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9 September, 2005 

Good morning

I trust your long weekend was relaxing, and while we've now ended the traditional summer period, hopefully your weather remains good (or is getting better if you're in the southern hemisphere).

I reviewed the Skype VoIP internet service three weeks ago, and at the time I opined

Skype's opportunity is also its vulnerability - it is a surprisingly unsophisticated product that is relying on quickly getting critical mass, rather than having any hard to copy technological sophistication.  If one of the already huge companies come up with a direct Skype competitor that resolves the weaknesses in Skype, then Skype could disappear as quickly as it grew.

I stand by that comment.  But, in another indicator that we're seeing something of a return to the dot com craze of the mid/late 1990s, rumors are flying, suggesting Skype may be about to be purchased by eBay, or possibly Google, for as much as $5 billion.

That's a lot of money.  Skype has something under 2 million users who occasionally use their paid services, and well under 50 million users in total.  If we say that a user who is paying for the service is twenty times as valuable as a free user, that suggests a purchase price of $5 billion would be based on a valuation of $1100 per paying user (and $56 per non paying user).

It is unlikely that a paying user would be paying Skype more than $75/year.  If we assume a 5% discounted cash flow, then $1100 represents 28 years of future income from each paying user.

Play with the figures any way you like, but it is plain this would be a grossly over-valued transaction.  eBay stock dropped almost 4% on the news.

This is not to say Skype isn't a great product (it is a great product), and neither am I suggesting the company is not growing rapidly, offering market leader advantages.  In contrast, the largest traditional type VoIP company, Vonage, reported this week finally signing up their one millionth user.  Vonage has been in business for four and a half years, but Skype has been in business only two years, and is signing up one million users every week.

One feature Skype currently lacks, but which is believed to be under development, is the ability to combine a voice call with video so you can both see and hear each other.  There are several other programs already offering this, and even a plug-in which can be added to Skype, all of which leads to (after the longest intro in many a week) :

This Week's Feature Column :  How to Add Video to your VoIP Voice Calling :  Video phones are no longer a future fantasy, but a present practicality.  Best of all, the cost of adding video to your phone calls is minimal - $30 or so for a camera, and nothing for the software.  This article tells you what you need to know for adding video to your VoIP calling.

Dinosaur watching :  Delta's stock price improves :  Delta's stock price turned around and improved this week on generally good industry news (eg fuel prices stabilizing) and after DL announced plans to sell off 11 767s to raise an estimated $190 million in cash, announced plans to cut another 1000 jobs, and a 26% cut back service in Cincinnati, its second largest hub.

Thursday night close data :


Close Price

Drop from previous week

Thurs 8 Sep


+ 10.6% increase in value

Thurs 1 Sep



Thurs 25 Aug



Thurs 18 Aug



Thurs 11 Aug



Thurs 4 Aug


at the time, this was an all time low.  Now it seems impossibly high.

Although the factors above are generally positive, many people continue to anticipate a DL bankruptcy filing prior to the 17 October change in bankruptcy law.

And talking about bankruptcy, United has now filed its plan to emerge from Chapter 11, with a projected exit date of 1 Feb, 2006.  Bizarrely, the plan and profit projections are all based around the expectation that oil prices will be in the $40-50/barrel price range from now through 2010.

As readers know, I'm calling for $100/barrel pricing prior to the end of 2006.  Prices today are down from last week's $71 peaks, and now trading in the mid $60's range.  What sort of person can realistically project oil prices to drop by 33% and then stay at these low levels for four and a half years?

One analyst, Vaughn Cordle of Airline Forecasts, projects oil prices remaining above $60 through at least 2007.  What might this mean to United if it turns out it did indeed misunderestimate its fuel bill?

In 2006, United's official plan forecasts a $349 million profit.  But if Vaugh Cordle's projection is correct, it would spend about $748 million more on jetfuel than it is planning for.  Which would make for a $399 million loss.  Ooops!

