Fuel, fuel, fuel

There is one topic, above all others, currently on the minds of everyone in the commercial aviation business—from passenger airlines to cargo carriers to OEMs. Fuel. Or, more specifically, the price of aircraft fuel.

Airlines for America (A4A) chief economist John Heimlich said this week that average US jet fuel prices are up 7% year to date in 2012, “which is important to note because 2011 was a record high year for spot jet fuel prices.” Singapore Airlines sunk to a rare quarterly deficit in the March period. “High fuel prices … weighed heavily,” it said.

Panama’s Copa Holdings managed to slightly increase profitability in the March quarter, but no thanks to fuel. Its quarterly fuel expense heightened 47.1% to $170.8 million, which nearly triples its next highest cost category (personnel, which cost the company $57.5 million in the year’s first three months). Copa’s CASM rose 9.9% in the first quarter, more than double the 4.2% rate of growth of its CASM ex-fuel.

But, as Pratt & Whitney president David Hess pointed out to me in a conversation last week, the rise in fuel prices does not hit all segments of the commercial air transport business the same way.

“The price of jet fuel right now is proving to be a two-edged sword,” he said. “On the one hand, it’s challenging the airlines in terms of preserving their profitability. On the other hand, it’s stimulating a recapitalization of their fleets so they can replace older aircraft with newer, more fuel-efficient, re-engined aircraft. We’re seeing a very robust order stream. The only thing that seems to be limiting the airframers is the ability to ramp up the supply chain.”

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AIA’s Jobs Doomsday Countdown

stopclock

Attending a US Aerospace Industries Association (AIA) media social at their Rosslyn, Va., office Tuesday, I was handed the magnet pictured above. It’s an attention-grabbing way to illustrate AIA’s Second to None campaign.

US aerospace and defense companies are in battle with Congress over proposed $1 trillion in defense budget cuts that would be a cornerstone of the so-called sequestration budget that is due to become law in January as part of attempts to reduce federal spending and debt.

With the military drawdowns in Iraq and Afghanistan, defense spending is a high-profile target for cuts. But as AIA points out, the question is how to do so responsibly. There are wider implications and potential unintended consequences if investment in aerospace research and development, aviation infrastructure, new technologies — including next generation ATM systems — is not maintained.

And, of course, there will be job losses across the America’s aerospace and defense industries. Which is the key message of AIA’s countdown magnet, which is ticking down to the day the spending cuts would become law, a day that AIA estimates will lead to 1 million American aerospace and defense jobs being lost. A large countdown clock also looms over the AIA reception desk.

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Lessons learned from US Airways’ failed bid for Delta color American merger attempt

US Airways (US) chairman and CEO Doug Parker last week wrote to company employees explaining US’s deal with American Airlines’ (AA) three largest unions to support an US-AA merger. One sentence from his letter jumps out to those of us who followed US’s failed attempt to acquire Delta Air Lines in 2007: “To get to an actual merger, many more things must happen including gaining the support of [AA parent] AMR’s creditors, its management team and its board of directors.”

This revealing sentence indicates that Parker and his management team have learned lessons from US’s $10.2 billion hostile takeover bid for Delta, then in Chapter 11 bankruptcy restructuring as AA is now, and don’t intend to pursue a merger if one is adamantly opposed by AA management. In 2007, Parker, not long removed from the America West-US merger, moved full speed ahead with the bid to buy Delta even as the airline’s then CEO, Gerald Grinstein, and its board and creditors rejected the overtures.

Perhaps the most memorable moment in the US-Delta saga occurred during a Senate hearing in which Parker and Grinstein were seated side-by-side at the witness table. Parker touted the many synergies the combination would create and insisted there would be little if any reduction in service. Grinstein slammed Parker’s analysis, calling the proposed deal “the poster child for the worst kind of merger” and then throwing this verbal grenade at his fellow CEO: “If you believe this merger won’t lead to reduced service, you believe in Tinker Bell.”

Delta’s executives strongly opposed the proposed merger from the start and creditors never warmed to the idea, finally convincing Parker that it no longer made sense to, as he put it, “keep chasing” the combination.

