete with a Chinese carrier currently flying (such as Continental's New York-Shanghai proposal, a route that will soon be flown by China Eastern Airlines). The DOT could select a proposal that would offer nonstop service to China from a city that currently lacks it. Cities like Seattle, Portland, Phoenix, Dallas, and Boston are very important economically, but currently lack nonstop service to China. The airline that bids would make the proposal from one of these cities primarily on the basis that origin and destination traffic would fill the flight. With the exception of Dallas, none of the cities listed are hubs for carriers that would fly to China, so the traffic for the flights would be local. It will be interesting to see what airlines propose in 2008, but it's likely American, Delta, and Continental will likely make similar proposals. United will have the opportunity to make a completely new proposal, perhaps bidding to offer nonstop service to Beijing from a hub such as Los Angeles. Northwest should definitely reconsider its proposed service between Detroit and Shanghai that simply isn't needed. A better Northwest proposal could be from a gateway city such as Seattle or Portland. Northwest currently serves Tokyo from both those cities, and nonstop service to China, particularly from Seattle, would make a very competitive bid, and a very profitable flight.

Will a Shakeout Occur With Second Tier Regional Lift Providers?

Regional lift providers, companies such as Skywest, Mesa, and Republic, have been squeezed lately as airlines try to keep costs low. 50-seat aircraft, which make up the bread and butter of most regional lift fleets are inefficient and costly for regional lift providers to operate and airlines to pay for. Airlines aren't willing to pay the enormous costs of keeping fleets of these aircraft in the air like they were five or ten years ago. Because of this, airlines that contract with regional lift providers are becoming more and more selective, and regional lift providers that can't compete in a cost-effective manner could quickly evaporate. Companies like ExpressJet and Pinnacle that used to have one client (Continental and Northwest, respectively) are finding that they must branch out, since the airlines they contract for don't need all that lift. As legacy airlines become increasingly more selective in using regional lift providers, only the strong will survive. Skywest, Mesa, and Republic will all survive the impending shakeout, because they are larger companies and have strong financials. Because they are larger, they can also offer better rates since economics of scale allow them to save on maintenance, crew training, labor, and administration costs. Each one has found its niche, and has loyal airline partners. Mesa offers the best rates but shaky reliability. Skywest offers some of the highest-quality service and reliability in the regional lift industry, however, their rates are often higher than Mesa's. Republic offers a nice variety of aircraft, and competitive rates, so airlines can easily customize capacity to their needs cheaply.

But there are other companies in this business that may not survive too long. Air Wisconsin is one example. Air Wisconsin offers excellent service and reliability but has very high rates for regional flying. United dropped Air Wisconsin as a regional lift provider a couple years ago in a bid to cut costs. Air Wisconsin banked on the resurgence of US Airways, and their investment has payed off, allowing the company to survive at least for now. Air Wisconsin operates 70 50-seat CRJ-200 regional jets for US Airways, and has ground handling contracts with United and Northwest. While Air Wisconsin has found success, at least for now, it's doubtful that the company will continue to grow substantially. The company only operates 50-seat regional jets, which is the type airlines are desperate to shed, and they still have relatively high contract rates. Air Wisconsin was hoping to get a contract from Midwest Airlines, which wanted to start flying to certain cities with regional jets. Midwest Airlines offers "the best care in the air" and with Air Wisconsin's high service standards and Wisconsin roots (Air Wisconsin is based in Appleton and Midwest Airlines is based in Milwaukee), many observers expected that Air Wisconsin was a shoe-in for the contract. But unfortunately for Air Wisconsin, Midwest Airlines announced on Thursday that Skywest, another high-quality provider, would receive the contract. That was a devastating blow to the company, and significantly damages its future growth prospects. While Air Wisconsin may survive in the coming years, it will almost entirely be due to their contract with US Airways; the company just won't grow with competitors that are better positioned. If US Airways decides to reevaluate its contract with Air Wisconsin in any way, the company will be hurt, and could be destroyed if US Airways terminates its regional lift contract.

Another example of a company that might succumb to competitive pressures is Trans States Airlines. Trans States has contracts to operate 50-seat regional jets, as well as some older turboprops. The company that owns Trans States Airlines, Trans States Holdings, also owns a subsidiary, that might survive a shakeout, GoJet Airlines, which operates 70-seat regional jets for United. GoJet was formed initially to skirt union rules at Trans States and save money, but pilots at GoJet have since tried to unionize. Trans States Airlines contracts with American, United, and US Airways. But, some of the contracts the company has are for flying turboprops that are practically worthless. These are older, 30-seat J41 turboprops that are simply too old and inefficient to be flown much longer. When those turboprops end their useful lives, American and US Airways are unlikely to renew their contract with Trans States without new turboprops and instead may try to contract with Skywest, which has 30-seat Embraer 120 turboprops. They may instead decide to just end service to some of these markets which aren't key to their overall networks. Trans States has done well, expanding its business, and offering reasonable rates. However, the aircraft the company offers, and the regions they do business in, overlap Republic quite well. Both companies operate primarily in the Midwest and the East Coast. And unfortunately for Trans States, Republic is a larger provider, and is expanding rapidly. Republic has been a success story in the past few years, as the company has been selected to fly 70-seat Embraer E-Jets for Delta, United, and US Airways. This has positioned the company for success in the long-term, as other companies, including Trans States have been slower to catch onto the 70-seat fever. Trans States, or at least parts of the company, may be purchased by Republic if Republic wants to expand since both companies operate sizable fleets of Embraer ERJ-145 aircraft and operate in overlapping regions. It's hard to see how Trans States will survive beyond the next 3-5 years, unless they receive a significant new contract and modernize their fleet with larger, more fuel efficient aircraft.

One other casualty of a shakeout in regional lift providers could be more consolidation. Deals such as the Skywest acquisition of one of Delta's regional lift subsidiaries, Atlantic Southeast Airlines (ASA), could become more common, as smaller companies sell out to the big three. A Republic/Trans States buyout is possible, with GoJets remaining an independent company. But another takeover could happen that would help transform a bankrupt Delta Air Lines. In addition to Atlantic Southeast, Delta has another regional subsidiary, Comair, that Delta might consider selling to another regional lift provider, much the same way Delta sold ASA to Skywest. A takeover of Comair would allow the buyer, likely Skywest or Mesa, to gain a large contract, and a lot of regional jets at a dirt cheap price. Republic could take Comair over, but Republic operates primarily Embraer jets while Comair operates Bombardier jets which doesn't help lower maintenance costs. But, a takeover of Comair might also lead to labor problems at the buyer, since Comair is currently experiencing labor difficulties, particularly with its pilots. Pilots at other providers might be sympathetic to their cause and cause labor action that could significantly damage Comair's owners. While that could pose problems, the acquisition of Comair could bring enormous benefits to the buyer, and help the buyer lower costs and eliminate inefficient aircraft. A Comair buyout would also allow either Skywest or Mesa to expand Eastward, since most of Comair's operations are out of Cincinnati, and expand Skywest's or Mesa's respective economies of scale, offering even lower rates to their customers.

Some smaller providers don't seem imminently threatened by a shakeout, however. Companies like Colgan Air, which used to have a sole customer, US Airways, now has two additional clients, United and Continental. Colgan, and other smaller regional lift providers that own turboprops have seen a resurgence in business, as airlines are flocking to turboprops as a cheaper alternative to regional jets for very short flights. While turboprops aren't useful for flights longer than an hour or so, they allow airlines to offer frequent service between a hub and a smaller city without flying an expensive, larger regional jet for the short journey. Mesaba, which operates a large fleet of the same type of turboprops Colgan operates, Saab 340s, seems to be in a buyout process with Northwest, allowing Northwest to cut costs for regional flying while keeping an important partner intact as a subsidiary. A regional lift provider shakeout will likely occur in the next few years, and regional lift providers that don't have strong, steady contracts, at competitive rates won't be able to stay in business much longer. Regional flying isn't dying; look at the investments being made by Horizon or Frontier's new subsidiary, Lynx in new aircraft. What is dying is the days of jet-only regional fleets. With fuel prices soaring, airlines are taking another look at turboprops and larger regional jets that can carry passengers more efficiently. Airlines will also be looking to squeeze regional lift providers for any additional rate cuts, as they try to trim costs. Many of those rate cuts can only come when regional lift providers get bigger, and when they have the ability to save money on maintenance, crew training, labor, and administration costs by enlarging, they will have a better chance of surviving. Regional lift providers that don't adapt and evolve to this changing scenario won't last long.

Should Northwest Consider a Merger?

According to some recent reports, including this article by The Pioneer Press, the answer is yes. And there are many reasons why Northwest would make a good acquisition target, especially with US Airways (if the US Airways/Delta merger doesn't go through) or even United. However, the possibility of a Northwest merger with United is far less likely for antitrust reasons as both airlines have large market shares in Asia, and particularly China. Neither airline would want regulators to force them to give up what could potentially be their most lucrative routes. But, US Airways on the other hand is a very attractive merger target for Northwest. US Airways now has healthy financials, unlike Northwest, and US Airways's route network fits perfectly with Northwest's, making this merger nearly as attractive as the Midwest/AirTran deal.

US Airways has hubs on both coasts, but lacks a central hub in the Midwest, where Northwest's U.S. hubs are concentrated. Remember that part of the worry with the America West/US Airways merger was that the new airline would have a "barbell network", with extensive service on both coasts, but lacking in the Midwest and Rockies. A Northwest merger would solve that problem. The biggest problem with the two airlines' route networks is the number of hubs in both. If a merger occurred, the airline might consolidate hubs. It's less efficient to have hubs in two cities relatively close to each other, and both airlines already have that problem in their respective networks. Northwest has two close hubs in Minneapolis/St. Paul and Detroit while US Airways has two close hubs in Phoenix and Las Vegas. If a merger occurred, some hubs would likely be closed. Between them, the two airlines operate seven hubs in the United States in addition to Northwest's hub in Tokyo. It's probable that at least three hubs would close down and become focus cities if a merger occurred.

I would guess that Northwest's hub in Memphis, where Northwest's regional lift providers Pinnacle and Mesaba do most of the flying for Northwest, would be the first to go. Memphis is Northwest's smallest U.S. hub, and has struggled with traffic issues for a long time. Memphis is a bad, bad location for a hub, because it lacks a strong base of origin and destination (O&D) traffic, and is in a relatively poor location geographically. O&D traffic refers to the number of passengers that use Northwest to fly to its Memphis hub but who aren't connecting but rather departing or arriving in Memphis. Because Memphis is a relatively small city, the number of flights it gets is very disproportional to the number of passengers who actually are traveling to/from Memphis. Cities like Phoenix or Detroit have larger populations and are better locations for a hub, provided they are in a reasonable geographic location. If Northwest's Memphis hub closed, the merged carrier would probably realign its regional operations. Pinnacle, one of Northwest's two regional lift providers contracts exclusively with Northwest, and their hub is in Memphis. Unless Pinnacle can demonstrate to the merged carrier that it is a valuable supplier, they may have to liquidate. Consequently, a Northwest merger could be opposed by many of Northwest's regional lift provider employees. But, Memphis wouldn't be the only hub to go in a US Airways/Northwest merger. The next likely hub to go would be Minneapolis/St. Paul. Since the hub is located near Northwest's larger hub in Detroit, Minneapolis makes no sense as a location for a hub from a geographic perspective. But moreover, Minneapolis receives far too many flights given its O&D needs. A merged carrier will need a Midwestern hub, and Detroit is a prime location, with Northwest's new terminal and a larger O&D base. Northwest has committed to Minneapolis for too long, and they need to realign their flight schedules in the city to better reflect traffic levels. Minneapolis is simply a duplicate hub that would be too expensive to operate for the merged carrier.

It's important to remember that any hub will receive a disproportionate amount of flights, otherwise, it wouldn't be a hub, since some passengers won't be departing or arriving the hub city. But it makes no sense for an airline to put a hub in a city that will receive few O&D customers, since they help pump up load factors, and airlines can typically charge O&D passengers more since the hub carrier has muscled out low-cost carriers that lower fares. For example, AirTran is currently the only low-fare carrier in Memphis. Minneapolis/St. Paul only has AirTran, Frontier, and Sun Country. Northwest can charge a lot in those markets, and they will make great focus cities, but they don't make sense as hubs.

But now the question becomes which US Airways hub gets eliminated if there are to be four in the merged carrier's domestic network. US Airways operates hubs in four prime cities, Las Vegas, Phoenix, Philadelphia, and Charlotte, and if a merged carrier decides to dismantle a hub operation in a city, there will almost certainly be a smaller, but substantial focus city operation. At first glance, the most logical choice for which hub should be dismantled is Charlotte. The smallest O&D market of the four by far, the city is also relatively out of the way geographically. However, that's where the criticisms stop. There are numerous reasons why it would be foolish for US Airways to dismantle the Charlotte hub. First, the South is one of America's fastest-growing aviation markets, and if Northwest's Memphis hub is dismantled like it should be, then Charlotte needs to remain intact as the Southern hub for the merged carrier. Second, Charlotte itself is a prime business market, and US Airways is able to charge a premium to the business travelers, who travel to/from Charlotte. Charlotte is America's number two city in terms of banking operations, after New York City, so there is a lot of business traffic that goes to and from Charlotte. Third, Charlotte still supports a large network of US Airways regional flights. Even though US Airways has trimmed the size of its regional operation, it's still very sizable compared to other carriers' regional operations, and the Charlotte hub enables US Airways to profitably compete with Delta on flights to and from smaller cities. Charlotte could become a focus city, with the merged carrier dismantling most of its regional and international flights and leaving only point-to-point service from Charlotte to major business and vacation destinations. However, if that were to occur, it would allow Southwest to come in and compete directly with the merged carrier on the routes it still operated. The merged carrier would quickly lose market share to Southwest, and would be relegated a much smaller role in Charlotte. So is there another US Airways hub city that could become a focus city?

The answer is yes, and that city is Las Vegas. Las Vegas has traditionally been a very low-yield market, with low-fare carriers of all stripes hankering to compete in a leisure market with seemingly endless growth potential. With US Airways having reduced their costs considerably, they can compete head-to-head against Southwest and other discounters. A focus city at Las Vegas wouldn't reconstitute a drastic change in their schedule, it would only mean that US Airways dump what little regional service operates from the airport, and perhaps the little international service to Mexico that exists there as well. US Airways concentrates most of their West Coast regional services and international fights from its Phoenix hub. By reducing non-mainline flights at Las Vegas, the airline would concentrate those resources in a larger, and more profitable O&D market, Phoenix, and save Las Vegas for primarily low-yield O&D passengers.

But hubs aren't the only areas where Northwest and US Airways would be great partners. Northwest provides service to few cities in Europe from its Detroit hub and instead offers connections to cities throughout Europe from KLM's Amsterdam hub. Northwest has a code-sharing agreement with KLM that allows both airlines to offer effective connections to North America and Europe without Northwest having to serve too many cities in Europe and vice versa. US Airways also offers limited European service, but offers a broader array of destinations than Northwest. US Airways also has some flights to Central America while Northwest has extremely limited service to the region. US Airways doesn't have any service to Asia, while Northwest offers an extensive Asia network. Internationally Northwest and US Airways don't fit each other as well as other airlines, since if a merger occurred, Europe and Asia would receive plenty of flights, while Latin America would suffer. Every legacy carrier, except perhaps Delta, has a stronger position in terms of market share and routes in Latin America right now, than a merged US Airways/Northwest would have without any new routes. Domestically, both airlines offer limited point-to-point service, the exceptions being for US Airways flights from focus cities on the East Coast such as Boston, New York LaGuardia, and Washington National, and so if the hubs make sense fiscally and geographically, and Las Vegas, Minneapolis/St. Paul, and Memphis are cut as hubs, but left as focus cities, the combined carrier would have a very strong network domestically and internationally.

