Legacy Airlines Making Cuts To Deal With Record Fuel Prices

As evidenced by yesterday's Delta announcement that the carrier will trim 2,000 jobs and reduce its domestic flying, many airlines are feeling pressure to shrink in the face of high fuel prices. Moreover United and Northwest have issued warnings that legacy carriers may need to shrink in order to survive by trimming routes that simply aren't profitable with such high fuel prices, especially those on higher-cost regional jet aircraft. Carriers are starting to feel the pinch. The question is, will these cuts be enough?

Perhaps the greater uncertainty that carriers face is not what the price of crude oil will be tomorrow, but rather what demand will be for air travel, particularly from business travelers, in the coming months and years, given a slowing economy. While the rise in oil prices hasn't helped the economy, most of the reasons for the recent economic slowdown are independent of oil prices, and so airlines are feeling a double-whammy from the economic slowdown and the recent rise in oil prices. What airlines have been able to count on in recent years is that demand is still strong, both from business and leisure travelers. But with a slowing economy, many businesses may try to reduce travel expenditures. Many travelers who work for small businesses or others who have unmanaged travel accounts provide lucrative yields to carriers. But their employers could be hit hardest by an economic downturn, and may have less of an ability to keep funding pricey travel. This would challenge airlines, especially because business travelers have a greater ability than leisure travelers to deal with the fare increases that airlines have had to impose due to rising fuel prices. As a result, many legacy carriers, are looking to expand abroad, where they feel demand will pick up more in the near future. Whether this is true or not is unclear, but there are two key drawbacks that carriers need to be aware of with regard to this expansion.

The first is that many of these long-haul flights, while offering higher yields, also have higher fuel bills to go along with them. Many of the new destinations that carriers are adding, in East Asia for instance, have 12+ hour flight times, which burn a tremendous amount of fuel. Moreover, many legacy carriers are operating these routes with older 767-variant aircraft, which are less fuel-efficient than the newer 777s. And with only 2 US carriers placing orders thus far for the fuel-efficient 787 aircraft, it may be awhile before US carriers can significantly reduce their international fuel needs. While legacy carriers can afford these fuel bills for the time being, because the yields are higher, many of these routes could be cut too. Many legacy carriers are expanding to new markets, markets that have little nonstop service to the US. Adding service to a market that has little nonstop service to the US offers greater risks and rewards than would a flight on an already-established route. With the heavy demand on fuel resources that international flights require, many carriers may not allocate a sufficient amount of time to let their new flights gain enough demand to a point where they can be profitable, because the initial losses will simply too severe due to high fuel costs. Any route takes time to gain demand and become profitable, but in this environment, airlines may be more risk-adverse. This may have good short-term implications for airline balance sheets, but if the new international markets airlines tout really do warrant service to the US, then other carriers, foreign carriers, may make the leap to start service and get a valuable head start on US carriers in terms of gaining market share.

The second drawback is this expansion of service by foreign carriers in US markets. In many cases, these foreign carriers have higher product and service standards than their US counterparts, especially in first and business class, allowing them to gain additional high-yield passengers, even if they start service on a route after a US carrier starts service. Moreover, foreign carriers often offer nonstop service where US carriers offer hub-and-spoke connections (though this works both ways, depending on the routes, since passengers can connect in the US on American carriers or abroad if flying on foreign carriers). Many passengers would prefer to spend five hours in Frankfurt than five hours in Chicago. US carriers have tried in recent years to upgrade their cabins to compete with foreign carriers, but sadly, they have fallen behind in many areas, and this could impact their ability to make international routes as profitable as they desire.

