Three Carriers Report Results--And A Note About Checked Luggage Policies

Alaska Air, US Airways, and JetBlue all reported first quarter earnings today. Alaska and US Airways reported quarterly losses, whereas JetBlue reported a profit, albeit a small one. The results were hampered by fuel hedge losses recorded in the quarter, though most carriers have detached themselves from most of their fuel hedge obligations, so in future quarters these losses will diminish (assuming the price of oil stays low). The results were a bit better than expected, and a promising sign for the upcoming summer months.

I wouldn't post about these earnings, because I don't have too much insight into them, except for one thing I found interesting in the results of both Alaska and US Airways. Both carriers used the date of their earnings releases to announce revisions to their baggage policies, and both policies will ultimately result in greater revenue for each carrier. US Airways will offer the option of online payment for checked baggage fees. If a passenger chooses not to pay online, there will be an additional $5 fee at the airport. Alaska will add a $15 fee for a first checked bag, bringing it in line with legacy carriers, though distancing itself from Southwest, which currently permits passengers to check two free checked bags. However, the nature of these moves differed.

US Airways added an additional restriction in their policy without adding any value to it whatsoever. Customers that had checked bags before for $15 or $25 will now have to pay more if they don't pay online. Not only is there no value added, but ostensibly, there is no reason why US Airways needs to add this charge now. The summer travel season is coming, meaning higher revenues, and fuel prices are at low levels. The economic crisis has been hurting airlines for the past several months, and though it's not clear things will get much better anytime soon, the business travel environment doesn't seem to be getting significantly worse. A more reasonable policy that would have added some value might have been to add the charge, but then offer customers who pay online a discount on the bag fee or bonus frequent flyer miles for the first few months. That way, US Airways could have seen whether the charge would be added by other carriers and either retreat from it if they were at a competitive disadvantage, or get rid of the discount after other carriers had added it.

What this new policy indicates is US Airways' aggressiveness to nickel and dime its passengers. In a similar move to add a new fee without adding any benefit, US Airways added fees for onboard soft drinks several months ago. The carrier was forced to retreat from this policy after the charge wasn't adopted by other carriers and frequent flyers complained. Nevertheless, US Airways is basing its survival on being able to charge customers for added services, and will continue to try and take the lead in adding new fees and charges in order to raise ancillary revenues without giving customers anything in return.

Contrast this with Alaska's new policy that will charge customers $15 for a first checked bag. What is interesting is that, although Alaska may be putting itself at a competitive disadvantage against Southwest, the carrier is offering their customers something for that extra fee--namely, a $25 discount off future travel or bonus frequent flyer miles if a customer checks in a bag and it arrives at the carousel more than 25 minutes late. Yes, customers are paying for a first checked bag, but at least the carrier has made an attempt to save face, to offer a perception of value even though the value of discounted travel certificates and frequent flyer miles awarded under this policy will be far far less than the new bag revenues collected.

Adding ancillary fees does not mean that airlines cannot do it in a customer-friendly manner, where customers feel that they received something extra for a service that was previously free, even if that something extra is only a nominal cost to the airline. This is something Southwest might want to take note of. Southwest could still maintain a consumer-friendly image even while moving to make itself competitive with other carriers. They are the ones that are putting themselves at a disadvantage, by having to match the fares of their competitors without the lucrative ancillary revenue streams their competitors use. I wouldn't be surprised if in the not-so-distant future, Southwest adds some limited new fees, though not necessarily for checked bags. Perhaps when they report Q2 earnings, airlines seem to like to appease their investors that way...

How Short-Sighted Management has Seriously Damaged the Industry (and some solutions on how to remedy this).

Editor's Note: I've been a bad blogger lately, and I apologize to my loyal readers. I haven't had a substantive post since May, and now we've reached August. How time flies! While I hope to post more often, the nice weather might prevent me from getting more work done on the computer, so posts may be less frequent than desired for the next few weeks. Also, I hope to post selected pictures of my Ecuador trip soon.