Fleetwise, this merger also makes a lot of sense. Both carriers are primarily Airbus carriers, and both operate A320 and A330-series aircraft. There are also some Boeing planes in both fleets, however. Both carriers operate the Boeing 757, so integrating those fleets (aside from some of Northwest's older 757s which have different emergency exit, and thus seating configurations) shouldn't be a problem. US Airways also operates ten older 767-200s, and dozens of older 737-300s and 737-400s. Northwest operates none of these models. Northwest operates the Boeing 747, an aircraft type that the old America West used to own in the 1980s, but has since rid itself of. Integrating these fleets shouldn't be much of a problem. The merged carrier could create a uniform seating configuration on all A320 and A330-series aircraft, and on most Boeing 757 planes. Current seating configurations could be kept on planes that only one carrier currently operates. Planes wouldn't also change their current routes much. If a merger occurred, Northwest's 747s would likely continue to operate Asia-Pacific flights, while US Airways's 767-200s could continue to be operated on Atlantic routes. If capacity cuts occurred, some of the older 737-300s or -400s would likely be taken out of service, helping the merged carrier save on maintenance costs for the older aircraft.

However, like many mergers, this one may encounter problems from labor. Northwest has already strained labor relations immensely, by forcing union mechanics to strike and bringing in scabs to replace them. Northwest also replaced all airport employees in non-hub airports with contract employees, and as a bankrupt carrier, Northwest has slashed employee wages significantly. Northwest pilots and flight attendants may be rightly worried about any proposed merger, but sadly, Northwest may be unable to thrive in the next decade if it doesn't make its route network and costs more competitive. These two labor groups should try to work with Northwest management to find an agreement by which the airline can merge, and the new company will keep seniority, pay, and benefits intact, because if they don't, pilots and flight attendants may decide to strike. It appears that while this merger won't happen right away, since US Airways still needs to figure out whether it will merge with Delta, it makes far more sense than the US Airways/Delta merger for the companies involved in terms of synergies of routes and fleets. What a Northwest/US Airways merger can't do, that a Delta/US Airways merger can do, however, is have the power to raise fares significantly, since Northwest and US Airways dominate different regions, while a Delta/US Airways merger would create a very powerful carrier on the East Coast that could hike ticket prices significantly to certain cities. But the US Airways/Northwest merger would allow both carriers to cut costs and to strengthen their respective networks, something both carriers need even more badly right now than the ability to raise fares.

United Airlines Toys With "Bare Fare" Concept

Fortunately, United's "bare fare" concept won't involve passengers flying nude (although less weight in clothes means less fuel used by the aircraft). Instead, United is considering offering more amenities a la carte, where passengers would pay extra for seat assignments, frequent flyer miles, and possibly checked luggage. United's management believes that there is a market for customers who desire basic transportation, and nothing more, and that United is losing this market because it offers a higher level of service aimed at business travelers. Customers who would utilize bare fares would likely be leisure travelers who plan travel well in advance and don't want to pay for checked luggage, seat assignments, or frequent flyer miles. United is struggling against low-cost competitors, particularly Southwest and Frontier that routinely offer lower fares than United's. Because United offers a higher level of service than most legacy airlines, let alone most low-cost airlines, United typically offers higher fares and has struggled recently to maintain load factors on routes where United directly competes with low-cost airlines. United has struggled in part because their fares appear higher on United's reservation system, and customers who use sites such as Kayak or Sidestep that check most airline Web sites see United's fare as higher than fares at other airlines. So in order to keep United's fares competitive with other airlines, United wants to offer low bare fares online, and offer options (such as accruing frequent flyer miles, assigned seats, and checked luggage) for customers to "upgrade" their travel. That way, United can advertise low fares, and allow customers to pay for what they use.

One interesting aspect of the bare fare concept is that it demonstrates how unsuccessful United's Ted experiment has been. Ted is United's "airline within an airline" that supposedly offers lower costs and fewer amenities for leisure travelers. Ted augments United service to some leisure destinations in the United States and Mexico such as Las Vegas, Fort Lauderdale, or Puerto Vallarta. Ted has a dedicated fleet of A-320 aircraft that offer 156 seats and sparse amenities, but enough to appear hip, a la JetBlue or Delta's failed airline within an airline, Song. Ted makes no sense from a cost perspective; having a fleet of aircraft separate from United's mainline fleet increases costs, since these fleets are essentially mutually exclusive, and can't be used on flights that are operated by the other brand. Moreover, United offers a configuration of 156 seats on Ted's A320s, which forces the airline to add a fourth flight attendant, United should either add more seats to increase revenues and offset the cost of an additional flight attendant, or remove a row of seats to give Ted aircraft 150 seats, the maximum they could have while only using three flight attendants. This move appears to make sense from a cost perspective, as JetBlue, which currently has 156 seats on their A-320s plans to reduce the number of seats to 150 in order to cut the number of flight attendants onboard. From a branding perspective, Ted also makes no sense for United as United has a more upscale brand targeting business travelers that Ted detracts from. Many of United's loyal customers are confused about the relationship between United and Ted. From a cost perspective, Ted makes no sense; it adds cost by having an exclusive fleet of aircraft that are configured in such a way that maximizes cost due to additional flight attendants. United's bare fare concept will try to capture the same market that Ted tried to, leisure travelers, but hopefully in a more cost-effective and flexible manner.

While United's bare fare concept is a good idea, United may not be the best carrier to implement it. United already has a strong brand and doesn't need to denigrate it with a Ryanair-like product that treats travelers like impulsive cattle. A carrier that has already chosen to cut service and amenities more than United, one that has already taken significant cost-cutting measures would be a better carrier to implement the bare fare strategy. The most logical choice out of the six major legacy carriers in the United States would be Northwest. For years, Northwest has offered mediocre service and amenities, nothing spectacular, but certainly not the worst in the industry. However, after entering bankruptcy, Northwest began cutting costs wildly, making flight attendants and pilots unhappier by cutting wages and making passengers unhappier by cutting free snacks, even peanuts. Northwest has already taken steps that would allow it to transition to bare fares more easily than other carriers. For example, Northwest doesn't have any inflight entertainment on domestic flights which adds cost for the airline and Northwest already charges for some seat assignments through their Coach Choice program. Charging for other things like frequent flyer mile accrual or checked baggage wouldn't denigrate Northwest's brand significantly, since many passengers expect Northwest to head this route. United still has a reputation that would suffer tremendously if a bare fare program was implemented. Other airlines that have less of a business traveler bent such as Delta and US Airways that are trying to cut costs may find bare fares attractive because they allow passengers to pay for services that cost both airlines a lot of money and bare fares allow both carriers to compete with rabid low-cost competitors on the East Coast.

While the bare fare concept makes sense for domestic flights, there are further complications for intercontinental travel. On most intercontinental fights, meals are served free of charge to all passengers. Will bare fare passengers still need to pay for meals on intercontinental flights? Moreover, on domestic flights it's easy for many passengers to fit all of his or her belongings into a carry-on bag, but on an international flight where travelers are typically gone for longer periods of time, it's harder to avoid checking bags, especially in light of the latest security hysteria. Will bare fare passengers on intercontinental flights receive a free checked luggage allowance? United may compromise and offer a smaller checked luggage allowance than regular economy passengers receive for bare fare passengers. Also, on longer flights, many travelers find it necessary to be seated next to any traveling companions. On shorter flights it typically makes less of a difference for couples or families. If they purchase a bare fare and don't receive seats next to each other, they could be very upset at the airline for seating them apart and make them think twice about purchasing another bare fare.

Another question that might be raised by United's bare fare plan is whether it would be adopted by low-cost airlines in the United States. Ryanair and EasyJet in Europe already have adopted all of the bare fare amenity cuts and more in a bid to cut costs, but low-cost airlines in the United States have been hesitant to cut costs drastically. Most low-cost airlines in this country take their cues from Southwest, and try to avoid offering a standard of service that is no lower than what most customers are accustomed to from the world's oldest low-cost airline. Some airlines (JetBlue and Frontier, for example) have even tried to best Southwest in their amenity offerings and service. However, given a renewed effort by airlines to cut costs, some airlines may be willing to offer even lower fares if passengers don't use certain services. AirTran has something close to bare fares for standby travel. If you're between 18 and 22 years old, you can fly standby using AirTran's X-fares program. X-fares passengers aren't guaranteed a seat (since it's standby travel, so AirTran will assign an available seat to an X-Fares customer just prior to boarding), aren't permitted to check luggage, or earn AirTran A+ Reward credits. But while there are those restrictions, the fares are also very attractive for those 18-22 years of age, at $69 per segment or $89 for long-haul segments (excluding taxes and fees). If AirTran were to offer a product similar to X-fares for travelers of any age and for travel booked in advance, it could be a big hit and help AirTran raise its dismal load factors. The fares probably wouldn't be as low as X-fares, since AirTran is simply trying to fill seats with X-fares that would otherwise go empty, but a ticket with benefits similar to X-fares could take up a seat by a more expensive fare-paying customer if booked well in advance, so AirTran would have to limit the number of seats with an X-fares-like product. AirTran would likely sell these seats at a significant discount compared to regular fares with full amenities since checked luggage, frequent flyer miles, and even seat assignments cost the airline more money than you might think. An AirTran bare fares-like product could seat customers in coach with passengers who paid regular fares and not in a separate section, though most customers would likely be seated towards the rear of the aircraft where the noise is greatest on AirTran's 717s. AirTran bare fares customers could still receive free soda, snacks, and XM Satellite Radio. AirTran is trying to become the lowest-cost provider of air travel in the industry, and to do that AirTran needs to raise load factors. The X-fares program is one way to do that, but an expanded bare fares-like product would allow the airline to fill seats, but allow customers who want to pay for checked luggage and other amenities to pay a nominal fee for them. A bare fares-like product that required a 14- or 21-day advance purchase would also allow AirTran to maintain seats at the last minute for full-fare business travelers while still allowing 18-22 year olds to travel standby at the last minute on X-fares.

Right now, the airline industry in the United States is undergoing a period of great change. Airlines are feeling pressure to join the merger bandwagon in order to consolidate seats, lower costs, and hopefully raise fares. However in the interim, airlines need to start finding ways of cutting costs, and a bare fares-like product at certain airlines that already have lower service standards would allow those airlines to cut costs, give the appearance of lowering fares, and increase load factors. While many customers may hesitate jumping for bare fares, it will allow many customers to pay less and only use what they paid for, which is transportation, nothing more. Some airlines that have more dignified brands including United, Continental, and JetBlue should steer clear of these types of products, because a bare fares-like product doesn't target their core customer base. But at other airlines, introducing bare fares-like products could be a way to grow their companies, particularly in leisure markets and add much-needed revenue to their bottom lines.

The Merits of a Midwest Airlines/AirTran Merger

AirTran Airways made headlines today by proposing to buy Midwest Air Group, the parent company of Midwest Airlines, for $11.25 per share, causing Midwest shares to rise over 22% in Wednesday's trading. Late today, Midwest released a statement rebuffing the merger proposal, however, AirTran vows to keep up pressure to merge. Many in Milwaukee, where Midwest is headquartered, aren't happy about the announcement. This merger has been speculated on for years as AirTran and Midwest have better synergies than almost any two airlines in the United States, and a merger could benefit both carriers tremendously. That's not to say there aren't problems with a merger, but they are much smaller given the size and scope of the carriers involved than a Delta/US Airways merger or even this wacky United/Continental merger. (A United/Continental merger is so nutty and nonsensical that I don't have time to talk about it tonight, but there are simply too few synergies and too many costs to make it worthwhile.) There are two primary synergies with the AirTran/Midwest merger that would help both carriers out. First, both airlines operate sizable fleets of Boeing 717-200 aircraft, a rare occurrence given that just over 150 717 aircraft were ever made. Merging the two airlines' 717 fleets will allow the new airline to save money on maintenance, training, and other costs. Second, AirTran is looking to expand further into the Midwestern United States where Midwest Airlines has significant market share, and Midwest Airlines wants to make further inroads on the East Coast where AirTran has an extensive presence. The routes that each airline operates complement each other nicely, and would allow the new company to be strong in both regions.

While the synergies associated with the 717 help reduce costs with this merger, there are a number of other fleet-related factors that complicate matters. First, Midwest Airlines also has a fleet of 11 MD-80 aircraft, that they plan on expanding to 13 by mid-2007. These aircraft aren't compatible with AirTran's 717s, and would likely be tossed from the fleet if a merger occurred. MD-80s can be acquired cheaply by Midwest, but they are also very expensive to operate and aren't compatible with AirTran's business model, since AirTran seeks to be the lowest-cost provider of air travel in the industry by embracing newer, cheaper-to-operate aircraft such as Boeing 717s and 737s. Another issue is the compatibility of AirTran's 737s. AirTran is receiving new 737-700 aircraft from Boeing on a regular basis, but they still have a relatively small fleet of 22 aircraft. Midwest currently has no 737s and has shunned them because Midwest operates from smaller markets in the Midwest that don't require an aircraft as large as the 737. A merged airline would likely concentrate 737s on AirTran's Atlanta and Orlando hubs until the new airline received enough aircraft to start basing 737s in Midwestern cities like Milwaukee or Kansas City. This would eliminate the cost of basing the planes in Kansas City or Milwaukee, which would lead to additional personnel and maintenance costs and given that the new airline couldn't likely fill those 737s from Kansas City or Milwaukee, it makes sense to keep them in safer hubs like Atlanta and Orlando. But the main difference in fleets between the two airlines is Midwest's wholly-owned regional operation, Skyway Airlines. Skyway uses small 19- and 32-seat planes to serve smaller cities in the Midwest. Midwest has also announced interest in purchasing 50-seat aircraft to expand Skyway's operations. Ever since their failed JetExpress experiment, AirTran has been adamant about not having a regional aircraft operation. If a merger occurred, AirTran would likely phase out Skyway Airlines because it doesn't fit into AirTran's core business model of providing simplified service at affordable prices. Regional aircraft like the ones Midwest owns are too expensive, and full of reliability issues that AirTran doesn't want to get involved in. It's hard to see AirTran finding room for Skyway, but perhaps if Midwest could prove that it made fiscal sense, AirTran would be receptive to retaining at least some regional operations. But while there appear to be many dissimilarities between the two carriers' fleets, remember that the 717 makes up the bulk of their fleets. AirTran operates approximately 85 717 aircraft (compared with 22 737s) and Midwest operates 25 717 aircraft (compared with 11 MD-80s and 18 regional aircraft). Because the 717 makes up a sizable chunk of both airlines' fleets, there are significant cost synergies such as reduced maintenance, crew training, and dispatch and operational costs (such as the increased likelihood of being able to find a spare compatible aircraft if there is a mechanical breakdown) that would be very real in a merged airline.

