enplaned

Bloomberg has this article today about Delta's unsecured creditors going after Delta lessors, claiming they've illegally colluded to achieve higher lease rates in Delta's bankruptcy. But earlier this year United lost a very similar issue in its bankruptcy.

Some background. In a US Chapter 11 bankruptcy, the company has the right to assume (i.e. keep) or reject all "executory contracts" (a contract in which some duties remain to be done by at least one of the parties). This includes aircraft leases. In theory, what happens is that a bankrupt company assumes all contracts that are below or at the market price for the same product or service and rejects all those that are above the market rate for the same product or service today. So, in theory, above-market contracts are "marked-to-market" (i.e. reset to market rate or replaced by new contracts at market rate).

In the case of aircraft leases, if an airline rejects a lease and returns the airplane and the lessor is unable to lease the aircraft to another airline at comparable or better rents, the lessor can file a claim against the bankrupt airline for the lost value. The catch is that such a claim is considered an unsecured claim against the bankruptcy estate, and in the case of airlines, such claims are generally paid out at pennies on the dollar (in the case of the first US Airways bankruptcy such claims were paid out at between 1 and 2 pennies on the dollar).

Something similar should, theoretically, happen in the case of aircraft that the airline has mortgaged. If an aircraft loan is upside down (market value of the aircraft is lower than the loan outstanding) then in theory the airline can return the aircraft and the difference between the loan outstanding and the market value of the aircraft is converted into an unsecured claim against the airline.

That's the theory, and until the United Airlines bankruptcy, this wasn't a bad high-level view of what generally happened in an airline bankruptcy (what actually happens is quite technical -- one day we'll have a discussion about Section 1110 of the bankruptcy code, for instance), especially if the airline was willing to lose a few aircraft here and there, because hardline lenders/lessors could be credibly threatened with the return of a few aircraft.

(Taking back an aircraft can be expensive for a lender/lessor. The aircraft may need maintenance, reconfiguration, paint, etc. Further, there are ways for a bankrupt airline to ensure the return is expensive. For instance, an engine is just a collection of parts. So before returning an aircraft, an airline can rebuild engines with parts that are closest to needing replacement/overhaul. So the lessor/lender is stuck with engines that need very expensive overhauls -- and though the lessor/lender might be able to claim this cost from the airline, it's likely another one of those unsecured claims paid at pennies on the dollar...)

In the United case, the bankruptcy dragged out so long (and United so angered aircraft lessors and lenders) that lenders/lessors finally banded together. Ultimately financiers for 175 of United's fleet (of then about 460 aircraft) came together in something called the Chapman group, significantly enhancing their leverage. At this point United's unsecured creditors complained such collusion was illegal (and damaged their interests, since if aircraft financiers get more, there's less left over for the unsecured creditors). United thought this was a good argument. The home town bankruptcy judge (who has generally sided with United) agreed.

United's argument sounded good: the Chapman group was a straightforward violation of anti-trust laws. However, an appeals court ultimately demolished this argument, spanking United -- and the bankruptcy judge -- hard. The key distinction, it transpires, is that although it's illegal to collude over new business, it's not illegal for creditors to cooperate to maximize recovery of debts owed, and the appeals court ruled that this is what the lessors were doing. United lost big time. The deals it eventually signed were, we've heard, worse than what it had originally negotiated before it decided to sue. We touched on this earlier in our post on United management's naked greed.

This appears to have established a new approach for aircraft lessors/lenders in airline bankruptcy. They now get together immediately and present as united (heh) a front as possible to the airline. It's now much harder for the airline to pick off lessors/lenders one at a time. Hence, Delta's renegotiated lease rates are higher than they would otherwise be, and Delta's unsecured creditors are not happy. But if the United precedent holds, that's just too bad.

All over the news yesterday -- Independence Air sent furlough notices to all its employees, warning them that they might not have a job as of January 7 unless the airline gets a "significant investment" by that time. Guess Independence is no longer pretending.

Decent article in BusinessWeek on the battle between the airlines and the GDSes. A GDS is a Global Distribution Service, previously known as a CRS (Computer Reservation Services). There are four big ones:

• Sabre -- originated as the American Airlines reservation system, but is now independent
• Galileo -- one of its major progenitors was Apollo, the United reservation system, but Galileo is now part of Cendant (a provider of "travel, real estate, vehicle, and financial services")
• Amadeus -- origins as the reservation system of several European airline res systems, was until earlier this year a publicly-traded company, recently taken private by a private equity, though Iberia, Air France/KLM and Lufthansa still have stakes. Also bought (in the mid 1990s) SystemOne, the Continental (and before that, Eastern) res system.
  
• Worldspan -- origins as the TWA, Northwest and Delta reservation systems, but now privately owned (it had an abortive IPO attempt in 2004).
  

The GDSes originated in the 1950s and 1960s to make airline seat inventories available to travel agents (remember, there was a time when we mostly all bought airline tickets through travel agents). This was a non-trivial problem at the dawn of the computer age. Sabre, Apollo and other GDS hardware was a common sight in travel agents starting from the 1970s onward.

The basic deal is that the airlines think the GDSes cost too much. In fact, many low cost carriers eschew GDSes (and travel agents) entirely. JetBlue, for instance, uses the Open Skies system owned by Navitaire (this was originally developed in the 1990s by a group led by JetBlue founder David Neeleman, then sold to Hewlett-Packard, then to Navitaire). JetBlue displays its inventory on its website and essentially nowhere else. Our understanding is that taking a reservation through a GDS costs a legacy major airline as much as an order of magnitude (10 times) or more what it costs JetBlue to take a reservation through its website. The article we linked to above says $12-13 per reservation through a GDS.

Many low-cost carriers (LCCs) have a model of totally avoiding travel agents, which is feasible because the web connects LCCs directly to customers (for this reason, LCCs typically advertise proportionately more than legacy carriers because LCCs need to renew this direct customer connection). EasyJet did this even before the web was widespread, relying on customers to call its toll-free telephone number, emblazoned on aircraft fuselages. Southwest (the granddaddy of all LCCs) used a special low-cost, low-feature version of Sabre (based on the Cowboy reservation system of the original Braniff International, which collapsed in 1982) to distribute tickets pre-web.

Legacy airlines, however, can't dispense with GDSes because they rely too heavily on corporate business, which is still dominated by travel agents, which in turn rely on the GDSes.

The current GDS model is arguably the last creaky remnant of what was an incredibly costly and irrational pre-web distribution system based on travel agent commissions. Travel agents made a commission on airline tickets of 8 to 10% or more -- which didn't exactly align travel agent interests with those of passengers. Many travel agents added little to no value. Our understanding is that, weirdly, travel agent GDS expenses were typically (or at least often) covered by the airlines rather than the travel agent.

Airline competed with each other to install the largest number of GDS terminals at travel agents, hoping to direct business in their direction. The Feds had to get involved to eliminate such things as "display bias" (preventing American Airlines, for instance, from listing its own flights before those of competitors, since lazy travel agents tended to book the first flight displayed, rather than the one that might best suit a customer).

This system started to crumble in the mid 1990s, and now the standard commission on an airline ticket is zero, and a lot of mom and pop travel agents have gone out of business (which is a good thing, since they were essentially just a valueless drag on the system). The reduction in airline commissions was a piece of airline good news during the late 1990s and the early years of this decade. Further, the airlines spun out the GDSes into free standing companies. The Feds recently woke up to the new world and have recently decided to get out of the business of regulating GDSes. So now all sorts of behavior is possible that wasn't before.

We're too much on the outskirts of this one to comment much on the details of how this is likely to shake out (in fact, we tend to believe that madness results from focusing too much on the GDSes and we'll freely admit that the depth of our knowledge is not what it might be) but we'll say this much: GDSes are middlemen in the era of the Web, and that's a bad place to be, since the Web is the ultimate disintermediator. It is still the case, for instance, that airlines pay GDSes, which pay travel agents. This seems like non-equilibrium behavior in the era of the web.

Orbitz was the first serious legacy airline attempt to break the grip of GDSes. Orbitz had direct access (bypassing GDSes) into some legacy airline seat inventories. But Orbitz has since disappeared into the maw of Cendant, which of course also owns Galileo and so has no great interest in hurting this business model. G2 Switchworks was launched by the former technology head of Orbitz to develop webtools to bypass GDSes. ITA is another on the same trail.

One big issue is how to bypass GDSes to access the business travel market, as corporations like the backoffice support and corporate travel policy enforcement that GDSes provide. LCCs have experimented with systems to make it easier for business travelers (such as SWABIZ for Southwest) or integrate LCC res systems into corporate back-office systems (here's an announcement earlier this year from easyJet).

Another dirty little secret about GDSes is that they don't seem to be as well designed as they could be. Otherwise why would a company like Airline Automation exist, which, among other things goes through existing reservations enforcing ticketing restrictions? Any well-designed designed distribution system would do that automatically rather than requiring an airline to contract with a company to do that.

Later addition: readers have submitted some good comments, including one we repeat here. All points we've heard before. It should now be clear to all readers that GDS is a multilayered and complex topic in itself. The airlines are motivated to crush the GDSes, but at the same time there's nothing that can yet do everything a GDS can do.

I'm no great fan of the GDSs, but a couple of points:

1)The web is not the world. Travellers in China, the Middle East, India, and other rapidly developing areas must have a way to book multiple-carrier trips. They might not have the infrastructure, or, in the case of China, their infrastructure might be blocked off from the rest of the world. So GDS terminals will still be around, in one way or another, in growing economies.

2) Luxury travellers a huge wildcard. Not just in the high-revenue seats they tend to book, but also in the kickbacks you can generate: the booking GDS can decide what car they drive, where they stay, what clothes they wear, etc., etc. I think we know who is leaning on this strategy. Personally, I don't think it amounts to much.

3) AFAIK, there is no consumer service that allows a customer to book a multiple-carrier trip using non-GDS carriers. The customer needs to do a bit of work if s/he is flying from, say, SHA to AKL. As you mentioned, there's a lot of furious work to get into this arena, and for good reason. It's a big project in every aspect, from marketing to operations. The GDSs have enough problems with interoperability, and there's only seven of them. Now imagine each airline's reservation backend trying to communicate with every other airline reservation backend.

Slightly stale, but good Q&A (dating from Dec 19) with Alan Mulally, CEO Boeing Commercial Airplanes, on the blog by James Wallace, aerospace reporter for the Seattle Post-Intelligencer.

• New narrowbody (applying 787 technology to a 737 replacement) likely 2013-2015 timeframe
• 787-10 likely to be built (this is a further stretch of the forthcoming 787, the significance of which is that the 787-10 would encroach on 777-200 territory, so Boeing is willing to obsolete itself, which we think is a good thing -- better to obsolete yourself, than have someone else do it to you). This was fairly widely reported at the time.
• Boeing still thinks that it will sell 777s to Qantas (the lack of a 777 or A340-500/600 order when Qantas ordered 787s was notable)
• 747-8 (the latest version of the 747) expected to get some passenger version orders in 2006.

The 747-8 program launched with orders only for the cargo version. Our view is that the 747 may be a 35+ year-old platform (first flight of the 747-100 was in 1969), but it probably has a few tricks still up its sleeve.

The 747-8 Freighter has some significant advantages:

• It's better suited for the typical density of air-freight -- in air freight there's the concept of whether a freighter "cubes out" or "weights out", depending on whether it runs out of volume or weight capacity. The A380 apparently has a lot of volume relative to its lift capacity, so it makes more sense for package express companies like Fedex (relatively light material) than it does for more typical air freight applications
• 747 freighter also has a nose door that permits long items to be loaded (see above). It's the only commercial production freighter with this ability (various aircraft originally built as military freighters have this ability, as do highly customized aircraft such as the Beluga)
  

European cargo specialist Cargolux lobbied hard for Boeing to launch the 747-8. In fact, Cargolux somewhat unusually announced (warning, poorly formatted webpage) it was negotiating to buy 10 "next generation" 747 freighters in July, several months before Boeing officially launched the program.

As for the 747-8 passenger version, it may be a derivative of a derivative (the first version of the 747 was the 747-100/200/300, followed by the 747-400 in 1989) but it's still the only commercial aircraft in the 400-500 passenger size (the A380 has more than 500 seats in typical configuration), it has good range and Boeing claims it has a lower weight/seat than the A380. There may be life in this thing yet.

A week or so ago we said that it sucks to be a regional airline. Today came the latest evidence for this as Continental said it was pulling 69 of 274 regional jets (RJs) that ExpressJet flies (or will fly -- our understanding is eight of these actually are delivered from manufacturer Embraer in 2006) for Continental. ExpressJet has the option to keep the 69 RJs if it pays Continental a higher rent for them. Since there's a glut of 50-seat RJs at the moment, we seriously doubt that ExpressJet will do that.

As we previously explained, US regional airlines are not airlines as most understand the term, but simply provide lift under contract to the legacy major airlines. Regionals fly mostly RJs (50 or 70 seat commercial jet aircraft) where/when major airline partners direct, and the payment the regional receives is essentially independent of how many passengers the major airline finds to put on regional flights. Further, the legacy major airline absorbs some key cost risks, like fuel. Enough review (read the previous piece if you want more) -- the point is that regional airlines do very little other than operate aircraft on behalf of others.

ExpressJet is even less substantial than other regional airlines because it leases all its aircraft from the single major airline for which it operates, Continental. Other regional airlines (such as Skywest, Mesa or Republic) either own regional jets themselves or lease them directly from third parties. Further, most regionals work for more than one major airline (Republic, for instance has units working for American, Delta, United and US Airways).

ExpressJet is so tied to Continental because it was once a subsidiary of Continental. In 2002, Continental spun out its former regional subsidiary as ExpressJet. Since Continental was already on the hook for the RJ order it had with Embraer (and since 50-seat RJs were then viewed as a hot commodity), Continental retained the headleases of the 50-seat RJs that ExpressJet flies, subleasing the aircraft to ExpressJet. (Pinnacle is in a similar position with respect to Northwest, from which it was spun out in late 2003).

Since its IPO, ExpressJet has not signed up a single additional major airline as a partner. In fact, at various times, ExpressJet has made a virtue of having a single partner, noting (correctly) Continental has been a lot more successful since 9/11 than most other legacy major airlines.

ExpressJet has a contract with Continental that ostensibly lasts for a long time (over a decade, if we recall correctly). However, there are several options for Continental to reduce its ExpressJet flying, including one that permits it to pull up to reduce flying with ExpressJet by 25%. Further, our understanding is that at the end of 2006, Continental has a no-cost option to end the contract.

Continental says that ExpressJet's contracted rates are now above market. See our previous comments about how regionals supply a commodity (lift) and that providing a commodity is a tough business to be in. Continental has apparently failed to negotiate acceptably lower rates with ExpressJet, so it's exercising its right to pull aircraft from ExpressJet.

While vicious price competition is just a basic feature of the business, we think there's another reason why Continental pulled flying from ExpressJet. ExpressJet is the sole RJ provider to Continental. As such, Continental is vulnerable because despite the fact that RJ lift is a commodity, it would be difficult to replace ExpressJet's 274 RJs at short notice should something happen to ExpressJet (such as a strike).

In short, Continental is taking a risk having all its RJs in the same basket. Such risks are real. This past summer, British Airways (BA) was brought to its knees when unions at its London Heathrow (LHR) catering company went on strike. BA had outsourced LHR catering back in the 1990s, but failed to diversify suppliers, so labor at its sole supplier had leverage over BA. We made the point in the prior article that one of the main benefits of RJ outsourcing to major airlines is to reduce labor (particularly pilot) leverage. The reality is that ExpressJet labor still has a lot of leverage so long as ExpressJet remains Continental's sole supplier for this critical function.

The point is that even if ExpressJet had RJ rates that were fully competitive, Continental still has a significant incentive to diversify suppliers. So we're unsurprised that at the first opporunity, Continental is, in fact, diversifying suppliers, since it has said that if (as we expect) ExpressJet opts not to keep the 69 RJs, another regional will fly these aircraft for Continental. Too bad for ExpressJet, but, after all, it sucks to be a regional airline.

