Cache of defunct enplaned site by a fan

Monday, March 06, 2006

Great British Design Contest

No, it's not an oxymoron. Via Flight, the BBC is having a contest to choose UK design icons and two of the three semifinalists are aircraft, the Concorde and the Spitfire.

Now, we generally have little time for military designs because they're just not very interesting to us. But in terms of utility, there's no question about which of the aircraft finalists is the most important, and that's the Spitfire. R.J. Mitchell's brilliant Supermarine Spitfire (along with the Hawker Hurricane) were the two main tools RAF pilots used to win the Battle of Britain (never in the field of human conflict was so much owed by so many to so few, and all that). In contrast, all the Concorde ever did was transport I-bankers and other overpaid parasites across the Atlantic quickly. It didn't save the UK -- in fact, one could argue that devoting so much time and energy to this failure was damaging to the UK's aero industry. And it's half-French, what? Not to mention it was a wholly uneconomic technological dead-end, however fast it went.

So between the two aircraft finalists, we don't think there's much choice, and we fully endorse Flight's (unstated, but clear) favorite, the Spitfire (it would be typically British, however, to choose a magnificent failure like the Concorde. The spirit of Scott lives on).

However, the third choice is London's Underground map, and that truly is a design icon. Both useful and undoubtedly iconic. If there's any justice in the world, that will be the winner.

Image: Beautiful and deadly, the Supermarine Spitfire, via Aeroflight.

Boeing Eying Small Jet Manufacture

Flight article says Boeing is clustering 737 replacement studies around two entries, one the traditional 150 seat size, the other in the 90-100 seat size, squarely in the regional aircraft domain. Not great news for Bombardier and Embraer if true. Perhaps Bombardier should have left sleeping dogs lie, rather than promote a (now dormant) proposal for an aircraft that would have competed at the low end with Airbus and Boeing.

The old argument against Boeing getting into the smaller jet arena would have hinged on its high manufacturing costs. Perhaps Boeing has simply driven so much cost out of its processes that this is no longer as great an obstacle as it was. If it has, and if it can offer useful commonalities from 90 seats through the 747-size aircraft, Boeing might be a tough competitor.

Perhaps Bombardier should attempt to become Boeing's partner in such a venture. See our prior post on Bomber's murky future. Interesting to remember that Boeing once owned deHavilland Canada, which later became the turboprop portion of Bombardier's aerospace portfolio.

Ft Worth Alliance Airport: Wright Hypocrisy

Apropos of the previous post, there’s a perfunctory discussion about Ft Worth Alliance Airport (AFW -- picture above) in From Prairie to Planes in which the authors make the incredible claim that AFW was built to relieve the congestion at Dallas-Ft Worth (DFW) airport.

Alliance Ft Worth is an “industrial” airport within the northern city limits of Ft Worth. It also happens to be a major hub for Fedex. AFW was built in the late 80s by the Perot family.

AFW is important to the Wright Amendment fight because it’s arguably an underappreciated example of hypocrisy. In conjunction with building DFW, the cities of Dallas and Ft Worth signed covenants for the bonds that were sold to fund the airport. In it, the two cities agreed not to do anything that would undermine the prospects of DFW. In particular, they agreed to prevent certificated air service at any municipal airport other than DFW. This was the basis for the city of Dallas trying numerous times to shut down Southwest’s service at Love Field in the early 1970s, an effort that was ultimately prevented by court rulings. This is also a significant basis of the fight against further opening of Dallas Love Field.

The interesting thing is that the relevant covenant makes no distinction between cargo and passenger service, yet in 1997, Fedex (which is without question a certificated air carrier) opened its southwest hub at AFW.

Forgetting the legal argument for a moment, the idea that DFW is too congested to host a Fedex hub is ludicrous. DFW is physically one of the largest airports in the world, as anyone who has been there can confirm. Further, DFW has seven (count ‘em) full-size runways. It is not short of runway capacity, even considering that its American Airlines hub is the second-largest in the world (after Delta at Atlanta).

Further, Fedex hubs operate at night, mostly in the early morning, precisely complementary to daytime passenger activity. Not only that, but if Fedex had its hub at DFW (and was paying landing fees for using otherwise lightly-used runways all night) that would reduce costs for all other users of DFW (spreading fixed costs over more flights), thereby indubitably strengthening DFW (so one cannot argue that having Fedex at another airport is somehow neutral with respect to DFW’s fortunes).

We don’t know the exact reasons why Fedex chose to put its southwest hub at AFW rather than DFW, but given that Fedex is presumably a mostly rational profit-seeking corporation, it’s safe to assume that it ultimately boiled down to cost: Fedex presumably thought that AFW would be cheaper than DFW.

This is, of course, exactly the reason why Southwest wants to keep flying at Dallas Love Field rather than move to DFW – it’s cheaper. Totally rational and an unambiguously good thing for Southwest passengers, since the difference in cost per 1000 lbs landing weight at DAL is roughly 1/10th that of DFW.

We, of course, are not lawyers (thank heavens), so we’re not qualified to say whether AFW is, in fact, a legal violation of the DFW bond covenants. But it’s transparently a violation of the spirit of these agreements. If it is all so dang important that all commercial service go through DFW airport (something we don’t agree with, but is an article of faith for Wright Amendment supporters) what the heck is Ft Worth doing tolerating the presence of Fedex at AFW? And if DFW supporters were eventually successful in shutting Love Field to commercial service, surely this would also logically require that the Fedex hub at Alliance be shut down? Which, of course, makes no sense at all.

The reality, of course, is that big metro areas almost always have multiple airports with diverse uses, and that is simply normal.

Wright Reading/Wright Out the Door?

Anyone who is interested in the Dallas Ft-Worth Airport (DFW) vs Dallas Love Field (DAL) fight, find and read this book:

From Prairie to Planes by Darwin Payne and Kathy Fitzpatrick (1999).

Unfortunately, it’s no longer in print, but we got a clean used hardcover copy for about $2.50 (through an Amazon affiliate) plus about double that in shipping and handling. It’s the story of the creation of DFW, but it gives the history of Dallas & Ft Worth commercial airline history right back to the dawn of aviation. It’s not particularly well written (it’s repetitive in places, sometimes within the scope of successive paragraphs) but it’s jam-packed with useful Dallas Metroplex background. Required reading for anyone who wants to shoot their mouth off in public on the topic of the Wright Amendment.

The Dallas vs Ft Worth airport saga goes back to before WWII. Yes, there is 60+ years of rivalry here. It’s hard to avoid the conclusion that Dallas has almost always has lost the political argument, despite having by far the economics on its side. Love Field was the preferred airport of passengers through the early 1970s, and Ft Worth constantly sought ways of undermining it. Passengers preferred Love, but Ft Worth ultimately found a political way of shutting it (or nearly so) and moving the center of economic gravity closer to itself.

Both the old Civil Aeronautics Board (CAB -- the govt agency that regulated US airlines pre-1979) and the Federal Aviation Administration (FAA) explicitly forced Dallas into building DFW and (mostly) shutting down Love Field by saying they would not fund Love Field nor permit international flights from there. This level of government interference seems mind-boggling today, but was par for the course back in the days when regulators were sure they knew better. It’s interesting, for instance, that the Federal govt identification with Ft Worth went back to the very earliest days, when the local CAB office was established at Ft Worth Meacham Field.

Furthermore, originally Dallas and Tarrant counties (Ft Worth is located in Tarrant county) planned on creating a joint authority (with taxing power) to build and manage the airport, but the people of Dallas defeated it in a referendum (and it lost both on a county-wide and city-wide basis). So the Dallas city fathers simply ignored the results and went ahead and built DFW as a joint venture between the cities of Dallas and Ft Worth directly. So much for democracy.

Although this airport no longer exists (and was in fact a failure), the construction of Amon Carter Field (ACF) was probably key to the long-term success of Ft Worth in undercutting Love Field. Ft Worth built ACF as its airport in the 1950s, it was located just south of today’s DFW (today’s American Airlines HQ is on the former site of ACF). There’s a great website about the life and times of ACF here.

ACF was exactly halfway between Dallas and Ft Worth, and Dallas was, in fact, interested in participating in the project (Love Field was always land-locked and difficult to expand) until Ft Worth moved the entrance to the airport from the north side (equally accessible from both Dallas and Ft Worth) to the west side (facing Ft Worth). At that point, Dallas saw ACF as a blatant attempt by Ft Worth to move the local center of economic gravity closer to Ft Worth, and wouldn’t have anything to do with ACF. So Ft Worth blew an earlier opportunity to have a joint airport with Dallas.

ACF was a magnificent facility when it was opened in the mid-50s, with one of the finest terminals in the world, long runways, etc. On that basis it was widely expected to damage Love Field by the powers-that-be. Instead it was a tremendous flop. Passengers voted with their feet, and almost all the flights moved back to Love Field, because it was closer to where most people wanted to go (Dallas, then as now, being larger than Ft Worth). The powers-that-be had zero understanding of the economics of commercial aviation, it transpired, something that is still largely true today: most people just don’t understand how this business works, and some of the least educated are politicians and bureaucrats.

It’s pretty clear from the book that regulators viewed the if-you-build-it-they-will-come failure of ACF almost as an insult (the Ft Worth city fathers were, of course, very unhappy) – they’d predicted, and wanted, ACF to be the preferred airport, but in fact they were dead wrong. And it is unfortunately in the nature of bureaucrats to take such things personally. It seemed self-evident to regulators that there “ought” to be a single airport in between Dallas and Ft Worth. The fact that there de-facto was a single airport, and its name was Love Field and it was located in Dallas, was unacceptable.

Ironically, by the time DFW was opened, Love Field was in fact saturated (or close to it), meaning that had the bureaucrats simply not interfered, by the early 1970s ACF (or, as it was by then renamed, Greater Southwest International Airport) would almost surely have become a success. Instead, the entire airfield, including the whole passenger infrastructure built only 20 years earlier, was plowed under as part of DFW construction. Few people understand that DFW displaced a substantial airport that had been completed only two decades before.

The book also shows that there’s little new under the sun. Some Texas politicians are now trying to create a “local solution” to the DAL vs DFW issue that might include a regional authority to run all the Dallas Metroplex airports. This has been proposed many many times over the past 60 years or more – unclear why we should expect it to happen now. It’s also unclear why layering on another level of (expensive, tax-absorbing) bureaucracy would be a good thing.

Finally, we strongly suspect the two sides have very different agendas relative to such an authority. We suspect Wright-repealers (to the extent they sees it as desirable at all) sees an authority as a way of ensuring that a fully-open Love Field could share revenues with DFW, thereby ensuring DFW’s finances are not undercut by the repeal of the Wright Amendment. On the other hand, we bet that Wright supporters see it as a vehicle for shutting down Love Field once all Dallas-area airports are under common control.

The good news is that if this article (or this opinion piece) is at all accurate, it appears that the Wright Amendment is on its way out, as the “compromise” discussed in the article is all about elimination of the Wright Amendment, whether after two or five or ten years. The perception of the Ft Worth newspaper is that Wright is on its way out faster than many expected. Let’s hope so.

Map showing location of significant Dallas area airports:


A = DAL = Dallas Love Field
B = DFW = Dallas/Ft Worth International Airport
C = AFW = Ft Worth Alliance Airport (see also this post)
D = FTW = Ft Worth Meacham International Airport

Past posts on Wright Amendment here.

Wednesday, February 08, 2006

Aircraft Appraisals: Handle With Care

There was one other 737 article in the most recent Flight International that we haven’t yet mentioned (our prior posts here and here on FI’s recent 737 issue). Perhaps the best reason to click through to the article is the images of what Flight thinks the next generation Airbus and Boeing narrowbodies might look like. The rest is just a bunch of appraisers (and some other airline observers) giving their views on the narrowbody segment. Appraisers value aircraft for buyers, for sellers and definitely for financiers and investors. So it’s a good excuse for us to talk about appraisers, a small but important part of the commercial aviation ecology.

We previously said (in this post) that there are lies, damn lies and aircraft manufacturer list prices. Much the same could be said of aircraft appraisals, another rarely-realized price. There are appraisers you use when you want to buy an airplane and appraisers you use when you want to sell an airplane, and in our experience, too few outsiders understand which are which. Some of the bigger appraisers are Airclaims, Avitas, Aviation Specialists, MB&A, BACK Aviation Solutions and there are at least half a dozen others. Just as for cars, many aircraft appraisers publish half-yearly “blue-books” with their idea of current (and future) aircraft values, plus they’re engaged to do appraisals on specific aircraft, or aircraft portfolios.

Appraising an aircraft is, to be sure, not an easy task, especially projecting values (predicting the future is hard). First of all, no one is required to publish the price at which an aircraft, new or used, is sold, and in fact generally the buyers and sellers go to some lengths to keep the price a secret. So appraisers don’t even get to see most data on real transactions.

That said, you can sometimes get an idea of what the sales price of an aircraft was. For instance, Ex-Im (discussed in this post) might say it guaranteed a certain amount of financing for an aircraft. Since the maximum guarantee is for 85% of the net-net price (plus the 3% guarantee fee) and since chances are the airline asked for the maximum financing, well, it’s just a matter of math to unwind that. Or by carefully untangling the balance sheet movements of an airline, you can get a good idea of what, say, JetBlue pays for A320s or Southwest pays for 737-700s.

Used transactions are more difficult. But the more liquid an aircraft, the more it sells, the more information is around, the more likely an appraiser is to get wind of what the real prices are.

However, other things complicate the used market. As we discussed in this post, the maintenance condition of an aircraft can have a big impact on what it’s worth. How old is the airplane? How many takeoff and landing cycles has it undergone? Where was it used in the past? Does it have a special heavy takeoff weight? Does it have more powerful engines than the base model? Just like cars, aircraft types have optional equipment and the exact specification can have a significant impact on the price.

And there are many used transactions that involve an aircraft under lease -- the owner changes but the aircraft stays at the lessee. Suppose the airplane has many years to go with a very fat lease rate to a good airline. The sales price will include the present value of this over-market lease. The reverse is also possible – an aircraft may come with a below-market lease, in which case the resulting aircraft price will seem unnaturally low.

So these are all factors that an appraiser has to untangle before s/he judges how much a given transaction price is relevant to the market, and that’s assuming s/he can get the price in the first place. Although, for the record, we've only ever met one woman appraiser. It seems to be a heavily male-dominated job.

But appraisers don’t necessarily do their reputations any favors either. Consider the appraiser concept of Base Value (BV), as distinct from Current Market Value (CMV). CMV is the appraiser’s idea of what you could sell the aircraft in the market today. At least, that’s what it’s supposed to be. If you challenge an appraiser on this point (“so you’re saying that if I went into the market today with this aircraft, that’s the price I could expect to get?”), you will often get a distressing amount of waffling in response. But at least conceptually, CMV is straightforward.

Not so in the case of Base Value. BV “pertains to a somewhat idealized aircraft and market combination” according to the handbook (pdf) of ISTAT, the aircraft appraiser organization (yes, there are in fact standards). Hmm. Sounds quite subjective. It is. Conceptually (and these are our words, not ISTAT’s) it’s the value of the aircraft in a “normal” market, according to its “highest and best use” (that phrase is ISTAT’s). This is some sort of idealized value -- a slippery concept at best, but you might not realize that if you didn’t know a heck of a lot about the aircraft market.

Interesting thing is that many aircraft financings are based on BV – hardly surprising given that bankers are in the business of making their deals look good, and BV is almost always bigger than CMV – so using BV will reduce the apparent loan-to-value. For instance, this 1998 prospectus for a refinancing of Airplanes (a big aircraft securitization that we discussed in this post) is shot-through with references to BV – that was the appraisal concept used in that deal.

You’d have thought that perhaps a more conservative approach would prevail post 9/11. Not so. This post-9/11 EETC (enhanced equipment trust certificate – a structured bond financing and secured by aircraft) by JetBlue still uses BV. Were we investing in an aircraft deal, we’d want to see, at a minimum, CMVs, and from a conservative appraiser.

As we said, it’s concepts like BV that do appraiser reputations no good. Another issue is that sometimes the values that different appraisers give the same aircraft are almost laughably different. In our experience, this problem is generally the worst for rare/illiquid aircraft, where there is not a lot of data for appraisers to rely on. Still, for older, low-value aircraft, we’ve seen appraisals differ by as much as 100% across appraisers. Not a lot of comfort from that.

So, if you’re in the used aircraft market, or otherwise relying on appraised aircraft values, be careful, be very very careful. Don't say we didn't warn you.

EAS: Flying to Where People Don't Want to Go

Article in the Modesto Bee (never let it be said that we don't cast our net widely) about Mesa's EAS proposal to fly from Las Vegas to Merced, California. EAS stands for Essential Air Service, a program of the US govt to pay airlines to fly places to which people don't want to go (i.e., there's no viable commercial demand). The program subsidizes service to small burgs across the country -- in theory the airlines that receive such funds are supposed to make something like a 5% profit. Here's a list (pdf) of the cities subsidized this way, and the annual subsidy. There's a separate list (pdf) for Alaska.

Surprise, surprise, in general we think this is a waste of money. The airlines receive this money to ensure access to a community, and then those airlines often charge nosebleed fares that are quite at odds with the motive of ensuring access. For instance, the Mesaba service from Memphis to Muscle Shoals (which appears first in the list referred to above) has a one-way last-minute fare of over $300 for a 136 mile flight. If the govt is going to hand out money to ensure access, perhaps it should at least ensure that fares aren't quite as egregious as that. Of course, this program is a favorite of many congresscritters -- another way to direct pork to the local community -- so unfortunately it's likely to be with us for years to come. EAS service can lever other federal funds into an airport -- for instance, commercial service means a TSA presence...

In the case described in the Modesto Bee article, Mesa is trying to take away the EAS subsidy currently going to Scenic Airlines for providing service from Las Vegas to Merced, CA. Mesa's application with the Dept of Transportation (DOT) is here (pdf). While Mesa is not to everyone's taste (prior posts on Mesa here and here) it seems that logically Mesa has a pretty good case, since it's offering to fly to the main Las Vegas airport from Merced (where passengers have easy access to connections on Mesa code-share partner America West/US Airways), where as Scenic Air flies from the small North Las Vegas airport.

Nonetheless, the Merced city fathers have voted unanimously in favor of Scenic. One thing we noted is that Scenic actually charges pretty reasonable fares to Las Vegas -- as low as $99 for a 300 mile flight, not bad by the standards of EAS. However, the DOT doesn't necessarily do what the local community wants. Recently it awarded EAS service to Cedar City, UT to Mesa over the objections of the local community.

Our preferred solution: drive from Merced to Modesto (about 40 miles) or Fresno (about 60 miles) and use the unsubsidized air service available there -- after all, what's a 60 mile drive in California? For that matter, the article says that Scenic plans to start unsubsidized service from Merced to Reno, so it's unclear why Merced needs EAS service at all, to the extent any city truly "needs" EAS service.

Image: Scenic also runs sightseeing trips over the Grand Canyon in deHavilland Canada Twin Otters. Yes, that's the name of an airplane.

Yet Another Reason To Avoid Russian Airlines/Aircraft

Plundered from the excellent commercial aircraft website, a recent incredible picture of a Russian aircraft just barely making it airborne by the end of the runway at Phuket, Thailand. It's worth clicking thru here to read the caption.

The aircraft is a Il-86, in some ways a four-engine knockoff of the original Airbus A300 design. It was the first Soviet wide-bodied design, and not a very successful one. You couldn't pay us enough to fly on a Russian airline, and we'd be doubly reluctant if the Russian airline was still flying Russian equipment.

Tuesday, February 07, 2006

United Non-Wage Costs

United filed the slides that CFO Jake Brace presented today at a conference. Here's a pdf version of the whole thing or, less conveniently, here's the version presented directly to the SEC. There's a lot of interesting material in there if you're an airline junkie. We'll just touch on a couple of slides.

The slide above (double click for a bigger version) shows something that has been noted for some time, that American has been far more successful since 9/11 at reducing non-wage costs than United. This is a counter-intuitive result, since United restructured in Chapter 11 and American did not. Chapter 11 gives a company the right to abrogate "executory contracts" (as we discussed in this post) so with this significant additional flexibility you would expect United to have been able to reduce non-wage costs more than American. But instead, American has blown United away.

To be fair, United has chosen to pursue a more complicated business model. United, in fact, seems to love to create brandnames -- Ted, p.s., explus, etc. We're not sure that any of this is to any real purpose -- does this profusion result in material revenue gain or does it just result in confusion? We suspect a fair proportion of the latter. In particular, we're not a fan of United's low-fare Ted division for reasons explained here.

Still, we think the above slide is evidence that United's restructuring has been heavy on brute force (check out this slide on United's alleged annual savings and count how much of the pie is out of the pockets of other parties, whether employees -- a huge fraction of the pie -- aircraft financiers or United's regional partners -- and see also our earlier comment) and light on intelligence (American's done brilliantly to cut non-wage, non-fuel costs by 20% without the ability to simply eliminate contracts it no longer wants).

On the one hand, this presumably means there's a lot of cost savings left to be had at United. Perhaps it's simply the nature of bankruptcy that you only bother with the broad strokes. On the other hand, getting such savings requires two things that American has largely had in the last three years and United still does not: (1) best management in the US airline business and (2) good working relationship with employees.

Related: United pumping fares back up after Independence Air's demise. Via Ben Mutzabaugh's Today in the Sky. At the end of the day, there's something to be said for patronizing your local LCC, even if it doesn't have the tasty frequent flyer miles of your favorite legacy major. LCCs, broadly, are still the consumer's friend. Legacy majors, broadly, are not. Of course, the reality is that people are swayed by frequent flyer miles, and any new airline business plan that doesn't take that simple fact into account is extremely unwise.

Whither Bomber

In the wake of Bombardier’s decision not (for now) to build the CSeries aircraft (our earlier post), a popular question is what future does Bombardier have in the regional aircraft business. Flight Intl has articles looking forward and back. Assuming we were being paid a boatload of money to help Bombardier answer this question (which, alas, we’re not) here’s what we’d say.

First, does Bombardier still want to be in this business? One thing to note is that Bombardier has to date not produced an all-new regional aircraft. Bombardier is a former snowmobile (or snow-machine, as some prefer to call it) manufacturer made good. It got into transit and train manufacturing, then entered aerospace by acquiring Canadair (a Canadian bizjet manufacturer), Learjet (US bizjet manufacturer), deHavilland Canada (a turboprop manufacturer) and Shorts (a UK turboprop manufacturer). In the case of the non-US properties, at least, it purchased the companies for a song and with the intense gratitude of Canada or the UK for cleaning up money-losing state-owned companies.

The CRJ series of regional jets (RJs) was a derivative of the Canadair Challenger bizjet, with a design that dates back to the 1970s, way before Bombardier was involved. The current Q-Series of turboprops dates back to original deHavilland Dash 8 first certified in the early 1980s, again before Bombardier was involved. So again, every regional aircraft produced under Bombardier ownership has been a derivative.

To date, Bombardier has been the McDonnell Douglas of the regional aircraft business – McDonnell never built an all-new commercial aircraft after it bought Douglas (except for the DC-10 which was arguably already on the drawing board). Every aircraft thereafter was a derivative of an existing design. McDonnell Douglas eventually lost all credibility as a commercial aircraft manufacturer.

So it may be that Bombardier concludes it doesn’t make sense to be in this business long-term, in which case the CRJ series of RJs will simply be a 1990s one-hit wonder. That’s a totally understandable outcome, in fact we suspect a reasonably likely outcome. As Flight correctly notes, the 100-seat jet market is a tough one, littered with failed projects -- such as Boeing's recently cancelled 717.

In fact, historically (pre-RJ) the regional aircraft market has never been very profitable, though we think that has to do with the fact that this was a favorite place for governments to interfere, it being the place to lose money if you want a national commercial aircraft business. Against that, however, the number of such manufacturers has declined precipitously in the last decade or so: Fokker, Saab, Fairchild, Shorts, BAE Systems (and all its predecessors) etc all no longer make aircraft. There is some level of commercial demand for these aircraft and with the only real players left being Bombardier, Embraer and for turboprops, ATR, presumably someone can make some money at some point.

So let’s suppose Bombardier wants to stay in this business. It’s the largest player in bizjets, so it’s in aerospace anyway, and it has built at least one all-new bizjet, so far as we can tell (we think bizjets are a bit boring, so we don’t pay that much attention to them, but the Global Express (pdf) and the Challenger 300 (pdf) are basically all-new, is our understanding). Plus Bombardier did get the Canadian, Quebec and UK governments to stump up C$850mm in launch aid for the now foregone (for now) CSeries, so its governments are behind it. What’s the right strategy?

First, think longer term: Bombardier shouldn’t aim to launch an all-new aircraft in the immediate future, it should think about launching it when it has the right technology. Bombardier apparently doesn’t have the ability to produce a carbon fiber regional aircraft yet: the CSeries was designed to be conventionally built. There’s no point in being the last guy to build a conventionally built aircraft now that the 787 is out there. Thinking a little longer term lets Bombardier set a goal of making its next aircraft carbon fiber.

Second, think across the entire product range. The Q-Series turboprop (TP) suffers from the same problems as the CRJ series: the fuselage is too narrow and the design is fundamentally old. It’s simply not that comfortable four abreast in a Q-Series. OK, so TPs are typically optimal on short flights, so passengers aren’t cooped up there for long. But if Bombardier is committed, long term, to TPs, and if it truly believes they can be as attractive to passengers as RJs, then it should ensure that that’s true. Plus, ATR is Bombardier’s only real TP competitor, and as we noted once before, its design is also 20 years old, so it’s not too early to think of an all-new turboprop.

Why not work towards the design not only of a new RJ family but also of a new TP family with (as much as possible) a common carbon-fiber fuselage? This may turn out to be difficult. Like the Q-Series, TPs are often high-wing (which is good for rough field landings and whatnot) while RJs are generally low wing. Does a new TP need to be high wing? If so, does that make it more difficult to use the same components in both a new RJ and new TP family? TP and RJ aircraft have different operating characteristics. Does that make common fuselage cross sections impractical? Something to be answered. But clearly, the more commonality across both RJ and TP families, the more costs can be amortized across a greater number of aircraft.