The other major synergy in a merged AirTran/Midwest Airlines would be combined routes. AirTran already serves Milwaukee and Kansas City, Midwest's two primary hubs, and Midwest serves Atlanta and Orlando, AirTran's primary hubs. However, AirTran has struggled to grow in the Midwest. AirTran has succeeded on the East Coast in part due to Southwest's relative lack of service in that region. But Southwest has long been established in the Midwest, and has substantial market share in cities such as Chicago, Kansas City, Omaha, and Dallas. While Midwest Airlines doesn't serve Chicago, it does serve all the other listed markets, and has significant market share in both Kansas City and Omaha. In fact, Midwest used to have even greater market share in Omaha, but substantially reduced service to the city in part due to competition from Southwest and in order to reduce costs. Kansas City and Omaha are two important Southwest markets, and AirTran would love to battle Southwest in these cities given that AirTran lost a major market share battle in Chicago against Southwest a couple years ago. Midwest Airlines has struggled against Southwest, and has tried to use its more upscale brand in order to win over customers. However, with AirTran's lower costs, a merged airline could offer customers more options to the East Coast from Kansas City and Omaha. Southwest still might retain considerable market share on flights to the West Coast, but a merged AirTran/Midwest could give Southwest a run for its money in Kansas City, where Southwest offers daily nonstop flights to several cities on the East Coast, as well as Omaha, where Southwest offers convenient connecting service to many East Coast cities. AirTran would also get improved access to markets such as Minneapolis where Midwest has already made a strong push for market share. AirTran would also get its first Canadian market, albeit one operated by Skyway Airlines, Toronto. Even if AirTran scrapped Skyway, they might use the merger as an opportunity to expand into Canada, including Eastern cities such as Toronto, Montreal, and Ottawa. Through a merger, Midwest customers would receive access to a wide-ranging AirTran network on the East Coast and beyond. Midwest customers would be able to fly to many cities that aren't currently served by Midwest such as Raleigh-Durham, Charlotte, Detroit, Chicago, and dozens more. It would enable Midwest to expand Eastward and provide extensive service for its customers, something that Midwest has tried to do in vain for years. The route networks for both airlines would complement each other nicely and allow each airline's customers to fly to previously unserved cities at a lower cost.

One wild card in the merger is what kind of amenities the new airline would offer. Midwest has suffered with a split identity for several years now, offering its Signature Service with 2x2 seating on flights to business destinations while offering Saver Service with 2x3 seating on flights to leisure destinations. The airline used to offer far more amenities than it currently does, post-9/11 economics forced Midwest to cut many aspects of its product that customers weren't willing to pay extra for, such as gourmet meals served on china. But the mixed products does create a problem for AirTran, which has a standard, low-cost product. AirTran offers minimal seat pitch to most customers, even less than most legacy carriers with an average seat pitch of between 30 and 32 inches. AirTran also offers business class with several more inches of seat pitch to those who will pay for it. AirTran also offers free XM Satellite Radio on most flights, something Midwest lacks. With this simple philosophy, AirTran has one of the lowest seat mile costs in the industry. If AirTran wants to lower costs, they must reconfigure Midwest's 717s with a typical AirTran seating configuration of 12 business class seats and 105 in coach and standardize the onboard product with XM Satellite Radio and a standard array of free snacks and beverages. While AirTran may lose some Midwest Airlines customers who fly Midwest because it offers a superior product, AirTran will likely win over more customers who will fly the airline because it offers lower fares and because AirTran's product is better than Southwest's. This sounds like a challenge, but rebranding the new carrier will be much easier than reconciling some of the other differences between the two carriers.

While Midwest rejected a merger today, in the future, if AirTran sees value in pursuing Midwest, a merger will occur. This merger will be much easier to complete and makes far more sense because of the demonstrated synergies of both carriers than either the Delta/US Airways or United/Continental mergers. It's worrisome to hear that the media has now picked up on the news of merger talks at several airlines as a sign of merger frenzy occurring in the industry. While there will likely be consolidation, particularly from smaller carriers such as AirTran, Midwest, or Spirit (which appears to be a realistic takeover target by JetBlue or Frontier), consolidation will not sweep through the big six legacy carriers, and merger combinations such as Delta/US Airways or United/Continental don't make sense from a business standpoint for many reasons unless there are significant labor, operational, route, brand, and fleet changes at those companies. Simply because a merged airline can raise fares doesn't mean that there are sufficient synergies, particularly in the areas of fleets, routes, and labor agreements, between the airlines to warrant a merger. With AirTran and Midwest these synergies exist to a far greater degree than between any of the six major legacy carriers. Hopefully, if airline executives do their job and try to protect shareholder value, and not protect investment bankers who want to conduct mergers and make large commissions in the process, then the US Airways/Delta and United/Continental mergers won't occur. But mergers between smaller airlines that have simpler route networks, fleets, and labor agreements are more realistic, and allow both airlines to grow substantially in the process. If AirTran merges with Midwest and uses the merger to create an optimized airline with an extensive low-cost route network to the East of the Mississippi, then both airlines will benefit tremendously, and it will pose a major competitive threat to Southwest in certain markets. I can guarantee that we haven't seen the last of AirTran's bids, but further information on the merger might not come until after the holidays. A release of more information or a revised bid by AirTran will certainly be something to watch for over the next few weeks.

Update on New China Route Bids

Later this month, the Department of Transportation will announce which airline receives the authority to launch a new route to China. American carriers are only allotted a certain number of flights to China, and Chinese carriers must receive a proportional number of flights to the United States. With demand for China service very hot these days, American carriers are lining up to bid for the opportunity to serve a given route to China. As I mentioned in an earlier post, Continental and United appear to have the strongest bids. United wants to serve Beijing from Washington D.C. while Continental wants to launch nonstop New York to Shanghai service. Both proposals make sense, since there is a lack of nonstop service to China from the East Coast. Currently, the only nonstop service to Mainland China from the East Coast is from New York to Beijing on Continental, United and Air China. China Eastern Airlines plans to launch New York to Shanghai service in January 2007, but no other nonstop service to Mainland China from the East Coast is planned. United's bid makes the most sense, since D.C. doesn't have any nonstop service to China, but Continental's makes sense too as the DOT would like to have U.S. competition to a Chinese carrier on the New York to Shanghai route, and four nonstop flights to China is still too few for America's largest city. But sadly the DOT approval process is highly-politicized, and the decision has as much to do with whether the proposal makes sense as whether the airline has connections and a good relationship with the DOT. Consequently, United, which has had a good relationship with the DOT for a long time, given that they have a long history serving China seems to have the best chance of success on the bid. Plus, United's D.C. bid makes the most sense. However, any of the four airlines, United, Continental, American, and Northwest still have a reasonable shot at receiving the route authority.

However, one airline has been forced to modify its bid in order to appease its pilots. American, which wanted to fly to Beijing from Dallas has been prevented from flying the route nonstop by their own pilots. Technically, the flight from Dallas to China was scheduled to be over the maximum flying time for pilots that is stipulated in the airline's latest pilot contract. Consequently, American has amended its proposal to fly a triangle route to fly between Dallas-Chicago-Beijing-Dallas. The return Beijing-Dallas flight has the advantage of tailwinds, and takes less time than the outbound flight, allowing it to fit within the duty range stipulated by American's pilot contract. But, this new development will significantly decrease the chances of American receiving the bid. United already flies from Chicago to Beijing, so American would simply be replicating United's route on the outbound flight. With this problem, American should look forward to 2008, when the DOT will award another China route authority. So should Northwest, which submitted a lousy bid between Detroit and Shanghai. Northwest already has the authority to fly this route nonstop, but chooses to fly it through Tokyo Narita in order to pick up passengers connecting from other Northwest gateway cities. Essentially, if the DOT gave Northwest the route authority, they would be re-awarding it, a complete waste given the precious opportunity the DOT has to choose a bid that makes economic sense. With that in mind, let's look ahead to what bids airlines might submit the next time the DOT awards a China route authority, in 2008.

One route that will certainly be reapplied for is Atlanta to Beijing on Delta. Earlier this year, Delta's bid on the route was rejected, but with time, this bid might gain momentum. If the bid is successful, Delta would be the only airline to offer nonstop service to China from the Southeast. While it wasn't a compelling case this year, in two years it might make a lot of sense. Given the recent influx of economic activity in the Southeast, especially by automotive manufacturers, Delta might have a very solid bid. American, United, Northwest, and Continental will all likely submit bids as well. In two years, American may be able to serve Beijing nonstop from Dallas if it works out a fair deal with their pilots, or they could try something else. American could bid for China service from Chicago, to compete with United's current service, or American might even try to bid for service from their Miami hub. Miami is American's chief Latin American hub, and nonstop service to China might facilitate connections to Latin America. In my December 6th post, I mentioned that traffic to Latin America is growing at very strong rates, though the airlines reaping the rewards of this growth are American's competitors. If American wants to share in the growth in Latin American traffic in the next few years, one of the things they need to do is offer easy connections between Latin America and Asia, and American has failed to do that thus far at its Dallas hub. American's Miami hub, which offers extensive Latin American service, may make more sense for Asia-Latin America connections. Meanwhile, if Continental's bid from Newark to Shanghai doesn't work out this time, Continental may try to rebid for that route or they might try to bid on a route to China from Houston. Flights from Houston to Beijing or Shanghai would make a lot of sense, given the new economic activity in Texas and the Southeast that's being driven by Asian companies as well as oil company traffic and connections from Latin American flights.

But then there are United and Northwest, the two U.S. carriers that have the largest market share of American carriers to China and the most experience operating in China. While the DOT may be very interested in fostering competition and allowing other airlines the opportunity to fly to China, realistically, United and Northwest have many connections at the DOT, and with their history operating in China, it's probable that one of these airlines will receive the 2008 route authority. Northwest and United have similar, yet attractive options for new China routes. One option is to offer point-to-point service from a West Coast gateway city to China. Seattle/Tacoma is at the top of that list, given that the city lacks any nonstop service to China. Seattle has strong business ties to China, and companies such as Boeing and Microsoft desire new flights. Seattle has been a big market for both United and Northwest and could definitely warrant nonstop service. Both carriers have served Tokyo nonstop successfully from Seattle for years, and have made a strong commitment to the Seattle market. Another possibility is nonstop service from Honolulu. Honolulu has a significant number of nonstop flights to Asia, but it lacks nonstop service to China. Unfortunately, I think this route is farther off, but it's still a remote possibility. Another possibility for Northwest and United is to serve a new market in China nonstop from the States, namely Guangzhou. A United bid for San Francisco to Guangzhou service might make a lot of sense, given the large Chinese community in San Francisco and the current lack of nonstop service between San Francisco and Guangzhou. Northwest might also consider serving Guangzhou from Detroit or New York City. Finally, there is the most likely possibility of both airlines serving a new China route from a hub. Northwest may try to resubmit its bid for nonstop service between Detroit and Shanghai, and given the geographic location of Northwest's U.S. hubs, that may be the best hub proposal, though the proposal itself makes little economic sense since Northwest already offers easy one-stop service from Detroit to Shanghai. United may have a good case if they bid to serve Shanghai from their Los Angeles hub. China Eastern is the only carrier to offer nonstop service on this route, and the DOT may like some competition on the route, even if it's not from a more recent entrant into the China market. However, a lot can change in two years, and the DOT may have different objectives when it awards the next route authority. Any predictions made at this point are just speculation, so it's important to keep these in perspective. Whichever airline receives China rights this time around will be the one to watch in two years. If the winning carrier can make good use of its new route and prove to the DOT that it has been successful, it wouldn't surprise me if the DOT decided to award two consecutive route authorities to the same carrier.

November 2006 Traffic Analysis-The Real Growth is in Latin America

Most airlines have released traffic figures for November and there are very defined patterns in these numbers that indicate some interesting trends about which airlines are succeeding. One interesting trend is the increase in passengers traveling to Latin America. Part of the increase is due to a rebound in traffic this year after the destruction caused in Mexico after Hurricane Wilma. But some of the increases are due to increased capacity to certain destinations, especially those in Brazil which saw new flights and expanded capacity from United and Continental Airlines this year. United, by no means the largest US carrier to Latin America, flying primarily to strategic business cities in the region, increased its overall number of seat miles to Latin America by 7.7% compared to November 2005, but the number of seat miles flown by passengers (revenue passenger miles) rose 15.8%, contributing to a load factor of 79.2%. Continental, which has extensive service to Latin America increased its seat miles flown by 17.4%, but the number of seat miles flown by passengers increased 23.7% compared to November 2005, contributing to a Latin American load factor of 78.6%. But some airlines have seen substantial increases in the number of passengers flying to Latin America, even as they have cut capacity. The largest carrier to Latin America, American Airlines, actually cut the number of seat miles it flew to Latin America compared to November of last year by 3%, but the number of seat miles flown by passengers was up 8%, contributing to a significant increase in American's Latin American load factor, up to 75.9% in November.

What does this mean for airlines? It is a clear indication that demand to Latin America is strong, even as some speculate that the political situation in countries such as Venezuela may soften demand for business travel to those countries. Economies like Brazil are growing very quickly, and the demand for air travel to the United States will continue to grow. But while we have seen increased capacity to Latin America lately, it will be increasingly difficult for some airlines to increase service to Latin America, possibly raising fares, load factors, or the possibility that foreign carriers could take some market share away from US carriers. Some airlines such as Continental and Delta are short on widebody aircraft used for operating services to South America. Continental and Delta both use 767 aircraft for these flights, and Continental is using most of its 767s on current Latin American routes as well as on some European routes. Delta is using its widebody planes on current international routes as well as on domestic transcontinental flights. Most flights to Central America are operated with 737-type aircraft, and those Continental and Delta can spare more easily, and perhaps add capacity on, but for longer routes to South America, both Continental and Delta may have reached the limits of their expansion until they receive new widebody aircraft.

The airline that seems to be able to take the most advantage of growth Latin America is United. United is expanding rapidly to the region, and has sufficient widebody aircraft for the job. Earlier this year, for example, United added a second daily flight between Washington D.C. and Sao Paulo, Brazil which took awhile to make money, but has finally caught on with passengers. But where United really has the potential to shine is in its ability to facilitate connections between the Asia-Pacific region and Latin America. This market will grow rapidly in the coming years as countries such as China continue to build ties with Latin America. It could also be a very profitable business for United. Some have speculated that with a convenient hub in Dallas-Fort Worth and flights to and from Asia as well as Latin America, American Airlines would be the best candidate to market flights between Asia and Latin America, however that's simply untrue. United's hub in Los Angeles currently offers dozens of daily Latin American flights, and allows the airline to move business travelers between Asia and South America. United's primary disadvantage is an extensive set of flights to Latin America, but compensates with reliable service from convenient gateway cities such as Los Angeles to most major business markets in Latin America. What American lacks that United has is a solid set of flights to Asia. American Airlines is extremely weak in the Pacific, with flights to Japan, China and India primarily serving Chicago O'Hare instead of American's primary Latin American hubs in Dallas-Fort Worth or Miami. United, meanwhile, serves many countries in Asia including several cities in China as well as cities across Asia and Australia. Most United flights to/from Asia go through Tokyo and then onward to hubs including Los Angeles that offer sufficient connections to Latin America. United may not have the highest volume of flights to or from Latin America, but they do have a much more extensive operation in Asia with a lot of market share to/from the United States. The one area internationally where Untied is the weakest is in Latin America, and United has a desire to go after its archrival American in the international region where American is the strongest. United can use its presence with business travelers in Asia to market convenient flights to South America, as long as United continues to expand services to Latin America. It would be a brilliant strategy that would step right on American's toes, and give United a strong foothold in an underpublicized emerging market, Latin America. If United continues to increase available seat miles, they will gain the requisite market share in order to be a competitive carrier in Latin America.

