Sunday, April 27, 2008

Eos joins list of bankrupt airlines

Eos, which launched the concept of the all-business class airline with its celebrated debut in 2004, announced today that it is filing for bankruptcy and ceasing operations. Like other airlines, Eos fell victim in part to high fuel prices resulting from $120-per-barrel oil as well as to a softening economy.

Several airlines, including British Airways and Continental Airlines, have announced plans to accommodate Eos travelers. (Doing so is relatively easy since Eos operated only a single router, New York-JFK to London-Stansted.)

According to the FAQ posted on its Web site, Eos had attempted to secure new funding but was unable to do so. Its operations will cease April 28, 2008. Points accrued in its Club 48 frequent flyer program are subject to bankruptcy court findings but will likely be worthless.

So, let's see: MAXjet, Aloha, ATA, Frontier, SkyBus, Eos... the bankruptcy list is getting crowded. Good thing that the U.S. continues to shoulder the bulk of the costs for the Iraq government, because otherwise they'd have to spend some of that oil money.

Continental-United merger is a no-go!

Big news: Continental has broken off its merger talks with United Air Lines!

As CEO Larry Kellner and President Smisek notified Continental employees in a letter, “The board very carefully considered all the risks and benefits of a merger with another airline, and determined that the risks of a merger at this time outweigh the potential rewards, as compared to Continental’s prospects on a stand-alone basis.”

Translation? United parent company UAL posted larger-than-expected losses of $537 million on Tuesday, and if we tie up with them, we're going down with them.

For those who may have been hoping that a Continental-United merger would create a "best of both worlds" airline that delivered Continental service to a larger network, here's a consolation: United is apparently also in talks with U.S. Airways. If that comes to fruition, the resulting decline in service is likely to make the decision to fly Continental all the easier.

(Sorry for the bias. I am a United 1K, but I've never had any good experiences with U.S. Airways, and that airline hasn't even managed to fully complete its merger with America West that took place in 2005. I'm not optimistic about a UAL-U.S. Airways tie-up helping matters.)

Wednesday, April 16, 2008

The lunacy of a "Gas Tax Holiday"

Yesterday, Senator John McCain proposed a "Gas Tax Holiday." His idea is that, during the busy summer travel time between Memorial Day through Labor Day, the Federal government stop collecting the taxes that it imposes on unleaded and diesel fuel (which are 18.4 and 24.4 cents per gallon, respectively).

This idea is absolutely ridiculous. Yes, as some observe, cutting the gas tax would reduce the price of fuel at the pump and put more money in people's pockets. But the gas tax is not some random revenue-generating contribution that covers someone's pet projects. The money gathered up through the gas tax is the money used by the Federal government to maintain the Interstate highway system--and it is basically the only money that is used for this purpose.

Why should we care? Here are three reasons:
  1. Safety. Road repairs keep us safe when we travel. If you think 18.4 cents per gallon is going to save you so much money, pull out your insurance policy and look at the deductible on your comprehensive policy. If you damage your car on bad roads, that's the policy that covers you. If you have it at all--and a lot of people don't--I'll wager that you'll spend a lot more in repairs if you get in an accident than you'll save on gas. Don't forget the medical costs, either. If the deferred repairs result in deaths, tack on funeral costs and emotional trauma. The cost of bad roads is much higher than you think.

  2. Free market economics. Americans love to tout the benefits of the free market, blissfully unaware that we live in one of the most coddled and regulated markets in the world. When fuel prices rise, the free market dictates that we either pony up the cash to keep driving at the same rate or we cut back. Getting the government to manipulate the price of fuel so we can cruise aimlessly or drive back and forth to the store two blocks from where we live--the two activities for which Americans most often use their cars, followed closely by driving absurdly long distances to work because we refuse to work near where we live--is ridiculous. That's something you expect from communists.

  3. Leverage. Eliminating the gas tax would save the average American driver between $3 and $6 per full tank of gas for a 10-20 gallon tank. Assuming that you fill up once per week, that's between $36 and $72 of cash in your pocket for the summer, which you in turn will duly spend in a few moments on an impulse purchase for something that you don't need. That same cut, however, will cost the Federal budget more than $10 billion in highway funds. As it is, our infrastructure is crumbling because the gas tax hasn't been raised in more than a decade. And many of you may not realize it, but it's the threat of withholding highway money from states that gives the Federal government leverage over the states on a huge range of issues. No taxes, no money, no leverage.
That last point may seem appealing to some of you, but consider this: you can always put more money in people's pockets by cutting taxes. If taxes are so unimportant, why not just eliminate them altogether and let everyone fend for themselves with no public goods at all? The answer is that our self-interests are better served by foregoing short-term gratification in favor of the long-term stability that comes from working together. That's why we have societies in the first place.

