There was an article in the Memphis Business Journal yesterday quoting Doug Steenland from NW as saying the combined DL/NW mega-carrier may ultimately be a smaller company if fuel prices continue to soar.
The reason? Simple. Fares have to go up to offset the high cost of oil, and rising fares will temper demand and result in fewer flights being offered in the marketplace. Where have I heard that mantra before? Oh yeah, me. I’ve posted several items about how the continued high price of oil has to be offset by higher fares, blah, blah, blah.
This news shouldn’t be a surprise to anyone, except maybe to the people who heard the initial description of the merger as being a “1+1 = 2” transaction. Even with oil at $50 a barrel there would have to be some economies of scale realized from a merger, or else why do one? But with oil over $120 a barrel the economics are pretty clear; no matter how big you are, you can only last as long as your cash holds out.
The thing that bugs me about this is the way management has positioned this as a win-win (I hate that term). On the Delta web site there is a blurb touting the greatly improved pass benefits for employees. The sub header in the piece says “New reciprocal travel program adds to previously announced plans for a substantial equity stake, pay increases, seniority protection and other benefits for Delta, Northwest employees”. That article is dated April 29 and the piece in the Memphis Business Journal is dated May 12. Has that much changed in 2 weeks?
To my knowledge the employees of Northwest and Delta are all tax paying adults who have responsibilities to pay their bills, raise their kids, and take care of their families and themselves. They deal with the realities of life every day, which includes dealing with bad news, and they certainly understand the basic tenant of economics that says if you have too much month left at the end of your money then something has to change. Better pass benefits are great, but if you can’t afford to put gas in the SUV then a weekend flight to Disney World is just, well…….goofy (sorry, couldn’t resist).
My advice (and you know what they say about free advice) to the people running NW and DL is to treat their employees like adults and level with them. Raising expectations about pay increases and seniority protection in the current economic situation is not going to have the desired result. The inevitable backpedaling has already begun, as witnessed in the quotes from Doug Steenland.
Scrolling through the various April traffic reports today and looking at the reported load factors I noted that the lowest reported today was Southwest’s 72.%, which is slightly higher than April 2007. Actually, American Eagle reported a lower load factor than Southwest – 70.8% – but typically regional airlines have lower load factors because their aircraft have fewer seats and a no show on a 50 seat aircraft has a statistically more significant impact than one on a 140 seat aircraft. If we had ever achieved a 70% load factor at Business Express while I was there, well, I’d still be there.
United reported 80.5%, USAirways reported 83.2, Delta was at 81.4%, American reported 80.1, and Alaska was at 75.0 for the month of April. Although the load factors for UA and AA were down year-over-year (-3.6 points for UA and -2.0 for AA), others reported load factors that were unchanged or even slightly higher than April 2007.
Excess capacity? I’m not sure how that is defined, but with many carriers running load factors around 80% it sure doesn’t seem like there are too many seats out there. Heck, nobody’s got any room to accommodate many more passengers. With an average load factor of 80% on all flights, it is safe to say that peak flights are sold out – all the time. Hey – anybody want to start an airline!
Ironically, it is the carrier with that reported the lowest April load factor today, Southwest, that has managed to remain somewhat profitable during these last few months. Hmm……maybe the unprofitable airlines need to fire some of their customers and hire the ones flying on the profitable ones; evidently it takes fewer of them to make a profit.
Of course, I am being facetious, but here’s the point. If you can’t make money with an 80% load factor I am not sure the problem is too much competition. True, the cost of oil is a big factor, and the economic pressures on the consumer are real. But the size of the U.S. domestic airline market isn’t the problem; the problem is finding the profitable customers within that market.
There were an interesting pair of news releases today regarding the settlement of the suit between Mesa and Hawaiian Airlines.
The settlement calls for Hawaiian to receive $52.5 million from a $90 million bond posted (in cash) by Mesa as security for the original judgment. In return Mesa will drop its appeal and get back the remaining $37.5 million of its own money.