Legacy carriers have done nearly all they can to reduce costs. There are no major cost cuts they can make, and any further cost cuts will either shrink the size of the carriers, or trim operations that shouldn't be trimmed for the long-term benefit of the company. What will need to happen now is that these carriers will need to look into the future and see how they can best position themselves towards these new realities. As much as legacies would like to believe that fuel prices will dramatically decrease, oil over $80 is a new reality that carriers need to adapt to. This means that carriers need to rethink their expansion as well as their new aircraft purchases and timing. Expect increased pressure from airlines around the world on aircraft manufacturers to create an aircraft that can deliver dramatic fuel efficiency gains. Moreover, airlines may exert continuing pressure on government to offer better solutions to energy policy. This isn't a problem we can drill our way out of, but rather one where established alternative energy solutions need to be implemented (such as electric vehicles) so oil can be used for industries where serious alternatives do not yet exist (such as aviation). By reducing the pressure on oil prices from automobile drivers and other oil users, airlines will see lower crude prices. But that will only come when airlines and other large companies lobby for a comprehensive national energy policy that takes renewables seriously. If the airline industry is to thrive, oil prices will have to come down, and the only way to do this is to reduce demand. Ultimately, this is where the solution lies.

Lufthansa Adds Seattle-Frankfurt Service

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

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

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

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

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

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

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

US Airlines Offer Bids in Fight for China Flights

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

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

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

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

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

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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.

US/EU Open Skies: Benefits and Drawbacks

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

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

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

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

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

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

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

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

United Receives New China Route

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

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

Is Ryanair the "Low-Fare, High-Emissions" Airline?

On Thursday, Ryanair's bombastic and slightly megalomaniacal CEO Michael O'Leary claimed that Ryanair is "the greenest in Europe." This came in response to comments from UK environment minister Ian Pearson who claimed that "When it comes to climate change, Ryanair are not just the unacceptable face of capitalism, they are the irresponsible face of capitalism." The debate in Europe over aircraft emissions is in stark contrast to the nonexistent debate in the United States, or in most of the remainder of the planet for that matter. Even though aviation accounts for only 2% of total greenhouse gas emissions, it is a figure that is growing rapidly, especially in Europe, where the continent is in the midst of a love affair with budget airline travel. Europe is doing the right thing by talking about climate change and forcing airlines to adopt restrictive, but necessary policies that will help reduce greenhouse gas emissions. What the debate centers around is an emissions trading scheme sponsored by the European Union (EU) that would include airlines in a wider pool of greenhouse gas contributers and force them to reduce emissions. The new restrictions would include all flights within Europe by 2011, and all international flights (including on foreign carriers) departing or arriving at an airport in the EU by 2012. Currently, the EU emissions trading scheme has been somewhat of a failure. When the first phase of the program commenced in 2005 with CO2 emissions from some industrial facilities including power plants and paper mills being targeted, governments were too lax with emission caps. Because they caved to industry pressure, the price of CO2 emissions fell sharply on the open market after it became apparent to most observers that caps governments set didn't force industry to change significantly, and consequently, there was little demand for the credits. The current price for a one-ton credit is around five Euros. Back in April 2005, it was over 30 Euros. An emissions trading scheme that involves airlines will need to build off of this experience by imposing strict limits on airlines, stricter than many industry observers, including myself, really want. But they are limits that are likely necessary to prevent an increase in greenhouse gas emissions the planet simply cannot handle right now.  

The next phase of the emission trading scheme will commence in 2008, and this second phase plans on including all sources for all greenhouse gas emissions, including aviation. The program would not only target CO2, but also a wider array of greenhouse gasses that are causing climate change. The scheme will require airlines to reduce emissions, period. EU politicians feel that the only significant way to reduce greenhouse gas emissions is to reduce the amount of air travel that takes place. Many countries already impose high taxes on air travel, and some governments plan on going further to impose more taxes. However, that won't be enough to help slow the growth in air travel. The emissions trading scheme will allocate airlines a certain number of emissions credits based on their current emission levels. The EU will set certain emission targets for these companies, and companies that fail to meet these reduced targets will be forced to purchase credits on the open market from companies that exceeded their targets by cutting more emissions than required. This could, unfortunately, lead to a lot of problems in European aviation. For one, it could punish low-cost airlines like Ryanair and EasyJet that already use new aircraft, and would have difficulty meeting emission reduction targets without cutting routes. The EU targets could favor the old guard, state airlines like SAS or Lufthansa that use some older, inefficient aircraft. It would be easier for these airlines to replace their older, more polluting aircraft, with newer aircraft, while still maintaining routes and frequencies. If the new EU regulations came into force, it could prevent airlines from expanding their routes and frequencies. Airlines would have a much higher threshold for starting service on a new route, and it would likely force that airline to trim service on another route. It would make it especially difficult for budget airlines to start new routes. The key for all airlines would be to increase load factors and make the most of the frequencies offered on a certain route. But part of the push by the EU and governments is to convince people to consider alternative methods of transportation, or to just not take the trip. If they can do that successfully by implementing higher taxes and increasing subsidies to rail, a much cleaner source of transport, then all airlines will have less of a need to grow. Commercial air travel could become the dominion of the wealthy. While that won't happen overnight, in ten years, airlines like EasyJet and Ryanair could get hit especially hard if governments increase taxes on air travel. Those taxes hit budget airlines the most since their passengers are far more price-sensitive than the clientele of state airlines, and it could reduce people taking spur-of-the-moment weekend getaways, or any vacations by air for that matter, if air travel becomes prohibitively expensive as Ryanair and EasyJet are forced to purchase expensive pollution credits.