Continental sold just under 50% of ExpressJet in 2002, and has since sold down its remaining position in ExpressJet to under 10%. ExpressJet stock (ticker XJT) IPO'd at $16 and in the time since then has only briefly traded above that level -- its performance could be accurately described as mediocre or worse. Not to be cynical, but Continental had every incentive to make ExpressJet look good when it was IPOing ExpressJet or selling down its ExpressJet position (especially since Continental has been short of cash since 9/11), and every incentive to crush ExpressJet once its ownership of ExpressJet was eliminated (or small). Caveat emptor...

Great blog by passenger on the Alaska Airlines flight that depressurized yesterday. This is part of a continuing self-inflicted ground-handling nightmare at Alaska. Back in May, Alaska took an uncharacteristically aggressive move and overnight replaced its own ramp services at Seattle with Menzies Aviation. It did so for the usual reason: it needed to cut costs.

There's nothing wrong with contracting out ramp services (ramp services include baggage handling, guiding the aircraft on/off the gate, servicing the toilets -- with the so-called "honey cart" and so forth). And in fact it's quite common for an airline to contract for ramp services (and other services besides) at airports where an airline has a small presence. However, it's less common to see an airline do this at its main hub, as Alaska Airlines did.

Alaska replaced workers overnight, so it was bound to have some problems, and it did. This report by a local Seattle TV station catalogues a series of problems since the transition. So it was doubly embarrassing for Alaska and Menzies that this incident was caused by one of the new rampers.

Alaska has been struggling to improve the profitability of its operation over the past couple of years. It had to cut flights earlier this year because it was unable to keep to a schedule designed to wring increased utilization out of it's aircraft -- perhaps not coincidentally, the schedule cutbacks occurred only a month or so after switching to a new ramp operation. Having new ramp workers probably didn't enhance reliability, which is key when an airline is trying to turn the aircraft quickly.

It also failed to reach an agreement with its pilots. Alaska needed to cut pilot costs (reductions at most of the big legacy airlines left Alaska with some of the highest rates), tried doing so through negotiation, had to resort to a mandatory arbitration feature of its pilot contract, succeeded in getting much of what it wanted through arbitration, again tried to reach a mutually agreeable resolution (to see if there was a comparable agreement that would be more acceptable to its pilots), and failed. So, good news that Alaska got savings, bad news that it did so at the cost of a significantly angry pilot corps. A glance at airlinepilotcentral.com shows that Alaska's rates are still significantly above those of many larger airlines, for instance, United.

And in 2004 Alaska had eliminated in-house heavy maintenance. Again, this is hardly something unique -- Southwest has always outsourced most of its heavy maintenance, for instance, Continental has outsourced most heavy maintenance since the early 1990s, and during this downturn there's been an orgy of outsourcing on the part of airlines going through Ch 11 (Northwest even took a strike before its recent Ch 11 on this issue, and succeeded in dumping most of its in-house maintenance while keeping the airline running).

One of the things that probably made it hard for Alaska to cut costs is that it hasn't faced the same sort of deep crisis almost all of the big legacy majors have hit. Alaska's future has never been in jeopardy, its profitability has simply been unacceptable. This is a difficult situation for any unionized company, because unions are motivated by survival, but not particularly by company profitability (someday we'll discuss the whole issue of aligning employee and company interests). "Not profitable enough" isn't generally a compelling argument to a union.

So to some extent, Alaska has been forced into taking decisions that are uncharacteristically harsh, and therefore all the more difficult employees. Contrast recent events with Alaska's reaction to 9/11 -- although Alaska cut flying significantly, it didn't furlough employees, carrying them until flying was later restored.

So this depressurization incident caps a difficult year for Alaska -- one of its outsourced rampers hits an airplane with his equipment, doesn't think there's any damage so doesn't report it, the airplane takes off, blows a hole where it was hit, depressurizes and it's all over the news and the web. Even before this incident, both Alaska Air & Menzies needed to be like Caesar's wife -- not even the hint of impropriety on the ramp service front. Instead, they each end the year with a massive black eye. While we generally agree that Alaska needs to take such cost cutting actions, its execution appears to leave something to be desired.

(Note, Alaska Airlines has a stylized picture of a Native Alaskan on its tail. Although "Eskimo" is no longer a preferred term to refer to Arctic native peoples, the industry still refers to Alaska's logo that way).

Later addition: James Wallace of the Seattle Post-Intelligencer has a blog entry focused on the inevitable ambulance chasing aspect of this story.

Further to Viva Mexico!, Mexican air travel may as much as double in next three years according to this article from Bloomberg. New entrant airfares actually undercut some luxury bus fares. Picture is from the homepage of Interjet, a Mexican new entrant. That would clearly be revolutionary, if it happens.

This article claims there's another boutique airline about to darken US skies. We've never heard of "Fly First Class" airlines before, but it claims to be only a few signatures away from being able to launch. Hmm, we'll believe it when we see it. We're doubtful that an airline that plans to fly from Wilmington, NC (corrected from Delaware) to Bermuda and London has much of a future.
Virgin Express is apparently the first airline (picture is from Dec 24) to engage in more-than-token use of blended winglets on 737-300 aircraft. Blended winglets have been retrofitted to 737 New Generation (NG) aircraft (737NG refers to 737-600/700/800/900 aircraft).

Until now, only a single 737-300 had been retrofitted with winglets. The 737-300/400/500 are an earlier generation of 737 generally known as 737 Classics (confusingly, however, there's an even earlier generation of 737, the 737-100/200). We previously wrote about the retrofitting of blended winglets to 757-200 aircraft, and how adding winglets makes the 757-200 look like a Russian Tu-204. Blended winglets reduce drag/increase range.

Someone asks in a comment section (which we currently can't track down) how airlines boost capacity at holidays, suggesting carefully scheduling maintenance around such holidays as one potential method. Sure, and the other thing is that airlines may have operational spares (aircraft not in maintenance allocated to back up the operation to ensure reliability). One can always schedule those too. Though we're unsure as to the prevalence of running "extra sections" (which is what such flights would often be called). We've seen JetBlue offer extra flights around holidays, not sure if other airlines do it much. Perhaps other readers can help here.

The airports at Worcester, MA (ORH), Manchester, NH (MHT) and Providence, RI (PVD) are respectively 45, 45 and 49 miles (as the crow flies) from Boston Logan airport.

In the last decade the latter two airports have boomed as LUV came to town (LUV is the stock symbol for Southwest). Annual passengers at MHT and PVD are about 4 mm (Excel file) and 5.5 mm respectively. Annual passengers at ORH? It just got its first commercial flight in 2.5 years, to Orlando Sanford airport via Allegiant Air.

ORH is run by Massport (the govt body that runs Boston Logan airport), which even picks up a lot of ORH's annual deficit. Theoretically, ORH is part of a Massport strategy for relieving congestion at Logan airport. In practice, ORH will never be commercially useful until a crippling disadvantage is remedied.

PVD and MHT work for the same reason: they're a more convenient option for a significantly number of people living on the outskirts of Boston (fares at MHT and PVD also tend to be cheaper, though this is less true since LCCs like JetBlue and Airtran moved into Boston). ORH could be another Boston alternative (it's not especially remote compared to PVD or MHT and it has an adequately long runway), but there's a problem -- road access to ORH is poor. MHT and PVD have good freeway access, while getting to ORH requires a lot of time on surface streets.

Massachusetts politicians have dumped a lot of money into ORH over the years, to no great effect. This won't change unless ORH gets a good connection to the closest highway (Interstate 90), but apparently there's a great deal of public opposition (pdf). If that's insurmountable there's only one real option: downgrade the airport to general aviation use only, or shut it entirely. Without access, Worcester airport will never be much use.

Highlighted link: one of the links above is to an Excel file listing 2004 annual traffic at most (but not all) US airports from the ACI-NA website (Airports Council International - North America). Here it is again.

Great Financial Times article (unfortunately, subscription required) about how European low cost carriers (LCCs) have ignited the revival of moribund European regional economies. Here's an excerpt:

Ryanair began flying to Carcassonne in 1998. In July this year the airport handled 90,000 visitors, up from a mere 4,000 monthly visits six years ago. Carcassonne's chamber of commerce estimates the increased activity at the airport has generated 3,049 jobs in L'Aude, a region of 310,000 inhabitants, and created €374m (£256m) in extra economic activity.

"An aeroplane-full of British visitors may not sound very significant but many of them liked what they found here, especially the property, and even more the property prices," says a British resident in Carcassonne.

"This summer the one flight a day from the UK became two flights a day, says a British resident in Carcassonne.

"Services started to Belgium. The foreigners have bought up most of the old farms and stone village houses. Prices are well on their way to Provence. Our village has been repopulated by young people. Some have found specialised building work, such as stonemasons. Others benefit from the revolution in electronic communications - web-designers, translators, writers, even a recruitment agent."

Other factoids: 750,000 Brits own Spanish properties. 200,000 Brits left London last year in search of a better life -- 30,000 of them settled in France. A town of 10,000 is being designed near Malaga (Spain) for Germans. The pilgrimage city of Santiago de Compostela is (allegedly -- sounds like the locals are underpricing the produce) running out of wine and shellfish to serve tourists since LCCs started service into the previously largely unused airport.

European LCCs are, we believe, the first true European airlines in two ways. First, the LCCs are the first European airlines with a true pan-European presence. The legacy European carriers have been largely unsuccessful in establishing hubs outside of their home countries. British Airways failed with Deutsche BA and Air Liberte/TAT. The old Swissair, which controlled former Belgian flag carrier Sabena and had various equity stakes in other European carriers, was a spectacular failure after 9/11. Certainly, Air France now controls KLM and Lufthansa has bought Swiss International, but neither of these situations is a case of organic growth into another country. (It's worth noting an exception: Scandinavian Airlines System -- SAS -- has been the flag carrier for Denmark, Norway and Sweden since 1946).

Compare to Ryanair (Flash) and easyJet with bases all over Europe. Air Berlin has started serving domestic UK sectors and has its third largest base in Palma de Majorca, Spain. The new Central/Eastern European LCCs, SkyEurope and Wizz Air (bringing new meaning to "take a Wizz") have been multi-national almost since the beginning.

Secondly, Euro LCCs have enabled cross-European mobility. The FT article above discussed Northern European movement to the south, but just as significant are migrants from poorer European regions to the west. Ryanair has credited "Polish Plumbers" (Eastern European emigres into the UK) for the success of its Polish flights, but it must also be true that the availability of cheap flights has reduced the barriers to Poles seeking higher wages in the UK (France and Germany are unwisely hiding behind temporary immigration barriers and thus denying themselves the benefits of Eastern European immigration).

Other examples: Brits are apparently flying to Poland for cheap dental work, while Polish dentists are being imported into the UK to fill open positions. The Latvian countryside is being depopulated as Lats emigrate to Western Europe for better wages -- picking mushroooms in Ireland being one choice (Ireland now imports laborers, rather than the other way around).

The long term effects of LCCs are one of our favorite topics. They can also be seen in the US, though they're not as stark because the US has always been a more fluid society, and there have never been any internal barriers (whereas Europe has recentlyh integrated dramatically). But US LCCs caused many previously moribund airports to flourish, such as Newark (thanks to PeopleExpress), Chicago Midway (initiated by the first Midway Airlines, cemented by ATA and most of all Southwest), Oakland (Southwest), San Jose (Reno Air, Southwest), Providence (Southwest), Manchester, NH (Southwest). JetBlue is behind the renaissance of JFK in New York and Long Beach, Airtran in Flint, Michigan and Akron, OH.

Perhaps more subtle is the role in LCCs in the growth of certain US states/cities. For instance, Las Vegas and Phoenix have grown tremendously in the past decade or two. Growth has been underwritten by significant demographic trends (aging population seeking the sun, people leaving an increasingly full California), but it can't hurt that Las Vegas and Phoenix are dominated by LCCs and therefore have some of the cheapest airfares in the country. When airfares to/from sunny places are so cheap, why not live there rather than somewhere else?

Link to earlier post on Glasgow Prestwick airport's Ryanair-led revival.

Readers likely think that enplaned reeks of aerogeekery, but in truth, we're rank beginners compared to Uncle Roger at Flight International. Of course, it's not quite fair because Uncle Roger is also interested military stuff, which to us is only intermittently interesting.

For a real challenge, see this year's Uncle Roger quiz ...and the answers (both pdfs).

Happy Holidays, etc.

Slovakia is on the verge of selling Bratislava airport to Vienna Airport.

Why is that a crazy notion? Bratislava is the capital of Slovakia, but it's also just over the border from Vienna. In particular, Bratislava airport might as well be another Vienna airport. In fact the above picture of Bratislava airport was taken by a plane descending into Vienna airport (click the picture to get a bigger version). So they're close.

Needless to say, as a new EU member, costs in Slovakia are quite a bit lower than in Austria. So Bratislava airport (which is growing ferociously because of all the low cost carrier action in the new EU states) is clearly a significant competitive threat to Vienna airport.

Which probably explains why Vienna airport was willing to bid so much higher than anyone else.

Now, it may be that Vienna airport's motives are pristine. But it's nothing you'd want to count on.

It would be foolhardy of Slovakia to sell Bratislava airport to Vienna just to get the best price. Slovakia needs to take a lesson from how Mexico privatized its airlines -- take a lower price to ensure healthy competition.

GA = General Aviation which includes bizjets and Piper Cubs. Ft Lauderdale airport is considering charging these guys landing fees. As the article points out, currently there's this bizarre situation where a corporate 737 pays no fees, but a commercial 737 does. Plus, as a busy GA airport, non-fee paying GA aircraft are contributing to Ft Lauderdale's congestion problem.

We touched on this question earlier in the article on the attack of the VLJs. Good to see another airport is tackling the issue of equal treatment for GA and commercial aircraft.

Good blog entries from Airline Business on Boeing's excellent year and from Flight International on the likely timing for new narrowbody aircraft. Since both the 737NG and the A320 families are selling well, neither Boeing nor Airbus wants to encourage the thought that it's time for a new airplane, but the time is drawing near. Think sometime in the first half of the next decade.

One reader suggests that another iconic airport terminal is in Lyon (see above). It's a good candidate, though technically isn't this the Lyon airport train station?

A question from a reader in one of the comments sections:

I do want to understand the perspective that American West is not succeeding. As far as I understood -- they made a pretty good turnaround over the past few years under the current management that is now heading US Airways.

Is there something I'm missing here?

This in the context of the new US Airways being allegedly the merger of two failed airlines, the old US Airways and America West (AWA).

Here's our view: the old US Airways was a mess, very few people dispute that, and AWA was doing far better than the old US Airways. And we think the AWA leadership (now the US Airways leadership) is quite good. Clearly the best leadership that AWA ever had, though the guys who preceded CEO Doug Parker & Co were no bargains.

Immediately after 9/11, AWA looked like dead meat. In fact AWA was the poster child for the US govt loan program that was passed to prop up the airline business. But they did get their govt loan and Doug Parker did straighten out the company. And then value pricing and revenue head honcho Scott Kirby's yield management tricks did start to pull in more money than most expected.

Despite all that, it's likely most analysts would tell you that America West's long-term strategic position wasn't great. It was, when you got down to it, not the first choice of a lot of people for travel, just because it was relatively small, and stuck out on the west coast, plus it had Southwest all over the Phoenix hub. Certainly management felt that way -- if you recall, AWA was the third bidder for ATA (after Southwest and Airtran) when that airline fell over because AWA felt it needed to have a bigger east coast presence.

So in our view, AWA was clearly not the trainwreck that was the old US Airways, and it was in much better shape than anyone expected it to be, but you wouldn't call its prospects wonderful.

Since the merger, this issue has assumed great significance among the workforce because of seniority list integration issues. Most airline employees live and die by their seniority position. For instance, the most senior pilot gets his/her pick of available assignments, the second highest picks second, down the line. So how the two seniority lists are integrated is a very big issue.

It's especially acute in this merger because US Airways shrunk so much in bankruptcy. In consequence, the most junior pilot at US Airways was hired 16 or 17 year ago. Whereas America West was only established two decades ago, so the vast majority of its pilots were hired less than 16 or 17 years ago.

So, as you might imagine, US Airways and AWA pilots have very different ideas about how to merge the seniority lists. Basically, the US Airways guys will be better off if the list is merged by date of hire (DOH) because almost all of them will jump to the head of the combined list.

