“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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Aviation08: The McCain aviation record

Is "Straight Talk Express" now the regional affiliate of Air McCain?

I haven’t had any luck getting the McCain campaign to fill me in on the details of his aviation plan (if he has one). His website has one mention of aviation, and it’s a throwaway press release on the air traffic control communications outage in August with a boilerplate call for reform in Washington. However, his twenty-six years in Washington and his chairmanship of the Senate committee that oversees aviation mean he has a pretty wide paper trail. Two of the most important issues on which he’s weighed in are air traffic control modernization (and how to fund it) and international aviation agreements.

John McCain has a track record of supporting market-based air traffic control reforms. In a 2001 interview with General Aviation News, which is full of revealing nuggets, he discussed a Reason Foundation report proposing a commercialized, nonprofit government corporation to provide air traffic control services (much like NAV CANADA). The interviewer was especially concerned about McCain’s support for user fees, the bete noire of the general-aviation community, and asked: “You have advocated ATC user fees in the past. Do you continue to support that approach?” McCain replied:

While there are a number of ideas about how to fund the aviation system, I have not yet come to a final conclusion about the best solution. The Commerce Committee will continue to examine different proposals and ideas, including a user-fee system. As I have often stated publicly, I am always open to new and fresh ideas on how to provide the proper funding to ensure a safe and efficient air-transportation system. The issue of user fees is closely linked to funding for the FAA, which is absolutely critical to the future of aviation in our country. The national air transportation system needs a predictable and reliable funding stream that is not subject to unnecessary budget pressures and gimmicks. A positive step in the right direction was the funding provided through the most recent FAA reauthorization bill, commonly known as AIR-21. But AIR-21 is not a permanent solution, and ensuring adequate funding for the long-term future of aviation remains a challenge.

While avoiding an endorsement of the Reason proposal, McCain did promise to include commercialization in the Commerce Committee deliberations on ATC: “However, the issue of ATC modernization is certainly an issue that the Commerce Committee will be looking into this year, and I expect ATC privatization will be included in the overall scope of the debate.”

User fees seem to appeal to McCain’s populist political persona and rhetoric. While acknowledging that user fees should not be structured to harm recreational users, he assails business jets’ use of the system:

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Wide open skies

Last week, the Financial Times carried an editorial on expanding “open skies” between the U.S. and Europe. After heralding the decline of flag carriers (even more marked with the proposed merger of BA and Iberia), the editors write: “Governments . . . must deal with the remaining obstacles to effective global airline consolidation.”

The US once led the way in deregulating air travel. However, the first European Union-US “open skies” agreement, which came into force in March, showed the Europeans are now keener to open up air traffic. The deal gave US carriers the right to operate flights between EU member states — but the US denied European operators access to its domestic market. After a slow start, Europe can reasonably claim it is now the leading advocate for a freer air-travel industry.

The current open skies negotiations’ top issue is whether the U.S. will allow foreigners to own more than 25 percent of voting stock in U.S. airlines, the quota that nearly scuttled Virgin America. According to the FT,

These absurd anachronisms must be abolished as soon as possible. Removing restrictions on cross-border ownership would pave the way for mergers between US and European carriers. Since the US and the EU dominate the airline industry, it would encourage other countries and regions to abolish their restrictions. Consolidating large airlines adds to their networks and allows significant economies of scale. Confining international operators to operating largely from one continent is ridiculous.

Americans discovered in the 1970s that confining airlines to certain regions or routes was also ridiculous. But what are the obstacles today to opening our airlines to foreign investment and our domestic routes to cabotage (i.e., allowing foreign carriers to operate domestically)? First, U.S. airlines fear competition from rivals that may still enjoy state subsidies or are simply better airlines. There’s no reason to shield them from competition; protectionism is both economically and politically retrograde. Second, small communities fear losing service. What incentive, they say, would Lufthansa have to maintain service to Hibbing, Minn.? Well, Northwest doesn’t have much of an incentive either, apart from a subsidy, so that’s a non-issue. Third, some fear that the U.S. will not be able to exercise sufficient safety oversight over foreign airlines. The solution here is to ensure that the parallel safety institutions in open skies partner countries are equal in quality to the FAA and that all parties are subject to ICAO standards. Furthermore, if we already trust an airline to operate at U.S. airports and over U.S. airspace, there is no reason to block it from a domestic flight. The fourth concern is labor. China is preparing to ramp up its pilot training program to meet domestic needs, but what if a U.S. airline could pump in cheap laborers domiciled in, say, China, who commute to the U.S. to work? At the moment, however, that’s not the situation we’re in. China is instead hiring hundreds of pilots from overseas, as are Middle Eastern, African, and other airlines. The U.S. has become a talent pool for airline pilots. In fact, allowing European cabotage might actually increase the U.S. pilot base, should European airlines wish to take advantage of lower relative labor costs.

