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Friday 4 May, 2007  

Good morning

Our special newsletter on Tuesday seems to have triggered quite a few spam filters.  If you didn't get a copy, you can read it here.  The newsletter compared and contrasted the two Christmas time cruises we're offering - the Christmas Markets Cruise and the New Year in Vienna cruise.  Hopefully we'll see you on one or other of these two lovely cruises.

I've been busy this week.  In addition to creating the web pages about the New Year in Vienna cruise, I've also updated the various pages about how to travel for best value in Britain to reflect current 2007 pricing and products - pages on rail fares and passes, the London Underground (a simple strategy that few visitors know will reduce your fare for a single journey from the exorbitant $8 price charged to a more reasonable $3), and the London Pass which gives free admission to 55 different places around London.

The main impetus for doing this was adding a new page about a Pass that gives you free admission to over 580 different places all around Britain - a tremendously good value that all visitors to Britain should consider.  If you'd like to know more about this, then click to :

This Week's Feature Column :  Great British Heritage Pass :  If travel to Britain is in your plans this year, here's a great way to save money when visiting the places you're going to want to see.

Talking about passes, one of the benefits of this pass, and its companion product, the London Pass, is that it often allows you to avoid the line at an attraction.  Typically there's a long line of people waiting to buy tickets, but no line at the actual entry point, and with your pass, you can avoid the ticket buying line and just go straight to the entry point and show your pass as you walk in.

This also applies to the Paris Museum pass, and in Paris there are already lineups at some of the major attractions, so one can only guess at how long the waits may be to get in during the busy summer months. 

Dinosaur watching :  I started writing a couple of short sentences, but they grew, and so here is more of an editorial commentary than the usual quick throwaway commentaries, on the subject of the future of airlines in the US.

Although I've been reporting improved profits pretty much across the board at most of the dinosaurs for the last quarter and some quarters prior to that, why is the stock market so gloomy about airline stocks?

Here's a logarithmically scaled chart of the composite airline index from 1 Jan 2000 through Thursday 3 May 2007.

As you can see, airline stocks climbed in the second half of 2006, but after hitting a three year peak in January, they have steadily dropped.  Since 1 Jan, airline stocks have dropped almost 14% and are down nearly 30% from their high on Jan 16th, while the major stock indices (eg Dow Jones, NASDAQ and S&P 500) are all up about 5%.

Even though the cycle has barely turned profitable once more after 5 - 6 years of losses, there are some troubling signs as to the future which perhaps investors are picking up on.  For example, even though we've seen a series of air fare increases this year, one study (admittedly a self serving one by the airline lobbying group, the ATA) is suggesting that the actual fares people pay aren't increasing in line with the published fare increases.  In other words, when the fares go up, people shop selectively for the more discounted fares.

People are proving to be more resistant to accepting increased fares than they used to be.  While passenger numbers are up, increasing numbers of those passengers are traveling on discounted rather than full fares.  In economic terms, air fares are displaying considerable elasticity of demand, although formerly (ie prior to 2000) it was conventional wisdom (at least in the minds of airline executives) that airfares were inelastic.

This week apparently saw the second largest equity investor in US Airways sell off their entire holding, just after US Airways both reported a larger than expected first quarter profit but also warned of weaker domestic revenues in the near future.  What does this investor (PAR Capital Management) know that we don't?  Merrill Lynch immediately downgraded their rating on US.

Perhaps one other factor in the industry's troubled future is increasing international competition.  Many of the dinosaurs turned their back on the US market which were becoming too open, unregulated and competitive, choosing instead to devote their attention and growth to international routes which remained relatively closed and uncompetitive.  I said at the time this was happening that this was a major mistake - the domestic markets are our domestic dinosaurs' key strategic markets, and if they can't profitably trade in those markets, they'll soon enough find themselves with no core business to support their international route extensions.  Not only does this comment still stand today, but the other shoe is dropping - the 'easy pickings' on international routes are successively becoming less easy, and international markets are becoming less regulated and more competitive.

This NY Times article reports on discounted business class fares.  While the major international carriers are successfully resisting the temptation to match these discounted fares, there can be no doubt the discount airlines are starting to have some impact, whether it be in the form of more generous negotiated discounts to high volume corporate travel accounts, or in the form of discounted business class fares if purchased in advance.

We're starting to see discounted business class fares spread to the west coast too.  Maxjet, the all business class airline, has said it will start service on 30 August between Los Angeles and London, with fares as low as $1398 roundtrip.  The airline is also adding flights to Las Vegas.

And new business class startup Silverjet has just taken delivery of its second plane, to be placed in service on 2 July, offering service between London and Newark.

