Friday 18 April, 2003

Good morning.  I hope that many of you chose to take advantage of the wonderful Virgin Atlantic fares to London earlier this week.  Virgin spokeswoman Wendy Buck described their sale as a phenomenal success. She said 'We wanted to put some momentum back into the marketplace, and this proved to be a juggernaut. Website bookings shot up to ten times their normal level.'

Let's hope that the reason for this special deal is an urgent need on Virgin's part to bring in some cash to pay for BA's Concordes!  Sadly, this is rather unlikely.  BA is resolutely maintaining that its planes aren't for sale, although Virgin's founder, Sir Richard Branson, today turned up the rhetoric and said his next step will be to ask the British government to intervene on Virgin's behalf.  He believes the government can and should get involved due to BA being originally given, for a mere 1, the Concorde fleet, and says BA is now obliged to pass the Concordes on to any other airline that would keep flying them.

BA's actions rather remind me of the boy who has too many marbles for himself, but refuses to share them with anyone else in the playground.  It does highlight the curious unbalanced equation that BA has to deal with - the Concordes are not the most profitable way for BA to get its passengers across the Atlantic, but although it will save money if it discontinues Concorde, it would lose a great deal of money if another airline took over the Concorde flights, due to the high fare passengers that would then switch loyalties from BA to the other airline.

BA had their own measure of success last week, too.  Their Concorde fare sale - 1000 discounted seats - sold out in less than 24 hours of being announced.  We will almost certainly see more sales between now and the end of October when Concorde is finally withdrawn; if you want to treat yourself to a Concorde flight, you'll have to act very quickly (or perhaps buy a QE2/Concorde combo package - remember this is also the QE2's last year of trans-Atlantic crossings).

If you're traveling this Easter (or any other time) you'll be freshly experiencing the inconvenience of having to be constantly showing your boarding pass and ID to various people as you pass through the airport.  And so :

This Week's Column :   Travel ID and Document Pouches :  You've probably noticed an increasing number of people at airports who carry their ticket, boarding pass and Photo ID in a special holder around their neck.  Great idea or crazy gimmick?  Read the article to find out.

Deathwatch Part 1 - United :  Continental CEO Gordon Bethune described United as 'HIV positive' as a way of referring to its financial problems.  The following day he apologized for using this phraseology, but added 'While United has many good employees, I believe that its mismanagement makes the chances of its successful emergence from Chapter 11 questionable'.

He also said that Continental wasn't interested in re-establishing a hub in Denver if UA shut down, but my guess is that he would love to do exactly that; but is holding out for an 'offer he can't refuse' from Denver Airport, who in turn won't do anything to upset UA while there is any chance of continuing their present relationship.

Although the Iraqi war is all but over, it still remains a convenient excuse, as was the case on Tuesday when United said it will cut its May schedule by nearly 12 percent worldwide because of booking declines related to the Iraq war and the pneumonia-like SARS illness.

Deathwatch Part 2 - AmericanLast week I quoted CEO Don Carty's forceful statement that there would be no 'deal sweeteners' offered to AA's unions - they had to either accept his offer or risk the consequences of bankruptcy.  Well, that was last week, and this is this week.  In a wonderful combination of stick and carrot, he did sweeten the deals offered to the three main unions, but then told them if they didn't immediately accede to his demands (for a total of $1.8 billion a year in labor cost concessions) he'd put the airline into bankruptcy and (as punishment?) seek an additional $500 million in further labor cost reductions through the bankruptcy court.

The pilots and ground workers/mechanics promptly accepted, but the flight attendants narrowly rejected the deal when their members voted on it.  So CEO Carty heaped more pressure on and gave them another 24 hours to revote.  Obviously not wanting to call his bluff, and not wanting to be the focus of blame for taking AA into bankruptcy, the flight attendants gave in and accepted the contract.

Next, making one wonder exactly what is happening, after getting what he claimed he needed from the unions, Carty said on Wednesday that the company is not yet 'out of the woods' and added that 'given the hostile financial and business environment we find ourselves in and its inherent risks, the success of our efforts is not assured.'

