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Archive for June, 2008

News came out today that the U.S. embassy in London has responded harshly to plans by HM Treasury to change the Air Passenger Duty into a per-plane tax at great expense to airlines and, ultimately, travelers. Air Passenger Duty was last raised dramatically in 2006 as an anti-climate change measure. Then-chancellor (and current prime minister) Gordon Brown said that APD was only a temporary solution to restraining aviation’s climate impacts until the sectors scheduled 2010 inclusion in the European emissions trading scheme. Airlines were starkly opposed, claiming that it was merely a revenue grab, and environmental campaigners dismissed its “green” credentials.

The current plan, outlined in a consultation document [PDF] released earlier this year, is to change the per-passenger charge into a per-plane charge based on maximum takeoff weight as a factor of three distance ranges: the European Economic Area, less than 3,000 miles from London (non-EEA), and more than 3,000 miles from London. The argument is that a given plane produces the same emissions whether it is fully loaded with APD-paying travelers or just half-full. The current £40 APD for economy-class long-haul travelers could climb as high as £100, according to the Daily Telegraph — which might severely affect traffic at British airports, especially connecting flights through London’s Heathrow Airport. Indeed, the Treasury acknowledges this in its consultation: “London Heathrow airport has the highest number of international transfer passengers of any airport in the world; transfer traffic there represents 34 per cent of all passenger traffic. Some airlines argue that the knock-on impact of aviation duty would reduce UK transfer traffic by imposing an effective cost on the provision of transfer traffic; and that this would have negative consequences for the UK economy, including through a reduction in the frequency and variety of services that can be offered directly from London.” This exposes one of the major obstacles facing those who would implement regional “green” taxes: competition.

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Here’s the latest in Daily Irregular Departures:

  • Save the cookie redux. Midwest Airlines pilots, concerned about the fate of their airline if minority owner Northwest is forced to divest as part of a merger with Delta, are “contacting members of Wisconsin’s congressional delegation to make clear their opposition to a forced sale.” [Milwaukee Journal Sentinel via Planenews]
  • The investigation begins. As expected, the Justice Department has asked Delta and Northwest to submit information about their merger, signaling the beginning of its antitrust inquiry. [Today in the Sky]
  • Legal recourse. Air France and its insurers are suing the Toronto airports authority and NavCanada, the national air traffic control provider, over the non-fatal crash of flight 358 at Toronto Pearson International Airport in 2005 as a result of a runway overrun. [Aviation Safety Network]
  • Paying the rent. Senators Claire McCaskill (D-Mo.) and Arlen Specter (R-Penn.) have introduced a bill to beef up oversight of overseas aircraft repair stations. The U.S. union representing FAA safety inspectors was pleased. [Aero-News.Net]
  • Not so “essential”? Essential Air Service subsidies aren’t keeping up with fuel prices, causing some towns to lose their scheduled service. Watch for Congress to pump up the subsidies instead of reform the system. [Aero-News.Net]
  • End of the line. John McCain wants to shut down Amtrak, which is aviation-related vis a vis this post. [Asymmetrical Information]
  • Play nice, says FAA. The FAA has instructed Paine Field, the airport north of Seattle where Boeing’s main assembly plant is located, to negotiate in good faith with Allegiant Air or risk losing its federal Airport Improvement Program funds. Neither the airport nor some surrounding communities want Allegiant. [Aero-News.Net]
  • Finally, a couple items from Daily Airline Filings, not available online but which come through RSS. First, Northwest’s pilots’ union council has filed a request not to grant permission for international route transfers between Northwest and Delta until labor issues are worked out.
  • Second, AirTran, Delta, Northwest, American, United, and US Airways have filed requests to waive minimum slot use requirements, claiming that high fuel prices prevent them from using all their slots at congested Washington National, JFK, Newark, LaGuardia, and Chicago-O’Hare airports. The airlines want to hold on to their slots in anticipation of a better economic road ahead. Virgin America has filed a response which calls their requests “anti-consumer, contrary to precedent, and without merit.”
  • Audible aviation. I’ve recorded a new podcast with Addison Schonland of Innovation Analysis Group, available here.

