Archive For The “United” Category
As the ITC reasoning behind its decision to deny Boeing’s claim is digested, the next dominos are falling. Delta’s statement is “Delta is pleased by the U.S. International Trade Commission’s ruling rejecting Boeing’s anticompetitive attempt to deny U.S. airlines and the U.S. traveling public access to the state-of-the-art 110-seat CS100 aircraft when Boeing offers no viable alternative. The airline looks forward to introducing the innovative CS100 to its fleet for the benefit of Delta’s employees, customers and shareowners.” It turns out that Delta’s testimony seemed to carry the most weight for the ITC.
An aspect of the ITC reasoning that is getting some attention is the airline is now able to take deliveries of the CS100 from Mirabel and not wait for years until the Mobile FAL is operating. Delta and Bombardier, understandably, are not saying anything about this.
The ITC result was unexpected by Bombardier like it was for almost everyone following the industry. There was a not very secret plan for any Mirabel built CS100s to go to AeroMexico. Bombardier and Delta must have been busy for months working on contingency plans. Then along came the unexpected ITC ruling and those plans, in place and well thought out, became moot.
Now Delta and Bombardier have to go back and essentially undo the plans they put in place. Delta had already planned to extend the use of their MD fleet in the event they had to wait for the Mobile FAL. Bombardier had to figure out where to put the Delta deliveries in their production slots because the expected ITC ruling was going to mess up any delivery plans. Details of how any aircraft were going to end up in Mexico are still secret. As one can see several moving parts had to be stopped once the ITC made its ruling.
We expect to see a CS100 is Delta colors soon. Both the airline and Bombardier want this. Delta believes the CS100 is going to disrupt its competitors and they have good reason to believe this. If passengers are given the choice of a regional jet or the more spacious CS cabin, the choice is easy. We expect Delta to make a big fuss of this feature in every market they take the CS100. Since most passengers have no idea which aircraft they are flying, Delta will need to undertake an education strategy.
Winning over customers to their CS100 at the start of a trip means Delta should be able to keep more traffic in its network. This means they can use the CS100 to increase market share and in the oligopoly without touching fares. Travelers who are price driven, rather than mileage loyalty driven, are likely to swing to the Delta product. Finding a spacious cabin with bigger seats will be something of a revelation for US air travelers. Once captured, these travelers might develop a liking for Delta’s product and service.
This outcome has been seen at CS300 launch customer airBaltic. “With the introduction of brand new Bombardier CS300 aircraft, this year airBaltic has increased the number of passengers served by 21 percent. Thanks to the improved efficiency of the aircraft, this summer was the strongest in the history of airBaltic. For several months in a row, airBaltic, which turned 22 this autumn, reached record high passenger flows as well as revenue,” the airline reported.
If Delta can their first CS100s in service quickly, we expect to see American and United react by either also acquiring CS100s or E190-E2s. Southwest may not be immune from this impact either. Delta’s deployment of the CS100 is likely to be good for Bombardier and also for Embraer.
Viasat announced a new contract with United Airlines to bring it’s latest generation in-flight entertainment and connectivity system to more than 70 aircraft, including at least 58 of United’s new Boeing 737MAX aircraft. This means Viasat will now be the direct in-flight internet service provider, deploying its most advanced IFEC system to provide United customers access to fast, reliable internet connections in-flight.
Viasat will serve as the direct in-flight ISP to United, deploying its most advanced IFEC system, in order to provide United customers access to fast, reliable internet connections from the air—for accessing websites to connecting with business applications such as a corporate VPN and secure email. Viasat’s IFEC system will also power United’s Private Screening entertainment option, which offers customers access to hundreds of entertainment titles from its onboard library direct to their own devices.
United will tap into Viasat’s advanced high-capacity Ka-band satellite system, which includes the ViaSat-1, ViaSat-2, and ViaSat-3 satellite platforms. These capacity-rich satellite platforms enable Viasat to deliver fast, high-quality in-flight internet service to each connected device on the aircraft. This technology allows United to deliver dependable internet connections gate-to-gate and perform over-the-air content uploads to its onboard entertainment system, ensuring its library has the most current content available.
