US Airways’ Doug Parker on challenges for the airline industry

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.”

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Continental’s Kellner (and US’s Parker) revisit reregulation

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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Bankruptcy, not bailouts

I bet you’re thinking, how would a bailout of the “big three” U.S.-based automakers — General Motors, Ford, and Chrysler — affect a bailout of the airline industry? Tellingly, a few observers have compared the situation with the car-makers (Scene: Washington. Detroit: Give us big money money; our bankruptcy is your DOOM. Congress: Sure, always happy to help the UAW, but let’s install a car czar to apply industrial policy and oversee green car production.) with the airline bailout in 2001. A while back, I warned that as troubles persist in the airline industry, we should look out for a revival of the Air Transportation Stabilization Board. A recent Wall Street Journal article by Paul Ingrassia holds up the ATSB as a model for Detroit:

If public dollars are the only way to keep General Motors afloat, as the company contends, a complete restructuring under a government overseer or oversight board has to be the price.

That is essentially the role played by the federal Air Transportation Stabilization Board in doling out taxpayer dollars to the airlines in the wake of 9/11. The board consisted of senior government officials with a staff recruited largely from the private sector. It was no figurehead. When one airline brought in a lengthy, convoluted restructuring plan, a board official ordered it to come back with something simpler and sustainable. uniThe Stabilization Board did its job — selling government-guaranteed airline loans and warrants to private investors, monitoring airline bankruptcies to protect the interests of taxpayers — and even returned money to the government.

William Swelbar provides a little more background:

On multiple occasions, United applied for an ATSB-backed loan prior to its decision to file for bankruptcy protection in late 2002. The ATSB continually found that United had failed to file a business plan that was sustainable. Ultimately United filed for bankruptcy protection and continues its restructuring today. The ATSB simply was not prepared to provide United a bridge loan to nowhere. Today, United is in a much better place as a result. Not out of the woods completely, but the prospects for tomorrow are much brighter.

The travel industry disintegration after 9/11 was an unexpected external shock, but for airlines like United, it unmasked the unsustainable labor obligations and management decisions that were obscured in the heady boom time of 1999-2001. Some airlines, the ATSB determined, could do with a small loan guarantee in order to get through a rough time not of the airlines’ making. But for legacy carriers with legacy cost structures, a bailout would only postpone the reckoning to come, possibly making the pain worse later. United, Delta, and Northwest all needed a run through bankruptcy court. (I’ll say that United did not do enough to help itself in bankruptcy court. For example, management threw out silly ideas like Ted and didn’t simplify its fleet sufficiently.)

What does this have to do with Detroit? As I said back in June, the times today do not call for an airline bailout. Nor do they call for a bailout for Detroit. The big three’s special pleading notwithstanding, its problems are due entirely to bad management and extraordinary concessions to labor unions. As Swelbar adds, “It is my hope that we do nothing unless a radical transformation of the legacy issues that make the auto industry non-competitive are insisted upon.”

So where does that leave the big three? Exactly where legacy airlines were left: in bankruptcy court. Michael Levine — an aviation policy expert, natch — points out in today’s Wall Street Journal, “GM as it is cannot survive without long-term government life support. If it gets that support, it can’t change enough and won’t change fast enough. Contrary to [GM CEO Rick] Wagoner’s brave declaration, bankruptcy is an option. In fact, it’s the only option that merits public support and actually has a chance at succeeding.”

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Airline to cut carbon emissions! . . . by doing what it was already doing anyway

An interesting item in the Commercial Appeal of Memphis, my hometown newspaper:

FedEx issued its first Global Citizenship Report Wednesday, touting plans for big cuts in pollution by jets and delivery trucks. . . . On the environmental front, the company aims to cut carbon dioxide emissions by FedEx Express jets by 20 percent within less than 12 years.

The article continues:

FedEx fuel consumption of about 1.5 billion gallons last year ranked behind the largest passenger airlines, which put more flights in the air. Fuel was 12.1 percent of the company’s total operating costs in fiscal 2008.

“We’re a large user of fuel, but we’re not the largest,” [sustainability director Mitch] Jackson said.

No, but according to an interview with CEO Fred Smith in the Wall Street Journal, it’s the second-largest user of energy in the world — after the U.S. military. See comment below.

To curb the appetite for oil, FedEx Express in 2005 set goals of a 20 percent reduction in carbon dioxide emissions by its jets and a 20 percent increase in fuel mileage for delivery vehicles.

The report showed that jet emissions have been reduced 3.7 percent on a pounds-per- available-ton-mile basis in three years, while vehicle fuel economy is already up 13.7 percent.