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The International Air Transport Association, the worldwide trade association for airlines, issued the following demands at its summit in Istanbul this week.

  • Governments must eliminate archaic rules that prevent airlines from restructuring across borders.
  • In view of existing fees and charges, governments must refrain from imposing multiple and additional punitive taxes and other measures that will only deepen the crisis.
  • State service providers must invest to modernise air transport infrastructure urgently, eliminating wasteful fuel consumption and emissions.
  • Business partners, in particular monopoly service providers, must become as efficient as airlines are now.  If not, regulators must restrain their appetite with tougher regulation.
  • Labour unions must refrain from making irresponsible claims and join the effort to secure jobs in aviation and indeed in other industries.
  • In the interest of the global economy and the flying public, we urge authorities to enforce the integrity of markets so that the cost of energy reflects its true value.

To which Brett Snyder responds:

Ok, so let me get this straight. In point 1 the argument is against regulation but points 4 and 6 want more regulation. Point 2 wants fewer fees charged, but point 3 wants more to be invested in infrastructure. It’s a bit confusing.

But points 5 and 6 have to be my favorites. I mean, come on. You’re going to wag your finger and tell labor unions that they should lighten up? Even more unlikely to have an impact, you think governments should step in and fix energy prices?!? Might as well just wish for world peace.

It’s important to keep in mind that IATA is a trade association — that is, a lobbying group. Every industry has one (except for the necktie industry, whose trade group closed down this week). And a lobbyist’s job is to promote his industry’s interests. Whether or not it’s sound policy –or even logical — it’s in airlines’ interests to have fewer limitations on foreign ownership, lower taxes, better airport and air traffic control facilities at lower cost, cheap labor, and cheap oil. For a lobbyist, policy coherence takes a back seat to getting your client’s way.

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One thing I’m surprised about in today’s hostile airline climate is that I’ve heard nothing about the Air Transportation Stabilization Board (ATSB), the body authorized by Congress in 2001 to distribute up to $10 billion in loan guarantees to airlines after the 9/11 attacks. With all the talk of airlines being in a crisis rivaling 9/11’s impact on the industry; a massive wave of capacity and personnel cuts at United, American, Continental, and (next) Delta; the uncertainty of when (or whether) the price of oil will fall; the credit crunch; and half-a-dozen U.S. scheduled carrier bankruptcies, don’t be surprised to hear chatter about reviving the ATSB — especially if a major carrier goes under.

The board was created to provide loan guarantees for airlines that could not otherwise access the credit markets in the tough months following 9/11, when many airlines threatened bankruptcy. Congress hastily passed the Air Transportation Safety and System Stabilization Act. Less than $1.2 billion was eventually approved for America West, US Airways, Frontier Airlines, ATA, Aloha Airlines, and two smaller carriers. None of these were or are especially healthy airlines: US Airways went into bankruptcy before merging with America West (a merger partially financed by the ATSB loan guarantee); Frontier is in Chapter 11 now, and ATA and Aloha shut down this spring. Many airlines preferred not to seek ATSB guarantees. In order to protect the government, the board negotiated options to purchase stock from guarantee recipients at below-market prices, which yielded profits during the more stable years between 2004 and 2007.

But there’s no guarantee that such activity will always generate revenue in the end, especially in the volatile airline industry. Beyond that, a bailout entails other risks. One is political intervention. Who wins, who loses? As airline deregulation expert Mike Levine points out (see page 20 of the PDF), the loan guarantee to Arizona-based America West was not John McCain’s finest moment. There’s also moral hazard. Because they can access the credit markets, well-managed airlines — like Southwest, which hedged fuel extensively — would be unable to get ATSB guarantees.

An ATSB revival would also be inappropriate because of big differences between the 2001 crisis and now. Back then, a single event (9/11) followed by several days of grounding constituted a single shock. The pressure of today’s high fuel prices leaves the future profitability of the industry an open question. Reviving the ATSB today could expose taxpayers to huge losses.

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B-roll

The following post has nothing to do with aviation policy; it’s just a rant. This story came across my reader today. What’s wrong with the screen cap below?