The airline industry has problems that no other industry does. For some reason, the airline industry has difficulty adequately matching capacity with demand, and as a result, business cycles and unexpected turns of events seem to hit the airlines much harder than other sectors. There are many reasons for why this may be true. But first and foremost, airlines offer a product that is both essential to the economy, and is one that is constantly in greater demand. Low-fare carriers have succeeded because they have been able to reduce the cost of air travel for those who otherwise couldn't afford it. Ryanair, which has succeeded in reducing fares more than any other carrier, has seen extraordinary growth, because people simply cannot get enough of air travel. After purchasing one car or cell phone, a consumer may have all he or she needs of those products for several years. It's much harder to increase milk sales by lowering prices than it is for airline tickets.

Consumers have limitless opportunities to fly, and airlines have succeeded in convincing them that it's a good use of money, partly because it's more convenient and comfortable than other forms of transport. Nevertheless, as costs rise, this myth will be shattered. Americans will still want to fly, but it will require more and more money. What airlines will hopefully realize is that they will be more profitable companies by offering fewer flights, targeting business travelers and those who are willing to pay for it. Capacity reductions are already starting to come into place that would help achieve this, but it could be too little, too late. Fuel prices have reached such stratospheric levels that most major US airlines will likely burn through their cash reserves in the next few years.

As legacies are at a substantial cost disadvantage with the hedging Southwest, instead of targeting their core customer base, their most frequent flyers, and improving their service, legacies have eliminated many of the perks that these travelers have come to expect, in the name of revenue generation. Known as "unbundling" it's a strategy that Ryanair has perfected (to the ire of much of Europe's flying public), by charging for many services that airlines offer, aside from the flight itself. Charging for checked bags, food, pillows and blankets, and anything else that isn't bolted to the cabin, seems to be the trend. In fact US Airways' new policy is to charge for all beverages onboard. This will even keep free water out of the hands of passengers, except in cases of medical emergency; bottled water and sodas onboard now cost $2.

Yet the fact of the matter is, some of these charges are overreaching, offering airlines far more in bad press than new revenues. Airlines need to maintain their reputations, and they need to maintain low fares. This is the dilemma that carriers face. Yet if carriers adopted a better yield management system, I suspect it could generate just as much, if not more than some of these extra charges. That means offering more deals at the last-minute to fill seats (but making them restrictive enough to prevent their usage by business travelers, whom the airlines need to pay full fare). If airlines aggressively move to fill seats on less popular flights, targeting flights individually, and ensuring that the plane will be as full as possible, additional revenues can be created. It also means further reducing frequent flyer award seats on popular flights, to allow more room for paying clientele. Moreover, increased overbooking, when possible, should be practiced to better fill seats. All these moves will likely be bad for passengers, but they won't deliver the continuous negative publicity that these fees seem to generate. They also will not interrupt the onboard service experience that passengers demand. Airlines are already working these angles, but let's face it, filling one additional seat on a plane at $100 could cover 50 $2 soda sales; they can do more.

Some might argue that the "unbundled" strategy airlines are adopting is what customers want. I don't buy that. Skybus' demise proved that the completely unbundled model cannot work in the US, at least with the high fixed costs that airlines currently face. Yet that seems to be the model many legacies are now replicating. There are services many airlines used to offer (and that a few still do) that weren't being effectively utilized by customers, and there was a great deal of waste. Some examples were airline meals and restrictions enabling customers to check two or even three pieces of checked luggage free of charge. Everyone was paying hidden costs in their ticket prices for services that a select group of customers was taking full advantage of. These are services that should be charged for. By most accounts, after US carriers started offering buy-on-board meals, fewer people ate onboard, but the food was of a better quality.

However, other services, including one free checked bag, snacks and drinks onboard, and free booking of award tickets (without some of the surcharges that certain carriers have recently imposed) should be things that all US legacies offer. These are basic comfort and service amenities that airlines need to retain loyal customers. Frequent flyer award tickets are hardly free if customers must pay to redeem the miles. Spirit and Allegiant will always be the deep-discounters in their respective markets, and charge for everything, but those carriers that are shooting for higher yields need to offer more services included within the ticket price.

True, airlines have yet to impose many of these charges on their most loyal customers, with high elite status or those paying full-fare. But it's not merely the charges themselves, but rather the impression they create to customers, that may hurt loyalty, even with customers unaffected by the charges. Continental, for instance, has resisted adding fees for a number of services. This is in part because of the company's concerns that they could disrupt operations, both on the ground, and in the air, as those passengers affected by the fees resist the changes, causing potential delays or turmoil in the cabin, affecting everyone's experience.

