David Field: April 2006 Archives

Get dinged daily! Southwest Airlines launched an employee-created "Nuts About Southwest" blog. Its purpose: "Nuts about Southwest is all about our Employees, Customers, airplanes, and airports. We really are Nuts about Southwest and we hope that our Readers will share that passion by posting their own comments".

This is the first air carrier-backed blog we know of even though Boeing executives have been blogging for well over a year. In this entrant, Southwest employees will write about their jobs and the travel industry, but invite comments from readers and customers (both with an upper case letter in the Southwest lexicon).

The blog links to the Southwest reservations page and browsers can link to read about Southwest's position in the hot dispute over air service from its home airport, Dallas Love Field, about which Southwest launched a separate site, 'Set Love Free.' Southwest decided about two years ago to be part of a cable television reality show that follows its employees as they deal with angry passengers and other problems. That show only helped boost the public perception of Southwest as a good airline with good people, and even though any blog is risky, Southwest is hopeful that this new way to connect to people, inherently risky though it may be, will help do the same. Corporate image consultants Ben McConnell and Jackie Huba, authors of 'Creating Customer Evangelists', say that "Southwest could really push the standards of corporate freedom" if they do the blog right. Of course if it ends up with they-lost-my-bag posts, well...

If you want say something nice, something witty, or just want to roam the realm of Nuts, click here.

Faced with growing congressional opposition, the Transportation Department (DoT) might delay adoption of its crucial proposed final rule on foreign ownership of and investment in US airlines. Under Secretary of Transportation Jeff Shane says "DOT is exploring whether a further period of review might be justified."

Shane told an aviation law conference in The Hague, Netherlands, in late April that the proposed rule "has been the focus of far more controversy in the US, frankly, than we had anticipated." Shane, like others, fears that without the rule, the EC would reject any proposed changes in the US/EC aviation regime, which the EC has said it will do; without the rule, no deal, and without the deal, the possibility that existing open skies treaties between the US and EC member states will be abrogated.

Failure to adopt the new US-EU agreement would actually be he fears "a 'triple-whammy.' That's because, if we lose the open-skies bilaterals, we face the very real prospect of dismantling the cross-border alliance structure upon which so much international aviation competition is based today. That is because the antitrust immunity that facilitates the efficient operation of many of the current (airline) alliances is necessarily predicated on the underlying open-skies agreements." Without legally secure open-skies agreements "it is very difficult for regulators to justify a grant of immunity from antitrust enforcement to airlines who are potential competitors," Shane said.  

Members of a key Senate appropriations panel have won approval of a measure that would effectively bar the government from implementing the rule, which would commit regulators in Washington to a more liberal and nuanced interpretation of longstanding limits on foreign investment in and management of US-registered airlines. Labour and political opposition has stalled a plan by US and international investors to begin a San Francisco-based Virgin Atlantic franchise or affiliate, dubbed Virgin America; the would-be carrier faces renewed examination by the DoT, which has been flooded with filings by legislators, pilots and other unions opposing the startup. Shane concludes that the EC Council of Ministers "might wish to postpone its consideration" of the rule's outcome until its fall gathering in October, he said. Read Jeff Shane's remarks: http://www.state.gov/e/eb/rls/rm/2006/65147.htm

Founder David Neeleman and the two other top executives at JetBlue Airways voluntarily gave up their bonuses of $75,000 each for 2005 - a record setting bad year for the six-year-old discount carrier, which posted its first quarterly loss, fall to the lower rungs of industry in terms of on-time performance, and said it did not expect a profit this year either.

The three - Neeleman, the airline chairman and chief executive; David Barger, its president and chief operating officer; and John Owen, executive vice-president and chief financial officer - disclosed in a Securities and Exchange Commission filing that they would forgo their annual bonuses, which are a guaranteed $75,000 a head. The three have a base salary of $200,000 each. In the SEC filing, JetBlue said the $75,000 bonuses are "subject to increase based on the achievement of performance-based milestones".

The word performance may have been enough to shake the three, who remain in charge and in general well thought of. Here we will list other airline executives who have declined a bonus: Anyone? Step right up, gentlemen. Plenty of room...