The Hawaiian release characterized the original lawsuit as “Mesa’s misuse of confidential and proprietary information obtained during Hawaiian’s Chapter 11 plan of reorganization in 2004”. The Mesa release characterized it as a “long-running lawsuit over Mesa’s inter-island flight services operated under the go! brand name.”
Tomato, tomahto I guess.
It may see a bit odd that Hawaiian would settle for less than the $80 million awarded, but it is hard to say how long the Mesa appeal would take to run its course. Suffice to say that in today’s environment, “cash is king”, and Hawaiian is probably happier to get $52.5 million today than it is to get an unknown amount (although probably higher than zero) some time in the future. On the other side, Mesa had to $90 million hanging out in that bond and they surely do need that cash, even if HA got the lion’s share.
As for the Aloha suit, if their case is as strong as Hawaiian’s then this kind of puts a number on that asset for them.
After my post regarding how fuel costs impact the P&L of a B737 flying a one hour route I received two corrections. The first one was received about 13 seconds after I posted (just kidding) from a reader who pointed out I had calculated correctly, but my explanation was a bit dyslexic. I had mistakenly typed that there are 6.84 gallons per pound of jet fuel, when it is obviously 6.84 pounds per gallon.
Another reader pointed out my flawed logic in using 800 gallons of fuel burned for the first hour of flight:
“In your fuel computation in Buzz, you compute an hourly fuel consumption of 800 gallons/hr for a B-737. This seems to be about right from my recollection of fuel burns on the 300/400 series at altitude. However, you have a small error in the logic of a 1-hour flight. While a 737 will burn 800 gallons per hour at altitude, getting there will cost you a whole lot more than 800 gallons per hour on any jet.”
Well actually, my analysis assumed that the B737 would be taken directly to FL350 on the belly of a B52 and then released into cruise flight. OK, fine. My quasi P&L for a B737 on a one hour flight was flawed. Using this information the first hour of flight will cost an additional 33% in fuel burn. So instead of fuel costing $30 per onboard passenger for a one hour flight, it really costs almost $40 when/if a barrel of oil costs $150. Yeah, that’s much better, thanks!
He also had an interesting theory about a new, more equitable way to asses a fuel surcharge, taking into consideration the impact of stage length on fuel burn:
“I’m waiting for the fuel surcharge to be a function of actual burn… you know… a meter at the entry door of the airplane where each passenger will slide his AmEx card. At the end of the flight, the flight attendant will give you a little slip like at the rental car return that has your actual fuel surcharge based on actual fuel burn on that flight. That would be more equitable than a per leg fuel surcharge, don’t you think?”
I think he may have a future as Director of Ancillary Revenue at an airline near you!
Everybody loves statistics. In an era where we count everything, we can now come up with a baseball player’s batting average with men on second and third base during a day game on a weekday when the pitcher’s last name begins with the letter “P”. I’ve seen stats that show which airlines can make money at various oil prices, and understandably the list of profitable airlines gets shorter as the price gets higher.
One metric I haven’t seen is a graph showing a correlation between the number of U. S. domestic airlines and the price of oil. I don’t think it is quite as linear as the comparison of profitability and the price of oil. There are most likely plateaus where the inevitable decrease in capacity boosts the revenue line by allowing the remaining airlines to raise prices to offset the increasing cost. The wild card here is finding the point at which air travel becomes too expensive for the discretionary traveler, and what price the remaining customers are willing to pay.
While poking around the net I found a neat matrix put together by ATA (not the airline) that shows the average price per gallon of jet fuel and the average price per barrel of oil by year. Looking at the 10 year period 1998 – 2007 there is a very consistent correlation between what a barrel of oil costs and what a gallon of jet fuel costs. Plugging the cost per gallon of jet fuel into a simple matrix that calculates the fuel burn of a commercial jet airliner is a simple matter. Then it becomes a exercise of masochism; how bad you want to make yourself feel?