Viasat is on something of a tear here. They won an order from American Airlines for its 737 MAX fleet. This may develop into something even bigger if the airline decides to switch away from Gogo‘s service. Then JetBlue also confirmed that it is upgrading its aircraft to utilize the ViaSat-2 satellite.
United Airlines shares fell 10% in early trading after their CEO, Scott Kirby, revealed a new strategy for the airline that includes capacity growth and matching fares with low cost carriers. “Half our revenue approximately comes from customers that are mostly shopping on price and we cannot ignore half of our revenue and we can’t let our low-cost carriers have price advantages in our hubs,” said United President Scott Kirby.
This has set of a panic among industry analysts and shareholders, as they understand that capacity restraint by the Big 3 plus Southwest have served well to maintain high yields and high profitability. United’s plans to expand capacity by 4%-6% annually through 2020 and matching low fare carrier pricing will likely result in fares being matched by competitors in each market. That will likely result in a decrease in yields industry-wide, returning to the pre-consolidation fare levels and lower profitability.
United needs to decide what it is. The carrier that introduced an all new Polaris International Business Class and launched an “invitation only” full dining restaurant at Newark Airport catering to business travelers apparently now also wants to compete with low fare carriers on price. Analysts are rightly recognizing that United cannot be all things to all people.
With half of United’s customers competing on price, which direction should the carrier take? Their current approach enabled the company to beat 4th quarter analyst projections, and the carrier is profitable. So why change?
CEO Oscar Munoz statements at the earning call did not impress analysts. “I think it’s important to know that what we have in front of you is a pretty darn good plan. I think the growth aspect of it as it’s been outlined, and the component pieces of it, and the reasons why, and the profitability therein, I think are important and doable.”
Several analysts questioned the strategy, but wondered when a transition from low to high margins would occur, and how this will translate to a higher share price, since airline stocks have traditionally fallen during times of industry overcapacity.
The fear of an industry-wide fare war being initiated by United resulted in American and Delta each being down more than 5% in early trading. It is clear that United’s new plan has spooked airline investors, and likely for good reason.
The Bottom Line
While consumers can benefit from lower fares, United appears to be the first member of the US major airline oligopoly to panic over LCC competition and both increase capacity and reduce fares. The question is now whether American,Delta, and Southwest will be forced to match fares and increase their own capacity to maintain revenue levels, and send US domestic airline yields and profitability into a downward spiral.
The Icelandic carriers, Icelandair and WOW air, are on a tear to find every niche they can. Both carriers have announced new service to the US. In Baltimore, they will be going head-to-head soon. The competition is interesting for several reasons. The airlines fly different fleets – Icelandair is a Boeing customer and WOW is in the Airbus camp. It also pits these two OEM’s long-range single aisles against each other.
But of these new markets announced, one stands out as something different. Take a look at this map provided by the Kansas City Department of Aviation. As their Deputy Director of Aviation – Marketing and Air Service Development, Justin Meyer, noted: “I think one of the things that makes the MCI opportunity so interesting is the massive geographic void of TATL service that exists between Dallas-Minneapolis and Chicago-Denver. This catchment area includes notable markets such as Omaha, Des Moines, Wichita, Lincoln, Columbia, Topeka, Tulsa, and more.”
In other words, just the kind of markets that are big enough to generate a good load factor on a long-range single-aisle aircraft like Icelandair’s 757. Moreover, the route is being developed as the airport works on a $1.3Bn renovation. Icelandair plans a three days per week service and allows for connections to 25 EU city pairs beyond Reykjavik.
“I think it shows the confidence Icelandair has in Kansas City to be able to make this commitment now for the summer season,” Tim Cowden, president and chief executive of KCADC, said. “Icelandair believes in Kansas City and, in turn, Kansas City believes in Icelandair. This is a true partnership.”