“I think there are a lot of tactical issues we could have done better but I don’t think any of that would have changed the outcome,” US president Scott Kirby said when the saga had ended. “It’s a whole lot easier to do a friendly deal. If you have a management team that says no, that ultimately becomes tough to overcome.”

Of course, AA chairman, president and CEO Tom Horton has dismissed US’s interest, saying there is no “easy path” that will allow AA to avoid job losses and fundamental reforms. But Parker’s letter indicated that, in contrast to the strategy deployed when trying to acquire Delta, he would much rather convince (or, if you like, pressure with the help of AA’s unions) Horton to go along with the proposal. It’s hard to imagine US attempting another purely hostile takeover given the Delta experience.

This is likely to play out throughout the spring and summer. AA has at least until September to come up with a viable plan to emerge from the Chapter 11 bankruptcy process, and to bring its unions around. Parker is undoubtedly hoping there is turbulence along the way and that Horton, exasperated by labor intransience and unfavorable court rulings, eventually throws up his hands and accepts that a merger with US represents the least bad alternative.

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AA-US Airways: still a long way to go

For all the heightened speculation of an American Airline-US Airways merger in the wake of a statement by US Airways management that it had reached agreement with AA labor unions supporting such a deal, there remains a lot of work to be done and obstacles to be cleared.

The unions representing AA’s pilots, flight attendants and ground workers issued a joint statement Friday saying they would support a merger and it would save thousands of jobs.

Their statement is unusual, not least because unions typically are against mergers, fearing job losses. But in AA’s case, the job losses are coming anyway because AMR Corps. is in Chapter 11 bankruptcy.

The cynic could observe that AA’s unions are not so much running towards the promise of a new land of milk and honey; more that they are attempting to flee from the jobs tsunami they know is coming.

Nor was the statement’s timing coincidental: AMR Chapter 11 court hearings are scheduled to begin this week.

US Airways’ unions, meanwhile, have issued much more cautious statements. The pilots’ union, USAPA, said its members has a lot in common with AA’s pilots’ unions and it looks forward to discussions, but that any deal “must include a solid and mutually beneficial commitment by our management that recognizes the sacrifices the pilots have made to keep these two airlines flying.”

The IAM was far more straightforward in its statement.  ““The IAM will oppose any merger that would take place at the expense of workers, the flying public, and the communities served by these two airlines,” said IAM Transportation General VP Sito Pantoja.

US Airways’ management interest in a merger is a fact. CEO Doug Parker has acknowledged that he is looking into such a deal, saying it “might make sense.” Parker was at the helm of America West when it merged with then-bankrupt US Airways. He also tried, but failed to complete a merger with Delta Air Lines in 2007. He knows the merger game; its risks and potential payoffs.

But his team is still a long way from securing this deal, even if they want it.

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Despite FAA reauthorization, NextGen questions persist

A group of aeropolitical heavyweights gathered in Washington Wednesday to discuss the US’s continuing, and often slow, effort to transition to a satellite-based ATC system. Given that FAA reauthorization legislation was finally passed in February, you might expect there would be some optimism over the country’s move to “NextGen” ATC after years of uncertainty created by political inertia.

But that’s not what I found at the offices of the Bipartisan Policy Center, where political and aviation experts came together to comment on a new policy paper presented by the Eno Center for Transportation titled “NextGen: Aligning Costs, Benefits and Political Leadership.”

The Eno report’s writer, Sakib bin Salam, noted that there are “significant differences” within the air transport industry over the validity of FAA’s projections on airspace efficiency benefits to be gained from NextGen. The agency has said that once NextGen is fully implemented by 2025, flight delays will lower nationally by 25-30% and aggregate aircraft fuel use will decrease by 25%. But, according to bin Salam, “there are still a lot of naysayers and critics in the [airline] industry who don’t really buy into FAA’s estimates.”

Despite the passage of an FAA bill that pushes forward NextGen implementation, the aircraft “equipage dilemma” has not been resolved, bin Salam said. “Right now, operators are expected to pay for the equipment” to enable NextGen functionality, he explained. “Operators haven’t been able to make a solid business case for investing in NextGen … The [satellite] infrastructure is no good if the operators won’t invest in the proper equipment.”