Third, don’t antagonize Airbus and Boeing. As we said before, the CSeries was a clear attack on their territory. Ensure that a new RJ family doesn’t go near Airbus and Boeing territory. Perhaps it will then be possible to get the cooperation of one or both of them in developing carbon fiber technology for a new Bombardier RJ/TP family.

Fourth, co-opt wannabes. Russia’s Sukhoi wants to build a so-called Russian Regional Jet (RRJ), possibly with participation by Italy’s Alenia. In our view, this is foolish. Given a choice between flying in a Russian aircraft and a western aircraft, what would you choose? So would most people (although the observation has been made, correctly, that 30 years ago the idea that people would willingly fly on a Brazilian made jet – Embraer – would have been thought absurd). Sukhoi should be persuaded that it will do far better to make a part of a future Bombardier-branded aircraft that people will buy than to build a majority of a Russian-branded aircraft that will be hard to sell in the west. If Russian national pride requires it, agree to a second final assembly line in Russia.

Fifth, put your money where your mouth is. If Bombardier wants to stay a player without immediately launching a new aircraft it should make a very public commitment to develope regional aircraft technology (especially carbon fiber). Ask the governments that previously committed to back the CSeries to contribute some proportion of that money in the name of increasing national technological capital and then add a lot of dough on top. If Bombardier wants to demonstrate it’s still a player, nothing convinces like putting money where ones mouth is.

Sixth: make lemons out of lemonade. Orders for the CRJ200 50-seat RJ have come to a near halt, and there are blood-curdling predictions of hundreds of surplus 50-seat RJs in the US (see, for instance, Mike Boyd). Whether that comes true or not, we strongly believe that 50-seat RJ values will be under great pressure for the foreseeable future. OK, fine, low-cost second-hand CRJ100/200s mean that more airlines around the world can afford these things. This is Bombardier’s opportunity to place such aircraft at airlines that would never before have considered the aircraft, and thus develop airline relationships and Bombardier’s global support network. Make Bombardier global support second to none so that Bombardier customers want to buy a future Bombardier aircraft.

Bottom line – there’s no point in trying to chase Embraer’s 170/190 series aircraft, the idea should be, if anything, to leapfrog it -- or failing that, go gently into the night.

(By the way, at the end of 2003 the original snowmobile business was spun out as part of BRP, the former Bombardier Regional Products).

Image: Bombardier Q400 -- the latest, longest derivative of de Havilland Canada's original Dash 8.

More Flight Intl 737 Nutrition

As MRO Wire points out (and we somehow unaccountably overlooked) lots more Flight International 737 stories this week, all marking the construction of the 5,000th 737.

FI article on future 737/A320 replacement designs. Key takeaways:

Applying all current technology and aerodynamic tricks to a new design results in only a modest improvement over current efficiency. It's all up to the engine manufacturers: Airbus and Boeing need new engines to work with, currently not expected to arrive until 2013-14 or so. We also note that apparently the Boeing plans include a cabin cross-section "wider than the A320". We've harped on that deficiency quite a bit recently.

As we've pointed out before, by the way, most of the current players have an incentive for playing down the potential benefit of a new narrowbody. Neither Airbus nor Boeing is currently in a position to spend on a new program, and both programs are selling very well. Why would they want to disturb the status quo until they have to? Same, more or less, for the engine manufacturers: GE's CFM56 (which is on both the 737NG and the A320) is selling like hotcakes and both Pratt & Whitney and Rolls-Royce are getting some action through their IAE joint venture (which powers some A320s).

We're unsurprised to see Pratt mentioned as pushing a new type of engine. Pratt dominated the first generation of narrowbodies, and then was largely swept from this dominance by CFM. Further, it's been eclipsed by both GE and Rolls in engines for widebodies, so if any party has something to gain by disturbing the status quo, it's Pratt.

FI article on 737 history. Some key points:

Boeing once offered to sell the whole 737 program to the Japanese. This was during financial straits of the early 1970s, which we previously discussed here. It also considered shutting down the program.

Benefits of wing-mounting the engines vs tail mounting. At the time the 737 was developed, the standard for this size aircraft involved tail-mounted engines: consider such predecessors/competitors as the Caravelle by Airbus-predecessor Sud-Aviation, Douglas DC-9, BAC 1-11, and larger predecessors/contemporaries 727, HS Trident. Boeing instead crammed the engines under the wing ("crammed" is right, there wasn't that much room there, which is why on the original 737, the engines are mounted more or less directly to the wing, instead of on pylons as on most aircraft and in fact as on later 737s -- compare this picture of a 737-200 with this of a 737NG).

Benefits of tail mounting include the fact that the wing is "clean" -- no big engines attached, simplifies wing design. Tail-mounting also makes much of the interior of the aircraft somewhat quieter (though not if you're sitting next to the engines in back). Against that are two serious disadvantages. The first is weight. In flight, the wings obviously carry the weight of the rest of the aircraft. If the engines are rear-mounted, then the fuselage structure between the wing and the tail needs to be stronger to support the engines, whereas if the engines are mounted under the wing, no such additional structure is necessary, saving weight. Boeing says that it saved the weight equivalent to six people by wing-mounting the 737 engines.

The other problem with rear-mounted engines is that they generally are accompanied by a T-tail -- the horizontal stabilizer is mounted on top of the vertical stabilizer (there may be an additional weight issue from that alone, since the vertical stabilizer needs to support the weight and forces of the horizontal stabilizer). In such designs, if the aircraft nose is raised high enough, the wash from the wings can mask the horizontal stabilizer, rendering it ineffective with consequent loss of control -- a very dangerous situation that can and has resulted in crashes. To prevent such things from happening, T-tail aircraft are equipped with a "stick-shaker" device that warns (by literally shaking the controls) the pilot that s/he is coming close to raising the nose of the aircraft too high.

Image: 737 first flight.

Monday, February 06, 2006

BlogSpot Screwed Up

BlogSpot has been unstable the past few days. Sorry if you've had problems accessing the site.

Air Cargo Carriers Tragedy

When we saw the Flight Intl article headline:
Two Shorts 360 freighters collide over Wisconsin
our spirits sank. We didn't need to read the rest to know who it was. The airline is Air Cargo Carriers (ACC), the nichiest of niche players -- flying obsolete commuter aircraft largely under contract to package express companies (e.g. UPS, Fedex, etc -- though we have no idea whether ACC is currently under contract to those particular companies -- ACC's website is currently down, although at the time of this Milwaukee Journal-Sentinal article was written it was apparently up).

So why do we keep track (from time to time) of ACC? We like ACC because it's an example of good ole American homegrown ingenuity. ACC's aircraft are Shorts 330s and Shorts 360s, which were once commuter passenger aircraft. Shorts was once an independent aircraft manufacturer based in Belfast, Northern Ireland, now no longer building aircraft but instead a parts-manufacturing division of Bombardier. The Shorts factory is at Belfast City Airport, which in recent years has taken an increasing share of traffic into that city (versus Belfast International).

The 330 and 360 were unlovely and mostly unloved -- high-wing, boxy, slow, unpressurized (so condemned to flying at low altitude) turboprops, their appearance did not necessarily inspire confidence in passengers, although the aircraft were unusually roomy for a regional aircraft. The standard joke was that the Shorts was the box that the Fairchild Metro (a 19-seat turboprop with an unusually cramped interior) came in.

Boxy? Did someone say boxy? The Shorts has a big square cross-section -- what could be better for cargo, which mostly doesn't care about pressurization or about an additional 10 minutes on a short sector? Yes, in fact there's hardly a better candidate for short-haul low-density freight carrier than a Shorts 330/360, and that's why ACC flies them. ACC's business, at least the last time we checked, was picking up packages from a big package express company and flying them relatively modest distances to a smaller airport.

[This is generally a four-nights a week business -- Monday thru Thursday, since over the weekend it's much cheaper to drive a truck (this statement also applies to many routes flown by US domestic package and air freight carriers -- shipments sent on Friday are generally due to be delivered on Monday, so, for instance, many Fedex & UPS aircraft sit idle from Friday morning until Monday night).]

One reason we like ACC is that freight is almost certainly the best use of a 330 and 360 and there's something appealing about recycling these otherwise useless aircraft. But the other reason we like ACC is that it doesn't just fly airplanes. ACC also develops and holds the freighter conversion STCs -- supplemental type certificates. These are the FAA-approved licenses which make legal the conversion of a passenger 330/360 to a freighter 330/360. And not just that, ACC has also developed a home-grown cargo container system for the 330/360 that makes moving freight from a big package express company to the ACC aircraft a cinch.

In fact, ACC is a miniature Shorts 330/360 industry based at Milwaukee airport. Last we checked (which was over a year ago and, as we said, the website is now down), the company also had one of only two Shorts simulators in the world and had on-site repair shops for things like Shorts 330/360 avionics (cockpit electronics/instrumentation).

And all of this creativity home-grown in Wisconsin, America's dairyland (Hello Wisconsin!). The spirit of Orville and Wilbur Wright, tinkering in their bicycle shop, still lives. You have to appreciate that.

So we were very sad to see that two ACC aircraft, sent out together, had collided in midair, with the destruction of one aircraft and the tragic death of its three person crew. We really hope this is not the end of ACC. It goes without saying that we have nothing but the deepest sympathy for everyone involved.

Later addition:
Aviation Safety Network page on this accident
Preliminary FAA report (scroll down to Record 2)
via MRO Wire

Image: Shorts 360 aircraft of ACC -- double click for bigger version.

Flight Intl on 737NG

Flight International has two articles on the 737-900ER and -700ER this week that expand on material we discussed last week (including the new exit doors on the 737-900ER, shown above).

An excellent large article focuses on the -900ER but also discusses other 737NG innovations. Some topics that we did not mention in our post include:
  • New higher-thrust versions of the CFM56-7 engine that powers the 737NG. The article mentions the concept of exhaust gas temperature (EGT) -- modern jet engines are maintained "on condition", meaning that so long as an engine is operating within specs, it stays on the wing. Perhaps the most significant spec that is monitored is EGT. When that gets too high, the engine needs more than routine attention.
  • Short-field improvements -- Boeing is tinkering with the aircraft to boost short-field performance, initially so that Brazilian LCC GOL can use 737-800s at Rio de Janiero's downtown airport. Other airports specifically targetted by this package are Faroe and London City (we doubt an aircraft as large as the 737-800 will ever land at those airports, but perhaps smaller 737-600s or -700s with short-field adaptations).
  • Replacing steel brakes with those made of carbon fiber. In combination with replacing bias-ply tires with radials, this saves the weight of 4-5 people. Here's the related Boeing press release. It's now a no-cost option on the aircraft.
The 737-700ER article is less expansive, though it mentions that a Boeing 737-800ER was also once a possibility.

As we've said before, the 737NG appears to be aerodynamically more adaptable and in many ways superior to the A320 family. Again, it's a pity that it suffers from a narrower fuselage than the A320, which appears to drive a lot of sales towards the Airbus product. But if you need something in a narrowbody with more than plain vanilla performance, the 737NG rules.

Dream Team Complete: Carty Joins Virgin America

There was nothing over the weekend that was sufficiently interesting or irritating to us to induce us to blog. As a grain of sand results in a pearl, or perhaps as a sore throat generates phlegm, we require something to inspire or annoy us. And then we saw... Don Carty (left) is to become Chairman of Virgin America, joining CEO Fred Reid. A new flynamic duo!

Have there ever been two more successful US airlines than American under Don Carty and Delta while Fred Reid was there? Have there ever been two more dynamic, innovative, consumer- and employee-friendly airlines than American and Delta? Could anyone possibly think of two leaders more naturally suited to bringing to the world the next big thing in airlines?

Well, OK, we're trying, but the announcement is beyond parody. For those who don't know, then CEO Don Carty left American Airlines in 2003 after he damn near put it into bankruptcy when, just as labor was voting on big concessions that would keep the company solvent, it was revealed (through a required SEC filing) that management had previously (and quietly) taken steps to immunize its own retirement benefits from bankruptcy at the same time that it was essentially threatening employees with the consequences of the same. So much for solidarity.

In combination with Carty's much-resented imperial style of management, this generated such outrage that employees (in particular, the flight attendants, who unusually held the fate of the company in their hands) almost threw the company into bankruptcy (we understand that it was within an hour or less of filing at one point), a fate that was only avoided when Carty fell on his sword, leaving American in the hands of CEO Gerard Arpey, who most think has done an extraordinary job of healing the divisions and leading American -- at least up until the recent management bonus scandal (and always remembering that American is incapable of rational thought on the topic of the Wright Amendment).

Don Carty, of course, also presided over two pointless American Airlines mergers, with:
  • Reno Air (announced November 1998, which resulted in significant labor disruption in 1999 that cost more than American paid for Reno, as we previously described here)
  • TWA in 2001. This was not a disaster as such, but was in the long run fairly pointless as after 9/11 the extra TWA capacity was essentially eliminated, and American ultimately gutted the St Louis hub it inherited from TWA. At the very least, it was a waste of time and energy, one which after 9/11 American could ill afford.
And of course we previously dilated on the topic of Fred Reid's background.

The point is that were you to search for airline executives more associated with the recent failures of US legacy major airlines, you'd be hard-pressed to come up with better examples than Messrs Carty and Reid. Why anyone thinks these guys have anything to contribute to the success of a new LCC like Virgin America is mind bending. That this venture has attracted investment is truly a tribute to the surplus funds sloshing around the world looking for returns. Why anyone thinks Virgin America is a good idea is, as Churchill once said about Russia, a riddle, wrapped in a mystery, inside an enigma.

One thing, however, is that it appears that Virgin America does not propose to offer any competition to Hawaiian Airlines, as Carty is on the board of Hawaiian and the Virgin America announcement does not mention that he proposes to resign from that board. Also noteworthy -- this is the second airline chairmanship he's assumed recently -- Carty is also the chairman of the new Porter Airlines, an all-turboprop startup that is supposed to launch flights from Toronto City Centre Airport later this year (press release, do-nothing website). Have silver hair, patrician bearing, nominally relevant resume, will travel.

Friday, February 03, 2006

Airlines Behaving Badly

Last year about this time the European Union put in place new airline passenger compensation rules (details, pdf) that cover denied boarding, cancellations and delays. The rules are pretty stringent and the amounts the airlines have to pay quite high (up to 600 euros), which is why we've had a fair amount of sympathy with the complaints of airlines like Ryanair, where the ticket prices are often significantly less than the mandated compensation. After all, trains and other forms of transportation aren't subject to the same rules, which seems unfair.

But then there's this recent article about Thomas Cook being successfully sued for compensation in the UK for cancelling a flight at short notice, busing passengers from London to Manchester the next day for another flight with the same flight number.

First the airline claimed that because it was the same flight number, the flight wasn't cancelled, just delayed. Well, that's a stretch -- the flight was from a whole different city 24 hours later -- and the judge wasn't buying it.

But the part that ticked us off, as a passenger, was the following:

Thomas Cook also tried to claim that it was not liable because there had been a fault with an engine which it could not have foreseen. The company said that it did not keep a back-up aircraft “because the cost would be prohibitive”.

A Thomas Cook engineer admitted in court, however, that the fault had not been on the aircraft due to be used for Mr Harbord’s flight but on another aircraft.

First, don't ever lie to your customers (or in court, and while it's not entirely clear, the fact that a mechanic admitted something appears to imply that Thomas Cook originally left a different impression). Secondly who among us has not wondered whether a cancelled flight was really ditched because of airline convenience? So the airline ditched this passenger's flight, not because there was something wrong with it, but because it was more convenient to cancel this flight (and presumably use the equipment to cover some other flight).

This is exactly the type of behavior that angers customers to the point they agitate for stringent customer rights measures of the sort the EU implemented last year.

It's like unions. Ideally there shouldn't be any, but the presence of a union at a company is a pretty strong indication that the management at some point screwed up badly -- i.e. many companies deserve the unions they're stuck with. We don't much like the compensation rules, but when airlines act like this they shouldn't be surprised that such rules have been imposed.

Prior articles mentioning Thomas Cook.

Thursday, February 02, 2006

Two New 737NGs/Extreme Performance Models Drive Sales

Within the past week or so, two new Boeing 737NG models have been in the news:
  • This week, Boeing announced the 737-700ER, a long range version of the 737-700
  • Last week, Boeing announced the 737-900ER (which is primarily aimed at the charter market) was reaching design completion.
This reminded us of what we view as an axiom of new aircraft marketing strategy: "extreme" performance versions of an aircraft family drive sales of base models. But we'll get to that in a minute.

The 737-700ER is basically a slightly different version of two 737NG models that already exist, namely the Boeing BBJ business jet and the 737-700C, a convertible passenger/cargo version that was developed for the Navy, which designates it the C-40A Clipper. All three aircraft amount to a 737-700 fuselage mated to the wing of the 737-800, which is identical in exterior dimensions to the wing of the -700 but is beefed up internally to carry higher weights. This allows the resulting aircraft to carry more fuel. The 700ER is the commercial passenger version of its two more exotic siblings (our bet is that the -700ER is essentially identical to the BBJ, which is just a commercial airframe adapted to a bizjet role).

Is there a market for the -700ER? In our view that depends on something like the following. Privatair in Switzerland flies BBJs transAtlantic with all-business class service under contract to Lufthansa, KLM and Swiss Intl. Those aircraft have 40 to 50 seats on them. Can a 737-700ER economically fly useful trans Atlantic stage lengths with a more conventional load, say 12 business class seats and 80-some economy seats (Continental flies 757s across the Atlantic with 16 business class seats and 156 economy). If so, then airlines like Continental may be interested in using them to further splinter the North Atlantic (or some other) market, flying to even smaller destinations than Continental already does with the 757, or flying them at lower demand times of the day to get a frequency advantage. It need not be the North Atlantic, that's just an example. The fact that Boeing has waited this long to produce this aircraft suggests that airline demand is not necessarily heavy. Be interesting to see -- it's a new tool, and new tools are often adapted for unexpected uses.

The -900ER is a bit more involved. Boeing already has a 737-900, which has never sold particularly well because the seating inside is limited to 189 by the capacity of the exits. There's space for a lot more seats at tighter pitches, but to install them in the -900 would be illegal. So Boeing has added a whole new door to the -900ER. It's also done something clever with the pressure bulkhead.

As an aircraft flies to altitude, the pressure inside remains at bearable, life-sustaining levels while that outside is very low, leaving the contents are under pressure. At the back of the airplane is a pressure bulkhead, behind which the aircraft is unpressurized. Typically this is spherical in shape, and it is on the -900. On the -900ER, however, Boeing has designed a flat rear bulkhead, which allows the interior to pushed further back within the existing -900 fuselage. Hence galleys or toilets can be pushed to the rear, releasing more space inside for seats. The 737-900ER will be able to carry as many as 215 seats, and should be an awesome aircraft for European charter carriers, which to date have been uninterested in the -900.

enplaned aircraft product strategy axiom: extreme performance models drive aircraft sales.

Think about the Boeing 777-200LR. This aircraft that will never likely sell in volume, because there simply isn't a need for a huge number of aircraft that can fly halfway around the world. However, the 777-200LR can drive sales of other 777 models.

It appears clear that the 777-200LR comprehensively spanks the A340-500, the Airbus equivalent. Now it turns out the A340-600 isn't quite as good as its Boeing equivalent either (the 777-300ER) but even if that were not true, if you need the performance of the 777-200LR, you are very unlikely to buy that aircraft and then buy the A340-600. You're much more likely to buy the 777-300ER )and other 777 models) for the less extreme routes in your and reap the benefit of commonality over the larger fleet. So extreme performance models, even if they don't sell terribly well in their own right, can drive sales of other models in the same family.

[Aha! you say, but what about Singapore Airlines, which currently has nothing but 777s except for a small fleet of A340-500s? Yes, it's a situation that doesn't make long-term sense. We expect Singapore is probably receiving some sort of non-performance payment from Airbus for the less-than-expected performance of that aircraft. We also expect Singapore essentially wants Boeing to pay (in the form of low-cost 777-200LRs and taking the A340-500s in trade-in) for the privilege of eliminating the A340-500s from its fleet -- after all, there's a lot of prestige from being in the Singapore Airlines fleet. We could be wrong. But certainly the current situation makes little sense.]

Our other posts on the 777-200LR here.

What does this axiom have to do with 737NGs? We've always wondered why Boeing didn't bring out something like the 737-700ER earlier. It's an extreme performance version of the 737NG, we suspect Airbus can't match it (the 737NG has longer legs than the A320 family) and thus the 737-700ER, had it been available earlier, had the potential to drive some narrowbody sales in Boeing's direction. Well, better late than never.

Image: The first 737-700ER will be built for Japanese carrier ANA. It won't look that different from any other 737-700 with winglets.

Morgan Stanley's Bogus Aircraft Adventure

On Monday, Morgan Stanley announced the sale of its AWAS aircraft leasing subsidiary to private equity Terra Firma, the end of Morgan Stanley’s bogus journey in aircraft leasing.

Morgan Stanley’s adventure began with another leasing company, GPA. In the late 1980s there were two big leasing companies, GPA and ILFC. GPA was a private Irish company founded by Tony Ryan of Ryanair fame. The early 90s recession took the wind out of GPA’s sails, a 1992 IPO failed and the company hit the financial rocks. GE Capital, always interested in a depressed financing sector, took over the marketing functions of GPA, which it merged with two other GE Capital aircraft businesses to form the modern GECAS, now the world’s pre-eminent aircraft financier.

[Ireland looms large in the aircraft leasing business, both because of its advantageous tax laws (making it attractive to base a leasing company there) and because GPA created a generation of Irishmen (and women) with significant aircraft leasing expertise.]

However, although GECAS managed the old GPA fleet (collected the rents, re-leased the aircraft and so forth), GPA was still the owner and still needed to refinance its aircraft. And that was a problem because many commercial banks no longer wanted to finance aircraft. Plus, after the early 90s airline recession, it wasn’t clear if the fleet had that much equity left – and therefore it wasn’t clear whether GPA had much equity left.

Necessity is the mother of invention and the bankers applied asset-backed securities (ABS) technology to aircraft, resulting in an “aircraft securitization.” What is an aircraft securitization? Essentially, it’s a special purpose aircraft leasing company. Imagine 30 or more commercial aircraft owned by a trust. The aircraft are on lease to airlines around the world. The trust pays a leasing company to manage the aircraft on its behalf.

The trust issues bonds – generally four different classes of bonds, from highest priority to lowest priority (somewhat like a first, second, third and fourth mortgage). Principal and interest of the bonds are paid from lease rentals -- aircraft may be sold too, but that’s not the primary method of paying down the bonds. The bonds are rated by rating agencies, based on certain requirements (for instance, not too many aircraft in any one area of the world or at any one airline) and stress-testing against various downside scenarios (suppose there’s an airline recession and lease rates drop by a certain amount for a certain period of time).

Very importantly, the only thing backing the bonds are the aircraft and the lease revenues they generate. Whoever owns the trust has no obligation to pay off the bonds, only the trust itself has an obligation to pay off the bonds.

Aircraft securitizations, which did not exist prior to the early 1990s, were specifically invented to re-finance GPA. Think of it this way: having frightened off commercial banks, those who needed aircraft financing needed new investors. Aircraft securitizations permitted GPA to tap the asset-backed securities (ABS) market (part of the bond market).

(An aircraft securitization should not be confused with the Enhanced Equipment Trust Certificate -- EETC -- which is a structured corporate bond that finances and is secured by aircraft. A corporate bond is one issued by a particular corporation and for which a corporation has ultimate responsibility. EETCs were developed at the same time as aircraft securitizations and were the standard form of aircraft financing for US airlines from the mid 90s through 9/11).

Two small aircraft securitization deals were done for GPA in 1992 and 1994 by other investment banks. But Morgan Stanley refinanced the bulk of GPA in 1996, in a monster $4 bn deal called “Airplanes”, backed by 229 aircraft. You can follow the progress of Airplanes here. The Airplanes deal revived the fortunes of GPA. A few years later, its name changed to AerFi, GPA was bought by debis AirFinance, an affiliate of Daimler Chrysler. Then last year, debis AirFinance was bought out by the private equity fund Cerberus, changing its name once again to AerCap, a second tier aircraft leasing company (relative to the giants ILFC and GECAS).

Morgan Stanley made large fees on the Airplanes deal – above $30mm we heard, an enormous payday that almost certainly made the bankers heroes within Morgan. The most interesting thing about the deal was how much money Morgan Stanley raised against the value of the GPA aircraft. It was far more than banks would have been willing to advance. So Morgan Stanley decided to get into the business for itself.

In 1997, Morgan Stanley bought 30 or so aircraft from ILFC and in 1998, they securitized them into something called Morgan Stanley Aircraft Finance (MSAF). And our understanding is that MSAF sold significantly more in bonds than Morgan Stanley had paid for the aircraft, therefore generating cash for Morgan Stanley. Remember, Morgan Stanley had no further obligation to the aircraft in MSAF – at least in theory, MSAF would, over time, pay down the bonds itself.

In 1999 Morgan Stanley bought more aircraft from ILFC, and in 2000 added them to MSAF, which issued more bonds to buy them. And our understanding is that Morgan Stanley didn’t do quite as well on that deal as it did on the 1998 MSAF transaction.

But by that time, Morgan Stanley had something bigger in mind. This was AWAS, which originally stood for Ansett Worldwide Aviation Services. Originally this was part of Ansett Australia, the now defunct Australian airline we mentioned in a post about Virgin Blue, and in fact for much of its existence, AWAS was an Australian company. AWAS was at one point the third largest aircraft lessor in the world, but by 2000 it had been fairly inactive for some time (meaning it hadn’t changed its portfolio much). It was then 50% owned by News Corporation and 50% owned by the TNT, originally an Australian freight company that was bought by the Dutch post office.

News and TNT had supported the development of AWAS by guaranteeing many of its aircraft financings. Then they’d lost interest in the business, but the guarantees made it hard for them to sell or spinoff AWAS, so AWAS wasn’t very active during the mid and late 1990s. Morgan Stanley apparently found some way of terminating these troublesome financings (that’s our assumption, we don’t know how Morgan did it) and decided to buy AWAS, clean it up and sell it. So in 2000, Morgan Stanley bought AWAS.