It isn't just business class where fares are dropping.  Flyglobespan is adding service between JFK and Liverpool and Zoom is adding service between London and New York (in addition to the services it already operates between Canada and the UK).

Meanwhile, the US domestic market remains difficult.  While new airline Skybus has yet to have any appreciable impact on the dinosaurs, its new business model - nothing included and a charge for every extra - makes it harder for dinosaurs to offer service premiums 'for free'.  And much as we may dislike the Skybus business model, it is definitely the one which most travelers seem to prefer - as much as passengers want food, drinks, and other service items, they consistently show themselves unwilling to pay a premium to receive such things.  In this respect, Skybus is positioning itself exactly to what the largest part of the traveling marketplace wants.

This is of course a classic part of the UK/European discount carrier model, as epitomized by Ryanair and Easyjet, but only just now making its way to the US.

And here's another part of the Ryanair/Easyjet model - remarkably low and truly loss leader fares.  We saw that last week with Skybus' announcement that at least ten seats on all flights would be sold for only $10 each way, and this week Spirit came out with a 1 each way fare sale that quickly sold out - plainly Spirit isn't as adventurous as its European counterparts who boldly proclaim promotions such as 'a million tickets for free'.  But these deals too can be expected to become more commonplace, depressing domestic fares and causing some parts of the traveling public to lower their view of what a 'fair fare' is.

Southwest continues to grow (although it also continues to increase its fares), JetBlue continues to grow, Skybus is a new entrant, and some time this year we'll probably see the start of Virgin America too, all of which further marginalizes the 'easy' routes which the dinosaurs can make unusually big profits on.

But wait - there's more bad news.  Labor problems are never far away from the airlines, and what a lot of the unions completely fail to accept is that their 'givebacks' over the last few years were not temporary but necessarily must be permanent for the dinosaurs to survive.  Whether they truly expect to be returned back to their earlier ridiculously high levels of wages and benefits or not, the airline unions are increasingly clamoring for such things.

For example, undeterred by United's loss making Q1, five of United's unions have banded together to form a coalition group, 'the United Airlines Union Coalition'.  Last Friday they issued a statement calling United's $152 million first-quarter loss 'unacceptable' and a 'failure by management'.  But, peculiarly, their own recipe for United's future financial success seems to revolve around United paying more to its employees, improving profit-sharing, and addressing 'quality of work-life' issues with each employee group.

Matching the rhetoric of the United unions is the American Airlines pilots' union.  As this article describes, the pilots are asking for an immediate 30.5% raise in pay, plus signing bonuses that would represent a one time benefit to current pilots of about $33,000 per pilot.  AA pilots currently average $136,000 for their short work weeks, and still have plenty of benefits that those of us with ordinary jobs would crawl over broken glass to secure.

Amazingly, the union seems unworried that their proposal would cost more than American's entire profit for last year.  Their solution - AA should raise the prices it sells its tickets for.

Here's a news flash for the union official who came up with that suggestion :  AA - and every other airline - are already selling their tickets for the absolute top dollar they believe they can command.  If there was a chance to get even another single dollar per ticket, they'd have already seized it with alacrity.

The 'just raise prices and don't care about the costs' principle was the one which dragged the dinosaurs into bankruptcy over the last few years.  Only an incredibly foolish person would advocate a return to that type of airline management.

If air fare prices are close to maxed out, and if productivity gains are now also maxed out, if competitive pressures are mounting on the few remaining profitable parts of their routes, and if staffing costs are threatening to start increasing out of control, then is it any surprise that investors are abandoning airline stocks?



I mentioned Southwest increasing its fares a few paragraphs above.  This is the second fare increase Southwest has initiated this year, with a $2 eachway rise in about 40% of its markets and a $1 increase in another 10%.  Needless to say, all other airlines matched with alacrity.

Southwest has been a very successful purveyor of 'smoke and mirrors' when it comes to its airfares.  Although nine people out of ten would identify Southwest with being a low fare airline, the reality is that many times the average fares earned by Southwest are closely comparable to those on other airlines.  Here's an interesting article that supports this suggestion, albeit in a very empirical and non-exact way.

There's an easier way to do this. Let's look at their 'yield' - the average number of cents Southwest receive per mile they fly each passenger.  For the three months ended 31 Dec 2006, this yield was 13.04 per revenue passenger mile, and 9.52 per available seat mile, with an average passenger journey being 798 miles and an average fare being $104.07.

In comparison, 'full fare dinosaur' American Airlines had a yield of 12.8 per revenue passenger mile during the same three months, and Continental had a yield of 12.1 per rpm, both slightly less than Southwest's yield.

So, with lower costs than most other airlines, and generally higher yields, is it any wonder that Southwest has been so consistently profitable and for so long?