To us, that doesn't seem fair, considering that the old US Airways was very close to dead, in which case the US Airways pilots would have had zero career. Which is why the AWA guys prefer a different theory, which is that US Airways is a failed carrier and so all those guys should be stapled to the bottom of the AWA seniority list.

OK, this is simplifying things considerably, but those are basically the two sides of the argument. Which is why it's suddenly become important (to some) to figure out just how poorly AWA was really doing.

What will probably happen is that an arbitrator will hand down a decision that will satisfy neither side, both sides will sue, there will be bad blood and grumbling for a very long time. And the solution will probably split the difference somehow, and it will likely include a lot of "fences". Fences reserve certain flying for pilots of the predecessor airlines for some period of time. For instance, even relatively junior AWA pilots may end up getting priority access to flying that was historically AWA's (like in Phoenix).

If (and it's still an if) the new US Airways is successful, a lot of this will likely solve itself within five to ten years because there are so many senior US Airways pilots and the retirement age for pilots is 60 (though it might be raised to 65). So if all these guys retire, that's going to open up a huge number of opportunities for remaining US Airways pilots, whether ex-AWA or not.

One last point, Doug Parker certainly has good timing. No sooner does he close the merger with the old US Airways than Delta, Northwest and Independence Air all enter Ch 11. The old US Airways system will be one of the main beneficiaries of Delta's domestic cuts and Independence Air's pullback (and potential collapse).

Link to our very first post, which was about how the new US Airways doesn't act much like a low cost carrier (in the way most people understand that term) despite having a stock symbol that is LCC.

AP article (via USA Today) about how Midway Chicago airport may become the biggest station in the Southwest system by 2007, keyed to a recent Citigroup report. Southwest certainly has the gates for it, now at 29. As we said a month ago, this implies a theoretical capacity of somewhere around 300 departures/day. The article says actual departures are up to 196 at the moment. As the article says, Southwest declines to discuss specific plans for competitive reasons.

If you look at documents related to ATA's recent return of Midway gates to Southwest and the City of Chicago, you can see that Southwest has committed to having at least 217 departures per day (i.e. 20 additional above today's level) by 2007. Page 5 of this says that Southwest commits to flying 29,720 daily departing seats by June 30, 2007 if it wants to hold onto all of its Midway gates. All but 25 of Southwest's aircraft have 137 seats (and those 25 aircraft, all 737-500s, have fewer), so that implies a minimum of 29,720/137 departures per day = 217.

Perhaps Citigroup noticed the same thing, we don't know, we haven't seen that report. In fact, 217 seems like relatively modest gate utilization given Southwest is sitting on 29 gates---it's only about 7.5 departures per day per gate, and and as we said, Southwest is capable of more. We'd be unsurprised if Southwest exceeded 217 departures per day by 2007.

One of Ryanair's strategies is to beat up airports. It threatens to take traffic away from airports that raise fees or otherwise displease Ryanair. This works with small airports where Ryanair may be the only airline bringing traffic to that airport. Historically the demand for low fare service in Europe has been so great that to some degree it didn't matter all that much which small airport Ryanair favored, Ryanair passengers would somehow find a reason to use it.

But it's a totally different story at the big airports. Like it or not, there is only one Dublin, there is only one London, and the number of airports that serve cities like this is finite. In the case of Dublin there's only one airport.

For years Ryanair has excoriated Dublin airport and the Irish government for not doing what Ryanair wants at the airport (basically it wants separate low fare facilities built, run by a separate organization not related to the airport authority). And we think what Ryanair wanted was a good idea, but CEO Michael O'Leary is never one to use honey when he could use vinegar instead so it's never been put in the most diplomatic terms.

But the fact of the matter is that he hasn't much leverage. Ryanair said it wouldn't add any routes to Europe (it comprehensively covers the UK from Dublin, that was its original business) until it got its way at the airport. Over the last few years you've seen Ryanair deviate from that a bit, with a route here and there popping up to Europe from Dublin.

The airport and government, however, just sat tight. And yesterday, Ryanair gave in -- 18 new routes from Dublin to Europe and yes, it'll actually work with the airport authority on the new terminal, but no, it's not going to stop fighting for what it wants. Sure, and that will be really effective, now that it's just admitted in the clearest way possible that it has no leverage. The missed opportunity was just too juicy, and the name of the game at Ryanair is making money, at which it happens to be very good.

Recommendation. One of the few airline books worth reading is Siobhan Creaton's Ryanair: How a Small Irish Airline Conquered Europe. Lots of good stuff there. Michael O'Leary (or "Leo Hairy Camel" as he's alleged to be on pprune) is a very interesting character, to say the least. Only $11.20 at Amazon, give it to yourself for New Year.

Link to earlier post on Glasgow Prestwick airport, a small (in traffic volume) airport that relies heavily on Ryanair.

This is hardly the first time anyone has noticed, but this Airline Business article (published on the Flight Intl website) raises the issue again -- Indian airlines have ordered a huge number of airplanes recently (here, here, here, here, here, here, here, here just for recent Airbus action for instance -- you can look up the Boeing stuff yourself), so where are they all going to go?

Indian airports are run by the government, and the Indian govt moves slowly, and judging from the article, there hasn't been a lot of progress in the recent past. The govt is now trying to share the load with the private sector, but some people have a problem with that.

Will those huge Indian orders actually deliver, or will India just have a slow motion airport wreck of its own?

International terminal of Chennai (Madras) Airport shown above (click on picture for better view).

Bonus linkage: Airports Authority of India website

It's a bit stale (from last week) but this article discusses current dynamics in the regional airline business unusually well (the media in general has a pretty poor understanding of this business). The author, Mark Reilly, seems to have a clue.

Just to fill in a few more pieces, regional partners of legacy airlines fly smaller airplanes (these days, mostly the 50 to 70 seat regional jets--RJs) on behalf of the legacy carrier. So United Express flights are flown by a separate airline (like Skywest or Mesa or Trans States) on behalf of United. United tells Skywest where and when to fly and pays Skywest per flight basically independent of how many passengers are on board. United, in turn, sells seats on the Skywest flight as if they were its own.

So United takes the revenue risk on the Skywest flights. Moreover, United covers some Skywest cost risks, like fuel. So Skywest isn't at risk if the price of fuel goes up. And Skywest currently makes a pretty good margin on its United contract, around 10%. Pretty good deal for Skywest.

Perhaps too good a deal considering that legacy major airlines hardly ever make an operating margin of 10% (positive 10% that is). We'll get into why, historically, the deals have been so good at another time. As the article makes clear, however, regional deals are getting tougher. Northwest is apparently putting its regional contracts back up for bid (United did this in its bankruptcy, US Airways did it in its first bankruptcy, Delta... well, that's a story for another time), which it can do in bankruptcy. Low bidder likely wins, so Northwest's existing partners have reason to be nervous. Northwest isn't exactly warm and cuddly at the best of times, and now it's bankrupt as well...

See, ultimately, though it was a good business in the past, being a regional airline partner sucks, or will suck. All regionals do is provide lift, and that's a commodity. Passengers don't care if their United Express flight is on Skywest, Mesa, Trans States or any of the other dozen or so RJ operators in the US. Skywest isn't a brand to a passenger, United is. Your relationship is with United and so are your frequent flyer miles. That's who you call if you want to go to some small city in the middle of nowhere -- you let United figure out (or perhaps you're oblivious of the whole issue) who flies the airplane. Regionals supply a commodity, and the margins on commodities tend to become thin.

The Regional Pilot Blues

But there's one thing that sucks worse than being a regional airline, and that's being a regional airline pilot. Major airlines hire regional airlines to fly small planes because regional airlines do it more cheaply. Regional airlines fly more cheaply because they have lower costs and their costs are less primarily because they pay less, particularly to pilots.

As this says, a first year first officer at Republic (which flies for Delta, US Airways, American & United) makes $22 per hour. And he'll probably get paid for about 80 hours a month, maybe more if he's diligent about picking up flights. He's getting about $22K per year, and he's got your life in his hands. He'll make a per diem, some travel subsistence, but his take home is not a lot. You just hope his financial worries fade away as he aims his Embraer 145 (see picture) at the runway in a howling blizzard in the middle of the night at O'Hare. You'll think he's worth a bit more than $22K at that particular time.

Pay does go up the next year, maybe to $29K, maybe a bit more, but that's not much. Your hero in the right seat up front is eating a lot of Kraft singles between Wonderbread on his lunch breaks between landing RJs full of I-bankers and lawyers (some making 10 or even 100 times what he makes) at LaGuardia. Scratch that, he can't afford national brands, he probably buys the Costco brand. For him, ketchup is a vegetable. Which may be why pilots are known for being cheap -- unafraid to lift unattended newspapers or relieve restaurants of sugar packets.

Time out. Lest you think we're raving Bolsheviks, we're not. We don't like unions. We don't have much respect for ALPA, the pilot union. But you don't have to be Rosa Luxemburg to to be a mite concerned. Time in.

The system is set up to ensure this result. As far as the legacy major airlines are concerned, that's the way, uh-huh uh-huh, they like it, uh-huh uh-huh. Historically, pilot unions wear the pants in their relationship with major airlines. It's very difficult for an airline to replace a pilot work force (it effectively happened only once, when Frank Lorenzo broke the Continental pilot union in the early 80s. Frank Lorenzo is consequently a name reviled among pilots). It takes too long to train new pilots, and you can't really fire them outside of a strike. When pilots walk out, or even just work to rule, the airline bleeds.

So major airlines are stuck with the pilots they employ. And in good times, those pilots can bend the airline over a barrel and have their wicked way with it. That's what United pilots did in the "summer of love" in 2000 until United's then-CEO called them Daddy and gave them a big raise--and that was just a pilot slowdown (in bad times, the shoe is on the other foot which is why United pilots have coughed up big concessions the last few years).

However, things are much better for the major if it doesn't directly hire the pilot, but hires a regional airline instead. Every time the major airline has a regional contract up for renewal, the major is going to pick the regional with the best bid -- which will be highly correlated with those with low pilot costs. Yes, reliability matters, but all a contract regional airline does is operate airplanes. It doesn't market, it doesn't yield manage, it doesn't have a frequent flyer program... if it can't operate reliably, it's got no business being a regional airline.

If a regional pilot union succeeds in forcing wages higher, all it's doing is making its carrier less capable of winning future contracts.

So the regional airline system has inbuilt pressures to keep regional airline pilot wages low. In fact, if major airlines could get away with it, they'd likely contract all flying to third party operating entities (perhaps keep their own flight attendants on board to maintain service quality), which would end up in the same low bid system as the regionals.

But the majors can't do this, because major airline pilot contracts say they can't. These are the so-called "scope clauses" within such contracts, which reserve all flying on big aircraft for, say, United, to pilots in the United pilot union, where "big aircraft" in the case of United means bigger than 70 seats. Scope clauses are a big deal -- read the article again and you'll see at the end where Northwest is trying to jack up the maximum size of aircraft that can be outsourced to regionals. In airline-speak they're trying to "relax the scope clause".

This is why every regional airline pilot dreams of the day when he (they're mostly still all men...) gets picked up by a major airline, especially if it's Southwest, UPS or Fedex (stable, profitable airlines which haven't forced concessions on their pilots). Check out the numbers here, for instance. Much better.

So next time you're on a regional jet, look for the tip cup and give generously.

Questions, comments, something not clear? In the comments section, please.

Flight International article says Boeing may never get a chance to sell 767 tankers to the Pentagon. The Pentagon's requirements have changed, they're now interested more in a 777-based multifunction (cargo/tanker) aircraft.

OK, so clearly not all bad news, but Boeing was so looking forward to selling 767s produced on the fully amortized 767 line (the 767 first flew in the early 80s, meaning its 25+ year old technology) and, of course, it's already done the 767 tanker development work and sold them to others (like the Italians, see above picture). Whereas Boeing would have to invest in more development for a tanker version of the 777.

We always thought selling the US brand new 767-200 tankers was a gross misuse of money when there are so many used 767-200s that are or will be one day looking for a home (or at any rate can be picked up cheaply) that could be converted. Would they be as good as new? No. Would they provide a better bang for the buck? We strongly suspected so.

It just seemed like so much pork. Especially since the original deal was (to get around some bull**** budget constraint) structured as a lease. That means unnecessary lawyers and financiers involved, each taking a cut. No one was more satisfied than we were when the 767 program turned out to be involved in a Pentagon scandal and the whole thing came to a crashing halt. Apparently permanently. If this sticks, the 767 production line will likely shut soon.

We've been underway here a month or so at enplaned, who knows how long we'll last. We have yet to find another really, uh, "dedicated" airline/aerospace blog and that's a problem. It's like being the sole lawyer in town -- it works better if there are at least two, so you can debate. Speaking of which, we know a lot of people are reading enplaned, so we're disappointed with the weak level of comments. Surely not everyone agrees with what we're writing. Have a different view? Speak up.

Interestingly, others do publish serious airline comment on the web but a lot of it has not yet been blogified. Mike Boyd is almost always thought-provoking, but unfortunately his material is trapped in a pre-blog format that makes it challenging to link to a specific item (plus we can't read it through a blog-reader). Richard Aboulafia's posts are in a nicer format, but we'd like an RSS (or similar) feed. Scott Hamilton provides pdfs, one of the least friendly formats.

As consultants and analysts, all three of these guys are in the business of selling ideas. Their web commentary is essentially a free-sample of the insight they can bring to projects/research. Putting the free samples on the web gives these guys wide exposure. Well, blogifying content extends potential reach many times over because blog feeds are a great distribution mechanism and Blog material can be reacted to and propagated by readers. Many consulting/analysis shops have a periodic free publication they email or post to the web. Think about Speednews This Week. Blogify it, guys, and watch your readship and influence soar. It's far easier to absorb this stuff through a blog reader than have it stuff up an e-mailbox.

Kudos, therefore, to Randy Baseler of Boeing for writing a weekly blog (or having one written in his name). Haven't yet seen an Airbus equivalent. It's enlightened of Reed Elsevier to sponsor blogs for the editors of Flight International and Airline Business magazines (though they could be a bit more active). Good for Greg Lindsay at Connecting Flights for getting out there, we look forward to more of the same. USA Today is on the right track with Today in the Sky (it's a little anodyne, but at least it's in the right format).

We also link to a lot of Flight International stuff. There's a reason for that -- FI provides RSS feeds and makes all of content freely available on the web -- including archives back to 1996. We looked in vain for feeds on the Aviationnow website (which aggregates Aviation Week and other McGraw-Hill titles). Yeah, we read Aviation Week, but it's far easier for us to blog about Flight International (and its stable-mate, Airline Business) than it is about Aviation Week, so naturally we're happier to propagate FI's content (and potentially extend its influence). Air Transport World has RSS feeds, but just for headlines (and a short blurb). ATW still seems a little tentative, but at least it knows what an RSS feed is. Hello? Anyone home at McGraw-Hill?

The aircraft/airline finance journals (AirFinance Journal, Jane's Transport Finance, Commerical Aviation Report) don't appear to know what a feed is. Then again, they don't offer much in the way of free samples. It's all very very expensive there.

Bottom line: airline/aerospace content providers (and the rest of us) will be better off if they blogify the content they already provide to the web. It's not hard.

Please let us know in the comments if you think we've missed good free web airline/aerospace content, especially if it has a feed.

Reasonable Marketwatch article on forthcoming shakeout in European low cost carrier (LCC) arena. Hard to disagree with the notion that 50-odd EuroLCCs can't all survive.

Article correctly notes that consolidation by substraction (liquidation of the weak) is much more likely than by addition (merger), given the advantages of organic growth. Unsurprisingly picks Ryanair, EasyJet and Air Berlin (the currently largest three LCCs) as future survivors and notes the huge order backlog these three airlines have.

Bonus link: cheap0.com follows EuroLCC developments.

Later addition: www.whichbudget.com seems to cover the same ground, and seems more user friendly, as someone said in the comments.

Comprehensive Flight Intl article on progress of A380 flight test. Includes update on A380 wake separation issue we previously discussed (the ICAO has ruled that for now, air traffic controllers must leave more space behind the A380 because of concerns about its wake -- see our prior post for more background and why this is a big deal).

