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6 October, 2006  

Good morning

It has been an incredible week, watching Airbus collapse to the point where its ongoing viability has to now be questioned.  In little more than a year it has changed from market leader, untroubled by Boeing and dominating the new plane marketplace, to now being in disgrace in front of its customers and prospective customers, and in financial difficulty.  Worse -  its bad news is not necessarily all over.  Read more, below.

I've now worked through the over 100 reader emails about why you do (or don't) fly first class, and have collated these with some background and commentary to form :

This Week's Feature Column :  Who Flies First Class Anymore?  I compare first class travel to open heart surgery, and recommend you should avoid both if at all possible. Find out why.

One unrelated but very interesting comment was offered by Carol when she wrote in with her thoughts about first class and business class.  She writes

Our ENT doc has advised us that night flights are very unhealthy for anyone prone to bronchial, sinus or ear infections.  The body is more relaxed at night (whether you can sleep or not) and therefore more vulnerable to virus and bacterial infections.

Since we switched to day flights our health has much improved.  I only wish you would use your influence to convince the low cost airlines to have at least one morning flight out of New York - I would switch immediately.

If anyone (especially physicians) can comment, I'd love to pass your thoughts on.

Dinosaur watching :  Good news for bankrupt Delta.  Its loss in August was only $11 million.  Sure, it is a loss, but it is a much smaller loss than Aug 05 when it lost $158 million, and with some $3 billion of unrestricted cash in the kitty, its bankruptcy seems to be far from threatening the very future of the company.

Even better news for Glenn Tilton, CEO of United Airlines.  After becoming the airline's fourth largest shareholder by virtue of his contractual entitlements when United exited its bankruptcy, his contract - due to expire on 1 September 2007 - has now been renewed for another four years.

His annual base salary gets a lift, from $605,000 up to $850,000 (a 40.5% increase).  I wonder how many other United employees are also receiving 40% increases in their pay packets at present?

And in case you think that $850k is way too low, don't worry.  He's got plenty of other benefits and bonuses, including a rather tortuously written provision that allows him 'an aggregate value of awards under United's long-term incentive plans beginning in 2007 and in each year thereafter equal to no less than 400% of the base salary midpoint of CEOs of comparable companies, provided that such aggregate value will not be less than 400% of his current base salary.'  If this is saying what I think it is saying, it is suggesting he should be earning four times what other similar CEOs are earning.

After the millions he has made from United's exit from bankruptcy, you'd think he'd no longer want to work at all, but he's obviously a very dedicated kinda guy.

One has to wonder why United's board would lock itself into a further four years with Mr Tilton at the same time they're searching for a merger partner - a partner who may insist on a different CEO being at the helm.  Tilton's current contract is not due to expire until September 2007.  Is the board acting in the best interest of Mr Tilton, or in the best interest of United and its shareholders?

Talking about United, the airline has filed an opposition to JetBlue's request to the FAA for landing rights at O'Hare, claiming JetBlue's application doesn't follow proper procedures.

JetBlue hopes to start service between O'Hare and JFK within 60 days of getting approval.  JetBlue is bravely putting its head in a noose there, with ORD being jealously considered by American and United as almost their own private property.  Look for some interesting pricing on that route if/when it starts service.

I mentioned last week United's quest for a merger partner.  A denial - for what it is worth - came from Continental this week, with their CEO, Larry Kellner, saying his airline has no plans to merge with another carrier despite speculation of a merger with United.

Good news for other airlines, too.  September operating results and third quarter earnings reports are starting to be announced.   Southwest reports a 9.8% increase in revenue passenger miles over the same period a year ago.  Alaska Air Group reported September traffic increased 5.9%.  Continental reported domestic revenue miles were up 10% and international revenue passenger miles were up 11.6%.

Talking about mergers, an audacious attempt was announced on Thursday this week when the flamboyant CEO of Irish discount carrier Ryanair, Michael O'Leary, announced a hostile takeover attempt of newly privatized Irish flag carrier, Aer Lingus.

