The data points coming in from travelers, travel managers and airlines are beginning to add up to a slow U-shaped recovery that will not really happen until 2011. While survey’s offer conflicting signals at some points, they do agree that 2010 will be another tough year.
The bottom line for airlines will be continued pressure on costs and yields with the public favoring low-cost carriers, which are aggressively targeting business travelers, at least in the domestic market.
Christmas Crotch Bomber
Terrorist incidents have always had a depressive impact on travel and, what has now been coined as the Christmas Crotch Bomber, will be no different. “It will diminish the desire to travel amongst those who are already nervous and certainly make flying less desirable for others,” said Aviation Consultant and Journalist Ron Kuhlman during a recent Innovations Analysis Group podcast on the outlook for 2010. “It will take a long time to shake out with a lot of people saying why put yourself through that.”
Airline Forecasts Chief Analyst Vaughn Cordle told Business Week he estimates that the Christmas Crotch Bomber “could dampen 2010 revenue by a mere 0.25% to 0.5% for the top 10 airlines. However, a sales decline even that small could translate into a 10% to 20% hit to those airlines' net earnings.”
Indeed, many of the announced knee-jerk reactions have been relaxed now that brains have taken over the debate. But once restrictions have been put in place they are rarely removed despite discussions on both sides of the Atlantic to eliminate the 3oz-liquid rule.
What is very heartening is the wide-spread contempt in which the US Transportation Security Administration is held. Yes, there are uninformed travelers saying the new rules are good because it is better safe than sorry. But aviation insiders, security experts and even casual observers universally condemned TSA and its methods saying it would be a joke if it weren’t so disruptive and ineffective. Even general assignment press coverage indicated that the TSA rules leaned more toward stupidity than any real attempt at raising security.
It is hoped that the President Obama’s call for a thorough look at TSA procedures will include actually using science and security intelligence to make the system more effective. It is interesting to note that TSA actually does have special agents which were sprung into action yesterday questioning two journalists as to how they got the soon-to-expire TSA special order on the new procedures which they proceeded to run verbatim in their blogs.
Visits to homes were made, subpoenas were issued, laptops were seized and chills were sent to all who know bloggers Christopher Elliott and Steven Frischling. Elliot is National Geographic Traveler’s reader advocate and writes the syndicated Travel Troubleshooter column, which appears in more than 50 U.S. newspapers and Web sites. He produces a popular weekly commentary and podcast on MSNBC.com and writes the Navigator column in Sunday’s Washington Post. Frischling writes the Flying with Fish blog and is also founder of The Travel Strategist.
Thorough examination of TSA needed
Once again, TSA was locking the barn door after the horse escaped.
It is this mentality that Congress should be examining in next month’s hearings not just what happened in this one incident. Clearly we need a public discussion to balance privacy and security concerns, something that is long passed due. If the public were asked, it would likely favor solid investigatory work to keep terrorists from boarding planes in the first place rather than relying on passengers to prevent the attack. They would also favor launching the combined talents of all our intelligence agencies when a threat is reported as in this case. They would favor removing the silos that force various intelligence agencies to keep their information to themselves so that dots cannot be connected since, it seems, we have learned little from 9/11.
If they can accept all the stupid rules imposed in knee-jerk reaction, they will likely think more effective methods will be okay. However, privacy advocates will have to be involved in the development of these methods.
During the same podcast, Innovation Analysis Group President Addison Schonland suggested that the silver lining to the incident is that it happened at the lowest part of the annual travel cycle instead of in July when the London bombings decimated international travel in 2007. However, Swelbar countered that it is this part of cycle in which people are making their decisions to book for summer, making the timing that much more problematic.
Political theater extends headlines
While industry observers told Business Week they expect the impact will only be short term, they may not be considering the publicity factor as Congress weighs in with hearings. In addition to the Congressional aviation committees wanting to weigh in, more legislators are jumping on the bandwagon meaning the story will have legs well into the first quarter. This will come on top of the airing of a major Frontline investigation on the anniversary of the Colgan accident which continues to produce major headlines in daily press.
Just yesterday morning, Rep. Eric Massa, a member of the House Homeland Security Committee, called for several officials from the past and current administrations to testify before the committee. He cited an ABC News report that the alleged masterminds of the Christmas day terrorist attempt, Muhmamad Attik al-Harbi and Said Ali Shari, were released from Guantanamo on November 9th, 2007.