Basically, Airbus doesn't understand the ICAO's position, so it's going to fly tests with an A380, 747-400, 777 and A320 to get some data that, presumably, it hopes will ameliorate the ruling.

Bloomberg reporting Varig creditors have voted to convert most of their claims to Varig equity and now have a bankruptcy plan that they believe the US judge will accept (Varig is currently fighting the repossession of half of its fleet in front of a US court). However, most of the leasing companies are apparently still opposed to the plan.

This after creditors rejected an earlier plan in which a newspaper owner would have teamed up with the foundation -- the Ruben Berta Foundation (FRB) -- that currently controls Varig.

We haven't kept up with the minutia of the Varig saga. But we're pretty sure of one thing. A pre-requisite of a successful Varig reorganization is ending FRB control.

The problem with the FRB is that, as it says on the Varig webpage:

The Ruben Berta Foundation has as its primary objective the well-being of the employees of a conglomorate of companies created with one major trunk: VARIG.

As we understand it, historically the FRB interprets this in a penny-wise, pound-foolish way, stopping Varig from pursuing efficiencies necessary for long-term health if such actions have immediate negative effects on employees, meaning the company is never run as efficiently as it needs to be. Consequently Varig has lurched from one crisis to another for at least the last 10-15 years. The upshot of this is that the future of Varig is now in considerable doubt, given the success of TAM and especially the relatively young Brazilian low cost carrier GOL.

The FRB is nothing if not tenacious. The prior arrangement with the newspaper owner involved him buying some equity from the FRB today, and "renting" (the word used) additional equity from the FRB for a 10-year period, after which the newspaper owner would presumably lose his controlling stake and the FRB could take another bite at the apple.

The difference is that Brazil now has a Chapter 11-style bankruptcy law in Brazil. If it works as it does in the US, it means that the old equity holders (and in particular the FRB) will likely see their stakes reduced to zero (or close to it) -- assuming Varig survives at all.

Again, the key thing to watch, assuming Varig survives, is whether the FRB is finally removed from control. If Varig survives with the FRB no longer in control, then Varig might actually have a future as a normal company. We're interested in comments from those who may be closer to the situation.

Glasgow Prestwick Intl Airport (shown above) is an example of how low cost carriers (LCCs) can radically reshape the fortunes of airports. When the British Airports Authority (now BAA) was privatized in 1987, Prestwick was part of its portfolio. Trans Atlantic flights to Glasgow had to use Prestwick rather than Abbotsinch airport closer to town.

It didn't really work, and BAA ultimately ended up dumping Prestwick in 1992 (at about the same time trans Atlantic routes were approved for Abbotsinch), at which point the airport was nearly devoid of passengers. Prestwick is now in the hands of an unusual New Zealand company, Infratil, which is developing a specialty in unloved European airports. It recently bought (click to see where it is) Kent Manston International airport, after its previous operator went bust, and Luebeck Airport in Germany. Manston is more or less where Prestwick once was: near-zero traffic.

In 1994, Ryanair showed up at Prestwick and the airport has grown to the point that it's now serving about 2.4mm passengers per year. While Prestwick is further away from Glasgow than Abbotsinch, its 1950s terminal was unaccountably built to handle 3mm passengers and it does have a rail connection (in the foreground of the above picture--click on it to see a bigger version) and a good road to Glasgow. This makes for an attractive LCC airport (a big, paid-for terminal plus good access).

One problem is that Ryanair still carries the vast majority of all the passenger traffic at Prestwick, leaving the airport somewhat captive (the Scottish version of Frankfurt-Hahn airport or Brussels Charleroi). Dutch LCC (and Air France-KLM subsidiary) Transavia has just announced Amsterdam-Prestwick service, but it will take a while before it's clear whether this is a breakthrough.

The other problem is that growth may be cresting. Ryanair now has deep-discount service to 19 destinations from Prestwick, but its latest additions are being offset by frequency reductions to existing destinations, and November y/y passenger figures actually dropped. Markets can't necessarily be stimulated forever, and Ryanair now flys a 100% 737-800 fleet, eliminating the smaller 737-200s which might have been more appropriate to somewhat thinner Prestwick routes.

Infratil has done a great job turning Prestwick from a white elephant into a useful facility, but it looks like low fares alone may not boost passenger numbers that much higher.

Quarterly financials and monthly traffic statistics for Prestwick here (Excel file).

Wall St Journal has a good interview today (subscription required) with Gary Kelly, CEO of Southwest. Not a lot there that will come as a shock to devoted followers (like us) of Southwest, but if you're not as informed as you want to be on Southwest it's a good one to read. Good, clear direct answers to the questions. The five tips taken from the interview, listed above, are somewhat platitudinous, but no less powerful for that.

Kelly said that Charlotte, NC, is in the "top six" list for new Southwest cities. Years ago Southwest would never have ventured into a fortress hub like Charlotte, but years ago it would never have ventured into Philadelphia either. Continued interest in Charlotte is consistent with the notion that Southwest wants to keep US Airways under considerable pressure.

Joel Spolsky was kind enough to refer this blog, and a lot of traffic showed up. We hope you like it.

United was apparently overwhelmed by the number of passengers using Chicago O'Hare over the weekend (Chicago Sun-Times article). Since Chicago is one of the few hub cities where passengers have a choice (American also at O'Hare, Southwest at Midway) this is particularly bad for United. Plus, the airline says it was not the result of a job action.

OK, so apparently this is just a(nother) management screw up. But beyond that, just imagine if employees do take it into their heads to punish management for its naked greed? How bad will things be then?

The past five years of financial ruin has permitted airline management to claw back a lot of the overgenerous contracts that airline unions grabbed during irrational exuberance -- and that was overdue. But the airline business is a service business. At the end of the day, it needs the goodwill of its employees. United management seeking to grab $285mm in stock for itself in the reorganization isn't a great way of building bridges to its long-suffering workforce.

No, the aircraft above never existed (yes, there is a DC-10, but it has three, not two engines), and that's the point of this article in Flight International looking back at some of the might have beens of yesteryear, commercial aircraft proposed but never built.

Congratulations to Connecting Flights for its mention in an article in the Sunday New York Times on JetBlue's new Terminal 5 in which CF suggests a LAX Theme Building-style restaurant for the Saarinen terminal. Our own suggestion (sadly, not in the New York Times) was make it a museum devoted to the 1960s Jet Age -- similar idea, different emphasis.

CF correctly notes that the JFK Saarinen terminal is one of a handful of truly iconic airline terminals globally ("and then only from the inside") -- he mentions Charles de Gaulle (Paris) Terminal 1 and perhaps United's Terminal 1 at Chicago O'Hare. Hmm.

The one that should spring to mind is the other Saarinen US airport 1960s Jet Age landmark, Washington Dulles -- both beautiful and unlike Saarinen JFK, not obsolete (see above). There are also a lot of spectacular Asian airports, though it remains to be seen whether any of them will stand the test of time. The Calatrava terminal at Bilbao might one day qualify. Suggestions/links to other iconic airport terminals welcome in the comments.

Flight International recap of Qantas 787 selection over A350 includes helpful above graph and the amusing anecdote from an Airbus colleague prior to the sale who said that if supersaleman John Leahy failed to return from Australia with the order, he should return by boat.

A350 orders are clearly still some distance from the 200 by year-end 2005 promised by Leahy, but there are, after all, still 12 days (and at least half a dozen shopping days) to the end of the year and Leahy is nothing if not determined. But, as Flight notes, most of the 787 orders have been achieved since Airbus launched the A350. In a straight fight between the 787 and A350, 787 wins.

Amid all the Boeing euphoria, let's remember that a lot is now riding on Boeing's engineering skills. Here's a key statement from the article:

“Whereas Boeing is viewed as an engineering-led company, Airbus is seen as being sales-led,” one chief executive of a 787 customer airline told Flight International recently. “The 787 is superior...Airbus can compete by being cheaper.”

Wow, and it was only a year or two ago that Airbus was viewed as the technology leader.

Having triumphed to this point, it's imperative Boeing bring the 787 in on time and within performance specs. The risks are inherently greater this time because of all the composite technology being used to this degree on a commercial aircraft for the first time. That's what's attracting the orders, but Boeing better get it right.

A further Flight International article indicates that the there may still be an order to come from Qantas. Qantas had been expected to also make an order for the 777 or A340, but didn't. Apparently:

the airline is thought to have issued an ambitious new set of requirements for longer-range routes, including Sydney-London direct, as well as others such as Dallas-Sydney. Both Airbus and Boeing are expected to renew talks with Qantas over possible solutions early in January 2006.

Click here for a map of the two routes mentioned (note that Sydney-Dallas is a lot shorter than Sydney-London, though there appear to be some minor ETOPS issues with Sydney-Dallas). The article also has a nifty profile of a couple of 787s looking more 767-like than ever -- hardly a criticism. Airlines buy aircraft because of economics, not looks.

Sneak Peek 2006: Mark Tagte on Transportation is one of the poorest airline articles we've seen in the general business press for a long time (that's Mr Tagte to the left). Right from the beginning it's in trouble:

The Big Trend
After three horrible years, some airlines may start showing profits in 2006.

Uh, every calendar year from 2001 through 2005 has been a financial disaster. That would be five, not three horrible years. It gets worse.

The Unconventional Wisdom
Deregulation is the best thing that ever happened to the U.S. airline industry. That’s false. It’s true that ticket prices dropped, but billions of taxpayer dollars and private investment capital were also poured down the drain in wasteful runway expansion and new airport terminals. Many of these facilities sit empty as the industry consolidates, making bondholders jittery.

Yes, that "wisdom" would be unconventional. It would also be wrong. Deregulation was done in the interests of the US consumer and the US economy, not for the benefit of the airline industry (in the sense of improving its financial results). And deregulation happened over 25 years ago, so it's difficult to blame it for capacity decisions taken recently. There are a couple places where unneeded runway space has been/is being created (St Louis comes to mind) but there are many more desperately short of runway capacity (see our earlier post on Southern California, for instance, but also think of Boston, New York City, Chicago, Ft Lauderdale, Philadelphia, etc). You know, places where many more people actually live.

The new US Airways faces big integration hurdles, but is a test case for airline mergers. Does it work to merge a low-cost upstart (America West) with an established legacy carrier (US Airways), hiring the discount carrier’s boss to run the whole shebang? If so, could an AirTran -JetBlue combination with Delta Airlines or Northwest Airlines be far behind?

Apparently Forbes is interested in the possibility of merging other low cost carriers (LCCs -- like Airtran or JetBlue) with other legacy major carriers (like Delta or Northwest), similar to the America West/US Airways merger. Cringe. Well, a JetBlue merger with any other airline is incredibly unlikely, as it has recently said. Maintaining corporate culture is key to JetBlue success. We're less sure Airtran would find it a stumbling block. But there's a big difference between America West and JetBlue/Airtran. JetBlue and Airtran are successful -- America West wasn't, though it was in a lot better shape than US Airways. JetBlue and Airtran don't need to merge to be successful (though if Midwest Airlines hits Chapter 11 we think Airtran would be first in line to buy it).

Delta and Northwest: Both airlines, under pressure to match discounters, are using Chapter 11 to reconfigure fleets, get labor concessions, reform pension plans and revamp networks. [...] The question for both these airlines is who will be their merger partners. Smart money says that neither is likely to stay independent post-bankruptcy.

Really? The America West/US Airways merger was a pretty specific set of circumstances. US Airways was a two-time loser with a desperate workforce that was happy to be taken over by an LCC that was itself in somewhat shaky condition (if nowhere near as bad as US Airways).

We've seen United CEO Glenn Tilton's comments about how he expects more consolidation, and we saw Continental CFO Jeff Misner's comment that Continental plus United would be a "knock 'em dead" combination. But we also noticed Misner said Continental would consider it if United offered a "bucket of dough". We think Continental knows full well a merger with United would be a mess, but if Tilton & Co are dumb enough to offer a bucket of dough for Continental (note Continental said nothing about it offering a bucket of dough for United), then Continental will do the right thing for shareholders and accept -- leaving United's shareholders with the mess. As it happens, we suspect Tilton would prefer someone else offer serious dough for United, permitting him to ride off into the sunset with a big parting gift. But the Forbes article says:

Continental, arguably the best-managed legacy airline, would love to buy United, a combination that would give the combined carrier clout in South America.

Of all the things United has that another airline might covet (London Heathrow access, a huge Asia-Pacific network, Chicago O'Hare hub, Denver hub, west coast presence), United's increasingly weak South American presence is far down the list -- in fact, it may have dropped off the end. Here's something out of left field (how did British Airways end up in the article?):

Could new BA Chief Executive Willie Walsh's promise to eliminate 35% of the airline’s managers be a precursor to sale?

British Airways might possibly be a predator, but is very unlikely to be near-term prey. Only EU airlines could consider buying BA because of foreign ownership restrictions, and only Air France and Lufthansa have sufficient financial resources to consider taking on BA, and that would probably result in serious anti-trust considerations, plus, of course, the futures of Lufthansa and Air France are likely less assured than that of BA.

The Bold Prediction
There will be two or three big airline mergers in the next 24 months. Pricing is simply too weak to support available seat capacity.

Depends what you mean by big. It's possible Alaska might get picked off, now its costs are no longer so much lower than the big legacy carriers. After all, Alaska occupies one of the last significant seats on the west coast. But it's hard to see two of the Big Six legacies (American, United, Delta, Northwest, Continental, US Airways) successfully consummating a merger. If they do pair up, the buyers are unlikely to prosper.

As for the comment on pricing, it's ludicrous. Capacity is expected to come down by something like 3% or more next year. If GDP increases by a few percent, then pricing will be strong in 2006. With halfway reasonable fuel prices, 2006 will be a much better year than 2005.

Mike Boyd at aviationplanning.com has a lot to say about the reaction of American and Dallas Ft Worth (DFW) airport to Southwest's entry into Missouri from Dallas Love Field courtesy of the Bond Amendment (our earlier reaction to American/DFW and an earlier post on prior comments by Mike on the Bond Amendment) and he's pretty scathing. We don't necessarily agree with every last detail, but we do with the general thrust.

Unfortunately, Mike's website is old-school, pre-blog. So you'll have to scroll down the screen (not too far, it's currently the second piece) to see his comment entitled American & D/FW International: Painted Into Their Own Corners. As usual, it's enlivened by colorful Mike Boyd adjectives and adverbs, especially astonishing coming out of the mouth of a consultant. We also liked the Christmas-appropriate colors in his graph above.

Connecting Flights (CF) has more on EOS woes (including pictures from an EOS flight). Apparently there are "whispers" that EOS's load factors are as low as 20-25% (while MaxJet apparently is somewhere around 50%).

CF also comments that in our earlier post we were "scratching our head" about the EOS business plan. Actually, although we expressed confusion about why EOS had aircraft on the ground, that was just our gentle way of emphasizing that it appears that not everything is nailed down at EOS. We're actually pretty negative on the EOS concept (we think it's much less viable than MaxJet, and in fact we're not even sure that MaxJet and EOS are really in the same category -- see below) and for the reason CF quotes EOS as saying: it needs to win corporate accounts ASAP to survive.

We think that's unlikely to happen, not in a big way. But before we say why, it might be worth thinking about what separates hotels from airlines. CF, in one of a series of articles he wrote for AdAge on the airline business, discussed three new "boutique" airlines, including MaxJet and EOS, by analogy with boutique hotels. At least three things separate the hotel from the airline business (this is preliminary, we haven't thought a whole lot about this until now, so consider this the first part of a conversation):

1. Network effects are far stronger for airlines than for hotels. Consequently the number of airlines is far fewer than the number of hotel chains. There are plenty of single-property hotels that do a good business without so much as a franchise agreement. There's no such concept, for instance, as "connecting" between hotels. Hotel economies of scale are far less evident than for airlines.
2. Airline travel will always be more of a commodity than a hotel stay. There is, for instance, only one George V Hotel in Paris, and there will never be another one. A historical property or a uniquely beautiful location instantly puts a hotel into a category of its own. Whereas, of course, both American (AA) and British Airways (BA) fly from JFK to London Heathrow (identical route) and every American 777 is pretty much the same as any other. For that matter, other than interior furnishings and engine selections, every 777 is pretty much the same as every other, and that's the way the airlines (and, very importantly, aircraft financiers) want it. There's a limit to how unique an airline experience can be.
3. Premium air travel costs a whole lot more than premium hotels/spas. A $600 night at a superluxury hotel is within reach of many more folks than a $6000 night in F class. Consequently, premium air travel is always likely to be predominantly paid for more by corporations than by private individuals. The operative word is "paid". Plenty of folks fly premium class on frequent flyer tickets, but that's another strong network effect, one that attenuates what demand there might otherwise be for privately paid premium travel.