Here's a thoughtful analysis of why Ryanair's move may be sensible.  Most exciting for US readers is the opportunity to have Ryanair re-invigorate Aer Lingus' routes to the US, and offer convenient connections on to other European destinations via discount Ryanair flights.

Why do I describe O'Leary as flamboyant?  Well, what word would you choose?  Here are some recent quotes :

  • On hedging his fuel costs for January to March next year at $73 a barrel when the oil price was below $61 :  'Jesus we don't look bright. If we were bright we wouldn't be working for airlines. We're no experts on oil here.  Frankly, we'll never get it right.'

  • On union staff at Dublin airport refusing to cooperate with a new online check-in system :  'It's not up to a bunch of trade union headbangers to decide who will, and who will not, go through the airport.'

  • On how Ryanair should address the environment lobby in future :  'It will also have to become more sensitive to all those environmental whingers.'

  • On BAA's proposed second runway and terminal at Stansted, Mr O'Leary said :  'A second runway and terminal can be built at a more realistic cost of 1bn, rather than the 4bn gold plated Taj Mahal proposed by the BAA airport monopoly.'

From external appearances, the all business class new airline, MaxJet, appears to be prospering, and confirmation of this came from a different direction this week with the appearance of another all business class airline soon to start service between London and New York.  The airline - UK based Silverjet - will operate out of London's Luton Airport.

Silverjet plans to start service within 3 - 4 months, with introductory roundtrip fares of about $1850 (999).

Three Italian doctors filed a lawsuit against Alitalia after the airline cancelled their flight and left them stranded in Chicago for 36 hours.  The three claimed they were sleep deprived, were kept at the airport until very late and were exposed to the extremely cold Chicago winter.  They also claimed distress, suffering and even physical and psychological pain.

Apparently an Italian judge agreed with them because he awarded them a total of $5,700 to cover "moral damages" and legal fees.  The airline has not said if it will appeal the ruling.

Oil prices are down 25% from highs of about $78/barrel and occasionally drop below $60/barrel, and we're all noticing lower prices at the pump.  Some of us are now restlessly starting to wonder if/when we'll see drops in airline fuel surcharges, so be prepared to be surprised.

Showing a peculiar sense of timing, Thai Airways has announced it is increasing its fuel surcharge on flights between the US and Bangkok.  I wonder why?

You may have heard of the tragedy in Brazil earlier this week when a 737 collided with a small executive jet in mid-air.  Astonishingly, the executive jet survived, but the 737 was lost with all 155 passengers and crew killed.

And now, here's an amazing opportunity to experience what happened on the executive jet.  Well known travel writer Joe Sharkey was on board the executive jet, and writes of his experience here.

As to what happened and why, it currently seems the two planes were being controlled by two separate control towers operating without sufficient co-ordination.  Joe's plane was cruising at 37,000 ft and the 737 was cleared to climb up through that altitude, intersecting (ie colliding with) Joe's plane as it did so.

Tax the Tourist 1 :  Italy is looking at implementing a tourist tax of up to 5 a day on all tourists, both foreign and Italian.  The tax is part of a draft budget that is awaiting approval from both Italian houses of Parliament.

Tax the Tourist 2 :  The Canadian government is scrapping its value-added tax rebate for tourists, due to take effect from 1 April 2007.  The VAT is 7%, and is currently refundable to visitors traveling out of the country - see my article here.

Tax the Tourist 3 :  The Airport Improvement fee at Toronto's Pearson International Airport will rise from C$15 per departing passenger to C$20, effective January 1, 2007.

The Amazing Airbus Collapse

When delays of about six months were first announced to Airbus' showpiece giant A-380 double decker plane last year, airline customers were disappointed but probably not entirely surprised.  But the announcement in June this year of a further six months of delays was greeted much less positively by airline customers, who were now facing a cumulative year of delay and the need to come up with temporary solutions for their projected airplane needs.  Airbus spread a lot of money around to restore their goodwill and to meet contractual obligations for delivery delays; the company's share priced tumbled, and their CEO left amid allegations of dishonestly selling large parcels of shares shortly before the news became public.

