This is self-explanatory. We’ll publish the results December 31.
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December 6 passed without fanfare, but the New American Airlines is a reality.
The first day of stock trading, under the symbol AAL, begins today. The Ft. Worth Star-Telegram–the hometown paper of the Ft. Worth-based AA–has this story, posted Saturday. The New York Times provides this analytical piece.
We know the US Airways management team reasonably well and we think they will be much better than the former American management. American hasn’t been the same since Bob Crandall retired in 1998. Crandall’s successor, Don Carty, had a lousy tenure. He originated the acquisition of Reno Air, a small airline headquartered in Reno (NV), for reasons that passed all understanding. In doing so, he created ill will with the AA pilots union (which, in fairness, wasn’t hard to do with this bunch of malcontents), creating all sorts of labor issues. Carty also acquired Trans World Airlines, another merger of mysterious motives that appeared more to do with market share than business sense. TWA’s only US hub by this time was St. Louis (MO), a mere 250 miles from AA’s massive Chicago O’Hare hub. TWA’s fare structure was low, competing as it was with fellow-hubber Southwest Airlines and able to attract traffic on price rather than quality.
We’ll never know whether the TWA merger would have been a success. The 9/11 terrorist attacks happened shortly after the acquisition, and by 2003, American was on the ropes. Carty negotiated steep concessions from the employee unions, but the deal unraveled when it was revealed that management simultaneously lined up for tens of millions of dollars in executive bonuses. Carty was forced out in the quid pro quo to complete the concession deal.
Carty’s successor, Gerard Arpey, gained respect from the employees. Over the next few years, more concessions were sought by Arpey as he strove to keep American from following all its peers into bankruptcy. But those bankruptcies allowed all the competitors to shave pension plans, cut wages and benefits and other costs while American remained burdened with higher costs across the board. In November 2011–10 years after 9/11–American finally succumbed and filed for Chapter 11. Arpey, who disagreed with the decision, resigned and was succeeded by Tom Horton.
We were never impressed with Horton, particularly with his view that he deserved $20m in the bankruptcy restructuring. He’s non-executive chairman of American but will leave the company soon. He provided this farewell message to employees.
Doug Parker, the CEO of US Airways and America West Airlines, who engineered the merger, is the new CEO of American. Parker and his team never got the respect we think they deserved for keeping US Airways alive, profitable and competitive with perhaps the weakest route system of the US legacy airlines.
Parker was an early proponent of adopting ancillary fees, a practice passengers really don’t like. But the industry had changed dramatically and free meals, free checked baggage and other stuff of history became just that for all the airlines: history. Today, most carriers make their profits from fees and not the tickets they sell.
Parker will have challenges to bring American back into the forefront of top tier airlines. Its reputation and employee morale have been battered. US Airways continues to rank near the bottom of passenger surveys. Employee group integration at US Airways from the merger with America West continues to be difficult; now add American to the mix.
AA and US will continue to fly under separate banners and certificates for some time, following the examples of United-Continental and Delta-Northwest. Integration of reservations systems, frequent flier programs and so on will undoubtedly present huge challenges. We fully anticipate passenger disruptions, also following the pattern of the other mega-mergers.
One of the things we expect to see is an employee contest for a new livery to replace the one adopted by Tom Horton. The tail logo is just awful, though the fuselage and stylized eagle are fine. When America West and US Airways merger, Parker held an employee contest and the winner is what’s painted on the US Airways planes today. It was a good was to involve employees. Then legacy paint jobs of the predecessor airlines were added to the fleet. We have no doubt this will happen at the New American. There are plenty of aviation geek ideas for an American livery. Some may be found here. From this link, you can click through to various other sites for some pretty creative ideas. We like several of the renderings at this website. The last two are what Horton should have adopted.
Aviation Week has a long, detailed story about the test program for the CFM LEAP engine, which is accelerating rapidly.
In its 737 MAX program update yesterday, Boeing said the LEAP-1B has begun testing and it will benefit from the testing already underway for the LEAP-1A, the version that is designed for the Airbus A320neo family. The LEAP-1C for the COMAC C919 is on its original schedule for certification in 2015, despite the fact the C919 has slipped to at least 2017, reports AvWeek.
The 737 MAX is exclusively powered by the LEAP, as is the C919. The former has more than 1,600 firm orders and the latter just hit its 400th order/commitment. CFM faces competition on the A320neo family from Pratt & Whitney’s P1000G Geared Turbo Fan, where PW holds a 49% market share against CFM, which previously held a larger, more dominate position in the A320ceo competition. A large number of orders don’t yet have an engine selection.