But the traffic figures released these past few days reveal more than just Latin American expansion, they also show an alarming decline in load factors at certain low-cost airlines, most notably AirTran. Last month, most legacy carriers received load factors of around 78%, an increase of 1-4 percentage points for most carriers. But low-cost carriers saw some of the weaker numbers, in part due to rapid overexpansion leading to emptier planes. AirTran reported that the number of available seat miles for November grew 19.1%, but because seat miles flown by passengers only grew by 15.4%, the load factor fell by 2.2 percentage points. AirTran has been struggling lately, as the airline has slowed expansion from its Atlanta hub and instead expanded from focus cities elsewhere. Because AirTran's presence in these markets isn't necessarily strong enough to yield considerable market share, and AirTran doesn't have the benefit of connecting traffic like in Atlanta, the airline has struggled to attract customers, especially from very competitive airports such as Chicago Midway. While AirTran is cutting some of these point-to-point routes, the airline continues to struggle, and these traffic figures indicate that the airline may have to lower fares in order to fill seats and may report sluggish profits. But beware, a decline in load factor alone isn't cause for alarm, at AirTran it happens to be indicative of larger problems the airline faces. But JetBlue also reported a decline in load factor to 80.8%, still high for any airline. Moreover, JetBlue has announced that it is trimming future growth and has a plan to turn itself around. AirTran hasn't clearly identified what they need to do to succeed, but if they don't decide to turn themselves around soon, they could be in big trouble just like American is on Latin American routes.

Airlines are Lining up to Buy Assets from a Merged US Airways/Delta

Ever since US Airways made a bid for Delta two weeks ago, several low-cost airlines have come forward and announced that they would be interested in purchasing select assets if the two airlines merge. Southwest, JetBlue, Frontier, and AirTran have all expressed interest in various assets from the new company, including gates, planes, and landing slots at certain airports. New assets would allow these carriers to expand their East Coast operations especially from airports that have been closed to new airlines due to landing restrictions, including New York's LaGuardia and Washington D.C.'s Reagan National. Low-cost airlines that purchase some of the assets will likely have a competitive advantage over others. However, the assets that low-cost airlines will most likely buy will not lower costs but will increase revenue. Many of the assets that would be sold are older aircraft (and typically more expensive to fly), gates at high-rent airports, and other various assets that would likely increase costs because they don't fit as well with the very defined low-cost systems that these airlines operate. But, the revenue gains that would come from the new equipment would offset the additional cost.

The merger would force US Airways and Delta to do several things that may be attractive to low-cost carriers interested in assets. First, the merger plan calls for the new company to reduce the number of seats it flies by 10% overall. This would mean that the combined company would likely shed older, more costly aircraft, particularly narrowbody aircraft that are used by low-cost carriers in the United States. Aircraft like 737-300s or A319/A320s could be attractive to low-cost carriers looking to pick up cheap used aircraft. Low-cost airlines might also be interested in gates at airports that are currently dominated by one airline, such as Cincinnati or Charlotte. These have been traditionally high-cost airports that haven't received many low-cost carriers. Also, US Airways and Delta have a large amount of market share in high-cost airports on the East Coast such as Boston Logan, New York LaGuardia, and Washington D.C. Reagan. While Southwest isn't as interested in those airports, JetBlue, AirTran, and even Frontier could all be looking to purchase gates and landing slots in order to compete with lower fares at those airports. If a merger occurs, there is bound to be some consolidation in terms of the hubs of each carrier, and one example of that is in Charlotte and Atlanta. It doesn't make fiscal sense to have hubs in relatively close geographic areas, and that is very true in this case given that the cities are less than 250 miles apart. The new company could save money by consolidating most of its hub operations into one airport. Atlanta is Delta's largest hub, and it's extremely unlikely that a merger would force Delta to dismantle that hub. Charlotte, on the other hand, is a major hub for US Airways, but secondary to Philadelphia. US Airways may downsize the Charlotte hub by dropping regional flights, but maintaining point-to-point service to major cities across the country in order to maintain market share. Charlotte already has limited service from AirTran and JetBlue, but if US Airways reduces flights to the city, then that could make way for an expansion of service from those two airlines or it could open the door for Southwest to commence service.

Southwest Chairman Herb Kelleher has called Delta CEO Gerald Grinstein and US Airways CEO Scott Kirby to express Southwest's interest in assets from a merged company. Southwest is interested in planes and gates, especially on the East Coast, where Southwest is weakest competitively, and has had trouble expanding. Southwest is very interested in obtaining additional aircraft for their rapidly-expanding fleet. Southwest might be interested in Delta or US Airways 737-300 aircraft, which is an older variant of the 737, but one that makes up nearly half of current Southwest's fleet. Recently, Southwest placed an order for 80 737s and when they asked Boeing to add two aircraft to the order, Boeing turned Southwest down, even though Southwest is arguably Boeing's best customer. Boeing has received a surge of orders recently, and didn't have the production capacity to accommodate Southwest's additional orders. Boeing instead suggested to Southwest that it buy used aircraft that were being dumped by the Ford Motor Company. If Southwest is unable to receive new aircraft in addition to the ones they have already ordered, they will likely want to purchase used aircraft, even if the used aircraft are older 737 variants like those at US Airways and Delta. Southwest might also be interested in gates at certain airports. Charlotte and Cincinnati are two hub cities that could see reductions in service, and if that occurs, Southwest might decide to add service. Southwest currently serves neither city, though is interested in serving both. Because both airports have been fortress hubs with high airport costs that make it very difficult for a low-cost carrier to succeed, Southwest hasn't dared to enter. But if there are service reductions, there will likely be more available gates and the airports may lower fees, at least for a limited amount of time, in order to woo new carriers. Southwest could get a lot out of a merger, but they need to be careful what they buy, and not take on too many assets that don't fit in well with Southwest's low-cost model.

On the other side of the spectrum, AirTran has a different set of interests than Southwest from this merger. AirTran wouldn't likely be looking for aircraft, as US Airways nor Delta has the type of aircraft AirTran uses, 717-200s and 737-700s. But AirTran is looking to add point-to-point service from some of the restricted airports that US Airways and Delta serves in Boston, New York, and Washington D.C., and AirTran is willing to pay for gates and landing slots at Boston Logan, New York LaGuardia, and Washington D.C. Reagan National. AirTran would likely add service to cities up and down the East Coast, especially to Florida where the airline is looking to increase its market share. AirTran's next phase of expansion involves adding point-to-point service from higher-cost airports so AirTran can build a market with business travelers and charge a premium for flights. If AirTran receives additional slots, they must expand from these higher-cost airports methodically. Only then will they be successful against Delta and US Airways, but sadly, AirTran may be forced to retreat in some of these markets like they have in Chicago Midway if there is too much competition.

JetBlue and Frontier could get aircraft from the merger as US Airways operates both A319 and A320 aircraft, but it's unlikely given how the new the aircraft are. US Airways would rather get rid of older 737-300s and -400s than the newer, and cheaper to operate A319s and A320s. JetBlue may be interested in the airport slots like AirTran is, as JetBlue is also interested in expanding point-to-point services from these cities. In this regard, JetBlue's interests are quite similar to AirTran's. One additional benefit David Neeleman sees to a merger is that Delta may reduce operations at JFK, instead consolidating New York City operations at LaGuardia or simply downsizing Delta's New York City focus city, enabling JetBlue to expand further from JFK. Frontier may want to expand to cities like Cincinnati and Charlotte that could use Frontier's low-cost service but are currently dominated by Delta or US Airways. Frontier might also interested in expanding service to Phoenix and Las Vegas. These are both big Frontier destination cities, and if US Airways consolidates capacity in these cities, and reduces available seats by 10%, then Frontier could take advantage of those cuts to expand service. But for both JetBlue and Frontier, service cuts by US Airways and Delta means potential service expansions that allows the respective carriers to strengthen their market share in key cities. The potential merger of US Airways and Delta will enable several low-cost carriers to expand by leasing gates formerly leased by US Airways or Delta and by expanding on routes that US Airways and Delta will cut frequency on. However, looking at the possibility of a merger, Delta is opposing it and currently a merger seems unlikely. But, the environment may change in the new year, and the merger may move ahead, enabling US Airways and Delta to cut costs and low-cost airlines to capitalize and expand in the void left by service cuts.

Two Airlines Take Increased Risks With New Flights

Frontier Airlines announced that it would start new red-eye service between Denver and Hartford, Connecticut starting March 2. This move makes sense in many regards, but also raises some questions about the level of risk Frontier is willing to take in a new market. Hartford isn't a very large airport, and doesn't have much service to the West. But Hartford does have Southwest with service to several destinations that allow passengers to connect to Western Cities, including Nashville, Chicago, and Las Vegas. Southwest has already lowered fares substantially in the market and may make it difficult for Frontier to compete. One of the few things that Frontier has going for it is that it offers nonstop service to Denver, a city currently unserved nonstop from Hartford. In Frontier's press release, the service to Denver specifically seems to be promoted, more so than other press releases, especially in comments by Governor Rell, and Frontier's own self-promotional paragraph stating:

"Frontier is proud to be the first carrier to fly non-stop between Hartford and Denver, and we're confident passengers who are unfamiliar with our airline will enjoy our new comfortable aircraft, superior service, consistent on-time departures and arrivals, and in-flight entertainment," said John Happ, senior vice president of marketing and planning for Frontier. "We get more requests from passengers to serve New England than any other area in the U.S., so we're looking forward to bringing the Frontier experience to Connecticut and southern New England travelers. Not to mention that with our early morning departure from Hartford, passengers can be in Denver and up to the mountains by noon to enjoy a half day of skiing, biking, hiking or any of the great activities the beautiful Rocky Mountains have to offer."

While the service is timed to offer connections to other cities in the West, it appears that Frontier is launching this service primarily because it will be the only non-stop service between Hartford and Denver. But is there a reason why this market has been previously unserved? It's interesting that United, doesn't serve the Hartford-Denver market, even though both cities are thriving business centers and business travelers are United's core customer base. If United doesn't feel a need to serve the Hartford-Denver market nonstop, then there may not be a need for that flight. Even with Southwest's presence, Hartford is by no means a low-yield destination, and United could easily charge a premium on nonstop service if it wanted to since Southwest doesn't serve the Hartford-Denver route nonstop. Frontier's entering the market with fares that are likely below where United would set fares, which might spur demand, but it also might prevent the flight from becoming profitable.

One challenge for Frontier in Hartford is to make itself well-known. Hopefully the airline and the airport can work together to publicize the new service and make it a success. Southwest is currently the only low-fare carrier at Hartford with a substantial operation and Frontier's new service of one daily flight might get overlooked by consumers when they need to book a trip out West. Many customers in Hartford have never heard of Frontier because Frontier hasn't served New England for several years since they left Boston in 2002. Frontier needs to get it's brand recognized by consumers in the Hartford area if it wants to convince customers that there is a low-fare alternative from Hartford. That could pose a challenge, but Frontier is aware of the problem and will do what it can to stir publicity. Nevertheless, it will be difficult, after all, how does an airline with one daily flight publicize a new destination effectively? JetBlue did this successfully when it launched a daily nonstop red-eye flight from New York to cities such as Seattle/Tacoma, Salt Lake City, or even Denver. All of those routes have been very profitable, so marketing a single daily flight can be done well. Frontier is taking a big risk with Hartford, but if it works hard to publicize the new route and offer fares that are reasonable, the new route should succeed. One suggestion, though, Frontier should make its in-flight television free to all passengers on the route until the end of the summer, so customers can experience all of Frontier's superior amenities over Southwest.

But Frontier isn't the only airline taking risks with new flights. Delta also announced new flights between New York and Chicago, making the market share battle on the route all the more interesting after JetBlue announced new service from O'Hare to JFK several weeks ago. Delta plans to start new service between LaGuardia and Midway, the two most convenient airports for business travelers in New York and Chicago, respectively. Delta's regional partner Shuttle America will operate Delta Shuttle-like service between the two airports with E170 jets that seat 70 passengers. The aim is to attract business travelers, who will like the convenient airports (including the convenience of flying from the Marine Air Terminal at LaGuardia) and the regularly-scheduled flights Delta plans to offer. Delta also plans to add additional flights between JFK and O'Hare on 50- and 70-seat regional jets through Delta's regional subsidiary Comair. The new service will ratchet up the market share battle between New York and Chicago, and will ultimately create some losers. Airlines like ATA or AirTran that have smaller operations between Midway and New York City (ATA to LaGuardia and AirTran to Newark) could be marginalized if larger airlines like American, United, or Delta use their large market share to offer deep-discount fares, driving these smaller carriers out of the market. Both ATA and AirTran might have to withdraw from the crowded New York City to Chicago market if they can't distinguish themselves from their competitors and offer lower fares than carriers with larger market share.

But this move is dangerous for Delta as well. Even though Delta will be operating the new flights with smaller jets, there is still a whole lot of risk involved. Delta has a lot of market share in New York City at both LaGuardia and JFK, but they have less in Chicago. Marketing these flights to business travelers in Chicago as a plausible alternative to American and United may be difficult. Given that business travelers often stick with an airline that they've racked up the most miles with, Delta might have a hard time breaking into Chicago, where there are thousands of business travelers that have racked up significant amounts of miles on American and/or United. Delta also may have trouble operating the standard of service business travelers expect. American and United set high standards of service and comfort for their New York to Chicago flights. But Delta's flights involve smaller jets that business travelers typically dislike because smaller jets are less comfortable to fly on. If Delta truly wants to make the new flights business traveler-friendly, then they should operate them with mainline aircraft. But, if Delta wants to make the flights profitable, Delta should probably use smaller planes. With this latest grab for business traveler market share, there is little doubt that there will be realignment in the New York to Chicago market next year, and every airline that flies the route is vulnerable to competitive pressures. ATA and AirTran are most vulnerable to exiting the New York to Chicago market but all airlines on the route may to cut flights, even the strongest such as American or United. Fares on the route will likely decline slightly in the next six months, but may rise if some airlines retreat and remove seats from the route. It will be a very interesting year in 2007 on the New York to Chicago route, and Delta's announcement will certainly not be the last we hear about the route anytime soon.

By the way, this is a milestone for Airline Bulletin. It is the 300th post since the creation of the site over two years ago. I certainly hope to write at least 300 more in the coming years.

The Challenges of Airline Consolidation

The proposed merger between US Airways and Delta has sparked a heated reaction from many observers who wonder about other merger combinations. Consolidation is difficult, especially in the airline business, and while hypothetical merger combinations may be nice to talk about, it's far more difficult to work them out in the real world because airlines are so complex. The Delta/US Airways merger will be difficult in part because the two airlines in question are so large. The larger the airline, the more complex the merger is, and both Delta and US Airways are very large airlines.