Three weeks ago, rumors started to leak out about further delays to the A-380 program, and the general expectation was there might be as much as another six month delay.  Airbus grudgingly confirmed there would be further delays, but only this week dropped its bombshell surprise on the aviation community.

Delays would be a further twelve months, not six, making for a cumulative total of 24 months slippage beyond originally promised delivery schedules.  Instead of Singapore Airlines operating planes in regular scheduled service about now, and shortly thereafter being joined by Qantas and other carriers, Airbus will now deliver a ceremonial single A-380 to SQ in October next year, and make no further deliveries to any airline until 2008, when 13 planes will be delivered.  25 more will be delivered in 2009, and 45 in 2010.  At this rate, the current order backlog won't be cleared until sometime in 2012 - six years from now.

Airbus' credibility with airlines is in tatters, and even in the polite diplo-speak that is usually adopted between airlines and the suppliers with whom they are locked in deadly symbiotic embraces, it is clear the airlines are furious.

I'd wondered two weeks ago if Airbus may lose one or more of its A-380 orders as a result of what I then thought might be another six month delay.  With the bad news now being a twelve month delay, it seems almost certain that one or more airlines will choose to 'teach Airbus a lesson' by publicly cancelling part or all of their order (even if they subsequently re-instate it at a future time).

A lot of speculation is mounting about Emirates' intentions.  Emirates currently has placed orders for 43 of the total 159 planes currently on order, and some people are predicting the airline might cancel as many as half of these, opting instead for the new Boeing 747-8, a passenger plane which, to date, has not won a single sale.

There are also rumors from several sources hinting that Boeing might be considering a truly enlarged version of the 747, not just the slightly lengthened 747-8 on present offer with a trivial increase of 34 passengers.  This might possibly take the form of a 747 derivative with a full length upper deck.

If Boeing could come up with a true alternative to the A-380, and commit to getting it in the air in a reasonable timeframe, it is likely many of the current A-380 customers would convert, if for no other reason than to punish Airbus for their unreliability.

It is impossible to understand how such massive delays can slip into a program that already has four airplanes in the air and which had been promising regular manufacturing operations and deliveries to commence in the very near future.  Delaying a new plane two years when it is just a design on a sheet of paper, six or more years away from taking to the air is one thing.  But delaying a plane two years when there are already four planes flying and deliveries promised starting from almost right now is hard to understand.

Airbus is blaming the delays on issues to do with laying out the electrical wiring harness in the plane.  Unusually, the wiring is largely made from aluminum rather than copper in the A-380.

In related bad news for the A-380, it seems that air safety authorities will be requiring greater separation between the A-380 and other airplanes when the plane is taking off and landing at airports, to protect following planes against vortices behind the giant A-380.  This would require an extra two minutes of delay to space out other planes behind it on take-off, and one minute on landing.  This might sound trivial, but it is a significant hit on a runway's ability to maximize its number of take-offs or landings, and stands to negate a large part of the A-380's theoretical benefit - the ability to fly more passengers in and out of airports already operating their runways at capacity.

So far, so bad.  But wait, there's more.  Even if Airbus doesn't lose a single A-380 order, the further delay of 12 months in getting cash from selling these $300 million a piece planes (list price), combined with major new payouts in compensation (totalling billions of dollars), and the increasingly weak US dollar exchange rate (Airbus has most of its costs in Euros, but has been selling its planes based on US dollar pricing, so as the dollar weakens, the actual money received by Airbus drops) all combine to put the company in a severe cash bind.

This is particularly a problem with the increased scrutiny of government funding to Airbus, and with Airbus becoming so unpopular, it would be difficult for European governments to give the company more funding anyway.  Airbus seems likely to need a lot more funding to underwrite the development costs of its new A-350 plane, estimated at perhaps costing $8 billion or more, twice earlier estimates.

The A-350 program is another shambles.  Airbus (and I too) initially under-estimated the success of Boeing's 787 program, and believed that a slightly re-worked A-330 with new more efficient engines, and giving it a new model name (A-350) would be a sufficient competitive response.  The market showed this to be totally unacceptable, and so in an embarrassing turnaround earlier this year, Airbus announced it was returning to the drawing board and would be designing a completely new improved plane in lieu of the originally proposed slightly tweaked A-330 derivative.

