International airline alliances in the spotlight

I’ve done several off-blog items on the subject of international airline alliances lately. Here they are:

• The Airplane Geeks podcast with Max and Court
• A guest post on the Cranky Flier
• An IAG podcast with Addison Schonland

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Expand Heathrow

The Financial Times reports on government findings that one-third of London Heathrow Airport’s passengers are on connecting flights, which magnifies “[t]he importance of the role that connecting passengers play at the UK’s busiest airport [that] has long been a source of conflict among campaigners for and against a third runway.” The issue is a hot button in UK politics, with the opposition Conservatives dead set against a new runway and London’s mayor proposing a new airport in the Thames estuary east of the city.

The figures on transfer passengers illustrate the network effect benefits of big hubs like Heathrow. Today, more than 76 percent of connecting passengers connect from one non-UK destination to another — up from 57 percent twenty years ago. These connections redound to the benefit of London travelers as well, who have more destinations than their city alone would otherwise support. “Without [connecting passengers,] the scale of the network and range of destinations as well as the number of daily services that can be supported on routes would suffer, damaging Heathrow’s attractiveness compared to European rivals such as Paris Charles de Gaulle, Frankfurt and Amsterdam Schiphol.”

Building a new airport — a perennial idea — would do little to improve Heathrow as a hub. If Heathrow is not improved as a hub, it will eventually fall behind Frankfurt, Paris-Charles de Gaulle, Amsterdam, and Madrid-Barajas as a major connecting hub. London doesn’t need a new airport; it has three perfectly good ones, all of which can be reasonable expanded, and two smaller ones. What it needs is a hub that can compete on even ground with its European rivals.

Important role of transfer passengers [FT]

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ATA conference call on airlines’ environmental performance

Since fuel consumption and greenhouse gas emissions correlate nearly exactly, U.S. airlines have a financial incentive to improve their environmental performance. According to officials at the Air Transport Association, the national trade group for commercial airlines, environmental performance continues to improve and other initiatives are on deck.

Speaking in a conference call with several aviation bloggers, ATA vice president for environmental affairs Nancy Young identified environmental performance, improving the nation’s air traffic control infrastructure, and energy policy as the airlines’ top policy priorities. The desire for fuel efficiency leads to greenhouse gas emissions reduction, she said: “We couldn’t be more motivated to do the right thing there.” Among these initiatives are alternative, environmentally and food-supply friendly fuels. Young said that it is much harder to develop this kind of fuel for air-based engine units. A 50/50 synthetic blend is currently being tested, she said, with the aim of having 50 percent of the jet fuel supply in alternatives by 2025.

ATA has also adopted an industry-wide goal of improving fuel efficiency by 30 percent by 2025. This can be done, she said, by upgrading fleets, investing in new aircraft (e.g., replacing American Airlines’ MD-80s with B-737s) and enhancing current aircraft (such as fitting them with winglets). John Heimlich, ATA’s chief economist, added that more efficient air traffic control navigation — such as optimal flight paths, continuous descent, and the like — would improve both operational and environmental performance. Heimlich also defended the recent spate of baggage fees as an environmental initative: “When the customer is imposing a fuel penalty on us, as with baggage, we pass that cost on to them.” The airlines are cutting down on fuel use by modifying passenger behavior.

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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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“Stop Oil Speculation Now” won’t make oil cheaper

I’m going to resist the airline lobby’s link bait for their Stop Oil Speculation Now website (google it if you care), but the airline CEOs’ letter calling for passengers to lobby Congress for tighter regulation of oil futures “speculation” deserves some attention. The aviation blogosphere sees through this as the bad proposal it is (see Elliott, Snyder, PlaneBuzz, Upgrade, TJI). Indeed, economists from across the ideological spectrum — from Paul Krugman to WSJ op-ed writers — don’t blame “speculation” for the rapid run-up in oil prices. While some of the run-up looks bubblicious, for the most part, oil futures prices reflect estimates of existing and projected demand and existing and projected supply. As Craig Pirrong writes, “Futures and swap markets facilitate the efficient management of price risks, and speculators are an important part of that process. For instance, a producer of oil may want to lock in the price at which he sells his oil in the coming months in order to hedge against fluctuations in its price.” Another economist whose work I follow recently wrote, “Financial markets are driving today’s prices to match expectations of tomorrow’s values.” Speculators are doing the work of price discovery.

And for crying out loud, what is with the airlines’ complaint about “speculators who trade oil on paper with no intention of ever taking delivery”? Do they really want only those who will personally use oil to buy it? What if I’m a sharp, entrepreneurial guy who can make money buying and selling oil? (I’m not.) Why should the government limit my ability to “truck and barter” in a commodity that’s otherwise freely traded? Instead of making oil cheaper, it would restrict the full measure of price information a functioning market can provide.

The challenge of leadership is running a business in hard times as well as good. As Brookings Institution economist Clifford Winston told me recently, airline profitably depends more on the handling of “shocks” than on wringing out efficiencies. The airlines’ proposal is a Band-Aid, a substitute for actually handling the shock of rising costs.