The last major airline merger was between US Airways and America West, and it worked for a number of reasons. One reason was the size of the airlines involved. After post-9/11 cuts, US Airways had diminished in size, and America West had never been too large. Because both airlines had very distinct spheres of influence on different coasts, the route networks complemented each other very nicely, and the fleets were also compatible. There were certainly problems, the foremost was that neither airline had sufficient aircraft to connect the hubs on two coasts. The largest aircraft these airlines had for transcontinental flights were 757s, and neither airline had many of them. Many transcontinental flights on the new US Airways are operated by A319s and A320s because of the lack of larger aircraft. The new airline is still merging two different systems of operation, and US Airways is incurring numerous costs in doing so. But the merger worked overall, and it greatly expanded the reach of both carriers. The Delta/US Airways merger is quite different, it would increase the market share of the merged airline on the East Coast but it wouldn't significantly increase the reach of the airline. US Airways customers could earn miles on Delta international routes, many of which aren't operated my US Airways. Meanwhile, Delta customers wouldn't benefit from too many routes unique to US Airways because US Airways is a much smaller carrier than Delta. The fleets and routes just don't work, and moreover, the size of the airlines complicates matters. Each airline has individual systems for reservations, maintenance, safety, etc and the costs to merge these systems will be significant. The problem is that US Airways and Delta don't complement each other well. America West and US Airways complemented each other well, and that's why the merger worked.

One other merger idea being circulated is US Airways and Northwest. This would make much more sense. Both airlines operate mostly-airbus fleets, but also operate 757s. Also, the route networks of each airline complement each other well. Northwest has an extensive route network in the Midwest, and US Airways has an extensive network in the East and a sizable network in the West. But nevertheless, even this sensible merger would encounter problems. Both these big airlines would encounter obstacles from labor groups. They would also incur significant costs merging their two networks and maintenance, safety, and management systems. Another question that also would need to be answered in the US Airways/Delta merger is what alliance the new airline would be a part of. Would the new frequent flyer program created by the merger be a part of Northwest and Delta's alliance, SkyTeam, or would it join Star Alliance, US Airways' alliance. The question becomes whether the costs involved can be recovered through synergies. Would each airline operate as a separate unit, like in the US Airways/Delta merger, or would the airlines really try to combine and produce further cost savings? It appears that this potential merger would lead to greater cost savings than their initial investment if done properly, but it's not for certain.

Low-cost airlines may have better chances merging in general. Because they are typically smaller, they can more easily combine their various systems, and in many cases, because they have a younger workforce, it's easier to make labor adjustments. A merger between AirTran and Midwest Airlines would, in theory, form a solid merger. Their fleet and route networks would complement each other nicely, and it would allow the new AirTran to re-brand itself as a more upscale airline worthy of charging higher fares. One of the things about a low-cost airline merger is that the route structure of the airlines involved would probably change more than a conventional airline merger. For example, the merged airlines might try to consolidate all their operations at one airport in certain metro areas with multiple airports. If Delta and US Airways merge, they will continue to operate from all airports in most metro areas in the United States. But given the current fare and competitive environment in the United States, it's unlikely that we will see a low-cost merger anytime soon.

The Delta/US Airways merger probably won't happen for a number of reasons, but the primary reason is that it will provide too few benefits for too high a cost. The economics of airline mergers makes it difficult to merge in most cases because of the complexities of the merger, and two large airlines that don't complement each other well can't merge economically. Delta will fight the merger and if Delta provides a comprehensive plan to exit bankruptcy, it's likely that their creditors will support Delta and not the bid by US Airways. It will be interesting to see how this situation proceeds in the coming weeks, but don't count on the merger working out unless the situation changes dramatically.

The Messy Mechanics of a US Airways-Delta Merger

The announcement from US Airways yesterday that proposed a merger with Delta Air Lines surprised many. While many on Wall Street have speculated about proposed mergers, most haven’t contemplated a deal between Delta and US Airways. Speculators preferred to publicize theories for mergers between Continental and United, or Delta and Northwest, for example. Many observers argued that a merger between Delta and US Airways would create a monopoly on many routes, leading to higher fares and consequently attempts to merge could be blocked by regulatory authorities, even though this is quite rare in the airline business. Moreover, with a wide variety of aircraft between the two airlines, as well as a poor distribution of hubs around the country, observers noted that the merger wouldn’t solve many of the problems that both airlines have. Cost synergies would be significant on some East Coast routes, but nominal or nonexistent on many others, and considering the difficulties in a merger, the idea wouldn’t make sense. However, US Airways begs to differ, arguing that the merger would save up to $1.65 billion in costs per year, and it would allow both airlines to optimize (aka reduce) capacity on overlapping routes. Moreover, US Airways argues that US Airways and Delta customers would benefit from the expanded networks of both carriers, giving them more options the next time they fly. But these are hyped-up claims. In this case, the speculators were right in not anticipating this proposed merger, because it’s doubtful that a merger between US Airways and Delta could work successfully.

The proposed merger would create an East Coast powerhouse with hubs in cities from Philly to Atlanta, Phoenix to Salt Lake City. But while it would create a dominating force on the East Coast, it would expose the new carrier to other problems such as fleet compatibility. US Airways is moving towards a primarily-Airbus fleet. US Airways has dumped some of its older 737-300s and 737-400s so it can make way for Airbus A319, 320, and 321 planes, while retaining some of its newer 737s. The new US Airways has also retained 757 and 767 aircraft, along with A330 twin-aisle planes. US Airways also plans to receive 20 A350 aircraft if that plane ever gets built. Meanwhile, the Delta mainline fleet is all-Boeing. If the merger were completed, the new combined company would take on a load of Delta’s 737s, 757s, 767s, a very limited number of 777s (Delta currently owns only eight 777 aircraft), along with a whole flurry of regional aircraft that Delta owns through its subsidiary Comair. The new company would likely dump US Airways’ older 737 variants as well as US Airways’ older 767-200s, but they would need to retain both Airbus and Boeing narrowbody aircraft, even though that adds cost.

Another problem with the merger is that it would create an unbalanced service area. US Airways has never been strong on the West Coast, offering only a handful of transcontinental flights from cities like Seattle/Tacoma, San Francisco, and Los Angeles to US Airways hubs in Philadelphia and Charlotte. However, with the acquisition of America West, the US Airways presence on the West Coast grew, although, given the size of the America West operation at both Phoenix and Las Vegas, US Airways’ presence on the West Coast was still relatively minor compared to airlines such as United, Alaska, or Southwest. Delta’s operation on the West Coast is also relatively minor. Delta’s third-largest hub is in Salt Lake City, and most passengers who use the hub connect from cities on the West Coast to cities in the Midwest and Northeast. Neither Delta nor US Airways offers any flights along the Western Coast, unlike services both carriers operate along the East Coast between the Northeast and Florida. A merger between US Airways and Delta wouldn’t rectify the imbalance of flights. Along with a deficit of flights in the West, the airline would have problems serving customers in the Midwest. Neither Delta nor US Airways have served the Midwest extensively, and the merger wouldn’t allow the airline to get into new markets. One of the problems with the US Airways merger with America West was that the new airline would have difficulties transporting customers across the country because their hubs in Phoenix, Las Vegas, Philly, and Charlotte are quite distant from another, and the new airline would offer “barbell” service, offering extensive service along the two coasts but little service in between. That has proven to be the case. To make matters worse, the new US Airways doesn’t have many 757s that are cost-effective at transporting customers across the country. If Delta merged with US Airways, Delta could offer 767 aircraft that are more efficient at transporting customers on transcontinental flights, but it wouldn’t do much in offering more convenient hubs that would help the new airline bolster service in the Midwest. The new airline would probably maintain a barbell service pattern with only a thicker bar to support the weights at the end because of the location of their hubs. The new airline would likely retain Delta hubs in Salt Lake City and Cincinnati, which are the closest hubs the new airline would have to the Midwest. However, they aren’t too convenient to many Midwestern markets. Other airlines offer closer hubs and more frequent service to Midwest markets, a Delta and US Airways merger would magnify their lack of service. In between Salt Lake City and Cincinnati, several airlines have closer hubs, including American at Dallas/Fort Worth, Chicago, and St. Louis, United in Denver and Chicago, Northwest in Minneapolis/St. Paul, Detroit, and Memphis, and Continental in Houston and Cleveland. If a merger occurs, the new airline would be primarily an East Coast airline; the merger wouldn’t do much to expand the reach of the new carrier.

Finally, labor would be a major roadblock in a potential merger. Delta and US Airways employees have both made wage and benefit concessions in recent years as both airlines have entered Chapter 11. But if a merger occurs, many employees will likely be laid off, especially in cities with overlapping operations. Employees of the dominant carrier may keep their jobs while employees of the smaller airline may be offered jobs or laid off. Delta employees might get laid off in Philadelphia where US Airways has a large hub, for example, and US Airways employees might get laid off in Atlanta where Delta has a huge hub. But management, maintenance, reservations, and other jobs where the two airlines have overlapping operations could see significant cuts and the battles over which employees get to keep their jobs could get nasty. Employees at both airlines would fight hard to maintain the status quo after they’ve given up so much already, but they might give in if the airlines promise not to make further job cuts for a given period of time and find a way to pass their cost savings onto remaining employees. But, given the immense sacrifices that these employees have already made, it’s unlikely that they will take job cuts without a fight.

A merger between US Airways and Delta would create an East Coast powerhouse with the ability to raise fares and trim capacity on routes that it sees fit. That’s what this proposed merger may be about. The new airline would have a very high market share from airports business travelers frequent such as Boston, Philadelphia, New York LaGuardia, Regan National in Washington D.C., and others. But while the new airline would have the ability to raise fares on lucrative routes between select business markets on the East Coast, including the shuttle routes between Boston, New York, and Washington D.C. But the new airline wouldn’t serve cities to the west of the Mississippi extensively, and it might focus the airline on East Coast routes only, which are very competitive, and susceptible to low-cost competitors. The new airline could pay a very high price for increased market share, including too many aircraft types and a demoralized employee pool. Simply put, the proposed merger forces US Airways and Delta to pay too high a price for too few benefits.

Is London All That Attractive for Delta?

In an interesting move, Delta Air Lines announced last week that it plans to serve London's Gatwick Airport from their JFK focus city. Delta bought the rights to fly the route from United for up to $21 million last week, and Delta's service will likely start in the fall, after United's service ends. Delta plans up to three daily flights on the route. But is London an important market for Delta from JFK? Delta is certainly bulking up in New York, intelligently recognizing that JetBlue isn't the only game in town due to the tremendous size of the New York market. In recent months, Delta has added more point-to-point flights using mainline aircraft and regional airliners from contracted lift providers. Delta wants to increase their market share in NYC and steal some from Continental and JetBlue. But Delta isn't primarily targeting JetBlue, they're targeting Continental, and Delta is making New York a very large focus city, perhaps even a hub, in an effort to redirect capacity to areas that are more profitable than selected current markets for Delta, such as Cincinnati or even Salt Lake City. Delta is able to funnel customers from the West Coast to Europe or the Northeast through either Atlanta or New York City, giving more options to consumers. Delta also wants to take some of the load off of their delay-prone hub in Atlanta, which will likely remain the largest Delta stronghold for decades to come, but can't handle all the carrier's traffic.
Delta already has international service from New York City, to markets that are underserved from the United States, such as Nice, Istanbul, or Budapest and to many major European cities such as Paris or Berlin like Continental does from Newark. But ironically, London isn't served nonstop from New York on Delta; you would need to connect in Atlanta to get there. To make New York an important focus city, service to London, Europe's most important city for business and tourism is necessary. But the New York to London market is extremely crowded, not simply because major American and British carriers such as American, Continental, British Airways, or Virgin Atlantic are currently involved, but because carriers based outside the U.S. and U.K. sensed an opportunity to pick up passengers and revenue when planes would be otherwise empty. To examples of this are Kuwait Airways and Air India, both airlines fly to London Heathrow from their respective countries, and both serve New York City. But because they don't have enough demand from the New York market, they combine the London and New York flights, flying from Kuwait/India to London to New York to London and back, and have the rights to pick up passengers in London and deliver them to New York and vice versa. These passengers may have never been to Kuwait or India, but can fly on these two carriers because they have the rights to fly passengers between New York and London. For Kuwait Airways and Air India, flying passengers between JFK and LHR allows them to utilize their aircraft better, by flying a full plane back to Asia instead of a half-empty one from New York or London. Many airlines choose to serve New York in this fashion, since New York can be a prestige market for many carriers, allowing them to pick up premium passengers in New York and take them to their respective countries without breaking the bank. Since many airlines in Asia and the Middle East still have some state control, it's in the interest of many governments to serve the U.S. and develop a link to the world's most powerful economy. But the only way to do that is to combine the flight to New York with a flight to another city, such as London.
Consequently, airlines such as Air India or Kuwait Airways can sell tickets on the New York-London route for far less than their competitors since these carriers would rather get something for seats that would otherwise be empty for the NYC-LHR part of the trip. Airlines such as American or British Airways don't want empty seats, but have more costs to recuperate, partly due to the lack of subsidies enjoyed by those two carriers, and partly due to the fact that they don't have passengers paying big bucks to fly to Asia on the same plane used to fly NYC-LHR. Air India and Kuwait Airways also have lower standards of service (fewer amenities) and lower labor costs than American or British Airways. And yes, Air India serves plenty of curry on New York to London flights.
So what does all this mean for Delta? It means that Delta will have a very tough time getting a foothold in the New York to London market. Delta is taking over from United, an airline that has downsized its operation in New York in recent years and was holding onto the New York-London route mainly as a convenience for higher yielding business travelers. But with little connecting traffic, United fought an uphill battle. Delta will have a fair amount of connecting traffic, making it easier to funnel passengers to the flight. But at the same time, Delta will have their own challenges to confront. First, Delta doesn't have the same business traveler loyalty as United, and Delta's international product isn't as appealing to business travelers as United's. Second, Delta will serve Gatwick, unlike United which serves Heathrow. Gatwick is one of London's less convenient airports, as even nonstop trains to the city take 30 minutes (and cost around of $25 each way). Heathrow is preferred by most business travelers, but it's slot restricted and the only U.S. carriers that have landing slots at Heathrow are American and United. Third, Delta will have to face up to the fact that the market is very crowded, and while demand roughly meets supply, if Delta plans to put three flights a day on a route that United currently serves with one. Delta needs to be very careful about how and when it adds flights to the route. All in all, the route could be a real winner for Delta, but unlike other international destinations Delta serves from New York, London needs to be treated differently because of the sheer size and complexity of the market.

Delta and AirTran Duel With Press Releases

On Thursday, Delta attempted a PR stunt that backfired and made industry observers laugh. Delta sent out a press release proclaiming themselves as the on-time airline in Atlanta. Delta cited US Department of Transportation statistics, which noted that over the past 13 months Delta topped AirTran in on-time performance in Atlanta. Delta flew 77.3% of its flights on-time in January, two percentage points higher than AirTran. Delta is currently in the mist of it's bankruptcy period and clearly wants to be recognized as a more reliable airline than AirTran, better for time-sensitive travelers, particularly business travelers. This press release was designed to fly that point home.

But, AirTran wasn't going to take an insult to its name sitting down. Two hours after Delta first released its message, AirTran replied with its own press release, detailing that AirTran had fewer cancelled flights, lost bags, involuntary denied boardings (passengers being bumped from overbooked flights), and complaints than Delta in January. Some of these statistics are quite staggering, according to AirTran vice president of planning Kevin Healy, "Based on the most recent DOT report, Delta was 21 percent more likely to cancel your flight, 64 percent more likely to lose your bag, an astounding 1,440 percent more likely to bump you against your will and, I suppose, not surprisingly, Delta customers complain 93 percent more about their Delta flights and service than AirTran customers." Delta did not reply.