If that jet in the picture looks like it’s in Continental’s livery, you’re right. The editors chose the do a screen grab of a Continental aircraft on a story about United. Why? Beats me, but it seems to go along with a general illiteracy about commercial aviation in the mainstream media.

I was once interviewed last fall for a segment on the Essential Air Service. The segment focused on flights at Washington Dulles Airport; all of the “b-roll” — the background footage that airs as people talk — came from Reagan National. But at least they shot the right airline.

TV shows and movies get it wrong a lot, too, confusing airline liveries and aircraft types. A sitcom episode I saw not long ago, set in 2007, showed an establishing shot of the Delta terminal at New York’s JFK airport. The aircraft were L1011s and Boeing 727s — decked out in Delta’s mid-’90s livery — types Delta has not operated since 2001 and 2003, respectively. The worst offender in this category is the terrible short-lived sitcom The Loop, which focused on a young executive at a major airline. This show had every reason to be accurate; after all, it was about the airline industry. Instead, its understanding of the industry was juvenile, as if the writers merely skimmed a few newspaper articles. But its visual cues were much worse. It used footage of LaGuardia and Newark airports as establishing shots of Chicago-O’Hare. It would show a narrowbody plane in an establishing shot, then reveal a widebody interior — and vice versa. And no wonder the fictional airline was hemorrhaging money — they were, according to the show, operating 747s on domestic routes like Chicago-Denver!

This is, of course, a trivial tip of the iceberg. Patrick Smith nearly has a full-time job pointing out errors in the mainstream media’s reporting of much more serious aviation issues.

Rant over. Now back to your regularly scheduled wonkishness.

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Congestion at major airports at peak travel times (and the consequent inability of passengers to whom time is very valuable to get the delay-free travel they would willingly pay for) obviously means to an economist that the pertinent government authorities have on the one hand failed efficiently to expand airport and air traffic control capacity and, on the other, to price those scarce facilities at their marginal opportunity costs. No wonder there are shortages.

Alfred Kahn, “Surprises of Airline Deregulation,” American Economic Review 78, no. 2 (May 1988).

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The first computerized booking systems dramatically changed air travel, allowing for different passengers to pay different fares and for airlines to maximize the number of passengers and manage the “yield” for each flight. The first airlines to develop reservations systems enjoyed heavy advantages: American developed Sabre, United created Apollo (which eventually became Galileo; both Sabre and Galileo are independent, leading reservations systems today), Eastern formed System One, and TWA had PARS. Small airlines increasingly had little choice but to use these systems, for which they paid handsomely. A good reservations system was a valuable airline asset in the 1980s.

The system owners attempted to use their systems for their own benefit in other ways, too; they charged higher fees to their close competitors than to other airlines, and they listed their own flights first. After all, they argued, they owned the systems, and they were determined to extract the commercial rewards. In the early 1980s, regulators examined the issue, and in 1984, the Civil Aeronautics Board (then only a year from closing down) banned discriminatory practices in listing flights.

Outside of the airline itself, these computerized systems were available only through travel agents. Reading about this recently got me thinking about how much different things are today: the reservations systems still exist, but through the airlines’ web sites and travel sites like Expedia, Orbitz, and Kayak, they are accessible to anyone and everyone. I’ve never used a travel agent, and (with apologies to Cranky) I doubt I ever will, at least for personal travel. Why? I can do it myself!

Technological change in engine technology fueled the first great phase of air travel democratization in the 1960s and ’70s; political and deregulatory change pushed the second phase in the ’80s; and in the ’90s and 2000s, the third phase has been driven in part by access to air travel tools. The aforementioned websites, tools like InsideTrip and Farecast, and helpful travel blogs like those on the right-hand side of this page spread information, promote transparency, and help people make their own travel decisions. That’s something to cheer.

What will be the next phase of air travel democratization? Free flight? Very Light Jets? Air-train partnerships? A viable alternative fuel? Or is there something completely new just beyond the horizon?

Photo credit: Flickr user Kramchang. Used through a Creative Commons license.

