Archive for 2007
December 7, 2007
Pressure on US airlines to merge is mounting as high fuel costs and weakening domestic travel demand threaten to destabilize freshly restructured carriers, senior airline executives said this week.
Airlines will have a hard time passing fuel expenses to customers through higher fares in a softening economy, senior executives of American Airlines parent AMR, UAL – parent of United Airlines, Delta Air Lines and US Airways said at the Reuters Aerospace and Defense Summit.
Delta’s Chief Financial Officer Edward Bastian said Delta remains confident in its future as a stand-alone company, but the current economic environment poses unforeseen threats that make the airline consider alternatives.
“The timing has certainly been accentuated by having oil at nearly USD$100 a barrel,” Bastian said on Thursday. “That causes one to look harder at structural solutions.”
Airline leaders see industry consolidation as a way to cut costs and capacity and lend stability to the volatile industry. A common view is that if two of the big airlines merge, others will scramble to find partners of their own.
The last merger of two major carriers was in 2005 between US Airways and America West. Early this year, Delta fought off a hostile bid from US Airways.
Speculation swirled last month that United and Delta were in talks. Delta denied the reports, but said it is considering strategic alternatives that could include consolidation.
The US airline industry is recovering from a years-long downturn triggered in part by low-fare competition and exacerbated by high fuel prices.
In 2006, the industry began cutting the number of seats for sale and raising fares. But trouble is brewing for the industry as it grapples with oil prices that hit a record high near USD$100 a barrel in November.
Airline executives have been increasingly vocal this year about the need for consolidation as a way to cut costs and reduce capacity.
“I’m happy to see more people come to the conclusion that we came to long ago,” US Airways Chief Executive Doug Parker said on Wednesday. “Wall Street seems extremely interested in trying to figure out what would trigger consolidation.”
So far, however, carriers have been reluctant to tackle obstacles presented by organized labor and anti-trust laws. Parker and other leaders also believe the transition to a new presidential administration in January 2009 poses a logistical hurdle to airline consolidation.
“There is a bit of a timing issue in that there is going to be a change,” Parker said. “If there is not something announced very early in ’08, I think you will see everything put on hiatus.”
AMR CFO Tom Horton said on Monday that carriers may attempt consolidation before the end of the Bush administration believing it to be more receptive to merger proposals than its successor government would be.
“It would seem that this administration has been relatively accommodative toward large mergers,” Horton said.
But regulatory history is not on the side of merger proponents. Aviation experts note the government’s long-held aversion to approving deals that involve relatively healthy big carriers. The last two major airline mergers involved at least one bankrupt airline.
The last attempt of two relatively healthy airlines to merge — United and US Airways — foundered on competition concerns in 2001.
UAL CFO Jake Brace said on Monday that regardless of economic conditions and regardless of the presidential administration, consolidation is healthy for the airline industry.
“We want consolidation to happen sooner rather than later, and we think that doing something now and getting it done in this administration is a good thing,” Brace said.
“If we were able to control that outcome, that’s what we’d do,” Brace said.
(Reuters)
December 7, 2007
JetBlue Airways said its preliminary passenger revenue per available seat mile for November rose 1 percent from the year-ago period.
Load factor was 77 percent, a decrease of 3.8 points from November 2006, the airline said in a statement.
(Reuters)
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December 6, 2007
Airport congestion and gaps at the US Federal Aviation Administration were blamed on Wednesday by a congressional watchdog for runway safety shortcomings that could lead to a serious airline accident.
The Government Accountability Office, the investigative arm of Congress, concluded that overall runway safety gains have eroded in recent years, and serious incidents, where collisions were barely avoided, continue and suggest a “high risk” for a catastrophe.
About a third of the most serious runway near-misses between fiscal year 2002 and 2007, which ended October 30, involved at least one airliner, researchers said.
The worst incident this year involved two big commercial planes that missed each other by less than 100 feet on a Florida runway, according to government safety records.
There have been other close calls in Los Angeles, Chicago, Philadelphia and Dallas-Fort Worth.
“The GAO findings are distressing,” said Rep. James Oberstar, a Minnesota Democrat and chairman of the Transportation Committee in the House of Representatives.
The number of runway near-collisions, most of which involve small private planes, peaked in fiscal 2001, then declined a bit and leveled off for five years. Preliminary data show incidents heading back up to 370 in fiscal 2007. There were more than 400 in 2001.
In a statement, the FAA noted the most serious incidents have fallen by half since 2001, and dropped from 31 in fiscal 2006 to 24 in fiscal 2007. Eight involved commercial aircraft, the latest figures show.
There were 61 million takeoffs and landings last year.
“Reducing the risk of runway incursions is one of the FAA’s top priorities. The agency has aggressively addressed the issue,” the FAA said.
Investigators noted FAA action since 2001, but said the most effective steps were “lower cost ones,” including updated airport markings, new lighting and signs.
GAO investigators said the main problems are airport congestion and shortcomings at the FAA.