The airline CEOs call the oil market “over-heated.” What’s really over-heated is the rhetoric and reasoning of their proposal.

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Deregulation “clearly, definitely” a good idea: an interview with Alfred Kahn

Sorry for the light posting around here. I’ve been working on some major writing projects that will appear over the next few months. In the course of one of them, I had occasion to chat with Alfred Kahn, the chairman of the Civil Aeronautics Board in the late ’70s and the “father of airline deregulation” (although when deregulation’s record was questioned he would later joke that he wanted a paternity test). Here are a few highlights from our conversation.

Looking back, was airline deregulation a good idea? “It clearly, definitely was,” Kahn said, “even though circumstances have now changed abruptly and the response of the market to changed circumstances . . . are in a sense wiping out henceforward many of the benefits that flowed during the past 30 years.”

Why was it so successful? The answer, he said, is that it “sparked an enormous increase in competition and air travel affordable to people from a much wider spectrum of income than before . . . made possible by filling seats in the previous decade that had gone empty.” Furthermore, he added, airlines are providing the service demanded: “I don’t see any evidence even now that the industry is failing to provide service that is economically viable.”

Notwithstanding the high fuel costs that many analysts say will drive most airlines into bankruptcy and force an industry transformation, Kahn insists that introducing competition into the industry was a good thing to do. “That’s no reason for denying the benefits from competition.” There is nothing inconsistent to say that there was a $5-10 billion per year benefit to consumers and that today’s energy situation may be reversing those benefits. Furthermore, changes the airlines made in the past thirty years due to competitive pressures may help them in today’s climate: “The increase in competition clearly forced them to improve their productivity; I don’t see that those [gains] are being wiped out.” All industries are to some extent exposed to losses due to high energy prices, Kahn said, so “nor would it be desirable for [airlines] to be sheltered from the change in our energy situation.”

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Of course IATA wants to have it both ways

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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Shame as a public policy tool

Today I’m reading Grounded: Frank Lorenzo and the Destruction of Eastern Airlines, an on-the-ground account written in 1990 by reporter Aaron Bernstein about the events surrounding Lorenzo’s ill-fated ownership of Eastern in the ’80s. (FYI: Bernstein takes a clear pro-labor angle that should be noted.) In his discussion of military man, former astronaut, and Eastern CEO Frank Borman’s actions preceding the sale, many of those whom Bernstein interviews thought that Borman was too proud to let his airline go into bankruptcy or sell it to corporate suitor Frank Lorenzo. “Borman had no desire to sell the company,” writes Bernstein. “Failure would be a bitter end to what had been a successful climb to the top of the corporate ladder.” But Borman ends up running to Lorenzo instead of buckling to union pressure.

Lorenzo seemed to have no such scruples, which led him to sell off most of Eastern’s most profitable assets, wage a demoralizing battle with the airline’s unions, leading to a disastrous strike and eventual shutdown in 1991. Lorenzo dragged capitalism through the mud, wrote William F. Buckley at the time, but “[t]here is no way a law could be written, to the effect that chief executives ought not to profiteer from the distress of companies they manage.” What remedy is left? “Some general manifestation of disdain for the abusers of capitalism is appropriate,” Buckley writes. That is to say, we should shame corporate officers who behave this way. Shame once might have been an effective tool for penalizing actually corrupt businessmen — which Lorenzo was not — but in the airline world, passengers seem not to care about honorable behavior by executives as long as they get a cheap flight. Rare is the instance in which an executive resigns in disgrace, as American Airlines’ Donald Carty did in 2003 during an attempt to extract concessions from flight attendants while offering top executives cash bonuses. (Carty did not leave the industry; he is currently chairman of Virgin America.)

I’ve written before about the decreasing stigma of bankruptcy. If the law is too heavy a cudgel to ensure upright behavior by airline bosses, and if bankruptcy judges see fit to allow airlines to shred contracts under what Herb Kelleher calls the “health spa” of Chapter 11, then we will have no choice but to shame the executives into doing the right thing. Does the American public have the moral stamina?

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Don’t kill the short hop

Ryan Avent writes:

I like the comment that short flights congest airports as much as long ones. I’m of the opinion that a carbon pricing scheme would give a boost to rail travel over both driving and short-haul flying. But a potentially more important factor in some regions might be the runway congestion charges under consideration. I suspect that auctioned spots would tend to go toward long-distance flights, for which there are few good substitutes (question to the gallery: what are the high margin flights — where do airlines make their money?). Were that the case, demand for regional rail should significantly increase.

You’ve read a lot in the past few years about airlines “shifting” to “more profitable” overseas routes, but that doesn’t quite express what’s going on. Airlines are maximizing their yields, and business-traveler-oriented long-haul international flights often have better yields than leisure-class runs to Vegas or Orlando. But the long-hauls are not necessarily high-yielding on their own, but because they access feed traffic from lots of smaller markets.

Imagine that there are 100 passengers in Washington, DC, who want to fly to Paris.

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