And then, on Thursday, the brown stuff really hit the fan.  The unions discovered, but only by reading a statutory SEC filing AA had just submitted, that AA had funded a supplemental pensions trust to protect a portion of the retirement benefits of 45 senior AA executives in the event of bankruptcy.  An AA spokesman declined to give specific details of the cost of this plan to the Wall St Journal, and the unions are justifiably outraged at what they believe to be an example of an unfair approach to sharing the potential burden of any future bankruptcy.

While I can understand (but not necessarily completely agree with) the situation that requires management to renegotiate a contract for future earnings, it seems that past entitlements - ie, pension plans, for all workers, not just senior managers, should be sacrosanct and never placed at risk.  Furthermore, if anyone had to shoulder the burden of losing their pension entitlements due to airline bankruptcy, who should more fairly accept this burden?  The mechanic on the ground, the pilot in the air, or the senior manager?  Surely it is the senior managers that are most responsible for the performance of a company, and they are the ones that get the multi-million dollar bonuses when things go well (or, in the case of airlines, often even when things go poorly, too!).  So the senior managers should then be the ones most strongly and negatively affected by the consequences of their bad management, not low level employees who have almost no input at all on the overall management and success of the company they work for.

It is also fair to observe that CEO Carty's ability to actually carry out his threats to extract substantially more concessions from his employees through a bankruptcy is far from a definite certainty.  If AA needs an extra $500 million in employee givebacks, then it should obtain them now, and, if it can't, then it should go into bankruptcy.  But if it doesn't need the extra $500 million, it shouldn't be threatening to try and take it later if the unions don't agree to $1.8 billion now, and a bankruptcy court judge is likely to be sensitive to these issues.

If I were a union leader, I'd be advising my members to call AA's bluff on this point, and fighting fire with fire in the form of threatening in turn to bring a motion to a future bankruptcy judge seeking to have a court appointed trustee replace current senior management, much the same way that Boeing is attempting with Hawaiian Airlines.  Both sides can play the 'if you make us go bankrupt then I'll do something you won't like' game.

Reader Fred raises an interesting point.  If you're considering buying a life membership of AA's Admirals Club, now might not be a good time to do this.  He says that he lost out when TWA was bought by AA, with his TWA lifetime membership not being transferred over to AA, and wonders what would happen to life members of the current AA program if AA declares bankruptcy.  He says he hasn't been able to obtain any concrete assurances from AA about what would happen.

Deathwatch Part 3 - US Airways :  I mentioned a couple of weeks ago that one of US Airways' last actions before emerging from bankruptcy was to void its gate contracts with Pittsburgh Airport, announcing that it was walking away from the remaining 20 year obligation in these contracts and declaring that it needed lower costs.

I guess I'm in a bluff calling mood, because if I was Pittsburgh Airport, I'd be tempted to call US Airways' bluff on this point and say 'you either pay the rate you agreed to, or you lose all the gates, effective immediately'.  On a wonderful basis of 'what goes round comes round' the reality is that US Airways needs its protected Pittsburgh hub probably equally as much as Pittsburgh needs US Airways.

Sadly, this hasn't happened.  Instead, PA Governor Rendell asked US Airways to move its headquarters to PA in return for reduced gate rates and other concessions, a request that US Airways rejected out of hand.  Meantime however, Pittsburgh Airport is urgently wooing Southwest (and probably other carriers) to establish or build their operations into Pittsburgh.

It truly would be poetic justice if the upshot of US Airways' bludgeoning of Pittsburgh Airport was to see it lose one of its key hubs!  US Airways is currently responsible for 90% of the traffic in/out of Pittsburgh.

US Airways reports that it is pulling in more revenue than expected with its code share with United. The airline has been able to take advantage of United's western routes popular with the business community. US Airways is not sure how much revenue the airline is bringing in from the codeshare at this time (!) but the expected annual benefit is expected to be significant.  Most of the value in the alliance comes from a limited number of United's flight segments, generally in major markets. This information came from a court filing.

A bit like the British tradition of 'the King is dead, long live the King', this week saw the end of one era and the start of another at Delta.  An era ended when it retired its last 727.  Delta plans to also retire its MD-11 fleet this year, reducing its fleet down to only five types of planes : MD88/90s, 737s, 757s, 767s and 777s.

