Trends & Predictions for 2010: Part II

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What a Price War Could Look Like in Europe

Ryanair and easyJet both plan to cut prices in the coming months in order to help lure passengers to their airlines. Ryanair announced that in the second half of this year the carrier may lose money. But Ryanair's costs are also rising which worries investors, though it appears to be a temporary increase due to some operational changes as well as higher airport charges. If Ryanair's costs continue to increase, it could signal a shift in dominance in the European low-cost airline industry, since Ryanair might no longer have the lowest costs, although this is rather unlikely in the near future. But even with these cost increases, Ryanair plans to launch an all-out price war, and hopes to damage the competition which cannot afford the fight. EasyJet plans to lower fares to compete with Ryanair, though it's likely Ryanair's fares will still be lower than easyJet's. But the real victims of this price war will be the smaller LCCs which don't have the scale or the cash to withstand a prolonged fight against Ryanair. Wizz Air in Eastern Europe, Vueling in Spain, and Sterling in Scandinavia could all be hurt by this price war. While it's unlikely that any of these companies will go out of business as a result of this fare war, it will no doubt hurt these airlines. It will also hurt traditional legacy carriers, who would be unable to come close to matching Ryanair's lower fares. However, these carriers have diversified themselves enough by attracting a large share of the business traveler market that they will be less affected by a fare war than LCCs. What all these LCCs must do is to find other areas to compete, aside from price. A fare war would encourage airlines to get more creative in their marketing, which could include airlines discussing comfort (since many LCCs have a greater seat pitch than Ryanair), travel convenience (since many of the LCCs listed above use primary airports closer to city centers where Ryanair uses secondary airports more distant from city centers), and booking convenience (since LCCs can advertise their low-cost vacation packages that can be booked all at the same site as airline tickets, saving customers time and money). This last point is critical. LCCs will need to sell customers based on ancillary revenue streams, such as hotel booking, car rental, travel insurance, and other products. If customers are looking for the easiest way to book their vacation, they can find it on the Web sites of many LCCs. Ryanair will win virtually any price war. The company has the lowest costs and the largest operation. And it will hurt many LCCs. But Ryanair doesn't necessarily offer the best value for vacations through its ancillary revenue partners. As a result, if Ryanair's competitors can sell themselves on points other than price, then these airlines can garner higher fares as well as drive more passengers to use their ancillary revenue streams which could generate considerable sums.
A price war is the inevitable result of a slowdown in demand. This is due primarily to the environmental controversy in the UK that has hurt the credibility of low-cost airlines on the environment, as well as higher passenger taxes, and the continuing hassles of air travel due to long lines at security checkpoints and air traffic control delays. These issues will continue to plague low-cost airlines for the indefinite future, as they are related to issues that won't go away anytime soon, the environment, security, and overcrowding of the skies. And since airlines have little control over how the public responds to these issues, airlines are held at the mercy of government and interest groups. These groups could do considerable damage to low-cost carriers in the future, and not just in Europe. For example, if the environment becomes a larger issue in the United States, particularly after the 2008 presidential elections, low-cost airlines could be hurt enormously.

As passengers continue to view air travel negatively, the growth in discretionary trips could subside, particularly from more well-off and educated regions, such as the UK, Scandinavia, and Spain. Regions which are poorer will continue to encourage low-cost airlines to service their countries in an effort to provide their citizens with convenient and cheap access to Western Europe. Poland is the poster child for what low-cost airlines can do to a region. Ryanair offers service to nearly a dozen Polish cities and connects these markets with London and other Western European cities. It offers cheap, reliable, and convenient service for thousands of Poles who need to access work and family in Western Europe, and Ryanair has made millions in the market. Ryanair is now starting to expand its successful Eastern European model to other nations. This is where low-cost air travel is needed. Not in bringing planeload after planeload of tourists to the Balearics, but by helping people who truly need to fly get where they need to go. Low-cost air travel will come under increasing assault in the coming years, and it's imperative that LCCs find ways to diversify themselves in the long-term by elongating average stage lengths and serving destinations that support fewer discretionary trips so that their businesses won't be destroyed by external factors. People who need to fly will continue to fly. People who don't may not.

