Archive for January, 2009
- There will be wave of additional industry consolidation in Europe over the next year
- Pension Underfunding is playing a key issue in failed merger talks from BA/Iberia to even BA/Qantas. While it is talked about as “valuation issues”, one of the largest is pensions and benefits
- While the EU Competition Commission is not likely to have changed its view on EI/FR, another suitor could put together a new bit Irish and EU regulatory backing
- Failed startup carriers like Silverjet and Eos may have been underfunded, but they avoided some of the legacy cost issues now plaguing the industry.
- BA needs to gain approval for its Merger with American Airlines- which we support fully. That union is becoming even more important as the economic climates- and cargo and passenger numbers fall
- There are parallel lessons for the airline and auto industry when it comes to organized labour.
To say that Aer Lingus has been on defense as of late is an understatement. I am personally impressed by both the airlines management and Irish Governments handling of the Ryanair bids, with the exception of the golden parachute for senior execs, that was later retracted. Today there is even rumour of fresh takeover talks from the Merrion Stockbrokers team.
No potental takeover bid can be successful until the potential suitor has an answer for what will happen with under-funded pensions and long-term labour contracts. Until this happens nearly all airline merger talks will end in tears.
In the case of Aer Lingus, the Irish State should not be left holding the bag for the debts, Alitalia style. Nor should the good people of Ireland need to face up to what US Authorities did with United Airlines in 2005, where the Federal Pension Guaranty Corp took over the airlines pensions for an exchange in a stake in the new United Airlines.
There are some also some new harsh realities out there that airline labour needs to face up to. No where is this more true than at Air France where pilots routinely appear to strike due to minute changes in retirement dates and work rules.
This is a now all too recurring theme in the airline sector, as earlier this week BA was said to have been valued below fellow oneworld partner Iberia. One of the key reasons for this financial faux-pas is that BA owes its pension fund a good deal of cash and is not current with contributions. While Walsh is out there claiming the any deal that does not value BA above Iberia is “not acceptable” to BA shareholders- why are those same shareholders not demanding answers on the pension underfunding?
I am no fan of these pension obligations, and were I a shareholder I would be asking management some serious questions about how they are going to solve this pension shortfall, or ultimately it is not the shareholder, but rather the EU taxpayers that will start footing the bill.
One of the reasons that we as consumers should be sad to see some airlines like Silverjet, Eos, and Sterling go is that that they knew the secret: don’t create a labour contract or pension plan that you cannot afford. Instead, be good to your employees, and create an innovative, agile, and fun environment in which to work. We feel that Virgin may well have the right balance here at the moment. In addition, American Airlines has managed to create through shared-sacrifice a stronger relationship with its organized labour, at the cost of ousting of their former CEO (Bob Crandall) in order to regain credibility.
This bring me back to a key point that I plan to continue supporting which is the AA/BA anti-trust application should be given fast track approval by the EU Competition Commission, as they currently are in a position to make a merger work. They have the cash, the teams, and will be able to get concessions to harmonise workforce rules. These are going to be keys to long-term viability. Other truly viable applications should also be given the same treatment. Ryanair and their bid were unrealistic and bad for EU consumers.
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What can airlines teach other industries about using IT? It’s a good question, and a recent article in leading US business technology magazine CIO offers some interesting answers – including insights from Carter Stewart, Managing Director of Trans World Consulting (TWC).
As the article notes, more airlines than ever are investing in more flexible technology to support their customer-focused strategies and survive a volatile, challenging economy. Cheaper prices, it seems, can no longer guarantee the passenger volumes of the past, and the industry is struggling to find not only new tactics, but also the technology to make them work.
So, what does the future hold for airline technology? And why is the current fashion of ‘unbundling’ airline services, from in-flight meals to pillows, unlikely to last? Find out what Carter Stewart and fellow industry experts have to say at:
© 2009 Trans World Consulting.
THE ISSUE – A FAILED BID FOR ANTITRUST IMMUNITY
In 2002, American Airlines (AA) and British Airways (BA) filed for antitrust immunity. Had their request been approved, they would have been free to work together to set more competitive flight schedules and fares. Unfortunately for the two airlines, no agreement has yet been reached with the US and EU regulatory authorities.
The question is: are consumers losing out as a result?
THE BACKGROUND – A LOT HAS CHANGED SINCE 2002
Back in 2002, the landscape of the EU-US airline market was very different. New entrants to the market were prohibited, and AA and BA practically had a monopoly hold on daily departures between London Heathrow and the US.
The new EU-US Open Skies accord has changed all that. Since the first phase of this agreement was reached in 2007, the doors have been opened for new market entrants to fundamentally change the competitive landscape at Heathrow and other European airports. Airlines such as Air France, Delta, US Airways and Northwest have begun to challenge established Heathrow-US carriers: an example of the healthy competition that comes from open markets.
ARGUMENTS FOR – MORE CHOICE FOR CONSUMERS
Ultimately, passengers now have a wider choice of carriers, service levels and new non-stop destinations than ever before.
