Sun Country Parent Files for Chapter 11

Sun Country Airlines parent company Petters Group filed for Chapter 11 bankruptcy protection amidst an ongoing investigation of fraud by former group chairman Tom Petters. While the airline expects to continue normal operations, at least for now, I have serious concerns about the health of the carrier. Recently, the company (complying with the federal WARN act) announced that it may lay off all of its employees if it is unable to improve its cash flow, and to do this, it may have to trim employee salaries by as much as 50%. These drastic measures signal a carrier in serious trouble.

While Sun Country is a pretty small potato in most of the country, it's an important carrier in Minneapolis, its base of operations, where the carrier not only operates a variety of services to leisure destinations, but also important business destinations such as Seattle, New York, and Los Angeles. There is no reason to believe that Sun Country will manage to survive the next six months. The airline simply has too many things going against it, and unfortunately, Sun Country is unable to command a price premium in most of the markets it serves, as it targets leisure travelers, making profitability ever more allusive. If Sun Country folds, expect Northwest to move quickly to shore up its position as the top dog at MSP, perhaps adding flights to some of the destinations Sun Country currently serves. But more importantly, Sun Country's departure would create an LCC vacuum at the airport, since it would only have minimal coverage by LCCs (mostly on Frontier and AirTran which don't offer many point-to-point flights). Perhaps Southwest will use its impending arrival at MSP in March to offer service on some of the routes Sun Country is abandoning, particularly to Los Angeles, Phoenix, Las Vegas, and Orlando. That would give Southwest a stronger competitive position at the airport, make the carrier attractive to business travelers, and provide Minneapolis flyers a more stable LCC that is unlikely to go bankrupt anytime soon.

ATA Files For Bankruptcy, Shuts Down

ATA, which has in recent years downsized its scheduled service operations to focus more on its charter business, filed for bankruptcy and ended scheduled service flights today. ATA had in recent weeks announced the closing of its Chicago-based scheduled flights, mainly because high fuel prices were making them unprofitable. However, what did ATA in was the loss of a very significant military charter contract, without which, the company was unable to survive. ATA, once the 10th largest airline in the US, was a much smaller player immediately before its demise, and so its loss isn't tremendously significant to the overall market. However, given that the carrier served a number of routes to/from Hawaii, it will deliver another blow to that state, which has been reeling from the loss of Aloha. Fortunately, other carriers will likely fill in the gaps left by ATA, though passengers from Oakland may be forced to trek across the bridge and fly from SFO in order to get to Hawaii. Passengers on Hawaii routes could also wind up paying higher fares, though competition is still plentiful on these routes, and fares won't increase dramatically.

Perhaps the biggest victim of this collapse is Southwest Airlines. Southwest, which had a codeshare agreement with ATA, will be unable to immediately fill many of the gaps that the agreement brought. Southwest funneled passengers from its flights onto ATA flights to Hawaii or Mexico. Since Southwest averages lower load factors than most other US carriers, the codeshare agreement helped the company fill seats on flights that otherwise would not be full, generating critical revenue at a time when the airline was facing higher costs. Southwest is looking to start flights to Mexico with its own aircraft and ATA could have provided additional capacity and travel options for Southwest customers traveling from Mexico or other international destinations. Moreover, at these international destinations, ATA and Southwest could have shared ground crews and gates, reducing costs and making their service more competitive.

With two small LCCs collapsing in the past week, will we see more? Probably not, at least not in the near-term. That being said, there are a couple smaller carriers that are vulnerable. USA3000 may be in trouble, as that carrier is in a similar position as Aloha, facing heavy competition on its routes with low yields. While it still operates a strong charter and vacation package business, that could be threatened due to a potential decrease in consumer spending on air travel, especially leisure travel, as a result of the impending economic slowdown. Sun Country is also trying to figure out a solid business model in this climate, and that carrier may reduce some of its scheduled service operations and focus more on its charter business. However, larger LCCs are unlikely to fail anytime soon, because they have much more substantial cash positions. That being said, in this environment, successful airlines will need to be able to have more control over their capacity, and legacy carriers, with larger fleets and a higher percentage of owned versus leased aircraft than some LCCs, will be better able to make adjustments. The carriers who could be vulnerable are those that don't have many aircraft that can easily be parked (due to high lease costs), and which are facing heavy competition and low yields. Frontier is in this category, and it has the added disadvantage of having a weaker cash position than many of its larger rivals, making it more vulnerable in a time of uncertainty. While the airline is making the smart decision to diversify its operations through regional service, it may not be enough to offset increasing competition on its mainline Denver routes. Unless Frontier finds some way of redeploying its capacity, that company could face trouble, as neither Southwest nor United are going away anytime soon in Denver.

If fuel costs continue to rise, there could be other carrier fatalities, as well as increased capacity reduction in some markets. Airlines will have to pass higher fuel costs on to customers, and not everyone can pay them. Therefore, demand on many routes, especially leisure-oriented routes, could decrease, potentially delivering another blow to LCCs, which tend to have more leisure-centered networks. In the immediate future, the little cuts that most airlines will need to make will add up, though they may not attract the media attention that ATA's collapse did, and customers will begin to notice just how problematic high fuel costs are to our air transportation system.