Should we expect any tectonic shifts at the open skies negotations?

However, despite acute domestic problems, it is the US government that is standing in the way of a new deal on foreign ownership. Banning foreign takeovers may win populist acclaim, but American consumers should not thank their politicians for shielding their airlines from help from abroad.

Borders in the sky [FT]

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What Open Skies can do, and what it can’t: the case of St. Louis

The Airline Hub blog links to a St. Louis Post-Dispatch story wistful for transatlantic flights to Lambert-St. Louis International Airport. Now, if you click on the “prestige” tag below, you’ll see that I have had some scathing opinions about airports that go out of their way to secure transoceanic airline service that’s not supported by the market. I must be getting soft in 2008 (for auld lang syne, &c. . . . speaking of which, Happy New Year, dear readers!), because all I’m going to say to St. Louis is: Best wishes in your quest for Europe service. It’s not likely, given that the hometown hub airline can’t seem to make it work, but I wish you all the best of luck in your quest.

But I do need to clear the air on the reporter’s (and airport booster’s) assertions about the recently signed open skies agreement (see my take at the time here). He writes: “Now there’s hope that a new trans-Atlantic aviation treaty known as ‘Open Skies’ might eventually change [St. Louis’s dearth of Europe flights].” Why? “When the treaty takes effect in March, it’ll break up the rigid agreements that have long governed who can fly where across the Atlantic.”

Not quite. Yes, open skies ended the antiquarian Bermuda II agreement, but that governed only Heathrow Airport. But most European countries already had bilateral agreements with the United States to allow flights. Open skies simply regularizes the rules across Europe (and yes, cuts the nasty Gordian knot of Heathrow protectionism). So to say that it will break up “rigid agreements” is not really accurate.

“This is sparking lots of new routes overseas and hope at Lambert-St. Louis International Airport that one of them may end up here.” This is not really true. Several airlines’ plans to serve Heathrow have been announced, but there’s not much new service directly attributable to open skies. Much of the added service the reporter mentions could have been begun under previous rules.

“‘Open Skies will certainly be an opportunity for airports like Lambert,’ said Brian Kinsey, the airport’s business and marketing manager. ‘The playbooks have been rewritten, and I don’t think it will take as much to convince an air carrier to operate nonstop from St. Louis to Europe.'” I don’t know what playbook he’s reading, but open skies is simply not as revolutionary Kinsey thinks. The major change will allow European airlines to fly between the United States and countries beside their country of registration (that is, British Airways from New York to Rome or Air France from Washington to Dublin). And European airlines are already salivating over these routes–but the new routes that will get picked up in this way are all heavily traveled, O&D-intensive destinations, like New York, Chicago, and Orlando. Don’t expect St. Louis to be at the top of the list if it wasn’t there before open skies.

So, open skies will not, in and of itself, suddenly make medium-sized markets more desirable to transatlantic air carriers. It will foster consumer-friendly competition on routes between large U.S. and European markets.

Lambert may miss out [St. Louis Post-Dispatch via The Airline Hub]

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

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The “homegrown” fallacy

My exchange with Daniel Hall earlier this week made it onto The Economist‘s Free Exchange, which was in turn picked up by Megan McArdle’s Asymmetrical Information.

The Economist writer brings in the intervention dimension:

[S]o politicised an industry as air travel need not fear dislocations in any case; governments would react incredibly quickly to pull back on any part of an agreed-upon energy bill that appeared to cause significant damage to airlines or aeroplane manufacturers. This, in fact, is one of the arguments made by carbon pricing sceptics–that governments will not allow the necessary pain to be felt.

