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TEMPE — On most policy issues at the national level, airlines work through their trade association, ATA. Yesterday, I asked C. A. Howlett, US Airways senior VP for public affairs, about what issues he works on that the ATA does not get very involved in. “The biggest issue that is US Airways-specific is the Reagan National Airport perimeter rule.” National is one of US Airways’ key focus cities. He said that although the airline favors reducing barriers wherever they exist, “a more practical political solution is to create more exemptions to beyond-perimeter flying.” This would add to the twenty-four (in practice, twelve round-trip) exemptions, which include US Airways’ routes to Phoenix (one of which I am about to take back to Washington).

The key, Howlett said, is to make these changes in the pending FAA reauthorization bill, because the perimeter at National is congressionally mandated. US Airways is also interested in increasing beyond-perimeter exemptions at LaGuardia Airport, where it has a focus city operation. At LaGuardia, however, the perimeter is a locally adopted rule which does not require federal action.

One of the obstacles to perimeter exemptions is the objections of communities within the perimeter that fear losing service to big West Coast markets.  “Our approach would protect small and medium markets within the perimeter,” Howlett said. “We would say that an airline could use up to some percentage of its existing slots to fly beyond the perimeter, provided that those flights were taken from large or medium hubs. . . . What we’re doing is trying to protect the city that has maybe two flights to DCA. . . . We’re building in protections so that communities don’t lose service.” Howlett offered the example of, say, Delta taking one flight out of the Atlanta market, which would not make much of a difference, to add a flight to Salt Lake City. Besides, he said, there is just not that much demand for nonstop travel from National to the West Coast. A few more exemptions should meet that demand. (more…)

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TEMPE — Echoing Doug Parker’s plea for the government to “do no harm” to the airline industry, C. A. Howlett, US Airways’ top government affairs officer, outlined the challenges the industry — and US Airways in particular — face in the policy environment. His primary focus was the pending FAA reauthorization bill. Put off since 2007, the bill has been passed by the House but no action has been taken in the Senate. “We will maybe get this in calendar year 2009 but no one is betting anything heavy on that particular forecast,” he quipped.

Howlett is in no rush to get the House bill passed, because it has several provisions that give US Airways and other airlines pause. The bill increases the Passenger Facility Charge (PFC) from $4.50 to $7.00. PFCs are used to fund airport improvements but are levied by airlines when passengers buy tickets. This, Howlett said, would add $2 billion to the airline industry’s costs. “Airports have the ability to raise revenues by raising our landing fees and charges,” he added. “Not all airports are the same. . . . [Raising landing fees is]a better way to finance projects.” Besides, he said, airports got $1.1 billion in the stimulus bill, plus $1 billion for security improvements.

Also of concern in the House’s FAA bill are labor issues regarding collective bargaining procedures, the passenger’s bill of rights provisions, and limitations on foreign repair stations. Howlett said that there is a provision inserted at the behest of the firefighters’ union that would cost US Airways alone $15 million per year at their hubs. (more…)

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TEMPE — US Airways chairman and CEO Doug Parker opened the airline’s annual media day with remarks on the state of the airline industry, pointing out financial, political, and labor-related challenges in the year ahead and calling on airline managers to change the way they think about industry competition.

Parker has long been an apostle of consolidation in the industry, leading America West to take over US Airways in 2005 and attempting to take over Delta in 2006-07. He pointed out today that no single airline has more than a 25 percent share of the U.S. airline market. “In a network business, that’s a lot of fragmentation. It’s a fragmentation that makes it hard to produce returns for shareholders,” he continued. “More [integration] will produce even more value.” He said that US’s hostile takeover of Delta attempt spurred the Delta-Northwest merger, and he added that whether US Airways is in mergers or not,  the airline will benefit: “Where the real value occurs is the reduction of fragmentation.”

As for government affairs, Parker said that “this is a business that is overtaxed, that is in many ways overregulated.” In what I interpreted as a veiled reference to House transportation chairman Jim Oberstar (D-Minn.), who has declared war on airline consolidation and networking, he said: “We have many in congress who view aviation as a public good.” Airlines have to focus on little issues like service to individual congressional districts. Congress, he said, wants to harness the industry to serve its own interests. [Not unlike most other industries, these days --ed.]  The regulatory picture looks bleak, he said. “This one is probably not going to get better. . . . The best we can do on this one is hold the line. . . . Our message through 2009 is ‘do no harm.’ Let us compete, leave us alone.” (more…)

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TEMPE — US Airways’ media day program is about to begin, but I wanted to share this non-US related interview by Loren Steffy from the Houston Chronicle:

Larry Kellner served me a cup of coffee with the aplomb of a veteran flight attendant, and then, a few moments later, served up a stunning comment about the airline industry.

“If the government wanted to re-regulate the business, I wouldn’t be opposed to it,” he said.

While he didn’t mean the wholesale regulation of yesteryear, it’s still a surprise coming from the chief executive of Continental Airlines, the nation’s fourth-largest carrier by traffic.

Thirty years ago, airline executives battled fiercely to preserve government control of routes and pricing. Former American Airlines chairman Bob Crandall, then a rising executive, declared profanely that deregulation would ruin the business.

Fast-forward to today, and Kellner, agrees, at least up to a point.

“What we’ve got today doesn’t work,” he said in an exclusive meeting with me and several Chronicle colleagues. “It isn’t creating a stable industry.”