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How Low-Cost Carriers Should Approach the Impending Consolidation

While much of the attention surrounding the merger frenzy in the industry right now has centered on legacy carriers and their many possible combinations, low-cost carriers are also very much in the fray, and could be important instigators of consolidation. There are several reasons for this. The first is that many LCCs are seeing their costs rise after years of solid cost containment. Older aircraft, more senior employees, as well as rapidly rising fuel costs are challenging LCCs. At the same time, many of these carriers recognize that there is relatively little "fat" to trim. These carriers have minimized staffing, fuel, airport, and other costs, and unfortunately, unless they were to convert to a Skybus-style business model (which, even then, doesn't yield tremendous cost savings), can't pare their costs much more.

Second, many of these carriers are smaller than the legacy carriers they compete with (with the notable exception of Southwest). Smaller carriers often lack the economies of scale that larger carriers have, and the even larger legacy carriers that could be created after a merger frenzy will have economies of scale that LCCs will simply be unable to match.

Third, many of these LCCs recognize that their business model has limited growth opportunities. Point-to-point domestic routes simply don't cut it anymore. To attract travelers and keep expanding, airlines need to offer connectivity with smaller aircraft (such as with Frontier's Lynx operation, or Alaska's longstanding partner Horizon Air), or they need to offer additional international service (as JetBlue and Spirit are doing in the Caribbean). Legacy carriers will continue to expand the diversity of their networks, and low-cost carriers, with their obvious fleet and cost constraints, will struggle to match them.

At a time when international growth, not domestic growth, will lead to higher profits, many low-cost carriers need to seriously think about how to offer more service options to customers. Spirit and JetBlue are looking towards Central and South America, Frontier towards Canada and Mexico, and Southwest towards unnamed international destinations. But even with this expansion, it misses the big prizes of Europe and Asia, which LCCs, in their current form, will be unable to serve.

The question is, though, whether a low-cost carrier would merely get bought out by a legacy carrier, as is quite possible, given that certain legacy carriers could otherwise get left out of the consolidation frenzy (like American and US Airways), or whether two low-cost carriers would merge together. I would suggest that the latter option is less likely, but possible. Since many LCCs have distinctive cultures and brands that they want to maintain, as well as a low cost base, it would be challenging to find a pairing of low-cost carriers that fit together very nicely. While there are certain scenarios that would be possible in this regard, they are limited in scope.

One brief example: I think Aloha Airlines is good takeover bait for Southwest or even Alaska, since both Southwest and Alaska are interested in Hawaii expansion, all three carriers operate 737-700s, and both Southwest and Alaska offer considerable service to the continental US from the smaller West Coast airports that Aloha serves, such as Sacramento, Oakland, and Orange County. However, Aloha is a relatively small carrier, and the acquisition of it by Southwest or Alaska would do very little to reduce either company's costs and instead be more centered about expansion.

A buyout of a low-cost carrier by a legacy carrier, would, however, be a way to add capacity to the network of a legacy carrier, even though it could destroy the brand of the bought carrier. This scenario is imperfect as well, since legacy carriers are focused mainly on improving efficiencies and yields on international routes, not the domestic ones where LCCs chiefly fly. The acquisition of a low-cost carrier would be to a legacy carriers' minimal advantage, unless that low-cost carrier had a certain degree of market share or pricing power in a key market.

For instance, while neither of these scenarios are in any way likely, a buyout of Frontier by United would give United an even greater degree of pricing power in Denver. The same would be true with a Delta buyout of AirTran, again, an unlikely possibility. Moreover, both these scenarios raise certain regulatory issues, since the Department of Justice is active in trying to prevent significant market power by one airline in any given market. However, I would argue that certain markets are large enough such that this wouldn't be a significant issue. Moreover, the unification of both carriers could create benefits for the customers of both companies by expanding route networks and flight schedules.

But if legacy carriers are focused on international growth, why would they want to expand their domestic networks, which would be inevitable with the takeover of an LCC? The main reason is to increase market share, particularly in critical markets of strategic importance to the company, where there are large concentrations of higher-yield travelers. Is there a merger that would do these things? I know of at least one, between United and JetBlue, which is detailed in this post. This is not to suggest that other merger scenarios are unthinkable, for all low-cost carriers are quietly discussing various merger scenarios and how they want to play a role in the upcoming consolidation, but I would suggest that the most attractive merger scenario involving a low-cost carrier is between United and JetBlue.

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Potential 2008 Merger: United and JetBlue

First of all, let's start out with a reality check. This merger is not very likely. It's possible, but less likely than other merger scenarios, such as a potential United/Continental merger. However, this may be the most likely merger scenario involving a legacy carrier and a low-cost carrier. A United/JetBlue merger would deliver high levels of service to business and leisure travelers across the country, and create a company focused on higher-yield passengers.