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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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Ryanair Announces Plans to Launch New Transatlantic LCC

Ryanair CEO Michael O'Leary made a surprise announcement recently, which made clear the company's plans for a new transatlantic LCC. O'Leary says Ryanair plans to use either Boeing 787s or Airbus A350s to fly transatlantic routes between secondary airports on either side of the Atlantic, such as London Stansted and Baltimore (for service to Washington DC) with fares as low as $12 each way. But as with any announcement regarding LCC expansion, the usual players were out misleading the public and criticizing the announcement. Before I elaborate on the viability of the proposal, I want to dispel two myths which seem to surround this announcement.

The first is that Ryanair is launching this airline to integrate it with its current shot-haul operations. O'Leary says explicitly that this new enterprise will not be part of Ryanair, and will have a separate management team and board. Moreover, he says Ryanair has no plans to introduce code-sharing or baggage transfers between the two airlines, even though they will be under the same corporate banner. While this new transatlantic LCC will look much like Ryanair, it will be separate, which is something the media has a hard time grasping. Unfortunately, many articles in have implied that the two airlines will be closely linked, which is simply untrue.

But the second myth is that this new carrier, just like any new LCC, will be bad for the environment and should be stopped. If this airline is allowed to fly, then people lured by cheap fares will be able to fly day trips to New York with little financial consequence. Any new air travel will hurt the environment, low-cost or legacy, but environmental campaigners fail to keep certain points in perspective. Ryanair's new long-haul LCC will likely be far more environmentally friendly than British Airways, American Airlines, or any other major transatlantic carrier. Unlike British Airways, which offers more space to customers in three premium classes, Ryanair's new airline plans to only have a business class cabin in addition to a tightly packed economy class cabin. And, Ryanair's new long-haul LCC plans to use a new fuel-efficient long-haul model type, which should deliver fuel savings of 15-20% and will reduce emissions by similar levels. As a result, this new airline is bound to be far more fuel-efficient and environmentally friendly per passenger than current operators. If other airlines have to compete with Ryanair's new long-haul LCC, they will need to lower their costs. Many carriers have been hesitant to order the new 787 or A350 because of their high acquisition costs and softening fuel prices. So if Ryanair's new long-haul LCC adopts this technology, then other airlines will see an additional reason to rapidly adopt new fuel-efficient and environmentally friendly planes. As a result the entry of Ryanair's new long-haul LCC could bring environmental benefits that stretch beyond the carrier itself.

If environmental campaigners want the most effective solution to the problem of aviation emissions, the first step is to find the inefficient operators and deal with them. Just because less efficient carriers are established historically on a route doesn't mean that they should be immune from having to change. New players shouldn't be the only ones scrutinized. It is a fair point that Ryanair's new airline could drive up traffic on certain routes and encourage people to travel when they otherwise wouldn't, but then that problem should be attacked appropriately. Environmentalists should be focusing their efforts on encouraging governments to change their aviation tax structure so passenger taxes cover the true carbon cost of one's journey. That would create a real financial burden for people to travel long distances, and it would minimize the kind of quick overseas trips that environmentalists fear would be spurred by this new airline. Growth in aviation can be controlled, and it must be controlled, but hounding every new entrant is ineffective; all players must be dealt with. What we too often forget is that with a challenge like climate change, it's easy to blame certain players or certain industries like aviation that are perceived as easy targets. But we cannot get caught up in anti-new airline hysteria to forget about finding the most effective solution to the problem of climate change.

