Archive For The “JetBlue” Category

Pondering the US DoC tariff on Bombardier

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If one limits the active airline passenger fleet In the United States to between 100-150 seats, then as of 2Q17 there were 1,671 aircraft.  Of these, 699 were Airbus, 794 were Boeing and 178 were Douglas.  Please bear in mind that even as we are in the 3Q17, the data is for the previous quarter.

Breaking this down further, the top eight airlines account for 93% of the fleet. The table lists the top ten, and the yellow highlights are airlines that have publicly opposed Boeing’s complaints to the DoC.  We should highlight at least one more, but cannot since this was not made public.

Looking at the market by model, we see the following.

Of the fleet, the Douglas aircraft are oldest.  Boeing is next.  Airbus has the youngest fleet.  Boeing’s tension about the sub-150 seat market is understandable.

Now take a look at this. This was Delta’s fleet at the end of 2Q17.  Is there any surprise they are moving on the CS100 and have an interest in the CS300?  Delta is clearly not enamored with the 737-700 or the A319.  Even its A320s are aging (ex-Northwest) and Delta has shown interest in the A321 and the 737-900ER which are outside this segment.  But there are 115 Douglas aircraft that are quickly approaching their appointment with the desert. Neither Airbus or Boeing offer what Delta wanted.

As Delta’s CEO said this morning on their earnings call:  “I think my words were very clear – we will not pay the tariff that are being discussed or debated. First of all, those tariffs are preliminary, as I mentioned. In our opinion, it is very difficult for Boeing or any other US manufacturer to claim harm with a product we purchased that they did not offer and that they don’t produce. In fact, they ended the production of the 717, which would be the closest, ten years ago. When we went through the RFP to select the C Series, Boeing competed very hard for the order. Except they were competing with not their own product but a Brazilian product, an Embraer product, that wasn’t even new, it was used E190’s, ironically from all places, from Canada. So, as you look through this and try to see how exactly a harm case is going to be developed, particularly to justify the type of tariffs that are being discussed, to us it’s unrealistic, a bit nonsensical. We’re working closely with our partners at Bombardier.”

In summary, we can understand Boeing’s concern about the sub-150 seat segment.  They have lost their traditional leadership role. Airbus has won business and its fleet is younger so less likely to be replaced for a while.  The Douglas fleet, a natural for Boeing to win, is not attracting Boeing orders.  Bombardier is a threat to Boeing and Airbus in the sub-150 seat segment.  So is Embraer, which will be coming into the 100-150 seat segment within 18 months.

The MAX7 (and A319neo) have not attracted a lot of interest. But the C Series and E2 have and will continue to do so.  In the US market, suing Bombardier does not look like winning Boeing any MAX7 orders. Southwest’s MAX deliveries will be MAX8s for a while still.  We wonder if they will ever take a MAX7.  American does not look like a MAX7 buyer, nor does United which changed its last 737-700 order.  Delta, we are quite certain, will not buy the MAX7.  In short, Ray Conners’ concern is a reality already.

In the US market, suing Bombardier does not look like winning Boeing any MAX7 orders. Southwest’s MAX deliveries will be MAX8s for a while still.  Southwest has 30 MAX7s on order compared to 170 MAX8s. We wonder if they will ever take a MAX7.  American does not look like a MAX7 buyer, nor does United which changed its last 737-700 order.  Delta, we are quite certain, will not order the MAX7.  In short, Ray Conners’ concern is the reality already.  The US market does not look like MAX7 friendly territory.

All the noise at the DoC claiming damage and a threat from Bombardier is too late.  Boeing lost the sub-150 seat battle before the Delta order for C Series.

Airbus has a strong portfolio over 150 seats and does not seem worried about Bombardier or Embraer.  Boeing also has a strong portfolio over 150 seats.  So what, exactly, is all the fuss about?  Boeing’s concern about the sub-150 seat segment is understandable (they are losing some business there) but seemingly irrational (they are winning big above 150 seats).

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The Single Aisle Segment – some perspective

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Delta reaffirms CSeries commitment

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In the quarterly earnings report yesterday, Delta’s Glen Hauenstein announced the airline would base its first CS100 in New York.   The idea is to relieve that hub of the 76-seaters which be moved elsewhere to replace the 50-seaters which will leave the fleet.