This was essentially a big trade. Buy it, transform it and sell it. And to bulk up AWAS even further, Morgan Stanley decided to add the MSAF aircraft to it. This meant pre-paying the bonds that MSAF had just sold in 1998 and 2000, which meant paying compensation to the bond-holders for taking the bonds away from them early. Such compensation amounted to, in the case of MSAF, anything from an additional half a percent of par to an additional 28% of par, depending on which bond was being redeemed. You can see these amounts here.

It appears that Morgan Stanley believed that the portfolio would fetch the highest price if it was totally free of any sort of financing. Of course, in the meantime, Morgan Stanley was totally exposed to the portfolio. MSAF was no more, so the MSAF bondholders were no longer bearing the risk of the MSAF aircraft. Those aircraft, like the original AWAS aircraft, were all directly on Morgan Stanley’s balance sheet. Morgan Stanley issued a selling document for AWAS. It was the summer of 2001. Cue the ominous music.

We don’t know how far Morgan Stanley got in selling AWAS, all we know is that when 9/11 hit, Morgan Stanley still owned AWAS. Not good.

The problem was two-fold. On the one hand, because its portfolio had been relatively static in the 1990s, AWAS still owned a lot of aircraft that were somewhat marginal. An aircraft lessor wants assets that are in constant demand and can be easily leased to many parties, so that when an aircraft is returned, either through default or simply at the scheduled end of the lease, the lessor can quickly put the aircraft back to work. Such highly liquid aircraft also perform the best in a downturn, because they are the last aircraft that the industry grounds.

Unfortunately, many of the original AWAS aircraft were rather illiquid, especially MD-80s and A300-600Rs, and therefore these values were particularly badly hurt in the steep downturn after 9/11. Moreover, in a downturn, such marginal assets typically have the greatest permanent decline, because coming out of a downturn, airlines like to re-equip with more modern aircraft types.

Secondly, many of the MSAF aircraft were also fairly marginal (even though they were probably also somewhat newer on average than the original AWAS aircraft). Morgan Stanley had bought the MSAF aircraft from aircraft leasing giant ILFC. There are two possibilities, neither putting Morgan Stanley in a great light:
  • Morgan Stanley didn’t understand aircraft well enough to know that ILFC took the opportunity to sell it some of ILFC's least liquid, most marginal aircraft

  • Morgan Stanley understood the aircraft were illiquid, but since the aircraft were originally destined for MSAF (and therefore the aircraft would be the problem of MSAF bondholders), Morgan Stanley didn’t care that much
Whatever the truth, many of the MSAF aircraft weren’t very liquid.

Unfortunately, on 9/11, Morgan Stanley was fully exposed to the marginal aircraft of AWAS and MSAF as the aircraft market collapsed. Ouch.

Consequently, AWAS has been a chronic problem for Morgan Stanley, causing periodic writedowns that damaged Morgan Stanley earnings. In the old days, Morgan Stanley would have been able to take a one-time write-off of the estimated loss in value, thereby putting the problem behind it. That is no longer possible under new accounting rules unless Morgan Stanley had formally taken a decision to get rid of AWAS. But Morgan didn’t want to sell AWAS because to do so would crystallize an even bigger loss. AWAS, a trade gone bad, was a millstone around Morgan’s neck.

All this changed when Morgan Stanley’s long-time CEO Phil Purcell resigned last year after a highly publicized struggle with investors and employees. When new CEO John Mack returned to Morgan Stanley, it was a fair bet that Morgan Stanley would soon dump AWAS. New brooms sweep clean, and in particular, a new CEO has every incentive to resolve issues like AWAS, as any resulting losses can be laid at the door of the departing CEO. And that’s exactly what happened. Mack was appointed CEO the last day of June, 2005. Barely more than a month and a half later, on August 17 (lightspeed for a corporation), Morgan Stanley announced it was flushing AWAS.

What did AWAS cost Morgan Stanley? Morgan Stanley public financial statements show pre-tax aircraft impairment charges of $87mm, $74mm, $323mm, and $109mm in financial years 2001, 2002, 2003 and 2004 (check the financials yourself). That’s $593mm. Morgan Stanley originally took a further pre-tax charge of $1.7bn (!) in FY2005, equivalent to about $1bn post-tax, when it announced it was dumping AWAS. In light of a better-than-expected offer from Terra Firma, Morgan revised the post-tax charge down to the $500-550mm range, presumably equivalent to about $850mm or so pre-tax. So, the impairment bill would be somewhere around $1.45bn since 2001, which of course vastly exceeds any conceivable gain Morgan might have realized on the earlier MSAF deals.

That, of course, does not include the effect of all the Morgan Stanley management attention that was no doubt spent on this since 9/11. In all, AWAS was a singularly unsuccessful venture into aircraft leasing. Just goes to show that you can be very smart (and there are a lot of very high paid, very smart people at Morgan Stanley, and that’s not at all meant to be snarky) and still get your head handed to you in this business.

Wednesday, February 01, 2006

FT on JetBlue Earnings

The Financial Times is generally pretty good with its airline coverage (as we mentioned in this post), though it's not as if the competition is that tough. So it was with some disappointment that we read the following in its report (subscription required) on JetBlue earnings:

The New York-based carrier has captured market share from established rivals with a mix of low costs and high service levels, but has deviated from the industry’s standard business model by introducing 90-seat Embraer 190s alongside its fleet of larger Airbus A320s.

Jeff Neeleman, chief executive officer, last week admitted there had been teething troubles with the launch of the new aircraft caused by delivery delays and technical and training issues.

OK, so getting the number of seats wrong on the E190 (90 vs 100) is a relatively small matter, at least in isolation. But it looks like part of a pattern when, in the very next sentence, the FT gets David Neeleman's first name wrong. Jeff? Where is that from? Jeff Potter of Frontier, maybe?

It's not as if JetBlue is an obscure carrier, or that it's CEO is low profile... Oh, FT, say it ain't so...

US Govt Wants to Eliminate Airport Security Subsidy

Bloomberg article on how US govt wants to double the security fee at airports from $2.50 to $5 per one way nonstop flight (while keeping the existing cap on connecting tickets). This is not a surprise. The govt tried the same thing last year. The Air Transport Association (the US big airline club) is already crying foul (see article). We disagree with them. As it currently stands, the government is subsidizing airport security. That's not fair to the non-flying public.

It's worthwhile to separate the issue of airport security into two separate strands:
  • How security is provided
  • Who pays for it
On the first point, we think airport security is currently provided in an exceptionally costly and probably ineffective way. On the second, we think air travelers should bear the full cost of airport security, however it is provided, which is the rationale for why the US govt wants to double the fee. If the country has decided that the Transportation Security Administration (TSA) is the right way to supply security, then air travelers should pay the full costs of that. If that means doubling the current fee, then that's the way it should be.

Here's why. Every person who chooses to travel by air exposes society to risk it would otherwise not face -- the danger that a commercial aircraft will be used as a weapon. If we all chose to travel by car or train (or not at all), there would be no commercial flights and therefore there would be no such danger. Society mitigates the danger by requiring airport security, which of course, does not come for free. It is only because people fly that such expense is incurred.

Any economist will tell you that it is economically efficient to ensure that these costs are completely borne by those people who make this expenditure necessary, namely air travelers. If in raising the fees to eliminate the subsidy, some travelers choose to stay home, or choose some other mode of transportation, that is the economically optimal outcome. The fact of the matter is that the government is currently subsidizing the provision of airport security, and that's not fair to those who choose not to travel by air.

Some will say, "but airport security protects the general population too". Fine, but the general population is only in danger from aircraft terrorism because some people choose to fly. So why should a non-air traveler pick up any of that cost? In fact if you want to be really pure, since the danger can never be fully eliminated, perhaps non-air travelers should receive some additional on-going payment in compensation (no, we're not seriously advocating that, just making a point).

We think airlines have a much better case to make on improving the cost effectiveness of security than they do on air travelers avoiding the full cost of that security. Of course, it's a little trickier for the airlines to advocate the reform of government agencies from which the airlines need cooperation, but that's life in the big city.

Bomber Throws in the Towel

Bombardier has announced that it will shelve its planned CSeries aircraft. The Financial Times said (subscription):
Bombardier has shelved its ambitious plan to develop the CSeries, a new family of 110-130 seat aircraft, throwing the future of the group’s commercial passenger jet business into uncertainty.
Not really. The future of Bombardier's commercial passenger jet business was already greatly uncertain. This decision arguably just stops Bombardier from spending $billions on something the market had already decided it didn't much like. Since a lot of the cash was likely to have come from the Canadian and Quebec governments this decision is likely a huge win for Canada. If there's a lesson here, it's once again that companies that don't obsolete themselves run the danger of having others do it to them. That's what's happened to Bombardier, we think.

Bombardier invented the modern regional jet (RJ) by stretching its Canadair Challenger widebody business jet into the 50-seat CRJ100/200 RJ, which entered service in 1993. As we discussed in this post about the collapse of Independence Air, it took awhile for the legacy major airlines to figure out that the 50-seat RJ could be a very powerful tool, but when they did, they ordered 50-seat RJs (through their regional partners) in great numbers.

The CRJ200's one competitor was the Embraer Regional Jet (ERJ), the original 50-seat version of which is the ERJ-145 which was first delivered late in 1996. The essential difference between the ERJ and the CRJ is that the CRJ is a fatter, shorter airplane. Seating is two seats on either side of the aisle (2-2 configuration), wheras in the ERJ, seating is one seat on one side and two seats on the other (1-2). Bombardier's current predicament can in part be traced to this difference.

The ERJ-145 can't reasonably be significantly stretched. The CRJ-200 can and was. While both Embraer and Bombardier developed a family of aircraft, Embraer shrank its aircraft, while Bombardier stretched it. The ERJ-135 has 37 seats, the ERJ-140 has 44. The CRJ-700 has 70 seats, the CRJ-900 has 86. A 70-seat aircraft based on the ERJ would have been impossibly long and thin.

So when Embraer built a 70-seat aircraft, it had to start with a clean sheet. The resulting aircraft, the E-170/175/190/195 covers the 70 to 110 seat range, depending on configuration. From a passenger comfort standpoint, it is far superior to the CRJ700 and CRJ900. The CRJ fuselage cross section (which is essentially common across the whole CRJ series) derives from the Challenger business jet. What constitutes "widebody" in a business jet is minimally acceptable from a passenger comfort standpoint in a 2-2 configuration RJ. A CRJ is OK for an hour or two, but not much fun for any longer than that.

As a derivative, the CRJ700/900 was a much faster, easier development than the E-170/190 series, plus for airlines that already flew the CRJ200 it offered terrific commonality, with the same cockpit. So the CRJ700, at least, initially sold very well.

However, the E-170/190 is now the large regional jet of choice because of its far higher comfort level. Its seats are wider than that of the A320, for instance, and it offers usable overhead baggage space. The comfort level is broadly as good (or perhaps even better) than on an A320 or 737NG. JetBlue famously ordered (and is now flying) the E190 (complete with seat-back TVs) -- we can't imagine JetBlue would ever fly the CRJ. The passenger experience would simply be unacceptable relative to what JetBlue offers on A320s. As we've written before, the 100-seat segment of the market, which Embraer now owns, is potentially very important.

As Embraer started the design of the E170/E190, Bombardier also mulled the launch of a competing aircraft, the BRJ-X, which was originally scheduled for delivery as soon as 2003. This was to be a 90 to 115 seat jet. Bombardier originally billed the aircraft as being launched as early as 1999, but in September 2000, there were reports of it being on hold because of the fast sales of the CRJ700 and the launch of the CRJ900. Since Bombardier now had a 90-seater (or close to it) in the CRJ900, what did it need the BRJ-X for? It sank without a trace.

This was a mistake. The CRJ900 has turned out to be a slow seller, to date with just one big order from Mesa, a smaller order from a Lufthansa regional affiliate and an order of one each from two other small airlines (although it's also sold -- in small numbers -- in a low-density 75-seat version called the CRJ705). It appears that few airlines are willing to buy an aircraft with the CRJ cross section in such a large size. Meanwhile, in 2003 (when the BRJ-X was first contemplated to be delivered) the Embraer 170/190 family was gathering praise and looking like the product to beat. But if Bombardier had launched a new 80-110 seater at that point, it would have taken years to get to market, years in which Embraer would have had the market to itself.

So at the 2004 Farnborough airshow, Bombardier announced that it was designing the 110-135 CSeries aircraft, big enough so as not to be a direct competitor to the E170/190. It also started making the rounds of governments to get launch aid: Canada, Quebec and the UK (Bombardier has significant facilities in Northern Ireland, the former Shorts aircraft factories).

Unfortunately, the CSeries was indifferently received by the market. The CSeries was squarely aimed at the low end of the 737 and A320 family range. It is true that the smallest members of the Airbus and Boeing narrowbody families (e.g. 737-700, A319) are heavier than optimal because the same basic aircraft structure is designed to extend all the way to 200+ seats. However, these aircraft are part of much broader families, which gives them compensatory appeal. Further, it was hard to see Bombardier, which has not had an easy financial time of it recently, going up against Airbus and Boeing with their vast resources. Strangely (not) both Airbus and Boeing were uninterested in cooperating with Bombardier on the CSeries.

And then there's the fact that the next Airbus and Boeing narrowbodies are almost certainly going to be built almost entirely out of carbon-fiber, a la the 787. The CSeries was to be of conventional metal construction, which raised the obvious danger that the CSeries might be quite quickly obsoleted by whatever Airbus and Boeing produce in the early years of the next decade.

Consequently, Bombardier found it somewhat difficult to entice suppliers to work with it on the CSeries. Both IAE and CFM declined to develop an engine for the aircraft, so Bombardier ended up working with Pratt & Whitney Canada (PWC) conveniently located nearby Bombardier in Montreal, but to that point not known as manufacturer of jet engines of the requisite size (PWC specializes on small engines for turboprops and business jets). Further, it does not appear that any airline was exactly rushing to order this aircraft.

So Bombardier has not had an easy time, and has, for now, thrown in the towel. To the extent Bombardier had a future at the top end of the regional jet market, it was probably the BRJ-X. In 2000 Bombardier was an investment-grade company on the upswing and still the company to beat in the small jet arena, a company with which suppliers would be far more willing to share risk than today. In our view, Bombardier blew it by trying to rely on the CRJ900, a derivative of a derivative (CRJ700) of a derivative (CRJ100/200) of a business jet. Incidentally, what is Bombardier's current plan B? A further development of the CRJ900, we kid you not.

As Boeing hopefully learned in the 1990s with the failed 757-300 and 767-400, there comes a time when you can't paper over the cracks in your product line with a derivative, a lesson Airbus is now being taught with the A340-500/600. When that time comes, better to launch an all-new aircraft even if it kills your existing product line. Better to do it to yourself, than to have someone do it to you.

Bonus linkage:

Bombardier orders and deliveries
Richard Aboulafia on the CSeries

Tuesday, January 31, 2006

Judge Stops the Insanity

Yesterday an Italian judge stopped the acquisition of Volare by Alitalia. Volare is an Italian LCC that since November 2004 has been operating in under administration in bankruptcy (not dissimilar in concept to US Chapter 11 bankruptcy). Thank heavens for that.

First, as we've already written, we don't believe it makes sense for legacy carriers to run LCC subsidiaries or divisions. Secondly, it's particularly egregious that Alitalia, which is itself in financial crisis and which is shamelessly hiding behind the skirts of the Italian government, should be the one to take over Volare. If the Italian government stopped protecting Alitalia, LCCs like Volare wouldn't be in bankruptcy, instead they'd likely be rolling in cash from backfilling for Alitalia.

Previous Alitalia posts here and here.

Old Norse Above Britain

We were trying to figure out why we thought it was so cool that Atlantic Airways announced service this summer from Faroe to Shetland to London. And then it came to us -- it's an example in miniature of the benefits of liberalization.

Where are these places? The Shetland Islands are the northern-most part of the United Kingdom, out in the North Sea. The last few decades they've done OK on the back of North Sea oil, to which they are very close.

Faroe is even further north, between Shetland and Iceland, a group of nominally Danish but in fact self-governing islands which speak a variant of Old Norse related to Icelandic. Oddly, Faroe is part of Denmark but not part of the EU (there are other such anomalies -- the Isle of Man, for instance, is part of the UK but not part of the EU). Here's a map showing the locations. Faroe and Shetland are lonely places with small populations -- Shetland has about 22,000 people, Faroe about 47,000. Historically they've been harsh places to live -- the traditional Faroe diet was heavily fish-based, with dried sheep meat (yum!) for special occasions. Not a lot of arable land, so not many vegetables, but Faroe has some spectacular scenery.

Nonetheless, Faroe supports its own airline, Atlantic Airways which flies four BAe-146 aircraft (photo here). We've discussed this oddball aircraft (and its later derivative, the Avro RJ) a couple of times (post on the woes of Mesaba, post on SN Brussels/Virgin Express). The one thing this aircraft has going for it is that it can fly from short runways, which is good because Faroe has a single airport with a very short runway. Short takeoff and landing capability also makes the BAe-146/Avro RJ the jet of choice at London City Airport, which has a short runway built on a former ship dock.

Atlantic Airways has previously offered London Stansted-Faroe nonstop service in the summer. This year, they're doing something different, offering London-Shetland-Faroe service, the hope being that there will be enough demand to support a viable flight between people wanting to go to Shetland (the first time a nonstop flight has ever been offered) and those who want to go to Faroe.

So what? The so-what is that Shetland-London is an internal UK flight being performed by another European airline. Yes, this is hardly the first time this type of thing has happened, but it's definitely one of the most unusual, and thus (to us at least) the charm. Shetland and Faroe happen to be different countries, but that aside, they clearly have a lot in common, being isolated rocks in a similar patch of cold dark sea.

Under the bad old days of regulation, Atlantic Airways could never have attempted to leverage Shetland as well as Faroe. Now, maybe it will work, maybe it won't, but at least this tiny airline from this tiny country can give it a try. A miniature example of the benefits of liberalization.

Update: Nate Silva, in the comments, points out that the Isle of Man is not legally part of the UK either, but is instead a crown dependency according to Wikipedia. Even more anomalous...

A World of Pain

In the post on the problems with mergers we mentioned that the only thing unions hate more than a merger was two airlines being run under common ownership. That turns out to be a key issue in the World Airways strike which started yesterday, as this article says.

Actually, it’s not a classic strike. The World contract forbids pilots from striking military charter flights, which is a large part of World’s business (as we mentioned in our post on Sec 1113, in the US airline business, union contracts never end, they become amendable, with the terms of the old contract enduring until a new contract is in place, so the clause forbidding strikes on military charter business is still intact).

A significant issue is that last year, the parent of World Airways bought another charter airline, North American. World flies DC-10s and MD-11s, while North American flies 757s and 767s. World Airways pilots want to make sure World gets as much growth opportunity as North American, a guarantee that apparently World won’t give. And so, in part for this reason, World Airways pilots are on strike, which apparently means the pilots won’t fly certain civilian charter flights. As we said, trying to run two airlines under common ownership is just begging for union grief.

World has had a renaissance since 9/11 on the back of military charter business, which has been strong with all the US military activity since 9/11. North American also does some military charter. The revival of the company’s fortunes since before 9/11 is apparent from its long-term stock graph, and its stock has maintained its value in recent months, notwithstanding that World is a significantly delinquent filer.

Both World and North American have interesting histories. World dates to 1948 and for decades was based in Oakland, run by a colorful character called Edward Daly. For most of its history World has been a charter carrier, with occasional generally unsuccessful forays into scheduled business. World was famous at the collapse of South Vietnam for flying the very last flights out of areas about to be captured. These are recounted here on the occasion of the anniversary of another famous World flight, airlifting Vietnamese orphans to the US, an action which induced the US govt into launching a program of such flights.

North American was started in the late 80s as a proxy for El Al, the Israeli airline. As we recall it, El Al was flying passengers from Tel Aviv to New York to Los Angeles. Since it as a foreign carrier it can’t sell tickets from New York to LA, it was losing a bundle flying mostly empty airplanes from New York to LA and back. The solution was to help start up North American (El Al took the maximum 25% stake that non-US entities may own of a US carrier), which flew 757s from New York to LA and back on behalf of El Al.

More on American Fleet Replacement

Flight International article on American Airlines' fleet replacement, which we touched upon in an earlier post. There have been a rash of articles recently driven by American's recent media day. Couple interesting things:
  • Phasing out American's MD-80s could be a 10-year project (American has about 350 MD-80s)
  • Aviation Partners Boeing apparently has worked on the potential for retrofitting blended winglets (we talked about them in the context of 757s earlier) to MD-80s. Apparently the savings aren't as good as on other aircraft. It would be interesting to know why.
  • Winglets present gate space issues for American. MD-80 has a smaller wingspan than 737NG. American also currently exploits the fact that widebody wings are higher than MD-80s by letting wings overlap at gates. That doesn't work with blended winglets.
American has retrofitted one 737-800 with winglets, which it ordered at the same time as it acquired 20 shipsets of winglets for 757s (pdf). Presumably this is some sort of test aircraft as the Flight article says American will make a 737 winglet decision sometime in the next six months.

Monday, January 30, 2006

Articles: Southwest, Demand for Pilots in Asia

Airline Business story (cover story?) on Southwest and CEO Gary Kelly, who apparently does not particularly like being known as mild-mannered (hey Gary, think Clark Kent, he was also mild-mannered). Not a lot new there, but decent background reading for those who want to know more about Southwest and the Wright Amendment. We caught one small error while flipping through the story. Airline Business says that one of the restrictions of the Wright Amendment is that Southwest:
cannot, for instance, display connecting flights to or from Love on its website.
Not true. Look up, for instance, Albuquerque, New Mexico to Harlingen, Texas on Southwest's website and it includes a connection via Dallas Love Field. The Wright Amendment (and subsequent amendments) forbids carrying passengers from Dallas Love Field to outside a nine-state area. So long as transportation is within that nine state area (map here), Southwest can connect passengers through Dallas Love Field (and display it on its website). Our previous posts on Wright Amendment here.

Meanwhile, Flight International has good article on shortage of pilots in Asia. The huge expansion of Indian & Chinese carriers has resulted in huge demand for pilots, including foreign pilots. India has resorted to boosting the maximum age of pilots in stages from 60 to 65 and requiring pilots give 6 months notice of quitting. Clearly another factor limiting the growth of these carriers.

Another big source of pilot demand (not the subject of the article) is the Middle Eastern carriers (Emirates and its local wannabe competitors).

Ex-Im Bank in the News

MRO Wire noted that, coincidentally (see post below) Ex-Im Bank is selling a 737-400 that it recovered from Air Nauru. Not everything that Ex-Im guarantees works out. So in this case Ex-Im presumably has made good on its guarantee to whoever it was who actually lent money to Air Nauru to buy the airplane, and has recovered the collateral, namely the airplane. Now it's trying to sell the aircraft to minimize whatever loss Ex-Im is facing.

Nauru, by the way, is a tiny island in the Pacific that was once very rich because of phosphate mining (phosphate deposits are what you get when birds defecate for millenia in the same place -- no, we are not making this up). In its heyday, Air Nauru had an extensive network of flights across the Central Pacific and a fleet of Fokker 28s (a small Dutch twin-engine jet seating about 60-80, built in the pre-regional jet era, from which the later Fokker 100 was derived). Unfortunately, the phosphates are mostly now gone and the island nation has not been prudent in investing the proceeds. So now it's a tiny little basket-case.

Incidentally, the Ex-Im press release is interesting because it highlights an issue with all aircraft recoveries -- getting the maintenance records (the release says that Ex-Im is now gathering the records for the Air Nauru aircraft). Every part on an airplane needs to have a clearly documented history back to its manufacture. An airplane without maintenance records is useless. We discussed (in this post on Delta) how airlines can make things difficult for aircraft financiers in bankruptcy, and this is just one more way (records for your airplane? Yes, we have them around here somewhere, but we're so short-staffed, might take awhile to find them, so sorry) Better ways of record keeping (e.g. keeping complete, up to the minute, offsite duplicates) is a continuing pre-occupation with aircraft financiers, or at least those financiers who have a clue.

Later addition: In the comments, Lars Marius Garshol provides a link to this excellent Economist article on the sad history of Nauru.

737NG: Huge Strategic Error? Yes

Over the weekend, an anonymous commenter jumped in the wayback machine to a November post and said:
The 737NG a mistake? As a Boeing shareholder, I know I feel regret with every delivery of this ancient aircraft. It is really awful for Boeing to have milked this cow for all these years. 569 2005 orders seems pretty shameful. Boeing has delivered more 737s than Airbus has delivered aircraft of all types. There are more 737s flying than there are Airbus aircraft of all types. It is remarkable to think that at the inception of the 737 program, Airbus was not yet even a gleam in a Frenchman's eye and one could order factory new the 707, 727, DC-8, DC-9, VC-10, BAC 1-11, or Mercure. The 737 has outlived them all, as befits the true DC-3 replacement.
What we had said (that presumably was objectionable) was:
The huge strategic error in making the 737 New Generation instead of an all-new narrowbody, which conceded the A320 the technology and cabin comfort lead
Yeah, we stand by those words. Let us elaborate.

In the early 90s Boeing had to do something with the 737 Classic (737-300/400/500). The Classic sold very well, but that was luck more than design. Boeing thought the 757 and 767 would be the big short-medium haul sellers (Boeing designed them in the late 70s and the 767 was originally designed as a US domestic aircraft, whereas it's mostly been used in medium-long haul international applications), but once deregulation hit, it turned out airlines wanted smaller gauge aircraft.

Having used up its ammo on the 757/767s, Boeing needed to refresh the 737s. The Classic was a quick early 80s update of the first generation 737 (stretch, new engines, a little fillet in the tail), and in the absence of anything better (the McDonnell Douglas MD-80 wasn't that, and the A320 came along in the late 80s and was an untried quantity by a still relatively new manufacturer, it didn't get traction until into the 90s) it sold really well.

So, early 90s, A320 starting to get some traction, Boeing needs to do something with the 737 Classic. Solution: replace basically everything except the fuselage and the technology (i.e. in many ways still the same old 737 under the skin, although nice new screens in the cockpit). New wing, new (at least bigger) tail, new engines, new landing gear -- resulting in the 737 New Generation (737-600/700/800/900). Unfortunately, this left the A320 with clear advantages in fuselage width (which passengers seem to like no matter how often you tell them it's width at the shoulder that matters) and technology.