I'll admit, I didn't predict this announcement to occur. In fact, I said quite explicitly in my recent Air Scoop article (R)evolution of Ryanair's Business Model (Part 1), that Ryanair wouldn't enter this business. And I made that statement because many analysts who predicted that Ryanair would enter this business believed that Ryanair's entry into the market would come in one of two ways. It would either come through an acquisition of Aer Lingus, which still appears unlikely, or through a new aircraft type addition to Ryanair's fleet and the integration of the short-haul and long-haul businesses. I said neither would occur because in both of those scenarios, costs are increased. Ryanair would have to deal with different aircraft types and route structures at Aer Lingus and it would have to facilitate baggage transfers, connecting passengers, and potentially differing amenity systems if the long-haul and short-haul operations were interlinked. Neither occurred. Instead, Ryanair's new long-haul LCC will have few ties with its short-haul partner, which will minimize costs. This makes much more sense for Ryanair as a whole company and it will enable the company to maximize profits from both airlines.

Now, presuming Ryanair's new long-haul airline takes off, it will find itself in an advantageous competitive situation. While open skies will force established carriers to lower fares, few airlines have announced plans to fill a low-fare vacuum across the Atlantic. Already there is plenty of low-cost charter service from Europe, and especially the UK, to Florida and the Caribbean which attracts droves of leisure passengers, but there is little in the way of service linking major business centers. Low-cost carrier Zoom UK recently announced a new route between London Gatwick and New York starting June 21, but aside from that, little low-cost, long-haul activity is taking place. If Ryanair's new carrier is able to lower fares as much as they advertise, then the new carrier will certainly attract customers. However, much of the new carrier's success will depend on five factors.

First is passenger comfort. While many customers are willing to endure Ryanair's less-than-comfortable aircraft for flights up to three or four hours, many would be less than enthusiastic about enduring a long-haul airline with comfort levels similar to Ryanair's for seven or eight hours. As a result, if Ryanair's new long-haul low-cost carrier cannot increase comfort levels for passengers in the economy cabin to levels most customers would consider tolerable (at least 31 inches of seat pitch), then this new airline will have difficulty attracting customers, regardless of how low the fares may be. Also, while many extras such as meals and entertainment will be charged for, if the rates aren't reasonable then many passengers who choose not to pay extra will be uncomfortable and agitated during the flight. If these customers choose not to pay for in-flight extras, they will be less likely to fly again, so the new carrier must be reasonable with what it charges customers for these extras.

Second, many customers don't use Ryanair's short-haul services because they often fly from secondary airports farther away from city centers. If customers cannot cheaply and easily access these secondary airports, then many may choose to use larger airports closer to city centers. Ryanair's new long-haul LCC must be careful about where it launches flights, because some alternate airports (such as Stansted) are relatively easy to access while others (such as Frankfurt Hahn) are far more difficult to get to. Although Ryanair organizes shuttle buses to operate between many of its alternate airports and the nearby city centers, those don't give customers very much flexibility about when or how they access the airport. Also, Ryanair must select airports in the United States which have sufficient transport options. Baltimore is one that does, but Islip on Long Island is one that doesn't. If passengers have to spend more time and money to access secondary airports, it will hurt the usefulness of the new airline for many customers. This is especially true with business travelers who typically value their time more than other types of travelers. If Ryanair's new long-haul LCC plants on courting business travelers, it must be careful about where it launches flights for this reason.

Third, the proposed EU Emission Trading Scheme and the new pushes for carbon taxes on air travelers could have a very damaging effect on Ryanair's long-haul LCC. Even though the new airline will be more efficient per passenger than most of its competitors, it could have difficulty succeeding if new taxes are added to air travel. Since this airline's customers are likely to be more price sensitive, on average, than customers at other transatlantic airlines (since it's likely that a greater proportion of the passengers flying on Ryanair's long-haul LCC will fly for discretionary purposes than on other carriers), any new taxes will decrease the number of discretionary trips taken. If taxes are increased significantly, then there will be a decrease in non-essential transatlantic travel, and low-fare carriers of any nature will suffer. But ultra-low fare carriers where leisure travelers make up the vast majority of their customers, like Ryanair's proposed LCC as well as charter carriers like First Choice, will suffer much more than other airlines.