One of the stock-in-trade concepts of the dinosaurs is to give with one hand while taking back with the other.  For a particularly egregious example, read this article that reveals how United's special bonus miles promotion, offered to selected members of its frequent flier program (presumably those with a 'sucker' label on their file), actually ends up costing vastly more than their normal fares.

Another standard trick is to make getting your money back from a dinosaur as difficult as possible.  But, even acknowledging this long accepted practice, American Airlines has reached a new low in this case.

Instead of an airline paying lip service to the global warming brigade, this week brings an airline that bravely stands up and tells some home truths about this burgeoning new industry.  Of equal interest are the results to the reader poll at the start of the article that shows an amazing 98% of readers (of a prominently left wing/liberal English newspaper) don't trust carbon offsetting schemes.

Perhaps confirming how global warming has become the new religion, to be accepted unquestioningly, here's a story of a hotel that has replaced the traditional nightstand copy of the Gideon Bible with a copy instead of the Gore 'bible'.

One of the major benefits touted by Airbus when promoting their super-jumbo A380 is that because the plane carries many more passengers than other planes, it can help move more people through congested airports.  But since those claims were first made, reality has frowned on them.  First was the FAA's requirement that there be greater separation between A380s and most other planes.  And now this article points out other possible problems on the ground that may occur.

Do you remember back to March 2006 when Airbus successfully carried out its evacuation test of the A380?  A staggering 853 passengers, 20 crew, and three life sized dolls imitating infants all exited an A380, with half its exits disabled, in 78 seconds.  Here now is a fascinating video of that evacuation process.

Can you guess what the world's most popular travel spot is?  The second, third, and fourth most popular spots are the National Mall and Memorial Parks in DC, Disneyworld in Florida and Trafalgar Square, London.  Go to the slide show on this page to find out the identity of the #1 location, and the identities of other locations down to #50, too.

Every drop counts.  By reducing the remaining gas in the tanks of ex-rental cars that they then sell, the Avis Budget Group estimates they can save as much as $600,000 a year.  Apparently cars sold at auction or returned to automakers are only required to have a quarter tank of gas, and so by siphoning any extra above this out, Avis/Budget expects to recoup $600,000 in gas savings.

I wonder how much the extra labor to siphon this gas out will cost them?

New data in Britain shows that people are using their cell phones less, with a 23% - 28% drop in the number of calls people make each week compared to the same time last year.  But text messaging is up.

Here's an interesting article on electrosensitivity.

This Week's Security Horror Story :  Russia so often manages to get things wrong.  As is evidenced in its updating of its carry-on security requirements.  Falling in line with much of the rest of the world, it now limits liquids and gels to 100ml bottles, to be contained within a 1 quart plastic bag.  And you can buy drinks and other liquids in shops beyond the security point in an airport and take them on board as well.  So far, so good.

Now for the catch.  The small containers of liquids and gels have to be in a container that cannot be opened in flight.  What type of container would that be?  And the ability to carry on purchased liquids such as bottles of drinking water (as well as vodka) - that's okay, but you're not allowed to drink those on board.  How will they stop people from bringing a bottle of water on board and drinking from it?  Or, perhaps more to the point, what will the penalty be?  Suggestion - wait until you're safely out of Russian airspace before attempting this possibly risky action.

The Indian government has made seat assignments compulsory for all domestic airlines.  The Office of the Director General of Civil Aviation said it was imposing the regulation 'in order to ensure correct loading of aircraft and keeping the centre of gravity of the aircraft within limits at all times during flight'.  And also to assist with any investigations that may subsequently be needed.  Will you feel safer on your next internal flight in India, knowing that the authorities know where you are sitting?

And will airlines now refuse to move you out of your pre-assigned middle seat 'for security reasons'?

Warren writes

I was deplaning at Logan Airport in Boston yesterday when I heard an announcement relating to an American Airlines flight from Boston to Raleigh-Durham, NC (a 2-hour flight?) :

Attention passengers, the lavatory facilities on this flight will be out of order.  Please take the next 15 minutes to visit the restroom here in the airport.

I couldn't believe it.  It's situations like this that warrant an Airline Passenger Bill of Rights.

Trivial pursuit.  If you write your dates in the form dd/mm/yy (ie most places in the world other than the US), take special note of a particular time in the wee hours of the morning of 6 May, when it will be 02:03:04 05/06/07.

Most readers know I'm from New Zealand, and so I find this article particularly interesting.  But the contestants in these races would clearly not stand a chance if this similar contraption were introduced into one of their races.

The unanswered question has to be - what are they using for fuel?  The mind boggles.

Until next week, please enjoy safe travels

              David M Rowell aka The Travel Insider

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