So a boutique airline is a much tougher sell than a boutique hotel and a boutique airline like EOS really is at the mercy of corporate contracts.

Corporate contracts

But big corporate contracts aren't likely to be forthcoming. First, there's a chicken and the egg thing. Why would a corporate travel manager go through the brain damage if it's not clear whether EOS will survive? Secondly, there's the scale/utility problem. EOS flies only one route, JFK-London, only once a day (it's still talking about getting up to three) and it does so to Stansted, not Heathrow. BA and AA fly ten and six times a day from NYC to London (including Newark flights), they fly to the preferred airport (Heathrow) and, what's more, they cover dozens more routes across the Atlantic as well.

Corporate travel managers like to group as much travel as possible under a relatively few relationships. It increases the leverage that corporation has with those airlines. If BA isn't giving you a good price on a route it uniquely serves, you divert trans Atlantic travel to one of your other relationships until BA cries uncle. And if you can take $20mm in annual travel away from BA, they're going to cut you a pretty good price overall when it's time to renew. Where does EOS fit into such a strategy? We're not saying that all corporate deals are off limits to EOS, but we are saying it will be a very tough row to hoe.

Flag carrier boutique brand

Lastly, suppose EOS becomes successful because it turns out that all those other disadvantages notwithstanding, there's sufficient unmet appetite among roadwarriors for boutique airline service. Then, like Starwood with its W Hotels chain, there's nothing to stop flag carriers from doing it themselves, and, in fact, in a small way, they've already taken steps in this direction.

United p.s. service (perhaps the one good thing United has managed in its entire sorry bankruptcy) for instance, dispenses totally with undifferentiated economy on special high-touch/low seating density transcontinental 757s, while Privatair runs all business-class services on the Atlantic on behalf of Lufthansa, KLM and Swiss Intl using 737NG and A319 equipment. We'd be interested to hear CF's comments on these services: he doesn't mention them in his AdAge article, though they're certainly relevant.

Advantage, MaxJet?

Which is why we think MaxJet's business plan is a better bet and why we think a clear distinction can be made between it and EOS. MaxJet is a business-class low cost carrier. It's trying to do to the trans Atlantic business class market what Southwest did to the domestic US market -- offer only those things that the most people value at a much lower price and thereby expand the marketplace to include people who didn't use this product before. MaxJet is premium, but it's not superluxury.

MaxJet seats aren't lie flat, they're maybe a generation behind. The meals are designed to be tasty and filling but not supergourmet. It's "premium utility" not "boutique". The customers are designed to be those who don't have access to corporate deals and would otherwise fly in economy or premium economy. They're not there for the Kobe beef, they just want more room for their laptop and to arrive in better shape for their business meeting. The flag carriers potentially have a much bigger problem with competing with MaxJet because it's based on low costs and expanding the market to those not served, not a higher touch offering to the existing corporate market.

In fact, one of the biggest near-term dangers to MaxJet is arguably a wounded EOS. The "seasonal" deep discounts offered by EOS (at $1250 one way) are low enough to overlap some of MaxJet's price points. Those levels are clearly too low to sustain EOS, but in the meantime they'll pull a few customers who would otherwise be on MaxJet. For all we know, MaxJet's business plan might not work either, but it's going to be harder if a dying EOS underprices all the way down.

BAA (owner London Heathrow, Gatwick and Stansted airports) has announced it's entered into a definitive agreement to purchase Budapest Ferihegy Airport (BUD). BAA's BUD purchase website includes the announcement and a couple of video presentations.

The Financial Times characterizes (registration required) the purchase price (GBP 1.26bn) as "very high" at about 30 times EBITDA, against 15-16 times for most recent airport privatizations.

BAA will be banking on continued high growth at the Central/Eastern European airports. EU membership for Central/Eastern European countries (and entry into the deregulated EU internal market) has resulted in explosive growth. Both established western European low cost carriers (LCCs) and new Central/Eastern European LCCs (like Wizz Air and SkyEurope) have dramatically increased service to the new EU members.

In 2004, for example, Warsaw airport grew by 17.8%, Budapest by 28.6% and Prague by 29.4%. Growth at smaller airports favored by LCCs was even more extreme (e.g. Bratislava, 86%). Traffic increases this year are slightly more sedate, but still substantial (up 27.1% in BUD through October, but expected growth of 21% for the full year 2005). BAA's business plan for BUD assumes traffic of over 19.4mm passengers by 2020, up from an expect 7.8mm in 2005, a compound average growth rate of about 6.25%. Apparently BUD's own forecasts are more aggressive still.

Later add: The FT's Lex column is not pleased (subscription required).

The shareholders of Cintra (a government-dominated holding company) have approved the sale of Mexicana to a local hotel company, Grupo Posadas. This leaves Aeromexico still in Cintra hands after a sale process that was widely characterized as "disappointing".

Not from a consumer standpoint -- or from the standpoint of the Mexican economy. Between its ownership of Aeromexico and Mexicana, Cintra had a dominant position in the Mexican airline industry. Had the Mexican government wanted to maximize privitization proceeds it would have privatized the two airlines in one package (or merged them) and restricted the growth of alternatives.

Instead, the government pursued a consumer (and economy) friendly path. Aeromexico and Mexicana are now clearly competitors, plus the government has thrown the industry open to new competition. At least four low cost carrier new entrants have been approved. Mexicana itself is trying to get in on the low cost action through its new Click subsidiary (though the precedents of low cost subsidiaries are not great -- and neither is the record of F100-based low cost carriers).

Consequently, Cintra didn't get a great price for Mexicana, and none of the bids were deemed acceptable for Aeromexico. But that's fine. Aeromexico and Mexicana are now in separate hands and it's a near-certainty that the price of air travel will drop significantly in Mexico, which is a far better thing for the Mexican consumer (and the Mexican economy) than boosting privatization proceeds to Cintra.

The corollary is that Aeromexico and Mexicana could well find themselves facing tough times. Let's hope the Mexican govt continues to hang tough if/when this happens. The important thing is not the survival of any particular airline, but rather the development of a cost efficient Mexican airline sector.

Bonus linkage:

Aeronautica Civil website appears (our Spanish isn't very good) to have month-by-month passenger data for routes in Mexico.

First American Airlines 757 with Aviation Partners Boeing blended winglets (as we mentioned in an earlier post). The new winglets make the 757 look like the Russian Tu-204, which is, of course, simply a 757 knockoff designed from scratch to have winglets.

British Airways (BA) is apparently exiting Melbourne with its own equipment. This isn't a great surprise. BA's unit costs (CASM -- cost per available seat mile, or, if you prefer, CASK, cost per available seat kilometer) are significantly above those of, say, Emirates or the other Emirates-wannabes like Qatar Airways, etc. Some have estimated Emirates has unit costs as much as 40% lower than the European flag carriers.

Luckily, BA is based at London Heathrow (LHR), the premier source of high value traffic in all of Europe. And to most destinations, BA can offer something from LHR that Emirates can't: a nonstop flight. And for most high value customers, a nonstop flight trumps everything else. A high proportion (we've heard around 60%) of all BA passengers have LHR as either their origin or destination (so-called O&D traffic). This means BA can collect a nice premium on its nonstop flights from LHR, helping to make up for its cost disadvantages.

The flip side of this is that one-stop flights on BA have much lower yields because BA no longer has the nonstop advantage and is therefore on a level playing field with every airline that can offer a onestop connection from LHR. And to Melbourne that includes a whole raft of airlines, but especially the likes of Emirates and Singapore, which can bury BA on costs and surpass it in on-board service levels. So BA yields to Melbourne are likely to be rubbish compared to, for instance, a nonstop flight to Shanghai.

BA's kept the flag flying in Australia for some time, but now appears to be down to just Sydney, and we're relatively confident BA's performance on that intrinsically one-stop route isn't anything to write home about either. Presumably the capacity released from Melbourne will be recycled into further nonstop flights from LHR (it will be interesting to see where). One day the same may happen to the Sydney capacity.

Press release from Newcastle International Airport says that American will not, after all, fly New York JFK-Newcastle next year as previously planned.

Why is this significant? When American announced this service back in July it was the first indication American might mimic Continental's strategy of bombing Europe from New York with 757s (with nonstop service from Newark Airport to smaller cities like Belfast and Bristol). American has played with 757 flights across the Atlantic already, but only a flight here or there (the 757 is smaller than anything else American currently uses to fly the Atlantic. A smaller aircraft potentially permits flights in smaller markets).

American is clearly interested in long range 757s. It recently added winglets to its first 757 (here's our earlier post on long-range 757s) and has ordered 20 shipsets worth (pdf). It will be interesting to see what American does with these aircraft. Given American's strength in Boston, one idea we think has merit would be to expand American's international service from that city with 757s. Boston is also relatively close to Europe, meaning American 757s could reach deeper into that continent.

Americans withdrawal perhaps opens the door for Continental to consider Newcastle. Newcastle is about as large an airport as Bristol. In 2005, Newcastle will likely serve just above 5mm passengers. Bristol will be a shade higher, though it's growing much more quickly and is in a richer part of the UK (traffic stats available through the airport websites: Newcastle, Bristol. Or through the UK Civil Aviation Authority website under Economics). Belfast appears to be smaller (and likely poorer?) than Newcastle, yet apparently warrants Continental service.

While Continental has flown trans Atlantic 757s for many years, it's unclear yet whether the latest bunch of 757 additions is a success. However, as of the end of October, Continental was still announcing new 757 destinations. Newcastle would fill the gap between Edinburgh and Manchester, both of which Continental already serves. Newcastle is only 91 miles from Edinburgh, but then Edinburgh is only 42 miles from Glasgow, which Continental also serves. Click here for a map showing distances.

A little knowledge is a dangerous thing. No knowledge is worse.

Post in the "Economics Table" part of TPMCafe.com (a Democrat-oriented political blog)suggests that there's a hidden cost to low cost travel. The writer is self-identified as a former airline maintenance employee. S/he states that Southwest flight crews are "well known" to make less than pilots at other airlines.

Except it's just the opposite. Southwest pilots are the best paid 737 pilots in the industry, just check out airlinepilotcentral.com for the nums. For instance, a 12-year seniority 737 first officer at Southwest makes $126/hr, at American its $108, at Continental its $111, etc.

Let's hear it for the facts...

The Airline Business blog says Emirates Vice Chair/President/Evil Genius Maurice Flanigan is thinking about single-class "Emirates Express" A380 service. Such an aircraft would have a "lot more" seats than the two-class 644-seat cabin it plans for India services.

To us, this is a vision of hell.

Although, come to think of it, we'd be willing to bet that single-class A380s feature sooner rather than later on Haj services to Mecca. Comfort and convenience is hardly the point of such flights.

Photo, by the way, shows the French Air Force Aerobatic team behind the A380 as it leaves this years Dubai airshow.

Alitalia is the sick man of Europe. OK, there are other useless European airlines, but none so large nor one representing/embarrassing such an important country. Today comes news that GE has lent $445million to Alitalia. Although it says it was done by something called "GE Corporate Banking Europe SAS," we'd bet dollars (or euros) to donuts that GECAS, GE's aircraft leasing unit, is behind it somewhere. GECAS is by far the world's most powerful aircraft finance organization -- it helps to be able to borrow at AAA rates (GE's credit rating).

So, perhaps GECAS thinks Alitalia isn't quite the basket case that it's widely believed to be? Doubtful. In the past couple years, GECAS has also lent to Delta (in the 4th quarter of 2004) and Independence Air (in the first quarter of this year). Both those airlines have since filed Chapter 11 bankruptcy.

So, perhaps GECAS isn't as smart as it's reputed? After all, lending to Delta and Independence Air was clearly a mistake in light of the later bankruptcies, no?

No.

All of these loans (including the Alitalia loan) were secured by aircraft, aircraft engines or other hard assets. In the case of Alitalia, it is mortgages on 28 aircraft (what types, we don't know). If GE is comfortable with the security (and, critically, comfortable its ability to get its hands on the security if there's a default under the loan) and if the value of the security nicely covers the amount outstanding on the loan, then GE isn't all that concerned with the condition of the airline.

It was quite obvious early this year that Independence Air was in a state of collapse, but that didn't prevent GE from lending money against parts and engines that GE knew how to turn into $$$ if Independence hit the wall. Likewise, we're pretty sure GE was under no illusions about Delta's condition when it lent it money in Autumn 2004 to help it avoid a filing that year.

So, firstly we doubt GE is taking any significant risk at Alitalia, even if Alitalia craters in the near future. Secondly, GE is a large company and has a lot of different agendas. For instance, GE may be in the process of transacting something else with the Italian government, perhaps connected to Alitalia, perhaps not, and helping out Berlusconi on Alitalia may be a quid pro quo. Who knows. Certainly the Berlusconi govt is unnaturally focused on keeping Alitalia aloft.

It's highly unlikely that GE has either taken leave of its senses or sees hidden virtue in Alitalia. More likely, it's just good business (for GE).

Former American Airlines chief Bob Crandall is wrong from the very first words of his recent Forbes opinion piece (registration required).

The U.S. airline industry, as we have known it, has effectively collapsed.

Really? A good portion of the US airline industry is in bankruptcy, but Delta, Northwest, United, ATA, Aloha and even Independence Air are all still operating. Airline travel is still plentiful and cheap (though capacity is likely to be reduced next year -- something many analysts have wanted for years). What's emerging is an industry that will be quite different from before 9/11, and likely foreign to what Bob remembers when he was managing American. But that's not necessarily a bad thing.

Let's see:

complaints about service abound

True, but, in general, passengers don't seem willing to pay for the type of service the legacy airlines offered historically. So the legacies are cutting service. On the other hand, most passengers seem very pleased about the type of service they receive on JetBlue and Southwest. JetBlue and Southwest are getting bigger. The legacies are, if anything, shrinking. System works.

air travel is less and less convenient

Hmm. Airports are ever more congested, that's for sure (though after capacity cuts, next year airports are likely to be a little less jammed). On the other hand, it's never been easier to book travel, it's never been easier to check in (even before you get to the airport).

Crandall blames misguided public policy. Crandall, of course, was a big opponent of US airline deregulation (from the standpoint of American, what was there to like about deregulation? Under regulation, the govt restricted competition and essentially aimed to ensure the airlines made a profit). He wants certain pre-deregulation features back, including the Mutual Aid Pact, in which airlines bailed out competitors that were taking a strike (we're not particularly a supporter of organized labor, but this seems grossly unfair).

Crandall is also unhappy that the govt has "burdened" the airline business with the full cost of post 9/11 security. Firstly, that's not true. Earlier this year the administration tried to do exactly that, but was rejected by Congress. The govt still subsidizes the cost of airline security.

Secondly, it's completely appropriate that govt make the airline business (or passengers, which is similar) bear the full cost of airline security. Traveling by air subjects society to risk, which it mitigates through security. Traveling by other modes of transportation does not subject society to the same risk -- and neither does not traveling at all. Why should anyone but an air traveler bear the cost of mitigating risks that society runs when someone travels by air? But isn't security provided incredibly inefficiently in the US by the TSA? Sure, but the efficiency of the TSA (and whether it should play this role at all) is a different issue from the general point that air travelers should bear the costs of air travel security.

The US airline business was ripe for substantial restructuring even in the absence of 9/11. US legacy airlines gorged on the fruits of late 1990s irrational exuberance and lost control of their costs. 9/11 simply accelerated a process that likely needed to happen in any event. The legacies are undergoing profound change in the forum that was designed for profound change: Chapter 11. We should let this play out before we declare it a failure (or success).