Kellner isn’t calling for a return to the good old days when fares were so high most people took the bus. Airline deregulation has always been about price, and in that sense, it’s been a roaring success.

Where it has failed, though, is on the cost side. Most airlines today have a cost structure that’s changed little since deregulation, which impedes consistent profitability. . . .

Read the whole article. It’s a good reminder that corporations are not inimical to regulation of their industry as long as it protects their profits and limits new entrants (for example, banks have been fighting tooth and nail to keep non-bank companies like Wal-Mart from horning in on their business, lest competition trim margins). The leading opposition to airline deregulation came from established national airlines and labor unions. Deregulation was (and remains) a consumer-friendly reform.

(H/T: ATW Daily News)

UPDATE, later today. Perry Flint of Air Transport World asked US Airways CEO Doug Parker about Kellner’s remarks. Parker said he had not read what Kellner said but that he would “disagree” about the need for reregulation. Indeed, he said, “I would hate to see us start moving back in the other direction at this point. . . . We’re still in the process of getting ourselves through a very lengthy deregulation process.” As part of this, he wants to ditch airport perimeter rules at DCA and LGA and reduce “barriers to investment.”

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Now that Continental has turned down suitor United, the latter is weighing a desperation move: merging with US Airways to create the world’s new largest airline (surpassing Delta-Northwest, assuming that goes through). The airlines may announce a tie-up within the next fortnight. Therefore, it’s time for another Merger Mania 2008 antitrust evaluation.

As you’ll remember from several months ago, there are a few key criteria by which the Justice Department will assess this merger:

  • Would a merger result in a significantly more concentrated market?
  • Would a merger raises concern about potential adverse competitive effects?
  • Would competitors be likely to enter concentrated markets in a timely manner and sufficiently to deter or to counteract the competitive effects of concern?
  • What efficiency gains does a merger offer?
  • But for a merger, will either party to the transaction would be likely to fail?

United and US Airways are unlike Delta-Northwest and United-Continental in that they are both concentrated in similar parts of the country: the West, the Northeast, and the South. Look at the map below:

(more…)

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More merger skepticism

There’s a good article today in the Atlanta Journal-Constitution about value of airline mergers. The AJC focuses on lessons for its hometown airline, Delta. It confirms what I wrote on January 17, exposing the flaws in the US Airways-America West merger obscured by Wall Street’s enthusiasm. Some key points:

  • Mergers often look good on paper – and can boost shareholder profits in the short run – but the successful union of two geographically and culturally different airlines saddled with their own problems isn’t guaranteed.”
  • US Airways, though, suffered more fundamental problems. International flights – the biggest moneymakers and the industry’s future – account for only 20 percent of US Airways’ business. And customer service took it on the chin: lost reservations; delayed flights; long check-in lines.”
  • “‘It was absolutely one of the messiest operations I’ve ever seen,’ [airline consultant Mike] Boyd said. ‘A merger does not enhance customer service; it makes it more difficult. Passengers pass on their problems to every employee they meet. That makes their job harder. That’s another reason why a lot of these alleged synergies don’t exist.'”
  • [U]nions representing pilots, mechanics, ramp and baggage handlers and flight attendants remain contract-less more than two years after the merger was announced. Dueling, east-versus-west pilots’ unions, in particular, trouble investors.”

Read the whole thing.

US Airways’ saga offers cautionary tale for Delta merger [Atlanta Journal-Constitution via Today in the Sky]

Image credit: Flickr user Cubbie_n_Vegas. Used through a Creative Commons license.

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So, all the airlines are talking mergers. The investors–especially big institutional investors like hedge funds–are happy, because stocks tend to do a sort of happy-dance after a merger, and right now airline stocks are dancing to a dirge. With mergers, there are tons of issues to discuss: labor, antitrust, operations. Lots of people will make big money off airline industry consolidation. Although I remain skeptical that total consolidation is inevitable, there is at least one recent policy change that will probably make mergers easier. (I’d say what it is, but I have an article coming out on the subject and don’t want to scoop myself.)

I also remain skeptical of the added value of a merger. The new US Airways, the only major merger to go through in the past several years, is a case in point. For the first several months after the merger in September 2005, the stock price climbed. This usually happens to post-merger airlines; for some reason, the market is euphoric about them. The US Airways rally continued through 2006 and into 2007, during a failed bid by the airline to buy then-emerging-from-bankruptcy Delta. (The markets were hot about that one too, and analysts heralded the long-awaited industry consolidation. Oops.)

US Airways Stock Price

Then, throughout 2007, US Airways stock tanked. It performed abysmally, and the airline didn’t perform so hot either. It took a year and a half to merge the US Airways and America West reservations and booking systems. Its two pilot groups are nowhere near agreeing on a master seniority list, and morale among the old US Airways folks is plummeting. Keep in mind that America West’s management took over the most dysfunctional airline in the country when they bought US. Then throw in a summer of record delays, oil climbing up to $100 per barrel (and stepping on airline stocks all the way), and a looming recession, and the US Airways stock decline makes sense. One might ask, where’s the value? I suspect the hit to US isn’t in the rising costs of oil so much as in the challenges of the merger process. Once the initial stock euphoria–extended by the US Airways bid for Delta–ended, investors saw that the merger didn’t create as much value as thought.

So when the chattering classes go on about how great airline consolidation will be, check the numbers and the facts first. The happy-dance band only plays for so long.

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