Dueling press releases are not unheard of in an industry where airline promotion has taken unusual turns with flamboyant CEOs such as Michael O'Leary of Ryanair, Richard Branson of Virgin Atlantic, and the great Herb Kelleher of Southwest who once offered to arm-wrestle another CEO for use of the tagline "Plane Smart". Ryanair and EasyJet are two airlines which come to mind with dueling press releases. There have been numerous instances where one airline has outraged the other enough to start a press release battle, and many of them have to do with on-time performance, a statistic customers and therefore airlines care about significantly. Delta may have lost this round, but you can bet that they will return fire on AirTran, as soon as they find something good, other than on-time performance, to write about.

The Battle for Atlanta...

This week there was much news concerning the two Atlanta-hubbed carriers, Delta and AirTran in regards to their futures as viable airlines. AirTran continued its expansion and announced new service to White Plains, NY, an airport which has been desperate to attract low-fare service, especially after the demise of Independence Air. AirTran also recently announced service to Seattle/Tacoma, and another West Coast city, Portland, may also be on the horizon. However, AirTran isn't finding success wherever it goes. AirTran recently canceled plans, on Friday the 13th oddly enough, to start service to Harrisburg, PA (the state capital of Pennsylvania for those who don't know) for reasons which are unclear, although AirTran is blaming high oil prices. What is clear is that going into a big market with large jets (even AirTran's 717s are considered large for Harrisburg) is extremely risky. That's the beauty about regional jets. They may be uncomfortable to fly on, but are very comfortable for airlines when entering small markets that can generate high fares. AirTran is very good about breaking even when it comes to making money, and would have taken a huge risk in a market such as Harrisburg. In Boston, the airline wants to expand and have all its gates at one terminal (currently they have 3 in D and 1 in C, but is fighting with Massport, the Logan Airport operator about gate space. JetBlue is renovating a terminal for itself, Terminal C, and AirTran's fellow Atlanta carrier, Delta recently moved into Terminal A, a wonderful new facility, but Delta isn't required to lease unused gate space (which is has plenty of) until 2010. Boston would be a terrific market for AirTran. Boston would allow AirTran to check JetBlue and make sure JetBlue's fares stay low. At the same time, AirTran could use its power to siphon travelers who are diverting to Manchester and Providence, Southwest cities when it comes to traveling to Boston. Boston would also allow AirTran to build on its base of business travelers. Atlanta provides a wonderful market for business travelers (especially considering you don't have to try very hard in terms of fares or amenities to beat Delta) and Boston is a big Delta market. AirTran already has Boston service, but a serious expansion, such as the one JetBlue is contemplating would do to Boston what Southwest did to Baltimore and create a glut of seats which lowered fares in the market permanently. Let the games begin!

Delta meanwhile has been dutifully working to leave bankruptcy this week, and announced that it will save $200 million a year in aircraft leasing costs by renegotiating leases on many of its aircraft. Delta has been consolidating its operations, letting go of 16 out of 24 gates in Orlando, another AirTran stronghold, and has been dumping other facilities such as hangars. While AirTran would love more gate space in Atlanta, especially in Concourse C, Delta operations are preventing that. But if AirTran needs a new hangar, Delta does have one available. Delta has just canceled its first lease at Atlanta, a maintenance hangar, which will save the company $3.4 million, pending bankruptcy court approval. However, in the coming months and years, it will be seen if AirTran places as much importance on Atlanta as Delta does. Delta has committed to Atlanta, with the recent closing of DFW and the realignment of Cincinnati, Delta needs Atlanta. AirTran announced new service from Chicago recently. As mentioned earlier, it wants to expand Boston service, and AirTran is currently a powerhouse in Orlando. Baltimore/Washington has AirTran expansion capability, and other cities such as Minneapolis may be next. Atlanta is certainly an important part of the AirTran network, but in the coming months and years AirTran will likely de-emphasize Atlanta, certainly not de-hub it, however. AirTran needs a hub like Atlanta to serve such small and mid-sized markets as Pensacola, Gulfport/Biloxi, and Savannah. But in near future it should be clear which direction AirTran expansion is taking, and perhaps more importantly, where.

Virgin America Prepares For Takeoff

Virgin America sent out a press release yesterday discussing its plans for launch in early 2006. They have filed for an operating certificate, a process which can take 3-6 months. The airline plans to launch from its base in San Francisco with two to four A320 aircraft. The airline plans to first fly between San Francisco and New York with other routes to follow. However, it's likely the airline will initially focus on ultra-competitive transcontinental routes. The airline also plans to headquarter in the San Francisco Bay region, adding much needed jobs to that area.

This is absolutely the last thing the industry needs, as airlines such as JetBlue are reducing capacity on transcontinental routes, even while they are growing rapidly elsewhere. Other carriers are also reducing capacity, and not just on transcon routes. Virgin America plans to enter a nation full of overcapacity in the markets it plans to serve. In many smaller and medium-sized markets capacity remains balanced; but Virgin America probably won't serve these markets due to the size of the A320 aircraft. Fares remain very, very low on the transcon routes, and low in general to the San Francisco area becuase of the presence of low-fare carriers in nearby Oakland and San Jose. Even if the Virgin America product builds on the success of the Virgin Atlantic brand, the airline will still have to compete against United which has a very loyal contingent of business travelers, as well as Continental and Delta which both have a large presence in NYC. Even with a great deal of start-up capital, Virgin America will be taking off into very stormy skies.

Battle Of The Shuttles

On Friday, JetBlue announced new E-190 service from Boston to Washington D.C. for 6 weekday round-trips and 5 weekend round-trips. The new flights will begin on January 17, 2006. With this announcement, Jet Blue has done a couple of things. First, they have expanded their presence on the ultra-competitive East Coast shuttle routes. Second, this announcement also signals a further shift in focus from NYC. It's been clear for a couple of years that JetBlue will be ramping up Boston operations in 2006, and has already made a major commitment with Massport to expand terminal C at Boston Logan Airport so JetBlue can add more flights. NYC will still be a major part of JetBlue's operations, but next year, it's all about Boston. They will be competing for the most part against Delta and U.S. Airways, however, American, Continental, and United are all competing on these routes. These routes, formerly cash cows for the majors will soon be just as competitive as flights to Florida. While they will struggle, they have advantages that JetBlue doesn't, and it won't be a decisive JetBlowout. JetBlue will be able to attract customers, as they have the right kind of product business travelers are looking for. TV, low prices, and friendly service will win many skeptics.

However, there are certain disadvantages for JetBlue, and these will make things difficult for them. First of all, JetBlue is missing two very, very important things to business travelers. At least one of them can be solved easily, but the other will take a lot of planning and thought. The first, and harder problem to solve is the relatively poor frequent flier program, known as TrueBlue, that JetBlue offers. TrueBlue is a cross between a Southwest-style program which gives customers credits irregardless of the length or cost of a flight, and a conventional program used by most major airlines which awards credit based on the length of a flight. TrueBlue groups JetBlue flights into three groups, based on the distance of a flight, they are: short, medium, and long, and awards TrueBlue credit based on the group the flight is put into. However, many business travelers will not only take longer to reach a free flight with this program, but JetBlue doesn't serve enough destinations for them to have much choice (in comparison to legacy carriers) for a free ticket. Furthermore, TrueBlue doesn't offer enough of an incentive for business travelers to switch from their current program, where many road warriors have accumulated hundreds of thousands of miles. For JetBlue to win over a substantial portion of business travelers, which make up the vast majority of customers on shuttle routes, they must make TrueBlue more attractive. Business travelers will do the math, and they won't mind paying $5-10 more to get the frequent flier miles. And plus, when JetBlue enters anybody's turf, what's the first thing airlines do to respond? They give away millions of bonus miles to loyal customers who fly the legacy airline when they are competing with JetBlue. With that, why should business travelers switch?

The second problem JetBlue must overcome is its lack of punctuality. JetBlue has had one of the lowest on-time performance ratings of any airline in the nation, a stark contrast to it's early years when they were close to the top. The primary reason for that JetBlue's operations were levered quite strongly to NYC, and with a series of storms hitting the city, particularly last winter, JetBlue's on-time performance has struggled. Delta and U.S. Airways, which have very serious shuttle operations, dedicate certain aircraft with special amenities simply for the Boston-New York City-Washington D.C. shuttle routes. If one aircraft needs repair, there is usually a spare at one of the three cities. Because the operation is relatively simple and small, yet so important, that sacrifice can be made. Since JetBlue is using an aircraft that's relatively new, they don't necessarily have those spares. Furthermore, since the aircraft are new, they may experience problems that mechanics may not have had experience dealing with before. Conversely, aircraft that are new do generally have fewer problems and require less maintenance than the older aircraft Delta and U.S. Airways use for these routes. If JetBlue does have punctuality problems, they will probably come from bad weather, which would affect the other two airlines. But, if JetBlue mismanages the use of the new aircraft, it could result in serious delays.

There are a couple of other minor issues that are disadvantages for JetBlue as well. First of all, Delta is transitioning to new shuttle aircraft, MD-88s which are a mainstay of Delta's mainline fleet. The aircraft will be refurbished and new seats will be put in to make it appealing to business travelers. While JetBlue usually has the top product with leather seats and free TV, this will provide some healthy competition for JetBlue. Furthermore, JetBlue will use Dulles Airport in D.C. for the new flights, where it currently has operations. This will be a major disadvantage for JetBlue as both Delta and U.S. Airways use Regan National Airport, closer and more accessible to the city. Also, both of those airlines operate dedicated security lines just for shuttle passengers which lessens the amount of time they need at the airport, allowing them more time to conduct business. JetBlue can overcome all these problems, with the award-winning service they offer. But, business travelers may be much harder than families to win over.

Song Will Sing No Longer...

Delta Air Lines today announced the closure of its sub-carrier Song back into the mainline Delta operation. Song was the result of Delta Express, not a bad idea, but poorly managed. Delta Express and Song tried to capture low-fare traffic from New York and Boston and send it South to Florida. While Delta Express was successful, it was competing with JetBlue, a very difficult foe. To help compete on these routes, Delta's management jazzed up Delta Express and renamed it Song and gave it new aircraft. However, the hip Song Brand soon expanded to other routes where JetBlue was present. But this led to confusion among Delta customers about the product to expect. For example, in Seattle/Tacoma, Delta turned its three daily flights to NYC into Song flights from regular Delta Mainline flights. However, the rest of Delta's flights in Seattle/Tacoma still stayed Delta Mainline. A little confusing for the average customer. Delta will add 26 first class seats to the Song 757 aircraft. The Song interiors, leather seats and entertainment systems will be maintained and added to and additional 50+ aircraft (presumably the rest of Delta's 757 fleet). The retrofitted aircraft will be used on the transcontinental routes to add comfort and enjoyment to cross-country travelers. The Song brand will continue flying separately from the Delta Mainline until May 2006, when new aircraft will begin retrofits until the end of 2006. Delta is smart to do this, it's differentiating itself from the competition and helping build brand loyalty. But not Song brand loyalty, Delta brand loyalty. With the new entertainment systems as well as the first class cabin. However, if fares aren't kept competitive with JetBlue as well as other low-fare airlines operating trans-con routes, then this will fail. Delta's transformation plan is a bold, powerful plan, and this is just one small part of it, but each part, including this one, must, must be competitive for the airline to return to profitability.

Delta Announces New International Routes

Delta Air Lines, following its transformation plan, announced new international service today. Delta plans to launch the new routes as early as late March, but some of the routes won't launch until May or June. The new routes are from Atlanta to Kiev, Budapest, Athens, Copenhagen, Tel Aviv, Dusseldorf, Venice, as well as several new routes from JFK to existing destinations.

Delta, as well as other legacy carriers are looking to international flights to increase their margins and to fly routes where low-fare competition isn't a big factor. However, there is only so much Delta and other airlines can do. Many of Delta's new markets, such as Tel Aviv, have existing competition, in this case, both from El Al and Continental Airlines. There is still a great pressure to cut costs and many consumers make travel decisions based upon existing brand loyalty. Plus when you're flying to Tel Aviv, Kiev, or other places which aren't exactly the world's safest places, then security and logistics are other issues that you must deal with. It can be lucrative, but with greater uncertainty and higher fares come higher costs. Unless Delta can manage those, they could easily lose money on these routes. With these new routes, Delta will become the largest trans-Atlantic carrier.

Mesaba Files For Bankruptcy... Just As Comair Announces Cuts

One of Northwest's small jet providers, Mesaba Airlines, has filed for bankruptcy protection. This move was precipitated by Northwest's trimming of Mesaba's fleet, eliminating one aircraft type, the Avro RJ85, while reducing the numbers of the other two aircraft in the fleet, the CRJ-200 and the Saab 340 turboprop. Like any other small jet provider, Mesaba has been having trouble adapting during this challanging time - they must downsize quickly to stem their high losses. Northwest seems to be committed to Mesaba for CRJ-200 and Saab 340 operations, even though their flights will be reduced. Mesaba has not been paid $30 million for some recent flights by Northwest, which has caused Mesaba to sue Northwest. With a planned fleet reduction of 28%, things will be tough at Mesaba, but they are really tough everywhere.

Comair, Delta's regional jet subsidiary based out of Cincinnati announced cuts today that will trim its workforce by 1000 people (including 350 previously announced job cuts). The small jet provider also said that it will trim up to 30 50-seat aircraft from its fleet, with 11 gone by December. The airline has the highest costs of any Delta small jet provider and Delta is giving them an opportunity to cut costs more. If Comair can't negotiate further decreases in labor costs as well as lower supply chain costs, the airline could either be liquidated or just sold - possibly to Mesa or Skywest, which are the long-term players in the small jet provider business. Comair has got stormy skies ahead, but it can manage if it gets costs down and if Delta has a truly loyal base at Cincinnati. Ever since Delta's SimpliFares program was started, more passengers have been drawn back to Cincinnati from other airports such as Louisville (which has Southwest service). However, if Comair fails to cut costs, there is a realistic possibility a Delta Cincinnati hub could be downsized further or shut down.

Will a Merger Solve Anything?

As the media discusses how two of America's largest airlines had to file Chapter 11, a question arises, what about mergers? U.S. Airways and America West will start the transition tomorrow toward a new U.S. Airways, and that deal seems to be working, so why can't it work with Delta and Northwest? Anybody who says that a merger between those airlines would be a success is in a different universe than those who know the airline business. The facts are that Northwest is primarily an Airbus operator; Delta, a Boeing operator. The millions of dollars required in fleet refurbishment, consolidation, new staff training, spare parts, etc. would be wasted on such a joint operation. Northwest has a profitable route system, taking passengers from smaller markets to larger markets, that's the growth in the industry you will be seeing, not more flights from NYC-Florida. Delta also has a profitable route network, however, they do have some work to do in expanding to Asia (where the real growth is), and reducing their dependency on regional jets for mid-size and large markets. A merger would help reduce some inefficiencies in each system, but the costs strongly outweigh the benefits.

However, that doesn't mean that mergers aren't possible in the industry. America West and U.S. Airways had complementary route structures, America West had a strong presence in the West, U.S. Airways, a legendary presence on the Eastern Seaboard. This can happen again with airlines that are weak (both America West and U.S. Airways were being hit hard by low-fare competition), but also with airlines that are relatively strong that can expand their horizons. A few pairings come to mind.