Crandall calls for a national aviation policy, and we think he's right in one regard. Aviation infrastructure (air traffic control -- ATC, airports, etc) is in a bad state in the US. ATC is under the dead hand of the Federal govt (which has comprehensively mismanaged it) while airport capacity is being restricted by extreme NIMBYism. These are huge issues that are beginning to constrain the capacity of the US airline system. That's something to worry about, Bob.

Guilford Transportation continues the utter degradation of the Pan Am name.

The current iteration of Pan Am is the fourth. The first was Juan Trippe's Pan American World Airways, globe-girdling US flag carrier of yore, launch customer for the 707 and 747 (among others), one-time symbol of US commercial aviation hegemony, liquidated in 1991 after being in continual decline after US deregulation in 1979. Lots of good websites if you want to know more, see, for instance, www.panam.org.

The second Pan Am was Marty Shugrue's 1996 restart of the old name with A300s (never a good sign). It merged with Carnival Airlines (spinoff of the eponymous cruise company) and collapsed in 1998.

The Pan Am name was bought out of bankruptcy II by Guilford Transportation, leading to Pan Am III. Pan Am III was based at Pease Airport (Portsmouth) in New Hampshire and flew elderly 727s between out-of-the-way airports. Pan Am and the Air Line Pilot Association (ALPA -- the pilot's union) were constantly at loggerheads. Guilford solved this by shutting down Pan Am III and transferring operations to Boston & Maine Airways, a non-union sibling carrier that was previously Pan Am III's commuter affiliate (hence "Clipper Connection", since Pan Am aircraft were/are called Clippers). That's Pan Am IV, in case you're counting.

Guilford has a bit of a chequered reputation, to say the least. The locals don't seem to like it much at all. Not a great thing when the home team manages to alienate the locals. It's run by the unfortunately named David Fink. Unclear how union-busting aligns with the "civility" part of Clipper Connection's tag line.

The latest blemish on the once grand Pan Am name is detailed here. Briefly, Boston & Maine is currently restricted as to the number of 727s it can fly. It wants to be able to fly all of Pan Am III's aircraft. Unfortunately, Boston & Maine's former counsel was discovered to be less than truthful on some documents filed with the government. B&M said these were rogue actions and fired him. In the meantime, the govt put B&M's application on ice.

Now, B&M has since complained that the status quo is costing it a lot of money, including characterizing the situation as "desperate". Perhaps not the swiftest move it ever made, since the govt is now querying B&M's financial fitness in light of this characterization.

Pan Am was once the grandest name in the airline business. It's a damn shame what Guilford's done to it. We can only hope that Guilford throws in the towel and lets the name expire in peace.

Now that certification of the Eclipse seems likely, it seems we're actually going to have to deal with the long-threatened darkening of the skies by microbizjets. Eclipse and its competitors seek to sell thousands of small bizjets (otherwise known as Very Light Jets or VLJs), and the question is, where will they all go.

Flight International covers the territory comprehensively here, here and here and editorial here.

There are several issues, including safety, but the one we think is most relevant is air traffic control (ATC) and airport congestion -- clearly a potential problem if you suddenly add thousands of little jets buzzing around the (largely North American) skies. Flight International's pious hope is that business and commercial aviation interests join together to demand more capacity in the system.

A worthy holiday sentiment, but in the real world resources are already constrained (a situation not likely to change anytime soon). Any time there's a constrained resource (in this case ATC and airport capacity) there's an obvious market solution, which is to charge for that resource, irrespective for how it's used. That means that if a 6-passenger bizjet takes up the same space in the sky (or on the runway) as a 300 passenger 777, the 6-passenger bizjet is charged the same amount as the 777 for ATC services or to land.

Now, it turns out that 6-passenger bizjets probably take up a bit less space in the sky (far less wake turbulence, for one thing). Unfortunately, it's probably not that much less, plus a VLJ's speed isn't quite that of a 777, so a VLJ could cause additional delays if it attempts to use the same flight levels. The point is that the ATC congestion fee for a VLJ (where it would be spread over a couple passengers) probably woudn't be that much different from that of a 777 (where it could be spread over a couple hundred).

The problem with a sensible congestion charge-based system to regulate access is that the NBAA (National Business Aviation Association) and AOPA (Airline Owners and Pilots Association) have so far been very successful at preventing anything like this, and we don't see that changing in the near-term. Boston Logan Airport tried to implement such a scheme in the past, figuring it would encourage the use of bigger aircraft and thus more efficient use of the airfield. NBAA and AOPA shot down Logan.

AOPA likes to talk about how such schemes favor the mean old nasty big airlines at the expense of the plucky little private aircraft pilot. The reality is that the demographics of the typical bizjet user are well into the fat-cat region (you have to be pretty well off to afford even a Piper Cub these days). If anyone is downtrodden in this argument it's the long-suffering passenger stuck in the middle seat in the economy class section of the 777. Our view is that if a fat cat can afford to pay the same charge to land his LearJet at Logan as a 777 operator, then more power to him, but that he shouldn't pay less. Logan runway space is scarce, there ought to be one price for everyone.

Unfortunately, because the typical bizjet user is a fat cat, he (generally it's a he) can more than take care of himself before congress, especially since Congressmen and Senators also benefit significantly from bizjet flights. Which is exactly why we unfortunately expect the NBAA and AOPA to continue to triumph in this debate, at least until matters reach a crisis.

British low cost carrier (LCC) flybe has done what we always figured Ryanair CEO Michael O'Leary would do first, and is charging per piece of checked luggage (with reduced charges for booking checked luggage in advance).

If it chooses to, Ryanair can now unbundle this service without, for once, looking like the bad guy.

Look up "chutzpah" in the dictionary and you'll see the beady eyes of United Airlines' CEO Glenn Tilton staring back at you. United proposes to give management a 15% stake (currently valued at $285mm) in the airline as it exits bankruptcy.

It's not unusual for management to get an equity stake in a reorganized company. However, as this article says, United proposes to give an unusually large stake to management. We'd argue that they deserve an unusually small stake:

• Much of United management are the same guys who rode the airline into Chapter 11 (e.g. Hacker, Brace, McDonald). You'll recall that United filed after management lost its bet that it could get a government loan in return for a mere 9% reduction in employee wages. Government stiff-armed United, at which point there was no way out for United other than filing bankruptcy. It was management's plan that failed, it was management who were to blame for United's Ch 11 filing.
• American Airlines management kept its company out of bankruptcy and has done a far better job at stripping out costs. American management isn't getting 15% of that company. Why should United management get a penny for screwing up where American has succeeded?
• Tilton should presumably reimburse United for needing on-the-job training. He had no airline experience whatsoever before coming to United only months before the filing. Did Tilton's inexperience contribute to the filing? It can't have helped.
• Management's initial Ch 11 plan failed utterly, wasting a year and a half. You'll recall that management initially hung its hat on getting the same government loan it couldn't get before Ch 11. Turns out it couldn't get the loan afterwards either, with the government finally turning down United flat in the summer of 2004. We're now 36 months into this bankruptcy. United is one of the poster children for the bankruptcy reform that was recently implemented (under the new law, United management would have lost control of the reorganization after 18 months -- if only).
• United management blew it when reducing its aircraft payments in Ch 11. United angered its aircraft financiers to the point where they joined together in a cartel. United came to an agreement with the cartel but then tried to weasel out, claiming the cartel violated antitrust rules. The bankruptcy judge agreed with United, but on appeal both United and the bankruptcy judge were spanked. In the meantime the aircraft market got stronger. By the time United came to a new agreement, terms were worse than if it had just signed the original agreement.
• United's wasted time and energy on the Ted subsidiary. Yes, we know they believe it's the greatest thing since sliced bread. Airlines always believe their new shiny low-cost brand is the greatest thing since sliced bread. United once thought the same about Shuttle, US Airways about Metrojet, Delta about Delta Express and then Song. There's never any way to independently verify how such an operation is doing so we're just supposed to take their word for it.
• If United management had put into place some innovative new business plan that had made the airline more profitable, perhaps they'd deserve a greater slice of the pie. But the reality is that value creation in this case is coming almost entirely because of crushing vendors and most of all labor, rather than management inspiraton. If there's a spare $285mm available, split it between the long-suffering unsecured creditors and the Pension Benefit Guarantee Corp. Don't give it to United management.

Luckily United creditors are objecting. The bankruptcy judge has a long history of doing precisely what United management wants, but perhaps even he will have trouble with this.

Perry Flint says it well in Air Transport World. Our related prior post is here.

Singapore Airlines has been lobbying to gain traffic rights from Australia to the United States. As this article says, Australian national carrier Qantas says it will cut fares (promises, promises) in a bid to keep the Australian government from giving Singapore Airlines what it wants (critics charge existing fares are too high, thereby depressing tourism, hence the need for more competition).

Hopefully the government will arrive at a different conclusion: if the mere threat of competition induces Qantas to drop its fares, imagine what actual competition will do. The Australian government has historically bent over backwards to accommodate Qantas. However, Qantas has benefitted for years from the ability to carry traffic beyond Singapore, so the Australian government arguably needs to give something to Singapore Airlines in return.

The above shows JetBlue's current system out of Long Beach (LGB). Part of American's drawdown from Dallas Ft Worth airport (DFW) yesterday was its flights to Long Beach (see hysterical pdf press release by DFW here, which among other things blames the recent slight relaxation of the Wright Amendment for scurvy, child abuse and the elimination of American's flight to Lima, Peru. OK, we're making up the scurvy and child abuse part, but they have only slightly less to do with American's draw down of DFW flights than does the relaxation of the Wright Amendment).

Elimination of American's last four flights into LGB is a nice holiday present from American to JetBlue. JetBlue isn't automatically entitled (that we can tell) to the four takeoff/landing pair slots that American has thereby released back to LGB, but JetBlue's as likely as anyone to get them and the reduction in competition can only help.

But that's not really our point. Our point is this: this marks the end of the temper tantrum that American threw over JetBlue at LGB. American is given to throwing tantrums when it doesn't get its way or when it thinks it needs to teach someone a lesson. The most notorious tantrum was perhaps in the summer of 1992, when American, frustrated that it hadn't been able to impose a new fare system on the industry, cut its fares more-or-less across the board by 50%. That made for a busy, profitless summer, but none of American's competitors materially changed their behavior that we noticed and although they all made less money, none of them even fell over as a result.

The LGB episode happened when JetBlue had the temerity to think outside the box and turn LGB from a sow's ear into a (potential) silk purse. LGB had never been a popular airport, despite being smack in the middle of the Los Angeles megalopolis. It had a noise-driven limit of 41 takeoff/landing pairs a day (for mainline aircraft) but even so, only a handful of them were in use. JetBlue realized that if it grabbed all remaining slots it could make it difficult/impossible for other airlines to directly compete with it, because there would be no slots left. LGB soon became a credible alternative (to some destinations anyway) to other Los Angeles area airports.

American hit the roof and sued to break the deal JetBlue cut with the airport. In a settlement, JetBlue was, in fact, forced to disgorge a few of its slots to American (and Alaska). American of course lost its shirt flying New York JFK airport to LGB in competition with JetBlue. American gave that up a year or so ago, and now it's given up on LGB entirely. This relatively predictable outcome lost American money and credibility. American made a big deal about taking on JetBlue, and it comprehensively lost.

Which brings us back to Dallas Love Field, site of American's latest temper tantrum. Against its wishes, Congress slightly relaxed the restrictions on flights from Dallas Love Field (see here and here for background). In response, American has again started operations from Dallas Love Field (to be fair, it's only added a few). American's not likely to make money at Love Field, and it's endowing Dallas Love Field with far more credibility than it would have otherwise. We think it's an irrational move, perhaps not quite as irrational as taking on JetBlue in LGB, but nonetheless, not the best use of American's time, money and effort.

We actually like American. American is what we think of when we visualize a US airline---the heritage, the size, the polished aluminum and perhaps the best US airline management, Wright Amendment issues aside. Which is why it's doubly frustrating to see this organization periodically acting on emotion, not logic.

Article in Flight International says charter carriers are dubious about whether the A350 or 787 are suitable for the medium haul, large capacity mission they need. Key sentence:

Many want an advanced technology aircraft with performance similiar to that of the 757.

The 757 was killed off because too many of its capabilities were duplicated by later generation aircraft. In particular, the 737-900 and the A321-200 have almost as much capacity and almost as much range.

Almost. In particular, neither the 737-900 nor the A321-200 can fly across the Atlantic like the 757. A 767 (or A330-200) is the smallest current production aircraft capable of this mission (ignoring super low density versions of the 737NG and the A319) and both are quite a bit larger than the 757, plus each has substantial cargo capacity that's fairly useless to the average charter carrier.

Of course, we can't discuss this without mentioning Boeing's own culpability in the death of the 757, namely its decision to build the 757-300 (a shorter-range stretch of the 757 that sold miserably) rather than the 757-200ER, which would have given the 757 another 500 miles (or so) range, thereby leveraging the key advantage of the 757 over the 737-900 and A321. The recent success of Aviation Partners Boeing in selling blended winglets (which extend the range of the 757-200 by about 370 miles) to Continental and American (for trans Atlantic applications) is another confirmation of one of Boeing's many late 1990s errors.

Unfortunately for charter operators, neither Airbus nor Boeing is in a position to fill this hole in the near future. It's likely that once Boeing has the 787 program humming it will turn its attention to applying 787 technology to a new generation of narrowbodies. But that's not likely until the end of this decade. Likewise in a couple years the A320 will be 20 years old, and Airbus will need to think about a new narrowbody. But Airbus is currently hugely stretched with the A380, A400M and desperately trying to patch together credible competitors to the increasingly dominant 777 and 787 programs. So Airbus is also unlikely to be able to seriously address a new narrowbody program before the end of the decade. And to be fair, the A320 continues to sell very well indeed, we'd guess it's a considerable cash cow by this point.

The charter carriers' lament suggests that a new Airbus or Boeing narrowbody family will have at least one version that duplicates the 757's mission (or goes beyond). However, until then, the charter carriers will just have to do without -- or acquire late model 757s retrofitted with winglets.

MaxJet today announced (pdf) that it's expanding service from Washington to London Stansted in February, adding this to its existing service from New York JFK to London Stansted.

Just as significant was a report in the Financial Times (subscription required) about the contrasting activities of MaxJet competitor EOS. Here are the two critical paragraphs:

Its US rival startup Eos Airlines - which began flying in mid-October, two weeks earlier than Maxjet, on the JFK-Stansted route - has been forced to postpone the planned doubling of its operation to twice daily flights, however, from the beginning of January to the second quarter next year.

Eos said it needed to turn its “full attention to sales and marketing” and was delaying the introduction of a second daily frequency for reasons of “fiscal responsibility.”

This doesn't sound good.

Broadly speaking, MaxJet offers traditional (not lie-flat) business class for the price of a (not deep discount) economy class ticket, whereas EOS offers a super-premium first class seat for the price of a business class ticket. We think MaxJet's offering is likely the easier sell (certainly its price points are more accessible) to most people than EOS.

What we don't understand is that EOS currently has three aircraft but only one flight a day, yet it's delaying the deployment of additional flights. We don't see how this all fits together.

Mike Boyd discusses the likely effect of the Bond Amendment on service from Dallas Love Field (background here) in his latest airport post. While it's mostly sensible (and his guess about what American will do is largely born out in today's American Airlines announcement on its new Love Field service) there is one thing we dispute.

As the above map shows, Southwest has not made any attempt to serve cities in the Shelby Amendment states (Kansas, Mississippi & Alabama) from Dallas Love Field. Boyd says this shows that Southwest is not currently interested in serving small and midsize cities (such as Birmingham, AL or Jackson, MS, both of which Southwest already serves but not from Love Field). The reason Southwest has started service to St Louis and Kansas City is that these are large(r) cities, he says.

We believe this misses an important nuance. Like a hub-and-spoke airline (but less so, since Southwest's system is more point-to-point oriented) Southwest relies on "beyond traffic" to support service to small and medium cities. The Wright Amendment kills a lot of potential beyond traffic because it prevents selling tickets from Dallas Love Field to any point beyond the Wright, Shelby and Bond amendment states.