The combined company would have tremendous synergies at several key airports. United has a substantial operation at JFK, and a combined JetBlue/United could use its synergies to create a more efficient and more comprehensive operation at the airport. A combined United/JetBlue could offer a third clear alternative in the New York market to Delta and Continental, by allowing customers to connect from JetBlue domestic flights to United international flights. Currently, both Delta and Continental have sizable hub operations, that connect traffic flows from routes all across the US to European flights, and United and JetBlue, both of which have very high customer service standards and huge legions of loyal passengers, could sift business away from Delta and Continental. Moreover, JetBlue has operations at four of United's five hubs (San Francisco, Denver, Chicago O'Hare, and Washington Dulles), albeit much smaller ones than at JFK. These could be easily absorbed into United's operations, reducing cost and increasing synergies by allowing customers to more easily connect flights and allowing JetBlue to trim its airport staff at these airports. The biggest loser in this case could be Frontier, because JetBlue, which offers a superior product to Frontier's, could add additional flights in Denver post-merger, squeezing Frontier even more as it tries to stay afloat in an increasingly saturated market.

The merger would offer tremendous benefits to JetBlue passengers, who love the carrier for domestic flights, but are unable to use it to easily connect to international flights. By teaming with United, passengers from upstate New York and elsewhere could easily fly JetBlue to New York city, and then connect to a United flight to take them to Europe and elsewhere. Moreover, now that Lufthansa, one of United's close Star Alliance partners, owns 19% of JetBlue, this could facilitate additional alliance-building on routes to Europe, and also make the potential merger easier to execute, if it ever were to occur.

Fleetwise, JetBlue only operates two aircraft types, the A320 and the Embraer E-190. United already has a large fleet of A320s, and the combined carrier could see reduced training and maintenance costs from having a larger fleet. The E-190 would be a new aircraft type to United, but one that would likely be well-received, as United needs an aircraft that is able to serve smaller and medium-size cities once or twice a day. JetBlue plans on receiving dozens more E-190s, and many of these could be put to work supplementing United's regional service in Chicago and Denver. However, with an increasing fleet of narrowbody aircraft, United may try to reduce some of its older 737 variants, though it may be challenging for the carrier to eliminate these entirely for several years.

A big question would be the issue of branding and this may be resolved in part by how the two carriers are structured post-merger. If JetBlue essentially remains a separate entity, but under the United umbrella, then United will feel less pressure to integrate JetBlue's amenities onto their mainline aircraft. But if the carriers completely interchange aircraft between the two fleets, then business customers may be put off by the differential in service standards between JetBlue and United planes. United's aircraft lack many of JetBlue's amenities (such as leather seats, televisions at every seat, hip snacks) but offers some amenities that JetBlue lacks (such as three-class seating on many domestic flights, with first, Economy Plus, and economy seats). One idea is to keep JetBlue as essentially a separate entity under the United umbrella, with a merger allowing the merged company to combine maintenance, training, and management activities. They would be two separate brands under one roof. There would be some problems with this, as it would make it more difficult for the combined company to interchange aircraft between the two fleets, and it would run the risk of alienating some premium travelers, who, for instance, may book on first class on a United aircraft, but then could be forced into coach on a JetBlue plane if a United plane is unavailable due to scheduling constraints.

Therefore, the best solution seems to be to already use the separate "airline-within-an-airline" that United already operates, Ted, and integrate that into JetBlue, by adopting the JetBlue brand and amenities. United's Ted, which is flies primarily leisure routes, and which operates A320 aircraft in a configuration very similar to JetBlue's, could be the best way to integrate JetBlue into United. JetBlue would adopt Ted's aircraft and operate the routes that Ted currently operates. When JetBlue received delivery of new planes, those planes would likely be used for shorter leisure routes and augment or even replace United mainline service. This would bring some sense of continuity to United's operations by maintaining a separate brand for leisure-oriented, lower-yield routes, one that would not offer premium class service, but one that would offer superior service to competitors.

However, while Ted would adopt JetBlue's product and amenities, JetBlue would likely adopt United's frequent flyer program, Mileage Plus. This program, which has many millions more members than JetBlue's TrueBlue, is also more consumer-friendly and better for business travelers, since it offers elite status and other incentives for very frequent flyers. In this sense, JetBlue would become part of the United family.

While employees at both companies could face staffing cuts, the effects of such a merger are likely less toxic than at other carriers. Because JetBlue is an expanding company, many redundancies (with some airport staffing and management exceptions) could be alleviated when JetBlue receives delivery of new planes. Flight crews, pilots, and maintenance staff will all be needed to operate these planes, and so their jobs are relatively safe, with some possible sporadic cuts depending on how capacity is realigned at the two carriers. Therefore, the layoffs from such a deal would likely be rather minimal, at least in comparison to most legacy carrier mergers. While a United/JetBlue is unlikely, it is possible, and would create long-term benefits for customers and shareholders.

Possible 2008 Merger: Northwest and US Airways

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Potential 2008 Merger: Delta and United

As the media has stated over and over in the past few weeks, Delta Air Lines is rumored to be a very important player in any eventual industry consolidation. And the two most mentioned partners for the carrier are United and Northwest (a scenario detailed in this earlier post). The Wall Street Journal has reported that Delta is seeking to enter formal merger talks soon with both United and Northwest, and the airline hopes to choose between the suitors in the near future. The United merger would create a very different carrier from the one it would create if Northwest were to merge with Delta, and I would argue that in fact, it would create a better company for investors, with a greater focus on business travelers and international expansion and fewer route and fleet synergies to resolve. For more information about the potential merger deals that could occur in the industry, see this post.