The first pair would be Alaska and AirTran. While Alaska has many variants of the 737, and AirTran only has the -700 they have very complementary route systems, each airline having well over 80% of its flights on its side of the Mississippi river (Alaska on the West, AirTran on the East). The airlines would be able to expand together into the center of the country while retaining their dominant positions in the Pacific Northwest, California, and the Southeast (especially Florida). While some fleet restructuring would be needed, this carrier would create a nationwide low-fare powerhouse in key leisure markets. But there's another piece of this. Alaska owns Horizon, a regional subsidiary. Horizon's services would be perfect in the Southeast, if the new airline ordered Bombardier Q400s. Here's why: Delta, the other dominant player in the region has hundreds of regional jets working for it in small communities around the South. The Q400 turboprop, which holds 74 people in Horizon's configuration costs the same amount to operate as a 50-seat regional jet. Delta has those jets working routes that the Q400 can do just as efficiently. In comes AirTran with a flood of new turboprops, they are able to lower fares in small markets that have been high partly because of the high cost of operating CRJ-200s, and dump capacity on those markets as well. With a new nationwide network, the airline would be able to attract passengers once attracted to Delta because of the array of destinations from the Atlanta hub (over 200). It would significantly weaken Delta's position as a regional provider in those markets and would hurt the already struggling airline. It would be the absolute best thing AirTran could do.

Another merger idea is AirTran and Midwest, this based on the idea that Midwest is a struggling airline with the same type of plane (717s) that AirTran uses (in addition to AirTran's 737-700s) and a route network that would allow AirTran to expand into the Midwest, which they have been trying to do from Atlanta, but there's only so much traffic that wants to go to Orlando or Charlotte. AirTran would be able to make the operation more efficient and maybe even keep the fresh-baked cookies on board. It would also be a smoother transition than with a much larger airline like Alaska.

A final merger idea is between Frontier and Spirit. They are both Airbus operators and have somewhat complementary route systems, Frontier in the West, Spirit in the East. In addition, Spirit is doing a great deal of expansion in Mexico and the Caribbean, two markets that Frontier is interested in getting into. Frontier has set up a mini-hub in Cancun already and has over half a dozen Mexico destinations. A merger would allow the new carrier to become a leisure-oriented airline, ferrying passengers from the lower 48 to destinations like Florida, California, Mexico, and the Caribbean. It would be a great operation, as long as the airline managed to keep things running smoothly during the off-season.

Which Way Go Regional Jets?

Currently, airlines (especially Delta) must confront a massive glut of regional jets, and in that segment of the market, industry observers predict up to 1/3 of the capacity may need to be removed, because those aircraft burn high amounts of fuel per passenger. But, counter intuitively, if energy prices continue to go higher, regional jets may be seen as assets, not liabilities, since they can ferry travelers from small communities to big hubs cheaper than driving 300 miles on the highway. If gas prices will dissuade people from taking road trips, that can only encourage them to fly America's friendly skies, which will bring higher yields, and higher load factors for airlines.

Delta and Northwest File Chapter 11

As predicted, both Delta and Northwest Airlines filed for Chapter 11 bankruptcy protection today. Both airlines cite the rapid increase in jet fuel prices as the main reason for this serious step. Both airlines have been struggling to cut costs anywhere they can, but now will be able to pare away further, using the protections in Chapter 11. If successful, they can emerge soon. (Let's just put it this way, Northwest and Delta should be in bankruptcy for less time than United, which entered in '02 and hasn't emerged.) Northwest is already cutting labor costs by hiring its replacement workers, but it needs to go further by increasing labor efficiency to cut further jobs. Are as many skycaps needed? What about check-in agents? As many gate personnel? Charging for checked baggage, as well as charging for skycap service are also on the table. (Actually, several airlines are testing whether customers will pay for a skycap at Seattle-Tacoma International Airport, $2 per bag). Delta and Northwest also have the option of grounding more planes (Northwest has already grounded a couple dozen DC-9's, and has considered grounding more). It will be interesting to see how far airlines go, and believe me, they need to go far if oil stays above $50.

Delta Days Away from Bankruptcy

You heard it here first, that it was quite likely that Delta Air Lines would be filing for bankruptcy during the week of September 12th, and if reports released today prove accurate, yours truly will be proved correct. According to a consultant who has been informed of the company's plans, the airline plans to announce the move on Wednesday, September 14th. Delta has about $20.5 billion in debt and about $21.6 billion in assets. Most of these assets have been dedicated as loan collateral. I expect the few remaining unencumbered assets will be similarly used in bankruptcy loans. Delta can turn itself around, and Chapter 11 will allow the airline to make some positive changes, however, it will not make the airline immune to rising jet fuel prices, which is the biggest problem the industry currently faces. Delta cannot transform itself into a low-cost carrier, but it can cut costs and become profitable. Good luck to them, because after losing nearly $10 billion since 2001 they will need it.

Delta Tries Desperately to Avoid Bankruptcy-Far from Enough Is Being Done

Delta airlines announced the significant reduction of flights from its Cincinnati hub today as the airline tries desperately to avoid bankruptcy. The airline is reducing flights at the airport 26% as the carrier tries to "right-size" the hub to accommodate more local traffic, meaning that 36% of the passengers using the hub are arriving or departing Cincinnati, a figure which the airline is trying to increase to 50%. The changes will take effect December 1. Most of the flights cut will be in the early morning and late night. The carrier will cut service to nine Delta Connection markets and replace the Cincinnati service that those markets had with Atlanta service. The carrier will also expand its international presence this winter with new flights to destinations such as Antigua and Managua, Nicaragua.

The carrier also announced that in order to save money, the Boeing 767-200 aircraft they still possess will be removed from service at an accelerated pace, and will be transferred to ABX Air. Those planes will be converted into freighters, the same fate as Delta's old MD-11 aircraft. All these moves are an attempt to save the carrier money at a time when cash is scarce and bankruptcy is all but imminent. The carrier will be in chapter 11 country soon, and as noted in earlier posts, that painful transition will give them a chance to save money, but it will not shield them from rising fuel costs or the long term devastation from hurricane Katrina, especially in the New Orleans market.

Northwest Warns Precious Time Is Running Out To Dodge Bankruptcy

Northwest Airlines warned recently that due to hurricane Katrina, and the additional spike in fuel prices that has resulted, the carrier has warned of a $350-$400 million loss in the third quarter, which might grow depending on the long-term impacts of the disaster, including, but not limited to, how long New Orleans will take to rebuild itself, the length of time it will take for traffic demand to grow to the city, the spike in fuel prices related to the disaster, and competitive moves related to the disaster (will Delta file bankruptcy ASAP?). Chapter 11 is a reality, but the airline, unless it makes many mistakes, will leave in a relatively short time. Delta has far more problems than Northwest. Delta not only has the complex labor problems that Northwest has, but they also have more issues concerning their fleet and the ridiculous situation with low-fare competition on the East Coast that Northwest doesn't have to deal with as much. Chapter 11 will be good for both airlines. For Northwest and Delta, it will give them a chance to sort out labor problems and to cut wages dramatically. Northwest can easily fire their unionized mechanics and cleaners and hire the replacements on a permanent basis. Flight attendants, gate attendants, and others who don't agree to wage cuts voluntarily, will be forced to cut the "fat" out of their paychecks. Furthermore, both airlines can both negotiate better deals on leased aircraft, which will be important, however, aircraft lenders have been stretched thin already, so it might be more difficult to get a better deal.

Delta should also solve problems concerning its fleet. (The chart isn't as updated as it should be, but it gives you a good sense of what's going on). Most importantly, Delta should certainly get rid of its 737-200 aircraft, which are very, very old and use up a ton of fuel. Also, the 737-300s can be dumped, but only if Delta is able to find other aircraft (like incoming 737-800s) to take the place of the -300s. The -300s also use up a great deal of fuel, but are newer and more efficient than the -200s. In addition, Delta's 767-200s are showing their age, however, those aircraft might stay awhile longer, and might be a very valuable part of Delta's fleet for years to come if the airline decides to expand long-haul flying to destinations such as Europe and Latin America. It's hard at this stage to give up long-haul aircraft since they are in such demand and can make a decent profit. The airline also needs to reduce its dependency on regional jet flying. Small jet providers will have a harder and harder time getting contracts as 50 seat jets become as useful as Vinyl records. Flying a regional jet (especially a 50-seater) is like trying to operate a taxi with a Hummer, and with that kind of mileage, and these kind of prices, it just doesn't work. Skywest will be a long-term partner, Shuttle America with the new E-170s will also be there, Chautauqua and Mesa' s Freedom Air will be vulnerable. Northwest doesn't have as many fleet problems, because it is dealing with them and not ignoring them. Northwest's DC-10s will be retired soon, and the 747-200s don't have much of a future in the fleet either. Instead they will be replaced, in part, by some of Northwest's new 787s that it will receive in a few years. For Delta, bankruptcy is a certainty. For Northwest, bankruptcy is evolving into a certainty.

Suicide In The Airline Industry

For the most part, Northwest Airlines operations have been running fairly smoothly since the mechanics and cleaners strike started Saturday, August 20. The airline has reported an increase in cancellations since the strike began, however, not a significant amount to do lasting damage to the airline. At the same time, the airline and the union have broken off talks and don't seem to be getting to that stage anytime soon. Northwest keeps the latest updates on the labor situation here. The union is on the expressway to extinction especially since union leaders, including Dennis Sutton, president of AMFA Local 5 in Romulus, MI make comments like the following: "Enjoy this. This is the chance of a lifetime to screw Northwest." Why should the public support the union with comments such as these? Keep in mind, most of the union members are asking for semi-reasonable concessions, ones that can be negotiated with the airline, but the union is completely opposed to the cutting of 1,100 jobs (about 53% of the union) of heavy maintenance which Northwest is hoping to source to save money. The only way this union can win is if Northwest joins the August air crash club which is unfortunately growing after the recent incident in Peru. If a Northwest jet were to crash, the airline would be forced to re-hire the union mechanics to save its reputation. The PR would be horrible to say the least, but it's better than keeping the replacements on-line.

But Northwest isn't the only airline with suicidal employees. The management of Spirit Airlines, the East Coast/Caribbean carrier that manages to stay out of the media very nicely clearly want to be fired after Spirit's latest announcement to start daily service to Atlanta, Georgia from Fort Lauderdale starting February 16, 2006. There are many things wrong with this decision, the first being that with only 1 daily flight to a new city to start, the airline is unlikely to gain any real following quickly, and because Atlanta is a hub city for two very large airlines, which both have a very strong following among Atlanta-area consumers, AirTran and Delta, Spirit is unlikely to gain any attention particularly with only 1 daily flight. Second, the Atlanta flight departs in the morning, allowing for timely connections to the Caribbean, yet Delta serves all those destinations daily, and in many cases with multiple daily flights. AirTran serves FLL from Atlanta and will start Cancun service before Spirit's Atlanta launch. Third and finally, Spirit has many, many other markets that it can serve that probably have more rewards. Atlanta already has a great deal of competition and JetBlue was forced out a few years ago due to strong competition and Spirit doesn't have the attention or the presence to even come close. A bad, bad move. At least they have awhile to get the word across.

Finally on the suicidal list is Delta/Independence Air. Both will be filing bankruptcy before the new laws come into effect mid-October, and the only thing unclear is if Independence Air will try to restructure under chapter 11, or if they will give up and liquidate under chapter 7. Independence Air uses for the most part 50-seat Canadair Regional Jets (CRJs), and the economics of CRJs is pretty lousy, but when fuel is at $67 a barrel, the economics just simply won't allow you to break even. Delta is very exposed to regional jets, as its former subsidiary Atlantic Southeast Airlines owned dozens of them. Delta pays other small jet providers such as Skywest (which did flying for Delta before the ASA purchase) the cost of operating the airplane, plus a small profit. Because airlines like Delta still suffer due to pricing pressure, they don't have the revenues to generate profits from the airplane. Airline stocks have never been popular, and now is no exception. However, I wouldn't mind being in desert real estate or aluminum smelting stocks. Because that's the future. Delta can restructure, but it will be a future with far, far fewer 50-seat regional jets. More 70-seat CRJs will be flown, and maybe, maybe more turboprops will be flown. The Q400 70-seat turboprop costs the same amount to operate as a 50-seat CRJ. Which would you fly with $67 oil. Even the turboprops will find difficulty making money, then again these flights are needed to differentiate Delta from Southwest and to diversify the revenue streams of the airline. They need a new plan, and hopefully, that's what chapter 11 is for.

Delta Will File Chapter 11 In September

It appears to be the consensus that Delta Airlines will file chapter 11; and the question at this point is when, not if. It appears the the airline is waiting until after the busy labor day weekend to do this in an effort to avoid scarring away ticketholders and potential customers. The airline is desperately struggling with very high fuel costs, especially as the carrier operates a fleet of very old MD-88 and MD-90 aircraft with inefficient engines. Furthermore, the airline has been unable to significantly hedge fuel due to a lack of liquidity. While the airline has tried to gain emergency cash with its sale of ASA, it will not be enough to make it through the end of the calendar year. Best of luck to all Delta employees in Atlanta and elsewhere. Expect a bankruptcy filing between September 12th to 15th or around those dates. It's going to be a tough road ahead for the airline, but they should get through this crisis due to its strong international route network, continued expansion especially out of it's Atlanta (super-hub, a strong point for the airline (now up to over 210 destinations total), and customer loyalty.

Delta, FlyI, Northwest All Have Heads Barely Above Water

Tis a dangerous time for many, many people in the aviation business. Delta is in the danger zone, it's stock has plummeted to as low as $1.39 a share and has sold one of its regional subsidiaries, Atlantic Southeast Airlines (ASA) for $425 million to Skywest Airlines of St. George, Utah to raise emergency cash. Delta may very well file for chapter 11 bankruptcy protection in the coming weeks, along with the struggling FlyI, which appears to be on deck for that honor. In addition, Northwest Airlines, which is being hit hard by rising fuel costs is also struggling. The airline is facing a surfeit of labor problems, and a strike by many employees, not just mechanics who are in a contract dispute, may start as early as August 20th. All three airlines are in chapter 11 territory. However, this will neither stop any of the airlines from normal operations (however, a strike at Northwest will). In addition, chapter 11 will not, not do much at any three of the airlines. At FlyI, they have a fundamental problem, they are using aircraft with very high fixed costs and charging low fares. The airline doesn't have a chance, and it's very likely that when (not if) the airline files chapter 11 or chapter 7, the airline will send its aircraft either back to GE or straight to the desert. Chapter 11 will not solve the fundamental problems at Independence Air. Only chapter 7 (total liquidation) can solve those. Delta and Northwest will not get much out of chapter 11 either. Both airlines have strong route systems, and chapter 11 cannot help the airlines reduce their number one problem which is high fuel costs. The only thing that chapter 11 can do is to reduce capital costs from lessors of aircraft and reduce labor costs, which is needed especially at Northwest. Chapter 11 will not solve most of the problems at Delta and Northwest. There are other cost cuts that can be made by most airlines, including reducing the number of personal at the gates, which is not the way that many airlines have decided to cut labor costs, which is just cutting wages. The main problem is that Delta nor Northwest are able to make cost cuts fast enough to cope with rising fuel prices. In addition, their ability to raise prices has been hampered especially since, oddly enough Northwest cut fares by as much as $20 round-trip after they were raised by all airlines including Northwest on Friday. Over the weekend, however, no other airline lowered the fares, allowing Northwest to take in a bunch of potential market share, since there was a huge price advantage there. The next few weeks will be interesting. Both Delta and Northwest can make it, but they need to start cutting costs further. And they need to start now, because chapter 11 will not make things much better.