Don't get us wrong. The 737NG outclasses the A320 in some important ways. Want to fly above the traffic? The 737NG can go higher than the A320, giving it access to flight levels the A320 can't reach. The 737NG also has longer legs -- Aloha and ATA are flying 737NGs from the US west coast to Hawaii. There's a reason why A320 operators don't do that -- they can't, not economically. If you need range in a small package, there's only one choice. And the new 737-900ER looks to be shaping up as the best charter aircraft out there.

And the 737, all three generations, has a sales record that is probably unreachable by the A320. But that's because the 737 sold so well in the past -- many of those past sales have already been recycled into beer cans. Right now, right here, the A320 is outselling the 737NG. Is Airbus pricing the A320 at narrower margins? Maybe, doubt it (they have to be making money somewhere, the most likely place is in the A320 program). It's probably a huge cash cow by now, it's been in production for almost 20 years.

And that's a big problem for Boeing. Every airline that starts flying the A320 is one that gets used to Airbus. It expands the A320 parts supply line, increases the number of A320 qualified pilots, instructors, mechanics, sends Airbus into every corner of the world. With the common cockpit across the Airbus product line, other Airbus equipment will be the first thought of any airline that's grown up with A320 family aircraft.

Suppose Boeing had done (in our opinion) the right thing and launched a totally new narrowbody instead of the 737NG, including a fuselage that passengers liked even better than the A320, and a control system based on the 777 fly-by-wire (only electrical connections between the cockpit and the flight surfaces) system. Now you've got an airplane that outclasses the A320 in every dimension.

Would the A320 be selling as well today? Not likely. And in fact that would be a very big problem for Airbus right now. The A380 is not yet in service and is facing delays -- Airbus doesn't get any money beyond deposits until it delivers the aircraft, and even then it's not going to make money on the first ones it sells. The A380 sold in desultory numbers last year. The A340-500/600 program is only a few years old and already in trouble.

What does Airbus have going for it now? The A320, that's what. A 20-year old design to which Boeing has given greater longevity by pulling its punches in the early 90s. Would Airbus be an easier or a tougher competitor today if the A320 wasn't still selling?

And we're skeptical Boeing is currently making more on a 737NG than it would have made on a new aircraft. If you believe a new narrowbody would have sold better than the A320, then by now it would be well into cash-cow territory itself. Plus Boeing really screwed up the introduction of 737NG manufacturing in the late 90s. Perhaps (and no one can know) it would have been more careful if the aircraft had been all new.

One other thing: in the late 90s/earlier this decade everyone was worried that Boeing was getting out of the business (and that probably influenced a few sales around the world, don't you think?). That wouldn't have been on the table had the 737NG been an all-new aircraft.

So, we say again, 737NG, good airplane, bad Boeing mistake.

Image: Dassault Mercure -- French narrowbody from the early 1970s, definitely in the "what the heck is that" category (but mentioned by the anonymous commenter above), there were only 11 delivered (and one of those was a modified production prototype) and it only ever flew with Air Inter, the former French state-owned domestic carrier (now part of Air France). Last in service in the early 1990s. Good article here, if you want to know more. Dassault is far better known for its fighters (Mystere, Mirage, Rafale) and its Falcon series of high-end bizjets, oh, and also a killer CAD/CAM system through what is now a separate company.

Export Credit Agencies

Lufthansa not only publishes two yearly environmental publications (which we described as part of this post), it also publishes a periodic policy brief (pdf). The latest one contains a page (numbered page 3 but actually page 4) complaining of the subsidy other airlines get through ECA (export credit agency) financing. And we concur – ECA financing is a subsidy and one of the reasons why the airline business has too much capital.

[We did not include ECAs on the list of parties in this post that pump capital into the industry. Oversight is one reason, but another is that ECAs don’t play a big role in financing US mainline airlines (and the post was in the context of American) for reasons that will become apparent.]

ECAs support exports by subsidizing the financing thereof. Commercial aircraft are huge items of capital equipment and one of the major beneficiaries of ECAs. The US and Europe may claim they don’t subsidize aircraft manufacturers (except, in the case of Europe, through launch aid to Airbus), but the activity of their ECAs proves them wrong. Subsidizing aircraft finance makes aircraft cheaper, and that helps manufacturers sell more of them.

The ECAs most relevant to the airlines are:
  • US Export-Import Bank (Ex-Im Bank), a US government agency which, of course, supports Boeing export financing

  • Export Credits Guarantee Department (ECGD), a UK govt agency that supports Airbus export financing

  • Coface, a private French insurer that acts on behalf of the French government in supporting Airbus export financing

  • Euler Hermes, a public/private consortium that, similar to Coface, acts on behalf of the German government in supporting Airbus export financing

  • Export Development Canada (EDC) a Canadian crown corporation (essentially, a government-owned company) that supports the financing of Bombardier exports.

  • Banco Nacional de Desenvolvimento Econômico e Social (BNDES), a Brazilian govt development bank that supports Embraer orders.
The ECAs for Airbus and Boeing operate according to different rules (such as the Large Aircraft Sector Understanding, negotiated as part of an OECD agreement to limit export financing. OECD = Organization for Economic Cooperation and Development, the “developed, democratic countries” club). ECAs have nakedly mercantilist aims (make sure our manufacturers sell exports rather than the other guy’s manufacturers) in a world that is largely supposed to believe in free trade, and over the years the OECD has worked to ensure things don’t get out of hand.

ECAs for Boeing and Airbus first of all cannot finance aircraft in the home countries of Boeing and Airbus – the US, France, Germany, Spain and the UK. These countries, are, if you like, a demilitarized zone, which is why Lufthansa can’t take advantage of these offers. Since an ECA can’t finance in its own country anyway (it wouldn’t be an export then, would it), this is really an agreement not to poach in the other guy’s backyard.

Big exception: ECAs can, and do, finance aircraft for lessors located in the home countries, so long as the lessor is leasing the aircraft to an airline outside the home countries. Even huge aircraft leasing companies like ILFC benefit from ECA financing.

Airbus & Boeing ECAs can finance up to 85% of the net-net price of the aircraft (meaning after all rebates, coupons, credit memos, etc – the real price of the aircraft, which will often be 20-30% lower than the list price). The length (“tenor”) of the financing can be at most 12 years (10 years for narrowbodies) and the loan has to fully amortize over that term (it can either amortize on a straight-line basis – equal principal payments – or “mortgage style” – where principal plus interest is a constant). There’s also a set method to calculate the interest rate on such loans.

However, in practice, the Airbus & Boeing ECAs (especially Ex-Im, historically) have not directly lent money but rather provided “pure cover”, meaning providing a guarantee. When an ECA does this, it is putting the full faith and credit of its country behind it. The bank making the loan is then no longer relying on the credit of some random airline in some random country, but rather on the credit of, say, the US. And as you can imagine, that bank is then willing to lend at a very low interest rate because the loan is now relatively risk-free. In exchange for this, the ECA gets a 3% fee upfront (but this can be added to the amount borrowed). And, of course, the loan and guarantee is secured by the aircraft being financed.

But wait, there’s more. Often, the 15% not financed by an ECA is financed (at least partially) on commercial terms (think of it as a second mortgage on a house) by the bank (or syndicate of banks) that is arranging the export finance, so the financing approaches 100% of the price of the aircraft. Secondly, the 12-year term has, over time, become to be seen as rather burdensome, requiring too much principal be retired too quickly (12 years is also a lot less than the lifetime of a typical commercial aircraft).

So in the last decade or two, both Boeing and Airbus ECAs have agreed to share the first priority claim they have on the aircraft with a so-called mismatch (Airbus ECAs) or SOAR (Ex-Im) loan that starts at zero principal and increases (accretes) as the ECA-loan amortizes. So although the ECA loan lasts only for 12 years, the two loans, taken together, have a longer (15-year) amortization. Oh, the clever things that bankers dream up to make money and justify bonuses.

Billions of dollars of such aircraft financings are done every year each by Ex-Im and the Airbus ECAs. That this is a subsidy is undeniable – each such financing is clearly cheaper than any feasible commercial alternative, because otherwise the commercial alternative would have been selected. Moreover, it’s not just dodgy airlines in dodgy countries that take advantage of this. Ryanair, based in Ireland despite doing a majority of its flying out of the UK and Germany, has financed most of its 737s with a US guarantee. But easyJet, which also does a majority of its flying out of the UK and Germany, can’t take advantage, because it’s based in the UK (as we previously said in this post, any EU startup airline would do well to see if it makes sense to be based in Ireland. Access to ECA financing is just another advantage of being based in Ireland.)

In the case of Canadian EDC and Brazilian BNDES, the situation is different. First of all, Canada and Brazil aren’t limited by the large aircraft agreements, because Bombardier and Embraer make smaller aircraft (Canada and Brazil have been invited into the latest discussions because it’s clear that their aircraft increasingly are competitors to Airbus and Boeing aircraft). Secondly, EDC and BNDES generally make loans directly. In the case of the Brazilians, they don’t have much choice because a Brazilian government guarantee doesn’t carry much weight. Both EDC and BNDES have supported exports to US airlines. In fact EDC is one of the parties most at risk from the collapse of the 50-seat regional jet market.

In the case of Germany, ECA financing isn’t the only weapon in its arsenal. Germany also has a development bank, KfW, which is functions as a so-called “Market Window” (we didn’t know this term until we read this Ex-Im report (pdf), which is a good overview of ECAs). This is basically a government agency supporting exports but (at least purportedly) at market rates and terms. Uh-huh. If KfW is only supporting exports at market rates and terms, why is its presence necessary at all? We’re pretty confident that most see KfW as a source of below-market finance, whatever the legal niceties, although the EU has apparently recently forced changes at KfW that may reduce its ability to interfere.

What’s an ECA subsidy worth? Lufthansa claims up to $500,000 per year for an A330. We’re not sure where it gets this figure from. In theory, the benefit to the airline is the difference between the financing rate it would have paid, and the interest rate it pays with the aid of the ECA. Of course some airlines wouldn’t be able to borrow at all without ECA cover and would have to lease an aircraft. That makes the analysis a bit more complicated. Assuming the Lufthansa figure is right, it’s certainly an amount worth having.

The airline business has a lot of problems that need to be solved if it is ever to be a more normal business. Eliminating the ECAs is one of them. The manufacturers would sell fewer aircraft, but the airlines would be, eventually, on average, somewhat healthier.

Saturday, January 28, 2006

Sayonara Shannon

Another thing contained in the pending US/EU open skies deal is the elimination of the notorious requirement that airlines flying across the Atlantic to Dublin also fly to Shannon, Ireland.

Until 1994, Ireland required all commercial trans Atlantic flights to enter or leave Ireland via Shannon. This bizarre policy (the Shannon Gateway Policy) was in place to promote economic development in the west of Ireland. In 1994, the rules changed to permit airlines to fly into Dublin, but each flight into Dublin had to be matched with a flight into Shannon. Of course, far fewer people want to go to Shannon than to Dublin, but that's too bad, airlines have to serve Shannon anyway. Again, the motive was to support economic development. If US/EU Open Skies is approved, the Shannon Gateway Policy will be history by 2008 (details here).

Both versions crippled development of Dublin airport as a trans Atlantic gateway/hub for Europe. Dublin airport has done well anyway in the last decade and a half on the back of LCC growth, particularly Ryanair, but it's clear that this policy has constrained the opportunities for Aer Lingus, the national flag carrier, and for decades it's made Dublin and Ireland harder to get to from North America than need be.

While (if you can't tell) we believe strongly in free-market solutions, we do think governments should seek to ameliorate social and economic ills -- but there are better and worse approaches. In our view, a particularly bad way of encouraging development of a depressed region is by simply mandating an arbitary level of service or production by that industry in that region, unconnected to any intrinsic demand.

One of the worst things about this type of policy is that it obscures the expense of it. Over time, Ireland could have achieved the same sort of economic development entirely through direct means: subsidies, the placing of government facilities in the area, the establishment of universities, and so forth and you'd be able to say that western Irish development had cost the Irish taxpayer this many billions of Euros and ask yourself whether it was worth it.

By contrast, it's virtually impossible to say what the Shannon Gateway Policy has cost Ireland over the years. It is certainly significant. In this way, at least, arbitrary requirements are worse than, say, the idiotic tax France is imposing on air travel to support third world development. At least we'll have some idea what that's costing the airline business because we can see the total tax raised, we can estimate the suppression in air travel demand, etc.

Another problem is that some of the development near Shannon now depends on this artificial provision of trans Atlantic flights, and is unlikely to survive without it. So now that the almost inevitable has occurred and the significant market distortion seems likely to be corrected, the Irish government has a problem on its hands.

In any event, if US/EU Open Skies is adopted, this part of it will materially benefit Dublin, Ireland and Aer Lingus. Aer Lingus is finally being run on close-to-commercial grounds. One of the Irishmen at Emirates has come back to take the reins (and promptly started a route back to Dubai, the first long-haul Aer Lingus route to the east), and the company is likely to be privatized. Having unfettered access to the North Atlantic can only be a good thing for the airline -- better late than never. Aer Lingus might be come somewhat more than a bit player on the Atlantic.

It will also be interesting to see how Aer Lingus chooses to exploit it. We like Continental's strategy of carpet bombing Europe with 757s. There's few European cities better suited to returning the favor than Dublin because of its promixity to North America and it's modest size (Ireland is a small country). 757s launched from Dublin could easily reach as far west as Chicago and maybe even, at a stretch, as far south as Atlanta. Something smaller gauge than Aer Lingus's A330s would enable Aer Lingus to tap smaller cities nonstop. Whether, however, it's worth investing in a new (and out of production) aircraft type is another question.

As we've said before, halting production of the 757 has left a hole. No other narrowbody is capable of spanning the North Atlantic (ignoring 737s and A319s in business-jet drag).

Friday, January 27, 2006

Air Canada: Equal Pay

Supreme Court of Canada rules that the country's human rights commission may consider whether Air Canada flight attendants should be paid the same as pilots and mechanics. This is under the doctrine of "equal pay for equal work", which attempts to determine whether certain jobs are being underpaid because of sex discrimination.

We think the concept makes no sense (and are glad that it's not law in the US). It's true some women-dominated jobs pay less than some men-dominated jobs. But we can think of a lot of reasons why that might be true. Even if one believes (and not everyone does) that some women-dominated jobs pay too little in some objective sense (it's difficult to understand how one judges this "objectively"), it may be that it's a symptom of deeper underlying causes.

In which case, adjusting pay through some non-market mechanism is treating the symptom, not the cause, and at the expense of interfering with the market, which is something one should always be very reluctant to do.

For instance, if boys and girls are socialized differently, so that girls are subtly (or unsubtly) directed away from learning subjects and adopting attitudes that are useful in pursuing certain higher paying jobs, then surely the thing to do is to address that issue head on.

In the specific case of flight attendants, while we believe the job of a flight attendant is worthy and difficult, a flight attendant clearly does not bear the responsibilities of a pilot and a mechanic. If a pilot screws up big time, there's a smoking crater, ditto if a mechanic screws up. Both must be familiar with complex systems and technologies. Flight attendant unions like to style flight attendants as safety professionals but while there's an important component of safety to their jobs the reality is that most of the time safety is not the minute-by-minute focus.

If a woman wants to be paid like a pilot or mechanic (and these days that's a lot less pay than it used to be) let her become a pilot or a mechanic. We're all for it. If in doing so, she is denied access to those professions, or is paid less, or in any way differentially suffers because she is not male, let the offending parties be swiftly punished and make restitution. But we don't think any group of people (like Canada's human rights commission) is smarter than the market.

Good luck, Air Canada.

Later addition -- to clarify, according to the Toronto Globe & Mail:
The flight attendants said they were paid differently for work that was of equal value to that performed by the male-dominated mechanical crews and pilots.
The ruling opens up the possibility of cross-comparisons of wages between other groups that are not in the same union
This really is about comparing wages across professions. The idea that someone might decide that a pilot should be paid some fixed multiple of another, wholly unrelated profession is absurd.

Later later addition: Hello folks, we are not saying that companies should be permitted to pay people doing the same work different pay based on sex. And note that for pilots, flight attendants and mechanics that's not an issue anyway, because there's a single hourly scale -- it's not as if there's a male pilot wage rate and a female pilot wage rate, for example.

We are objecting to any group of people getting together and deciding the relative worth of one profession versus another.

Later later later addition: a reader sends us this link to a snarky interpretation of what this might mean one day.

Prior post on Air Canada here.


Jon Bright said...

Equal pay for equal work is a good idea. If women are doing the same work men are, let them be paid the same. I also don't see an issue with the human rights commission looking into the matter if they feel like it. There's only a difficulty if they take the utterly insane decision that flight attendants are doing the same work as pilots.

Female pilots should get the same as male pilots. Since this has historically been an issue (maybe not for pilots, but in other professions), making it law is probably a good plan.

Male flight attendants should get the same as female flight attendants. Flight attendants shouldn't get the same as pilots even if they're hermaphroditic martians - it's a different job needing different qualifications.

If Canada's law turns out to mean flight attendants get the same pay as pilots, the law needs changing - but the principle's still sound.

27 January, 2006 13:48  
Erich Finchley said...

I was thinking about this too. First, I don't think the story was suggesting that pilots get the same as flight attendants. It seems to me the issue is about pay changes.

For example, say the largely male pilots association is at average pay A at time T. The flight attendants (largely female) are getting pay average B at the same point. If at time T' the pilots are getting A+15%, but the attendants are getting B+10%, then what's going on?

Obviously pilots jobs are more complex, require more skill, etc. etc. But should they get more over time as a percentage of their starting salaries? I don't know. Maybe the planes are more complex, or they're all getting older (and getting raises). But wouldn't the same be true for flight attendants?

Two other factors might be a reason for less of an increase in average pay. One is that the representative union is worse at bargaining, has less bargaining power. The other is that the management (consciously or not) devalues the work of flight attendants.

Sadly, even for work of equal value, women make vastly less than men of equal ability. One good example is tenured professors. I think the figure there is around 15% less than a male of equal ability.

I do agree with the post's comment about addressing the source of the problem, however. What that involves is less clear.

27 January, 2006 14:08  
Jon Bright said...

The law should fix the problem with the tenured professors. (Granted, it's difficult to define "equal work" in that field.)

Experienced pilots, I'd imagine, are worth more. You can fly a plane better the more experience you've had (the same way you're a better driver the more experience you've had). There's probably some improvement in the performance of cabin staff over time - but I struggle to believe that it's the same increment. You might organise stuff better, you might get to know the average customer better, but at the end of the day, there's probably less improvement to justify the increment over starting salary.

Employees of <insert fast food chain here> doubtless get worthless increments if they get them at all. The difference between a burger flipper with 5 years' experience and a burger flipper fresh from burger flipping training just doesn't make it enough worth keeping the former to give him/her a noticeable increment.

I get the impression that idlewild's ideal solution would be to get the government out of the way and let the market deal with all this. Some airline pays female pilots less than their male equivalents, other airlines will get those female employees. They'll maybe lose out on good female employees (and maybe keep the bad ones). I'm pretty sure, though, that you could populate an airline entirely with male pilots and not be noticeably less competitive. There are enough pilots.

27 January, 2006 16:46  
Anonymous said...

The day they start paying mechanics the same as flight attendents is the same day I stop flying Air Canada.

If the are f*ed up enought to believe the inequality warrents it, they should increase wages for female mechanics and pilots to encourage more women to do it. The solution isn't to raise wages for flight attendents.

03 February, 2006 11:45  

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Thursday, January 26, 2006

Joe Sutter's New Book/747s and SSTs

Joe Sutter headed the original 747 design team, which is akin to being present at the Creation. He's still alive and kicking and has written his autobiography. It will be out in (Amazon says) June, but the Seattle P-I has some exerpts (via James Wallace/P-I blog). The blog also has links to other recent stories about Sutter and the creation of the 747. Worth reading, especially if you're a bit of an airline nerd (we resemble that remark and if you're reading this you should be worried).

There aren't many good aerospace/airline books so we hope this adds to the number. The last really good airline book we read we mentioned at the end of this post. Anyone with a good airline/commercial aerospace book recommendation, please add it to the comments.

One thing we did not see mentioned in those stories was why, on what was largely a single-deck aircraft (the upper deck was pretty small on the original aircraft, though it's since been stretched), Boeing put the cockpit on top. In 1969, a lot of people thought the future belonged to SSTs (supersonic transports -- The Concorde, the Russian Tu-144 "Concordski", The Boeing 2707...). The story goes that the 747 was designed (not for the military transport C-5A competition that Lockheed won, Sutter says that's not true and anyway, it's pretty clear the 747 is a very different aircraft) to be converted into freighters once the SSTs made them obsolete. Previous post on 747 cargo aircraft here.

In the event, that never happened. The Concorde was the only SST that made even a minimal impact, and that was pretty minimal. Although a wonderful aircraft, it was an economic disaster and somewhat of a dead end (imagine if the best commercial aircraft engineers in the UK and France had spent that time designing something useful).

By contrast, the 747 had a huge impact, though it sold so badly after the first burst of orders that in combination with the 2707 cancellation it almost put Boeing out of business (the famous billboard pictured above dates from this era). Employment at Boeing in Seattle, as this page says, went from 101K to 39K from 1967 to 1971. Which is why we've always thought that the launch aid that Airbus gets is not fair. Though, of course, if you ever tried firing Airbus employees in those numbers they'd burn the factory down.

Which reminds us, Connecting Flights has a link called "Concorde, the 30th Anniversary of a Bad Idea" that may be of interest to some of you.

People do love the idea of an SST. We once were at manufacturer seminar with a lot of non-airline folk and the manufacturer made the mistake of mentioning a hypersonic aircraft. The whole of the question and answer period was taken up with questions about the thing, even though it seems like an irrelevance, at least on any sort of reasonable time scale (as in, before we die). Quite frustrating to airline nerds who wanted to get into the nitty-gritty of the latest narrowbody.


Anonymous said...

Hard Landing by Tom Petzinger. Arguably one of the better boooks on commercial airline industry.

26 January, 2006 11:26  
idlewild said...

True, but now 10 years old.

26 January, 2006 15:15  
Anonymous said...

I will cut and paste the actual book titles, but this thread over at has some suggestions that look good.


26 January, 2006 17:21  

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Wednesday, January 25, 2006

Ryanair Charges for Bags (More Unbundling)

That's what the headlines will read -- as we predicted when flybe started doing this. It's a bit more comprehensive than that, however (press release). Ryanair is combining this with measures designed to get people to web check-in -- there's no mention of airport kiosks.

[We've never subjected ourselves to (sorry, we mean, we've never flown) Ryanair but we don't think it has kiosks. Our suspicion is that it would probably resent the expense of buying/installing them, and might it make it a bit more difficult to pull out of airports that anger them. We could be wrong.]

Fares are to be reduced (to the extent that's a meaningful statement... You can reduce fares and still jack up the average fare by changing the number of fares sold at each fare level. Besides, Ryanair loves selling "free" -- net of taxes -- fares, hard to reduce those). Those who web check-in go straight to the gate and get boarding preference, thereby permitting (presumably) Ryanair to eliminate some of its airport personnel. Baggage allowance increased to 30 kilos, but you pay per bag, double if you don't do it in advance when you check in (they don't really want to take your money at the airport). Hmm, we forecast many large bags, since it's a per-bag charge -- why not one very large 30kg bag?

Unbundling continues. Those who check in bags will be very unhappy, but you can't say it's irrational. The traditional product was bundled, and we all got used to it. But there wasn't a huge amount of rhyme or reason to it. Why should someone who's checking bags be able to do so for free? You can bet US (as well as European) airlines will be watching this like a hawk. Who would bet against this happening in the US within the next few years? Next five years?

One very good reason to have free bag checkin is that people will try to take the kitchen sink on board. The state safety authorities are going to have to keep an eye on this. There was an interesting (not on-line) story recently in Airliners magazine (an enthusiasts magazine with a lot of pictures -- or "airline porn" as we refer to it) about the German inspectors who roam airports looking for safety violations. On board a Russian aircraft they found a woman who had all her luggage with her -- blocking an emergency exit (which is where you'd find the bodies piled up if there had been an otherwise survivable accident). Starting now the Germans may have to keep an eye on Ryanair flights, because you know people will do anything to save a quid/euro.

Update: we've now read elsewhere that Ryanair has a 10kg limit on carry-on luggage (easyJet apparently has no limit (?)). Wonder how stringently it enforces it.


UKScrooge said...

As you say, Ryanair don't have check-in kiosks. At least not at London Stansted, their main 'hub', and if they don't have them there I can't see them being anywhere else (and certainly have never encountered one myself.)

They also don't have pockets on the backs of seats, free food or drink (not even soft drinks), or really any other frills. On the other hand, they ARE Cheap, and considering that many of their flights of are less duration than your morning commute, you can't argue their business case.

This has been on the cards for some time, but as you hint, I wonder if it will succeed if everyone is 'taking the kitchen sink' on board. This has been a problem generally associated with US air passengers more than European ones. Most of the destinations Ryanair fly to are small airports where the baggage does not take very long to come through, so I prefer to check it and not drag it around the airport. (Also my wife, being Canadian, tends to take a few minutes to get through passport control at the destination, so the bags are often already there when we get through-- landing cards being another thing Ryanair doesn't do.) But if everyone is taking their large bags onto the aircraft, will this not increase boarding times-- and if the aircraft is on the ground longer, that will cost more, no?

25 January, 2006 19:41  
idlewild said...

If that starts to be a problem, they'll likely make it a profit center, with strict standards of how much you can bring on board (bag sizers and the like).

The guys at the x-ray machines are going to love Ryanair for making their lives more difficult.

25 January, 2006 22:47  
S. Kitty said...

This isn't quite unprecedented. Back in the day, you had to pay for checking bags on PeoplExpress. US majors are getting a lot stricter about people sticking to baggage limits and making them pay for overweight/oversized pieces.

Frankly, I think that people and baggage have gotten quite out of hand, so if you wanna play, you'll have to pay. I'm looking forward to see how American Eagle's new buy-your-soda policy works. Airlines are like lemmings...