United has a lot to offer Delta, including an expanded international presence, especially in the Pacific Rim, as well as loyal legions of business travelers in key markets such as Washington DC, Chicago, and Los Angeles. United offers a very high standard of service (for a US carrier, that is) on international flights, and with international growth becoming increasingly important for carriers as a revenue generator, the competition on such routes will only increase. As a result, having top-notch service and great brand loyalty (which United probably has more than any other US carrier) will help ensure success.

Like with the Northwest merger, if Delta were to merge with United, it would force changes in the route networks of the combined carrier. All of United's hubs would probably be kept in one form or another. And that's a very bold statement, considering that United has five hubs scattered across the country. But all of these are simply too integral to the carrier, in markets that have a critical mass of business travelers, that they need to be kept, although some may be slightly downsized. United's San Francisco and Los Angeles hubs will likely be kept because of the amount of connecting traffic between the US and Asia as well as South America these generate. With large populations of travelers in both cities willing to pay a premium to fly to points in Asia nonstop, United has considerable pricing power. Some regional services from the two hubs, to various smaller markets in California and along the West Coast may be scrapped, but the vast majority of mainline United flights, especially international flights, will likely be kept. United's hubs in Chicago and Washington DC will also likely be kept, because in both those cities, United has great legions of business travelers, and in Washington, many government travelers who pay profitable prenegotiated fares.

Denver is a bit of a wild card because United has been hit really hart in the city with the pressures of Frontier's growth. Frontier offers very competitive fares, amenities, and a consumer-friendly frequent flyer program with low redemption requirements and has hurt United in the market, though to United's credit, industry-leading customer service and more flight options have enabled the carrier to hold its own more than other legacy carriers would have. But with the rapid expansion of Southwest in Denver, it's clear that the city is hungry for more low-cost flights, flights which United probably will not be offering. But Denver is a great hub location geographically, and it will probably be of some benefit to the combined carrier to maintain a hub there. This is especially true because Delta's Salt Lake City hub is smaller and the airline has invested less there, in terms of operations and infrastructure, than United has in Denver.

As a result, Delta may scale back its Salt Lake City operations into a focus city size, but much of their connecting traffic will get shifted to Denver, and Salt Lake City could see greatly reduced air service. This could open up the door for Frontier or Southwest to add additional flights from the city and plug holes that the downsizing of Delta will leave. But it's unlikely that if Delta reduces the size of its hub in SLC that it will maintain as many regional flights as it does now, and many smaller communities could lose some of their vital air service. While Delta probably would not keep its Cincinnati hub, it would keep a number of mainline flights in the city to serve high-yield business travelers, while shedding regional jet service from Comair to most markets. Also, Delta's massive Atlanta hub would likely be kept in its current form, again with the exception that some regional routes could be cut. Simply put, regional routes are important for legacy carriers, but with current yields, they're becoming more and more difficult to sustain and airlines have to be more discriminating with the short routes they serve.

Where the route maps of this merged pair would shift the most, I would guess, would be in focus city markets, cities where the carrier has a reasonable presence, with some point-to-point flights, but is not the dominant carrier. United's Seattle operations or Delta's Orlando operations are characteristic of this. Both companies have numerous point-to-point flights in addition to hub service (United, for instance, offers service to Hawaii and Tokyo, as well as regional feeder flights around the Northwest from Seattle and Delta offers nonstop service from Orlando to a number of East Coast destinations on both mainline and regional aircraft). I suspect that these point-to-point operations may be harder to sustain if the market is low-yield (such as Orlando), or if the carrier isn't dominant on the route. While some point-to-point service will be maintained (for instance, I suspect United will keep flying between Seattle and Tokyo because the flights are so popular with technology firms), many point-to-point routes, especially those operated on smaller aircraft, will need to be dropped if consolidation occurs. Moreover, many focus cities not only offer point-to-point routes, but also a lot of hub flights (perhaps in excess of what a market of that size deserves), and I suspect that some of those flights could be cut as well. At stake is a sizable reduction in United's operations in Seattle and Delta's operations in Boston, Orlando, and Columbus in order to realign their route structure to focus on hubs.

The other way the route systems of these two carriers will likely shift is in their use of regional jets, as alluded to before. Delta has huge regional jet operations in all three of its hubs, but 50-seater aircraft, of which Delta uses well over 100 in its operations, are simply inefficient with high fuel costs. 70- and 90-seat jets are more efficient, and their use will be expanded in the coming years, but many cities in and around Delta's Atlanta hub that currently receive one or two daily 50-seater flights could receive one 70-seat flight or none at all. A lot of smaller markets, in the Southeast and in the Midwest and California, where many of United's regional jet operations are, could lose much of their service, because with fuel prices so high, it simply doesn't make sense to serve them. However, there are certainly exceptions to the cutback mantra. For instance, many of United's regional operations in Denver could be preserved because they generate very high yields or have little competition, such as United's flights from Denver to Aspen. 50-seat regional jets will still make up a considerable portion of the fleets of Delta and United's regional jet contractors, but their use will need to be minimized in the future to save money.