The ability of airlines to cut costs in this environment is rather minimal, without shrinking the size of their businesses. Instead, airlines need to focus on better yield generation. That does include some of the charges being proposed, but it also includes fare increases, and a concentrated effort to fill planes during less-traveled periods. The unbundled strategy has gone too far, and the reputation damage has been done. Airlines need to be extremely cautious going forward about adding additional charges, because discretionary air travel will decrease if the experience becomes too painful, and business travelers will be more willing to consider other options of transport (or conducting meetings).

Potential 2008 Merger: United and US Airways

After Continental spurned United, the latter carrier's best hope of a merger is with US Airways. This merger was attempted back in 2002 before United backed out. But, with fuel costs at such high levels, United and US Airways could make a good pairing. Some fleet and service issues would need to be sorted out, but it could be done. And apparently, it is being done, as merger negotiations are said to be in a "very advanced state".

To start off, I don't think this merger would be as good as the United/Continental deal. United and US Airways have fewer commonalities, and a greater amount of overlap in their systems (in terms of redundant hubs and routes, creating difficulties in network integration). That could make it harder for regulators to accept, but easier when it comes to trimming capacity. I think it would be challenging for the labor groups of both airlines to come together, both of which have been abused by management with substantial pay cuts, and in the case of US Airways, botched attempts at seniority integration. The labor force of a combined carrier would likely be one with lowered morale, and I seriously question their ability to deliver the high levels of customer service that customers expect from United.

The combination of routes and hubs of the two carriers would be a big mess. US Airways has large hubs in Phoenix and Las Vegas, near United's Los Angeles hub, though admittedly, the traffic flows are somewhat different, Los Angeles serving as a jumping off point for a lot of Asian and Latin American services, unlike the mostly domestic focus of Phoenix and Las Vegas. These hubs would have to be consolidated somehow, as it makes no sense for this carrier to operate three separate hubs within a very small radius. What will probably happen is that Las Vegas will receive the bulk of the flight cuts. Any regional/international service, as well as many of its lower-yielding domestic routes could be cut. Las Vegas would be retained mostly as a point-to-point destination, and the combined carrier's operations there would compete mainly against Southwest's point-to-point service to/from the city. Some of the capacity cut from Vegas could get shifted to Los Angeles or Phoenix.

The other primary US Airways hubs are Philadelphia and Charlotte. US Airways has strong market positions in both these cities, and I expect that these would be tougher to consolidate. Because of the functioning of international traffic flows, some regional service in the South could get shifted from Charlotte to United's Washington Dulles hub, and longer-distance domestic routes (such as to the West Coast) from Charlotte could be cut in the face of high fuel costs, with much of that traffic getting rerouted through another hub like Chicago O'Hare. Philadelphia will probably keep most of its current assortment of flights in a merger because of its scale and advantageous position for European flights.

There are some narrowbody fleet synergies, as both United and US Airways operate A319s and A320s, as well as some older variant 737-300s. But, these advantages are mitigated by the fact that United has committed to a Boeing widebody fleet, and US Airways to an Airbus fleet. While this is certainly not a show stopper, it could be a problem, especially if the carrier focuses on international growth. Things could be complicated by the fact that US Airways has orders for Airbus A350s, Airbus's answer to the 787, but the combined carrier will not see those planes for several years, and by that time, the company may have decided that although the A350 is economically beneficial, it's not worthwhile keeping the relatively small subfleet of Airbus widebodies in the overall fleet.

The key is that this merger needs to exploit United's advantages on high-yielding Asia-Pacific and European routes and combine that with US Airways' presence in some key small markets. There are travelers willing to pay $2500 to get from Scranton to Kuwait City, and the combined carrier can make a lot of money off of them. Of course, the combined carrier will need to be prudent about which regional routes it keeps, since much of US Airways' regional network is operated by 50-seat or less jets, which are very uneconomical at current fuel prices. But if the combined carrier can get the right balance of connectivity to an array of smaller destinations with nonstop international flights to destinations few other carriers serve from the US, this carrier will have a winning formula. Hub-and-spoke carriers will survive because they can fill so many different roles. They can't be all things to all people, and US Airways may find that Southwest will continue to gain more market share on Philly to Fort Lauderdale routes. But hub-and-spoke carriers can be in places where there are strong yields, and provided the cost to obtain those yields isn't too high (like it very well may be with some small cities served with 50-seat aircraft or below), hub-and-spoke carriers can be very profitable.

