August 2005 Archives

After months of wrangling, SAS has finally presuaded Amadeus to lower its distribution costs in exchange for full access to all SAS fares. The Scandinavian carrier has been a vehement critic of the Global Distribution System (GDS) model whereby travel agents receive several dollars per ticket in kickbacks to book with a particular GDS.

The carrier calls the scheme agreed with Amadeus a "step in the right direction", and is in talks with the other GDSs about similar deals.

This might only be one deal, and involve only one carrier, but could signal the beginning of the end for what airlines describe as the "broken" GDS model.

Northwest Airlines went through the second week of a mechanics strike with flying colours, or colours flying. The airline is fulfiling more than 98% of its schedule and operating at about industry average punctuality. The union, AMFA or Aircraft Mechanics Fraternal Association, half-heartedly disputes the airline's on-time performance data but says the real effects of its strike will come later as more flights are delayed because replacement machinists won't be able to keep Northwest going.

SAS has become the latest European carrier to go for one-way fares on its short-haul route network, following in the footsteps of Aer Lingus and the UK's bmi. The Irish flag carrier became the first network major to follow the example of low-cost players and offer cheaper one-way fares, and do away with the much-hated saturday night stopover restrictions.

It is the markets where low-cost competition is at its fiercest - Ireland, the UK and Scandinavia - where the legacy carriers have been forced to response first. British Airways, after initial reluctance, began offering them in the early summer. Although both Air France and Lufthansa say they have no plans to follow suit, how long can they, and others, hold out against simple old market demand and the move to one-way fares goes from being a trickle to a flood?

Crew chatter from the galley can tell you a lot - if you have no shame about eavesdropping or more properly bulkhead-dropping. On a recent America West long-haul flight, the cabin crew were like excited kids talking about the merger with US Airways this fall.

The new aircraft livery was topic A. When airline people talk about the paint scheme and not about how lousy the pay is or how mean or dim the bosses are, perhaps that's a good sign. One gate agent proudly told a flyer headed for a Hawaii-bound codeshare connection, "we'll be flying there ourselves in a few months". Pride in the era of concessions, cutbacks and walk-outs may be the first good news in a long while.

But like all things aesthetic, this new look of blue and white will doubtless displease someone. In this case, that's probably Steve Wolf, who led US Airways in the 1990s. He is doubtless grumbling into his vintage wine about the sorry fate of the livery he inspired, the dark-blue and red "business suit" that was meant to make a big regional named US Air into a little major called US Airways.

For more information see "US Airways and America West unveil new livery."

Delta and Northwest Airlines will have to work the corridors of power through the dog days if they are to get what they want in Washington. In addition to the usual laundry list - pension reform, tax relief, help on security mandates - they have a new task.

It would have seemed a hollow boast when an airline seemed proud about getting "most" of its flights off the runway, much less on time. But Northwest Airlines is making the boast and people are listening as the airline enters the first full week of a strike by a union representing most of its plane-fixers and metal-bashers. The union, AMFA for Aircraft Mechanics Fraternal Association, walked off they job on the weekend after talks broke down and a cooling-off period cooled off. The airline says it can fly through a strike while the union says it can't and wants the world to wait until Northwest runs out of replacement mechanics and backup planes.

The upbeat prediction of Boeing chief salesman Scott Carson at the Paris Air Show in mid-June of a healthy number of orders for its 747 and 767 lines is coming to pass. The announcement of an order from UPS for eight 747-400 freighters follows on from a six -400 freighter order from Guggenheim Aviation Partners in July and has lifted the firm-order backlog for the 747 to 36. Every new order takes the manufacturer closer to bridging the production gap between the end of 747-400 output and the start of the 747 Advanced. Boeing hopes to get sufficient orders to launch the longer and more efficient version of the venerable 747 in September and enter production in 2008.

The 767, until recently under threat of extinction, has also been granted a reprieve, with Japan Airlines, Shanghai Airlines, All Nippon Airlines and LAN Airlines all placing orders for a grand total of 17 767s in recent weeks. Boeing says any decision on closing the 767 production line will now be delayed. This is a boost for the aircraft, which until recently was struggling to attract new orders because many customers were opting for the 787 instead.

The retirement of Ed Winter, easyJet's chief operating officer (COO), makes this an opportune time to discuss the make-up of the management team at Europe's second largest low-cost carrier as it continues its search for a new chief executive to replace Ray Webster.