Oil at $150 a barrel means jet fuel at ~$3.60 a gallon, and that means a 737 burns up almost $3,000 an hour for fuel alone. At an 80% load factor with 130 coach seats that means almost $30 per onboard passenger goes for fuel on a one hour flight. (Check my math; [5500 LBS/hour for a 737-300 x 6.84 pounds per gallon of jet fuel = ~800 gallons/hour] x $3.60 = $2,880 / 104 passengers). Plug your own numbers in for your favorite aircraft, and adjust the fuel burn numbers for a longer average stage length if you’d like.
Using my simplistic model, outside of fares, a lot of things get smaller when oil gets that expensive; fewer short flights in a 737, fewer passengers (due both to higher fares and less service) flying on even fewer airlines, and the ATC and Airport Security problems diminish (there is a silver lining).
Play it forward – how high can the price of oil go? $150? $200? Higher? The absolute number doesn’t really matter. The price of oil will be what the buyer is willing to pay and what speculator thinks it will be worth in the future. Oil price volatility is the new “re-regulation”, forcing airlines to remove themselves from markets that don’t make economic sense and presenting a significant barrier to entry to the industry for new carriers.
Determining the shape and size of the airline business in the future is more difficult, and probably a fruitless exercise anyway. It’s Airline Darwinism, which is to say it is an evolution that requires the industry to adapt to the new world of expensive fuel. Those unable to make a profit on their basic business will burn cash until they either figure it out, run out of cash and things to sell off, or oil prices significantly reduce (in which case they remain exposed to another upturn in prices). Or, they will survive if they do nothing but have the financial stamina to hang on until the industry shrinks enough so that fares can rise to offset the new cost structure.
How much capacity will have to be pruned is a question best left to experts, of which I ain’t one. Regardless of how much capacity reduction is ‘enough’ to generate a positive revenue impact, in my view it will require more than just temporarily parking airplanes. Unfortunately the additional pain of workforce reduction is necessary in order that airlines don’t adversely affect their unit costs.
A less important but nonetheless interesting issue is the question of how ancillary revenue plays a part once fares rise. Anyone who read my post entitled “Ancillary Agida” knows my view of that issue. If fuel prices stay high, or volatile, and another 5 or 6 airlines stop flying, will the survivors continue to put lipstick on that pig? Or instead, will they raise fares $50 each way and include checked bags, advanced seat assignment, and bad airline food?
In 1974 my favorite band (Tower of Power) released one of my all-time favorite tunes called “Only So Much Oil In The Ground”. Although known more for their unique and hard driving music, Tower was prescient in its message; there isn’t an endless supply of oil, so we better find something else. [If you want to see the band doing it at the 2006 Montreux Jazz Festival, check this out]. TOP is STILL my favorite band.
Thirty-four years later we can add to that “There’s Only So Much Cash In My Checking Account”; we’ve still got oil but it is just expensive as hell.
There’s a neat chart put out by the California Energy Commission that compares the annual and peak price of gas for the years between 1970 and today, adjusted for 2008 dollars. Using that chart you can see that until sometime in 2006 the average price for a gallon of gas never exceeded the level attained in 1980. At it’s peak in 1981, the cost of oil topped out at $87 a barrel (in 2008 dollars).
Oil is now at ~$110 a barrel and last week four U.S. airlines went toes up, with rumors rampant about the imminent demise of a few more.
At some point (some would say we’ve already reached that point) the effect of high energy costs become ubiquitous, making everything from a loaf of bread to electricity more expensive. But although airfares have inched up, they’ve obviously not been raised sufficiently to offset the increased fuel costs. There are lots of reasons for this, but I believe there are three primary causes; 1) Demand for air travel is somewhat elastic and therefore raising prices could temper demand, 2) There is a significant amount of excess capacity, and 3) Airlines typically have high fixed costs.
Items 1 and 2 are somewhat related, since a reduction of demand caused by raising fares will exacerbate the capacity problem. I don’t totally buy that argument, but I will concede the point. Although four domestic airlines did cease service last week the capacity impact was minimal. Capacity pruning has been announced by several carriers. Whether or not the reductions are sufficient to return the industry to profitability is dependent on whether the price of oil continues to rise or not.