Okay, maybe they're shy, but there are some airline ceos who turned down bonuses, some while under a harsh spotlight, some more grandstanding than others. There's Gerard Arpey, another young CEO, who took over American Airlines in 2003 in the midst of an employee revolt over management demands for pay cuts at the same time that then-CEO Don Carty had approved a major bonus to himself. This year, Arpey and other executives toned down a bonus plan put in place after the 2003 crisis, and neither he nor any other senior executive received a bonus for 2005. He did, however, get a 1.5% salary increase, to $526,620, plus restricted stock worth $328,000, awarded in place of a bonus. American is the only major network carrier not to have flirted with bankruptcy since 9/11. At Delta, one airline that has fallen in to bankruptcy, chief executive Gerry Grinstein has barred bonuses since he came in to office in 2004.

To editorialise, which is after all what bloggers do whether or not they admit it, we think a lot of the crowing about executive compensation at airlines is meaningless or resentment-driven. No one goes into the airlines these days to get rich (remember the old joke about how to make a small fortune in the airlines - start with a large fortune). And people who run airlines have a high-stress job, just as do people who work for them. We think that there is a real danger of good talent being forced away from airline management. Remember the instance of Richard Anderson a tough-talking former prosecuting attorney from Galveston, Texas. He became the head of Northwest Airlines but left to take (are you ready for this?) a less stressful position at a healthcare company, driven away, his friends said at the time, not just by the stress but by the fact that he had to take a pay cut every time he asked the unions to do the same.

'Right sizing'. 'Path to rebound'. 'Return to profitability'. That's the kind of phrase heard when another big airline starts the twists and turns that all too often end up in the steps of bankruptcy court as it parks planes, slashes routes and trims wages. It's all part of the same sad legacy of woes that legacy carriers know well.

Now, though, it's a low-cost carrier, and a darling one at that, that's begun the walz triste. JetBlue Airways, the six-year-old low-fares high flier said it will postpone some new aircraft deliveries, sell off some of its fleet and end a number of its transcon routes.

On the bright side, JetBlue's new Embraer 190s are a major profit tool, Neeleman says, since revenues on routes they're on has risen steeply - as much as 24% on one route. The 100-seat Brazilian planes collect full-size airliner fares because they offer a full-size airplane flight.

After posting its second consecutive quarterly loss, this one a deficit of $32 million in the first quarter (compared with a profit of $6.97 million in the same period last year), both driven by the higher cost of fuel, founder David Neeleman has a 'Return to Profitability' plan. This includes delaying deliveries of 12 Airbus A320 aircraft, originally scheduled for delivery between 2007 and 2009 to the 2011-2012 timeframe. JetBlue also plans to sell at least two, and perhaps as many as five, of the 88 Airbus A320s that are now in service "but depreciated enough that we can sell 'em".

Key goals: a return to JetBlue's route roots as a short- to medium-haul airline and a focus on revenue that stresses fewer of the lowest bucket fares and more of those in the middle. "I'd rather sell a lot more $89 fares to Florida and fewer $69 fares. In a word, we're trading load factor for yields" by squeezing capacity, said Neeleman. This isn't a fare increase; "we just want to sell a better mix of fares".

Overall, Neeleman said, JetBlue capacity should increase this year by 20% to 22%, rather than the 28% previously projected. Summer capacity in the New York to Florida markets will be down about 15%, while New York-Los Angeles will decline around 8%, he said. Through a mix of higher average fares (up from $105 in the quarter) and efficiencies such as faster aircraft turns, Neeleman thinks JetBlue will enjoy a $70 million benefit by year end, half in savings, half in revenue. JP Morgan analyst Jamie Baker was sceptical, saying that now "suspect revenue optimism" is added to the mix of high fuel costs and rising competition.

Mike Linenberg of Merrill Lynch said that JetBlue underperformed the industry's passenger unit-revenue increase of 14.3% for the quarter and that its operating margin at a negative 5.1% is "so far, is the worst margin performance of airlines reporting".

Ending on a confessional tone, Neeleman said, this crisis "has a silver lining. It forces us to sharpen our sword".

In the eternal battle between the big guy and just plain folks, the little guys should win more often, considering how many allies he has out there fighting for him. Take for instance the Washington brouhaha brewing between business aviation and the airlines over new user fees to keep the FAA afloat. Business aviation is the little guy's pal, and has come out fighting for the rights of the retired dentist who only flies on Sunday: he shouldn't have to pay these new user fees. Well, now airlines are part of the protectorates, having decreed that they agree: the sports fliers should not have to pay any of the new fees, whether they're based on weight, distance, time in the air-traffic system or whatever. The old fuel tax should be enough for weekend wingers.