In addition to making sure that capacity is in the right place, and that there is an attractive network for customers, balanced between small, regional, national, and international destinations, the new carrier must also institute systemwide capacity reductions. The combined carrier will have planes that it can easily remove from its fleet (older 737-300s, -400s, and -500s), but whether the company will have the courage to make the necessary decisions is another matter altogether.

United needs to reduce flights to and from its hubs and consolidate its remaining capacity. Because United is merging with US Airways, a legacy carrier billing itself as "low-cost" that offers relatively few amenities compared to its legacy or low-cost competitors, United may decide that it's best to downgrade its own operations and brand. This may not be a smart strategic decision, as business travelers who appreciate comfort and service are likely to be the biggest profit generators for the company, but they may have to begrudgingly accept the financial realities that United faces and put up with a diminished product. By eliminating its Economy Plus section, United could add several rows of coach seating to its narrowbody aircraft, enabling the company to reduce CASMs and consolidate its existing capacity. Seven flights a day between two major cities could be made into five. Overall capacity will decrease, though it will be mitigated by adding additional seats onto each aircraft. It doesn't sound sexy or exciting, but it has the potential to save the company a tremendous amount of money in the long run.

A merger between any two carriers must be used to consolidate the tremendous amount of capacity in the domestic market. Serious cuts will need to be made. The ridiculous proposal that Delta and Northwest made several weeks ago doesn't do this, instead, it tries to keep everyone happy by promising that all hubs will remain intact (the validity of this promise is yet to be determined). All that will do will make investment banks happy, executives rich, and leave our air transportation system in even deeper excrement. While United and Continental had the potential to create a world-class airline, with high standards of service focused on business travelers, the combination would likely have had minimal capacity cuts. US Airways and United have real overlap. Cuts can and should be made. Cuts, made strategically and with an eye towards customer needs, will result in fewer flights, but higher yields, and in the long run, more profits. If it's going to cost hundreds of millions of dollars to put these carriers together, there better be a tangible plan for long-term savings. Getting those hundreds of millions of dollars in savings doesn't result from combining management, it results from company-wide modifications. In a world of $120 oil, no amount of hedging, seat pitch tightening, or aircraft modifications will be sufficient to generate the savings that investors are looking for. Capacity must be cut on mainline domestic routes, as well as on small regional routes (particularly with 50-seat jets). That is the only path to profitability. 

Creating a brand attractive to business travelers, with high levels of service, an expansion of international routes (particularly in the Asia-Pacific region, where United is currently dominant), and frequent flight schedules is also critical. The combined carrier won't survive without loyal customers and those customers won't be loyal without the benefits to keep them there. The combined carrier needs to take seriously its frequent flyer benefits, onboard amenities, and service standards, and make these things a priority in a merger deal. But the airline won't thrive without actively managing its capacity, and that's the key to any merger, not just to a potential United/US Airways deal.

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What Delta and Northwest Need to Change in Order to Thrive

Recently, Delta and Northwest got back to merger negotiations, after having broken off talks due to difficulties concerning the combination of seniority lists if a merger were to take place. The Wall Street Journal reported today that a deal could be announced within a couple days. With airlines suffering from record fuel costs, as well as ongoing maintenance issues, a merger is appearing more attractive to airline executives. Unfortunately, the savings they desire may be elusive. The easiest way to combine carriers would be a holding company combination, where management activities, as well as some airport operations, would be combined, but pilots and flight attendants would operate under separate contracts and probably on separate fleets, at least in the near term. A combination is fine because it allows Delta and Northwest to resolve the two issues that are most important, controlling and adjusting capacity to the realities of $100 a barrel oil, as well as improving the company's customer service.

One of the reasons many managers were looking to merge legacy carriers was in order to consolidate domestic capacity. But a merger wouldn't necessarily allow Delta and Northwest to consolidate a significant amount of capacity in terms of seats. Both Delta and Northwest are in the process of removing capacity from their fleets and there isn't a tremendous amount of overlap on their domestic routes. Internationally, both carriers are expanding, and capacity would increase. However, a combination would allow the carriers to better manage their existing capacity, consolidate some flights, as well as reevaluate service to small markets, that with $100+ oil, may not be profitable. With a combination and a restructuring of the combined carrier's route network, the company could have the opportunity to rearrange its agreements with regional jet contractors, such as Mesa or SkyWest, in order to help the companies reduce costs and capacity to unprofitable markets. Even though the number of seats reduced in the carrier's overall system would be small by the trimming of some regional routes, it could save the carrier a great deal of money.