Which brings us to item 3; high fixed costs. Reducing capacity removes the variable costs involved in flying an airplane, but not the fixed costs. For an airline with a fleet of fairly new airplanes, the cost of ownership can be as onerous as putting fuel in the tanks. Airlines with older and less costly airplanes can afford to park those airplanes more readily and ride out the storm, so to speak.
However, even with airplanes temporarily parked there still is the question of what to do with flight and maintenance personnel made superfluous by parking airplanes. Personnel costs can be absorbed more easily than bleeding red ink on losing routes, but there’s only so much training and maintenance that can be done before negating the savings of parking the airplane. In an environment where oil prices are volatile, temporarily parking airplanes is a good strategy, as long as the cost of oil comes back down to a level at which those parked airplanes can be flown.
If oil prices stay high however, the capacity reductions need to become permanent. Whether these are done through mergers or more airlines just closing their doors, capacity needs to be significantly reduced so that fares can go up. There, I said it. Fares are too damn low. Consumers who pay $60 a week to put gas in the SUV can not expect to pay $99 one way for a 1,000 mile trip.
To date, higher gasoline prices have not significantly affected the consumer’s appetite for driving their personal car, though at $3.50 for a gallon gas we may be at the brink. Most experts agree there is too much airline capacity, so maybe the high oil prices will provide both the opportunity for airlines to cut losing routes as well as the justification to raise fares on those routes still operating.
Perusing the web for some archival fare information I found an old PeoplExpress timetable, which although crude, makes a point about airfares in 1981. On their June 1981 timetable they advertised weekday flights from Newark to Jacksonville for $79, which in 2008 dollars is just shy of $188. Each way. And that was when oil was at $87/barrel, adjusted for inflation.
Thinking any airline can offer $99, $89, or $79 fares, even when charging $50 for checking a bag, is illogical. Ancillary, schmancillary, if an airline can’t make money selling air travel I just don’t see how it can be a viable business for anybody.
A few days ago CNN.com reported a story about a woman who was forced to remove her nipple rings before being allowed to board a flight from Lubbock to Dallas on February 24th.
Wait, did I just write that?
The TSA Blog, called “Evolution of Security”, said that the 4 agents involved (2 male, 2 female) followed the proper procedures, but upon further review those procedures will be modified.
If you want to have a chuckle you should check out the comments, which as of this writing totaled 171. I’d say the sentiment runs pretty strongly against the TSA in this case.
In response to the comments the TSA came out with an official Statement on the incident, which in part says –
“TSA has reviewed the procedures themselves and agrees that they need to be changed. In the future TSA will inform passengers that they have the option to resolve the alarm through a visual inspection of the article in lieu of removing the item in question. TSA acknowledges that our procedures caused difficulty for the passenger involved and regrets the situation in which she found herself. We appreciate her raising awareness on this issue and we are changing the procedures to ensure that this does not happen again.”
I recall a story a couple of years ago about a woman who was arrested for taking her top off at an airport security checkpoint after she set off the magnetometer. I guess it’s OK now as long as it is done during a “private” security screening. Perhaps that’s what the TSA means when it says “The Evolution of Security”. Let’s just cut to the chase and have all passengers completely disrobe and follow their carry on bags through the x-ray machine.
I’m joking of course, because treating physical security like this is a joke, but it’s not funny to those of us who must endure it when we travel. It isn’t the hard metal objects that are a danger to our safety on airplanes, it is those who would use these objects to harm us or others. Richard Reid tries to light a fuse on his Nike’s and we subsequently all take our shoes off for screening. The London crew decides to use liquid explosives in their failed endeavor, and subsequently all liquids must be a certain size and fit into a small baggie. This isn’t evolution; this is reactive, not proactive.
In the wrong hands a pencil is a lethal weapon, and it’s not even metal. Cell phones can be used to set off explosive devices. Following the premise that physical security must keep all dangerous objects off of commercial airplanes to it’s illogical conclusion, it becomes apparent that the safest alternative is to just ban all objects.