Mainline fleet makeup will be a more challenging question. While the combined carrier would have compatibility with its longhaul fleet, given the prevalence of 777 and 767s in both United's and Delta's fleets, the short-haul fleet of the combined carrier would be a combination of Boeing, Airbus, and McDonald Douglas aircraft. Delta's MD-88s and MD-90s would likely get retired as quickly as the airline could manage, but that could take five years or more because there are so many aircraft (Delta has well over 100 MD-88s and MD-90s). It's hard to say what the merged carrier will do in the long-term to its short-haul fleet, but it may not order new shorthaul planes until Boeing or Airbus releases their next generation narrowbody in a few years or until domestic yields show signs of picking up.

One of the other difficult issues that the combined carrier will need to grapple with is how it chooses to brand itself. United has a very strong brand with business travelers, offering generous amenities, frequent flyer benefits, and seating arrangements (such as its Economy Plus seating, which offers additional legroom to premium travelers). Delta does not have the same loyalty from business travelers, but has instead targeted more leisure travelers, trying to outdo JetBlue and other carriers on amenities that attract families and other budget-conscious travelers, such as personal televisions at every seat on some planes. With increasing pressure on yields, it's likely that the combined carrier will standardize its fleet and do so in a way to minimize costs. I doubt that personal televisions will be put into seats all across the combined fleet. Moreover, I would not be surprised if much of the Economy Plus seating was removed from United's aircraft on domestic flights, so the airline could fit more seats into the cabin and increase revenues. The seats would only be left on international aircraft, where the airline could charge more for the additional legroom in addition to offering it to elite customers at no charge. As a result, to standardize operations, Delta may add premium economy seating on its international fleet. Similarly, United could upgrade some aircraft, likely 757s, with personal televisions at every seat in order to bring them up to Delta's standards.

If this merger goes through, it could create an airline with massive economies of scale in key business markets all across the country. The company will be able to leverage its ability in some markets to raise fares considerably. Look at New York City. Not only is Delta a very important player at LaGuardia, where the company operates its highly-profitable shuttle service, as well as numerous other high-yield flights, but it's one of the largest carriers at JFK, and combined with United's operations there, the airline would become the largest carrier in New York. With an array of destinations from both JFK and LaGuardia that could only be matched from Continental at Newark (and even Continental doesn't serve many of Delta's highly profitable international destinations), the new airline would have massive pricing power, manipulating fares lower on routes with low-cost competition from JetBlue, but likely keeping fares extraordinarily high if the only competition was Continental. New York could become an immensely profitable market for the combined carrier because there is very little connectivity out of LaGuardia (mostly high-yield flights to other cities) and most of the connectivity out of JFK is transferring domestic passengers to international flights, which is increasingly profitable for the carrier.

Similarly in Washington DC, strong market positions at both National and Dulles could create huge market power (and thus, pricing power) for the carrier. In fact, the Washington DC market is the one market where the combined carrier may have to shed some operations in order to appease regulators, because the only sizable competitor at either major DC airport to United and Delta is US Airways, which doesn't offer many point-to-point flights from the city.

Unlike a Delta/Northwest merger, this one would create a carrier with immense profit potential because of its dominance in so many of the nation's key business markets. There would not be as many labor and fleet issues to resolve (though there certainly are some) as with the Northwest deal, and the combined carrier would be able to structure a route system to cover the entire nation much better than a Delta/Northwest combination. But, a Delta/United merger may be harder to get by regulators because it would create a very, very large airline with considerable leverage at a lot of big airports. However, unlike a Delta/US Airways deal, which was proposed late in 2006, this one doesn't have any obvious road blocks with regulators (like the market positions of Delta and US Airways at key slot-controlled airports such as LaGuardia and Washington National in the proposed Delta/US Airways deal), though the Justice Department certainly has reasons for concern. While it's not a guarantee that a Delta/United deal would be approved, I would say the odds are probably greater than if US Airways were to make another bid for Delta.

As a result, a Delta/United merger deal would be an amazing deal for investors and the airlines involved. It's not perfect, but no combination of two legacy carriers, with all their idiosyncrasies, would be. Conversely, while airline consolidation will inevitably leave consumers with higher fares and fewer flight options, this merger could offer one of the worst deals for consumers imaginable. It will hang business travelers out to dry in many key markets, allowing the airline to essentially commit highway robbery against last-minute travelers. Travelers would have little recourse against these high last-minute fares because of the lack of competition. But, unfortunately for customers, this is an industry that desperately needs to cut costs and raise revenues, and even at the expense of consumers, consolidation will probably help salvage companies that otherwise might have to downsize even more, trimming air service in many areas as well as jobs for thousands of people.

The better deal for consumers would be a merger with Northwest. Not only would it minimize market power of the combined carrier in key business markets, but it would also likely improve the dismal customer service record of Northwest, since Delta's organization and employees seem to take customer service, baggage handling, and delay management more seriously. But the better deal for investors, one that would create enormous pricing power in San Francisco, Los Angeles, Denver, Chicago, Cincinnati, Atlanta, Washington DC, and New York, would be a Delta/United merger.