Webster announced he was stepping down in May. In early August the carrier thought it had got its man in the form of non-executive director Colin Day, but talks broke down and it has been forced to go back to drawing board.

The search is being led by easyJet founder Stelios Haji-Ioannou, who rejoined the company's board at the same time as Webster's announcement. EasyJet says the search for Webster's replacement is on going, but stresses that there is no rush or timetable as the New Zealander has committed to staying until November 2006 while the hunt continues.

The make-up of easyJet's executive team and its organisational structure will become clearer once the carrier appoints a new chief executive. EasyJet says it will be up to the carrier's new head how the team is shaped.

The wait means the carrier has delayed naming a new commercial director, following the departure of Mike Cooper earlier this year, although a search for a replacement is underway. Former head of revenue and schedule development John Stephenson is working as interim commercial director.

Winter could be retained as a consultant to the carrier but it is not certain whether the COO position, which encompasses legal affairs and airport and contract negotiations, will be retained or its responsibilities rolled into another position. One possibility is operations director Mike Szucs being promoted to the COO position.

All of these issues will be resolved once Webster's replacement is in place to shape the new executive team. Word on the street says this is still more likely to be someone from outside the airline industry. With easyJet's ownership make-up in the news (see related Blog on 16 August) the announcement is being eagerly awaited and takes on a new urgency.

In the meantime, we send our best wishes to Ed Winter, who was the most senior manager that joined easyJet when it bought Go in 2002. He retires at the end of September. Winter, 58, who had wanted to retire at that time, was persuaded to move across to easyJet for a couple of years to help integrate the operations of London Stansted-based Go and assist with easyJet's fast expansion.

Winter qualified as a commercial pilot in 1967 when he joined BOAC flying Boeing 707s. He remained at BOAC and then British Airways before joining Go. His roles at BA included head of operations for British Airways Regional and chief pilot at Gatwick. His last BA role was as chief pilot for Concorde, 747s and 777s.

Good luck Ed.

It is not often that an airline stock sets the market alight, but that is exactly what the surge in easyJet's share price since the third quarter of last year has done. Back then, it was trading at just above the 120p mark. It is now changing hands at around 300p.

The reason for this massive increase is not hard to fathom. Iceland's FL Group, the owner of Icelandair, started buying into the stock back in October, and despite the hike in easyJet's share price, is still buying, with its stake now over the 13% mark.

There is little doubt then about the main reason for the increase in the share price. While easyJet's new investor relations team may be doing a better job of managing expectations, the airline's financial performance has been solid rather than spectacular. It is the prospect of a takeover that has got the market excited.

When FL first started to buy into easyJet, few saw any rationale in the move, other than the fact that, in hindsight, it was a good financial investment. Indeed, if FL sold out today, it would make a handsome profit.

Most analysts are still sceptical that a successful takeover could be launched, but could they be wrong? FL is one of three Icelandic companies, run by fiercely competitive entrepreneurs, who have been trying to outdo each other on the acquisition trail. These are Hannes Smarason, chairman of FL Group; Magnus Thorsteinsson, chairman of Avion; and Palmi Haraldsson and Johannes Kristinsson, who control Fons Eignarhaldsfelag.

Avion, the parent of wet-lease company Air Atlanta and UK charter operator Excel Airways, has just taken a stake in US charter airline Casino Express.

Fons Eignarhaldsfelag, meanwhile, is in the process of adding Denmark's Maersk Air to its stable, which already includes recent acquisition low-cost carrier Sterling and Icelandic Express.

The owners of the three companies are fiercely competitive with each other, and Fons Eignarhaldsfelag's rapid build up of a low-cost presence in Scandinavia will not have gone unnoticed by Smarason.

Smarason has not ruled out the possibility of buying easyJet. He told Iceland's Channel-2 television channel in mid-August that he would not exclude the possibility of a bid for easyJet, saying "anything can be bought".

The chances of a hostile bid being successful seem remote, however, given that easyJet founder Stelios Haji-Ioannou and his family control 41% of the carrier. As one analyst puts it, "If it's a case of a race to the 50% mark, there will only be one winner."

So, any bid would almost certainly have to have the blessing of Stelios in order to succeed. Stelios has said that he has no plans to sell, not surprisingly, perhaps, describing the stock as "undervalued". Stelios, of course, has developed interests in a number of other areas and recently opened the first easyHotel. Will he be tempted to cash in his easyJet shares to support other ventures?