Who wants to bet that United's management will be moaning in the all too near future 'but we never expected oil prices to be that high'.

Suggestion to Judge 'Just Can't Say No' Wedoff.  Throw this filing out of court and insist United comes back with something several degrees closer to reality.

And what of the unsecured creditors?  They'll get between 4% and 7% of what is owed to them, some three years late.  And - bonus - these payments will not be cash, they'll be in the form of stock in the 'new' United Airlines.  A chance to get in on the ground floor; with of course the risk that the elevator will promptly descend into the basement.

Not yet bankrupt Northwest is making a gamble as it continues 'normal' operations with a completely replaced workforce of mechanics.  While the public is apparently unconcerned about safety issues at present, if the airline has a high visibility safety incident, this would likely cause enormous damage to NW's reputation and customer support.

You would think that NW is twice as safety sensitive at present than it was before the strike started.  So what to make of the following report?

An unnamed FAA inspector was temporarily reassigned from his duties at Northwest last week after he complained to the FAA and a senator from Minnesota that inspection reports were not entered into the database, 11 days after the strike by mechanics began.  The inspector said about 470 FAA inspector reports were not entered and if they had been entered, it would have triggered a formal 'risk assessment' of the airline.

58% to 90% of the reports cited defects, compared with a defect rate of 3% to 5% for Northwest prior to the strike. 9% would have triggered an internal FAA alert.  The inspector was transferred after Northwest complained he was intimidating replacement mechanics.

Enter the Catch 22 :  The FAA says it can't do anything now because there is no information to suggest any problems exist, because the reports were not entered.  In the absence of the reports, the FAA insists that Northwest's planes are safe to fly.  But, just in case, it also said it is working with the airline to address the issues, and promised to take 'decisive action' if necessary.

The FAA has pledged close oversight of NW during the work stoppage.  So we can all relax.

And, talking about close oversight, both JetBlue and Sun Country Airlines have installed hidden surveillance cameras on their planes to allow pilots to monitor passengers in an effort to avert a hijacking.  JetBlue has as many as four cameras aboard each plane.  We are told that none are in the toilets.

Northwest blinked?  Or did it?  At the airline's request, a meeting was held on Thursday between NW and its striking mechanics.  But the airline said that rather than offering concessions to its workers, it may actually seek to ask for even more givebacks, due to the high cost of fuel!

This fuel thing continues to be used as an excuse for poor financial (ie management) performance, to beat up on passengers (due to airfare increases way beyond the underlying increase in fuel), to beat up on employees, and, yes, one more thing, too.

Always simmering barely below the surface are the airlines' continued efforts to get the government to pay for as much of their ordinary operating expenses as possible.  And so is it any surprise that this excuse is being offered to the government too.

DOT Secretary Norman Mineta suggested to airline officials that the government might drop the 7.5% tax on tickets so as to allow the airlines a chance to keep more of the gross ticket price for themselves.

A short while later, an aide to Mineta explained that when Mineta said this, he didn't actually mean it, because it would require an act of Congress to change the tax code.

Undeterred, Mineta said it would be worth looking at a rollback of the 4.4 cents per gallon airlines pay on jet fuel.  He's plainly determined to give something to the airlines, even if a bit confused as to exactly what.

BA - wasn't it once self proclaimed as 'the world's favorite airline'?  No longer.  In August, discount Irish airline Ryanair flew more passengers than BA.  Ryanair flew 3.26 million passengers in August, an increase of 27% over Aug 04.  BA flew 3.1 million passengers, a decrease of 3.9%.  While some of this drop is doubtless due to the wildcat strike BA suffered on 11 & 12 Aug, Ryanair said it expects to fly more passengers for the entire year than BA.

BA pointed out that its average passenger flies a longer distance than does Ryanair's passengers.  Which is doubtless cold comfort, especially because applying that measure shows BA as only the third largest carrier in Europe these days.