26 January, 2006 09:17  
Jon Bright said...

easyJet don't have a limit on weight - but they do have a limit on dimensions of carry-on luggage. They have a steel frame in front of their kiosks, with something like "if it fits in here, it can go on board". The easyJet FAQ says this is 55x40x20cm (21.5x16x8 inches). Take a solid block of lead of that size and you come out with a touch under 500kg. I guess EasyJet is planning on you not doing that.

26 January, 2006 14:49  
idlewild said...

Yes, in our post on unbundling we mentioned that People Express had a highly unbundled product. We did once have the pleasure (?) of flying on PE.

26 January, 2006 15:26  
Ecozeppelin said...

Ryanair's new "30 kg limit" actually refers to 20 kg of checked baggage and 10 kg of carry-on.

These guys spin every story they release (the current flap about flight cancellations due to flight crew duty hour limits being a case in point). So what sounds like a class-leading 30 kg allowance is actually just the industry norm of 20 kg checked.

Yes, they can be cheap, but they have applied unbundling to so many non-discretionary aspects that the "free" fares add up to real money fairly quickly. Compulsory "wheelchair" surcharge (actually a nice revenue stream when you do the math), compulsory surcharge for virtually every means of payment (ditto) - who needs fuel surcharges?

27 January, 2006 05:22  
idlewild said...

Thought the courts had decided that Ryanair and the airport have to jointly pay for wheelchairs?

27 January, 2006 09:09  
Anonymous said...

I find the inter-europe airlines to be sticklers for the weight of carry ons. In domestic US flights, I rarely see a person by using a kiosk, or if I do, they never ask to weigh my carryon.

In Europe, they frequently do so, and my rollaway is always more than 10 kilos.

28 January, 2006 12:05  
Ecozeppelin said...

Most airports currently provide wheelchair assistance for free. As of last year, there were six on the Ryanair network which did not (unfortunately one was Stansted, their biggest hub, which rather skews the numbers). The Ryanair website FAQs are surprisingly emollient on this subject ("This fee reflects the recommendations of a consultation paper issued by the EU Commission") especially given their hostility to regulation in other areas. In fact the consultation paper is just that, not EU-mandated policy, and no other airline that I'm aware of imposes a specific wheelchair charge.

30 January, 2006 07:56  

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American to Review Bonus Policy

FT (subscription required) carrying a story (don't see it elsewhere yet) that American will review the controversial bonus plan that has resulted in significant payouts despite the fact that American is not yet profitable. We discussed this (if not in excruciating detail) in a prior post.

Wondering when that was going to happen. We're a little surprised that CEO Gerard Arpey didn't get on top of this earlier, given that he's (rightly) pushed to permanently fix the traditionally fractious relations between management and unions at the company. That it's taken this long suggests there's yet more work to be done on the communication front, since it's clear that this has really angered workers (understandably, in our view -- $70mm in management bonuses, including some in seven figures, isn't right when the company is still in the red and asking employees to pull together).


AceMakr said...

It may not be right but AA's management has managed to keep the airline out of Chapter 11 yet still are not paid on par with counterparts in similar jobs at other companies.

27 January, 2006 15:17  
idlewild said...

The issue is not what American management should be paid. The issue is this particular bonus scheme, which looks ill-timed at best.

For what it's worth, we think AMR's management may be the best in the industry (except on Love Field issues, where they are wholly irrational).

27 January, 2006 16:17  

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Slots a Factor in Jet's Purchase of Sahara/India's Private Airlines Arrive

Airline Business blog says that getting more slots at Indian airports was a factor in Jet Airways' purchase of Air Sahara -- slots are like "gold dust". Jet Airways' domestic business is apparently growing at 25% per year. In places like India and China, you have to remind yourself that airlines are a go-go growth business. This is by way of followup on our post querying where Indian carriers are going to fly all the aircraft they ordered last year, given local infrastructure constraints.

Background: Traditionally there were only two airlines of any consequence in India: Air India and Indian Airlines, both owned by the government. The split was originally Air India for international, Indian for domestic and neighboring countries.

[Although this type of split seems dumb today (many journeys involve a connection from an international to a domestic carrier, and it's generally simpler to connect on the same airline) they were common in the bad old days of govt ownership/regulation. Pan Am was almost completely banned from US domestic flying until deregulation in 1979, for instance, while British Airways had two predecessors, British European Airways for UK/Europe and British Overseas Airways Corp. (BOAC -- Better On A Camel) for everything else. Air France was originally international only, there was something called Air Inter for domestic. Apparently this made sense to bureaucrats everywhere.]

In the early 1990s, the Indian govt dipped a toe into the deregulation waters and permitted a few private carriers. Jet Airways established itself as the most viable of these. In the meantime, Air India and Indian Airways have been hamstrung by the government's endless indecision over replacement fleets (which has only just now been resolved or so it seems), to the point where significant portions of India's international route rights weren't being used simply for lack of aircraft. Virgin Atlantic, for instance, engaged in codesharing with Air India where Virgin flew the aircraft using Air India's route rights.

So in the last few years the restrictions have really come off, with the private carriers now being permitted to fly internationally as well. Last year Jet started flying to London and also applied for rights to fly to the USA (it is currently battling bizarre allegations by the CEO of an unrelated US company called Jet Airways Inc that Jet Airways India was funded by monies linked to Al Qaeda. This seems extremely unlikely. Jet Airways IPO'd last year with an underwriting team of some of the leading global investment banks).

Consequently, there has been a significant increase in new private carriers entering the scene. Two, for instance, are funded with beverage company money -- Air Deccan, funded by a local Coca Cola bottler, and Kingfisher, by the beer company. India has a reputation as a socially conservative place (at least by comparison with the US or Europe) but cheesecake (paneercake?) is apparently live and well, judging by this link on the airline's website. That sort of thing went out in the US a long time ago, until revived by Hooters Air.

In any event, the merger of Jet Airways and Air Sahara (the other private Indian airline that's survived since the early 1990s) is supposed to result in the single largest Indian carrier. We don't pretend to know a lot about the Indian industry so this is probably about as deep as we'll go into that market.

But we should note that opening international routes to India's private carriers has been accompanied by a general relaxation of route rights into India. In the future, folks will be able to get a nonstop flight into India who before would have connected through Dubai or Singapore. The pickings will no longer be quite as easy for the likes of Emirates and Singapore Airlines for which India has been a very good market simply because it's been constrained. Assuming Indian airports can keep up, the emergence of competent Indian carriers as a potentially significant international competitive presence is an interesting and novel development.

Lastly we will snarkily comment (because it so deserves it) on Air Sahara's advertising tagline: "Emotionally Yours." *Gack* It's difficult to think of anything else so irrelevant yet cringe-inducing yet on the polite side of offensive. Someone who wants an airline to be emotionally theirs probably needs a good psychiatrist. It doesn't say anything positive or pertinant about an airline. Or perhaps it's simply really badly translated from Hindi. In our mind it's reason enough to approve Jet's takeover.

Fun fact: Indian Airlines has the only A320s in the world with four-tire "bogey" landing gear. All other A320s have a single axle and two-tires per main landing gear -- see a picture here. Indian Airlines A320s have two axles and four tires per main landing gear, the same as you would generally see on a much larger aircraft -- here's a picture.

When it first came out in the late 80s, Airbus had a tough time selling the aircraft. Sometimes it seemed that it couldn't give away the aircraft (a bunch of them were being built for Pan Am, which went bust so they went to Braniff II, which went bust so they went to America West, which went Chapter 11 in the early 1990s, but many of them stayed there anyway... in fact, Braniff II titles were recently found under America West paint as the aircraft was stripped to repaint it into US Airways colors).

Indian Airlines was worried about the weight-bearing capacity of India's runways, so Airbus, to close the deal, agreed to modify the aircraft. Since then, Indian has acquired additional A320s, so now it also has some aircraft without bogey landing gear as well.


Gordon Werner said...

"Assuming Indian airports can keep up, the emergence of competent Indian carriers as a potentially significant international competitive presence is an interesting and novel development."

That is the crux of the matter. Currently they are already experiencing problems with capacity at even the larger airports.

I cannot imagine what will happen when you throw in the 36,000 or so A320s that all these "new" airlines have ordered. (not to mention recent re-equipping of AI and IA)

I know for a fact that in countries like China, if they need to make a new or larger airport, they just move people out of the way ... somehow I don't think that they will have the same ability to do this in India ... maybe I am wrong, but it should be interesting nonetheless to watch the market evolve and develop.

25 January, 2006 14:46  

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Tuesday, January 24, 2006

Is There a Pilot (or Dispatcher) On Board?

sPh wants to know more about how airlines designate alternates (see comment section to our piece on A380s and Las Vegas).
  • Does an airport have to be certified as "A380 compliant" to be listed as an alternate? Related question, are all airports rated as alternates on an aircraft-type by aircraft-type basis?
  • Can an airline pilot list an alternate where the airport says it doesn't want the type there, but the runway will accommodate the type? What's the penalty for doing so? Who sets these rules?
Our guess is that the answer to the first question is Yes and that the answer to the first part of the second is No.

We'd expect that in the event of a true emergency, where nothing will do but the nearest airport, most of the rules go out the window, but that declaring an alternate that doesn't want to be declared is a pretty big no no. For instance, military airports can be off-limits, as can (obviously) airports in hostile territory, even though an aircraft might technically be able to land there.

However, we'd like to hear it from a pilot (or perhaps a dispatcher) if we could. Use the comment section (if you desire complete anonymity) or send us an email (jt9d17r at yahoo dot com) and if you don't want us to use your name, we won't.


Anonymous said...

this might help answer your questions:

24 January, 2006 16:52  
Anonymous said...

sorry for the broken link -here it is:

24 January, 2006 16:55  
Anonymous said...

Preface: An alternate airport is required where the weather at the destination is forecast to be less than the minimum established in the carriers operations specifications "ops spec." Because "ops specs" vary by airline and even by type and equipment within airlines, there is no pat answer for when you need an alternate. Ops Specs are issued by the certifying authority, in this U.S. it is the FAA a sub unit of the Department of Transportation.

For air carrier ops the airport of intended use (either pirmary or alternate) must be certified under part 139 of 14 CFR. The ops specs or the carrier's operations manual may also impose other requirements (such as a copy of the carriers ground handling and emergency manuals must be on hand at the airport). In air carrier ops this can significantly decrease the number of available airports. It is a safe bet that in most cases the alternate choosen for listing on the flight plan will be an airport where the air carrier has normal operations. For ETOPS and other remote operations alternate airports may be somewhat out of the way and disused(say midway island) and the aircraft will carry a library sufficient to meet all on ground needs for documentation. The air carrier will normally make other advance arrangements.

When is an alternate required?

If the airport you are going to has certain low weather conditions then you need an alternate.

Example from small plane ops (I haven't flown an airliner in 10 years and forget all my airliner examples). Flying twin engine bug smasher 101 I am required to have an alternate when the destination airport is forecasting, for an hour before until an hour after my planned arrival time, a ceiling of less than 2000 feet and/or visibility less than 3 miles. If that is the case then I must select an alternate airport that is available as an alternate (many airports with instrument approaches are available, but some are not) and that airport must be forecasting a ceiling of at least 400' and a vis. of 1 mile at my estimated time of arrival if it has a useable precision (read ILS) approach, or 600' and 1 mile if only non precision (read GPS/VOR/LOC/NDB/SDF/LDA . . . ) type approaches are available and useable.

In air carrier ops (if ops specs allow) even lower alternate mins are authorized if a second alternate is available.

You ask: SO why not always have an alternate independent of the Wx. Because alternates impose a fuel requirements. One must always be able to fly to the airport of intended destination, and then to the alternate at normal cruise power (this doesn't mean you can't fly slower to save fuel, it just means you can't plan to do so) and then for 45 minutes. There are situations where the additional fuel to go to the alternate will require a reduced revenue (pax or carg) load since fuel is heavy. So it may be desireable not to need to file an alternate.

If you get to your destination and can't land for some reason. You do not need to go to the filed alternate (the one you used for planning and put on your flight plan) you may go to a closer airport if you wish and it is lawfull to do so (wx and facilities are appropriate) So, if you are flying in an area of widespread low ceilings and visibilities, and for the most part they are lower than your alternate mins for planning purposes, but above what you need to get in you could go someplance else. Example: Your destination is ORD and due to the forcast you must file DTW as your alternate. You get to ORD and they are below mins. You talk with dispatch and they tell you that MKE is now at ILS mins (say 200' & 1/2 mi) and slowly improving. You may diver to MKE (even though it was below the mins to file it as an alternate), you'll just land with more fuel than if you had diverted to DTW and more fuel is nearly always a good thing (fire being a glaring exception).

All the decisions before leaving the gate must be agreed to by the captain and the dispatcher. Once off the gate the captain is in charge, but most will consult with dispatch and work out a plan that incurs the least disruption and inconvenience for the pax., maintenance, crew scheduling, etc.

Hope this helps.

24 January, 2006 17:28  
Tailwinds said...

First question: airport runways are rated by weight and wheel bogey configurations. The Airport Facilities Directory lists the weight limits for various wheel configurations. The bigger issue is probably taxiways, which require much larger shoulders to accomodate wide turns of larger aircraft. An airport without especially wide shoulders would have severe issues if an A380 rolled to the end of the runway and could then not turn off.

Second question: airports do not have the legal ability to deny aircraft (especially emergencies), but they do have the ability to issue fines. See for example noise curfews. They can be violated, for a price.

24 January, 2006 19:00  
Anonymous said...

I'm not the original anonymous...

If an air carrier ever PLANS to use an airport, that airport MUST be preapproved and listed in the carrier's ops specs. That means that a dispatcher cannot randomly pick an airport for use as an alternate -- the specific airport must already be preapproved.

FWIW, there are three "types" of airports that a carrier may designate. I may have the terms wrong because it's been awhile since I've had to use the information, but there are "general use" airports where the carriers conducts normal daily operations, "refueling" airports where the carrier does not enplane or deplane pax as a matter of course but DOES uplift fuel, and "diversion" (or alternate) where a carrier would plan to use it in the event the primary airport becomes unusable. The alternate airport may be an airport the carrier conducts normal operations at, but it may be a "backup airport" as well. Moses Lake, WA, is one such airport that regularly handles diverted aircraft from SEA.

It is significant to note that a flight operating under part 121 may depart for its destination ONLY if the weather is forecasted to be suitable for landing within an hour of either side of the ETA.

With respect to question 1, if a carrier wants to use an airport as an alternate for A380 operations, that the FAA must preapprove said use, so it is outside of the pilot/dispatch/airline's hands.

Wrt question 2: The dispatcher, with concurrence of the pilot, sets the alternate. It's a technicality, but still one nonetheless. As above, a dispatcher can't select an alternate unless the FAA has approved it via the ops specs.

I want to take issue tailwinds' comment that the airport authority does not have legal authority to deny aircraft based on type.

I submit two examples, AIY (Atlantic City Bader Field) and TEB (Teterboro, NJ). AIY restricts the use of the airport to Category A operations only (basically small airplanes with an approach speed of less than 90 kts) which definitely excludes jets. To the best of my knowledge, TEB restricts the use of the airport to aircraft with an MGTOW of less than 100,000 lbs. This prohibits its use by the BBJ for example.

However, in an emergency, all bets are off.

So, to answer the question "Can LAS deny the A380 the right to land there?" I believe the answer is yes, and one way they can do that is by implementing a weight restriction with an obscenely high penalty.

25 January, 2006 07:05  
Anonymous said...

> I submit two examples, AIY (Atlantic City Bader Field) and TEB (Teterboro, NJ). AIY restricts the
> use of the airport to Category A
> operations only (basically small
> airplanes with an approach speed
> of less than 90 kts) which
> definitely excludes jets. To the
> best of my knowledge, TEB
> restricts the use of the airport
>to aircraft with an MGTOW of less
> than 100,000 lbs. This prohibits
> its use by the BBJ for example.

If such an airport receives federal funds, however, don't they have to have approval of the FAA to impose such restrictions? Which in turn would require at least publication in the Federal Register and a public hearing.

If Las Vegas received federal funds for the 12,500 ft runway and it is used by 747s, I think they would have a hard time making an argument that 380s should not be accepted.


25 January, 2006 10:54  

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Viva Mexico Followup

Big article in Flight International giving current rundown on start-up situation in Mexico (see our post Viva Mexico on the topic). Five new start-ups, of which three are either underway or have signed contracts for aircraft, plus the two old incumbents (AeroMexico and Mexicana) of which Mexicana is now under contract to be sold. Unfortunately, although the article does not explicitly say so, it leaves the impression that some Mexican airline chiefs believe US Chapter 11 bankruptcy involves government aid, which, of course, it does not.


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AirTran & ExpressJet 4Q05/FY05 Earnings Reports

Find them here, if you're interested.


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Monday, January 23, 2006

Finding Alternate Airports for the A380

Via MRO Wire, Las Vegas Sun article on how Las Vegas airport will not undertake modifications necessary to accommodate the A380, and in fact in the (unlikely) event that an airline wants to serve Las Vegas with the A380, the airport will tell them no.

OK, fair enough. Only Virgin Atlantic and Japan Air Lines even serve Las Vegas with a 747 at the moment (and JAL is supposed to be dropping its service) so no big deal right? Well, the previous week there was an interesting article in Flight Intl about Airbus finding alternate airports for the A380 on behalf of customer airlines that are "struggling to convince some secondary airports to become emergency diversion destinations". You need a place to put the A380 if the destination airport for some reason closes or if there's a problem and the airplane needs to land short of its destination.

The link between the two articles is that Las Vegas is a reasonably common alternate for Los Angeles. It's on the way (at least from the east) and has at least one very long (14,500 ft) runway. Scratch that one off the list. That's the challenge: why should an airfield that will not itself be the beneficiary of traffic from the A380 pay for the necessary modifications to accommodate the aircraft? The Flight article mentions that Hanover, Germany is not keen to spend the dough to make it an alternate either.

There are precedents for manufacturers paying for infrastructure improvements. Boeing subsidized the airfield at Midway Atoll in the Pacific to make long-range twin-engine (ETOPS) services viable across the Pacific. McDonnell Douglas and Lockheed paid for LaGuardia to be upgraded to accommodate the DC-10 and L-1011. Let's hope that airlines that bought the A380 were wise enough to somehow make this expense Airbus's problem.

Image from Nevada Division of Environmental Protection shows (click image for bigger version) Las Vegas McCarran Intl Airport, with the Las Vegas Strip to the upper right. Nice and green...


Anonymous said...

Does this actually affect A380 operations, though? Does an airport have to be "380 certified" in order for a flight to list, or even use it, as an alternate? If the 380s wheel loading is as advertised less than the 747, which already flies into Las Vegas (say), surely in the event of an actual diversion the pilot would call for a follow-me truck to avoid taxiway obstructions and make do with whatever jetway and/or boarding stairs were available?

Or must the airport agree to be listed as a diversion for each type? That would seem unworkable.


23 January, 2006 22:16  
idlewild said...

In a true emergency, you land on whatever is available -- in the famous case of an Air Canada 767 "the Gimli Glider" that ran out of fuel over Canada (incredible yet true) an abandoned military airfield that was being used as a drag strip.

Wikipedia Gimli Glider entry

That doesn't mean it was an approved alternate. It sure wasn't listed on the flight plan.

We don't know the exact procedure for approving an alterante approved, but if alternate airports weren't an issue, Airbus wouldn't be trying to solve it.

Also, as the Las Vegas Sun article makes clear, if an A380 lands at Las Vegas, it's not just have problems itself, it's going to cause problems because taxiway clearances as such that when it's moving, nothing else can use adjacent taxiways/runways. So if it does land, it can really gum up the works.

23 January, 2006 23:30  
Anonymous said...

> Also, as the Las Vegas Sun article
> makes clear, if an A380 lands at Las
> Vegas, it's not just have problems
> itself, it's going to cause problems
> because taxiway clearances as such > that when it's moving, nothing else
> can use adjacent taxiways/runways.
> So if it does land, it can really
> gum up the works.

I have never worked in the air transport industry, but I have spent a lot of time at heavy industrial facilities including very large power plants. Those kinds of situations are what we called "problems to be solved", and when new engineers would gripe about them my (very annoying) response would be 'that is what they pay us the big bucks for'.

To me it would seem the key questions are (1) how often do 747/777 divert to Las Vegas (2) can airlines legally list Las Vegas as an alternate even if they do not have approval from the airport authorities. The follow up question being, would the airlines risk civil lawsuits for damages that might result from actually using it.

Of course, this may well just be a negotiating tactic by Las Vegas authorities to gain some development funds from Airbus, Virgin, etc.


24 January, 2006 10:26  
Anonymous said...

Boeing subsidized the airfield at Midway Atoll in the Pacific to make long-range twin-engine (ETOPS) services viable across the Pacific.

Actually, I think that may have been Wake Island. (See third paragraph of `Postwar' section..)

Anyway, thanks for another great article!

24 January, 2006 13:10  
idlewild said...

sPh -- let's ask the readership and see if a pilot (or dispatcher) can help.

24 January, 2006 16:17  
Gordon Werner said...

Provided that Airbus is correct in their estimates and measurments re: wheel loading, etc ... the real issue has more to do with taxiway / runway clearences ... and more importantly ground equipment. If an aircraft lands at an airport you have to be able to handle the aircraft on the ground. this includes airstairs, possibly ground power, never mind a heck of a lot of fuel.

25 January, 2006 14:37  

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A Little More on Allegiant (and Ryanair)

Reader David asks if there's any public info relative to Allegiant's business plan. None that we know of, but that set us to thinking.

First, Allegiant appears to be the first airline to profitably fly (so far) mainline aircraft to really quite small markets with low frequencies. For instance, Topeka and Peoria are not big cities. The recently failed Southeast and Transmeridian tried similar things, but perhaps not to the same extent as Allegiant. AirTran also flies to a few smaller cities (like Akron/Canton, Ohio or Flint, Michigan) but these are generally close to bigger cities so that they also function as alternative airports.

(Another interesting factoid is that on some routes, Allegiant competes with Southwest and on those routes does not necessarily undercut Soutwest. We looked at fares on Oklahoma City-Las Vegas, for instance. The lowest Allegiant fare was a dollar or two more than the lowest Southwest fare, booking several months in advance).

Allegiant seems to be unique in making a specialty of low frequency flying into small cities, which makes it superficially similar to Ryanair, which serves out-of-the-way places in Europe. But there's a big difference. Europe is so densely populated that even the middle-of-nowhere in Europe is close to somewhere.

Looking at it from another direction, however, there have always been charter programs bringing passengers into Nevada to play at casinos. For many years Casino Express flew two old 737s (called the King and the Queen because of the face cards painted on the tails) around the country to bring gamblers to Elko, Nevada (more profoundly in the middle of nowhere than anywhere in Europe) (Casino Express is now Xtra Airways, part of Excel Aviation USA, which is about 20% owned by Avion Group, Iceland).

In fact, Allegiant is part of a program bringing gamblers to Reno and Laughlin, Nevada on behalf of Harrah's. Allegiant scheduled service into Las Vegas seems just one step beyond that, especially since Allegiant is more than willing to sell you a Las Vegas hotel package along with the flight. That may explain why it's willing to be slightly undercut on fares by Southwest (which you'd think would be most people's first choice over Allegiant on familiarity grounds alone).

One way Allegiant almost certainly cuts cost (we haven't seen this printed anywhere, but it's reasonably obvious) is by arranging its flights to eliminate any overnight stays by crew. This is a Ryanair trick. Overnight expenses, meals and transportation for five people (two pilots, three flight attendants) are meaningful in the context of fares that (in the case of Allegiant) are somewhere around $100 one way.

Supposing overnight expense is several hundred dollars (Allegiant is serving small cities so perhaps it could get away something like this) that's the equivalent of fares paid by several people, which starts to eat meaningfully into profit margin since its aircraft seat only 150. In Europe, where just about everything is more expensive (and where Ryanair's average fares are only around 40 euros) it's definitely worth having.

We haven't checked Allegiant's schedule in detail, but we'd bet every flight is an out-and-back pair from Las Vegas (or Orlando).

Image: The airport in Elko, Nevada. There's not a lot there other than gambling and mining.


Scott Hamilton said...

There have been a few articles on Allegiant in enthusiast magazines like Airliners or Airways; and shorter pieces in trade magazines like Commercial Aviation Report: see

with a reference in USA Today

and a link from that article to an AP story.

23 January, 2006 22:32  

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ATR "Joint Top of Regionals League"?

Somewhat misleading headline in Flight International article on 2005 regional aircraft orders. ATR is an EADS-Alenia (Alenia is an Italian aerospace company) joint venture that makes regional aircraft. To be more accurate, it makes turboprops (the ATR 42/72 series), having missed the regional jet (RJ) boat a decade or more ago. It's long since conceded that market to Bombardier and Embraer.

Here's what it says about itself:
ATR is leader in Turboprops in the 40 to 70 seat market segment
It would be overstating matters considerably to say this is the equivalent of being the being the leader in buggy whips, because for short routes (say under 300 miles or so) turboprops are still the most economical choice. But the market for turboprops is definitely not what it was pre-RJ (the first modern RJs entered service in 1993 or so).

And straight economics is not the only thing that drives the regional aircraft market. Passengers just don't seem to like turboprops as much. You can debate how strong the "turboprop avoidance factor" is, but it seems real (see last paragraph). So on a route that straight economics tells you should be served by a turboprop, if the other guy has an RJ into the same market, your competitor may end up sufficiently more than its fair share of the passengers to be profitable, despite the technically non-optimal equipment.

So here's Flight International proclaiming ATR "joint top of the regionals league" on the basis of a surge in turboprop orders last year. Said ATR's CEO:
This commercial success is evidence of the strong revival of the turboprop aircraft in the regional aviation market.
The ATR press release goes on to say:
The reasons for the revival of the turboprop are due to the soaring price of a barrel of crude oil, to the regional market.s growing traffic and to the obligation for airlines to reduce their costs.
Really? Let's look at the numbers.

Of the 90 aircraft in ATR's 2005 orderbook, 50 were from Indian airlines and another 10 from the Turkish Navy. Zero were from North America. So what?

The Turkish Navy order is something driven by non-commercial concerns so it's irrelevant. 2005 was the year the Indian airlines went wild -- few people expect them to order again in such size for many years. Thirdly, the North American market is where 75% or more of all 50-seat RJs were sold (the 50-seat RJ was the aircraft that obliterated the turboprop market). So if the reasons quoted were such a big deal and we're really seeing a revival of the turboprop market, where are the North American orders?

