American Airlines plans to firm up Qantas ties – A response to Delta’s tie-up with Virgin Australia?

by: Siva Vayali - May 16th, 2011   Filed under: Airlines, Airports Add Comment

American Airlines and Qantas today announced their intention to form a Joint Business Agreement on their services between the United States and Australia/New Zealand, within these regions and beyond to third countries. The irony is that American Airlines does not operate to Australia/New Zealand. So, this is not a revenue sharing agreement since AA does not generate anything.

Qantas B747 - Courtesy: Qantas

Qantas B747 - Courtesy: Qantas

American and Qantas are part of the Oneworld alliance and already place each others code on their respective schedules. So, what does this agreement bring to the table? The main reason behind this tie-up is the shift of Qantas’ services from San Francisco International Airport, where it has virtually no connection feed, to Dallas/Fort Worth International Airport, where American operates its biggest hub.

The idea makes sense on many fronts: Qantas had virtually no connecting traffic from San Francisco. It had to compete with United, which operates a major trans-pacific hub there with lots of feed from throughout the US and Canada. Shifting the route to DFW makes sense as it opens up the entire US and Canada to Qantas through American’s extensive network. This also gives Qantas a nice way to balance the US flights between a West Coast (Los Angeles) and a Midwest (Dallas/Fort Worth) destination offering better connections. For American, which does not have an aircraft that can stretch the DFW – Australia route nonstop, it offers a nice compromise by placing its code on Qantas’ Australian and New Zealand destinations. Qantas will operate only four services a week and hence it is a decent start. American might consider operating its own metal on this route (or from Chicago?) when it gets B787 dreamliner (expected in 2014).

It is interesting to note that this proposal comes in the wake of Delta Air Lines and Virgin Australia gaining approval from the US Department of Transportation for their alliance. Delta, which is expanding its presence in Los Angeles, already operates the Los Angeles – Sydney route. V Australia, which is the international arm of Virgin Australia, operates flights from Los Angeles to Sydney, Melbourne and Brisbane with connections throughout Australia and New Zealand.

So the competition in the US – Australia air service market is heating up. Qantas and United Airlines are the largest operators in this sector with Delta trying to gain some market share. With the Joint Business Agreement with American Airlines, Qantas, which is the largest player in the sector, is trying to protect its turf. United Airlines, the second biggest player in the sector, has Air New Zealand as the Star Alliance partner. United also has plans to start the Houston – Auckland route when it gets the B787. With Delta, finally getting approval for its alliance with a re-invigorated Virgin Australia, the battle lines are drawn.

Let the games begin!!!

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American Airlines Q1 Results – A Snapshot

by: Siva Vayali - April 20th, 2011   Filed under: Airlines 1 Comment

American Airlines today announced its Q1 results. As expected, the carrier lost money. Last year American outlined turnaround plan that would focus on its five cornerstone markets (New York, Chicago, Los Angeles, Dallas and Miami), implementing joint venture agreements on Trans-Atlantic and Trans-Pacific routes. The results reflect the fact that American’s efforts for a turnaround are hampered by the rising cost of fuel. As the only legacy carrier that did not declare bankruptcy, American continued to be hurt by its huge debt, higher labor costs and pension obligations.

Q1 highlights

  • Unit Revenue (PRASM) up by 5.2%
  • Passenger yield up by 6.2% (year-over-year)
  • Unit costs down by 1.8% (excluding fuel costs and special items)
  • Mainline capacity up by 2.7%
  • Joint business with British Airways and Iberia implemented on Trans-Atlantic routes
  • Joint business with Japan Airlines implemented on Trans-Pacific routes
  • Enhanced service at Los Angeles LAX (including new LAX – Shanghai route launch)
  • New agreements signed with Expedia (and Hotwire)
  • New agreement signed with Priceline
  • Law suit filed against Orbitz (and Travelport, LLC)

Guidance

  • Planning to reduce the domestic capacity and increase international capacity
  • Planning to retire 25 more MD-80s in 2011
  • Fuel is the biggest concern
  • Cost of fuel expected to be $3.10/gallon for Q2 and $3.07/gallon for 2011
  • For Q2, 49% of fuel hedged at average cap of 2.66/gallon and 39% of fuel hedged at average floor of $2.04/gallon
  • For entire 2011, 41% of fuel hedged at average cap of 2.63/gallon and 35% of fuel hedged at average floor of $2.02/gallon
  • Cost per Available Seat Mile (CASM) is expected to be about flat to 2010, excluding fuel and potential new labor costs
  • Other concerns include Labor Contracts, Facilities and Healthcare costs
 

  • Unit Revenue (PRASM) up by 5.2%
  • Passenger yield up by 6.2% (year-over-year)
  • Unit costs down by 1.8% (excluding fuel costs and special items)
  • Mainline capacity up by 2.7%
  • Joint business with British Airways and Iberia implemented on Trans-Atlantic routes
  • Joint business with Japan Airlines implemented on Trans-Pacific routes
  • Enhanced service at Los Angeles LAX (including new LAX – Shanghai route launch)
  • New agreements signed with Expedia (and Hotwire)
  • New agreement signed with Priceline
  • Law suit filed against Orbitz (and Travelport, LLC)
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American Airlines and British Airways optimize their schedule on New York – London route

by: Siva Vayali - March 18th, 2011   Filed under: Airlines, Airports Add Comment

American Airlines and British Airways have finally managed to optimize their schedules in the New York JFK – London Heathrow sector. It is the most lucrative transatlantic air travel market. Thanks to the joint venture between AA, BA and Iberia, the service dubbed as London Express, ups the ante against other major players in the market: Delta Air Lines (from JFK), Virgin Atlantic (from JFK and EWR) and Continental (EWR), part of the new United.