And while closing one door, Delta simultaneously opened the door on a new era - its Song operation.  Tuesday saw the inaugural Song flight (between JFK and West Palm Beach).  It will add flights to its next destination (Orlando) on 10 May, and has a stated intention to grow to 144 daily flights within six months.

Song is a curious contradiction, but may succeed.  Delta describes it as a low cost operation, but is paying its pilots the same high wages it pays its regular pilots.  And although offering low fares, it is offering an up market service standard.  Delta says that by getting better use of its planes (flying them for 13 hours a day, two hours more than typical, and faster turnarounds on the ground), Song will have 22% lower costs than its main operation.

It is hard to think of a worse time to start a new airline - with the after effects of the Iraq War still lingering, and with SARS becoming a bigger issue with each passing week.  Industry analysts are also skeptical.  "It never worked before," observes Ray Neidl of Blaylock & Partners, talking about the 'airline within an airline' concept.  UBS Warburg's Sam Buttrick says low costs will be critical, and, 'It's not exactly clear how adding state-of-the-art in-flight entertainment ... reduces costs, because it doesn't'.

Without a doubt, Song could successfully compete against Delta's own branded flights, but surprisingly, Delta doesn't want to do this.  If Song has the potential to be profitable, and offers lower costs and a more consumer friendly service, the big unanswered question has to be 'Why is Delta trying to compete against the tough competition (JetBlue and Southwest) when there are easy competitors to knock over (the rest of the 'Big Six' and its own mainline operations)?'  Even with a 22% reduction in costs, Song is unlikely to be able to match the low operating costs of JetBlue and Southwest, both of which also have strongly loyal client bases.

The Song concept is great - more airline for less money - but leave Southwest and JetBlue alone, and instead hurry the demise of some of the dinosaur airlines that have no ability to compete on either a cost or service basis.  As any fisherman knows, the best place to go fishing is where the fish are, and where the other fisherman aren't!

Talking about JetBlue, they've just marked the one year anniversary of their IPO.  To the astonishment of everyone, this new startup, right from day one, has been profitable, with four quarterly profits in a row, and tremendous passenger growth.

However, their easy days may be coming to an end, and not only because of the launch of Song.  Continental has now reacted to JetBlue's presence in New York and is matching fares on routes between the Northeast and Florida - routes that represent almost half of JetBlue's revenues.  One analyst suggests JetBlue might grow a more moderate 45% in its next twelve months, while also remaining profitable.

Let's all wish JetBlue a Happy Anniversary and many happy returns.

Great news for lovers of the golden era of cruise liners.  The liner which perhaps marked the highest point of cruise liner design - the extraordinarily fast SS United States (it set the record for the fastest trans-Atlantic crossing on its maiden voyage in 1952 - an average speed of 41 mph - faster than most water ski boats ever travel!) has ignominiously languished, forlorn and neglected, since being withdrawn from service in 1969.  Various schemes to return it to service all failed.  But earlier this week, Norwegian Cruise Line purchased the ship and announced plans to convert the ship to a 'state of the art, modern cruise ship', to be used on cruises to and from mainland US.  NCL also owns the former SS France, now renamed the SS Norway.

This Week's WiFi Growth Story :  Plans have been suggested to use WiFi to quickly create a communications infrastructure in Iraq.  Other unlikely places that already have WiFi service include villages in Bhutan and a base camp at 17,000 ft on Mt Everest.

But is WiFi in your neighborhood?  Have a look at this astonishing website.  I checked and it seems that several of my neighbors at home have open WiFi nodes, but was very pleased to see that my own WiFi node has not been detected!

I'm getting increasing amounts of email from you all about examples of how the airlines are sneaking in extra fees and 'fine print' on frequent flier awards.  None of us like seeing tickets we have fairly earned become harder and harder to get, and less 'free' but more costly.

Winning this week's 'Mr Meany' award is Air Canada, that announced it will charge members of its Aeroplan frequent flier program $25 for every reward flight they book, plus a $15-25 fuel surcharge as well, adding $35-50 to the cost of an otherwise 'free' ticket.  Air Canada says that this will bring in tens of millions of dollars of extra profit each year.