We can forgive ATR (which hasn't had this level of orders in over 15 years(!)) for making the most of it, but Flight International could show a bit more sense. Flight could at least have made reference to the very different order backlog positions of all three manufacturers (which it did publish -- see above). ATR's backlog is half that of Bombardier, which is itself half of Embraer. That's a more reasonable view of relative position of the three manufacturers in regional aircraft.

There's no question the 50-seat RJ market is in trouble, we've believed that for years. There's no question that Bombardier has been hit far worse than Embraer by this (check out how fast Bombardier's backlog is dropping), because Bombardier doesn't have anything like Embraer's E170/E190 aircraft. And it may be that one day there will be a sustained revival of the turboprop market (though if the bottom falls out of the 50-seat RJ market, that will further delay the revival of the turboprop because 50-seat RJs will be cheap for quite some time).

But saying that ATR is "joint top of the regionals league" without some caveat is materially misleading in our view, even if there is some narrow sense in which it is true. The reality, we think, is that the ATR 42/72 series of aircraft is a 20+ year old niche product, where in 2005 the stars aligned to give it an unusually good year for orders that's unlikely to be repeated anytime soon.


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Monday, January 23, 2006

All Time Classic Alitalia Quote?

Alitalia is the perennially embarrassing (and uneconomic) Italian flag carrier. (We previously wrote about Alitalia in the context of a loan it received from General Electric) The Italian government is too gutless to do the right thing and let the company go bankrupt (despite European Union laws that are supposed to prevent Italy from interfering) and so has repeatedly at least violated the spirit of the law (and probably more, but in our less grandiose moments we realize this isn't our judgment to make, though of course we did) to keep the carrier alive.

But are employees grateful for this? Like heck they are. Few feel so entitled as those who are employees of a former (or current) state-owned airline (US legacy major employees had similar attitudes up through deregulation, and it's taken the better part of 30 years to change them).

So Alitalia employees are engaged in their fifth day of strikes. This is beginning to exhaust the patience of even the milquetoast Italian government, which has begun to mutter that perhaps it should just let just nature take its course. Here's the Italian labor minister, who apparently is on record as saying that he doesn't think letting Alitalia go away would be a disaster (unfortunately, his opinions are not representative of the rest of the Italian government):
If Alitalia can't compete, if it can't stay in the market and protect jobs, perhaps it will be necessary to think in terms of a solution that normally happens in such cases, without dramas and without excessive reliance on ideology.
This from an FT article (subscription). OK, so Italian Prime Minister Silvio Berlusconi (that's him in the background of the picture above) is asked about this possibility in an interview and he says (from another FT article):
It isn’t easy to do things like that. National pride is involved in having a flagship carrier . . . For sure, if the workers didn’t hold dozens and dozens of strikes, and instead behaved like Air France workers, things would be going better at Alitalia
You know things are bad when Air France workers are paragons of virtue next to those of Alitalia. Air France workers are notoriously militant -- a quick google shows Air France has suffered a strike (over a colleague "suspended over a deadly accident") as recently as 11 months ago. And that's just a strike that makes the international papers. In the meantime we've personally experienced a short strike (by certain ramp staff) at Paris Charles de Gaulle airport that inconvenienced thousands but didn't make the papers (a mere bagatelle).

And this is when Air France is doing pretty well. In 1994 when Air France was on the ropes, Air France employees shut down the airport, charging the runways among other behavior. France pumped $4 billion into Air France that time, or more than the market cap of any airline in the US at the moment, with the exception of Southwest. In fact that had to be one of the most painful aspects (to the Dutch) of Air France's 2004 takeover of KLM. If there was any justice in the world, at most times in the past it would have been the other way around.

Not that France would ever let Air France fail (or be sold to the Dutch of all people). That's the other part of the Berlusconi quote -- it's national pride. Yo, it's just an airline -- think Greyhound with wings. It's not a symbol of undying national glory. When one thinks of the glory of Italy one thinks of Fermi, Ferrari, Armani, Michelangelo, da Vinci, Dante, Machievelli, lasagna (sounds like an outtake from A Fish Called Wanda). The renaissance! Venice! Rome! Trust us when we tell you, Silvio, that to us, the name Alitalia only brings dishonor to Italy. Surely Don Corleone would have had it capped long ago.

[Let us just say that we are huge fans of Italy and most things Italian... just not Alitalia and Italy's week-kneed attitude towards it.]

OK, you get the idea. We don't really need to explain why France would never let Air France fail, do we?

Image: One proposed solution to the Alitalia problem from an Italian website. As if Ferrari parent Fiat doesn't have enough problems.


Anonymous said...

Heres their unofficial slogan
Always Late In Takeoff, Always Late In Arrival

24 January, 2006 08:38  
Anonymous said...

Yes, but their in-flight coffee is unbelievably good. Go, Alitalia!

24 January, 2006 08:38  
idlewild said...

OK, we'll save the coffee-makers if/when the airline collapses.

24 January, 2006 10:02  
Anonymous said...

The apocalypse is upon us. As you correctly pointed out, Air France employees are being held up as the example. What's next, O'Leary has tact?

24 January, 2006 23:34  

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Sunday, January 22, 2006

We're From the Government and We're Here to Help You

One of the biggest issues in the commercial aerospace world is the clash over launch aid to Airbus. When Airbus wants to finance a new aircraft program it goes to the European taxpayer, which forks over financing which is then paid back from profits (if any) on that program.

Boeing and the US have complained bitterly about such subsidies for years. Recently, the US has lodged a complaint with the World Trade Organization.

The European riposte to such complaints is that Boeing is a huge military contractor and receives similar subsidies through juicy military contracts, and that clearly Boeing commercial aircraft have benefited from technology developed on the military side. And it is indisputable, for instance, that Boeing developed an early lead in large jet aerodynamics through developing and debugging the B-47 and B-52 bombers back in the 1940s and 50s.

We've always seen the European riposte as hypocritical at best. EADS and BAE Systems (respectively 80% and 20% owner of Airbus) are huge military contractors in their own right, so if Boeing is sucking at the public teat through military contracts, then so is Airbus. And if Boeing is able to cross fertilize from the military side, so is Airbus.

But is Boeing able to cross-fertilize from the military side? Sounds like a stupid question, right? The answer, obviously, is "of course!", right?

Wrong. Read the following incredibly surreal article from the Seattle Times (via MRO Wire) about the ridiculous precautions Boeing is being forced to take to ensure that no technology developed for military purposes somehow ends up in the 787 -- including re-running experiments first performed in the 1970s to "re-learn", this time commercially, information that is now common knowledge about composites that was originally discovered in the course of military development. In this regard, at least, the law is an ass, and badly needs to be changed.

Image: Classic picture of the B-47 from First flight for this aircraft was in 1947. This is rather incredible when one considers that jets first saw military service towards the end of WWII, and played an insignificant role in that conflict. Yet only a few years later, Boeing designed, produced and flew an aircraft that has most of the features of a modern commercial aircraft, including high aspect ratio (essentially, long & narrow) swept wings and engines in pods. Lessons Boeing learned from debugging this aircraft catapulted it into a large-aircraft wing-design leadership position it has yet to lose.


Greg said...

Anyone know if EADS has to follow the same "ridiculous precautions"?

23 January, 2006 13:22  

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Tuesday, January 17, 2006

US Legacies Have Yet to Order

Scott Hamilton has a geographic analysis (pdf, unfortunately) of Boeing.s 2005 orders (Airbus will report its 2005 totals today). Once you exclude Air Canada and two big US leasing companies (GECAS and ILFC) from the North American totals, the US accounted for only 13.3% of the gross new orders (Scott says the .US. accounts for 16.8%, but it.s clear he means North America, so one must further exclude Air Canada).

Scott says the US amounts to about half the world.s airline market. We.d put it at around/under 40%. Whichever way you look at it, it.s clear that the US isn.t pulling its weight, which isn.t too surprising . the US airline industry as a whole has yet to turn the corner since 9/11.

Some aerospace analysts, in fact, are counting-on/hoping-for a burst of US orders in the last half of this decade to extend the aerospace upcycle. To see why that.s a reasonable hope, consider the fleet of American Airlines. American.s operating fleet as of Sep 30, 2005 (see page 16) included 34 A300-600Rs, 143 757-200s, 74 767-200/300ERs and 354 MD-80s (*).

Given the delivery dates for these aircraft, American will be reasonably looking to retire these aircraft from its fleet starting sometime in the next 5-10 years. not saying that every one of these aircraft will be out of the American fleet within 10 years, but we are saying that it won.t be too much longer than that for most of these aircraft, and for some, like many of the MD-80s, it ideally needs to be closer to 5 years than to 10. The JT8D-200 engines on MD-80s are pretty thirsty relative to more modern engines, for instance, not to mention more noisy.

One possibility is that American does not replace all of these aircraft. American has a lot of wood to chop before it could justify replacement, and it.s nowhere close to being there. For instance, unlike United, US Airways, Delta and Northwest, American hasn.t used Chapter 11 to jettison obligations. It will take quite some time for American to dig its way out and it may be that by the time American is in a position to consider replacement, getting a bit smaller is the rational response.

But even if American doesn.t replace every last aircraft, the volumes will likely be impressive if/when American does order. American will likely get the best pricing available. Airbus and Boeing list prices are, of course, a bad joke . no one pays them, and especially not a prestigious client like American that can order in volume. A discount of 30% from list for a key client like American would not be out of the question.

Even so, talking enormous dollars when American orders. Full replacement of the fleet mentioned above is easily a $30bn proposition (not list prices, actual). The total number of aircraft listed above is far greater than all of Boeing.s production (290 aircraft) in 2005.

To some extent the fleets of other US legacy majors will also need renewal as this decade comes to a close and the next one opens (Continental perhaps least of all, since it replaced almost all its fleet starting in the mid-late 1990s). And that.s why aerospace analysts hope the upcycle will be prolonged by the late recovery of US legacy airlines.

(*) Note, American also has other aircraft . 777-200ERs, 737NGs . that will not require replacement in the next 5-10 years.

Image credit: MD-80 postcard from the airline postcard collection of Bill Demarest -- lots of historic stuff there.


Baeck said...

Given the large number of aircraft that would need to be ordered by American and other US carriers, does Boeing have the capacity to deliver that many planes in the ideal timeframe, or will a bit of fighting for delivery spaces be in order?

17 January, 2006 09:38  
idlewild said...

Well, first of all the right question is "do Airbus or Boeing" have the capacity, since it turns out Airbus also makes commercial aircraft.

Secondly, Boeing has publicly mused about the potential need for additional 787 manufacturing capacity, so clearly its aware of the issue.

Thirdly, manufacturers will move things around to accommodate an order they particularly want/need. Just as if an order position suddenly becomes available (e.g. a customer blows up), they'll go to a favorite customer and offer them an incremental aircraft (or an earlier delivery position) on favorable terms.

If someone real wants to order 100 airplanes, manufacturers get creative.

17 January, 2006 10:05  
Scott Hamilton said...

The first of AA's MD-80s don't reach 25 years until mid-decade, and Boeing is ramping up 737 production to 31 a month. If AA doesn't wait too long, it should be able to get 737 delivery slots on a timely basis to match MD-80 retirements as they reach 25 years. And Boeing's plan for a 737 successor (the "797 Dreamliner")of 2012 presents AA with an opportunity to become a launch customer if finances can be turned around.

(And thanks, Idlewild, for the plug.)

17 January, 2006 11:03  
Anonymous said...

United still has 87 737 Classics in its fleet, and the combined US Airways has 116 737-300/400s.

Some of these, obviously, will go away with the existing Airbus orders, but could we see the Embraer 190 make inroads at both carriers?

United has pioneered the use of large RJs for "mainline-style" service, with First Class and Economy Plus cabins, so the 190 would seem a perfect fit.

18 January, 2006 19:28  
idlewild said...

E190s possible currently at US Airways from a scope standpoint (they can't be outsourced, but can be flown internally at regional pilot-ish wages) not possible scopewise at United, currently.

19 January, 2006 14:18  

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Continental: Chapter 11 Shoe on Other Foot

FT article (subscription required) reports two takeaways from Continental's earnings today:
  • Continental says it's tough to compete with airlines slimming fast in Chapter 11. Oh the irony. One advantage Continental had from the mid 1990s through 9/11 was that two bouts of Chapter 11 (in the early 80s & early 90s) had left it sleeker than its legacy competitors. For instance, Continental already outsourced most heavy maintenance during this period. Now it's playing against other airlines that have gone through the Chapter 11 health spa. Which isn't to take anything away from the superb job Continental has done in avoiding Chapter 11, despite having far fewer resources than American, the only other big legacy major to avoid Chapter 11 this time around.
  • Continental pushing back on low-cost carrier interlopers, jacking up planned domestic growth this year from 2.2% to 3.6%. International growth planned for 12.5%. As usual, Continental publishes fairly comprehensive guidance about how it sees the rest of the year. This is the sort of incremental capacity increase/pushback that airline analysts hate. Monkey see, monkey do, and the more monkeys do it, the more capacity there is, the softer pricing becomes (because it's more or less a commodity business).
Experimental feature: links to earnings releases.


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Bankruptcy Improves Customer Service?

In the comments section of our recent post on Perverse Incentives/Poor Union Leadership, we noted that some believe that bankruptcy has actually improved customer service at United:
Interestingly, one thing many have said is that the customer facing side of United has gotten a lot better since Ch 11. A lot of employees who formerly had a sense of entitlement got that old-tyme religion -- pilots addressing passengers before they board, stuff like that. Nothing like the prospect of the noose to concentrate the mind, apparently.
And today (barely 24 hours later) there's a piece in the New York Times suggesting this same thing. You read it here first.


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Monday, January 16, 2006

Liverpool John Lennon Airport: Living the Low Cost Carrier Dream

Small item in FT today (subscription required) saying 2005 Liverpool John Lennon Airport traffic reached 4.4mm, representing growth of 32%. That's what happens when Ryanair and easyJet start competing with each other at a UK provincial airport. Liverpool just needs to hope that neither wins.

Liverpool Airport was one of the greatest beneficiaries of low cost competition in the UK. Growth has been at a compound average of over 20% since 1997. Liverpool has grown in significant part as a low cost alternative to nearby Manchester (which has had relatively sedate compound growth of around 4% since 1997), in much the same way as London Stansted and Luton airports have absorbed much of the low cost-driven growth of London. The initial Liverpool surge in the late 1990s was driven by easyJet, but in the last year or two Ryanair has greatly expanded. easyJet has not backed off, recently basing an eighth aircraft at the airport.

The airport owner/operator, Peel Holdings, is also pretty slick, for instance getting Yoko Ono's approval to name the airport after famous local son John Lennon (including using the tag line from Imagine, "above us only sky" and a John Lennon cartoon/self-portrait). Naming airports after people is nowhere near as prevalent in Europe as it is in the US. Liverpool will have scheduled service to over 45 European airports this summer, almost all of it low cost, an unthinkable variety and volume a decade ago.

Peel is using the same approach with its newest airport, Doncaster Sheffield Robin Hood airport, a converted former military base. The UK is so densely populated that many secondary airports are within easy driving distance of significant populations so attracting good volumes is generally just a matter of securing low cost carrier service. Robin Hood airport, for instance, handled half a million passengers in its first six months of operation.

Previous post on long term effects of low-cost carriers. Previous post on growth of Glasgow Prestwick airport.


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Monday, January 16, 2006

Eurostar Continues to Crush Airlines

Times (London) article on increasing dominance of Eurostar (the under-channel train) on the London to Paris route.

When the route was first initiated, the UK side had only low-speed track. The Eurostar zipped along the French countryside, but meandered through England. High speed rail has been progressively laid on the UK side and by 2007 the Channel Tunnel Rail Link should be completed and high speed track will be ready all the way to a new London terminus at St Pancras station (as opposed to the current station in Waterloo). This will drive travel time down to 2 1/4 hours.

Eurostar grabbed the lion's share of traffic almost from the get-go, simply because it's a lot more productive to spend several hours working on a train than wrestling with the various stages of an air journey during approximately the same period of time. But with every decrease in travel time, Eurostar only gets more attractive.

Unfortunately, as the Times article says, over a decade after starting operations, Eurostar is still not profitable, though it expects to be within a year or two.

If there's anywhere similar service should exist (and be profitable) in the US, it's in the Northeast corridor, especially NYC to Washington DC and NYC to Boston (comparable distances to London to Paris). Amtrak Acela on these routes is a pale shadow of European high speed rail. Air traffic on the Northeast corridor was crushed by 9/11, as people moved to other modes of transport, including Amtrak. Recently, JetBlue has started low cost service from New York JFK airport to Boston. It will be interesting to see whether that changes share between modes significantly.

Amtrak, of course, is not profitable, but it would be interesting to know whether a dedicated Boston-NYC-Washington railroad could be, shorn of Amtrak's mandates to also run trains in places where they don't make sense.


crzwdjk said...

The problems with Amtrak are many, and it mostly comes down to the fact that they've been kept on a starvation budget ever since the beginning. The Acela from New York to Washington, for example, wasn't much of an improvement over the Metroliner, simply because the tracks and wires there are old and won't allow it to go faster, and Amtrak never has enough money to replace the wires hung back in the 1930's. The other problem that Amtrak really needs to deal with is on time performance, and while sometimes they have the excuse of having to share tracks with freight railroads, which cut back capacity during the decline of the 60s and 70s, in some places, like the NEC, they have their own tracks and absolutely no excuse to be late.
Imagine if the air transport system were like Amtrak: most towns would have just a little wooden shack for an airport, which would in general have one flight a day, likely as not in the middle of the night, and they would be as likely as not to be late, sometimes by many hours. Planes would be DC-3s, because there hasn't been money to buy anything better, because all of it was spent just paying for patches to keep sinkholes from developing in the runways, and the government would threaten to shut the whole thing down every year.
The problem isn't Amtrak, it's just the way things are set up in this country. Airlines can rely on a large government-funded infrastructure such as airports, while Amtrak must maintain its own tracks with its own money which it has to beg for every year.

16 January, 2006 18:02  
Baeck said...

Of course it's also hard to operate a train on a really tight schedule when you expect it to make so many stops. If all it had to do was get between NYC and DC in a few hours, I don't think it would be as much of a problem.

16 January, 2006 18:04  
crzwdjk said...

By the way, an interesting potential idea is integrating trains into the airline network, to provide local connections. It certainly seems more efficient than flying small turboprops or regional jets, especially if the train is right at the airport terminal, and has a relatively short run, like New York JFK to Albany, or maybe Philadelphia Airport to New York.

16 January, 2006 18:05  
Shane said...

The other reason Eurostar is a lot more attractive than the plane is that it actually goes from London to Paris. London Gatwick? 45km London Luton? 55km Paris Beauvais? 85km

And, of course, it's not just London <->Paris, but Japan, Germany etc. where well-run train services provide the best choice over city hops.

17 January, 2006 07:09  
Ecozeppelin said...

Crzwdjk's right about the potential for trains to integrate with the airline network, provided there's a good rail<->air interchange. Quite a few German intercity trains to Frankfurt airport carry Lufthansa codes, and Air France does the same thing with the high-speed trains that stop at Roissy/CDG. And doesn't Continental do something like that with some of the Amtrak trains at EWR? (I know, I know, it's a bit like connecting from a 777 to a DC3...)

17 January, 2006 07:17  
Cole said...

Continental does, in theory, make Amtrak connections at EWR, but I don't think it's exactly a popular service--there's a Continental counter at New York Penn Station that I don't think I've ever seen staffed. A slightly more interesting idea that Amtrak had a while back (not sure if it's still running) is taking a long train ride, like NY->Chicago or even NY->SF/LA (heaven help you), for old-time nostalgia sake, and then on the way back codesharing with an airline--I feel like it was American, but maybe it was Continental as well--rather than putting up with another interminable train ride.

17 January, 2006 10:22  
Andy said...

While you're right that the Eurostar isn't profitable, you should note that most other high speed trains in Europe have already passed the break-even point.
The TGVs (especially Sud-Est, between Paris and Lyon) run by SNCF are very successful and have made most air travel in France obsolete. However, SNCF is largely funded by the French goverment so that might be unfair (on the other hand, Air France probably has received enough from the goverment as well).

The Thalys however -which is a commercial offering- is hugely profitable. Thalys has two main lines, Amsterdam-Brussel-Paris and Kln-Paris and is taking huge portions of the airline market. When booking in advance, prices are lower than the budget airlines (mostly because of airport taxes).

Next year, the northern part of the network (Amsterdam-Brussel) will be upgraded with the 200mph tracks, which will reduce the total journey time by another 45 minutes.

17 January, 2006 13:07  
idlewild said...

Just as a general statement, when something that is a small part of a much larger whole is declared to be profitable (while the larger whole remains loss making) one has to be a little skeptical about the quality of the profit of the small part. Are cost allocations being done correctly? Who knows.

17 January, 2006 15:01  
crzwdjk said...

The issue of cost allocations is a tricky one, especially for something like Amtrak, which inherited a lot of the structure from its predecessors, who for a long time had a vested interest in making passenger rail seems as unprofitable as possible, so that they would be allowed to abandon it and get on with hauling freight. Another major mistake that railroads made, back in the 60s, was the abandoning of branch lines. In airline terms, it would be like getting rid of the regional flights. Of course, as a standalone venture they're pretty unprofitable, but they feed traffic and revenue into the main network. If you look at the Eurostar page, right now one of the things they're advertising is the ski train, to the French Alps. And do you think there's a high speed line all the way there? No, of course not, it runs high speed part of the way and then runs on regular lines. But what if Amtrak were to try that idea here, for example by running an Acela to Killington, the northeast's largest ski area? Well, for one thing, the Acela can't even get to Albany because the line isn't electrified. For another thing, it takes 2 hours to go the last 60 miles into Rutland, because that branch line is in such terrible shape, and this completely destroys any time or convenience advantage the train might have.

17 January, 2006 16:54  
Anonymous said...

Amtrak has or had such a "train one way, fly the other way" deal, with United - they called it "Air-Rail Vacations." Not sure if it still exists.

18 January, 2006 19:20  

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Sunday, January 15, 2006

Perverse Incentives/Poor Union Leadership

Article in the Denver Post worth reading for some excerpts from an internal United memo about how to sell management incentives included in the plan of re-organization. Also reminded us of a couple of important points (or at least, points we think are important):

Perverse incentives undermine the system and confidence therein. Giving management a stake in a restructured company may be standard operating procedure, but creates perverse incentives when it's the same management that took the company into bankruptcy.

Management has a fiduciary duty to shareholders, in which capacity it's presumed to want to keep a company out of bankruptcy (since bankruptcy is generally really bad for equity) -- at least right up until the company is close to bankruptcy (in the "zone of insolvency") at which point management is obligated to stop maximizing shareholder value and works instead to maximize enterprise value (i.e. the total value of the company).

But there's a pretty obvious conflict of interest if the same management that's supposed to want to keep an airline out of bankruptcy can benefit from taking it into bankruptcy. And without saying that top United management took the company bankrupt to line its own pockets, it's also true that top United pre-bankruptcy management pockets will be lined by having gone through bankruptcy. That is a perverse incentive, one that undermines the system (if only by undermining confidence in the system).

There are solutions: for instance, legislate that no top pre-bankruptcy management can benefit from distributions at reorganization. It's crude and would have disadvantages as well as advantages -- it's a significant disincentive to remain at the company for those pre-bankruptcy managers who were blameless in the bankruptcy and could make significant contributions to the reorganization.

That said, we'd probably still be in favor of something like this, because it's quite rare that anyone is truly indispensable to a re-org process. Current United management, for instance, is not on anyone's list of the top airline managers, yet still got its way through the process. In our view such managment disincentives are a relatively small risk to take relative to the benefit of eliminating a perverse systemic incentive that brings disrepute to the system.

Just to emphasize: we're not arguing to get rid of incentives, we're just saying those incentives shouldn't be available to top management that was at the company at the time it filed.

Whether or not Glenn Tilton or Robert Milton (CEO of Air Canada -- a non-US example) is to blame for having put his respective airline into bankruptcy, it is unseemly that each of these gentlemen benefit from it to the extent they will or have. It makes the bankruptcy process look like a scam, whether or not it is, and thereby undermines confidence in our economic system. Had there been laws that prevented them from reaping big rewards from bankruptcy they might not have stayed at their companies through bankruptcy, but it's doubtful this would have prevented United or Air Canada from re-organizing.

Another solution might simply be that management of a bankrupt company can't propose the plan of reorganization -- i.e. bankruptcy management is in a caretaker position, and therefore isn't in a position to propose giving itself a lot of money in a re-org. Anyone wonder why there's no private equity involved in the United re-organization? Any credible private equity stumping up any meaningful amount of re-org equity would want management control -- and that might not include hiring Glenn Tilton & Co. It's not like Glenn's the best available. Greg Brenneman (former Continental COO) is out there, Gordon Bethune (former Continental CEO) is out there, Doug Parker is out there (well, he's busy, but there's a price for everything)... United's bankruptcy process hasn't had a remotely optimal outcome.

Low quality of airline union leadership. Airline managements are blessed by the poor quality of some of the union leaders. The United flight attendant leader is quoted, referring to the management bonuses embedded within United Airlines' plan of reorganization:
In medieval times, people guilty of this kind of greed would have been boiled in oil.
No, people guilty of that kind of greed in medieval times were called knights, lords, princes and kings. To mix metaphors, the top dogs of medieval times showed no compunction about awarding themselves the lion's share, and then some. If anything, what's happening today is a return to that age, not something distinct from it.

OK, so it's a minor example of the less-than-stellar intellect of some of the airline labor leadership. The United flight attendant union has talked a big game throughout United's bankruptcy, but has lost essentially every important battle (which, to be fair, is what you'd expect: the flight attendants have some of the worst leverage of any airline labor group. So what should they have done? Pick their spots, educate their membership on what was achievable and build some credibility). It's another example of the ineffective "bluster and carry a small stick" phenomenon that's prevalent in this industry.