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On Potential Merger Deals in 2008

The big issue that the airline industry will have to tackle in 2008 is to what degree consolidation will play in reducing costs for the industry given soaring fuel prices. A great deal of merger scenarios have been proposed, and many industry observers believe that early in 2008 will be the time when many of these deals are announced. Many executives believe that if consolidation occurs, Delta will be the catalyst that will make it happen. This was shown when in late 2006, US Airways made a surprise bid to merge with Delta, a bid that ultimately failed. However, with Delta being a very attractive merger partner, given its diverse operations and recent cost-cuts, it's likely that the carrier will be involved on an upcoming merger.
Moreover, other carriers, including low-cost carriers such as Southwest and Frontier, have been rumored as merger partners with each other or with legacy carriers. So-called low-cost carriers are also trying to cut costs and diversify their operations, and a merger may be the way for these carriers to do that, even though they will likely lose their ability to simplify some aspects of their operations, such as having one family of aircraft or having the luxury of flying relatively short routes. It will be interesting to see how the merger scenarios play out in the coming weeks and months, and stick with Airline Bulletin as we bring you additional information about the merger situation.

Will Skybus's Launch Provoke Other Airlines to Add Fees?

Skybus's launch has been getting a lot of attention in the past few days by a range of national media (such as this column in USA Today). But much of the coverage has not centered on Skybus's new routes or the opportunities it presents for smaller, underutilized airports. Rather, many news outlets have focused on what Skybus is not providing, at least, not for free. Skybus plans to charge for virtually any extra passengers need, short of using the restroom. And since this is a revolutionary idea in the States, it is picking up a lot of media coverage. But it begs the question: Will other carriers consider adding more a la carte amenities in a bid to raise revenues? If fares continue to remain relatively low, LCCs will need to find more ways to make money, and ancillary revenue streams are the easiest, cheapest, least risky way to accomplish that goal. Low-cost carriers have seen their costs rise in recent years. Many of them have new fleets which are now getting older and which require more costly maintenance. Also, many LCCs have labor agreements that are becoming more expensive to maintain, since many employee groups are looking for higher wages and more profit-sharing. When airlines first start out, employees typically get paid quite little relative to their counterparts at other airlines. But as they gain experience and seniority in the company, many employees receive pay increases, and that costs LCCs more and more money each year.

And with fares increasing very little, airlines are trying to figure out how to raise more revenues. Food and beverage sales is one idea that hasn't been fully exploited by LCCs, something Skybus will try. It's probable that other LCCs will start cracking down on some of the free snacks they are handing to customers, and may charge customers for the treats. Also, some LCCs may start charging customers for beverages, a move that could be very profitable, since beverages typically can be sold at high profit margins and many passengers find themselves dehydrated inflight. Moreover, most US LCCs have excess baggage fees that are similar to legacy carriers. Only Spirit has taken steps to remedy that, but even that carrier still allows customers to check one bag for free (although this will soon change, and customers will need to pay for all checked bags for reservations made after June 19). LCCs, especially those aiming to have a tighter grip on their costs, including Southwest and AirTran, may crack down on their checked baggage policies. While most US LCCs offer hotel and car rental reservations on their Web sites, and collect commissions from sales, they don't advertise these outlets very well on their sites and airlines don't appear to be focused on offering customers a good value for all their travel needs. Airlines typically make it difficult to purchase a flight, hotel, and car rental in one search, since hotel and car rental reservations are often kept on separate pages on US LCC sites. And many of the hotel and car rental partners airlines contract with offer lower rates at their respective Web sites, and if airlines want customers to book hotels and car rentals through them, they need to ensure that customers are receiving the best deal. Also, Allegiant and Skybus are the only two LCCs to charge for the privilege of boarding early. Allegiant offers advance seat assignments for an additional fee, and Skybus offers early boarding with no seat assignments. The revenue from these services costs very little to obtain, and if it improves a customer's comfort level on a given flight, people will pay it. Other LCCs, including Southwest and AirTran may charge for early boarding in the future. It's an extremely profitable and easy-to-implement revenue stream, more so than any other ancillary revenue stream, and LCCs would be foolish not to utilize it with LCCs so desperate to raise revenues. LCCs may also add fees for the use of their in-flight entertainment systems. AirTran, for example, offers customers satellite radio at every seat, and customers can hook up to it for free (assuming they have their own headset). However, AirTran would be an ideal airline to charge customers for the use of that entertainment because it doesn't market itself primarily based on entertainment like JetBlue and Frontier do. Even if customers were only charged $2 or $3 on a flight, that could still raise hundreds in revenue that AirTran otherwise wouldn't receive.

Even though customers prefer airlines that provide free amenities, it simply doesn't make sense for LCCs to do that in a stagnant revenue environment where legacy carriers are much more cost-competitive than they were several years ago. LCCs need to find ways to raise additional revenue, and in the wake of Skybus charging for many of these previously free services, the airline has paved the way for many other LCCs to start doing the same. As customers get used to paying for checked luggage, seat assignments, or in-flight sodas on Skybus, then other airlines will have fewer difficulties getting customers to accept these new fees. LCCs that market themselves primarily on the basis of low fares, such as Southwest, AirTran, Spirit, and Alaska (which, to be quite honest, is hard to classify as either an LCC or a legacy carrier), are the most likely candidates to implement these new fees. LCCs that attract customers less on the basis of fares, and more on the basis of their amenities, including JetBlue and Frontier, will be less likely to adopt some of these ancillary revenue streams because they could hurt their brand and discourage airline loyalty. While more fees may be one more hassle customers will need to deal with when flying, greater adoption of more ancillary revenue streams, including fees as well as commissions, may enable many LCCs to continue making money in the face of higher costs and marginally increasing fares.