As well as the need to persuade Stelios to support a deal, Smarason would also have to tackle the issue of brand ownership. Stelios owns the easyJet brand, so some sort of arrangement would have to be made here.

Then there is the little matter of strategic value. Few see much in the way of synergies. However, in the event of a successful takeover, Smarason would, if nothing else, give Thorsteinsson, Haraldsson and Kristinsson something to think about.  

Everybody is surprised at how this tiny dispute in Gate Gourmet was able to leap from one little-known company to a major flag-carrier in a few hours and then bring the giant to its knees within minutes - rather like a computer virus. But it doesn't take much.

Behind the mystery is the chronically deficient business model in which airlines rely utterly on robust, 24/7, service from caterers, ground-handlers and so on but are not willing to pay a sensible price for them. So margins and reward-packages at those suppliers are in perpetual conflict - in this case a dose of heavy-handed US labour relations (Gate Gourmet is owned by Texas Pacific Group) was all it needed to ignite the tinderbox.

In the extended Heathrow village of west London there are plenty of BA workers with friends and relatives in Gate Gourmet, but perhaps more importantly there are plenty who are spoiling for a fight to show incoming CEO Willie Walsh just what he will be taking on next month. That's because they've been on the end of BA's cost-cutting ever since 911 and because Walsh brings his own rancorous labour relations baggage with him from Aer Lingus. And all that in turn is because both BA and Aer Lingus were finally forced to address decades of dysfunctional business practices in a compressed timescale in order to survive.

There is precisely nothing unique to the UK in all of that - and every reason to think we will see similar horrors worldwide.

Rod Eddington, it seems, will leave British Airways on something of a high. Financials for the June quarter, the last that he will deliver as chief executive, were fairly impressive, with net profits doubled on the back of some strong revenue gains. See related article There are still some challenges ahead for BA, but Rod is now handing over to Willie Walsh a group in much stronger shape than the one that he inherited back in 2000.

In large part, the latest set of figures reflect a general recovery in premium flying that has begun to lift other European majors too. BA benefits particularly from a stronger US dollar given its strength on the other side of the North Atlantic. Yields were up by 1.5% in the quarter!

But his real success has been in bringing BA out of its funk as a legacy carrier struggling to come to terms with the new world order and its own role in it.

The European operations under intense low-cost competition were bleeding BA dry and that has largely been stemmed, although there are still no great profits to show. More than that, Rod has helped BA to regain its sense of ambition, not least pioneering on the web. It is now competing online with the best of them and that showed through too in the latest quarterly results: selling costs were down by over 20%, representing a saving of more than $50 million dollars. That more than paid for the quarter's wage increases!

Willie Walsh himself is no stranger to reinvigorating an ailing legacy carrier as his transformation of Aer Lingus shows. Will he succeed at BA? With a fair wind, I reckon he will. Like Rod, he's an affable guy but shrewd too. I saw him a few weeks ago and he certainly seemed all geared up to go after a few months in the background. Rod's leaving party is on 6 September, so there's not much waiting left!

"We'll get them in the end!" So Qantas chief executive Geoff Dixon told us a few weeks back, talking of JetStar Asia's bid to absorb fellow Singaporean start-up Valuair. It seems that he was right. His low-cost subsidiary has indeed taken over its erstwhile competitor:

That should come as little surprise. Singapore's low-cost market was clearly overcrowded and Valuair's future was in question virtually from the get go. In any case, Temasek Holdings, Singapore's investment national arm, owns stakes in both JetStar and rival Tiger Airways, as well, of course, as a majority in Singapore Airlines. They like to keep things in the family in Singapore. For its part, Valuair's chairman was a former head of Singapore Airlines.

More interesting, was how bullish Geoff appeared, when we met up up with him, on the prospects of spreading the JetStar Asia franchise across other parts of the region, again partnering with a local (maybe government?) partner. Lead candidates would seem to be the likes of Malaysia, Indonesia and the Philippines, with potentially large local markets.

If low-cost follows the same trajectory in Asia-Pacific as it has in North America and Europe then we should expect a dash for growth, followed by the emergence of just two or three lead players. In Asia that game is still wide open, but the smart money would for one of those positions must be on Air Asia, which as Tony Fernandes points out has the lowest seat unit costs of any carrier on the planet. Seems as if Qantas may be angling to be up there too.

Technorati tag: JetStar Valuair Qantas Airlines