The recent publicly released documents of the Boeing complaint against Bombardier indicated Delta’s deal with Bombardier is for a low MTOW CS100.  This means the Delta CS100 will have less than its full range capability.  SWISS also has a “lighter” CS100 and their aircraft have a range of 1,900NM. The following map shows how far the CS100 can go from JFK with this range. That is a large market.  It is certainly far larger than what the 76-seaters offer which Delta will take out of JFK.  Indeed the CS100 could open several new markets.  (Something which will catch the eye of JetBlue)

Another important statement that came out was from Delta CEO Ed Bastian who addressed analysts on the call: “We do not intend to slow down any of the deliveries we have for the CSeries.”  He added: “We will take the first delivery this coming spring.

There is a sense that the CSeries program has slowed down.  Company officials have spoken about a back-loaded 2017.  The Boeing complaint must have thrown some uncertainty into airlines (specifically American and United) considering the aircraft.

United changed its previous order for 737-700s, so a fleet gap there is open.  Moreover, United has 122 A319s (averaging 16.7 years) plus 40 737-700s (averaging 18.3 years). American has 250 A319 (average 13.2 years).  Although Airbus and Boeing continue to offer updated variants of these models in neo and MAX, the market has not been knocking the doors down to order them.

Which means that as these two airlines consider a refresh, Bombardier and Embraer are where they need to turn. Delta’s reaffirmation helps Bombardier and incidentally, Embraer as well.  Smaller, lighter, aircraft with a useful range offer airlines the opportunity to develop new markets.

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The next Battle of The Atlantic

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There was a previous battle in world war two.  The next one will not be violent but looks to be as belligerent.  The next battle will be in the skies over the Atlantic as the newcomer LCCs pour capacity into the market and upset what has become a comfortable club for network airlines.

The belligerents include the network airlines from the US (American, Delta, and United) and the EU (Air France/KLM, British Airways, Lufthansa, and their partners).  On the other side of this fight will be Norwegian, and soon JetBlue, with more to come.  To try offset the disruptive role being played by Norwegian, British Airways and Iberia are offering LEVEL.   Now Lufthansa is going to extend the reach of its Eurowings brand.  Air France is creating something called Boost.

Norwegian probably could never have imagined such a competitive response.  The EU competition is rolling out their big guns.  LEVEL and Eurowings will deploy A330s.  It’s not clear what Boost will deploy, but the bet would be A330s as well.  These aircraft are cost effective and paid for.  Norwegian will deploy 787s and MAX8s.  JetBlue will deploy the A321neo and A321LR. Then there is WOW and Icelandair also growing their reach.  These last two have home bases that will allow for disruptive use of single aisle aircraft in the market.

As we have seen numerous times before, the plans at airlines are easily disrupted by labor strife.  The big three European airlines about to get into this battle have long histories with strikes.  Air France’s decision to hire cabin crew for Boost at 40% less than its mainline has been described as “scandalous”.   Lufthansa has just ended a long-running fight with its pilots.  British Airways crews are getting annoyed again, too.  No wonder LEVEL will be based in Spain.

Jean-Marc Janaillac Air France-KLM CEO noted “We are lagging behind in terms of competitiveness. Since we are a legacy carrier, we are old, with many layers of management. We are not agile and lean enough to be innovative. We need to reduce our unit costs and continue our productivity efforts in order to grow.”  And there’s the rub.  This comment applies to the network airlines on both sides of the Atlantic.  The aircraft will not make the difference. It will be the people.   Imagine the reaction at these airlines when and if the sclerotic layers are cut?  The US airlines are further down the road on this, and although we have seen better financials, we have also seen what happens when exogenous factors like weather throw operations into a crisis.  The management layers are a problem – until you need them.  Since airline operations are subject to many exogenous factors, sometimes you need those people.

However, it is clear that newer airlines like Norwegian are doing things differently.  The way they hire people saves the airline a lot of money.  In the US, Norwegian faced pushback from local airline unions.  And then, suddenly, the problem was gone.  Is Norwegian more supple and flexible? Absolutely and the legacy airlines cannot match this.  Their labor relations are much more complex and the legacy airlines can’t pivot as quickly.  Recall the attempts by Delta (Song) and United (Ted) to invent sub-brands and how that worked out.  Corporate culture is not something that grows more flexible over time.

The Atlantic market is getting more crowded and the network airlines are going to lose market share and revenues.  Given their high costs, the size of the impact is not clear, but we can be sure the impact will be negative.

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Aer Lingus eyeing A321LRs?

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News from Bloomberg suggests that AerLingus is about to announce a decision to select the Airbus A321LR to replace its Boeing 757s.  These 757s are primarily used to connect Ireland and US east coast cities.  The Boeing 757 is a remarkable aircraft that enjoyed great popularity long after Boeing stopped making them.  But the existing airframes are ageing and its obsolesce is a factor.