It isn’t necessary to invade privacy in order for the TSA to know the airline passengers a little better. The information provided to the airline in their reservation is sufficient. But until we get over the aversion to mingling airline reservations together and utilizing the simple information contained in the airline reservation to help focus the physical security more effectively, we will continue to read stories like the nipple ring incident.
Besides an acquisition-from-hell, an unhappy workforce, and a giant rat outside of their Phoenix headquarters, USAirways has found another way to make negative news. This past Saturday one of their pilots accidentally discharged his weapon in the cockpit of a scheduled flight between Denver and Charlotte.
Understandably there was a flurry of opinion pieces chastising the airline, TSA, the pilot, and Charleton Heston, for allowing its pilots to legally carry a weapon onboard. I don’t want to get into a Second Amendment discussion here, but I was particularly amused by an airline pundit who wondered why the pilot had a bullet in the chamber to protect against the gun accidentally firing. If the weapon was a revolver then there really isn’t any choice but to have a bullet in the chamber, and a semi-automatic weapon without a bullet in the chamber is just a paperweight anyway, but I digress.
I’ve no idea what the Federal Flight Deck Officer (FFDO) training program teaches, but I’d guess that they teach the weapon is to be loaded with a round in the chamber and the safety on while in the cockpit. If the weapon isn’t ready to use quickly then you might as well leave it home anyway. It is highly unlikely that a gun would go off without being handled by someone, so it’s safe to assume that on a routine flight, on a routine day, you might want to break up the routine by showing off your new gun. Add some PIO (Pilot Induced Oscillation), and there you have it. I’d love to read the transcript of the cockpit voice recorder:
“Watch out for the………[boom!!]”
“Think anybody heard that?”
The TSA doesn’t allow just any pilot to carry a weapon in the FFDO program; there is a psychological evaluation that must be passed by the pilot before beginning the training. I only know this because a friend of mine who works for a large air freight company flunked the psych evaluation; evidently he has “difficulty dealing with authority”, and was not allowed to participate in the FFDO program. I guess that doesn’t say much for my choice of friends, but that’s probably another story.
Personally I don’t have strong feelings one way or another about pilots carrying weapons on commercial flights. I guess if anyone has a gun onboard an airplane I’d rather it be a good guy than a bad guy; and it’s not like airport security is so perfect that they occasionally might miss a weapon in someone’s carry on bag. A gun on an airplane isn’t inherently dangerous unless the person who controls it has evil intentions, or, as in this case, becomes careless.
As a pilot myself I’ve always thought that having the airplane yoke in my hands would be far more effective a deterrent than a loaded gun. A couple of negative G pushovers that send the bad guy flying into top of the cabin would probably be pretty effective.
When I first started blogging I promised to only write about things I knew about. Perhaps that explains the paucity of my posts to date.
Over the past few weeks it’s been a bonanza for bad stuff. How much will a barrel of oil eventually cost? How low will the dollar really go? Is it better to work for an airline or an investment bank?
So I’ve been reading the news and talking to people who know a whole lot more than I do about the financial markets, and it’s pretty clear this is uncharted territory and nobody really know what the heck is going to happen. It sure is easier to predict things “will get worse before they get better”. It’s like saying the Cubs won’t win the series in 2008; you’ve got a lot more chance to be right than wrong and nobody will remember if you were wrong anyway.
Try as I may, I have never been able to figure out the game of craps as played in Las Vegas. Seemingly you can bet on anything, and if you are lucky you can win a lot of money. No value is created, no service is provided, and minimal skill is involved. A bet is made and won, or lost.
Sounds like Wall St. to me; but then again, I am not a financial wunderkind.
OK, that’s not fair. In part, the financial markets provide capital with which those so inclined can wager bets. Some safe, some not so safe. Some backed by logic, some backed by emotion.
It’s the emotion part that is the most difficult for me to understand. If I believed everything I heard about the state of the world everyday I’d be suicidal. Pass me the ammunition honey, the 6 o’clock news is coming on.
My personal opinion is that the bad news we are hearing about the financial markets now is just payback for the multi-million dollar bonuses that have been earned by Wall St. financial types over the past few years. I believe the system itself is basically sound and it is proving its soundness now.