AA, BA and Iberia - Part of Oneworld - Courtesy: Oneworld

AA, BA and Iberia - Part of Oneworld - Courtesy: Oneworld

New York – London air travel market is one of the most competitive in the world.  The Oneworld alliance is already the most dominant player in the market. With this schedule alignment, it is trying to protect its market share against increased competition from Delta and the new United. From March 27, AA/BA will have near hourly departure from New York JFK in the evening. With BA’s multiple departures from Newark to Heathrow and from JFK to London City, Oneworld covers the entire geography of London and New York. Continental recently announced increasing its services from EWR to LHR.

Competition is heating up on many US – London routes. Oneworld has optimized its schedules on Chicago – London, Miami – London and Boston – London routes. This comes around the same time Delta announced its Miami – London and Boston – London services (ironically from the slots it got from Oneworld as a part of the Anti Trust Immunity approval from US DOT/EU competition commission).

It would be interesting to see how the landscape unfolds! Let’s wait and see!

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Jet Airways talking to Delta, Air France and KLM – A gain for SkyTeam?

by: Siva Vayali - March 15th, 2011   Filed under: Airlines, Airports Add Comment

Jet Airways is reportedly in talks with Delta Air Lines, Air France, KLM and Alitalia to form a transatlantic joint venture with SkyTeam. As India’s largest and most respected airline, currently Jet does not belong to any of the major alliances. It has code sharing pacts with many airlines from different alliances.

Jet Airways Boeing 777 - Courtesy: Jet Airways

Jet Airways Boeing 777 - Courtesy: Jet Airways

Why considering a Joint Venture with SkyTeam now?

Ideally, Jet would like to join Star Alliance. It has strong relationship with Star through its code share pacts with Brussels Airlines, United, US Airways, Air Canada, and ANA. Majority of Jet’s European traffic is routed through Brussels Airlines. Jet uses Brussels Airport as a transfer point for connecting passengers between India and North America. It also has strong ties with Oneworld carriers through code share pacts with American Airlines and Qantas. Jet has no code share partner from SkyTeam, except with Alitalia through its recently launched Delhi – Milan Malpensa route.

SkyTeam Partners - Courtesy: SkyTeam

SkyTeam Partners - Courtesy: SkyTeam

So, why Jet would consider the option of joining SkyTeam or a JV? With Air India joining Star and Kingfisher Airlines joining Oneworld, Jet is running out of options. It has been reported that the Indian government was against Jet joining Star as it might dislodge Air India as a second tier partner. SkyTeam does not have any major airline from India in its kitty. So, the deal could be mutually attractive.

Is it good for Jet?

Jet Airways has built a nice little operation at Brussels Airport. It is an efficient operation with all flights arriving and departing within the same short window of time. This makes transfers easy. Brussels Airport, being small compared to other European hubs and a one-terminal facility, also helps (but, I have heard few complaints about passport control and security scrambling to handle high passenger volumes in short window of time). Code share partner Brussels Airlines (now part of the Lufthansa group) provides decent connections throughout Western Europe and Africa. Jet Airways can keep the revenue from lucrative North American traffic to itself as the later does not have flights across the Atlantic.

Joining an alliance with SkyTeam would involve Jet transferring its hub from Brussels to Amsterdam’s Schiphol airport, where KLM operates a mega hub. KLM offers much better connections throughout Europe, Africa and North America than Brussels Airlines. Delta Air Lines also has significant operations at Schiphol. This greatly expands Jet’s ability to offer connections. If Jet starts a flight to Atlanta, it would virtually put the entire North America under its map through Delta’s network.

But, the downside is that Schiphol has a much better transatlantic connectivity and competition than Brussels and how much control would Jet get on the transatlantic routes from there. Media reports suggest that SkyTeam is willing to allow Jet to takeover only one route from Amsterdam. Currently Jet Airways operates its own metal on Chennai – New York JFK, Mumbai – Newark, and Delhi – Toronto sectors, all routed through Brussels. It has plans to add more North American destinations in future. If Jet has to shift the hub to Amsterdam, would it be able to offer these routes? KLM serves to Delhi and Delta servers to Mumbai currently. From Schiphol, KLM and Delta pretty much cover the entire North and South American continents. Under these circumstances, what could Jet offer using its own metal? How the revenue would be shared? What would happen to Jet’s existing code share agreement with American Airlines? All these questions need to be answered.

