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Anzac Day, Friday 25 April, 2008  

Good morning

And happy Anzac Day to my fellow Antipodeans.  Of course, your Friday was yesterday, but I think you'll agree that such a seminal event in our countries' histories deserves a double celebration, even now, 93 years after our brave lads landed at Anzac Cove, Gallipoli.

For the 98% of other readers, Anzac Day commemorates both the specific memory of a disastrous campaign fought in large number by members of the Australian and New Zealand Army Corps (hence the acronym) in Gallipoli, part of Turkey during WW1 in 1915, and also the broader memory of our fallen dead in battles all around the world.  It is an interesting phenomenon that the Anzac Day celebrations, and pilgrimages to the Gallipoli battlegrounds, are steadily growing in popularity in both countries, even though the last servicemen who fought during the campaign are no longer with us.  Although war and soldiering is no longer as respected as it once was, there is something epochal in our Anzac history that unites us and gives us national pride and identity.  The travel company I founded in 1990 and sold in 2000 was named Anzac Travel, not to commercially exploit the name (which is largely unrecognized in the US anyway) but rather to honor the memory.

There are some interesting snippets about the Anzac story on this website, maintained by a friend of mine in Australia.  And if you'd like some rather moody cinematic entertainment on the topic, Peter Weir's 1981 movie, Gallipoli, would be a good choice.  The movie stars Mel Gibson, and had as one of its producers a Mr Rupert Murdoch.

As an aside, drawing together both the Turkish/Anzac thread and the seasonal resurgence of tulips, did you know that Turkey was the original home of tulips, and has the tulip as its national flower.  Istanbul hosts a nine day tulip festival each year and has massively planted tulips throughout the city during the last three years.

But if you don't want to go to Turkey to see tulips, they are also of course available in Holland, with some of the tulip focused river cruises being an increasingly popular way of visiting the fields and markets.  Which, ahem, reminds me - Wednesday next week, 30 April, is the last day to put Amadeus' 2009 river cruises on deposit and qualify for an extra 5% 'early booking discount', in addition to the 5% Travel Insider discount and possibly $100 AARP and Past Passenger discounts you might get as well.  More details here.

And if you don't want to leave the US, Washington State's Tulip Festival is another option open to you.

Another Bluetooth headset review this week.  After stridently complaining last week that no Bluetooth headset gives close to acceptable sound quality, guess what?  I found one that does, indeed the sound quality is, if anything, better than talking directly through the phone.  Amazing.  So, what's not to like about this headset - well, unfortunately, it does have issues, but even so, it is probably the best headset I've yet encountered.  So :

This Week's Feature Column :  The Cardo S-800 Bluetooth Headset :  This headset is so good you'll certainly not want to lose it.  Unfortunately, it has a nasty tendency to fall out of your ear when you least expect it, and also to discreetly pop out of its carry cradle, too.  But wrap it securely around your head with some 2" duct tape, and you'll have the perfect headset.

Okay, so the 2" duct tape was a bit of a cheap shot.  The unit does actually come with an alternative ear-mounting system (hmmm, that sounds rather odd, doesn't it), which works well.  And I do like it.  But after reviewing so many of these units (not all of which ever make it to print) it sometimes gets a little hard to take it all solemnly and seriously.  Anyway, let's now get out our long sad serious faces, for here is :

Dinosaur watching :  It was a bad week to be a dinosaur this week, because you had to 'fess up to the marketplace with your first quarter losses.  I mentioned Southwest's increased profit last week, but this week sees some less positive results.

American Airlines reported a $328 million loss.  US Airways lost $236 million.  United Airlines dropped $537 million.  Continental dropped a mere $80 million.  Smaller airlines were not spared, either.  Alaska lost $36 million.  AirTran lost $35 million.  And JetBlue lost $8 million.

So, what airlines have I overlooked?  Oh yes, Delta and Northwest.  They too didn't exactly make a stellar profit.  Northwest had a bit of a bad quarter, losing $4.1 billion.  But that looks positively profitable compared to Delta.  It managed to lose $6.4 billion.

No, there's no mistake here.  But there are some accounting 'complexities' - in terms of actual trading losses, Delta lost a mere $274 million and Northwest lost $191 million.  The extra losses relate to the reduced market valuation of the two airlines - 'non cash goodwill impairment charges', but are surely spectacular, no matter what they are called.  If (when) merged, this would be a $10 billion loss in a single quarter.