Fourth, customer service for Ryanair's new long-haul LCC will be much more important than on Ryanair's short-haul flights. Ryanair can get away with dodging customer service on its short-haul flights, since passengers are less reliant on the check-in staff and flight attendants during their journeys. However, on long-haul flights, customer service becomes more important, because passengers are typically less comfortable and under more stress since they are at the airport and onboard the aircraft longer. If Ryanair's new long-haul LCC forgets that it only takes one bad customer service experience to lose a customer, then the airline will fail. This is especially true since the new airline will target business travelers, who expect higher levels of customer service on long-haul flights. Repeat customers are crucial to an airline's success, and low fares aren't enough to drive an airline's success over the long-term. That's why the most successful low-cost airline is also the one that is perhaps most focused on customer service. The founder of Southwest Airlines, Herb Kelleher, says that Southwest is a company in the customer service business which happens to be an airline. Ryanair has been able to get a sufficient number of repeat customers onboard to be profitable, but with an intensely competitive transatlantic market, Ryanair's new long-haul LCC will need to focus on building customer loyalty.

Fifth, Ryanair's new long-haul LCC needs to ensure it can avoid routes with overcapacity, and target capacity effectively to many different city-pairs. Open skies will lead to capacity increases on transatlantic routes, and Ryanair's new long-haul LCC needs to ensure that it adds capacity carefully and methodically. Overcapacity could benefit Ryanair's new long-haul LCC, since it could lead to lower fares that competitors will be unable to match profitably, but it could also hurt the airline since it will take time for it to build up a base of loyal customers. While the market realigns its capacity with demand, other carriers, such as British Airways, may be able to fill planes with loyal customers while Ryanair's new long-haul LCC may have difficulty filling its planes.

If Ryanair's new long-haul LCC starts operations and navigates the five issues above well, then it should succeed. With open skies, competition will force Ryanair's new long-haul LCC to focus on more than fares. Consequently, if the airline wants to succeed and distinguish itself from the competition, it needs to focus on many of the operational, comfort, and service issues which Ryanair's short-haul operation has ignored.

The Enviro-Nuts in Britain are at it Again...

At first, it was simply an awareness campaign. Environmental groups in the UK used the disdain many people have with the proliferation of low-cost airlines to discuss the environmental consequences of air travel growth. That was such a good thing, for consumers who were mostly unaware of the dangers of pollution caused by air travel, for governments, who could use the campaign to call for improved measures to curtail climate change, and for low-cost airlines, because Europe's largest LCCs operate some of the newest and cleanest fleets in the world and they could demonstrate to customers that the problem is much bigger than the growth of cheap flights. But then, this campaign evolved into criticizing most increases in air service. The open skies deal signed in Europe was attacked because it's projected to increase the amount of travelers crossing the Atlantic, even though it would provide enormous benefits for consumers and the global economy. But now the message transmitted by environmental groups has evolved into all-out hysteria, with a UK think tank, the Institute for Public Policy Research, suggesting Thursday that advertisements for air travel and new cars contain bold warnings similar to those on cigarette packets, such as "flying causes climate change". While their efforts at attempting to reduce climate change are respected, they have gone way too far. Unfortunately, while their proposal discusses some alternatives Britons can utilize, these alternatives are unrealistic for most. Their press release suggests that Britons use rail services for longer routes, such as London to Madrid, even though a train takes far longer and is significantly more expensive in most cases. The IPPR, like other environmentally-aware groups, should instead be proposing specific solutions to fixing Britain's and Europe's transportation mess, particularly for rail travel, which is seen as the most palatable alternative to aviation. The IPPR says that rail transport needs to be improved, but nearly everyone says that. What they don't answer is: "how do Britain and its European counterparts do that?" That's what makes the IPPR and many environmentally-conscious groups like it so ineffective, they don't propose the nitty gritty solutions, only the ones that will receive media coverage. In Britain, the rail system is in chaos, with late and crowded trains becoming the norm. Traffic on Britain's rail lines is expected to climb in the next several years, and current problems are only expected to exacerbate. Moreover, rail fares have increased, while airfares have decreased, making trains a less realistic option for many price-conscious travelers who will instead fly. Politicians have few bold solutions to solve the problem, and think tanks could be an asset to help them find solutions, but instead they are simply spouting too many cursory, unworkable ideas.