For instance, while Southwest could still route an aircraft Albuquerque-Dallas-Birmingham (and sell tickets Albuquerque-Birmingham) Southwest cannot route aircraft (or sell tickets) on, say, Dallas-Birmingham-Jacksonville. So the economics of a potential Dallas-Birmingham route are damaged by the inability of Southwest to support it with tickets that go from Dallas to a point beyond Birmingham.

Our guess is that in a world without any restrictions on the use of Dallas Love Field, Southwest would eventually fly Dallas-Birmingham. The point is that as they stand, the restrictions at Love Field also hurt service to secondary cities even within the permitted states. Whether anyone can make Congress understand this is a good question.

Interesting SEC filing today by Hawaiian (HA). HA filed some slides (one of which we show above) that purport to show that it will have a cost advantage over Mesa's proposed new Hawaii inter-island regional jet service. The work was done for HA by consultancy SH&E.

There is at least one odd thing in slide shown above that causes us to question the quality of the work done by SH&E. It shows that the fuel CASM (cost per available seat mile) of the CRJ900 is above that of the CRJ700. The CRJ900 is a stretched CRJ700. It has more or less the same engines, wing, etc. The CRJ900 therefore almost certainly has better economics (and in particular fuel economics) than the CRJ700. So we're skeptical when viewing a chart showing the CRJ900 having worse fuel economics than the CRJ700. We wouldn't be surprised if the 50-seat CRJ200 had inferior per-seat economics to the 717, but we doubt the 86-seat CRJ900 is much worse than the 717, and (given Mesa's lower wage scales) we wouldn't be surprised if it was better.

HA's stock has been under pressure since the spring, and in particular took a bit of a knock in September when Mesa announced it would start a Hawaii interisland service with regional jets. Clearly there's some concern that Mesa could cause HA problems.

There's reason for concern. Notwithstanding its recent Chapter 11 restructuring, HA isn't a low cost carrier (LCC). In particular it pays its pilots well -- arguable too well. airlinepilotcentral.com shows that its 717 wage scale is hugely greater than, say, the E190 wage scale of JetBlue (the E190 is only slightly smaller than the 717).

We've believed for some time that the Hawaiian interisland market is vulnerable to low cost carrier incursion. It used to be a bad market. HA and traditional competitor Aloha would sell inter-island coupons through travel agents to raise cash. The coupons could be used at any time on any flight, making yield management impossible. Consequently HA and Aloha never made money on the flights, consequently they needed to raise cash, so they sold coupons, wash rinse repeat.

This stopped after 9/11 when HA and Aloha got temporary anti-trust immunity to fix this problem. Consequently fares increased and the number of passengers on interisland flights declined significantly. Now it's a more normal market.

In a three-cornered fight between HA, Aloha and a competent LCC, we'd once have picked Aloha as the meat in the sandwich. But Aloha itself has been restructured and it seems somewhat more comprehensively than HA (rule of thumb: the later an airline restructures in this downturn, the deeper the cuts). For instance, Aloha's pilot pay rates are now significantly lower than HA's.

Further, we're not sure that Mesa is the best possible challenger. It's using CRJ regional jets. Sure, interisland flights are short, but the CRJs are still an inferior product to the 717s and 737s that HA and Aloha offer -- in particular, there's virtually no overhead capacity in a CRJ, which seems like a critical problem in a market where many people don't want to check bags (since it's a real drag to wait to collect your bags when the flight itself was only 30 minutes). Also, Mesa's background is being a regional airline, which is a different proposition from being a low cost carrier.

Bottom line: yeah, the Hawaiian interisland market probably could stand some competition, and we suspect that HA is vulnerable to such competition, given that Aloha may come out of its Chapter 11 with better costs than HA. But HA probably has a better chance against Mesa than against other potential interlopers.

The A350 continues to evolve, according to Flight International. Various tweaks to the wing to increase cruise speed (the A340 is notoriously slow compared to the 747 or 777, and Airbus seems to have learned that lesson). The nose was earlier reshaped to accommodate an under-cockpit crew rest area.

That may seem slightly bizarre, but the A300/310/330/340/350 fuselage has a relatively low ceiling and therefore no room in the crown for crew rest (which is where Boeing likes to put it).

Richard Aboulafia's column from January 2005 is ever more apropos. What was originally a low-investment A330 derivative becomes ever more a new aircraft. Except, of course, for the fuselage cross section -- the A350 is still not going to offer a meaningfully better passenger environment than the ancient A300.

Every emirate in the United Arab Emirates (UAE) wants an airline, that is. Story today that Ras Al Khaimah is to launch its own airline by the end of 2006 as "an appropriate vehicle to carry forward a multi-billion dollar expansion of tourism facilities in the emirate". After all, "We have the sand, the mountains and the valleys. We also have the desert, all within motoring distance of a few minutes." At first blush, sand and mountains doesn't seem all that attractive to us, but that's pretty much all Arizona and Nevada have going for them. Perhaps Ras Al Khaimah should invest in gambling and retirement communities.

This is at least the fourth (out of seven) emirate to establish its own airline. The most notable is Emirates (of Dubai). More recently Abu Dhabi established Etihad and Sharjah launched Air Arabia. Sharjah is otherwise notable for having a mostly-cargo airport beloved of plane spotters for the wide variety of ancient ex-Soviet aircraft that land there. The neighborhood also includes Qatar Airways, Oman Air and the original Gulf Air (which used to be the flag carrier of the UAE as well as Oman and Bahrain). All three of Emirates, Etihad and Qatar are notorious for aggressive aircraft orders. Emirates, for instance, has by far the largest single order for A380s.

Incidentally, the website for the Arab Air Carriers Association seems surprisingly useful.

According to the CIA Factbook, the UAE has a total population of less than 3 million. it remains to be seen whether it can support four airlines, including one (Emirates) which is dead set on being one of the largest in the world.

Exterior renderings at architect Gensler's website. The overhead shot (above) raises the question of how T5 will be connected to JFK's AirTrain transit system. The tracks are visible curving to the left in the lower left corner. That seems like quite a distance to T5.

Interior renderings (and snapshots of the ground-breaking ceremony at the Saarinen terminal) at Connecting Flights (via Curbed).

Our earlier post on T5 at the occasion of ground-breaking.

He's tanned, rested, ready. Today Fred Reid, CEO of will-they-won't-they Virgin America finally officially launched the airline. Press release here for instance.

Fred, it turns out, is a "long time advocate for airline industry innovation and reform." We hadn't noticed that before, but that's what it says on the new Virgin America website so it must be true. Our view is that airline startups are generally best run by revolutionaries like Ryanair's O'Leary or JetBlue's Neeleman. Fred's always seemed a little too establishment for that role, but then again, he did go to Berkeley as an undergrad and he has based the airline in San Francisco, so maybe he's simply getting back to his roots.

Fred is also flashing a lot of cash: a commitment by investors of $177mm with lead investors Black Canyon Capital (who is also supplying the chairman of Virgin America, one Mark Lanigan), Cyrus Capital Partners and of course, a group headed by Sir Richard Branson, who is also licensing them the Virgin name, naturally. Black Canyon is apparently an affiliate of Canyon Capital Advisors. Cash is good, though apparently not all of its is equity -- the foreign portion of the funding includes debt.

There's a counter on the Virgin America website showing the time since officially kicking off the airline at 2:02pm today. Weirdly, that's east coast time. Virgin America has already taken its sweet time getting going, so one question everyone will want to know is whether it's bidding for Independence Air (FLYI: see below). Taking over FLYI's certificate could significantly reduce the time it takes Virgin America to get into the air. Virgin America is widely rumored to be one of the bidders for FLYI.

Yesterday Independence Air (FLYI) announces its new FLYiBIZ web product for travel managers and business travelers. So much so boring, right? Well, except FLYI is bankrupt and the day before it had provided an update on the bankruptcy court-supervised auction process by which FLYI will be sold, either as a going concern or in pieces.

FLYI, in other words, is living on borrowed time. Gary Chase at Lehman Brothers, for instance, thinks it’s likely to be shrink or cease operations in the near future. In our view, best case FLYI survives as something very different from what it is now. Which is why we’re at a loss to understand why any travel manager would want to sign up for FLYiBIZ right now. Seems like (FLYI CEO) Kerry Skeen’s reality distortion field is alive and well. Too bad the same isn’t true of his airline.

Speaking of which, we finally caught up with Richard Aboulafia’s November report. It’s mostly about the boom/bust of the 50-seat regional jet (RJ). We don’t fully agree with it, and we’ll have more to say about that later. However, embedded within is something we do fully endorse, namely a little discussion of FLYI. The CRJ-200, by the way (see below), is Bombardier’s 50-seat RJ product. Take it away Richard…

But the big over the waterfall moment of the CRJ-200’s life was the Independence Air debacle. Independence was the name/proclamation chosen by Atlantic Coast (ACA) after deciding to not share United’s pain. Independence, or FLYI as its impossibly clueless shareholders knew it, was presented as a way of preserving ACA’s unnaturally high margins even as United sank deeper into red ink. Rather than just a typical fee-for-service role pumping passengers into United’s route network, FLYI elected to fly its own routes for the low-cost travel crowd.

This was one of the all time greatest let's drink the Kool-Aid events in aviation history. FLYI’s dream of reinvention as a discount carrier might have been possible if the entire 80-something CRJ fleet was swapped out for A319s overnight. But with a fleet of 50-seat RJs with very high seat mile costs (worsened by high oil prices), the battle was lost before it started. And of course United used other feeders to stay in the markets it lost after ACA’s defection, greatly exacerbating overcapacity.

Technically FLYI is still alive, in much the same way that my dream of owning Tuscany is still alive. But it’s a reasonable bet that its 60+ CRJs will be lining up at soup kitchens this winter.

Minor point --- FLYI didn’t actually have 60 CRJs when it went bankrupt. But no mind, it’s still an Aboulafia classic. Later in the piece he suggests that Independence’s stock symbol should have been CFIT (for Controlled Flight Into Terrain). As they say, read the whole thing.

JetBlue (B6) released the above picture of its new JFK terminal, scheduled to be finished by 2009. The terminal will have 26 gates, with maximum design throughput of 250 departures/day (or about 20mm passengers/year). Link to the press release here.

Note the ex-TWA Saarinen terminal in the forecourt. This has caused much angst among modern architecture preservationists, who can't get it through their heads that the building is functionally obsolete, however beautiful it may be. Activists seriously want the building preserved as a working terminal. Good background piece here, including some photos. More photos here. We're OK with JetBlue's solution.

This year JFK will handle about 41mm passengers, so JetBlue's 2009 JFK presence will be massive. Expansion space will still be available at the site of Terminal 6, which JetBlue currently uses. Our bet is that at some point B6 orders a trans Atlantic-capable aircraft and starts bombing Europe with them.

Backed by the best demographics in the US (the New York City metro area) and significant potential connect traffic (from those 250 domestic flights), B6 would be a formidable trans Atlantic competitor. Terminal 6 would make a great site for an international extension to the new JetBlue terminal.

Later addition -- Our vote for what to do with the Saarinen terminal: make it a branch of the Smithsonian Air & Space Museum, dedicated to exhibits about the 1960s Jet Age, as reflected in Catch Me If You Can.

For those with access to the Wall St Journal, great front page article today on the growth of Macquarie, an Australian investment bank, and other Australian institutions as powers behind the financing and operation of infrastructure, including airports.

This link may or may not work for those who don't have access, for a while.

Short version: Australia creates forced savings law in early 1990s that has resulted in a huge pool of capital building up that needs to be put to work. Local I-banks don't have especially good access to usual avenues of investment, happen upon infrastructure assets as a new investment class. And Aussies take to it like ducks to water. Hence Macquarie and its investment funds are running around the world, buying up roads, airports, etc. Long term future as an investment class has yet to be proved. Etc.

This is why the Aussies own a lot of airports around the world.

Good grief. We think we have a decent idea of what's going on in the airline business and then we completely overlook all this great anti-Wright Amendment stuff for sale on the Southwest merchandise website. Make sure you're wearing yours, the next time you fly American through Dallas Ft Worth airport.

Now we know what we're getting all our friends for Christmas.

We've blogged a bit too much on the topic of 777 vs A340 recently, don't want people to think we're obsessed, so we promise to move on.

However, we can't resist slamming this recent comment by Flight International. It starts off OK, by noting that the 777-300ER has "soundly trounced" the A340-600 this year. So far so good. Then it says these things go in cycles: the A340-500/600 was first off the mark, and it was the only aircraft in its class out there so it got all the orders. OK.

Then it indulges in a little retrospective needling about how Boeing didn't have an immediate riposte and only had one once the GE90-115B engine became available. Hmmm.

But here's the really, uh, unwise part of Flight's comment:

But with no let up in sight for the success of the 777, what should Airbus do? One option would be for it to design a “me-too” large twinjet, but this is unlikely to provide a tangible advantage over the existing 777, and any powerplant improvements would be directly applicable to its rival.

Wisely, Airbus has instead been quietly working on an “enhanced” A340-500/600 derivative that could enter service around six years from now. As exclusively revealed by Flight International last week, this new family would incorporate some elements of the A350, including its new-generation engine technology, providing lower operating costs and potentially a significant increase in range.

If Airbus gets the specification right, this new aircraft will re-benchmark the large long-haul market sector, and again leave Boeing and the 777 scrabbling to respond. If it gets it wrong, then champagne imports into the Seattle area could skyrocket.

Huh? The first delivery of the A340-600 was in July 2002. The first delivery of the 777-300ER was less than two years later (May 2004). So Airbus had the running for less than two years until Boeing delivered a superior product. Now it's "wise" of Airbus to concede control of this market segment to Boeing for the next six years?

We wrote about this last week. We don't think Airbus is wise. In fact, we're not sure why Airbus would even bother updating this aircraft in six years if in the meantime it's so unsuccessful in the market (and any technology Airbus can apply to the A340, Boeing can presumably apply to the 777). Airbus also has a credibility problem with its customers at the moment. This rather embarrassing recent Flight article says that Emirates, perhaps Airbus's best customer at the moment, is wary of Airbus's promises on A350 performance because of recent Airbus "misses" in performance and delivery targets. Ouch.

The problem is that the original A340, the -200/300, was always compromised by (1) sharing a common wing with the A330 (a two-engine aircraft -- wing design is sensitive to such things) and (2) having engines, CFM56, that were really at the limit of their capabilities and (3) having four rather than two engines.

Once it became clear that the 777-200ER was kicking some serious A340-200/300 butt, Airbus repeated the mistake. The A340-500/600 is itself compromised as a derivative of the A340-200/300. It's still carrying around the legacy of the original A340 design compromises, plus it's still got four engines. Airbus would have had to be very clever indeed for the A340-600 to be a better aircraft than the 777-300ER and of course, it isn't. Not even close, apparently, judging by recent sales (by the way, Qantas is supposed to announce later this week).

If Airbus sells a couple hundred A380s, that's a hollow victory if the other long haul routes are dominated by 777s in 2010 (with its little brother 787 sharing duties from then on). It's not like this is a trivial market segment -- these are the aircraft that will be supplying bread-and-butter long-haul lift for the next few decades . Both the 777 and 787 look quite powerful in their segments at the moment, while Airbus widebody programs seem to be in disarray, with the A340 losing to the 777, the A350 nowhere near as successful as the 787 and the A380 with significant delivery delays to its customers (and very few recent A380 orders). The A330-200 is plugging along, but it's clearly yesterday's airplane next to the 787 and A350.

The only thing that is going unambiguously well for Airbus is the A320 program. But how long will that last? It's coming up on 20 years since the first delivery.

Flight International this week has a slightly odd story about Airbus trying to enhance the A340-500/600 to make it competitive with Boeing's 777.

The story confirms that the 777-300ER has become the widebody "benchmark" (we have a number of prior posts on this topic), with fuel burn estimated at 8-9% better than the A340-600.

The idea is to make the A340-500/600 more competitive with new engines (using 787 engine technology), a lighter frame (aluminum-lithium alloys) and aerodynamic improvements to the wings. This would allegedly result in "significantly better operating cost and range performance than the 777-200LR/300ER."

But the weird thing is that the A340-600E would be available in... 2011. Even supposing the A340-600E has wonderful economics (and it's unclear why Boeing couldn't also apply new technology to the 777) six years is a long time for Airbus to wait to have a real competitor.