In addition to former Homeland Security Dept Secretary Michael Chertoff, former Attorney General Alberto Gonzales, former Attorney General Michael Mukasey, and former National Security Advisor Stephen Hadley, providing an explanation of who else was released and when during the Bush Administration, he wants current Homeland Security Dept Secretary Janet Napolitano to testify before the committee about what went wrong. Napolitano is being described as Obama’s Brown, the disastrous government emergency leader responding to Hurricane Katrina.
Within minutes of President Barack Obama’s statement that this was a systemic failure, Massa’s colleague on the committee, Rep. Bill Pascrell, Jr. (D-NJ-8) called for a top-to-bottom review of Department of Homeland Security personnel.
Bottom line? The new TSA regulations will favor business aviation. That industry’s leaders expect that corporate aircraft will be used more rather than any expectations of increased sales in 2010. The Hassle Factor, according to the Travel Industry Association, caused passengers to avoid taking 41 million trips between mid-2007 and 2008 for a total economic cost of $26.5 billion – $9 billion was in the airline biz. Compounding this $26 billion is the $12 billion+ lost to delays.
Safety Continues as a Hot Issue
Compounding the security coverage will be a continuation of last year’s safety story which could further dampen demand. In February, Frontline will air the results of its investigation on regional airline training and pay issues, a continuation of all the negative coverage the industry experienced this year. The show will coincide with Congressional efforts to finally develop and pass Federal Aviation Administration re-authorization legislation.
There is a high likelihood that aviation committees will demand hearings on why there has been so little progress on flight and duty rules despite all the promises from stakeholders last year as well as other issues surrounding the Colgan accident at Buffalo February 12.
Replace current With Friends Like these…. copy with the following. It has a lot more analysis of what is going to happen on the legislative front.
Travel industry surveys sobering
The travel industry is sending mixed signals but it is leaving the overall impression that this year is not going to be much better than last year despite hopeful signals earlier this month. So, we will start out the new decade as we did the last with troubled times in the airline industry. The good news? 2009 is over as is the industry’s most horrific decade. The bad news? There is more to come.
Those who expect to travel less outnumber those who plan to travel more almost two to one, 30% vs. 16%, respectively, according to a USA Today/Gallup Poll. Airline CEOs at the Next Gen Equity Research conference earlier this month indicated that they had seen the bottom and forward and close-in bookings were picking up. However, that was before Christmas Day when Umar Farouk Abdulmutallab tried to blow up a Delta A330 inbound to Detroit.
USA Today also reported that American Express does not expect demand for most travel services to return to pre-recession levels in the foreseeable future. It suggested what we are experiencing now is the “new normal” in travel demand. Indeed, 40% of all corporate and association meeting planners told Amex they expected to postpone or cancel off-site meetings this year.
The US Travel Association survey, done with YPartnership, suggests their respondents indicated travel will resume in 2011 or 2012. In their October travelhorizons, they said that 18% of regular travelers expected to take at least one business trip between October 2009 and April 2010, up from 17% a year ago. However, that was down from 23% in April 2009. They also reported that 70% of travel managers expected travel budgets to grow in 2010. The survey suggests leisure will remain stable through the year but the bottom line will not be a net increase but, rather, will involve poaching from each other.
“What's hot,” asked Travel Daily News yesterday in reporting on the survey. “Drive vacations, mid-priced hotels, low-cost carriers, all-inclusive resorts, packaged vacations, and cruises (regardless of duration). What's not? Luxury hotels and resorts, first class air, five-star dining.”
Mergers?
Then there are the Wall Street analysts who suggest two things – the job airlines have done in reducing ex-fuel costs will equal more passengers; and, even a modest increase in GDP, will equal a return to profitability. However, tempering that is what was expected this time last year – the US airlines would be the lone bright spot in profitability amidst a sea of global red ink.
The good news? Travelers perceive travel as more affordable. The bad news? “Christmas day is going to dictate a lot of what happens with EU and US airlines and it probably won’t be good for those betting on a more vibrant international market,”
MIT Center for Air Transport Research Engineer Bill Swelbar said in the IAG podcast.
The big issue for Swelbar this year will be yields. “I think it is a bit suspect as to whether we will see a return of high-yield traffic for many airlines,” he said. “So yield is the data point I’m going to watch in 2010. The comps to 2009 will be easy, but will we continue to see an improvement in yield as airlines pursue a more profitable mix? That is the question.”