But Jim May, the head of the airlines in the US, says, a lot of the guys around who are flying their own planes around aren't really little guys, but are fat cats, using 'little guy' rhetoric to hide their nefarious ways. May brought the Air Transport Association's view of things to the International Aviation Club of Washington the other week, launching an attack: "the supposed 'little guy' in this tableau is none other than some of the biggest and most profitable companies in the world - companies like Exxon Mobil, Anheuser-Busch and IBM".

Exxon Mobil had just announced its profits and the retirement package it was giving Lee Raymond, its executive of 22 years, who, according to calculations, had earned some $686 million between 1993 and 2005, when he pulled down $144,573 a day pumping gas. "Helped by the good luck (for it) of rising fuel prices, Exxon Mobil earned $25 billion in 2004 and $36 billion in 2005. Contrasting those profits to what has gone on in the airline industry, as it has adjusted to new market realities, the irony is less than subtle…. When (Lee) Raymond retired at the end of 2005 as Exxon's chairman and CEO, he also gained continued access to the company's corporate jets - to go on top of hundreds of millions in compensation over the past few years. I have a hard time thinking of Lee Raymond as a 'little guy'," concluded May. Stay tuned for the Anheuser-Busch attack. Read the ATA leader's speech: http://www.airlines.org/news/d.aspx?nid=9865

Pickets, with a large stuffed rat, international support, a $10-million bank account: the Delta pilots union had a full armada when it warned its members, telling them to clean out their lockers at work, and certainly scaring the public, who booked away from Delta, and scared the media, who ran banner headlines with the largest-size type they could find to spell out S T R I K E.

One would think that a strike against a bankrupt carrier is madness: after all they're bankrupt and presumably don't have whole heck of a lot of money. And many lawyers, most of them working for airlines, believe that the law bars any strike against a bankrupt carrier. Even though this is a grey area legally, it's likely that a judge would end order any strike ended until the courts settle the issue.

Turns out both sides, the Air Line Pilots Association and Delta Air Lines were running scared and as Americans prepared for a weekend strike watch, the stuffed rat was replaced by the dove of peace or at least a dove of tentative quiet: the two sides agreed just days before an independent arbitrators' panel was to decide if Delta should be allowed to tear up its ALPA contract - which would have precipitated a strike.

It was pretty widely agreed that Delta would cease to exist within a day or two at most if struck; but it was the stern words of the arbitration panel's chairman, Richard Bloch, that scared the two sides into negotiating seriously enough that they could get a deal. Bloch's language deserves recognition because it would seem to apply to too many airline labour crises: "This is a shameful exercise by two groups who, it appears, have bargained successfully in fat times, and in hard times, the talk turns to nuclear options and shredding a labour agreement, eviscerating pensions and the profound expectations of families, striking the company, generally taking actions that that challenge for the long term, not just today or tomorrow, a 65-year relationship that's at the core and character of this company". Bloch concluded, "You need to agree on a fix. You both got us here, this is your mess, you fix it.".

The old saying is that you'd have to have at least one hole in the head to invest in airlines, but as smart US institutions are snapping up airline securities, someone has a lot of holes or a whole better idea. Take for instance Fidelity, a Boston-based money manager that has the largest US group of mutual funds and is a trusted name to small investors throughout the nation. Several of Fidelity's funds have bought into UAL Corp., the parent of United Airlines, and it is now the largest single shareholder, with a stake of 13%, and is also the single largest shareholder in AMR, the parent of American Airlines, with a stake of just under 13% of AMR's outstanding shares. As a mutual fund family, Fidelity tends to hold on to shares for relatively long periods. UAL has also drawn attention from another well-known mutual funds investment management firm, Charles Schwab. Though a subsidiary called US Trust, the Schwab group has bought a stake of just over 12% in UAL. Both firms, which are big on the nation's main streets, have told securities regulators that they plan to hold them as a passive investor. Airline shares in the US have run up strongly in past months as the industry's ability to extract increasingly higher yields has encouraged investors. Although some analysts question the run-up in certain shares - UAL in particular has come under fire as overvalued - most airline observers see a real possibility for profits this year. Merrill Lynch airline guru Mike Linenberg thinks that UAL shares could reach $45, well above the mid-$30s range they were trading in at the time of the fund purchases - even though no one thinks it will make money this year. And most analysts are truly bullish on AMR, with Susan Donofrio of Cathay Financial seeing it as possibly profitable this year.