There was a story in the LA Times yesterday about an elite level frequent flyer on American Airlines who experienced some truly horrendous treatment on a couple of AA flights. Although the story relates several of his experiences on AA, the most notable was a flight from LA to London that was diverted to JFK due to a flight attendant who’d mistakenly thought she’d seen this gentleman on the employee bus. Thinking the passenger had circumvented security, she advised the cockpit crew and the decision was made to divert to JFK. This incident was widely reported at the time.
It’s easy to read this story and decide that the flight crew involved overreacted and that this is racial profiling, plane and simple. It is also easy to forget that about 6 and 1/2 years ago ~2,800 people went to work not expecting or deserving to die, but they did.
It is frustrating when I read stories about this misplaced suspicion that causes flights to divert, or when someone runs through a security screening checkpoint and a concourse is shut down for 4 hours. Relying on physical security alone isn’t going to cut it. We regularly read about airport security failures; just Google “Airport Security Failures” and check it out.
Airline flight crews deal with airport security every day and know well its absurdity; perhaps that explains (though doesn’t justify) the American Airlines flight attendant’s actions on the L.A – London flight. It’s virtually impossible to keep all sharp objects and liquids in containers larger than 4 oz. of of commercial airplanes 100% of the time.
I recall a flight I took to Reagan National Airport in November 2001 that illustrated this fact. At the time passengers weren’t allowed to leave their seats for the last 30 minutes of the arrival and flights to Washington received a second security screening at the boarding gate. On this particular flight they also had a bomb sniffing dog do a once through the airplane before we boarded. However the dog wasn’t trained to detect hand tools.
Upon arrival in D.C. and as the aircraft rolled out on the runway I felt something roll into my foot. I looked down and there laying next to my foot was a 6 ” long screwdriver, evidently left onboard by a mechanic during some previous maintenance work. I thought about telling the flight attendant but then realized I’d be spending the next 4-5 hours talking to the D.C. police, so I discreetly put it in my briefcase.
When I departed DCA for the return trip I forgot the screwdriver was still in my briefcase until I laid it on the x-ray machine belt during the security screening process. No big deal, they can just confiscate it and I’ll be on my way. Except they didn’t detect it. The offending screwdriver now hangs on my garage wall next to my other hand tools.
The moral of the story is that it isn’t the sharp object from which we need protection; it is the person that would use the object to cause us harm on the airplane. And I am not talking about CAPPS II or whatever iteration is currently being contemplated. We don’t need a mega database with everyone’s credit information and other personal data so the government can spy on us.
In a previous life I worked for a company that proposed to the TSA a method to utilize the data that is present in airline reservations to provide real time responses to queries about the data. Things like – show me all of the reservations booked between W and X dates for travel out of Y airport on or after Z date. Designed to be used by security or law enforcement agencies, it would be a tool to confirm intelligence from the field. So if information was that bad guys were planning to do bad things to flights leaving London and bound for the USA next month, this tool could help find those reservations made by the bad guys. No credit checks, no social security numbers, no data enhancement, no billion dollar capitol cost to set it up. Just use whatever is in the reservation and don’t bloat it (and make it slower) with useless personal data.
Instead of looking for weapons that have been tried in the past – shoe bombs, liquid explosives, or box cutters, let’s just look for the bad guys. One thing every bad guy needs to accomplish their dastardly deed is a reservation.
Unfortunately what happened with CAPPS II was that the big government contractors smelled cash and lined up at the trough for their fair share. Ultimately there was a lot of money spent with no beneficial result, and the companies involved had the added bonus of defending themselves in various class action cases brought by privacy advocates. Although it supposedly was killed by TSA, it has been reported that they will continue to develop an “automated passenger pre-screening system”. Oh goodie.
Fast forward 6 years and we are still looking for sharp objects and liquids at security checkpoints, taking off our shoes and belts, and diverting flights because we are not sure whether someone is a threat, or just a really good customer who happens to fly a lot.