This article might lead you to think: “Good for FedEx. Look at the way they care about the environment. What an upright corporate citizen.” It’s good for the reader that at least one outlet has gotten the rest of the story. According to ATW Daily News:

Key to the increased efficiency will be the replacement of its 90 727Fs with at least 87 757-200 converted freighters by 2016. The 757s will reduce “fuel consumption up to 36% while providing 20% more payload capacity,” it said.

FedEx has been planning this fleet transition for years (with a focus on fuel and labor savings and increased medium haul capacity). How great for FedEx — they get environmental plaudits while doing exactly what they were doing all along. Unfortunately, this kind of reporting is par for the course at the CA, which years ago — through a series of redesigns and changes in editorial leadership — shifted away from serious reporting into local cheerleading, soft and fluffy features, and barely edited press releases.

In other news: FedEx has a blog! Welcome to the aviation blogosphere!

FedEx will do its part for cleaner environment [Commercial Appeal]
FedEx sets target to lower aircraft CO2 emissions by 20% by 2020 [ATW Daily News]

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Delta-Northwest is a go: Justice Department

The Justice Department announced today that its Antitrust Division has found that “the proposed merger between Delta and Northwest is likely to produce substantial and credible efficiencies that will benefit U.S. consumers and is not likely to substantially lessen competition.” This clears the way for Delta and Northwest to merge officially. It was not an unexpected decision.

Justice says that the combined airline will face competition from other carriers on the “vast majority” of its nonstop routes. Furthermore, it adds, “the merger likely will result in efficiencies such as cost savings in airport operations, information technology, supply chain economics, and fleet optimization that will benefit consumers. Consumers are also likely to benefit from improved service made possible by combining under single ownership the complementary aspects of the airlines’ networks.”

I’ll reiterate what I said about the merger back when it was announced: There was no reason to block it on business or policy grounds, but the business case for merging was weak.

The Associated Press reports that the merger faces a lawsuit set to go trial next week in San Francisco. See also my previous blogging on the Delta-NWA tie-up and “merger mania 2008.”

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“Wild times”: Southwest’s Gary Kelly announces service to MSP, discusses challenges in airline industry

Southwest Airlines chairman, president, and CEO Gary Kelly announces new Southwest service to Minneapolis-St. Paul.

DALLAS — Southwest is well-positioned in tricky times for the airline industry and will launch new service to Minneapolis-St. Paul in March 2009, Southwest Airlines chief Gary Kelly said today. The Twin Cities are the first new Southwest market since 2006, and the first planned service will be nonstop to Chicago’s Midway Airport.

The announcement of expansion comes at a time when the airline industry is contracting. Southwest has been on a cautious and slow expansion track, focusing more on filling in gaps between its current cities than opening new markets. The new service comes after one of the most difficult summers for the airline industry. “It is a wild time” for us, Kelly said. “We’ve got to get our revenues per departure up. . . . Our costs have gone up. I don’t see costs going back down.” Even so, he said, “if you take out fuel, our unit costs are way below the legacy carriers.”

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Thought leaders on aviation trends

From left: Tom Parsons, Randy Petersen, Terry Trippler, Peter Greenberg, and Rick Seaney

DALLAS — Our lunchtime entertainment here at Southwest headquarters was provided by a panel of five airline industry thought leaders who offered their thoughts on the future of the industry. Rick Seaney of FareCompare.com kicked off the discussion. Some of the trends he noted include a “decline in human interaction” through the increasing utility of technology. He also expected “advertising in aircraft like in a subway car” and “a la carte aviation pricing” (the latter I think is a good thing, as regular readers will know). Seaney also announced that he expects to see an airline passengers’ bill of rights soon (PBOR), a theme echoed by other panelists.

Peter Greenberg, the travel editor for the Today show, said that most airlines are adopting an attitude of “we’re not happy till you’re not happy,” and added that it will be hard for airlines to improve customer service with so many unhappy employees. With respect to delays, he said that there will be no meaningful delay reductions until local airport authorities cap operations on their runways to what those runways can actually handle. And he cautioned U.S. airlines to prepare for foreign ownership and even cabotage: “it’s going to happen. Get ready for it.”

On the merits of a PBOR, Terry Trippler of Trippler and Associates said, “Once the government gets involved, they will not stop.” He recounted experience working with the Civil Aeronautics Board in regulation days and said it was not consumer-friendly. The reason airlines offered such extraordinary service (compared to today) is that they could compete only on service — not on fares. Instead of a PBOR, he said, “I want the free-enterprise system to work it out . . . and I think it will. . . . I want the Southwests of the world to be free to go where they want to go, be what they want to be, and charge what they want to charge.”