Moreover, the Iceland market is attracting attention for American, Delta, and United. But none of the US carriers can match the convenience of a non-stop; thereby avoiding increasingly unpleasant, crowded, hubs that are subject to weather snafus. Any success at Kansas City will inevitably attract attention from WOW. And behind them are Norwegian and Primera, who will also be watching closely.
The results are grim. Etihad reported a loss of $1.9bn. Emirates announced its first decline in profits in five years. And Qatar is besieged and indications are to expect it to report 30% lower revenues because of the neighboring countries blockade of airspace. What was once the future, and the center, of the Airbus and Boeing wide-body sales efforts has run out of steam with alarming speed.
To make things worse, the ME3 had big plans to “invade” the US. With far better service levels and new aircraft, they were well placed to win over business travelers. The threat was obvious to the US majors, who rather than compete, ran for cover in Washington DC. These earlier proponents of Open Skies suddenly didn’t like the idea of competitors having access to “their” market. US business travelers could easily have taken a US-flag flight to the Gulf. But for equal (or less) money they could fly on an ME3 flight – where they are offered award winning service and industry leading cabin design. The market spoke and the US majors shrank schedules to the Gulf due to a lack of traffic.
But it got even worse. The US government decided to hit business travelers hardest when they imposed security regulations that forbade travelers from bringing laptops into the cabin from certain countries, including the home airports of the ME3. For a business traveler, this is akin to saying “go away.” Business travelers have zero tolerance for disruptions and immediately changed to flights connecting through the EU. The impact was to freeze out ME3 business traffic. The ME3 quickly had to cut back US services. The US majors are determined to rid themselves of the ME3 threat.
The security limits have since been lifted. But the message was clearly received.
Not satisfied with their first moves, the US majors seem bent of following through with additional efforts to stop them. American canceled its codeshare with Qatar, claiming it and the other members of the ME3 are receiving state subsidies. Though Qatar seems determined to become a shareholder in that airline. Delta has taken a 10% stake in AF/KLM, while welcoming that group as a fellow shareholder in Virgin Atlantic. What United has planned is not reported as yet, but it is unlikely to sit out the opportunity to also cement its alliances with Star Alliance partners including Lufthansa, which competes against the ME3 in Europe.
These moves by the older network airlines speak to more than holding the ME3 at bay. These moves provide old network airlines a chance to literally lock up markets. This becomes a profound problem if one looks forward even a few years. What was an opportunity for travelers to have more choice is being curtailed. Consolidation does not and never will work in favor of the consumer or traveler. Cutting choice only serves the interests of the supplier, never the buyer. How the US airline consolidation was ever allowed remains a mystery for those familiar with antitrust law. (Useful primer) This is a story that needs to be re-told and the implications, including the fact that consolidation has chilled new entrants, examined closely. When six majors become three, competition is essentially eliminated.
On top of the competitive threats that consolidation brings, consider the plight of employees. Pilots are in ever shorter supply. A knee-jerk reaction in Congress to an unfortunate accident raised transport pilot requirements so high as to cause a pilot shortage in the industry. It was already nearly impossible for a cadet pilot to get a job at a living wage and repay their eduction, and the shortage is thankfully raising wages. (US Regionals are paying new hires between $38,000 to $65,000k with bonuses plus training costs of about $30,000.) The cost of education and pilot training are prohibitive, causing a large drop ut rate. Regional airlines face wafer thin margins under today’s Capacity Purchase Agreement structure. Meanwhile the regionals are seeing some new hires progressing quickly from joining the regionals to moving on to a major in under a year. The pilot shortage is pulling people through the system – but that means regionals are continually searching for new talent.
Non-pilot employees don’t have an especially attractive career either. Working for an airline has proven to be a rather good way to see your benefits and wages cut and have a high likelihood of losing your job to consolidation. Look at the next chart and try persuading yourself that an airline job is a great career. You must do more, earn less (never mind inflation) and run the risk of working in an industry known for retrenchments and layoffs.