Criticism included gaps in agency leadership, inaction and poor coordination on key safety goals, and schedule delays and cost overruns for technology designed to alert air traffic controllers to potential collisions.
The GAO also cited air traffic controller fatigue, a complaint amplified by the air traffic controllers union in its fight with the FAA over staffing levels.
(Reuters)
December 6, 2007
Unions representing Air France ground staff at Orly Airport south of Paris called a 24 hour strike for December 20 over pay and conditions.
“We’re not striking at the start of the (Christmas) holiday but the day before. It’s a warning shot,” said a spokesman for union Sud on Wednesday.
An Air France spokeswoman said the airline had not so far received any formal notification of strike action.
The airline has been hit by a number of protests since the summer. The most serious, by cabin crew, disrupted flights for several days during school holidays in October.
The Air France spokeswoman said talks with the cabin crew were continuing with the aim of reaching a new agreement on salaries and working conditions by the end of the year.
(Reuters)
December 5, 2007
American Airlines aid it will apply to the US Department of Transportation for authorization to begin codeshare operation with El Al Israel Airlines.
The application proposes that codesharing operations begin on February 1, 2008, the company said in a statement.
(Reuters)
December 3, 2007
A slowing US economy and high oil prices could cripple the US airline industry’s fledgling recovery and push carriers into seeking merger partners.
For the last year and a half, major carriers such as American Airlines and Continental Airlines have been clawing back some of the USD$35 billion in losses racked up during the industry’s long slump following the September 11, 2001, attacks.
Despite the recent turnaround, the industry remains fragile, and losses could return if the airlines are unable to pass on higher oil prices to their customers.
“If you can’t make lots of money when your planes are loaded, then you’re in deep dog poo when things turn against you,” said Richard Gritta, a finance professor at the University of Portland, Oregon, who studies the airline industry.
Even with packed planes, the US airline industry eked out a profit margin of about 1.9 percent in 2006, according to data from the Air Transport Association.
Mergers are seen by many industry experts as the answer to the boom-and-bust cycle that has plagued US carriers for decades.
While deals — which face formidable obstacles such as potential antitrust issues and labor opposition — have been rare, that could change.
Airline managers are under mounting pressures from disgruntled shareholders to boost value by selling off assets or merging.
Another downturn could force executives to act and lead to the first deal in the industry since US Airways and America West merged to create US Airways Group in 2005.
“A couple of bad quarters would test the patience of stockholders,” said Joe Schwieterman, transportation expert at DePaul University in Chicago. “It could force an airline to make a move.”
Since hitting a three-year high in January, the Amex airline index has fallen about 40 percent, hovering at its lowest levels since April 2003. And some believe further weakness is in store.
“Despite the recent weakness in airline equities, we think the risk/reward is still not compelling,” said Goldman Sachs analyst Robert Barry in a note.
“Our primary concern remains the degree to which carriers will be able to pass on rising fuel prices in the face of a slowing US macro environment,” he said.
On November 27, Goldman Sachs cut its view on the sector to “cautious” from “neutral.”
The weakness in airline shares has already prompted some investors to openly demand changes.
AMR shareholder Iceland-based FL Group has urged the carrier to consider spinning off its frequent flyer program and other assets. On November 28, AMR said it would divest its regional carrier American Eagle next year. But the move wasn’t enough for FL Group, which subsequently reduced its stake to 1.1 percent from 9 percent.
Pardus Capital Management, which holds stakes in both United Airlines parent UAL and Delta Air Lines, has pressed the two carriers to merge.
Although they have denied discussing a merger, United and Delta are both vocal proponents of industry consolidation. Delta, which earlier this year rejected a hostile takeover offer from US Airways, has said it has formed a committee to consider its strategic options, including mergers.
UAL Chief Executive Glenn Tilton recently reiterated he believes consolidation “would be a plus” for the industry.
Despite all the talk, meaningful deals have yet to be struck. The last merger of two major carriers was the 2005 marriage of US Airways and America West. Many experts believe that US Airways, then in bankruptcy, would not have survived without the merger.
“The suggestion is that (consolidation) requires dire financial conditions rather than good times,” said Michael Roach, an airline consultant and co-founder of America West.
“I don’t think we’re in good times, but we’re certainly not in dire times.”
(Reuters)
December 3, 2007
EADS chief executive Louis Gallois said on Monday that moving production outside the euro zone was needed for survival due to the continued slide of the dollar versus the euro.
He told Europe 1 radio in an interview that the delocalisation would involve all plane types but not all parts.
He added that Airbus was continuing discussions with possible buyers of a number of industrial sites, but the dollar decline did not help.
(Reuters)
November 29, 2007
The financial turnaround at airlines, especially in the United States, would be at risk in 2008 if unions were too aggressive in trying to recoup wages and benefits lost in restructuring, the chief of the industry’s trade group IATA said.