And also to be fair, they're not the worst. That would probably be the Northwest mechanics union, AMFA, which tried to teach Northwest a lesson last year and has essentially been thrown off the property, probably the most comprehensive airline union defeat since Frank Lorenzo broke the Continental pilot's union in the early 1980s.

Self-serving managements and poor union leadership. It's a great combination.

Image credit: 1936 United logo from


Anonymous said...

First, congratulations on the blog; interesting stuff and well written and it appeals to the anorak in me. That said, you're a bit tough on pre-bankruptcy mgt; as I recall Tilton was brought in just months prior when Chapter 11 was a probability and wasn't really responsible for United's sort-of-controlled flight into terrain. The grim "customer-facing" elements that are at least partly responsible for this once-Gold-level flier having not boarded a UA flight in some seven years have taken their lumps, but Tilton has - by fair means or foul - kept this turkey in something that passes for flight. I'm not saying he's a saint, or he deserves the size of the incentives etc etc but...

15 January, 2006 22:17  
idlewild said...

When United hit Ch 11 it's likely Tilton was still relatively clueless about the business. But step back a second and ask yourself what sort of person joins a company in that shape? United was somewhat of a ship of the damned just prior to Ch 11 -- attracting decent management to a company on the verge of bankruptcy is hard. Some have noted Tilton's career prospects weren't necessarily that bright. Why else does someone go from ChevronTexaco to United (or more broadly, the Awl Bidness to trying to find butts for seats?)

Further, if Tilton wasn't responsible for United's Ch 11, then his pre-Ch 11 direct reports (Brace, Hacker, McDonald) were, especially since Tilton's predecessor was a figurehead. Yet Tilton either wouldn't or (we suspect, because of the ship of the damned aspect) couldn't replace them after Ch 11. If he wasn't willing to replace them, that says something about him. If he couldn't replace them, that says something about the place he joined. Neither one reflects very well on him.

Interestingly, one thing many have said is that the customer facing side of United has gotten a lot better since Ch 11. A lot of employees who formerly had a sense of entitlement got that old-tyme religion -- pilots addressing passengers before they board, stuff like that. Nothing like the prospect of the noose to concentrate the mind, apparently.

15 January, 2006 23:11  

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Thursday, January 19, 2006

Ben, Meet DOT Data, DOT Data, Meet Ben

Ben Mutzabaugh runs a button-down corporate blog called Today in the Sky for USA Today, keeping track of airline events.

He gets one wrong today, however, venturing the opinion that because Allegiant Air is a private company, there's no way to tell if it's profitable.

In fact US carriers, whether privately or publicly owned, are required to file data with the US Department of Transportation -- a lot of data, about all sorts of things, including their income statement ("Form 41"). This is distinct from the filings that a public airline must (also) make with the SEC. So in fact it's not hard to figure out whether Allegiant is profitable.

The relevant source is here (schedule P-12) and after a little downloading of a largish spreadsheet and some re-arranging, the answer is that for the first 9 months of 2005, Allegiant says they made net income of $4.5mm on revenues of $99.7mm. Profitable to date, be interesting to see how they did in the fourth quarter.

Glad to help, Ben.

Allegiant, by the way, is an interesting airline. It flies from obscure third-tier airports to vacation destinations, largely Las Vegas and Orlando (we previously mentioned Allegiant in the context of its recent entry into Worcester, MA). It's run by Maurice J. Gallagher, who was one of the founders of ValuJet (which eventually took over and assumed the name of AirTran). Last year it attracted a large private equity investment, including participation by Irelandia, which is an investment vehicle for Tony Ryan, who founded Ryanair in the 1980s. Ryan also founded the late, great aircraft leasing company GPA, which blew up in the airline downturn of the early 1990s and was in large part taken over by General Electric, forming the foundation of GECAS, now the world's largest aircraft leasing company.


David said...

I am new to this communication forum so please excuse any improper comments. In reference to Allegiant, is there any public information regarding their business plan? How is this small private company capable of sustaining continued growth and profit in a market that seems to already contain so much overcapacity? I would be cautious to say that this airline will survive in the current industry conditions. I am curious to know more about this small quiet company and its survival strategy in the giant pond of airlines today.

20 January, 2006 09:33  
idlewild said...

We are too. Other than the government filings, we're unaware of significant public info on Allegiant. But it's pretty easy to see what the airline is doing -- airlines sell to the public, so an airline's route structure, schedule are all, of course, public.

What Allegiant does is fairly unique. Older aircraft (MD-80s), small cities (this week they started in Topeka, which hasn't had its own air service in years) to big leisure destinations. And if you believe the DOT filings, reasonably profitable, especially when you consider that the MD-80 isn't the most fuel efficient in the world.

20 January, 2006 10:53  
Anonymous said...

Way to call out a fellow journalist in a classy, private way.

20 January, 2006 18:03  
idlewild said...

No journalists here, friend. Read "Lamentable Forbes Article" and "Allegedly Aging JetBlue", you'll see.

21 January, 2006 01:49  
Anonymous said...

On Allegiant, these guys have more common sense in this industry than any reporter or analyst will give them credit and they like it this way. They stay under the radar for a purpose. Look at who is behind the curtain (Tony Ryan) and then look at his other investments of late (Tiger Airways of Singapore). Expect big things out of Allegiant due only to the tried and true experience of those on its Board.

21 January, 2006 13:01  

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Tuesday, January 17, 2006

Airbus 2005 Orders: Dog Did My Homework!

There's only one thing more remarkable than not being able to turn in your homework because the dog ate it. That, of course, is when, when all hope seems lost, your dog does your homework for you.

After significantly trailing Boeing after 11 months in terms of 2005 orders, Airbus somehow finishes the year ahead, with 1055 net new orders (the total stood at only 687 at the end of November) vs 1002 for Boeing. Yes, Airbus booked 368 firm orders in December, a number greater than the total for the year earlier in this cycle (Boeing booked 204 in the same month).

Congratulations, Airbus! That sure is some swell dog you have.

But, Airbus concedes, Boeing booked more orders by value (as opposed to number of sales). You can't have everything, apparently. Also, according to the Flight International article, Airbus whiffed on its 2005 A350 target of 200 orders, booking only 172.

Flight says "Just over one week ago EADS co-chief executive Nol Forgeard claimed the manufacturer had reached its target, a claim now attributed to mis-translation." Mistranslation by Flight or by Airbus? Other news sources correctly reported that Airbus had suggested it had missed for the year.

As the Wall St Journal article notes (subscription required), some firm orders are of variable quality. For instance, 100 are by IndiGo, an Indian startup carrier that has yet to start flying. As we mentioned once before, it may be an issue to find a place to fly/park all the aircraft recently ordered by Indian carriers.

Nonetheless, the promise of a bird in the hand is better than none at all.

Bonus linkage:
Airbus press release
Airbus interactive order page
Boeing interactive order page

Image: Standard French Poodle, which of course was historically bred to be a retriever.


Jon Bright said...

So, given what I read here about the A340, who's buying those 89 A330s and A340s? Dumb airlines, or people looking for commonality over a fleet, or...?

Can we assume that "the order intake for...the A330/A340/A350 were the highest ever for those product series" is a result of Airbus selling the A350 hard? Or is there something the A340's got that means it's old tech and thirsty, but it's still worth buying for some people?

17 January, 2006 09:13  
Jon Bright said...

Ah, and now I read at BBC News that they only sold 15 A340s. Even so, it's not like these things come free with breakfast cereal - how did they even sell 15?

17 January, 2006 09:16  
idlewild said...

1) There's a price for everything
2) Some airline still like 4-engined aircraft
3) The A330-200 is still the best in its class, if "class" means aircraft built today. It competes with the 767-300ER, not so much the 777. So if you need something now, the A330-200 can be a good option.

Point (3) shows how you have to be careful in comparing aircraft types. Unsurprisingly, manufacturers slice the data in the way that's most advantageous to themselves, not always being so careful to note that fact.

17 January, 2006 09:37  
Marc Lacoste said...

come one, idlewild, for sure Airbus is a little bit faking with these results, but boeing isn't more trustworthy. Plus you've got french readers :)

17 January, 2006 10:03  
idlewild said...

And we (oui?) appreciate our French readers.

The only point here is that generally people have to make up excuses for failing to do something. In this case, it's like you have to make up excuses for having succeeded.

The self-described "neutral" (take that for what it's worth...) Kieran Daly at the Flight International blog says he's "sitting in London not exactly sure how they've done it".

Us too.

17 January, 2006 11:38  
Miguel said...

I'd say you editorialize a little too much in your headlines (even if it can be argued that blogs are all about editorializing :). Other than that, I spent a couple of minutes looking at Boeings 2005 orders, and there are at least a couple of elements that seem "shadowy" to my unexpierenced eyes:

1) Aircrafts sold to the usaf are counted as "civil" sales? (january)

2) Isn't Boeing business jet a part of boeing?

3) What is the explanation for the "unidentified customers"?


17 January, 2006 11:40  
idlewild said...

The purpose of headlines is to pique, annoy, amuse, etc.

It's up to the customer to identify itself. Boeing doesn't "out" customers (and presumably Airbus is equally respectful).

On the other hand, Boeing is arguably required to report orders, since its material to its prospects and its stock price. So that's a good reason (1) for Boeing to report orders even when they're unidentified and (2) to doubt that Boeing plays games with unannounced orders.

17 January, 2006 13:14  
Jon Bright said...

While I'm all for people keeping things private, and I'm sure it has no effect on either company's sales figures, I'm curious about the unidentified customers. Surely, Airbus knows about it the moment somebody bought something from Boeing, and vice versa? If the customers don't want to be identified, fair enough... but I'm left wondering why they wouldn't. Maybe it's Bizjets?

17 January, 2006 14:15  
idlewild said...

Why would Airbus know the minute that a customer, for instance, exercised an option on a previous Boeing order? Not all firm orders are the result of competition between A and B.

Monday, January 16, 2006

First Sign of Avian Flu Impact?

New York Times article (registration required) wherein a UN official recommends screening flights from affected European areas for people and their belongings. Says there are 80 flights/day arriving into Frankfurt alone from affected areas.

Needless to say, even if no one gets sick, this has the potential to increase expenses and delays, though if the threat is as bad as it's feared, a little prevention is no bad thing.


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A340 Ugliness in WSJ

Significant article today in Wall St Journal (subscription required) summarizing distressing status of Airbus's mid-size twin-aisle long-haul program (A340, A350).

Here's some of the key info (all Airbus stats for 11 months to Nov 2005, because Airbus still hasn't come clean about its 2005 orderbook):
  • A340 and A330-300 orders number just 30, 777 orders number 154
  • Boeing twin-aisle dominance in 2005 gives it much larger share of value than of numbers of aircraft. CSFB estimates Boeing got 54% of 2005 orders by number, 70% by value.
  • Airbus supersalesman John Leahy says that Boeing was resurgent in 2005 because it cut prices. But WSJ notes Tim Clark of Emirates says the 777 is more reliable than the A340 and that the 777 has exceeded all planned performance criteria. Air Canada Chairman Robert Milton says the 777 has considerable economic efficiencies over Airbus models. Air France CFO says that A340s "from the 1990s" (presumably A340-300s, since Air France does not fly the second-generation A340) burns 15-20% more fuel (enplaned comment: holy cow!) than similar vintage 777s.
Airbus's mid-sized long-haul product range doesn't seem to be working, as we've said before. WSJ says Airbus is considering tweaking the products again.

It's hard for us to see Airbus making its money back on the A340-500/600 program. Yes, it was a derivative from the A340-200/300 program, but it involved a heavily modified wing (wing root extension, as opposed to a wing tip extension), new engines, new landing gear and a big weight increase (so a significant number of other components were likely beefed up). And it will be difficult for Airbus to devote more resources to the A340 given all its other commitments. Plus, we kinda doubt there's an economic way to tweak the A340 to make up the performance gap on the 777.

The A340 platform has always been outclassed by the 777. Time for a new platform? Or just wait for the A350?


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Boyd on Virgin America

Michael Boyd this week has a take on a potential initial service pattern for Virgin America, based on government filings (if you look at the Boyd link more than a week from today's date, you will need to scroll down the page -- Mike's not yet in the blog age). Appendix 12 of Virgin America's DOT application (pdf) shows an illustrative schedule between unnamed airports.

Boyd takes a stab of guessing what those might be (the image above is the resulting route map), while giving an appropriate caveat that airline plans can and do change. For instance, the original JetBlue application listed many potential mid-range destinations from New York, most of which JetBlue has yet to touch six years after initiating service (this may change now that it's rolling out 100-seat E190 aircraft). The curious thing is that Virgin America does not plan to be very big in any one city -- the illustrative schedule given in the application is diffuse, with eight markets between seven airports (flight times are consistent with transcon routes).

An unusual strategy (Mike correctly notes this could result in higher marketing expense), but airlines are free to change their minds, so this could simply be a head-fake. MaxJet, for instance, talked up the prospect of serving London from Baltimore, but in the end started service from JFK Airport in NYC. Since NYC-London is much the largest trans Atlantic market (and is thus by far the most rational market to consider for an airline planning point-to-point trans Atlantic service), one might reasonably speculate that perhaps MaxJet had NYC in mind all along.

One last comment: Mike, the word you want in reference to Virgin's reputation is not "cache" (a place in which to store things) but "cachet" (prestige).


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Friday, January 13, 2006

Spirit Snacks -- Don't Leave Home Without Your Credit Card

Kinda odd. Spirit Airlines (not to be confused with Spirit AeroSystems) will only sell you snacks if you have a credit or debit card "for your convenience".

Without being too snarky about this, our impression of Spirit is that it likely has a higher proportion of customers without credit cards than some other airlines. And given its Caribbean strategy, we'd imagine the proportion of such passengers will only increase. What are these folks supposed to do, go hungry?

Fun fact: Spirit President & COO B. Ben Baldanza is a serious gamer. Do a google search for Ben Baldanza and you'll find his name all over the gaming sites (leading one to wonder when he has time for airlines). Traditional games, that is, not Doom, Quake and the like. And yes, it's the same guy, the pictures from the airlines sites match the pictures from the gaming sites. Apparently we should have kept playing Dungeons & Dragons.


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Virgin America Mystery/Airline Brain Drain

Stories about Virgin America signing a lease for a HQ in Burlingame, CA, just south of San Francisco Intl Airport (SFO). Says the Virgin VP Airports:
The new jobs created by Virgin America will represent a significant economic boom to the Bay Area, which is a rich talent pool filled with energetic, creative people we'll need to create the new airline.
Hmmm. It's not impossible to HQ a low-cost carrier (LCC) in a high cost area. JetBlue is based in Southern Connecticut (executive HQ) and Forest Hills, NY (operational HQ) (CEO David Neeleman appears to prefer to raise his many children in bucolic Connecticut rather than Queens). It's the right move for an airline that so closely identifies itself with NYC. Maintaining that hip New York image while based in, say, Salt Lake City, would be difficult.

If Virgin America plans on identifying itself strongly with the Bay Area, then having an HQ there might make sense too, though it's very expensive. But unlike the New York airports before JetBlue (and we're not including Newark here), the Bay Area airports do have clearly dominant players, and its hard to see any startup coming to dominate SFO (or another Bay Area airport) the way JetBlue is coming to dominate JFK airport in New York.

Going up against United at SFO doesn't seem like a smart move:
Going up against Southwest at Oakland or San Jose seems like a bad move too, though at least Southwest doesn't compete in the premium sector.

So why it makes sense for Virgin America to be based in the Bay Area remains a mystery.

But... (enplaned segue alert) the Virgin America statement above ties in to something else that broke this week, namely the conflict over American's executive bonus incentive program, which is scheduled to pay some American executives (but not the CEO) some large bonuses, despite the fact that American parent AMR will turn in a large loss for 2005. Executive VP Dan Garton, for instance, will receive $1.7mm, which is hard for line employees to accept, given the airline is not yet making money. Texas columnists came down on both sides of the story, pro & anti management.

So what's this got to do with the Virgin America statement above? A serious issue in this industry is finding and keeping talented people. The airlines have lost a ton of money over the past five years, and that's translated to reduced wages. The ones we hear about the most are line employees: flight attendants, ramp workers, mechanics, customer service reps and most of all, pilots. Yes, they've all suffered terribly, but that's not our point, not this time.

The issue is salaried and management employees. It turns out there's a limited number of people who are (1) competent and (2) so fascinated by the airline business that they're willing to work for significantly less just to get their daily fix. Airlines are already a backwater. If you're a bright young thing on the make your first thought is not "airlines". Since 9/11 a lot of talent has drained from a business that wasn't overrun with it to start with. And we firmly believe it's more efficient to pay above market wages to fewer really bright employees than pay average salaries to a greater number of mediocre employees. Unfortunately, we don't think that's ever been the philosophy of the airlines.

At some point good people need to get paid to stay in the airline business (and we're not defending this particular American Airlines bonus scheme, which at the very least seems to have been ill designed). The problem is how you square that with keeping line employees on-side. A pilot who's just taken a 30% paycut is not going to like it if a middle manager gets a wage increase. It may be true the market for competent middle managers is a lot stronger than the market for airline pilots, but it's still going to anger the pilot, which can have consequences.

That's the sort of tough problem you wish you had a few really bright managers to solve.


Baeck said...

As I think you alluded to, the fact that Virgin America is lining up its hub in the Bay area is especially strange because of the similarities between Virgin's and United's strategies.

Virgin likes to promote itself as an airline providing a host of extra amenities for the same or lower price as its competitors. At the same time - as stated in today's WSJ article - United is focusing on providing more amenities to lure high yield passengers and/or business travelers.

It seems that if Virgin wanted to use its better amenities approach to the maximum advantage (no pun intended - you'll see), it would pick on American at DFW/ORD or Northwest at MSP/DTW. Both of these legacies have been focused on stripping amenities from their flights and any of these hub cities would be more cost-conscious than SFO.

13 January, 2006 21:27  
dfwdelta said...

So little is known about Virgin at this point that seems nearly impossible to compare the Virgin apples to the United oranges. Is it possible that the Bay Area might have some special social preference for the Virgin brand? Or, is it possible that the response to the Virgin Atlantic brand was not strong enough in the east coast cities it considered for its HQ that the Virgin America went elsewhere?

Personally, as someone who lives under the AA choke hold at DFW, it seems like Virgin would do amazingly well here. Both WN and AA are offering less and less amenities in flight, and if there is enough O&D traffic here, there might be a niche opening. From the free rent in the vacated Delta terminal E, to the talent at both WN and AA's corporate HQ (not to mention those who could be coaxed to move from Continental in Houston), the Dallas-Ft Worth area makes a lot of sense to me. But then again, AA has a way of making airlines regret ever crossing the Texas border.

Also, it seems like Virgin is really intent upon starting service with just transcon routes (from what I've read). Looking at airports on each coast with good sized O&D traffic, there doesn't appear to be one large enough to house an eventual good sized hub without a massive legacy carrier hub present as well.

13 January, 2006 21:41  
Baeck said...

The other thing that worries me about Virgin's strategy is starting off on trans-con routes.

If Virgin wanted to tackle AA, NW, or UA, they would hit them the hardest on mid-con (i.e. - ORD-West Coast) routes where neither airline provides anywhere near top-notch service. AA and United both provide their best services on their trans-con routes because they are more comparable to international flights in length. Virgin is not likely to match or exceed their offerings using A320 aircraft.

13 January, 2006 21:52  
Anonymous said...

I suppose the implication is that by situating itself in the Bay Area, VB will perhaps find it easier to attract and retain top white collar "talent" (for whom a cosmopolitan lifestyle is often valued over-and-above more traditional "quality of life" measures -- sq ft, etc -- which would be easier to realize in traditional "heartland" airline cities, no matter the salary) addition, it's not much of a stretch to imagine the liberal, "design/style-conscious community" in SF being as receptive to VB's arrival as their compatriots were to J6's in NYC. Of course similar demographics do not a successful airline make. I agree that it largely depends on whether they can successfully parry with UAL on the transcon and LUV on the shorter stuff.

13 January, 2006 22:34  
Kaleberg said...

Unfortunately the airlines are in the passenger transportation business, and that business has never been much of a money maker. For the past several thousand years, the government, or rather various governments, have had to step in with regulations and subsidies. Henry V regulated the post-chaise business, the US subsidized the railroads and the steamboats, and Nebuchadnezar probably regulated and subsidized donkeys.

Unlike the freight business, which is profitable, the passenger business is hard pressed to attract management go getters, except during periods of higher subsidies or heavy regulation. Right now, we are at an impasse. The perceived need to subsidize and protect the major carriers is preventing the development of new airline structures more suited to our current needs.

If we are serious about getting better upper and middle managers into the airline business, we need to let the major carriers fail. The US doesn't gain anything by protecting incompetent CEO jobs. The planes, the airports, and the trained line employees are not going to vanish into thin air. (No Finnair jokes, please). They will become the assets of new airlines.

Competent managers will figure out good strategies. Most of the new airlines will go under, and others will be acquired. The better, and luckier managers, will rise to the top of the new airlines.

Of course, since there is no money in the passenger business, as stagecoach and railroad operators used to complain in their heyday, these airlines will eventually grow sclerotic and start demanding government bailouts. However, if we do things right now, we will all be comfortably in our graves when this happens.

13 January, 2006 23:24  
jdforce said...

As a neophyte to this board ... parhaps Virgin America is using San Francisco as a base of operations in order to partially help it secure the Eastern end of the (surprisingly) lucrative Australia route.

SYD-LAX accounts for 25% of Qantas' international revenues. United is unable to fight Qantas effectively right now ... thoughts?

Granted it is just one plank to support the SFO platform, but is it worthy of thought?

14 January, 2006 02:14  
idlewild said...

Virgin America has ordered A320s. Be tough to get to Australia using those.

14 January, 2006 04:00  
JJ said...

On the Airline Brain Drain, don't get it why people are so fixated on the Incentive Plan.

1. It is not a "BONUS" but a incentive compensation plan, common at many corporations

2. The plan was public. Everyone knew about it including the Unions but no one objected at that time

3. The timing of when this will pay out was set back way then. If AA stock was at $5 then nobody would care. Seems like people are more annoyed at the price rise than the plan otherwise they had a few years to complain about this

4.Check out the proxy statements and see the pretty miserable salaries of the top guys at AMR. There has been a drain of top executives, AA is on their 3rd CFO in a few years.

5. The $500M number quote in the press was inaccurate. The $500M is mostly the broad based stock plan for all employees done after the concessions a few years back

14 January, 2006 14:40  
Anonymous said...

Virgin America isn't going to be competing with Southwest or even United. They are here to take on JetBlue and Frontier. These low cost carriers offer things that SWA doesn't offer. TV on-demand, assigned seating, and that feeling of flying a 'hip' airline.

United is too heavly entrenched at SFO to even feel a pinch. They may have to lower fares a bit or run special fares on dates but nothing that will hurt numbers too seriously for United at SFO.

However, JetBlue may have to become more competitve on their trans-continent because JetBlue has no code shares and Virgin America will likely code share with Virgin Atlantic making a flight from LA to London via NYC much easier than having to change airlines and tickets and rebook bags.

As a previous commenter stated, Airlines don't make their money on fares but rather cargo. I am sure VA is trying to ink some good deals in order to make money quickly.

As for VA taking a stab a the middle part of the US. United, American, Northwest, and Southwest have a pretty decent strong hold on the region. United has hubs in Chicago and Denver. American hubs in Chicago and Dallas with St. Louis a focus city. Northwest has hubs in Minneapolis, Detriot, and a smaller hub in Memphis. And Southwest has no hubs per say but major flight operations at Love Field, Midway, St. Louis, Kansas City, and now their arrival into Denver is expected to really progress the airline.

Also, a majority of international arrivals and departures are coming from the big west and east coast cities. Boston, NYC region, DC, Atlanta, Miami, LA, SFO, and Seattle. Although quite a few international flights come into Dallas, Chicago, and Minneapolis, still a vast majority come into the US via the big coastal cities. Thus making VA's trans-continental decision a wise one and making SFO a very wise location


14 January, 2006 18:27  
Cole said...

I think that anonymous (i.e., #4) has the only reasonable answer--for a brand like Virgin, Dallas isn't exactly going to cut it--no offense. After all, Virgin Atlantic doesn't fly there now (nor does it fly to ORD), and the likelihood of some sort of codesharing/point-sharing agreement between V.Am. and V.Atl. seems pretty high. No other Virgin Atlantic destination city makes sense for a new airline--MIA or EWR would be like poking a grizzly bear, LAX and JFK are filled to the gills, LAS is a no-margin wasteland, and BOS and MCO are already both pretty full and pretty competitive. Which leaves IAD and SFO, and though the market structure at both is very similar, SFO is the preferred airport in its region, while IAD plays a sad and little-liked second fiddle to DCA.

Certainly some Bay Area types (and some New Yorkers and others headed there) will find the "hip" vibe of Virgin America appealing, and operating SFO-JFK (presumably) will give it an advantage over the incumbent in hip, JetBlue. Not to mention that SFO has an entire terminal empty in one of the most expensive real estate markets in the world . . . that makes rent in Burlingame (which is not exactly the 30th story of a downtown office building with views of both bridges) more bearable.

16 January, 2006 14:40  
idlewild said...

What advantage would Virgin America have over JetBlue on SFO-NYC?

16 January, 2006 16:30  
hhoran said...

There is no evidence to support your presumed relationship between increased management pay and increased management quality when you look at a very small market (like aviation) and it becomes especially dubious when the industry goes through a long period of structural decline or volatility. When an industry is growing innovative thinkers and managers who can produce strong results can usually find opportunities to stand out. When an industry is dynamic, outside investors are desperately looking for .better. managers, and something of a market can develop. When an industry stagnates or declines, the discipline of growth and outside capital disappears and companies become intensely inbred and political. .Better. managers threaten the senior execs who let the company decline in the first place. Bonus pools, or other types of .above market pay. in these situation become rewards for loyalty and not rocking the boat. Big contracts for new, outside people go to the old buddies of the CEO, not to people looking to shake up a moribund culture.