Midwest and Northwest Announce Codeshare Agreement

Midwest Airlines and Northwest Airlines announced an important codeshare deal today that will bring important benefits for both carriers. This codeshare agreement will enable Northwest to sell tickets and award Northwest WorldPerks frequent flyer miles for flights operated by Midwest Airlines and vice versa. As a result, both carriers will offer more flight and frequent flyer options to their customers, helping to build loyalty in a fiercely competitive market. But aside from that benefit, one virtually all codeshare agreements bring, this codeshare agreement contains unique benefits for both Midwest and Northwest.

For Midwest, it will help the airline diversify itself and steer clear of AirTran's hostile takeover bid. Midwest is struggling to survive in the midst of AirTran's bid, and it recently has tried to diversify itself by adding flights on 50-seat regional jets and expanding its mainline flight offerings. But nevertheless, Midwest is still a viable takeover target for AirTran, and so it's essential for Midwest, if it wants to remain an independent company, that it try to maneuver in such a way that makes it difficult for AirTran to execute its bid. While AirTran has a marketing agreement of its own with Frontier Airlines (which has many of the same benefits and drawbacks as a codeshare agreement, but without the technicality of putting one airline's code on another's flight), AirTran is resistant to linking up with other carriers through codeshare agreements, since these agreements can increase costs and decrease expansion opportunities, even if they have the potential to increase revenues. It's also a very different thing for a low-cost carrier (LCC) to link up with another LCC, which is what AirTran is doing, than for an airline, Midwest, which is not an LCC (but not a legacy carrier, either) to link up with a legacy carrier. As a result, this agreement may make Midwest a less attractive purchase in AirTran's mind. But, the agreement is also beneficial for Midwest, since it enables the airline to demonstrate that it's committed to the interests of the Milwaukee and Kansas City public. The codeshare agreement covers international destinations, as well as cities in Alaska and Hawaii, which Midwest has no intention of serving in the near future. But rather than ignoring the demand for those markets, Midwest can raise revenues and offer customers some of the benefits of Midwest, such as Midwest Miles frequent flyer miles, without making the enormous investment to serve new markets. As a result, Midwest creates the impression to customers that it's a larger, more important airline than it actually is, which is exactly the impression it needs right now as it tries to maintain customer loyalty and customer support for its battle against AirTran.

For Northwest, the agreement enables the carrier to concede defeat in some Midwestern markets, especially Milwaukee. A couple years ago, Northwest tried to develop a focus city operation in the city, but was crushed by competitors, primarily Midwest Airlines. Northwest's focus city operation in Indianapolis has succeeded, and this agreement enables Northwest to keep Midwest out of that valuable market. Also, the agreement will help boost Northwest's loads on flights to Hawaii, since passengers can fly Midwest to a city where Northwest offers nonstop service to Hawaii, and then fly Northwest the rest of the way. But even though Milwaukee was an unprofitable location for Northwest to launch point-to-point flights, it's still an important market for Northwest for geographic reasons. Milwaukee is right in between Northwest's two largest hubs, Minneapolis/St. Paul and Detroit, and Northwest controls much of the market in the Midwestern US. Northwest has a lot of frequent flyers in the Milwaukee area, because Northwest offers the most frequent and convenient service from Milwaukee to faraway destinations, via its Minneapolis/St. Paul and Detroit hubs. And Northwest wants to provide those loyal flyers with the most options possible, especially where Northwest itself cannot provide them. This is true particularly with domestic flights, where Northwest offers a weaker network than some of its competitors. While Northwest offers connecting service from Milwaukee to most markets in the US, many business travelers are demanding nonstop flights. And since Midwest can provide them, and Northwest can't, Northwest made a smart decision to codeshare with Midwest, and offer customers more domestic options from Milwaukee and Kansas City.

While it's too early to determine whether this relationship will work, it will certainly have an effect on the market in the Midwest. Northwest and Midwest will still compete, no doubt, but it's less likely that either airline will invade the turf of another. Both airlines are relatively weak and vulnerable right now, and it's to neither airline's advantage to fight with the other. Instead, the market has been carved up, Northwest will stay out of the point-to-point market in Milwaukee and Kansas City, for the most part, and Midwest will stay out of the point-to-point market from Indianapolis, a Northwest focus city in the region, as well as Northwest's hubs. Northwest hopes to lure travelers on international flights, while Midwest plans to focus on the short-haul regional and domestic markets. It's indicative of how these airlines plan to grow their respective operations in the next few years. Northwest recognizes that it will be more profitable to fly internationally where demand is increasing and fares are high, instead of domestically where fares are still relatively low, and demand is flat. Midwest recognizes that as a growing company, it can capture a larger share of the domestic market, even if the market itself isn't growing, and the airline can maintain a fare premium to cover the added costs of domestic flights, provided it continues to offer a superior product to customers. This codeshare agreement is also indicative of the necessity airlines feel to diversify their offerings to customers. With more and more competition, offering choices is what builds loyalty, and both Midwest and Northwest are doing that with this agreement. As the market becomes increasingly competitive, more codeshare agreements will likely be formed in order to keep airlines profitable, and their market shares in certain key cities intact.