Kuhlman is also concerned about fuel prices. Citing recent headlines saying it is going up to $79 per barrel and prices creeping up at the pumps, he indicated that given the narrow margins and yield problems, even if it rises only 10% it will be critical.
Noting the great interest in mergers among analysts during the NextGen conference, the IAG Podcast panel indicated they did not favor mergers. Kuhlman and Swelbar both noted past mergers have not been very effective.
“If you look at the history of mergers, they have not resulted in a situation that is vastly improved,” said Kuhlman. “Most have bombed or been a non-event. For instance, when US Airways bought PSA to gain access to the California market it only took them about 18 months to run through everything and disappear.
There is also the integration of the pilot lists which remains in the Delta/Northwest and even the US Airways/American West mergers. I am curious as to why people still see mergers as a panacea when history says otherwise. Even the battle of JAL is like a couple of guys on skid row fighting over a cigar. If the airlines had money it would be one thing but this is very risky at this time. It seems all those lessons that should have been learned about good airline management have been forgotten and there is a need to revisit the school room.
“I think there needs to be a distinction between intent and outcome,” he said of past mergers and whether or not they largely resulted in getting rid of the competition. “My view is that there was, in each case, a real desire to blend the resources of the acquired company but an inability to actually make it work.
Looking at the USAir/PSA fiasco, USAir had good intentions but was culturally incapable of playing in the coastal market in the west. They were used to high-yield, East-Coast shuttles and could not adjust to the free-for-all that existed out here. Similarly, AA/TW had some legs and STL was surely ideally placed to be the connecting alternative to ORD but they blew the chance and never really capitalized on the acquisition and ended up making a hash of it. Juxtaposing US/America West and Lufthansa/Swiss International, there is virtually no comparison in the success of the outcome thus far. Maybe the Europeans are just better at cooperation and integration than are the ruggedly independent Americans.”
The deal’s the thing
But, all this assumes that Wall Street analysts are as interested in a successful outcome as they are in the deal. There is a big difference between the two for investors, especially short-term investors. With every CEO cross-questioned during the NextGen conference about the prospects of mergers, it seemed as if analysts were not only pushing the idea but already arranging the deals in their heads with United and Continental being the prime targets.
American and US Airways have also been mentioned.
“I am in no way advocating mergers,” cautioned Swelbar. “But the significant cutbacks the airlines have done have made merger discussions a lot easier today than they have been. There is now very little overlap and the Delta/Northwest merger taught us that the end-to-end model is the right way to go. In the past, the only way to get the merger to work is to get rid of redundant capacity. Given the size of airlines today, it is a lot easier but I share the view that labor and other issues are not worth the headache. Alligning makes much more sense.”
In a recent blog, Swelbar set out the problem for airlines.
“Getting a smaller piece of a smaller pie is rarely a good combination,” he wrote. “But beginning sometime late in the year 2000, that has been the case for the US airline industry. For decades leading up to 2000, domestic passenger revenue averaged .73% of US Gross Domestic Product.
From the fourth quarter of 2000 through the fourth quarter of 2008, the relationship averaged .57%. Thus far in 2009, the relationship has fallen further to .47%. The difference between .47% of GDP and the historic relationship of .73% suggests that there is $36 billion less in domestic passenger revenue today for airlines to share.
“Some of this decline can be attributed to an industry that is 12% smaller than it was in 2007,” he continued. “However that only explains a portion of the fact that revenue is 22% less in 2009 than in 2008.
Despite aggressive capacity reductions originally designed to address the rising cost of oil, the US and global economies have forced the industry to aggressively cut prices charged to consumers throughout 2009. This is true in the domestic arena where fares are down more than 14%. International fares in 2009 are down nearly 17% in 2009 when compared to 2008.
“When an industry is not permitted to consolidate capacity, fragmented markets produce these kinds of results,” he said. “But these results do not produce the profits necessary to reinvest in the business. You would think an industry that employs over 160,000 fewer men and women today than it did in 2001 would send a message to the government that fundamental change is required. Nah. Is this latest decline to .47% of GDP a new norm?”
With friends like these….
Government is unlikely to do anything that will help the industry largely because transportation has become such a lonely step child, despite all the urgent headlines. The industry has failed again and again to deliver an effective message which is not helped by the fact that commercial and business aviation interests are continuing their internecine warfare.
At a time when the government convened yet another commission to determine how it can help, airline leaders hold out little hope. Just as with the impact of the hassle factor and the inefficiencies of the NAS, the industry faces an uphill battle on multiple fronts.