Don't be fooled by this pandering nonsense in an election year. Roads and bridges are public goods from which we all benefit, and keeping them safe is a lot more important than whether you have an extra $3-6 a week. Prices are high? Pay more or drive less. That's rational. That's how a free market works.

Continental responds to merger news

Back in February, we talked about the potential impact of a Delta-Northwest merger on Continental Airlines. All three carriers are members of SkyTeam, and presumably "the New Delta" will remain that way even after its merger is approved(1).

Continental, meanwhile, has indicated that it wants to stay independent for acknowledges that it would need to react to a changing market. The going theory is that the Delta-Northwest merger will prompt a similar union between the third SkyTeam carrier and another airline, and the most likely candidate is United Airlines. Since United is one of two U.S. members of the Star Alliance (the other being U.S. Airways), the result of a Continental-United Merger--a "New United," if you will, since indications are that the United name would be retained in such a deal--would likely keep the Star Alliance affiliation.

As frequent flyers, and especially as international travelers, we should care! SkyTeam affiliation gives us earning reciprocity and lounge access with a certain group of carriers, including Air France, Alitalia, and Korean Air. Star Alliance affiliation would change that group entirely, replacing these with Singapore Airlines, ANA, and Lufthansa (among others). There are also fundamental differences in service--not just seat types and plane colors, but the focus placed of taking care of customers as well as how the upgrade processes work--between United and Continental. Simply put, United is not as friendly or service-oriented.

Does that mean that a potential Continental-United merger should be feared? No, not really: scuttlebutt is that Wall Street prefers Continental's management team and track record, so if Larry Kellner and his team were to head up a "New United," there's a good chance that we'd see an expansion of Continental's famed customer service across the broader combined network. That's a best-case scenario.

In the meantime, though, Continental--which posted a profit of more than $500 million last year and overfunded its pension plan at a time when most legacy carriers have simply dumped the plans in bankruptcy court--understands that its passengers are concerned. To that end, the airline has actually launched a Web site dedicated to keeping people informed (the only one of its kind as of today).

True, we can only watch and wait. But at least Continental is giving us a place to look.

Oh, and in the meantime, you New York travelers can now use OnePass miles to start your award trip with a time-saving flight from the City to Newark-Liberty Airport, courtesy of U.S. Helicopter. The 8-minute trip goes for 20,000 miles.

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(1) The Delta-Northwest merger is still subject to shareholder approval as well as the approval of U.S. regulators. That being said, shareholders have been clamoring for this deal, and it's unlikely that the SEC will block it on anti-competitive grounds when fuel is at $120 a barrel and four airlines have been driven into bankruptcy in the last thirty days. Until I hear otherwise, I'll assume that "the New Delta" is happening.

Tuesday, April 15, 2008

The airport train? It takes time.

This past weekend, I had the pleasure of spending four days exploring Tokyo after concluding a week-long business trip south of the capital. There are a lot of hotels in Tokyo, but since these extra days were at my expense rather than being covered by my employer, I decided to tradedsome of my acquired Hilton HHonors points for a free room instead of running up a tab on lodging. The catch? My room was in Narita, not far from the airport.

Narita is hardly a backwater: both the airport itself and the suburb that bears it name have their own railway stations, with service provided both by Japan Railways (JR East) and a Keisei regional line, so it's convenient enough to get into Tokyo. The problem is that it's far from the city, as in fourteen stops on a Limited Express or more than thirty should you be cursed to catch a local train.

The best solution is therefore to take either the Narita Express (N'Ex) from the airport or the Skyliner from Narita Keisei station, both of which get you to Tokyo with just a few stops. But even then, you're looking at upwards of an hour into the city, plus another hour back out, and the cost of an Express ticket is about $25 one way. There's also the 25-minute shuttle ride from the hotel to either origin point.

By the time it's all said and done, you're looking at leaving the hotel at 8:00 a.m. to arrive in town by 10:00 a.m. Similarly, you need to leave Tokyo by 8:30 p.m. at the latest if you want to guarantee that a shuttle will be there to get you back to the hotel when you make it back to Narita. That's four or more hours of commuting each day--hours that don't get spent sightseeing in Tokyo. Nor is this a dilemma unique to Tokyo: Chicago's O'Hare is equally far from the city, but the CTA is almost always local and a cab ride is far too expensive to be practical.

The bottom line? Traveling from a city to an airport takes time, and on short trips, that time can be more valuable than the perceived savings of staying at the airport. Stay closer to what you want to see, and you'll be able to spend more time seeing it.

Northwest and Delta merge; are they the first of many?

It's official: after weeks of wrangling and the complete failure of the two carriers' respective pilots' unions to reach an agreement over how to merge their seniority lists, Delta Air Lines and Northwest Airlines have announced an agreement to merge. Assuming that the deal passes regulatory muster (and it probably will), "the New Delta" will be the world's largest airline.