As the US Airways/America West merger has demonstrated, forcing two sides to a labor agreement that neither particularly likes is a bad recipe for employee morale and customer service. The pilots have still not satisfactorily resolved their longstanding disagreements over seniority agreements. Therefore, instead of a complete merger, a combination of the operations side of the business while keeping Delta and Northwest as essentially separate carriers under one parent company might be a preferable arrangement. Unfortunately, this wouldn't lead to as many cost savings as managers would desire, since larger labor groups, such as pilots, would be covered under separate contracts. But what is critical in this deal, even more than cost savings, is that management cannot force the pilots unions to accept an agreement that one side sees as unfair. Airlines will have to deal with large groups of employees for the indefinite future, and they need to do their best to keep them happy. What legacy carriers especially cannot forget is that with the flying experience becoming increasingly unbearable for travelers in the US, airlines need to ensure that their employees deliver top-notch service. And one of the best ways they can do that is by making them feel valued and treating them with the respect they deserve. This is partly why Southwest is known for its service. Even though the company has more leeway than other carriers in its hiring, because it can select from a broader range of candidates, the airline successfully retains and motivates their employees by keeping them in a work environment that lets their voices be heard. If Delta and Northwest cannot improve their customer service, they will seriously threaten their future viability as businesses.

A carrier modeled under the Air France/KLM combo where the carriers operate separately under a holding company that controls scheduling and pricing for both carriers, would allow Delta and Northwest to adjust their route network to make it more efficient as well as adjust pricing to make the carrier more profitable. Unfortunately, restructuring flights will not do enough for the combined carrier. What airlines in the United States are suffering from is a media deluge of negative publicity. Customers are growing more antagonistic towards the airlines. The recent airline quality survey that came out last week was a typical example of this. Nationwide coverage of increased delays, increased rates of lost bags, and so forth, didn't do much to help the airlines. And Congress has caught onto the act, with front-page hearings criticizing airline executives about safety. To put it bluntly, consumers in this country hate airlines. And with rising prices, customers are getting increasingly irritated with putting up with substandard service that they feel they don't deserve given the exorbitant cost of their ticket.

As a result, the merged carrier needs to re-brand itself, with the Delta name, as a carrier that genuinely cares about service. What we don't know in this market with rising prices is whether there will be sustained demand for leisure travel. Business travel (specifically unmanaged business travel), while perhaps decreasing slightly in demand, is going to be a more important target market for the carrier in the coming years. Moreover, Delta has a very strong presence in large business markets, including Boston, New York, and Washington DC, and by making sure that it offers industry-leading service, comparable with carriers abroad, will help the carrier maintain yields and market share in this turbulent market. Business travelers will otherwise look to LCCs such as Southwest and JetBlue, which are pulling out all the stops by offering business travelers more amenities, better service, higher punctuality, and lower fares. With air travel becoming increasingly burdensome for business travelers, airlines that make the experience as pleasant as possible will be those that will see growth in market share and profits.

This company, if it is positioning itself for a future of more competition, especially from overseas, as well as from LCCs on key domestic routes, and a future of high oil prices, needs to discipline itself on capacity and service. The carrier will likely get Delta and Northwest's route networks integrated into a larger whole, and the company will find way to combine operational redundancies to reduce some costs. But, this carrier will not make money if it has too much excess capacity in the market, as well as too little capacity in growing markets. Moreover, it will not make money if it has poor service, because as has been shown in Europe and Asia, customers, and especially business travelers, are willing to pay more for good service if airlines actually deliver it. Now to get good service, management needs to, for lack of a better term, "be nice" to its employees, especially its pilots and flight attendants. That means these labor issues need to get resolved, or at least get to a point where they won't boil over after a combination. If the combined company can focus on these two areas, capacity and service, not only will it be the largest carrier in the world, it will be one of the best positioned for an uncertain future.