But governments need to be careful. Many governments are unfairly taxing long-haul travel, which is typically more of a necessity. Often, people can go without taking short-haul trips, but if somebody is willing to subject themselves to 10+ hours in the back of a cramped airplane, there's probably a good reason why they're going. While long-haul travel does pollute more, it does more to help a country than short-haul travel. Long-haul flights have been shown to strengthen the economies of both countries significantly, often boosting the economies of both countries by tens of millions of dollars (or Euros) a year. Taxing passengers who are more likely to be businesspersons helping the economy, not vacationers, seems a bit counterintuitive. There are certainly long-haul budget flights, and they are a problem. Charter airlines like Monarch offer cheap flights from Britain to vacation destinations in North America, Africa, and Asia. Corsair does the same from Paris. Governments may be wise to start taxing long-haul passengers based on their destination (or origin, if they are entering the country). Destinations in the West Indies would see huge taxes, while Tokyo or Taipei would see lower taxes. It also has to be a flat fee, so passengers who fly on more expensive tickets don't end up paying more than passengers who pay less. It is discriminatory, but it would be an effective policy that would allow governments to tax the people they want taxed. Taxes on air travel are meant in part to discourage people from taking the trip, just as taxes on any kind of consumption are meant to help discourage overconsumption. Vacations are voluntary and business travel is voluntary too, but it's necessary to support the economy, and European governments want to do all they can to help businesses, given the economic difficulties Europe has had recently. Governments also need to remember that in most cases, long-haul air travel is the only option. Europe has a brilliant train network that, in most cases, can replace short-haul flights even though it typically takes longer to travel by train. Trains aren't an option for traveling to Shanghai or Sydney, neither are ships. Sadly, air travel is the only way to access many faraway destinations, and if people need to go to these destinations, they shouldn't be penalized for taking the only realistic method of transportation available.

But budget airlines deserve to be defended. Is Ryanair Europe's greenest airline? In some ways the answer is yes. Ryanair has purchased new fuel-efficient 737-800 aircraft and maximized the amount of seats onboard, jamming in 189 seats while reducing the amount of weight the plane carries (saving on fuel cost) by removing seat pockets, window shades, and strictly limiting the amount of carry-on and checked luggage passengers can carry. Most airlines only seat around 150-160 passengers on a 737-800, so Ryanair can, in four flights fly about as many passengers other airlines can in five flights. Although Ryanair's heavier aircraft will use more fuel per trip, it's still more fuel efficient (though far less comfortable) to fly on Ryanair than to fly on another airline that has a more spacious seating configuration. In fact, a Dutch consumer group recently rated Ryanair as Europe's "greenest" airline in terms of emissions released per passenger. But something is missing from that analysis which is very important. Ryanair skirts "high-fare" airports in favor of airports farther out from metro areas, out in areas inconvenient for many passengers to access because they often lack rail connections. For example, Ryanair serves Beauvais airport in Paris instead of closer Charles De Gaulles or Orly. What is significant about this is that passengers spend much of their time and energy (literally) getting to these airports. Passengers must either drive, using polluting automobiles, or take shuttles that Ryanair arranges. While fully-loaded buses are far more efficient than an automobile per passenger, they are still polluting, and more so per passenger than a fully-loaded train. Most airports in Europe that are considered a city's primary airport are typically connected to the city center by rail. In Paris, both Orly and De Gaulles are connected to the Paris RER metro system. Beauvais is only accessible by vehicle. The same story is true at other Ryanair bases across Europe. In Frankfurt, Rome, Milan, Barcelona, and Glasgow, just to name a few, the airports Ryanair serves lack convenient rail links to the city center, while the main airports that "high-fare" airlines serve feature easy rail links to the city center. EasyJet has higher emissions per passenger since it flies smaller planes that, although packed with seats, are less efficient per passenger than Ryanair's 737-800s. They rated in the #4 spot on the Dutch chart. But EasyJet is much better than Ryanair about flying to airports that are convenient to city centers, preventing polluting transfers in buses or automobiles. While EasyJet serves some Ryanair airports that are without convenient rail links, such as Rome Ciampino, EasyJet serves central airports in Barcelona, Glasgow, Milan, Paris, and in many other European cities. While the amount of pollution saved by avoiding an automobile transfer probably doesn't make up what is lost by flying in a less efficient aircraft, EasyJet passengers should still feel comfortable flying with an airline that is very green.