The only two prominent cases of worthwhile major .investments in management talent. at North American airlines in the last 15 years followed major new investors coming into Northwest and Continental in the early/mid 90s. In both cases the huge gains in corporate value had very little to do with individual management skills and a lot to do with breaking up the old, tired culture.the combination of new owners and large infusions of fresh blood created an environment that made major changes possible. In both cases, company culture went stale by the late 90s, as management teams coalesced around narrow cliques of loyalists. Bonuses paid out to these loyalists skyrocked, as they were making all of the horrible union, pricing and capacity decisions that would soon plunge them back towards bankruptcy. There is simply no other case (unless you go back to AA.s growth in the early 80s) of a North American carrier paying way above the market for management, and having investors, customers or others see any kind of return on that expenditure.

Southwest has always had medium/low management pay versus the Legacies. America West has always strongly and sensibly argued that they need management pay levels considerably below the larger carriers (given their inherent network/revenue disadvantages) consistent with their claimed need for lower pilot and mechanic pay levels.

There are obviously isolated cases when .above market pay. can work. The presence of new, hands-on, highly motivated investors is ideal. Incentive schemes can be justified when the managers are actually taking financial risks (below market pay if you fail, way above market only if you succeed wildly) tied to long-term indicators of corporate value defined by the owners. Full disclosure and transparency to all stakeholders. Very few executive comp schemes in any industry meet these kind of standards. When you argue vaguely about .the need for higher pay to attract better managers into aviation. all you end up with is another excuse for the insiders to loot the treasury a bit more.

16 January, 2006 19:06  
idlewild said...

We'd draw a distinction between top management and middle management. If you see our comments on United, you'll see we're well aware of the danger of self-serving top management.



This post was meant to focus on middle management. A lot of solid long-time middle-managers have had to leave the business, things have gotten so bad pay-wise. These are people who were committed to their companies but simply can't take the pay cuts any longer. That's a serious issue.

16 January, 2006 23:28  
hhoran said...

Point taken if your concern was middle management pay. But managing that properly in a cost-costrained big company environment might be even harder than controlling senior exec pay.

18 January, 2006 11:35  
NYGabriel said...

the advantage Virgin America would have over JetBlue on SFO-NYC is that it would actually fly to SFO, not Oakland.

24 January, 2006 17:15  

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Friday, January 13, 2006

Pretending There's No Alternative To Raising Fare Caps

Decent article on the one-year anniversary of Delta's fare caps contains the following questionable statement:
American executives had worried that with the lower cap, some flights could end up completely sold out well before the day of departure, forcing some corporate fliers to turn to other carriers on last-minute trips.
This in itself is a very poor excuse to raise the fare cap (which is what American did). If an airline finds itself running out of last minute (we prefer the term "walk up") seats, it can do one of two things:
  • Reduce the number of seats sold in advance at lower prices
  • Increase walk-up fares
Both will increase revenues. Now, it may be that profits are maximized by doing the latter, not the former. But it's disingenous to pretend there's no alternative to increasing the fare cap, though it certainly sounds better than admitting that heck, we're going to keep fares high because, well, we can. Not that there's anything wrong with that per se. It's a free market, companies can set prices as they wish. Just don't pretend that you're being forced into doing something you want to do.

When you get right down to it, the legacy majors still can't let go of those steeply ramped fare curves. They're getting better,but the average ratio of highest to lowest fares on a given route is still a lot higher for the legacy majors than it is for a low cost carrier (LCC) like Southwest.

[At least in the US that is. In Europe the LCCs have very steeply pitched fare curves (a lot of which has to do with the penchant for selling a certain number of extremely low, even "free" -- net of taxes -- fares). This gets back to European LCCs not being business-friendly. US LCCs probably give last minute travelers a better deal than European LCCs, especially when you consider that Southwest and JetBlue have several inches more legroom than the typical Euro LCC.]


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Thursday, January 12, 2006

Airbus: A320 Replacement Not Until 2015

Via MRO Wire, Reuters report with the CEO of Airbus correcting the "mistaken" impression left by the CEO of parent EADS that Airbus was working on an A320 replacement. See our earlier post.

The A320 is selling very well indeed for an airplane that is almost 20 years old. Given the issues Airbus is having with its widebody range, putting a question mark over the cashcow A320 program is the last thing Airbus needs.

So, new Boeing narrowbody in 2013-2015 range, new Airbus narrowbody by 2015.


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Wednesday, January 11, 2006

100 Seat Flashpoint: JetBlue's Role

Two things to keep in mind as 2006 progresses. One already discussed: the showdown between Northwest Airlines and its pilots over the issue of outsourcing aircraft up to 100 seats, which we think has the potential to be the most significant labor dispute in the airline business in perhaps the last decade or so.

The other is what JetBlue does with its new 100-seat aircraft, the Embraer 190. And yes, this issue is linked to the Northwest issue. It.s all about 100-seat aircraft.

What.s so special about 100-seat aircraft? discussed the issue of outsourcing and scope before. Basically, legacy major airlines have the right to outsource aircraft up to about 70 seats. Such outsourcing is to so-called regional airlines, which do nothing more than operate the aircraft under contract to the major airlines. Regional airlines have lower costs, in large part because they pay less than major airlines.

Legacy major airlines, for their part, typically don.t fly aircraft any smaller than, say, 125 seats. Any smaller and it.s more economic to use a 70-seat aircraft flown by a regional partner. So in the system of each legacy major airline there.s a capacity gap . there are no aircraft in the 100-seat category.

(The exception is Northwest, where the gap is not from 70 to 125 but rather from 50 to 100 . Northwest can.t outsource anything larger than 50 seats and for historic reasons it flies a lot of 100-seat aircraft itself. This is why the 100-seat issue is so acute for Northwest because 100-seat aircraft are still flown at Northwest itself).

This means that there are a lot of routes in the US that are being non-optimally served by legacy major airlines, routes that would be best served by something in the 100-seat category.

Another factor is that Embraer has recently built a 100-seat aircraft (the Embraer 190, otherwise known as the EMB-190, otherwise known as the E190) that is a lot more economic to fly than previous 100-seaters. The E190 is a lot lighter per-seat than, say, the 717 (which was a derivative of the DC-9 aircraft which has a design dating back to the 1960s). Indeed 100-seat aircraft built in the last decade or two haven.t sold all that well, in part because below, say, 125 seats, major airline pilots simply became too expensive.

Into this breach steps JetBlue. JetBlue CEO David Neeleman likes to go where other airlines can.t, because it creates a protected niche where JetBlue can thrive. Prior examples of this include getting slot waivers to fly into JFK airport in New York and entering slot-protected Long Beach Airport. 100-seat aircraft is another example. As discussed earlier, JetBlue is also paying its E190 pilots modestly, a lot more modestly than, say, Northwest pilots are paid to fly the only slightly larger DC-9. In consequence, JetBlue.s per-seat costs for the E190 are expected to be only slightly higher than they are for the A320, which in JetBlue.s configuration has 156 seats.

Generally, all other things being equal, per-seat costs for an aircraft drop with increased aircraft size (there are economies of scale for aircraft size). So any time you can fly a smaller aircraft with only slightly higher per-seat costs, that.s pretty exciting from a network planning standpoint. A network planner's ideal aircraft would combine the size of a Piper Cub with the per-seat costs of a 777.

Observers have noted for at least couple years that JetBlue.s E190s have the potential to be game-changing. In particular, we agree with those who say the E190 is a 50-seat regional jet (RJ) killer. As previously discussed, 50-seat RJs are a high per-seat cost aircraft that requires high fares to thrive. Pre-9/11, such fares were common within legacy major airline systems. Further, Pre-9/11 scope clauses generally limited legacy major airlines to outsourcing aircraft of 50 seats or less. These two factors caused the legacy major airlines to order far more 50-seaters than would be optimal today.

The way we think of the JetBlue E190 threat is this: JetBlue will enter cities/markets that are too small to be efficiently served by current .mainline. aircraft like A320s or 737s. By definition, such cities or markets are therefore currently served by major airlines in large part by regional jets. E190 per-seat costs are better than 50-seat RJs, so JetBlue will undercut average fares currently offered by major airlines on RJs. Lower fares will also stimulate additional traffic that JetBlue needs to fill larger E190s.

Further, the E190 is significantly more comfortable than the typical 50-seat RJ (either Bombardier.s CRJ100/200 or Embraer.s ERJ-145) and the most prevalent 70-seat RJ, Bombardier.s CRJ700. While the E190 has the same seating configuration (two seats on each side of a single aisle) as the CRJ700, similarities end there. The E190 has a much bigger, more pleasant cabin, including seats that are slightly wider than that of the A320 and even real overhead baggage space. Passengers will not mourn if 50-seat RJs lose out to E190s.

(Some major airlines now have the E170 in their regional system which is the 70-seat baby brother of the E190, featuring the same level of cabin comfort, but not quite the same economics).

Thus far, JetBlue has announced service to Austin and Richmond with the E190 (here and here). These are the type of secondary cities that (with the exception of upstate New York and Burlington, Vermont, both of which are served for political, not economic, reasons) JetBlue has yet to serve. It is also has the E190 on the Boston-New York route, which is a less imaginative but apparently quite popular use of the aircraft.

Which is another reason why the Northwest pilot issue is so important. If Northwest gets its way with its pilots over 100 seaters, every other legacy major airline will seek (and eventually get) the same thing, and the legacy carriers will be able to respond to JetBlue relatively quickly. If not, JetBlue will have this niche to itself (and other LCCs that try the same thing) that much longer (probably until the next serious downturn when pilots will again have to give ground).

Either way, the legacy major airlines are going to wish that they hadn.t contracted for quite as many 50-seat RJs as they have. That's a story for another day.


Anonymous said...

Interestingly, US Airways has already cut a scope-clause deal with its pilots which makes the E190 (which may be purchased in large numbers to replace the airline's aging 737-300/400 fleet) a thoroughly-mainline aircraft to be flown by mainline employees.

That will significantly bolster NWA pilots in holding the scope line at 100 seats for mainline. A precedent has been set for the 190 on legacy carriers and that precedent is not outsourced.

12 January, 2006 05:22  
idlewild said...

True, but the US Airways E190 pilot pay rates that we've seen are a lot more similar to the JetBlue E190 rates than the Northwest DC-9 pay rates.

In other words, if NW pilots fight to get to where US Airways is today on the E190, NW pilots are still looking at a heck of a reduction in pay.

That may, in fact, be a "compromise" that Northwest is quite willing to get to. OK, you can keep your jobs, but your pay comes down a whole bunch.

12 January, 2006 06:10  
idlewild said...

Then again, that solution (NW pilots flying the relevant aircraft but at much lower wages) was unacceptable to Northwest when Northwest proposed it for 70-seat flying the last time around.

The problem with keeping it in-house but at much lower wages (from the Northwest management standpoint) is that NW pilots will almost immediately agitate to increase wages back to the old levels, whereas if the flying is outsourced, its much harder for that to happen...

12 January, 2006 06:27  
Anonymous said...

You mean per seat mile costs, not per seat costs - don't you?

12 January, 2006 07:03  
Cole said...

On the topic of jetBlue's per-seat (mile) costs--why does JB put 156 seats in its A320s? Doesn't that require an additional flight attendant over what would be needed with 6 fewer seats?

More pedestrian response: E170s/190s are wonderful and extremely comfortable aircraft--even the one that I flew with US Airways Express. I hope we start to see a lot more of them.

12 January, 2006 11:31  
Tailwinds said...

One problem for Northwest is that its DC9 pilots have far more longevity than their jetBlue counterparts. Even with identical pay scales NWA would lose big. I'm guessing that the average 100 seat captain would have 7 - 10 years more longevity at NWA than JBL.

Going to a regional helps with the lower pay scales, but then the E190 will go to the most senior pilots on property. If SkyWest flew them they'd be all 10-20 yr captains, although there are substantially younger regionals that could staff them with far more junior pilots.

NWA proposed NewCo would solve both longevity and apy rate issues, but it will cause massive (possibly fatal) labor unrest. Besides, isn't it illegal to fire your employees so you can offer to rehire them at half price?

12 January, 2006 14:16  
idlewild said...

Since we're making relative statements about cost it doesn't matter whether we make them about per-seat costs or per seat-mile costs, it's equivalent.

You're correct that the industry works mostly in per-seat mile costs rather than per-seat costs. However, seems to us that the concept of a per-seat cost is easier for a non-expert to grasp.

We should probably have a background post on this topic at some point.

12 January, 2006 14:16  
idlewild said...

Hmm. If you take a look at how pay increases with longevity/seniority (yes, not exactly the same thing, but close enough for our purposes) you see that it's not very big compared with, for instance, the difference between JetBlue and Northwest payscales for E190/DC-9. So the longevity effect, while real, is not the main issue.

Secondly, Northwest can do more or less anything it wants so long as it gets union buy-in and/or the judge says so.

12 January, 2006 14:45  
Anonymous said...

Unbelievable!!!!!!!!!!! I'm a Northwest Pilot..Number one point we have offered the company to fly the 100 seat market aircraft at rates equal to UsAir/Amwest. Second what happens next year when the company whats a DualNewco at 150-180 Pax Jets.The only way a newco happens is if NWA furloughed pilots fly it. And third we will not allow the corporate raiders to use bankruptcy to destroy this industry.

13 January, 2006 01:11  
idlewild said...

Apparently JetBlue thinks that the savings from removing one FA does not compensate for the expected missed revenue on those days when its aircraft are full. JetBlue does run very high average load factors.

Interestingly, easyJet made the same calculation, except it has 156 seats in an A319, which is considerably shorter than the A320... (and yes, the same rule applies in the UK)

13 January, 2006 03:11  
Jon Bright said...

Is it possible that the additional FA helps reduce turnaround time?

13 January, 2006 06:28  

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Tuesday, January 10, 2006

Airbus Developing All Composite Narrowbody

Seattle P-I article on Airbus's announcement that it will, after all, pursue all-composite aircraft. The A320 replacement will apparently be an all-composite aircraft, though Airbus is not yet discussing timing.

It's also notable because only recently, Airbus was raising safety issues about the use of all-composite fuselages in the context of Boeing's new 787. Apparently all composite fuselages are now OK.

Airlines such as Southwest have already asked Boeing to apply 787 technology to a 737 replacement (the 737 and A320 are narrowbody competitors). Boeing has earlier said that a 737 replacement is likely in the 2013-15 timeframe.


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Monday, January 09, 2006

Picking on Mike Boyd: Southwest@Denver

We previously directed readers to Mike Boyd.s 2006 predictions. Interesting stuff in there, but we don.t agree with all of it and going to pick on items from time to time. The item of the day is Southwest Airlines at Denver.

Southwest recently started service at Denver after a break of 20 years. It.s worth noting that in its 30+ year history, Southwest has exited only a handful of airports because it.s generally reluctant to exit markets . Southwest wants its customers to feel they can count on Southwest to always be there. The old Denver Stapleton Airport was congested and that was much less acceptable to Southwest in the early 80s than it would be today.

It.s always news when LUV comes to town (LUV is Southwest.s stock symbol, a reference to Dallas Love Field, its hometown airport) and it was even more so when Southwest announced its return to Denver. First, Denver is a hub for both United (dominant) and Frontier. Further, Denver is a relatively expensive airport at which to do business. There was a time when Southwest would not challenge a legacy major airline (like United) at one of its hubs. There was also a time when Southwest would not do business at high cost airports.

Mike Boyd makes some points we agree with, the biggest being that Southwest is likely looking to thrive at Denver at the expense of Frontier. We agree. However, along the way he makes some points that we disagree with. For instance, Mike says that it is somehow new that Southwest is looking to take share at the expense of other low cost carriers (LCCs) like Frontier, rather than simply grow the market through stimulation.

Not true. One of the greatest threats to other LCCs has always been Southwest. For instance, Southwest has made America West.s life miserable since at least the late 1980s. JetBlue.s business plan was clearly designed with this in mind. JetBlue has played keepaway from Southwest ever since inception (every JetBlue nonstop route has at least one endpoint that is not a Southwest airport).

Further, although Frontier is a LCC, it.s an LCC with costs that are higher than Southwest. That means Southwest can afford to charge average fares lower than those of Frontier, and that means some (likely modest yet non-negligible) level of stimulation is still possible at Denver. seen estimates of Southwest.s cost advantage as high as 15%, which is far above Frontier.s operating margin. That's a problem for Frontier.

Another thing Mike says is that Southwest must change its product to be successful in Denver. In particular, he says Southwest must offer advance seat selection. Anyone who flies Southwest knows it doesn.t offer assigned seats.

Southwest might very well one day offer advance seat selection, but that decision is unlikely to be driven by the Denver market for the simple reason that initially Denver will be more of a big new destination for existing Southwest customers, more so than a big source of new Southwest customers. It.s unclear Mike has grasped this.

The three cities that Southwest initially connected to Denver are Chicago (Midway), Phoenix and Las Vegas. These are three of the biggest stations in the Southwest network. Until recently, Denver was one of the biggest missing destinations from these cities in the Southwest network. It will therefore be easy for Southwest to fill flights to Denver largely with folks at Chicago, Phoenix and Las Vegas (or connections thru these cities) who tend to fly Southwest to anywhere Southwest flies . and now no longer have to make an exception when they fly to Denver.

More recently, Southwest added flights to Denver from Salt Lake City and Baltimore. Baltimore is another huge Southwest city. Salt Lake City has a significantly smaller Southwest operation than the other four destinations from Denver, but we.d bet that it.s still a decent source of Southwest traffic, especially for a short flight like Denver.

Again, we agree with Mike that Southwest has Frontier in its sights. We disagree that Southwest needs to significantly change its business model to be effective in Denver. The right way to think of Denver in the Southwest system (at least initially) is as a big spoke from the existing Southwest cities that Southwest chooses to serve from Denver. These will be a source of good traffic to Denver for Southwest. These folks are all quite used to lack of advance seat assignment on Southwest.

Some portion of these folks who will fly Southwest to Denver would otherwise have flown Frontier. That.s a loss of traffic that Frontier will find troublesome. At the same time, Southwest has the ability to (and probably will) on average undercut previous Frontier fares on Denver point-of-sale traffic. That.s another problem for Frontier (the same things will apply to United at Denver, but less so because far less of United.s much larger Denver system will be affected, and of course Denver is only one part of the United system whereas it.s every part of the Frontier system).


Anonymous said...

JetBlue will FINALLY have a non-stop flight connecting two Southwest airports on 1/19 when they launch a FLL-OAK non-stop. Should be interesting.


09 January, 2006 09:21  
PGTravel said...

I agree with you that this will begin as a big spoke for existing WN customers and that these people are used to no advance seat assignments. What I think you overlook is that some of these people actually PREFER no advance seat assignments.

Now that you can check in 24 hours in advance of your flight online, you can effectively be guaranteed an A boarding pass which enables you to have your choice of window or aisle even if you're the last A on board. This is a lot better than last minute travelers can often find on a carrier with advanced seat assignments that are already taken. There is a loyal following for this type of product and I don't believe it will have to change.

09 January, 2006 12:30  
DMZ said...

I'm also curious why the lack of advance seat selection's perceived as such a big deal. I know for those who haven't flown Southwest there's a perception that it's a cross between a bus and a cattle roundup, but once you decide to risk it to save 50% on a route served by a legacy carrier, you find out it's not that bad (and now, with online checking, as pgtravel noted, it's even easier).

Is it a psychological barrier to getting customers to try Southwest when it enters a new market, or is there really an advantage for similar LCCs who offer seat selection?

09 January, 2006 13:17  
idlewild said...

It's unclear that advance seat selection is that big a deal. We know at least one frequent Southwest flyer who thinks advance seat selection would be worse than the current system.

We will say that lack of advance seat selection can still bite you, even if you've scored an "A" boarding pass (Southwest hands out 45 "A"s, 45 "B"s and the rest "C"s, then boards the As before the Bs before the Cs. You can now check in 24 hrs in advance and so get your A pass through the web instead of going to the airport).

09 January, 2006 22:05  
idlewild said...

Whoops, sorry, finished that a little too early.

It's still possible to get screwed with an A boarding pass if you happen to show up after the flight has started to board. It's no mystery why some people prefer the certainty of an assigned seat. That said, not everyone does, and there are good reasons why Southwest keeps the system, not least that it's absolutely true that the flight boards faster with their system.

09 January, 2006 22:10  
Jon Bright said...

If the plane's full, 90 out of 137 passengers also get a tiny psychological boost out of being A or B passengers and not being stuck with the poor, underprivileged C schmoes. The less full the plane, the higher the percentage of passengers with some perceived advantage.

I'm sure this isn't the reason Southwest boards this way, but I'd be willing to bet that surveys would indicate this effect does exist. People like being called "A", even if it's based on something as arbitrary as check-in order.

10 January, 2006 02:22  
Anonymous said...

I don't know WN's boarding policy for parents traveling with children, but there's a lot of security in having confirmed seats in that situation. I suppose I'll find out whenever WN opens up a DEN-PHL route.

Gordon Weakliem

11 January, 2006 18:03  
idlewild said...

This post has been removed by the author.

12 January, 2006 02:12  
idlewild said...

Our recollection is that families with small kiddies get to board first at Southwest, which obviously takes care of that issue.

12 January, 2006 02:13  
Anonymous said...

The real advantage of no advance seat selection is that the value of your seat is less determined by window or aisle, front or back than it is by whom you are sitting next to. On Southwest, this allows people to optimize by avoiding the screaming kids in row 5 or the fat guy in row 12 or the scary nutjob in row 17.

A further refinement to this is that on non-full flights, it is actually an advantage to boarding with the B's because you pick who you sit next to instead of them deciding to sit next to you (if you boarded first as an A). If you sit in an aisle seat on a row with a single businessman on the window, the middle seat will probably not get taken. If you sit by yourself on a row, a couple may decide your row is best and take both remaining seats.

I fly about 50 flights a year and I always take Southwest when I have a choice. This is one of the big reasons.

13 January, 2006 12:36  
Anonymous said...

"Another thing Mike says is that Southwest must change its product to be successful in Denver"

I read it to mean Boyd was talking about Southwest's competition in general, not just Denver. And that's a valid point he makes.

Take Song versus Southwest in the TPA-BDL, MCO-BDL markets. Very O&D oriented. Song obtains a RASM 25% higher using much larger aircraft.
(Form 441 data. T-100 segment data)
Given that Song's non-fuel costs are essentially the same, that's a no win situation for Southwest.

07 February, 2006 14:24  

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Wednesday, January 04, 2006

Kerry Skeen: the Ego That Ate Independence Air

Washington Post article (registration required) on Kerry Skeen (CEO of about-to-be-departed low-cost carrier wannabe Independence Air) has him saying that he has "no regrets".

Good grief. It takes an ego of monstrous proportions to be able to say that after having destroyed hundreds of millions of dollars of shareholder value and thousands of jobs. That's why we titled yesterday's piece on Independence Air "Sic Transit Gloria Skeen". This was all about Kerry Skeen's ego.

And he's not finished. He's asked the bankruptcy judge to approve $3.2mm in bonuses to keep a wind-down team employed. No, we are not making this up.


Lars Marius Garshol said...

Your previous post on Independence Air (and also the Washington Post article) said that smaller jets have higher costs per seat compared to larger jets. Is this why smaller planes are usually turboprops?

(I know this is kind of tangential to this specific article, but your posts are so thorough, and seem to an outsider so well founded, that it's hard to ask anything other than tangential questions.)

04 January, 2006 07:32  
Air Boss said...

Let them eat cake....

04 January, 2006 10:46  
Air Boss said...

To Lars:

There are generally economics of unit operating costs (per seat-hour, per seat-mile) with the size/scale of aircraft.

So, smaller means higher unit costs, larger means lower unit costs.

Propellor-powered (piston and turboprop) aircraft tended to be used for smaller, short-haul missions until the advent and marketplace adoption of "small jets" (the Canadair Challenger bizjet-based CRJ and Embraer's 145, the foremost examples).

The economics of propellor power are still attractive, if "propellor avoidance" by the flying public can be overcome.

As an example, Alaska/Horizon recently traded options for Bombardier CRJ700 small jets for the same firm's Dash 8-Q400 turboprops.

Both are 70-seat class aircraft, but the Q400 is more efficient on Horizon's short-haul PacNW network.

04 January, 2006 11:03  
Joe said...

I would like to add that turboprops are much more fuel efficient than turbofan planes. The RJs that use turbofan are more for passenger convenience than anything. CJRs have the engines at the back of the plane to minimize noise and vibration in the cabin. But planes like Emb-146 have to keep the engines on the wing for obvious reasons.

Knowing this, I still prefer CJRs because I'm not pleased be stuck with the engines droning for a flight no matter how short it is

04 January, 2006 11:36  
Ecozeppelin said...

Joe, maybe I can sort out a few things you seem confused about.

CRJs (not "CJRs") do not have the engines at the back "to minimize noise and vibration in the cabin" - try sitting in row 12 of a CRJ200 and tell me how you like the noise minimization compared to an aircraft with underwing engines. I've never come across an "Emb-146" so I guess nothing about it will be "obvious" to me, but if you mean the EMB-145, that's actually a rear-engined configuration just like the CRJ.

You say "The RJs that use turbofan [sic] are more for passenger convenience than anything." Not so. Turboprops will be more efficient than turbofans on say a 200 nautical mile sector (there'll be little difference in block time, and the turboprop will burn less fuel) but on longer sectors, the jet will be a lot more efficient, not least because it'll fit more flights in per day.

In the meantime, enjoy those CJRs and Emb-146s. :-)

(Air boss has summarised the jet vs turboprop debate well - there's an excellent article in the Flight International archive
here. )

04 January, 2006 12:20  
Anonymous said...

Re: What ecozepplin said:
I think that Joe probably meant BAE-146 not EMB-146 (which does not exist) or EMB-145 (which, as you noted, has engines at the rear). The BAE-146 does have two engines under each wing. I suspect that you knew what he meant too.

04 January, 2006 13:02  
idlewild said...

Play nice, guys, play nice...

04 January, 2006 13:27  
Anonymous said...

This post has been removed by a blog administrator.

04 January, 2006 15:04  
NYGabriel said...

Its a very prudent move to ask for bonuses to keep the existing finanicial employees as the services will be required to wind down the company. You can lose all the employees and end up paying outside consultants/accountants even more to wind down the affairs (which can take years.)

04 January, 2006 15:23  

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Mike Boyd 2006 Predictions

We don't have much time at the moment, so in lieu of a post today, we suggest reading Mike Boyd's 2006 predictions. We don't necessarily agree with him, but as usual it's interesting reading.


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