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Potential 2008 Merger: United and Continental

If a Delta/Northwest deal goes through, which is looking increasingly likely, then United and Continental may be poised to join forces to create a formidable competitor. The combined carrier would be the combination of two carriers that have been very successful at maintaining relatively high service standards (for US carriers), even during the service downturn that customers have seen in the past several years, and as a result, each has maintained a solid base of business travelers.

What a combination would do is give this carrier dominance in certain international regions particularly in the Pacific Rim and the Middle East. As an increasing amount of business traffic is being directed to these two regions, the combined carrier would have a distinct competitive advantage over even a combined Delta/Northwest in providing high-quality, frequent service to these, and other, parts of the world.

A merger would likely do little to greatly realign the route networks of either Continental or United, with one notable exception. United has five very large hubs, all generating a significant amount of a high-yield origin and destination traffic and all a sufficient distance away from any of Continental's, that none of them are likely to see any major service reductions. But, Continental's Cleveland hub could see a gradual draw down in service, with the elimination of much of its regional service (or a reshuffling of that regional service to Chicago or Washington). Cleveland for Continental is similar to Cincinnati for Delta. Both are hubs that generate a fair amount of origin and destination traffic, and this traffic generates solid yields. But, the sizes of the hubs are dwarfed by others in the respective carrier's route network, and it's simply inefficient to maintain them should Continental and/or Delta merge.

In addition to some flight reductions at Cleveland, some eventual realignments and shifts in international service could occur. For instance, some international flights could get moved from Washington Dulles to Continental's Newark hub or vice versa depending on traffic patterns to facilitate easier connections from West Coast flights to lucrative international flights. It's also possible that some services to the Pacific could be realigned. For instance, Continental has a small hub in Guam, allowing the carrier to serve Micronesia. But, that hub can only be accessed from Honolulu in the US, whereas a much more convenient connection location for customers might be San Francisco or Los Angeles, because there are much more frequent and convenient connection opportunities for customers.   

Moreover, the merger would offer significant benefits in terms of fleet simplification. United has one of the most diverse fleets of any major US carrier, but since its mainline fleet is mostly Boeing planes, while Continental's mainline fleet is all-Boeing, then the combined carrier will yield some significant synergies with maintenance and training costs due to fleet combination.

If the fleets were combined, United may try to reduce the number of older 737 variants in its fleet, but because Continental also has many of these types, they may have to be kept for longer than either airline would like since it would be difficult to eliminate them outright. One of Continental's largest problems in recent years concerning its fleet has been its lack of 777 aircraft to service very long international flights. As a result, Continental has had to delegate its 777s to just a few select routes. United has dozens of 777 long-haul planes, and these could be added to some long-haul routes currently operated on Continental 767s (typically older, smaller planes) to add capacity and lower ASM costs.

Concerning alliances, the biggest thing that could stop this merger is the "golden share" which Northwest holds over Continental that essentially gives Northwest the right to veto any mergers Continental might conduct. But, if Delta and Northwest merge, Continental could purchase its golden share back from Northwest for $100, enabling the carrier to merge as it wishes. However, it's very likely that Continental will have to drop its codesharing agreement with Delta and Northwest if it merges with United, and assuming that United makes the acquisition, Continental will likely become a member of Star Alliance, leaving Delta and Northwest as the remaining two US carriers that are a part of SkyTeam.

Since it appears United will make the acquisition, I suspect the Continental brand could eventually be dropped, and all operations integrated into United. But like with the US Airways/America West merger, the transition period will take awhile, and so customers and employees need to be prepared. United has a team of experienced managers who aren't as ruthless as those who ran US Airways through its transition period, and the cultures at United and Continental are much more similar than at the old US Airways and America West, so there will probably be less resistance from employees to such a deal, provided management treats them fairly. As a result, even though a United/Continental merger is much larger than the US Airways/America West deal, it should be smoother.