Plus, there is now a serious potential contender in the London-US market. Heathrow’s second largest airline BMI has been raising its profile to business travellers over the past few months, while Lufthansa has recently increased its stake in the airline. So, could direct links to the US be far off for BMI, giving consumers even more choice when it comes to transatlantic flights?
Notably, both BMI and Lufthansa are members of the Star Alliance, which already operates with antitrust immunity and as a result is growing stronger and more competitive by the day. In all this, the consumer is once again the winner.
ARGUMENTS AGAINST – THE IMPACT ON GATWICK AND COULD BA/AA ‘MONOPOLY’ INFLATE FARES?
The past few years have seen other London airports such as Stansted and Luton experiment with transatlantic links – with mixed results. And in the wake of Open Skies, a near ‘mass Exodus’ of carriers shifting their operations to Heathrow has led to radical changes at Gatwick. These changes could, in fact, continue – but in new direction. If Virgin Atlantic wins its bid to buy the airport from the British Aviation Authority, it could potentially shift consumer preference away from Heathrow with a superior airport experience.
Unsurprisingly, it is competitors such as Virgin Atlantic that most strongly oppose the BA/AA bid for antitrust immunity. Along with several consumer groups, Virgin Atlantic claims that the result would be a ‘stranglehold’ on Heathrow-US services, which would enable BA and AA to coordinate schedules enough to inflate demand and therefore fares.
OUR CONCLUSION – AA/BA ANTITRUST IMMUNITY MAKES SENSE
While antitrust immunity could arguably have some impact on frequency and schedules as BA and AA coordinate their services, consumer demand and pressure from new competitors will help keep fares in check. Most importantly, it will give passengers an alternative choice of carriers on a scale not previously available.
So, overall, we feel there is no cogent argument for opposing the AA/BA request for antitrust immunity: a request that has been granted to many other alliances in Europe and the US. Its approval can only help to level the playing field between airline alliances, increase competitive pressures – and ultimately benefit consumers.
It is therefore in all our interests to urge lawmakers to approve the BA/AA application sooner rather than later.
Airport Sustainability has been a headline topic in the United Kingdom over the past year. Ongoing Heathrow Expansion, new political agendas from both the Conservatives and Labour party, and the beginning-of-the-end of the BAA London Airport monopoly have only served to fuel the debate.
The concept of sustainability has been defined as the “triple-bottom-line” of balancing economic, environmental, and social issues. We advocate that many important elements of airport sustainability are being ignored in favour of the more emotive issues of environmental special interest and narrow and near-term economic views. When viewed under the lens of our strategic planning models, several issues come to the foreground that we feel have an important impact on the overall sustainability.
In the context of some quantifiable global trends, is our airport infrastructure truly socially sustainable?
With a peak in the EU population of over sixty-fives expected in the next 10 years, are our current airport designs- with long walks to gates and limited space- socially sustainable? How will we as an industry respond to the increased needs of increasingly aging and mobility-challenged passenger numbers?
With larger aircraft and an emergence of a mobile middle class in growing Mid East and Asian economies, how will our current infrastructure serve these unprecedented passenger numbers?
How will changes in airline and passenger preference in point-to-point flights be handled by constrained regional airports?
In the environmental sphere, there are still key questions that we feel are being eclipsed by confusing, and often misleading information, about the aviation industry’s contribution to overall CO2 emissions and what actions could really be applied to reduce emissions in the short term.
Reducing airbourne traffic delays, and increasing Air Traffic Control efficiencies between is certain to reduce carbon emissions, yet plans for single skies have languished for years. If the EU is serious about reducing the 3% of carbon emissions attributed to the commercial aviation sector, one alternative is more broadly funded and fast-track plans for the integrated EU Single Skies Air Traffic Control (SESAR).
There are more productive, short-term, carbon reduction plans that the EU Government could adopt, which airlines would most likely embrace. In particular, we believe that the innovative “Green Flight” programme, developed by SAS, has immediate potential to help governments and the industry reduce emissions. With changes in both processes and technological investment, SAS have been able to reduce carbon emissions by 23,000 tonnes per year through more efficient flight and ATC ground systems interaction.
Prior to announcing the inclusion of airlines into the Carbon Credit scheme, both the UK and EU have failed to demonstrate that at least some of the carbon reduction goals would not have occurred in the natural order of next generation aircraft development. Primarily these net savings would come from increased aircraft efficiencies. Government-endorsed carbon offset schemes are unregulated and many have dubious claims, which only serve to further skew public opinion on the complex issue of airline emissions. We take the position that the truth about these programmes is that they should be subject to regulatory scrutiny and exposed to a market moral hazard should they fail to live up to their claims.
We want to emphasise the position that ATC efficiency is a more immediate and sustainable approach than investing in the enforcement and administration of the carbon credit scheme. v Overall, we believe that true sustainability must equitably address the balance between economic, environmental, and social aspects. Quantitative measurement plans, based on sound analysis of future trends is one of the keys to success. It is also important to assess outlying future events, and judge their probability, as part of any sound strategic planning cycle. In conjunction with our partner companies, TWC is developing a model to help airlines, airport authorities, and governments to iteratively review, measure, and develop policies to support long-term sustainability. Essentially what we offer is our own sustainable process model for strategic success.