David Neeleman Ousted as JetBlue CEO

David Neeleman was ousted as JetBlue's CEO in a surprise announcement today. He will be replaced with the company's longtime COO, Dave Barger. To put it simply, this is a major mistake for the company. Even though Neeleman blew it when it came to the Valentine's Day debacle, he is still the best person to run the company. The popular rationale for this announcement, which is probably true to an extent, is that JetBlue's board believes that now that the company has reached a certain size, it needs a person at the top who is more operations-oriented instead of vision-oriented. It was Neeleman's vision that many believe caused the mess on Valentine's Day, because the company grew too quickly without the proper emergency support systems, and it didn't cancel flights because of Neeleman's creed that customers prefer a heavily-delayed flight to a canceled one.

But while this departure may satisfy the board in the short-term, I suspect that in the long run, the board will regret its decision. The airline industry in the United States is very, very competitive right now (as if there were a time in recent memory when it wasn't), and operating a good airline is very important in order to retain customers. Unless the operation is run well, customers will have no reason to return. Given all the hassles flying entails these days, with weather delays and security hassles, any problems being caused by the airlines themselves are looked at with closer scrutiny by customers. Operations will destroy an airline if they aren't dealt with well (Ryanair may be the lone exception to this rule), and it's why Southwest Airlines has been so successful over the years. Southwest has a very simple business model, and has executed it very well with high on-time arrival rates and few mishandled bags.

If David Neeleman didn't run a good operation, then JetBlue would not have succeeded as well as it has. For example, Neeleman instituted a policy at JetBlue that required notification of headquarters if baggage delivery took more than 20 minutes. He also has been very generous with vouchers for free travel, even before the Valentine's Day incident. Passengers routinely receive vouchers if their in-flight entertainment doesn't work, a gesture passengers rarely see at other carriers. And he has created a company that provides some of the best customer service in the industry. There is little doubt in my mind that Neeleman has run a fantastic operation up until the Valentine's Day meltdown. That's not to suggest operations at JetBlue have been perfect; the airline has one of the lowest on-time performance ratings in the industry (partly due to JetBlue's concentration of flights in the Northeast, which is frequently hit with storms), although Neeleman has been working to correct that by scheduling flights with longer turnaround times to compensate for delays. Neeleman has learned from his mistakes during the Valentine's Day incident, and he deserves a second chance. Removing Neeleman won't help solve JetBlue's problems and it's unlikely to boost JetBlue's brand in the eyes of most customers. Even though he hurt the company tremendously because of the enormity of his errors that weekend, he is uniquely qualified to lead JetBlue forward, and the Board of Directors failed to recognize that.

What is needed in this industry right now, because of the intense competition within, is vision. JetBlue went on a mission over seven years ago to "bring humanity back to air travel". They did a very nice job of that, and they need to do that again. Flying has become much more difficult in the years after 9/11 due to longer lines at airports, more planes flying with an insufficient number of air traffic controllers to handle them, and hassles associated with more time-consuming (though not necessarily more rigorous) airport security. JetBlue needs to innovate once again, and only Neeleman is capable of doing that. The transition from Neeleman to Barger is symbolic in JetBlue's development as a company. This transition will help mark the moment JetBlue stopped being a start-up airline focused on innovation and instead becoming a mainstream airline focused on survival.

Innovation is what enabled JetBlue to develop such an enormous following from customers, and it's what enabled the airline to survive in the face of massive competition on the East Coast. Granted, JetBlue may not be able to make nearly as many innovations in the next seven years as in the previous seven, but it's essential to JetBlue's survival that the airline finds new ways to keep customers happy. Legacies have been able to gain and retain customers, particularly business travelers, with more amenities (such as premium classes), more extensive schedules and route networks, and attractive frequent flyer programs. Southwest, Frontier, AirTran, and Spirit have been able to gain and retain customers mainly due to low prices and simplicity of service. JetBlue is able to attract customers because it can find a happy medium between the two extremes. JetBlue offers low fares and plenty of amenities. But JetBlue's fares are typically higher than those of other LCCs, and if JetBlue fails to innovate, then the airline will be unable to maintain its price premium of $10-20 on a round-trip ticket. Other LCCs are adding amenities in a bid to compete, look at Virgin America (with first class seating and a fancy entertainment system) or AirTran (with business class seating and XM Satellite Radio). An innovation price premium is how JetBlue is making its money right now, and unless JetBlue tries to remodel itself and lower its costs substantially, the airline needs that premium to survive. Operations are important for retaining customers with any airline, but in JetBlue's case, innovation is just as important. I wish the best of luck to JetBlue, because I see trouble ahead if competitors can innovate more quickly. Neeleman can innovate; he has a track record of doing it. Barger may be able to, but in my mind, he's a much bigger wild card for the company than Neeleman is. Given the level of competition in the industry right now, the transition isn't worth the risk.