What's interesting is that UAL's other major shareholder is an unwilling one: the federal government, which got an interest in the airline when it left bankruptcy protection in February. Its stake of about 11% through the federally backed Pension Benefit Guaranty Corp. is not an investment that will be cashed out but instead will be used to bolster the retirement scheme.

Tom Horton finally phoned home. After 17 years at American Airlines, Horton left in 2003 for what seemed a safer industry, telecoms, but after a stint at AT&T, a former phone giant, he's come back to American as chief financial officer, ending he hopes the revolving door that had seen both his successors as CFO leave the airline. Horton, 44, succeeds James Beer, who left American to become CFO at Symantec Corp., a California software-security company. At AT&T, Horton helped negotiate a mega-merger with SBC Communications Inc. At American and its parent AMR, he'd helped design the 2001 takeover of TWA, but insists that he didn't return to American to work on any mergers or acquisitions. Horton will add the title of executive vice president of finance and planning and will oversee all planning operations.

Horton stressed that he did not make his move in order to come back to the airline industry but "to come home to this company". In his AT&T office, Horton said, he had plenty of models of American Airlines planes. But at AMR, he won't have any model telephones. Upon arriving at his new job at AMR headquarters in Fort Worth, Horton said he found a 'to do' list of six or seven items on his desk from Gerard Arpey, AMR's chairman and chief executive. "One of them read 'AMR unprofitable. Please fix'," Horton said. 

But Horton and American view "bankruptcy as a solution that is kind of un-American. I wouldn't trade our position with the other airlines who've been through bankruptcy. We're going to go about this the right way. What we've got to do is find ways of working together to make the company successful", he said. "A lot has changed at American since 2003", he said, noting that the airline has cut non-fuel costs by $5.5 billion, and improved employee productivity. "Our biggest challenge is to avoid complacency, to not confuse a rising tide to a solution to a problem. As they say on Wall Street, don't confuse brains with a bull market," he told reporters.

Talk about your contrarians. Southwest, the airline that wrote the book on low-cost orthodoxy, is again breaking its own rules again. The Gospel according to Herb holds that if you want to keep costs down and fares low, you fly only into secondary airports and avoid big hubs with their inherently higher operating costs and inherently entrenched incumbents. Southwest began breaking this rule two years ago when it went to Philadelphia's big international airport, lured in part by the chance to topple a weakened incumbent, US Airways; early this year it added its second big airport, Denver International, where the low-cost local, Frontier, was busy defending itself from dominant United. In fact, Southwest had served the old Denver airport, Stapleton, but pulled out over high costs there when it was as a United/Continental duopoly.

Now Southwest wants to go into Washington's Dulles, another United-dominated hub and, as importantly, an airport that is just 50 or 60 miles from one of Southwest's fastest growing airports, Baltimore/Washington International Airport ('BWI'). That breaks another of Southwest founder Herb Kelleher's commandments: don't cannibalise yourself by going into more than one airport in the same market. Gary Kelly, Southwest's chief executive, insists that it won't be stealing from itself at BWI because "the two regions, Northern Virginia and Baltimore, are really distinct markets, and highway gridlock between the two cities is a real factor". About half of BWI's passengers come from the Washington metropolitan area and at least 10% come from Virginia, Kelly said.

But why Dulles now, reporters asked Gary. "Well, we just thought that if we were going to enter the Dulles market, now was the time. There is competition. There are carriers out there that are growing rapidly. We can't be complacent." Ah, mysterious Texans. But our friend at Dulles, Leo Schefer, whose Washington Airports Task Force has brought new and increased traffic to the airport for more than 15 years, says that Southwest had to move before someone else entered the market for low-fares travel at Dulles. The late and lamented Independence Air established that the wealthy Northern Virginia suburbs have a real thirst for discount travel, Schefer notes, and both AirTran and jetBlue have Dulles toeholds. Independence's low, or too-low, fares, pushed Dulles to rank as the Washington region's largest airport last year with 27 million passengers, edging out BWI's 19.7 million flyers, about 40% of them Southwest passengers.

At Dulles, United will set a ceiling on fares, and Southwest will operate under that, says consultant Bob Mann, who notes that United now has strong low-fares competition from Southwest at every one of its hub cities, at Chicago (United at O'Hare, Southwest at Midway) to San Francisco, where Southwest competes from Oakland. Kelly did not announce routes for the Dulles service, expected to be launched this fall. Dulles will be the airline's 63rd airport, and Southwest probably will not announce another new city this year, Kelly said, but will nevertheless keep its projected 2006 and 2007 growth rates of about 8% annually.