So far, few details have emerged about the new A-350, and only one customer has appeared - Aeroflot, the Russian national carrier that split an order for planes between Airbus and Boeing, apparently solely on political grounds rather than on the merits of the two planes.  It is believed Aeroflot's preference, prior to political pressure from the Kremlin, was to buy all Boeing.  So Airbus has one largely undeserved order for 20 A-350s while Boeing has so far managed to bag 377 orders for its 787.

And now there is speculation mounting that Airbus may be forced to kill its A-350 development, due to lack of funds.  This would cede a large and profitable sector of the airplane market entirely to Boeing, making it easier for Boeing to make inroads into formerly all-Airbus airlines and harder for Airbus to do the same to formerly all-Boeing airlines.

Until now Airbus has correctly described the A-350 as 'fundamental to its future'.  Which rather begs the question - what might Airbus' future be, without the A-350, and with an A-380 program in tatters?

But wait, there's more.  Airbus also disclosed that its A-400M military freighter could be facing problems, cost over-runs and delays.

Is there any good news on Airbus' horizon?  None that I can see, and whereas little more than a year ago it was reigning supreme and seemingly unchallenged as airplane manufacturing market leader, it now seems much further behind Boeing in all respects than Boeing ever was with respect to Airbus.

Europe's pride and purported proof that European business can succeed against US business - Airbus - is becoming Europe's massive embarrassment.

The winner in all of this is certainly Boeing.  To my astonishment, I may even choose to buy a few Boeing shares.

This week's useless but interesting bit of information :  Among U.S. households with an annual income of $85,000 or more, the number with five or more computers grew almost 35 percent from 2005 to 2006.  Although I have seven computers here, I struggle to guess what the average family would do with five.

This Week's Security Horror Story :  Be careful if you're speaking in a foreign language at a US airport.  You might have the police sent to take you off the plane you were about to board and interrogate you as to why you weren't speaking English.  That's what happened to a Chicago resident earlier this week.

Freedom of speech used to extend to both the written and spoken word.  But apparently now it be limited only to English, and also an exception might exist for criticism of the TSA.  A man wrote 'Kip Hawley is an idiot' on the plastic bag containing his toiletries (Kip Hawley heads the TSA) and when a TSA screener detected it, the man was detained for apparently 25 minutes while the TSA confirmed that he did not pose a threat.

Translation - they harassed him gratuitously for 25 minutes.  These actions sound more like a police state than the United States.

I dare you to write this on your plastic bag for next time you go through security, too. If enough of us do it, the TSA will lack the resource to hassle us all for 25 minutes under the pretext of worrying we might be terrorists. Let me know how you fare.

And if you wondered how the new rules on how much and what types of liquids you can carry on were arrived at, here's an interesting article that explains there actually was some science underlying what seemed to be arbitrary decisions.

Help wanted; bravery not required :  Four Canadian border crossings were shut down last Sunday as about 60 of Canada's unarmed border guards walked off the job after they were warned that a person classified as "armed and dangerous" may be headed into Canada.

The walkouts permitted when the guards perceive threats to their personal safety began mid-afternoon and stalled northbound border traffic for hours.

There have been several such walkouts since the terrorist attacks of Sept. 11, 2001.

However, help is at hand, but only if you're very patient.  In August, Canadian Prime Minister Stephen Harper said Canada's border guards will be armed, in a program to be successively implemented over ten years starting from September 2007.

Eleven years from now till then?  What takes so long to drive to the local gun store, buy some sidearms and a few boxes of bullets, and hand them out to the border guards?

This week's most ridiculous confiscation of a non-dangerous object from a non-threatening passenger with a bona fide reason to have the object goes to the TSA screeners in Hartford who took a small rock from a Geology Professor traveling to a geology conference.

Maybe we'll see this incident featured in this year's 'Stupid Security' awards.  You are invited to send in nominations between now and 31 October.

Until next week, please enjoy safe travels

              David M Rowell aka The Travel Insider

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