The ME3 problems are ensuring they are a declining force in the US market. But even as we understand that City States cannot typically generate sufficient traffic for a large carrier, we also can see what happens when truly open skies are closed. The double-digit ME3 growth rates were unsustainable long-term, but the recent actions demonstrate why one should show them sympathy. They were not beaten by competitors, but by governments.
We should show appreciation for their disruptive behavior that demonstrated to the traveling public what true airline service could be like, with modern fleets, innovative interiors, and world-class service.
The Centre for Asia Pacific Aviation is a highly respected consultancy, and we at AirInsight have met their leadership team and respect their capabilities and ethics. They are an outstanding firm. Annually, they award “man of the year” honors to an industry participant. For 2017, the award was presented to Qatar Airways CEO Akbar al-Baker.
CAPA’s rationale for choosing Al-Baker was straightforward and logical. Qatar has faced a ban on the use of airspace by neighboring countries, and a ban on its flights in the region. That has required a reconfiguration of destinations, routes, and essentially a recalibration of Qatar’s entire network. The ability of Qatar to continue to grow and prosper under those circumstances, and to turn a setback into an opportunity is a credit to Akbar Al-Baker’s management skill. Qatar Airways has faced difficulties that would be the equivalent of Canada and Mexico shutting off airspace to US carriers, and has adapted to conditions that its political opponents hoped would drive them out of business. Thanks to Al-Baker’s leadership, the airline continues to thrive.
Unfortunately, CAPA is now coming under fire from a lobbying group in the US, The Partnership for Open and Fair Skies, who have publicly criticized that selection and impugned CAPA’s integrity. Their spokesperson, Jill Zuckman, stated that “Cheater of the Year” would have been a more appropriate title, and that “This recognition should be viewed as nothing more than an unsubtle attempt by a CEO who is reliant on government subsidies to buy credibility from an organization that lives in the pocket of the Gulf carriers.”
Who is the Partnership for Open and Fair Skies? This group, according to their website, consists of American Airlines, Delta Air Lines, United Airlines, Air Line Pilots Association, Allied Pilots Association, the airline division of the International Brotherhood of Teamsters, the Association of Flight Attendants-CWA, the Association of Professional Flight Attendants, the Communication Workers of America and the Southwest Airlines Pilots Association.
While Delta, American, United and their unions have been waging a PR campaign against the growth of the ME3 in the US market, their PR folks may have gone too far in defaming a well-respect industry consultancy. CAPA has noted that it has no contracts with the ME3, and made the choice based on the actions of Qatar to counter the shut-down of airspace due to politics, a dangerous precedent that violates the principles of the Chicago Convention of 1945.
The Bottom Line
The Partnership for Open and Fair Skies went a bit too far, and is not doing a service to its members on the world stage. CAPA is a respected organization, and Akbar Al-Baker has done what no one thought possible – turning a threat to survival into a new network that has been able to stabilize the situation and reposition the airline towards growth in 2018, with the boycott still impending the viability of recent aircraft acquisitions. We stand with our colleagues at CAPA in our recognition for what Qatar has been able to accomplish in very challenging circumstances.
AirInsight also has no business ties to Qatar Aviation or the ME3, and join CAPA as a US-based organization in recognizing Akbar Al-Baker our Man of the Year as well, in support of our colleagues in Asia.
It is disappointing that some of the finest legacy carrier in the world, American, Delta, and United have opted for a strategy that we can only characterize as misguided against an internationally recognized consulting firm. While we appreciate the challenging nature of the competition from the ME3 that those carriers have been faced with, and in particular the velocity upon which this competition has been materializing, we reject any attempts at questioning the integrity of our CAPA colleagues with their selection of Mr Al Baker as their Man of the Year.
One can only wonder how Mr. Al-Baker’s assumption of the leadership of IATA’s general assembly in 2018 will impact the US3 legacy carriers on the international stage. Stay tuned.