Part of the problem is that Britain's political situation isn't very conducive to constructive solutions on solving Europe's transportation and emissions crisis. In a few months, Britain's Chancellor, Gordon Brown is expected to take over leadership of Britain's Labor Party, becoming the Prime Minister. Brown was the author of plans, announced in December and implemented in February, to double the Air Passenger Duty (APD) for passengers traveling to or from the UK. Unfortunately, taxing aviation isn't a solution to the problem, but Brown is appeasing the groups who believe that air travel needs to be slowed by any means necessary. That includes raising the price of a ticket, even if the tax isn't proportional to the emissions produced. Given Brown's poor record dealing with aviation, it would be a miracle if he could reform Britain's rail network, which the next Prime Minister must do if he wants to effectively lead Britain down a path to reduce emissions from transport.

Now I believe there's nothing wrong with government using taxes and incentives to change behavior. But if those programs aren't proportional and effective, then they won't help solve the problem. Not only is the APD a tax that's disproportional to the emissions produced, and one that doesn't directly fund environmental programs that reduce emissions, but it isn't effective at slowing air travel growth. This is primarily because on the routes where it's most likely to slow growth, such as intra-UK routes, including London-Manchester and London-Glasgow, the gap between air and rail travel fares is so huge that an extra 10 GBP won't come near closing it. If politicians in Europe want to tax aviation to once again make it a domain of the wealthy, which may be inevitable if aviation emissions continue to skyrocket, then they at least need to tax in such a way that accomplishes their goals. That means each ticket would need to be given a tax of at least 50 GBP, and possibly more, if governments wanted to dissuade the masses from flying. But a significant airline tax increase would only work if those who couldn't afford to fly had some other way (most likely rail) to travel cheaply and quickly. Otherwise, a tax that hefty would never, ever, get passed. Governments shouldn't use a tax which simply fuels the government (which is what the APD does) and one which makes it more difficult for lower- and middle-class passengers to travel when they lack a realistic alternative.

A comprehensive plan must be implemented covering transport in the UK that facilitates its environmentally-friendly development. That may mean that airport expansion, an idea currently popular with many UK airports, may be severely curtailed or prohibited. Slot restrictions may need to be implemented at many airports, including Gatwick, Stansted, and others, depending on their traffic levels and growth projections. Rail networks will need to be expanded, and politicians must be willing to expand high-speed services, including maglev trains on popular corridors. Imports by sea must be curtailed, and industries at home must be given the government support they need to thrive. Finally, road pricing must be implemented in a smart fashion which protects low-income drivers from over taxation but which taxes gas-guzzling vehicles. However, taxes and incentives alone aren't an effective plan, and if Britons want to seriously help the environment, they must demand the politicians present full, detailed, comprehensive plans that cover all forms of transport. These plans must target the most profligate uses of transport and provide solutions for implementing eco-friendly alternatives. Those plans may deal little with aviation in the short-term, because it pollutes far less than road transport, and somewhat less than marine shipping, although since aviation emissions are projected to grow significantly in the next several decades, they need to be controlled somehow. Without real solutions for targeting the right forms of transport, Britain will lag behind the industrialized world in emissions control, and the country will continue to listen to propaganda over effective proposals. But Britain isn't alone in needing to find transport alternatives. I pick on Britain because environmental groups in that country scream the loudest about the problem with aviation emissions. However, all industrialized nations face similar challenges in reforming their transport networks to make them cleaner, and the same proposals outlined in this post for Britain's needs can be applied to other industrialized countries.