Some of us might be wondering what the over-inflated valuation was of the two airlines prior to it now being written down.  And we might also puzzle how companies with total market valuations of less than these losses can sustain the losses and still be solvent.  It all smells a bit fishy, but with the string of auditors and compliance regulations surrounding public companies these days, it is undoubtedly legal, even if not intuitive, and basically relates to fictional 'book value' goodwill amounts being incorporated into the value of the two carriers when they emerged from bankruptcy last year.  These fancifully optimistic numbers are now being shown to be the nonsense they always were, and the lack of adjustment in real market values shows that few people ever believed them.

What are the airlines doing in response to their losses?  Well, the first thing they're doing is blaming everyone except themselves.  It is our fault for not paying enough for tickets, it is other airlines' faults for flying too many flights and depressing the prices that tickets can be sold for, and it is everyone's fault for allowing oil costs to go so high, and so on.

The second thing they're doing is continuing to shrink domestic services, with many of the major airlines now looking to shrink by 10% or even more during this year.  This poses an interesting question - with nearly full planes, a 10% reduction in available flights and seats means not everyone will be able to fly where they want and when they want.

What happens to these people?  Either they don't fly at all (eg in the case of businessmen, this means they fly less times each year), or they drive.  Or, a new non-dinosaur airline comes along and offers them the service they need.

The airlines hope that by reducing the number of flights and seats, they'll force the price of tickets up.  But this assumes we'll continue to buy tickets, even if the prices massively increase, and - especially in these soft economic times - there's little reason to expect this will be the case.  And, as I've said before, airlines, with their large fixed costs, become even more difficult to operate profitably when they cut back on flights.  Are the dinosaurs indulging in a death spiral of fewer flights, higher fares, fewer passengers, and therefore still fewer flights, still higher fares, and still fewer passengers, and so on?  Possibly.

The next part of this spiral is higher fares.  And so, here's what seems to be a regular weekly announcement.  United has increased its fares yet again, on Thursday, with increases ranging between $4 - $70 roundtrip for most of the routes it flies.  By the end of the day, American and Delta had already matched United's increases, and assuming the other majors match in the next day or so, we'll have the ninth fare increase of the year.

More in the background, United has also been increasing some of its other fees - the change fee on a domestic ticket goes from $100 to $150, and many of their lower fares have been adjusted to now require Saturday night stays.

If you think $150 is a massive cost to change your travel dates on a ticket, wait till you try to do it on an international ticket.  United will now charge you $250 for a change on an international ticket.

Needless to say, United says it needs to increase ticket change fees because of high fuel costs.

Now I can sort of understand why United needs to increase its base fares, particularly in light of their $537 million loss for the last quarter, but would someone please tell me how the price of jet fuel impacts on the administrative cost of changing a computer entry from one flight to another?

Jet fuel costs have become the airlines' 'Get Out of Jail Free' card which they're playing for all it is worth (as are as many other parts of the travel industry in general as possible).  Not only is United justifying its rapacious change fee increases on higher jet fuel costs, but Delta is using it as an excuse for closing its Crown Rooms in Denver, Honolulu, Kansas City, London (Gatwick), Phoenix, Seattle and San Juan, and one of the lounges in Boston and Cincinnati.

Although Delta refers to these as secondary locations, they sure seem primary if one of these airports is your home town airport and you are a regular Delta flier.  And I'm bamboozled as to how closing a lounge saves on jet fuel costs?  I'd understood the Crown Rooms were operated as a separate profit center within Delta, so don't see how flight operational issues should impact on this on-the-ground service at all.

But it is another step in Delta's own death spiral - frequent Delta fliers and Crown Room members in the above cities will now be tempted to switch to another airline, and these people are typically business travelers who pay the higher more profitable fares.

This is one more example of how the airlines' current problems are indicative of a lot more wrong headedness than just those issues related to high fuel costs.  Sure, fuel costs are way up, but let's put this in perspective.  For example, Delta, with an exactly 50% growth in fuel costs compared to the same quarter last year, had its overall costs per available seat mile increase by only 16.3% - 1.63 cents per mile.

Now that is a very interesting number, and gives us a new way to look at how much the airlines need to increase fares to recover increased fuel costs.  Let's be generous, give them a bit of profit, and say they need to get an extra 2c per mile compared to what they were getting a year back.  How much is that?  On a 1000 mile roundtrip, it is $20 extra on the fare.  On a 5000 mile coast to coast roundtrip, it is $100, and so on.