What is occurring in Europe with the implementation of the EU emission trading scheme is part discrimination, part good governance. Ryanair is a target politicians love to bash. Politicians, particularly in Britain are fed up with people complaining to their MPs how they can't get compensation from Ryanair when they were stranded because their flight was canceled. There's a lot of anger at Ryanair in particular by passengers, and by politicians. Other budget airlines like EasyJet or Air Berlin seem to carry more favor with passengers and politicians. Politicians in the EU feel a certain national pride in their national airline and they should, even though most national airlines today are mostly privatized and obtain little or no government support, although the government is still a big shareholder in some state airlines such as SAS. This system for decades that involved heavy subsidies to state airlines to keep flying unprofitable routes with high fares so countries would have a source of pride, the right to brag that a German can fly all the way from Frankfurt to Nairobi nonstop. Airlines like Ryanair not only violate the admiration people have for air travel as a point of national pride. Ryanair violates a system that worked for people like EU bureaucrats and the well-off. Ryanair broke the unspoken rules and created an airline that served the people, but not necessarily the national interest. That's why Ryanair's been so successful. But many, including many politicians and EU regulators believe airlines like Ryanair tarnish the experience of flying and bring every football hooligan from London to Dublin for three quid. Ryanair has done a lot of good, making flying more democratic, but they have also made flying more painful in the process, and EU politicians don't like that. They don't like that laypeople now expect that they can use air travel to get to every city in Europe, because they won't want to give it up. Even though many disgruntled Ryanair or EasyJet passengers complain about poor customer service and canceled flights, they like cheap flights and most of those disgruntled passengers will continue to use them. That's why Ryanair and EasyJet are growing at record rates, and will continue to do so. When people have something they like, they won't want to give it up, and it will be very difficult for Europeans to end their love affair with budget flights. But if the EU does the right thing, and if governments of member states act according to the plan in good faith (I cannot overemphasize this point, without government support that imposes strict rules on industry, no climate change policy works, just look at Kyoto) and the organization moves forward with the program, it will mean a very important step for aviation climate change efforts globally. But not only do governments in Europe need to work with the plan, airlines around the world that serve Europe need to accept and support the program. Some American carriers that serve Europe are considering legal action to prevent the program from being enforced on foreign airlines that fly to Europe. If the EU starts forcing U.S. carriers to cut emissions on their European flights, it could give these carriers an opportunity to adopt more fuel-efficient aircraft, like the Boeing 787, or it could give these carriers good reason to raise fares and trim service to Europe. Hopefully the EU will take a tough stand with all foreign carriers, but it could be a tough fight, and the U.S. government could get involved if American carriers lobby for the government to intervene and negotiate with the EU for a fair deal. If the 27-member European Union can move collectively to force airlines to cut emissions, then hopefully it will set a good example for governments in other countries, especially the United States, that they have the ability, and they must exercise that ability, to force airlines to reduce their effects on climate change.