Airlines for America (A4A) senior VP-legislative and regulatory policy Sharon Pinkerton said US carriers have “questions about [NextGen’s] benefits and questions about FAA’s ability to deliver.” Indeed, Jeffrey Shane, formerly the US Dept. of Transportation’s (DOT) undersecretary for policy, recalled that FAA staff was initially skeptical about NextGen prior to DOT officially moving forward with the initiative in 2004.
“It’s interesting in retrospect to ask whether that assessment [by some FAA staff] was actually true, that launching NextGen was too bold,” Shane said.

David Plavin, formerly president of Airports Council International-North America (ACI-NA), cautioned that just implementing NextGen ATC won’t be sufficent to meet future air traffic demand. “The top 17 US airports accounted for 50% of air traffic in the US last year,” he said. “So we need runways … The whole conversation [about NextGen] needs to be expanded.” Satellite ATC will “help a lot” in alleviating system congestion, but unless major US airports’ physical infrastructure also expands, “it’s not enough,” Plavin commented.

Noting that the original target for full NextGen implementation was 2014, former US Transportation Secretary Norman Mineta, who announced the formation of the satellite-based ATC program in 2004, said the lack of progress over the last eight years—and the continued uncertainty over financing—“is really frustrating.” He blamed a “lack of political leadership” and warned that the US is in danger of falling behind in all areas of transportation infrastructure, not just ATC.

“Other countries are not taking their foot off the pedal” in terms of infrastructure investment, Mineta said. “The problem right now [in Washington] is that people can’t make the distinction between spending that is investment and spending that is consumption. I’m afraid that in 15 years [we in the US are] going to be standing around with our shorts around our ankles and wondering, ‘What happened?’ [Inadequate investment in NextGen and other US transportation infrastructure] really concerns me.”

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Consolidation’s impact on US airline market

How has US airlines’ consolidation push of recent years changed the makeup of the world’s largest air transport market?

Not nearly as much as one might think. At least in terms of domestic passenger market share, the US remains a relatively fractured market.

Eric Amel, formerly the chief economist for both Delta Air Lines and Continental Airlines and now a vice president with the Compass Lexecon consulting firm, provided a breakdown at the recent FAA Aviation Forecast Conference of US airlines’ domestic market share post-consolidation compared to 2007 (before the Delta/Northwest, United/Continental and Southwest/AirTran mergers).

Pre-consolidation, here’s how things broke down in terms of US carriers’ domestic O&D passenger market share (circa 2007):  Southwest (19.8%), American (13.2%), Delta (11.5%), United (10.9%), US Airways (10.8%), Northwest (7.3%), Continental (7.2%), JetBlue (4.2%), AirTran (4.2%), Alaska (3.1%) and others (7.9%).

Here’s how the domestic market breaks down now: Southwest (25.9%), Delta (18.9%), United (15.6%), American (11.5%), US Airways (10.6%), JetBlue (5.1%), Alaska (3.4%), Frontier (2.6%), Hawaiian (1.5%), Spirit (1.4%) and others (3.5%).

Even after consolidation, no airline controls more than a quarter of the domestic market and only three carriers have a market share of 15% or more. In 2007, the top 10 carriers controlled 92.5% of the domestic market; now they control 96.5%. The top five US carriers went from controlling 66.2% pre-consolidation to 82.5% post-consolidation.

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EU’s red rag to a green bull

Just when you thought it might be time to start ratcheting down the hot air on the EU Emissions Trading System (ETS) and begin instead some cool and common-sense negotiations, the European Parliament today issued a resolution asking the EU to implement ETS in full.

Although just another non-binding resolution in the continuing ETS saga, Parliament also put out a statement containing words of strong support for the aviation carbon tax and for the European Commission, while  adding another dig at those who are against the ETS (which is just about everyone except the EC and most EU Members of Parliament, who voted for ETS by 398 to 132.)

“If Europe would decide not to implement the legislation just because of the pressure from third countries, that would be a very negative precedence also for other fields of politics, such as regulation of the financial market or trade policy,” MEPs Matthias Groote and Peter Liese said in a joint statement.

They added that they would ask the EC to include a provision in ETS legislation to continue to seek a global agreement via ICAO. But then another kick: “Unfortunately, the third countries have no common idea how ICAO should address the problem.”