Airbus better sell a lot of A380s and A320s in the meantime, because it looks like Boeing will sell a lot of 777s the rest of this decade.

Los Angeles has agreed to further restrict the capacity of Los Angeles International Airport (LAX). LA Times article here. The new cap is essentially 75mm (annual) passengers, down from the 78mm passengers envisioned in the prior plan. This itself was a significant reduction from the previous plans (which envisioned a new runway). With a few exceptions, basically everything that the prior mayor planned in terms of a comprehensive redevelopment of LAX has been junked.

Why does this matter? Forecasts published last year by the Southern California Association of Governments (the unfortunately named SCAG) show unconstrained demand for air travel in the LA basin in 2030 of 192mm passengers (2004 Regional Transportation Plan here, Aviation Appendix (pdf) here, look at page D-6-10). In 2004 the six relevant airports (LAX, Burbank/BUR, Orange County/SNA, Ontario/ONT, Long Beach/LGB and Palm Springs/PSP -- yes, that's wa-a-a-y out there) served just over 86mm pax (available by adding up the 2004 numbers available at the websites for each of the airports).

SCAG projects the 2030 constrained capacity of these airports, plus four outlying airports which do not currently have commercial service, at 141mm passengers. The four as yet unused airports are Palmdale/PMD, San Bernadino/SBD, Southern California Logistics Airport (Victorville)/VCV and March Inland Port Airport (Riverside)/RIV. However, even the figure of 141mm depends on a few key assumptions, one of which is that LAX will handle 78mm passengers (in 2004, LAX handled 60.7mm pax). That's obviously now obsolete, given the new agreement to restrict LAX growth to 75mm pax.

Further, SCAG assumes that Ontario will accommodate 30mm passengers, up from 6.9mm in 2004. Precedent suggests this is optimistic.

In 2001, the SCAG constrained 2030 forecast was for 167mm passengers. Why the huge drop to 141mm in the 2004 forecast? In the meantime, the good people of Orange County point-blank refused to permit development of former El Toro Marine Corps Air Station as a commercial airport. SCAG had El Toro pencilled in for 30mm pax capacity by 2030, so the loss of El Toro has left a gaping hole in future LA basin airport capacity supply.

Since Orange County residents have already capped SNA capacity and have killed El Toro, and since Long Beach is already tightly capped, and since LAX neighbors have capped that airport (and Burbank refuses to significantly develop its airport), it's unclear why we should expect Ontario's neighborhoods to embrace the traffic displaced from elsewhere in the LA basin.

SCAG has some ideas for increasing effective airport capacity. It suggests LA basin airports could accommodate up to 170mm pax in 2030 through the use, primarily, of maglev (or other high speed rail) trains to connect outlying airports with population centers. This would allow the four outlying airports (some of which are very outlying) to serve 33.5mm projected pax vs 6.5mm projected without.

Unfortunately, high speed rail has yet to make much of a significant impact in the US, it would cost serious $$$ (SCAG says a cool $29bn), and railway construction and operation could result in NIMBY opposition itself, though perhaps right of ways could be built on top of existing freeways. The word "maglev" in particular raises our hackles, as it's one of the perennial gee-whiz "technologies of the future" that so far apparently has just one "demonstration" application at Shanghai International Airport (it runs only part of the day). One might also question the likely success of rail in such a car-saturated culture, though at some point the roads will congeal to the point that even Southern California residents want alternatives.

So the LA basin faces a slow motion crisis in airport capacity in the next 25 years, absent the complete collapse of economic growth in the region or some sort of federal intervention (seems unlikely) to force further development of LAX, etc. Airport limits will themselves have a substantial impact on the LA area. SCAG claims 1mm in foregone annual pax translates to $620mm less economic benefit and 4,475 fewer jobs. That's not chicken feed.

Conclusion 1: LAX, Burbank and Ontario airports are highly likely to become de-facto slot constrained in some fashion, as Long Beach and Orange County are already. Other US airports that have become slot constrained gave slots to those who happened to be there at the time (it's a dumb way to do things, but the incumbents really love it). That suggests airlines may want to overserve these airports to make sure they get slots, which will one day be quite valuable.

Conclusion 2: Buy land around the closer outlying airports. San Bernadino and March look interesting: relatively close to existing development. At some point people are going to be turning to these airports for capacity.

It's official: Cathay Pacific orders the 777-300ER, despite already having the competing A340-600 in the fleet. 16 firm orders (four to be taken from leasing company ILFC, 12 from Boeing directly) and 20 options.

There's a strong smell of MD-11 about the A340-500/600. The MD-11 was McDonnell-Douglas's competitor to the A340 and 777. Although it originally attracted some good orders, the MD-11 failed to meet design promises. Singapore Airlines famously cancelled its order (in favor of A340-300s, which were later ironically replaced by 777s) and the MD-11 failed as a passenger aircraft (though it turned out to be a pretty popular freighter, and in fact most MD-11s have been converted to freighters).

Our prior discussion on 777 vs A340 issue can be found here, here and here.

Yesterday American Airlines (AA) confirmed an open secret -- it's going back into Dallas Love Field (DAL):

FORT WORTH, Texas, Nov. 30 /PRNewswire-FirstCall/ -- Following up on its recent meeting with Dallas Love Field Airport officials, American Airlines today formally notified the airport that it intends to start service from Love Field as soon as it can obtain and prepare appropriate facilities.
This decision was prompted by the President's signing into law the 2006 Transportation Appropriations bill and the subsequent exemption of Missouri from Wright Amendment restrictions.
American does not have a schedule to announce today. As plans are finalized, a full schedule-change announcement will be forthcoming.

Current AMR Corp. (NYSE: AMR) news releases can be accessed via the Internet. The address is http://www.aa.com

AA (or its consultants) has been saying that that repealing the Wright Amendment (which limits airlines from flying out of DAL -- Southwest's anti-Wright Amendment site is here if you want more details) will result in bad things happening to the Dallas Metroplex. Essentially AA (or its supporters) says it would move significant resources from Dallas Ft Worth (DFW) airport to DAL, hurting DFW, thereby reducing the global visibility of the Dallas Metroplex, hurting transport options to Ft Worth, resulting in war, famine, pestilence, death, impotence, Hillary winning the White House, gay marriage, etc.

Well, actually they don't claim the last seven of those, but we're pretty sure they would if they could. DFW, for instance, says with a straight face that repealing the Wright Amendment will result in the loss of 400 AA flights per day at DFW. DAL is a tiny airport (32 gates total, 14 currently used by Southwest) compared with DFW and poses no such threat. AA has the world's second-largest hub at DFW -- it's the beating heart of the AA system. AA can't afford to significantly damage that heart, whatever happens to DAL.

What's happened thus far is not a repeal of the Wright Amendment, but a further weakening of it -- the inclusion of Missouri in the list of states that can be flown to from DAL. This was signed into law yesterday and Southwest says it will shortly launch service to St Louis and Kansas City (the fact that AA recently reduced fares to these to cities from DFW is, of course, pure coincidence...)

So, having said that Wright Amendment repeal would result in the apocaplypse, AA will be anxious to "prove" that even weakening it is deleterious. So, expect a disproportionate response by AA, one designed to put more Fear, Uncertainty and Doubt (FUD) into an audience of politicians rather than designed to rationally compete with Southwest.

Basically, having promised that opening DAL will cause DFW a heart-attack, expect AA to fake angina as a result of the weakening of Wright.

Note, we're not saying repealing Wright won't affect AA or DFW. Of course it will. It will force AA (and DFW) to become more competitive than it is. That's why this country believes in competition -- it's good for us. Back on that stairmaster, American, exercise that heart...

Willie Walsh, new CEO of British Airways (BA), has started the cost cutting process the right way by gutting 35% of management (BA's press release here), including 50% of senior management and 30% of middle managers. Total job losses will be just under 600.

As others have already observed, apart from likely being a good thing in itself (efficiency is your friend), it also sets the right tone for the continuing talks with unions over necessary rationalization in advance of BA's move into London Heathrow (LHR) Terminal 5. BA currently operates from Terminals 1 and 4, and apart from the intrinsic inefficiencies of a split operation across obsolete terminals, BA's unionized employees operate under separate labor agreements at the two terminals.

So there's a lot of heavy lifting to be done and given the disastrous catering strike this past summer (where BA baggage handlers went out on an illegal sympathy strike) the situation is somewhat delicate. Demonstrating that Walsh is being (if anything) even tougher on management is a good start.

But we have a different point to make, which is this: It's nearly impossible to imagine Air France/KLM (AF/KL) or even Lufthansa (LH) doing the same thing. AF/KL is first of all hamstrung by the restrictions it agreed at the time of the Air France-KLM merger, which basically require that it keep completely separate Air France and KLM operations into the next decade. Which is why AF/KL is really "more than an alliance, less than a merger" (it's worth noting that LH is not restricted the same way in what it does with Swiss International). Yes, you heard that right. There will be separate AF and KL HQ staff until into the next decade. No, you're right, economically it's completely indefensible.

Secondly, of course, firing 35% of any group of employees is a good way to induce rioting in France. Not to mention that AF/KL management would instantly become social and political pariahs, not really a tenable position when AF/KL relies so heavily on political goodwill (like, to be fair, most airlines, though we think more so in France). To a lesser but still significant extent, the same is true about Germany and LH.

To be sure, this needn't prevent AF/KL and LH from achieving redundancies incrementally (and quietly) over time. But it makes it very difficult for either of these companies to achieve step-changes that are occasionally required in business.

Of course, if you're an AF/KL or LH employee, you probably have the opposite view -- it's great to be French (or German), my lifestyle is safe. In the short-run, that might be true, but the excess costs that these companies drag around relative to BA (which was already more efficient) will catch up to AF/KL and LH eventually, just the same way as it got the US majors. And just look what happened to them.

The new US Airways has this "heritage" logo as part of its new livery (it's next to the door as you enter the aircraft). It's apparently popular among the employees because it acknowledges the heritage of the old US Airways as the amalgamation of (clockwise from the 9 o'clock position): Allegheny, PSA and Piedmont.

There are several interesting things about this, one of which being that over 18 years after the mergers of PSA (May 29, 1987) and Piedmont (Nov 5, 1987) into then US Air, these names still have real resonance within the old US Airways (to be exact, PSA and Piedmont have resonance, Allegheny less so, it appears. There are web sites commemorating the old PSA and Piedmont, but none we've found for Allegheny).

We'd ascribe this partly to the fact that US Airways (and US Air before it, and Allegheny before that) had a rather grey, colorless corporate image compared to vibrant PSA and Piedmont and also partly to the fact that since the 1987 mergers US Air/US Airways has been, on average, quite unsuccessful, meaning that the airline hasn't grown much since then (actually it did grow in the late 90s and then shrank after 9/11).

In consequence, 18 years later US Airways is still loaded with employees who were actually hired by one of the three constituent airlines of the old US Air, and whose last experience with consistent success was pre-1987. For instance, until the merger with America West, the junior-most pilot at US Airways had something like 16 years seniority -- meaning that most pilots at US Airways were actually hired by one of PSA, Piedmont or the old US Air.

But there's another aspect to this. One of the challenges of the US Airways/America West merger is to ensure that the surviving corporate culture is that of America West, given that the old US Airways was so dysfunctional. Unfortunately, the old US Airways is also by far the larger carrier. America West is in danger of being swamped by the old US Airways because in size, US Airways > America West.

Clever then of America West's management (the surviving management) to recast this not as a merger between US Airways and America West but rather Allegheny, PSA, Piedmont and America West -- each of them smaller regional carriers, each of them in its time relatively successful, each of them with a far more positive image than the old US Airways. The dynamic is no longer a much larger dysfunctional US Airways screwing up America West, it's America West linking up with three roughly comparable units.

Which doesn't mean it will work, but we think it's clever nonetheless. Divide and assimilate.

Reuters breaking news. Here's our quick-and-dirty.

Key point:

The deal, if approved, would allow every EU and American-based airline to fly between every city in Europe and the United States. The deal would effectively remove fiercely protected competition barriers to London's Heathrow airport, Europe's foremost gateway for international business travel.

But still things on which the deal could founder:

Europe still wants to see if a crucial side issue -- the U.S. proposal to dismantle some limits on foreign investment in domestic carriers -- is finalized and whether it would truly facilitate greater investment opportunities in American commercial aviation companies and greater access to the biggest cities.

So no one should count their chickens. This ain't over.

We've always been cynical about the attitude of Europe (and especially the UK) towards these things. Restricting US airline access into Heathrow (LHR) has always been an article of faith for the UK govt because British Airways (BA) and Virgin Atlantic simply benefit too much from the restrictions. Between them, BA and Virgin control far more than 50% of the key NYC - London market, for instance. In fact, BA's share is above 40%, if we recall correctly.

The stated desire of the Europeans for access to the US market (such as the right to own a greater proportion of US carriers) is also something we find inexplicable. The US airline business is, empirically, a bad investment. So do the Europeans really want these rights, or is it simply a way of preventing full Open Skies by asking for something that they know the US govt can't give?

(It's worth noting that we fully support the elimination of all ownership restrictions on airlines globally, not that we think that will happen any time soon).

But let's be optimistic. Who wins and who loses? Single greatest winner is Michael Bishop and British Midland Airways (BD), which owns the second largest number of slots at LHR but can't use them to the US and so uses them mostly for money-losing European routes. Pre-9/11 Bishop bet big that he'd get LHR-US rights and ordered four A330-200s, aircraft that BD's struggled to use profitably ever since after that bet failed (insert comment about counting chickens before they're hatched). BD will be sitting pretty now.

Biggest loser might be Virgin Atlantic. Virgin has a great onboard product, but at the end of the day we think the biggest reason why it's successful across the Atlantic is that it doesn't face much competition. Virgin might well be forced into a defensive merger with the LHR operations of BD (with, perhaps, the BD's low cost operation, bmibaby, spun out). Richard Branson has certainly discussed a Virgin-BD merger before. The combination of the two in an open LHR would be extremely powerful, and be a key member of Star, assuming BD stayed in that alliance.

For BA and AA it's a mixed bag. Losing the competitive restrictions means they'll face more competition. However, if they can trade that for anti-trust immunity, it finally gives oneworld what Star and SkyTeam have, and that's worth something.

For Continental (CO), Newark (EWR) to LHR is the single biggest hole in its network and one it will want to fill as soon as possible. The rub is paying for slots. Getting the right to fly to LHR is one thing, buying LHR slots so you can actually do so is another. LHR slots are very expensive, we've heard figures like 10 million pounds sterling per slot pair. Painful given the financial circumstances of the US industry, but for CO, likely something it will want to pay (though it will do its best to force slots to be given to it, something we think will probably not work). CO is already the dominant airline in the NYC area, LHR access would cement that. There's no reason why CO shouldn't eventually be one of the top two or three airlines in the NYC to London market. Just think of all those I-bankers going out to Newark to fly to LHR...

To a lesser extent the other non-LHR incumbent US carriers would face the issue of paying up for LHR slots. Hard to see any of them not doing so, ultimately. LHR is such an important source of traffic from which CO, Delta, Northwest and US Airways have been blocked. You'd figure they'd all pay up for at least some slots to access LHR from their main hubs. LHR could look very different in a year or two, if open skies really happens. Slots now used for other purposes will be shifted to the Atlantic. We suspect most of those slots are currently being used for European routes (certainly likely to be true for BD slots). So European traffic will move to other London airports--that benefits Ryanair, easyJet and friends.

It's also potentially bad news for MaxJet, the new transAtlantic entrant (there's also EOS, but we think EOS is much less likely to survive than MaxJet: selling business class for an economy fare -- Maxjet's business plan -- seems more viable to us than selling first class for a business class fare -- EOS -- especially from London Stansted, which is hardly the preferred London airport). There's going to be a lot more capacity to the US from LHR in the future, if this happens. That will drive down pricing. In particular, if CO enters NYC-London, and British Midland tries to force its way in, then we're going to see a real jump in capacity in this market, with lots of deals. None of that is beneficial for a new entrant whose primary value proposition is price. We're not saying it's a fatal blow, but it's not a good thing.

Oh, this one will be fun to watch.