Sure, in theory it will do this, but I wonder if anyone thought about the greater number of tens of millions of dollars they will lose when outraged Aeroplan members do all they can to fly any other airline than Air Canada?

Is it any wonder, with attitudes to its customers such as this, that Air Canada managed to bankrupt itself, even though it has a 70% market share in Canada and no major competition!

This week's 'Careful what you wish for, because it might come true' award goes to the large hotel chains.  Back in the 'good old days' hotels complained endlessly about the cost of paying mere 10% commissions to travel agencies.  Then along came the internet, and hoteliers were delighted to see a new lower cost way of selling their hotel rooms, through the internet booking services, 'direct' to the public.

Except, it didn't quite work out that way!

First of all, it is important to understand that selling hotel rooms on the internet doesn't increase the number of hotel rooms sold.  All it does is change the way that the rooms are sold.  None of us spend more nights a year in hotel rooms because it is such fun booking them on the internet, do we!

Secondly, the internet has made it harder for the hotels to play the pricing games they used to like to secretively play.  Hotels have as many different prices for their rooms as airlines have prices for their seats, for the same reasons - hotel rooms and air travel are both 'perishable' and have a low variable cost.  Hotels are now finding that they are selling their rooms for less through the internet than they were when they could secretly give deals to some regions and some resellers but not to others.

But, even so, you might think that at least they are saving the 10% commissions they pay to travel agents.  After all, the fully automated computerized internet website must be getting much less than 10% - right?

Wrong!  It was revealed this week that hotel chains have been paying as much as 35% commission to some of the very large internet travel sites!  This information came to light when Hilton delightedly announced that it had just struck what it called 'the best deal in the industry' by reducing the commission it pays to Expedia to a mere 18%, down from the 25%-28% it had been paying Expedia before.

Lower room rates.  Higher commissions.  But no extra business.  Doesn't sound like a very great deal to me at all.

This Week's Security Horror Story :  Imagine this scenario.  Some sort of problem occurs at the front of the plane.  A passenger - perhaps a terrorist - is struggling with one of the flight attendants.  And then another passenger gets out of his seat, draws a gun, and moves forward.  As he gets out of his seat, a flight attendant rushes up from behind and smashes a wine bottle over his head, knocking him unconscious.

What is wrong with this scenario?  Well, if you're on a Canadian plane, the RCMP officers that occasionally fly them as 'Armed Protection Officers' don't tell the cabin crew that they are on board, and so if something causes them to alert and draw their weapon, flight attendants will assume they are terrorists.

This startling fact is highlighted in this excellent and hard hitting report titled 'The Myth of Security at Canada's Airports' that all Canadian readers should read.  Although very blunt and direct in its criticisms to the point of being politically incorrect; it represents the findings of a parliamentary enquiry into the subject.  Being as how Canadian air services impact on the lives of Americans and other people, elsewhere in the world, and being as how many of the same exposed weaknesses apply to other countries too, it is good Easter reading for us all.

And this week's Stupid Defense against SAMS Suggestion can be found in this Fortune article, which advocates building 'smart fences' around airports to create safe zones in which terrorists would be detected if they tried to enter and launch missiles against planes.  Ignoring the inconvenient fact that it takes a terrorist less than 30 seconds to ready, aim, and fire a missile, meaning that any alarm and response to his presence would be way too late, there is one other even bigger problem.

Planes are vulnerable to SAM attack when they are as much as 50 miles away from an airport.  Just how big would these fences have to be?  Draw a 50 mile circle around LaGuardia or Reagan Airports and see how much of downtown New York or DC would have to be moved!

And, lastly this week, let's give an award to Caterpillar Financial Services Corporation for the most ridiculous use of security as an excuse.  My Monday email to a subscriber there about the Virgin special fares was rejected.  I was sent an explanatory message that said 'To protect Caterpillar Financial Services Corporation, enhanced security measures have been implemented. Your message matched the security criteria and has been rejected because of potentially unacceptable content.'

An informational email about airfare specials is a 'security threat'???

Until next week, please enjoy safe travels.

David M Rowell aka The Travel Insider
ps :  Don't forget to visit Joe Brancatelli's site for his weekly updates, too.

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