But, with the new United increase of yesterday, how much more than this have fares gone up during the nine increases so far this year (see table here for the impact of the first six increases, the latest three have added up to another $100 to these figures, so some fares have increased by over $200 this year alone), let alone the countless more last year as well?

On the face of it, something is not adding up.  The airlines are increasing fares by way more than the increase in their costs, but the cost increases are not flowing through to their bottom lines.  Why not?  Could it be that we're experiencing the 'elasticity of demand' - when fares go up, people change their travel habits to fly less, or to fly less expensively?  This may be the case, and hints at the uncertain sense of airlines trying to use fare increases and operational downsizing as their way out of trouble.

One last comment about airlines increasing their prices.  Airlines have to go to great lengths to maintain a facade that suggests they change their pricing independently of each other, in an open and competitive marketplace.  So called 'signaling' - sending unofficial messages between airlines, perhaps in the form of tentative small fare increases in limited markets, or via 'back room communication' - is a very naughty thing.

But Delta's CEO seems to have come across an interesting new way to 'signal' to his competitors.  He makes a public statement saying the industry needs to raise its fares by 15% - 20% in order to return to profitability.  Almost immediately thereafter, United obediently raises its fares, within half a day, Delta followed, as did American, and presumably after a theatrical show of reluctant uncertainty, the other major carriers will also join this latest round of increases.  Is an airline CEO saying 'we need to raise our prices 15% - 20%' some form of signaling?  Apparently not.

Back to fuel increases - not only are bizarre cost increases occurring on items and services that have nothing to do with fuel, but the way direct fuel surcharges are calculated clearly shows they often have nothing to do with recovering the cost of extra fuel in any sort of directly linked manner.

For example, think of a cruise ship.  Does carrying some passengers consume more fuel than others?  Do passengers stop consuming fuel on an extended cruise?  Apparently so.  For example, the latest fuel surcharge increases by RCCL see an $8 per person, per day applying to passengers, but only up to a maximum of 14 days - after that, there's no extra surcharge.  And if you're a third or fourth person in a statement, you'll be charged only $3 a day (and again for up to 14 days).

These aren't fuel surcharges.  They are simple price increases.

Oh - if you come across any other ridiculous and/or rapacious ways in which jet fuel is being blamed for other cut backs and fee increases, do let me know.

One thing is for sure.  If an airline can successfully find a way to tap into the growing unfilled demand for affordable convenient air travel, they could be on to a good thing.  But there's no evidence of this elusive goal being achieved by any of the carriers, not even what seems to be the only profitable carrier of any size for Q1, Southwest.  And let's not overlook that even the great Southwest has a troubled future, leavened only by its current short term competitive advantage based on its greater level of fuel hedging.

And talking of Southwest, what of its share price?  It closed on Thursday at $12.70, up slightly from last week's $12.61 - no small accomplishment in a week of shatteringly bad news for the airline industry as a whole.  Since I first commented on the share price (13 March when it was at $11.70), we have seen Southwest appreciate by 7.8% but the overall airline index (including an allowance for Southwest's increase) has plunged 16%.

And talking about plunging stock values, let's not forget Alitalia.  Alitalia's future was made into an election issue in the recent Italian election, with successful incoming prime minister Silvio Berlusconi objecting to its proposed buyout by Air France/KLM, saying he wanted to keep it Italian.

So what has he done about that?  First of all, he is illegally loaning the airline $475 million, even though the EU says the Italian government can't do this.

Secondly, he has coined a slogan 'I love Italy.  I fly Alitalia'.  Doubtless this will make a great deal of difference to the airline.

Thirdly, in his effort to keep the airline Italian, he has held talks with investors interested in buying into Alitalia.  Apparently the fact that these investors are Russian (ie Aeroflot) in no way threatens the Italian-ness of Alitalia.

And, fourthly, he has indicated a willingness to negotiate a new deal with Air France/KLM.  Hey - weren't they the bad guys prior to the election?

The exact nature of his 'keeping Alitalia Italian' pledge remains unclear to all concerned.

Here's an interesting twist.  Staff at American Airlines pilots union (it is getting late - I've stared at this phrase for several minutes and can't decide where to put the apostrophe(s)!) have picketed the union itself.  While the pilots have been busy picketing the airline, it seems that their union has allowed its own staff to go 300 days without a contract.  Hmmm.