McArdle follows this with

[G]overnments will not allow anything to harm the airline industry.

What I don’t quite understand is why this is so. Why is everyone obsessed with having protected domestic airlines, and indeed, airplane manufacturing capacity? . . . Now China, too, wants its own airframe manufacturer. And everyone wants to protect their national airlines.

 

Why is flying so emotional? And so heavily, heavily protected by the heavy hand of the state?

Two things to say about this: amen, but things may be looking up.

Aviation remains one of the most nationalized industries on the planet. British author Simon Calder once wrote,

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Seriously, this is news?

Well, I’m back from a little-longer-than-usual Thanksgiving break. My day job has been busy and I have a couple of side editing projects that have been butting into my blogging time. But I was rousted from my bloggy slumber by this piece of non-news from Reuters:

New pact could shake up airlines: Barron’s

New pact? Why, what new pact? Who signed a new agreement? This is big news. Oh, wait:

A new international aviation pact signed by the United States and the European Union could lead to lower prices for trans-Atlantic air travel and cause a shake-up among airlines, according to a report in Barron’s.

You mean the open skies agreement signed this spring? The one already extensively covered in the business and aviation press, including your humble blogger in an article that predates this blog post? Welcome to the party, Barron’s–you’re only more than six months (fashionably) late. Also, good for Barron’s: I see your analysis is the same as everyone else’s. Glad to see that it only takes you several months to come out with the conventional wisdom.

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Open skies to Oz

The U.S. and Australian governments will “conclude a comprehensive open-skies aviation agreement” early next year, according to The Age, opening up competition on U.S.-Australia nonstops. Qantas currently controls 75 percent of that market, and the only U.S. airline to fly nonstop to Australia is United. The article claims that the route is one of the world’s least competitive. Current rules virtually guarantee that new entrants fail: “The current Australia-US air services agreement restricts airlines on the route to four flights a week in their first year of operation — a level of frequency deemed uneconomic for airlines wanting to grab a slice of the high-yielding corporate market.” The Age‘s realistically jaundiced eye also notes that incumbent carriers are looking to throw whatever self-protecting measures they can into the mix. In the meantime, hooray for more open skies.

US air pact ups Virgin Blue hopes [The Age]

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A whole lot of not much

Travel Weekly reports that after four years of talks, the U.S.-Japanese bilateral aviation agreement has been amended for the first time in ten years, with minimal changes: a minor codeshare rule change, more flexibility in setting fares (“While that provides more fare freedom in theory, the U.S. government never blocked fares, and it was not clear how often the Japanese government did so, if at all. It is possible, however, that airlines avoided offering fares they believed might be rejected.”), fifth freedom rights for some cargo operators, and more charter flights. Progress, sure, but wow, not very much.

U.S. and Japan revamp aviation deal [Travel Weekly; registration required]

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Winners all in China grab bag

The Department of Transportation has awarded new China route authority (see my earlier post on this), and all the major airline applicants took home a prize. Delta goes first, with immediate approval for Atlanta-Shanghai. The 2008 route is for Guangzhou only, and only United submitted a bid, for service from San Francisco. Finally, in 2009, US Airways will begin serving Philadelphia-Beijing, Northwest will fly Detroit-Shanghai, American will add Chicago-Beijing, and Continental will launch Newark-Shanghai service.

What’s too bad about this is that there is so much pent-up demand for China flights stymied by trade restrictions and tight control. Chinese airlines won’t even use all their allocated routes, but U.S. carriers can’t step in and take them over. Hopefully, recognition of this demand will stimulate movement toward an open skies agreement with China.

What’s great about this is the increased connectivity. By 2009, virtually every U.S. airport with commercial service will have one-stop access to China. This is an impressive gain since deregulation, when Pan Am and Northwest Orient dominated Asia routes (and often flew through intermediate gateways like Honolulu, Anchorage, and Seattle), and especially with respect to service to nonstop service to China itself, which was very limited and did not begin until the 1980s. The remarkable expansion of accessible China service to almost everywhere in the United States is something to applaud.

Delta, United get first crack at new China routes [USA Today via Today in the Sky]

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