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The Civil Aeronautics Board, which regulated interstate air fares and routes until its statutory demise from 1978 to 1985, was by the early ’70s a hidebound agency with little interest in serving consumers. It declined to approve new route authorities, frequently offered antitrust immunity to airlines when they colluded on scheduling, and generally opposed any effort to reduce fares — even as the technological barriers to lower fares were falling in the jet age. “As the CAB’s regulation of the industry grew more ham-handed, an airline nderground sprang up,” write Barbara Sturken Peterson and James Glab in Rapid Descent: Deregulation and the Shakeout in the Airlines.

Travelers banded together in phony groups that existed only to charter a flight. Authorities became suspicious when organizations like the Czechoslovakian Radio Hour Friendship Club started showing an unlikely interest in globetrotting. The CAB assigned gumshoes to stand at airports and check charter passengers’ IDs. The campaign reached hilarious heights in 1971, when the government’s air fare police raided a plane carrying members of the “Left Handed Club,” a group they accurately suspected included many right-handed passengers in search of inexpensive air travel.

The sad thing was that the CAB did not have to act this way. Congress deregulated the industry in response to the CAB’s relentless refusal to adapt to the changing environment of aviation. I think there’s a lesson here today. The chief regulatory agency in the U.S. aviation world, the FAA, has failed to keep up with increasing and evolving demand for air travel, leaving us with congestion problems that can only be “solved” by external shocks like 9/11 (in 2001) or a recession (very soon). When the regulator can’t keep up, Congress needs to reform it.

The CAB’s lack of interest in promoting competition in the airline industry eventually became so outrageous that it drew Ted Kennedy, Ralph Nader, and free-market economists into the same camp. How bad will our current situation get before similar change will come to pass?

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When stories like this come through my reader, I tend to ignore them — after all, opening military airspace to passenger traffic has a negligible impact on congestion. The last thing I need to do is read more high-ranking officials’ vapid statements, like the president’s last fall: “We’ve got a problem. We understand there’s a problem. And we’re going to address the problem.” Thanks for clearing that up!

But I couldn’t help but chuckle at Mike Boyd’s trenchant commentary today on Transportation Secretary Mary Peters’s latest initiative:

WASHINGTON (AP) To help ease airline delays over the busy Memorial Day weekend, commercial flights off the East Coast will be able to use military airspace, Transportation Secretary Mary Peters said Thursday.

“It gives airlines a fighting chance to beat delays by allowing them to plan new routes” in one of the country’s most congested aviation corridors, Peters said

Here are a couple of facts:

Fact one: The “busy” Memorial Day weekend was no busier in the skies than any other weekend. No more flights were operated compared to any other week-end. Less, actually, as some carriers – such as Southwest – flew reduced schedules in the middle of the period. There was no more –  or less – potential for delayed flights than any other day.

Fact two: Delays are driven by Ms. Peters’ incompetently managed, understaffed, and under-planned ATC system. Delays are not the result of high passenger volumes – and it’s inexcusable for a person in her position to not know better. Or worse, try to mis-inform the public. To act as if she’s trying to help the airline industry with “their” delay problem is like Mrs. O’Leary’s cow giving lectures to the Chicago Fire Department.

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J. P. Morgan has updated a report assessing the liquidity and balance-sheet health of U.S. airlines, and it finds Northwest Airlines second most likely to file for reorganization under Chapter 11 bankruptcy. If you’ll recall my introduction to airline antitrust, the Justice Department looks more kindly on a merger if one of the parties is about to fail. But in answer to the above question, a potential Chapter 11 by NWA would not move its merger with Delta along because it does not meet the following conditions:

1) the allegedly failing firm would be unable to meet its financial obligations in the near future; 2) it would not be able to reorganize successfully under Chapter ll of the Bankruptcy Act; 3) it has made unsuccessful good-faith efforts to elicit reasonable alternative offers of acquisition of the assets of the failing firm that would both keep its tangible and intangible assets in the relevant market and pose a less severe danger to competition than does the proposed merger; and 4) absent the acquisition, the assets of the failing firm would exit the relevant market.

Northwest may be cash-flow-weak right now, but it’s nowhere near ready for the “failing firm” provision of the Horizontal Merger Guidelines. Nothing to see here, folks.

Airline bankruptcy ranking [Sky Talk]
BOTBS Version 2.0 [PlaneBuzz]

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