A win for SkyTeam and a loss for Star Alliance

If this happens, it would be a major win for SkyTeam.  It was scrambling to find a partner in India. It could not ask for a better one than Jet Airways. Jet connects the length and breadth of India. SkyTeam instantly gains access to the second fastest growing economy in the world.

It would be a major loss for the Star Alliance. Star would be better served with the inclusion of Jet than the current proposed partner in Air India. The government owned Air India is in survival mode and it’s joining the alliance has been delayed due to several operational reasons. Air India is also financially bleeding, with massive debt and labor issues and it is steadily losing market share in both domestic and international routes. I don’t know why Star, especially Lufthansa, preferred Air India over Jet. One reason could be that, Lufthansa has a major presence in India and did not want a stronger carrier that could compete with it.

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Virgin Atlantic at the Crossroads: Good Opportunity for Delta and the SkyTeam?

by: Siva Vayali - February 25th, 2011   Filed under: Airlines 2 Comments

Virgin Atlantic Airways is in a peculiar situation. The airline, promoted by Sir Richard Branson, does not belong to one of the three major alliances (Star, OneWorld, Sky Team). The airline’s viability is now threatened by the industry consolidation, the Open Skies agreement between the European Union and the United States and Anti Trust Immunity (ATI) granted to the airline alliances for the transatlantic services. The ATI for OneWorld partners British Airways, Iberia and American Airlines especially threatens Virgin’s long term ability to compete in the important UK-US aviation market.

Virgin Atlantic A340-600: Courtesy - Virgin Atlantic Airways

Virgin Atlantic A340-600: Courtesy - Virgin Atlantic Airways

Virgin Atlantic has been a long time opponent of any alliance between AA and BA (no wonder its tagline was “No Way BA/AA”). Rumors have been that Virgin is finally evaluating its options and the SkyTeam is trying to come up with a bid to acquire Virgin.

Virgin Atlantic’s strengths

Virgin Atlantic’s important strength is its slots at London’s Heathrow Airport (LHR).  LHR is the biggest international airport in the world and London is the most important transatlantic business market along with New York. Virgin is an important player in that market.

Virgin Atlantic has an excellent product which is consistently ranked as one of the best in the world, well above that of the mainline European and North American airlines. Only carriers like Singapore Airlines and Emirates can challenge Virgin’s product. Virgin’s lounges and airport clubs have been top notch and it has a stellar brand loyalty.

Virgin through its subsidiaries Virgin Blue and V Australia, has a decent footprint in Australia.

Virgin Atlantic’s weaknesses

Virgin’s route network is mostly long haul, point-to-point. Passenger traffic is mostly to O&D. It was setup that way by the management. In this world of alliances and frequent flyer loyalties, it is difficult for Virgin to develop new markets.

Virgin has no flights within the UK except at London (LHR and Gatwick), Manchester and Glasgow. Virgin has no flights to the rest of the Europe as well. This makes Virgin a niche player, making it difficult to expand its market share.

Virgin’s fleet primarily consists of B747s and A340s. Most competitors utilize more efficient B777s and A330s (which are slowly showing up in Virgin’s fleet now). This means Virgin’s operating cost will be higher than its competitors.

Sir Richard has his footprint all over the airline. Even though this is a good thing in general, the industry may view it the other way. He might not be open for outright acquisition and liquidation of Virgin brand.

Opportunity for Delta and SkyTeam

Rumors are on the rounds that Delta, along with its SkyTeam partners Air France-KLM, is preparing a bid to acquire Virgin. This is a great opportunity for Delta and SkyTeam. They can acquire the 49% stake currently held by Singapore Airlines. There are immediate benefits.

Delta and SkyTeam resolve their biggest missing link – a strong foothold in London and UK in general.

Delta gains the new additional slots at LHR. This greatly enhances its ability to serve the busiest transatlantic market: London – New York. Combining Delta’s and Virgin’s flights would give the BA/AA combo a better competition (still BA/AA would be the strongest player in this market for the foreseeable future). It will move Delta to the second place in this market ahead of Continental. Delta will have flights to the top five US-UK air travel markets: New York, Chicago, Los Angeles, Washington, San Francisco. Except New York, Delta does not operate in any of these markets. Combine this with Delta’s growing London – Boston and London – Miami routes, and its dominance at Atlanta and Detroit, the SkyTeam becomes the second biggest players in the US-UK market ahead of Star.

Delta gains a mini hub at San Francisco, thanks to the growing Virgin America operations.

Delta’s fledgling transpacific operation could get a boost from a partnership with V Australia and Virgin Blue.

Upside for Virgin too

Virgin Atlantic has some upsides as well.

It can retain the Virgin brand and its unique product.

Joining the SkyTeam means, it has better chances to gain the connecting traffic in US. Virgin can start services to Atlanta and Detroit using its own metal, paving the way for its UK passengers to connect through these fortress hubs operated by Delta.

Better Pan European connectivity through  Air France and KLM.

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