During a recent speech to Chicago’s Executive Club United Chair Glenn Tilton noted: “Taxes on airlines and our passengers have hit an all-time high. Taxes by airports, the Federal Aviation Administration and the Department of Homeland Security represent as much as $60, or 20 percent, of a $300 domestic round-trip airline ticket. America’s aviation sector and our customers shoulder a federal tax burden that is typically higher than the amount the alcohol and tobacco industries pay. The extreme and unfair tax burden on commercial aviation and our customers should be reduced.
“Losses from U.S. airlines totaled some $27 billion since the beginning of 2008 – and losses since 2001 totaling some $60 billion,” said Tilton, adding there have been 185 bankruptcies in the last 30 years. “It has been 16 years since a commission established by President Clinton offered recommendations to address the ailing airline industry … recommendations that were largely ignored. Not surprisingly, most of the issues and many of the recommendations from that commission remain largely unresolved.”
Despite this, it in highly unlikely the industry will see legislative relief, even with the very sympathetic noises from aviation committee members wanting to raise the amount the general funds contributes to government aviation budgets.
Instead, we will see renewed runs at passing the Federal Aviation Administration reauthorization, something Congress, has been unable to do for three years. Last year, House and Senate committees proposed their own two-year re-authorization legislation, which, once again failed to pass in favor of more continuing resolutions. The limited re-authorization (two years), said legislators, was to give the new Obama Administration time to forge its own aviation legislative agenda.
But the Administration has ignored the industry – which contributes $1.2 trillion to the economy – all year and it will likely do so for the foreseeable future. It was only in the waning days of its first year that it even paid any attention with a conference on how government can help the industry. But its conclusion was to set up a commission to study the issue, meaning the Administration will be able to say, for the immediate future, that it will await the commission’s report before forging its policy.
In Washington, if you don’t want to deal with an issue or you want to look as if you are doing something when you really don’t give a damn, you ask for a study. Then, you completely ignore its recommendations as has happened with all the previous studies now collecting dust on so many Department of Transportation shelves.
A key signal will be the Administration’s budget. Last year, the Administration stunned the aviation industry by virtually ignoring it in the budget but granting $13 billion to develop a competitive industry – high-speed rail – all with monies from the general fund. But that was all for studies and we have already seen what Washington does with studies.
Amidst safety and security headlines, it will likely be up to the Senate and House aviation subcommittees to forge FAA re-authorization. But it is also likely that user fees will again be the catalyst for another industry-wide fight with the Senate sticking stubbornly to new user fees and the House dropping them in favor of trying to get re-authorization passed.
Air Transport Association has continued its media battle against general aviation. It benefited from the excoriation that industry took early last year in the wake of the three automakers hauling into Washington, hat in hand, in their corporate jets. And it has continued to feed major newspapers with stories about “wasted” government spending at small airports across the country. As usual, little has been done to counter these stories, save a few op-eds or letters to the editor.
Too bad. One only has to look back at 9/11 to see the value of small airports, even those with no commercial service, which took legions of commercial jets in the wake of the FAA ordering all aircraft out of the air. A vast array of airports were built for the same reason the highway system was built – as part of a national defense strategy.
Added to the mix will be language on alliances as attempted last year by House Transportation and Infrastructure Chair James Oberstar who opposes such cooperation. We only await the result of his request to the Government Accountability Office on how alliances impact competition. Oberstar wants anti-trust immunity (ATI) to automatically sunset after three years in favor of a new ATI immunity investigation.
The other factor that will overwhelm any legislative or executive help coming to the industry’s rescue is the fact that Congress has become increasingly unable to cope with more than a single issue. We saw the health-care debate overwhelm all other legislation this year, eclipsing any chance of passing meaningful environmental legislation even with Copenhagen looming.
Environmental legislative efforts will continue but the best that can be hoped for in aviation is acknowledgement of the International Civil Aviation Organization as the authority. Even there, the industry faces a long battle to get ICAO to finally hammer out a policy. It is hoped that that can be accomplished at the September/October assembly. In the meantime, the US industry can only await the outcome of its court action against the EU to forestall implementation of the proposed trading scheme for all airlines entering the market.
Add to this the fact that it is a Congressional election year. That means mostly gridlock for anything to requires a controversial stand – cap & trade – and anything that will impact labor to name just two factors.
by Kathryn Creedy