This merger could mean good or bad things for business travelers. Both United and Continental have considerable bases of loyal business travelers who will likely continue to fly with the combined carrier. But, as shown a week ago, when United announced a new $25 baggage fee to its non-elite restricted coach flyers (many business travelers, especially those who fly for smaller businesses will travel on restricted coach tickets), one airline is focused on nickel-and-diming passengers while the other is focused on offering inclusive amenities and providing services to its customers. Continental continues to be the only major US carrier to offer free meals, even in coach, on medium-to-long domestic flights, and the company recently announced a new onboard entertainment system to be installed in many of its domestic mainline aircraft. If the two carriers merge, they will need to determine whether to continue down the path many other US carriers are taking, charging customers extra for services that were formerly free, or offering all-inclusive rates. I would argue that the latter option better meets the needs of business travelers, many of whom already pay exorbitant amounts for their tickets, and who make decisions about which carrier to fly based on amenities and service.

Like all legacy carriers, United and Continental are both moving forward with international expansion planes, while curtailing domestic flying. That's a fine, smart thing to do right now at this time when the economy is stuttering. But, if United and Continental become more international carriers and less domestic carriers, then to win over business travelers, they can't simply outdo other US legacy carriers with lousy service standards. They have to compete against foreign carriers, which on the whole, offer superior service and amenities to business travelers than US carriers. As more and more foreign carriers expand in the US, legacies like United and Continental will have a tougher time winning the patronage of business travelers, which is why a renewed emphasis on amenities, loyalty benefits for high-yield travelers, and most of all, customer service, will keep business travelers loyal. Many foreign carriers don't win over customers based on price, they win them over based on the experience, and since US carriers have less low-cost competition in foreign markets, they don't need to worry so much about winning on price but instead on delivering an excellent experience to customers. If a combined United and Continental can do this, then they will become the leading US carrier, and have a significant competitive advantage over American as well as combined Delta/Northwest.

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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.

Lufthansa Adds Seattle-Frankfurt Service

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

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

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

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

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

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

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

JetBlue and AirTran Gear Up for Lucrative, Risky Winter Season

JetBlue announced a significant expansion of its Fort Lauderdale routes today, with three new routes from the city to Richmond, Raleigh, and Charlotte. These routes, to be operated seasonally on a once daily basis, will help expand the attractiveness of JetBlue in these respective markets, where JetBlue has been reticent to expand beyond routes to New York and Boston.

But more importantly, these new routes will help the airline do battle against a key foe, AirTran. AirTran and JetBlue are planning on expanding more conservatively in the next few years, and that means that both carriers will be increasingly competing on similar routes. The carriers would rather avoid competing with each other, because each has much to lose. As a result, these carriers may try to announce routes where they don’t directly compete, though competition will be inevitable. For example, AirTran recently announced seasonal service between Boston and West Palm Beach, a route that JetBlue currently operates.

The Northeast/Mid-Atlantic-Florida market is lucrative for carriers since the yields low but steadily rising, and the demand is incredibly high. AirTran and JetBlue are likely to add more Florida routes in the coming weeks in preparation for the peak winter season, and this was a smart route announcement by JetBlue because AirTran is unlikely to match it. Moreover, there is certainly a need for these three routes for consumers in Richmond, Raleigh, and Charlotte, as one or two carriers currently dominate those routes.

AirTran and JetBlue will continue to stake out their respective routes in the coming week, in time for the biggest winter travel season Florida has experienced. Both carriers should succeed because the market is so large, but both carriers will need to be prudent about the fares they charge because the consumers are more prudent than ever when it comes to finding the best price and ultra low-cost carriers like Spirit will keep yields low. Moreover, customer service is going to be a bigger issue for consumers than it has been in the past.

Even a minor slipup by JetBlue could do serious damage to that airline’s brand. Many customers understood JetBlue’s mistakes the first time, this past February when the airline suffered its now infamous Valentine’s Day meltdown. But they will not be so forgiving if it happens again, and JetBlue could have serious difficulty containing the fallout. But what is more threatening for JetBlue is the possibility that a major customer service gaffe by another low-cost carrier will stain the LCC segment of the industry.

If AirTran has a customer service meltdown sometime this winter, not only will it hurt that carrier, but it will also reflect poorly on all airlines, but especially low-cost carriers such as JetBlue, Southwest, Spirit, and even US Airways. As a result, carriers will have to execute a delicate balance between keeping fares low and ensuring a steady profit, while maintaining enough customer service staff on the ground to handle potential calamities. Otherwise, if customers get the message that flying is likely to be a hassle and a pain, which could happen if a publicized meltdown occurs, then demand on leisure routes could soften in 2008 onward, giving the industry one more problem it doesn’t need.