Delta, Northwest Headed Off Course

Both Delta and Northwest Airlines reported earnings this past week and the losses they posted showed how desperate the situation at many airlines is right now. American and Continental aren't in great shape, they are able to make a little money when times are good, but lose it like crazy when times are bad. Delta and Northwest can't seem to make money period. Delta is starting to turn things around, but earlier this week, CEO Gerald Gerstein said in a leaked internal company memo something to the effect that Delta's Transformation Plan, which was supposed to turn the company around isn't enough. That sent Delta's stock down to under $3, down with other Wall Street losers such as Charter Communications and JDS Uniphase. The company can make it, they have a great route structure in the East Coast, but especially in the growth belts. The two main growth belts of the United States in this economy are going to be the area surrounding Lake Erie in Michigan, Ohio, and even Indiana. These states are gaining jobs through new manufacturing as well as IT and consulting jobs especially North of Detroit. Delta is able to serve this area well with its hub in Cincinnati and has a loyal following in the area. Delta has the advantage that Southwest doesn't serve the city, unlike Columbus and Cleveland, the latter of which is a hub for the stronger Continental Airlines. Delta is also strong in the country's other growth belt, the south. Stretching from Fort Worth to Fayetteville, NC, a great deal of new automotive manufacturing is taking place, and other jobs are coming with those. These are good jobs, even though they may not pay as much as those in Flint, and people in that area will travel more and more, and where will they go? To American's DFW hub? Continental's in Houston? or how about Delta's Atlanta mega-hub which serves around 200 different destinations? If Delta gives customers in that region so much choice and competitive SimpliFares, that's a winning combination. Delta can survive, but it won't be easy. Some planes will need to be cut from the fleet, particularly the MD-88 and MD-90 aircraft, but those aren't the only ones. Delta needs better employee management, and better efficiency especially from Delta's hub-based employees (the same is also true for Northwest). Delta will get through this, but they need to act quickly, Delta can't keep losing money forever.

Northwest is in a different situation. Northwest, like Delta has competition on its growth belt, but is the carrier that best serves that area. Northwest has its main hub in Detroit, which serves many domestic and international destinations, which is very, very important especially with the growing importance of Asia as an economic powerhouse. Northwest has service to Amsterdam which will be the fuel stop for new service to Bangalore (Northwest already serves Mumbai) and Northwest has flights to Tokyo, important in itself, but a transit point to Beijing, Guangzhou, Hong Kong, Seoul, Shanghai and more. Northwest already has a great operation going, its Airbus aircraft are working well, not just for domestic flights, but also for international flights, on such international routes that don't carry 500 passengers a day, such as Portland, OR to Tokyo. Northwest needs to cut its costs, and fuel is a big problem for the airline, especially since it uses over 100 DC-9 aircraft which have fairly inefficient engines, and the designs aren't the greatest for efficiency (it's part of the reason Boeing is closing the 717 assembly line). However, Northwest is preparing for the future, it will be the first airline to operate the fuel-efficient and passenger-friendly Boeing 787, and it should have 18 of the aircraft by 2010, with options for 50 more! But Northwest really needs to worry now about labor, and how it can cut labor costs, just as other "legacy" carriers have these past few years. It's being reported now that Northwest has hired extra security guards to watch over mechanics to make sure they will not damage company property prior to a strike deadline for August 20. The mechanics are upset at the company's plan to cut wages. Northwest will probably make it through this storm, but both sides are dead serious here, and it could get ugly.

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.

Delta Finally Raises SimpliFares Cap!

Delta Airlines finally took action on the higher-than-expected fuel cost front and raised walk-up SimpliFares by $100 to a maximum of $599 each way for coach, and $699 for first class. This is great news for most "legacy" carriers which have been inching to raise fares, and this is a great opportunity. This is especially good for Northwest Airlines which has attempted on several occasions to raise fares but with little success since on most occasions other carriers wouldn't match the higher fares. If all "legacy" carriers follow this increase which seems likely, then there will once again be some sanity on the pricing front. These airlines need to raise fares, and they should be. Good luck to them, they will need it competing domestically against a growing Southwest...

Northwest Tries Raising Fares...Again

Northwest Airlines today announced a fare increase of $5-$10 in markets where it competes with low-cost carriers, and more importantly, it raised fares $50 for business fares which had been affected by the Delta Simplifares program. Most major airlines have matched the increase, however, only Continental and United have matched the $50 increase, which marks the first time that airlines have tried to increase the Simplifares limit. It will be very interesting in the next 48 hours to see if the increases hold, the $5-$10 will probably hold, but if the $50 does, it will mark a significant change in the pricing systems of these carriers.

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!

JetBlue's Profit Declines, Northwest and Delta's Nosedive!

JetBlue announced a reduced profit today as it spent considerably more on maintenance costs due to its aging fleet, and of course high fuel costs. JetBlue made $7 million in the first quarter compared with $15.2 million in the first quarter of 2004. JetBlue expects to make money in 2005, but has reduced its forecast for the remainder of the year.

Alaska Airlines posted a loss for the first quarter of $80 million due to competitive pressures and higher-than-expected fuel prices. A fare war with Southwest Airlines on the west coast between Seattle/Tacoma and Portland to California has not been good for Alaska. However, this loss increased mainly due to certain special charges. Otherwise, the loss would have been about $41.5 million, about what it was first quarter 2004.

Northwest Airlines posted a surprisingly large loss of $458 million for the first quarter, nearly double that of first quarter 2004 which was $230 million. Northwest (in addition to fuel) blames its "increasingly noncompetitive labor costs" as well as excess capacity. Although Northwest is trying to get labor concessions, that might not be enough for the carrier.

Last on today's hit parade is Delta, which lost $1.1 billion in the first quarter 2005. Delta has been struggling trying to compete effectively on the east coast corridor where it has most of its operations. It has introduced its low-fare brand Song, as well as the Simplifares program, which really hasn't done that much except boost sales on www.delta.com for a day or so and lower the last minute fares that nobody pays. Yes, there are those who buy tickets at the last minute, but most of those didn't pay the $1000+ that Delta was lowering.

Delta Headed to Moscow with a Liquidity Crisis

Delta Airlines announced the times for its flight to Moscow from Atlanta as it has received permission from both the U.S. and Russian governments to fly the route. Delta already flies to Moscow from New York JFK and is expanding from its Atlanta superhub to try to improve access to Moscow from the Midwest and Southeast.

In addition, Delta announced today that it will face liquidity issues over the next two years mainly due to higher fuel costs. However, according to its CEO it should be able to avoid bankruptcy since it has gained concessions from its labor unions. In addition, Delta expects to cut its nonfuel costs by 13 percent in 2005. If Delta can successfully cut its costs so that fuel isn't a problem, then avoiding Chapter 11 will be a reality, however, without a lot of cash it will be unable to hedge fuel which could help cut its costs even further. With fuel headed up faster than ever due to events in the Middle East, it's quite difficult to predict what will happen in the next year, as fuel could hit $40 or $80, so it will be necessary to wait and see, but clearly hedging works, as shown by Southwest's consistent profitability.

Delta's Hitting Turbulance!

Delta Airlines announced in a filing with the SEC that it will post a "substantial" loss in 2005 and that bankruptcy is a very real option at this point. Delta does not expect do find new sources of financing due to encumbered assets and low credit ratings. One of Delta's last options to raise new cash is to sell its wholely owned regional carriers Comair and Atlantic Southeast Airlines (ASA) and its assets to Skywest, which also is a regional jet provider to Delta. There was talk of this move earlier in the week, but with this new filing, it may have to come sooner than expected...

A Fight About Nothing But Peaunts

Delta Airlines announced today that it will eliminate its buy-on-board food program on all domestic and U.S.-Canada flights as well as  some flights between the U.S. and Central America and the Carribean. The changes will exclude Delta's Song "low-cost" carrier and its Delta Shuttle operation. Not to be outdone, however, Southwest Airlines issued a press release attacking "other airlines [that offer] less than peanuts." that starting in April it will offer some of the same new snacks that Delta will start offering free to its economy passengers as well as the pre-packaged snack boxes that Delta will offer on flights longer than 3 hours, 30 minutes.

Delta Adding New Routes

Delta Airlines announced today that it will start daily non-stop service between Boise and Atlanta, twice daily service between Raleigh-Durham and Salt Lake City, twice daily service between Fort Lauderdale and Nassau, Bahamas on its regional affiliate. In addition, Delta will start twice daily flights summer-only flights between Jackson Hole, Wyoming and Atlanta on high-capacity 757 aircraft.

Delta-Down, but not Out Concerning China

With the recent approval of two new China routes to American and Continental Airlines, Delta Airlines, which was hoping to launch a Beijing-Atlanta non-stop will now have to wait just a little longer as that was denied by the USDOT. Delta plans to appeal the decision, and get their piece of this lucrative market. Delta is a prime choice for the route due to the strong automotive manufacturing occurring in Alabama, Mississippi, and Texas. Many Japanese companies manufacture autos in those states. Delta responded to the decision by mentioning that Chicago already has three non-stops to China, two to Beijing, one to Shanghai (approved yesterday).

New Routes Galore!!!

Pinnacle Airlines, the regional subsidiary of Northwest Airlines, announced today a new daily flight between Charlottetown in Prince Edward Island, Canada, and the Detroit hub. Flights will be operated with a 50-seat CRJ. The new flights will be seasonal.

Ryanair announced 6 new routes from Dublin, Ireland to various points in Europe. Ryanair's ultra-low fares have helped propel it to become the number one low-cost airline in Europe. Ryanair is able to cut costs by contracting out most of its jobs except pilots, and by using airports out of major urban areas that Ryanair sometimes gets subsidies to use.

Finally, Delta Airlines' Song, essentially a JetBlue clone, is expanding its operations by adding new service to Los Angeles, San Francisco, Seattle/Tacoma, San Juan, Puerto Rico, and Aruba (Saturdays only, all other flights have several frequencies daily).

Continental and Delta Post Fourth Quarter Losses!

Delta Airlines reported a fourth quarter loss of $2.2 billion, yes billion with a "B" and a net loss for 2004 of $5.2 billion. The losses are attributed to a decreased revenue environment, higher than expected fuel prices. Delta is hoping that its transformation of cutting costs and simplifying its operation allows it to regain profitability soon.

Continental Airlines also reported a fourth quarter loss, however, its was much smaller, only $206 million for the quarter, and a total loss of $363 million for the year. Again, losses are attributed to higher than expected fuel prices, and weak yields, especially domestically.

Boeing Announces That the 717 is No More!

Boeing announced today that the 717, the newest version of the classic MD-80 and DC-9 aircraft is going out of production at the end of filling the orders that have been placed, mainly by AirTran Airways. With the small number of orders due to the 737 being more economical for most carriers, and the Embraer 190/195 series about to enter service in the U.S. in the fall with JetBlue Airways ordering 100. That series is more economical and carriers around 20-30 less people than the 717 did. Really, the next step in the industry is the 190/195 because it has the range turboprops don't but economics that are a boon to airlines everywhere and are advancing into a new market segment not touched, between a 737 and a regional jet, 70-110 seats, and the Embraer 190/195 is an aircraft most airlines need at this time. That is the future of the 717's domain, and is perfect for an airline like JetBlue, which has A320's, an aircraft much like a Boeing 737-700/-800, which is used for the routes with more traffic. The 190 will supplement JetBlue's operations and allow them to get into medium-sized markets. 2006, when JetBlue will have the Embraer 190 in service for sure, assuming everything goes to plan, will be an interesting and truely historic year for aviation.

Delta's Move Is Worring Others

With Delta lowering its fares, including its last-minute coach walk-up fares (the money-makers), which used to be over $1000, now just $499. And in many businesses, the airline business, companies play a game of follow the leader. American Airlines announced it was reducing its fares to broadly match Delta's new fare structure. Will more carriers start shooting themselves in the foot? We'll see...

Is Delta Taking a Shot at LCC's?

Delta's new move to expand its SimpliFares program nationwide is raisng a few eyebrows, and creating guesses about why now. Some believe it will disrupt the growth of Low Cost Carriers, such as Tom Parsons, founder of Bestfares.com, however, others think that it will hurt the industry as a whole, in perticular the major carriers, who have struggled to compete for a while against the LCC's. Northwest Airlines released a statement believing that it will be a negative concept for revenue, and will adversly and significantly hurt industry revenues. This will be interesting to see how it plays out, and if it will hurt some of the stronger major carriers, such as Northwest and Continental.

Delta's Cuttin' Fares!

It's reported in the online edition of Time Magazine that Delta Airlines will change its fare structure nationwide, lowering fares on all routes to compete with low-fare carriers. Delta has been testing its SimpliFares at its Cincinatti hub since August 2004, and the magazine reports that the program will be brought nationwide in the coming days.

Holiday Travel Woes

Comair, a Delta Airlines subsidiary, canceled all its flights Christmas day and is attempting to operate on a limited schedule today. They blame the cancellations due to computer problems that schedule pilots and flight attendants because the system was overloaded when  bad weather set in around the Cincinnati area (their hub) around the 22nd.

U.S. Airways is also feeling the effects of bad weather and an employee shortage, and thus, about 10,000 pieces of luggage have been separated from passengers. U.S. Airways blames this problem due to "some of [their] employees [chosing] to call in sick over the weekend."

Best of luck to all those stranded.

Traffic (October 2004)

The only major news coming in the last couple days are traffic reports from various carriers. I didn't post yesturday because election day kept the markets fairly stagnant, the airline industry being no exception. No huge surprises here, however, if your hometown airline is listed, see how they did last month.
American Airlines here
American Eagle (AA's regional carrier, posts seperate traffic report) here
US Air here
Delta here
America West here

Good News for Delta

Delta Airlines DAL announced today that it has obtained $500 million in financing from GE Commercial Finance. $300 million will be part of a senior secured revovling credit facility, and $200 million in a short-term loan. Up to $100 million of this new financing will be provided by American Express Travel Related Sevice Company.
See more of the story here

Delta and its Pilots

It's official, Delta DALhas reached a tennitive agreement with its pilots union, an act that might save the Atlanta-based carrier from entering Chapter 11. That's not certain, but it a big step in the right direction.

AMEX to Lend Delta $600M

American Express AXP reported record earnings today, and also reported they have reached an agreement with Delta Airlines DAL to inject $600 million into the struggling airline. This is a good chunk of money since Delta lost $650 million in the third quarter, so this will keep them going a little while. We expect to up updating this story tomorrow as more facts are revealed.

Delta's & Flyi's Different Deals

Delta: After reporting some "weak earnings," (translated: a huge loss for the quarter of around $650 million), today Delta appears to have reached a tentative agreement with their pilots' union, whose members receive the highest pay in the industry. The pilots have appeared to agree to the $1 billion in concessions that Delta management was asking for which they claimed was necessary to avoid bankruptcy. In addition, Delta announced new service between Salt Lake City (hubsite) and Baltimore, Cancun, and seasonal summer service between Fairbanks, Anchorage and Salt Lake City.

Flyi: The upstart Independence Air is announcing a sale. (I will define the airline's fleet, routes, etc. at a later date). They are offering fares from $34 between Wash/Dulles and select markets, or fares as low as $59 connecting through Wash/Dulles. These fares don't include taxes/fees which would probably amount to around $10-15, (typical for most domestic flights).