Frequent-flier-mile guru Randy Petersen of Inside Flyer and Boarding Area contested Trippler’s faith in the private sector to work out the issue: “Free enterprise hasn’t proven to work.” He discussed trends in frequent flier miles, arguing that some of the more negative pronouncements going around today are exaggerated. Finally, BestFares.com’s Tom Parsons talked about how with fares rising, “best fares” will be thought of as “reasonable fares,” and he commented that Southwest is leadeing fare increases, much to the delight of the legacy carriers.

During the Q&A period, friend of this blog and Jetwhine editor Rob Mark called attention to the issue of people being kept on planes for hours on the ramp. Greenberg suggested a renewed appreciation for the virtues of airstairs. Then, he said to my amusement, “Let’s talk about the history of denied boarding. It starts with Ralph Nader being thrown off an Allegheny flight.” More seriously, he said that if airlines don’t embrace common-sense measures like deplaning passengers on long delays, they will get a PBOR. Parsons said that we need a PBOR “with meat on it,” because to date the private sector hasn’t been successful.

Photo by Evan Sparks

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Southwest comments on Stop Oil Speculation Now

DALLAS — During the summer, the Air Transport Association and its member airlines launched a campaign to “Stop Oil Speculation Now.” I (and the rest of the aviation blogosphere) commented on it, arguing that limiting “speculation” on oil futures wouldn’t bring down the price of oil. Mark Ashley added that he was surprised about the campaign: “One surprise: Southwest signed the letter. By the logic of the letter, Southwest is one of the ‘speculators,’ and in fact it’s a major reason Southwest has been eating everyone else’s lunch. Yet they signed the letter decrying their own business practices. Huh.”

Southwest has, as is commonly known, aggressively hedged its fuel costs. According to Laura Wright, Southwest’s CFO, hedging is part of Southwest’s conservative financial strategy, controlling fluctuation in costs. She said that Southwest is 80 percent hedged in the third and fourth quarters, and 86 percent of its hedges are backed up by cash collateral and thus minimally exposed to counterparty risk.

I caught up with Wright to ask about the apparent inconsistency with calling for an end to “oil speculation” and engaging in risk-management practices that involve speculation about the future price of oil (i.e., hedging). Isn’t hedging the same sort of financial operation as speculation on oil futures? Wright said that the ATA’s proposal to stop oil speculation is aimed at “players [in the market] that aren’t end users” of oil products.

Wright said that Southwest doesn’t hedge for financial gain as much as it does for financial stability. The fact that Southwest is paying as little as $51 per barrel is a financial benefit not to be sneezed at, but its benefit is primarily in terms of being able to predict what costs will be and being insulated from fast-moving fluctuations in the price of jet fuel. Hedging permits Southwest to “have costs predictable within a range.”

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If you love Alitalia so much, Silvio, why don’t you just marry it?

Alitalia, the feline airline with nine lives, may yet live, according to AP and Financial Times stories. (The FT lede says that the lack of a “Plan B” may keep Alitalia flying. In the real world, the lack of a Plan B means liquidation.) No one wants to buy this basket case of an airline, but Italian prime minister Silvio Berlusconi made keeping Alitalia Italian (and operating) a central item on his agenda. So, since all else seems to have failed, why doesn’t Berlusconi just buy the government stake in Alitalia himself? He’s Italy’s richest man, with a net worth of $12 billion — enough hardly to notice an investment of $600 million, which is what the last consortium was bidding.

Furthermore, aviation is an industry that attracts eccentric businessmen: Richard Branson, Donald Trump, Howard Hughes. Why not Silvio? Of course, it might be that he’s a shrewd enough businessman to recognize that Alitalia as currently constituted is a gaping money pit. Like most politicians, he’s happy to invest other people’s money in unprofitable but “patriotic” ventures. (See also: Henry Paulson, Barney Frank.)

All the same, I hereby call on Silvio Berlusconi either to pony up the cash for Alitalia or let this airline die a dignified death.

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“Lehman Brothers reminds me of Pan Am”

Interesting op-ed by Andy Kessler on Forbes.com yesterday:

Not to sound harsh, but Lehman Brothers reminds me of Pan Am Airlines. No one (well, beyond their employees) is going to miss them. There are plenty of others to take their place.

In the ’70s and ’80s, a deregulated airline industry grew beyond its means, was stuck with bad assets, prices dropped and consolidation became inevitable. Pan Am was an early innovator, flying seaplanes into previously unreachable Caribbean Islands. They eventually flew everywhere, competed with everyone, stretched their balance sheet so it was as inedible as the mystery meat they served on flights and then one day went . . . Poof!

Analogies only go so far, but Wall Street got caught in the same wringer. Deregulated since 1975, balance sheets grew and grew as money got thrown at the profitable business of trading stocks and bonds, investment banking and money management. In the cheap-money period of 2002 to 2007, Wall Street’s thirst for capital saw no limits.

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