The pressure being put on the once apparently invulnerable major 'flag carriers' in Europe helps to explain an apparently simple story.  A week back, France published a list of six airlines it refused to allow operate flights in/out of France.  One of the airlines promptly closed down in response.  And now the European parliament is pressing for an EU-wide blacklist of 'unsafe' airlines (whatever that means).

The reason behind this was hinted at by Greek deputy, Georgios Karatzaferis, when he said

We all know what conditions charters fly in.  People have faith in Lufthansa, Alitalia, state airlines.  (The European Commission) is trying to create competition, but it creates those fake companies flying around.

Cypriot deputy Ioannis Kasoulides was apparently unaware of the irony in his words when he added

In the EU we could have much stricter measures, we could strengthen checks.  Because of the deregulation there's need to tighten up controls.  (my emphasis)

Translation :  We can't have all these nasty low fare airlines giving our loss making flag carriers a hard time.  We need to put the pressure on them and run them out of business.

Although it is hard to know how much political pressure really intruded on LOT's decision, or the fact that it is a pre-existing Boeing customer, but it would seem Boeing won a significant victory over Airbus this week when LOT Polish Airlines chose the 787 over Airbus' new A350.

The long-delayed decision - for a mere 7 planes, but regarded as a 'must win' by both airlines - came after intense lobbying lobbying from U.S. President George Bush on Boeing's side, and European leaders including French President Jacques Chirac, German Chancellor Gerhard Schroeder and British Prime Minister Tony Blair on Airbus' side.

Which just goes to show.  One American President trumps a French President, a German Chancellor and even a British Prime Minister.

This Week's Security Horror Story :  A woman was killed and 62 injured during the evacuation of a Saudi Arabian Boeing 747 on Thursday.  The plane, carrying more than 400 passengers and a crew of 19 was taxiing on the runway when the pilot received a call from the tower about a bomb threat.  The plane stopped and passengers were ordered to evacuate through the emergency doors.  Panic stricken passengers pushed and shoved their way out, with the death and 62 injuries as a result.

There was no bomb on the plane.

Winning a prize for this week's stupidest attempt at profiteering from 9/11 (four years ago this Sunday) is Sky Posse.  Who or what is this?  In the words of their press release

We can never forget the heroes who died on 9/11. Unfortunately, our world changed forever on that day. In the spirit of the heroes of Flight 93, who fought back, Sky Posse is a means of demonstrating a visible symbol that you are one American who will fight back.

Sky Posse pins are a small but easily recognizable lapel, shirt or hat pin that serve as a silent signal to those around you. Others wearing Sky Posse pins provide a visible sign that your resistance to any attempt to commandeer an aircraft will instantly become group resistance. There is safety and strength in numbers!

We are in touch with cabin and cockpit unions, security agencies and major airlines promoting the concept. This is a patriotic, American grass roots program that is available to all concerned citizens and frequent flyers.

So what do you have to do to become a Sky Posse member?  What training is required?  What screening is applied against potential applicants?

Ummm, nothing.  To become a Sky Posse member, you send Sky Posse $10 in return for which you get a miniature five point star badge, rather like you used to get in the cornflakes at a younger age.

If I were a terrorist, the first thing I'd do, in attempting to commandeer a plane, would be to neutralize (ie kill or maim) all potential sources of resistance on board.  Sky Posse badges, while meaningless, would still provide a way of identifying potential troublemakers.

There's a reason why real Air Marshals are in plain clothes.  You should be, too.

My comment last week about unusual place names in Britain brought this gem of a website from a reader.  You need to type in at least the first three characters of a British postal code.  Try SP1 or NW1 or any other code you might know.

And lastly, one shouldn't make fun of this tragedy.  Three crew members on the Monarch of the Seas cruise liner died, and nineteen others were taken to local hospitals, after exposure to a gas on board the ship last Friday.

What was this gas?  Suffice it to say that, at the time of the tragedy, they were replacing a length of pipe connected to the ship's sewage system.

Until next week, please enjoy safe travels.

              David M Rowell aka The Travel Insider

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