AerLingus has four 757s, and the report says the airline is looking at seven A321LRs. This might indicate a decision by AerLingus to increase its trans-Atlantic routes from Dublin.  Are all going to fly west to the US?  Perhaps, but perhaps not.  The advantage of aircraft with long range is that they offer potential to be flexible and experiment with new markets.  The following map shows markets that are within reach.

The map shows the ranges for the 757, A321LR and MAX8.  We include the MAX8 because it will also be in the market, deployed by Norwegian.  AerLingus is going to face competition from Norwegian and needs appropriate tools to respond.  Norwegian has 100 MAX8s on order. Yes, 100.  That must be alarming to legacy airlines serving the trans-Atlantic.  The MAX8 seems to have the range to serve several markets along the North American east coast.  Iceland Air is also buying MAXs to build its trans-Atlantic business.

We think AerLingus is responding to Norwegian; how long before the other legacies in the market do something?  For the US carriers, obstruction by legal means is not a sustainable long term strategy. Even JetBlue is thinking about crossing the Atlantic by 2019, using the A321LR.  If AerLingus rejoins oneworld, that adds pressure on SkyTeam and Star Alliance.

Airbus has said it sees a market for 1,000 A321LRs.  Boeing has been less enamored with replacing the 757 suggesting its MAX9 can do the job.  The market clearly disagrees and the A320neo outsells the MAX9.  Norwegian, (a growing Boeing customer) converted 30 of its A320neo orders to A321LRs.

Airbus’ John Leahy thought the A321LR could replace 469 757 plus add another 500 (to get to the 1,000) in growth. Boeing’s Randy Tinseth dismissed this: “the thought of a 1,000 aircraft size market is frankly a little bit laughable.”  Boeing has suggested the 757 north Atlantic market is worth 50 – 60 aircraft.

But it seems the reality is changing quickly.  The charge is being led by Norwegian, an increasingly important Boeing customer.  Norwegian has demonstrated the 787 is an exceptionally good market creator.  Norwegian is likely to use the MAX8 in the same way – serving Providence RI from Dublin, cherry picking markets.  The airline has also undertaken interesting new seasonal business between the US east coast and the French Caribbean.  If this airline has identified the need for 30 A321LRs in addition to the MAX8s then something is up.  The A321LR is an enabler in a way that the 757 once was. Norwegian will use its A321LRs to connect points on the map to move people from and to the US and Canada across Europe and beyond.

The north Atlantic is a start for long range small aircraft as the 757 has shown.  The market apparently likes what it sees in the A321LR.  IAG’s yet to be named LCC is going to probably use Barcelona the same way Norwegian will use Gatwick and Dublin.  AerLingus out of Dublin adds to this mix.

Airbus has the first mover advantage and Boeing needs to respond, with an equivalent offering. This should be something bigger than the MAX but smaller and lighter than the 787-8.  The pressure for Boeing’s MOM solution builds.

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jetBlue and free Wi-Fi: Competing on Service

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It had to come.  Who even pays for Wi-Fi anymore?  Your correspondent does not on Delta, because of a very useful deal between T-Mobile and GoGo.  T-Mobile customers get free access allowing for Twitter and Facebook.  These two apps are great boredom solutions.

The jetBlue deal is sponsored by Amazon.  Passengers can stream Amazon Video on their devices.  The solution deployed by jetBlue offers 15-30mbps. This speed comes on all the airline’s US domestic flights.  GoGo is apparently operating at 10mbps.

Alaska Airlines, now owner of Virgin America, announced passengers on Wi-Fi enabled flights can use iMessage, WhatsApp and Facebook Messenger at no cost.

jetBlue’s service is called Fly-Fi and is uninterrupted Wi-Fi – meaning no waiting to reach 10,000 feet before getting online. From the boarding to arrival Fly-Fi is connected.

jetBlue is in an interesting situation here. They use ViaSat for their signals and the system is satellite based.  Currently ViaSat 1 offers its signals over North America – which is why the talk is about US domestic service.  But ViaSat 2 should be offering signals from March or April, and that signal covers the North Atlantic.  jetBlue should be getting its A321neos before long, and if as we expect, the airline flies to Europe, they can offer the highest Wi-Fi speed to every passenger.  The existing antenna for JetBlue will only work with ViaSat1, however a new antenna for their A321neos on order will be both forward and backward compatible for all three satellites.

jetBlue is focusing on competing on product.  This is great because it’s not the old faithful price war solution, which leaves every airline bleeding.  Perhaps this will help raise service levels across the industry.

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