There are many problems with the MEP’s statement, including the fact that it talks of third countries and lists the US, China, India, Brazil, Belarus, Uganda and Guatemala, but omits any mention of the European aviation companies and airlines that this week formed a coalition to protest ETS.

It also says worldwide reaction is disproportionate because ETS is “a very low burden” on airlines when compared with  national tax duties that countries already impose. This ignores the fact that the actual cost of ETS at this stage is largely irrelevant; what has everyone stirred up is the principle of the EC unilaterally imposing an aviation tax on non-EU nations without due and proper dialogue with those countries, whether directly or via ICAO, the internationally-recognized body for such matters. In any case, whoever heard of a tax, once implemented, getting smaller?

But most wrong of all, the MEPs’ timing for such a resolution and high-handed statements is disastrous.  Either they have paid no attention to the increasingly vehement and unified protests from all parts of the world and aviation industry, or they have decided they are ready for a fight, perhaps seeing it as cause d’honneur that will make them personally appear good before their constituents.

Again, they are wrong. As with so much of politics today, they ignore the now very real potential for a trade war that would damage the European financial markets and European trade — the “other fields of politics” they claim to be protecting. And given the already precarious state of the euro, that’s a terrible risk to take.

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US airlines expected to contend with sluggish yield growth for years to come

US airlines are being lauded for a disciplined approach to capacity that has contributed to an upswing in yields, but the good times aren’t expected to keep rolling, at least not at the same level of growth.

Carriers should expect a difficult yield environment for the foreseeable future, FAA warned at its Aviation Forecast Conference last week.

FAA said that “reduced capacity combined with a modest recovery in passenger demand provided pricing power for [US] carriers during 2011,” with nominal yield increasing 4.6% compared to 2010. It projected another 3.1% increase in nominal yield this year.

But over the medium term (next five years), FAA said airlines can expect little more than “relative stability” in yields and, through 2032, it forecasted that US airlines’ nominal yield will rise just 1.2% on average per year.

This was received by airlines as good news, by the way. That prompted Airlines for America (A4A) chief economist John Heimlich to quip, “It’s hard to think of another industry that would say, ‘We’ll have flat pricing over the next five years,’ and then throw a party about it.”

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FAA’s changing ‘1 billion passengers’ forecast

If you were at FAA’s annual Aviation Forecast Conference in 2001, you would have been told that US airlines would pass the magic mark of 1 billion passengers carried annually…in 2012. If you are sitting at this year’s FAA forecast event in Washington, as I am, the agency is telling you that US airlines will carry 1 billion annual passengers…in 2024. That’s three years later than last year, when FAA predicted the 1 billion mark would be passed…in 2021. In 2008, FAA predicted the milestone would be reached by 2016. In 2010, by 2023.

I don’t bring this up to disparage FAA’s forecasting; predicting the twists and turns of the air transport industry is hardly a simple matter. FAA is just going by the available data and making its best guess.

But it’s important not to take the numbers too literally; FAA itself is the first to point out that an unexpected economic shock or per barrel oil prices skyrocketing could change its forecast quickly. It’s also worth asking if the mark will ever actually be achieved.

US airlines carried 730.7 million passengers in 2011 and are expected to carry about the same number this year. Growth has stagnated. US mainline airlines’ system capacity is essentially the same now as in 2000. Overall, all US airlines’ domestic capacity is down 7% since 2001. Mainline airlines offered 16% less domestic capacity in 2011 than in 2001, according to FAA.

Is it possible the US airline market is mostly matured, that there just aren’t that many more people per year in the country who want to, or can afford to, fly? Maybe the 1 billion annual passengers mark will be forever elusive.

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Leahy: Legion d’Honneur Officer and Pain Reliever

Congratulations and Felicitations to Airbus chief commercial officer John Leahy, who today was made an Officer of the Legion d’Honneur.

John’s cutting wit — aimed mostly at his “friends in Seattle” –  has long been staple fodder for aerospace hacks, but this Reuters interview shows he can turn that wit on himself, as he suggests a common link with another Legion d’Honneur New Yorker –  Napolean’s dentist. Classic Leahy.

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