To be clear, it isn't that the Delta and Northwest pilots finally got things figured out; that's as jumbled a mess as ever. It's just that the merger was never dependent on their agreement in the first place--with the exception that Delta's CEO had stated that it was. That he has now gone back on that promise is a reflection of the changing landscape. That Delta's last CEO lobbied U.S. lawmakers about the perils of airline mergers as part of his strategy to fend off an unwanted 2007 bid by U.S Airways has similarly been discarded with the times.

Since last year, fuel prices have risen precipitously. Those prices are far from the only threat facing legacy airlines like Northwest and Delta--the recent and still unresolved squabble over seniority lists, for instance, highlights the ever-present challenges of a labor model originated more than forty years ago during the days of regulation--but they are serious. Within the last thirty days, in fact, four different airlines (five, if you count regional carrier Champion Air) have filed for bankruptcy protection. Aloha, ATA, and SkyBus are effectively out of business; Frontier continues to operate, but with enormous competition at its Denver hub from powerhouse United as well as popular newcomer Southwest, it's unclear what the future holds for the struggling carrier.

But it's not clear what the Delta-Northwest merger will accomplish. Perhaps to deflect criticism of anti-competitive behavior, "the New Delta" doesn't plan to cut jobs or reduce capacity, which are the two tactics that traditionally yield savings in an airline merger. A potential merger between United Airlines and Continental similarly would result in little reduction for the same reasons. And seniority lists are so difficult to integrate--U.S. Airways and America West are still trying to figure them out, four years after their merger--that even customers may continue to fly with two airlines operating under one name.

So, what does this merger hold for us? It's hard to say. For now, all that we can do is wait, wonder, and hope that the looming consolidations don't reduce service standards below their already unenviable levels.

Wednesday, April 2, 2008

Aloha, Aloha.

Honolulu-based Aloha Airlines declared bankruptcy and stopped operations on March 31, 2008. Aloha's decision, and the subsequent refusal of a bankruptcy judge to block the shutdown, ended 61 years of service and left nearly 2000 employees without jobs.

Hawaiian Airlines added 6000 seats in response and announced that it would accept Aloha passengers free of charge for three days; low-cost inter-island carrier go! also added service. But the distance from the islands to the mainland is far enough that standard domestic planes aren't likely to make the trip, which has left some passengers still scrambling to find their way home in one direction or the other.

The history of the airline industry is filled with bankruptcies. Even over the last five years, Northwest, Delta, and United have all been in bankruptcy at some point. More often than not, though, airlines secure new financing, restructure their operations, and bounce back. As a result, people tend to forget that airlines are businesses that can go under.

They can. They do.

Aloha's collapse is unexpected, but it isn't unprecedented. In the days of regulation, Pan Am was America's flagship carrier; it vanished in 1991, the same year as rival Eastern Airlines. Pan Am's earliest international rival, TWA, collapsed in 2001*. Washington D.C.-based Independence Air vanished in 2006, just after two years after its celebrated launch. Premium carrier MAXjet shut down on Christmas Eve in 2007. The airline industry has always been one subject to change.

More Changes Ahead

Although Monday's announcement by Aloha has gotten plenty of attention, another change went into effect the day before: March 30, 2008 marked the start of the EU-US Air Transport Agreement (more commonly known as the Open Skies Agreement). Prior to this agreement, flights between the United States and European Union had to originate from the country in which the operating carrier was based; now, they can originate from anywhere.

What does this mean? To the industry, it changes the playing field. German carrier Lufthansa can fly to the United States from Paris, or Air France can fly to the U.S. from Germany. American companies can also buy European carriers--though, perhaps surprisingly to those who don't understand how restricted the U.S. "free trade" economy is, foreign carriers remain forbidden to own U.S. airlines.

To passengers, Open Skies means more choice, especially with regards to popular destination London. Until now, only four airlines offered service between Heathrow and the United States: British Airways, Virgin Atlantic, United Airlines, and American Airlines. Open Skies makes gates at Heathrow available to U.S. carriers the previously had to fly into Gatwick (like Continental). The agreement also promises new transatlantic low-cost carriers, including British Airways' subsidiary OpenSkies and a plan by RyanAir executive Michael O’Leary that would offer fares to and from Europe of less than $20.

None of these changes helps the employees or passengers stranded by the collapse of Aloha Airlines. Instead of focusing on Aloha's sudden and inconvenient end, however, let's say mahalo for the 61 years that Aloha delighted its customers with a level of service fast disappearing against that backdrop of today's price wars and cutthroat competition.

All that we can hope is that there will be good changes to offset our farewell.

* Technically, TWA was acquired by American Airlines, which absorbed its massive debts.