Here's some starting news.  In a tentative reversal of its earlier findings, Britain's Competition Commission is now saying that allowing the private company BAA (no relation to BA) to own seven of the country's largest airports in fact 'may not be serving well the interests of either airlines or passengers'.

BAA owns Heathrow, Gatwick and Stansted in the London area, giving it close to a lock on providing airport services in the London area.  And with Edinburgh, Glasgow and Aberdeen airports, it dominates Scotland, too.

With Britain's airport services tangibly deteriorating over the years that BAA have controlled them, these cautious comments by the Competition Commission may seem 'a day late and a dollar short', but hopefully they mark the start of a new era of realism and accountability, and if Heathrow was to be split off and sold, perhaps the competitive pressures might act where regulatory oversight has clearly failed and encourage both BAA (with the other two airports) and the new Heathrow owner to get their acts together.

The new Heathrow Terminal 5 disaster has to be understood as being a joint failing by both BA and BAA, but while BA is suffering commercially as a result, those same passengers who have switched their business from BA to another airline are still flying through Heathrow (or Gatwick or Stansted) and thereby not applying any commercial pressure on BAA at all.  It is well past time for this to change.

As readers know, the newsletter is often bedeviled with problems getting through some readers' trigger happy spam filters, and sadly some of the biggest mail services have the worst approach to such issues.  Reader Bill wrote in with an interesting story about problems with his AT&T email :

We are currently in France and have been corresponding with our French contacts by email, sending the emails successfully, but not being able to receive a reply to ANY of the emails.  When I contacted the recipients, they told me that their responses were blocked and returned to them.

After a lot of difficulty reaching the appropriate person in AT&T, I was told that within the last month or so, they added new security enhancements to their email programs, in an effort to filter out spam.  AT&T says that many domains outside the United States do not have the necessary software filters to sort out regular mail from the spam and until AT&T is satisfied that these filters are in place, emails coming from these domains will be completely blocked, across the board.  Getting a domain unblocked is an onerous and cumbersome procedure.

The domains that could not send me emails included Orange.fr and Wanadoo.fr, both of which are operated by the national telephone company, France Telecom, and which are probably used by a large percentage of all French users.

I don't know how extensive AT&T's "blacklist" is, but it would seem to pose a huge problem for travelers and stay-at-home people alike.

Zero tolerance for spam, such as AT&T is displaying, equates to zero sense.  Shame on one of our largest telecommunication giants for displaying such an asinine approach to spam control.

This Week's Security Horror Story :  If you've ever had your fingerprints taken, you may know that getting a good set of fingerprints is a surprisingly complicated and difficult challenge.  I've had my fingerprints taken many times - every step along the tortuous path to US citizenship seemed to require another set of fingerprints to be taken (no, I don't know why - it isn't as though they change!), and frequently, the official fingerprints taken by the local Police Dept were rejected by the Immigration Service and had to be redone.

It is a bizarre contradiction that CSI type people can take a partial smudged fingerprint off a murder weapon and use it to convict a killer, but the US government can't accept an official set of fingerprints taken by the Police Department in a fully optimized environment.

And the point of this?  Well, Homeland Security is now wanting to know all about not just people entering the country, but also people leaving the country, too, and so has decided to fingerprint not only visitors arriving into the US but also those same people when they leave again (yes, the same question about 'so have their fingerprints changed during their two week visit?' applies here too).

Of course, taking fingerprints of departing passengers is a lot of extra work and hassle.  So much so, in fact, that Homeland Security doesn't want to do the work itself.  Instead, it is asking the airlines to do the work for them.

Does anyone care to guess at how much extra time it will take to check in for an international flight if half the passengers are going to have to be fingerprinted?

Another reader writes in with his recent TSA experiences.

Last month I simply forgot to separate my toothpaste and hair gel when packing for a trip.  I realized when unpacking in my hotel room that my bag had not been 'screened properly' as these items were packed deeply in my carry-on suitcase which had been placed through the x-ray machine.  So I decided to try an experiment and not separate these items on my return trip home.  Again, the bag went through without the items being detected.

I have since been on two more trips requiring me and my bag to pass through security four different times in three different airports around the country all with the same result of my toothpaste not setting off any alarms.

A recent seat mate of mine admitted doing the same. Gather from this what you will.

Do you feel safer now?

Until next week, please enjoy safe travels

David M Rowell aka The Travel Insider

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