“Unfortunately, as the industry shows even fragile profitability, labor starts to look for a free lunch. Already we’ve seen strikes from France to Japan,” Giovanni Bisignani of the International Air Transport Association told an industry group.
“Several key US contracts will be negotiated next year — if labor pursues an agenda as an irresponsible adversary, our common future is limited,” Bisignani said.
Globally, labor represents 23 percent of airline costs, down 5 percentage points from 2001 — the start of a six-year restructuring accelerated by the 2001 attacks on New York and Washington.
During that period four US carriers, United Airlines parent UAL, US Airways, Delta Air Lines and Northwest Airlines, fell into bankruptcy and AMR, parent of American Airlines, nearly sought protection from creditors.
Bisignani also worries that US carriers could have a hard time upgrading their fleets due to general economic uncertainty and continuing credit woes where debt remains high relative to cash flow.
“Lenders will be cautious and even if orders are placed today, production lines at Boeing and Airbus are virtually full for the next three years,” Bisignani said.
About a third of the US fleet is more than 25 years old, reducing the cost advantages of depreciation and heightening the impact of fuel costs since older jets are less efficient than the newest models.
IATA is poised next month to revise the industry’s outlook to account for oil prices now pushing USD$100 per barrel. In September, the group projected 2008 profits of USD$7.8 billion, but the forecast was based on oil at just under USD$70 a barrel.
International carriers, especially in Europe, worry about US credit market turmoil because of the potential impact on financing conditions and corporate travel. Premium travelers — usually business customers — account for 25 percent of traffic aboard the top five European airlines on transatlantic flights, compared with 15 percent for US carriers, IATA figures show.
“That translates into a 30 percent yield premium for Europe,” Bisignani said.
(Reuters)
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| KLM Royal Dutch Airlines is broadening its regular assortment of wines with varieties originating in the Netherlands, or produced by Dutch winemakers abroad.
On this same date KLM’s World Business Class will start serving dishes created by renowned chef Pascal Jalhaij. Dutch Touch Pascal Jalhaij High appreciation |
The International Air Transport Association (IATA) called for the White House and Congressional politicians in the United States to take more aggressive short-term action to mitigate air traffic congestion and the lingering security hassles.
“President Bush’s recent announcement about making limited airspace changes in an attempt to alleviate congestion during the holidays is a political placebo for a serious long-term illness,” said Giovanni Bisignani, IATA’s Director General and CEO.
He warned that there would likely be more air delays next summer if the Government continues to move too slowly in making capacity and efficiency improvements.
“Instead of addressing the problem, DOT wants to change the way people travel by making it more expensive at peak times,” Bisignani said.
The White House is considering peak pricing at New York JFK airport as a band-aid for delays, but Bisignani said that “congestion pricing has never worked effectively for air transport anywhere in the world so it is foolhardy to believe that it will work in New York.” Instead, the US Government should implement the IATA Worldwide Scheduling Guidelines and immediately implement operational and infrastructure improvements. “There’s already a list of at least 75 projects that could begin tomorrow and we can’t wait any longer,” Bisignani said.
In a speech to the Aero Club of Washington, Bisignani urged industry leaders in Washington also to focus on security and the environment.
Security: “The industry is now paying US$5.9 billion a year – $300 million higher than previous estimates – to comply with a growing list of security regulations. I see more hassle than value so let’s be open and transparent with the problems and the solutions. Too many knee-jerk security enhancement decisions are based on fear even though the threat hasn’t changed. We are wasting limited and precious resources. We need to cut through the government red tape and focus on harmonised processes around the globe and push for simplification. We must invest in new technology to help security become smarter, faster and easier to manage,” Bisignani said.
Financial Outlook: “US carriers have gone from industry sick-man to the most profitable of any region in the world. This is an incredible turnaround but it’s too early to open the champagne. Airlines are US$200 billion in debt and we could be heading for an economic downturn with little cash in the bank to cushion the fall. US carriers are operating aging fleets and labour is also putting pressure on airlines. It is disturbing that as soon as the industry shows even fragile profits, labour starts to look for a free lunch. If labour pursues an agenda as an irresponsible adversary everybody’s future is limited,” said Bisignani.
Environment: IATA’s four-pillar strategy to address climate change is: invest in technology; build and operate efficient infrastructure; fly planes efficiently; and then explore economic measures. “Our goal is carbon neutral growth in the medium-term leading to zero carbon emissions. The US Government was among the 179 States attending the Triennial Assembly of the International Civil Aviation Organization, which endorsed the strategy and IATA’s target to improve fuel efficiency 25% by 2020.
Europe is our biggest disappointment, as it is fixated on emissions trading. This is against the Chicago Convention and I support the US in challenging this in the world’s courts. I also have to ring the warning bell. Don’t wait for a communications crisis to start talking about the environment. We have a solid track record and an ambitious vision to become a zero-emissions industry. Now is the time to communicate to help passengers and stakeholders understand that aviation is setting the highest benchmarks in environmental performance of any industry,” Bisignani said.