PW is the sole-source engine provider for the Bombardier CSeries, the Mitsubishi MRJ and the Embraer E-Jet E2. PW splits the engine choice on the Irkut MC-21 (soon to be renamed the YAK 242) with a Russian engine.
Just as Boeing’s LEAP-1B will benefit from the experience of the LEAP-1A now in testing for Airbus, Airbus will benefit from the testing and experience of PW’s testing of the GTF on the Bombardier CSeries.
Aviation Week also has a story about the Airbus A350-800 with the blunt headline, The airplane Airbus doesn’t want to build. This refers to the A350-800. AvWeek muses that the outcome of the merger between US Airways, now the largest customer for the airplane, and American Airlines, may be the deciding factor for the airplane. We agree. With American’s large order for the Boeing 787-9, the A350-800 would be unnecessary.
That would then leave Hawaiian Airlines as a key decision-maker. We hear in the market that Hawaiian is just sitting back and waiting to see what kind of incentives Airbus will offer to entice a switch to the larger A350-900.
Movement on AA-US merger: Terry Maxon of The Dallas Morning News reports that American Airlines, US Airways and the Department of Justice have picked a mediator to sort out the DOJ’s lawsuit to block the AA-US merger. See also this Maxon report.
Maxon has a long piece, asking several pontificators (including yours truly) what they think the outcome will be.
Bloomberg reports that American CEO Tom Horton “sees a way” to a settlement but did not elaborate.
COMAC orders: COMAC says it received 20 more orders for the C919, but it once again is from a Chinese lessor, not an airline. A majority of orders for the C919 are from Chinese lessors, in stark contrast to standard practice among established lessors that they want to see a solid base (or a likely solid base) for a new aircraft type from airlines before signing up.
Although COMAC says this latest order brings the total up to 400, a data base shows only 275 so far (meaning the other 125 haven’t been converted to firm orders yet).
A380 Break Even: Airbus CEO Fabrice Bregier says hitting break even on the A380 program in 2015, which is the current plan, will be difficult if deliveries fall below the target of 30 per year. Airbus should deliver 25 this year, he said.
Southwest Airlines has begun a one year countdown to the day the Wright Amendment will disappear.
The Amendment, named after former US House Speaker Jim Wright, restricts Southwest’s ability to fly from in-town Dallas Love Field. Originally Southwest was restricted to Texas and the immediately adjacent states. The Amendment has been modified several times. Today the carrier may fly anywhere within the US beyond the exceptions with one stop. Love Field is now restricted to 20 gates; Southwest controls all but a few of them.
The restrictions were put into place to protect the then-new Dallas-Ft. Worth Regional Airport, which was constructed mid-way between the two cities. All the airlines at the time served Love Field and when DFW was created, they all agreed to move to the new airport and close Love Field to airline traffic. Except Southwest, which didn’t exist at the time of the agreement but which began service from Love in the interim between the signing of the agreement and the opening of DFW. The attempts by Braniff International Airways and
Trans Texas International (nee TRANS Texas) to put Southwest out of business are industry folklore.
The fear was that Southwest and Love would hurt DFW and the airlines competing from the distant airport, including American Airlines. When Southwest a few years ago launched a full-scale attack on the Wright Amendment, American led the charge to block the effort. The compromise was the gate restriction, the one-stop service and a five year phase out.
Who could have foreseen that this now could help come to the rescue of American and US Airways as they fight the US Department of Justice’s attempt to block the merger of these two carriers?
There’s one element that particularly caught our eye, and that is market share. While DOJ points out that the New American, along with Delta Air Lines and United Airlines, would control some 80% of the available seat miles (a statistically correct figure), AA and US point out that in terms of domestic market share, Southwest Airlines, other LCCs plus Alaska Airlines and Hawaiian Airlines control 40% of all domestic passengers.
The Complaint’s focus on legacy airlines causes it to ignore the most meaningful competitive development in the airline industry since deregulation: the emergence of low cost carriers. Southwest, which in 1978 was an oddity limited to intrastate flying in Texas, is now the country’s largest domestic airline, carrying more passengers last year than any legacy carrier and more than US Airways and American combined. Other low cost carriers, including JetBlue, Spirit Airlines, Virgin America, Sun Country, and Allegiant, are expanding at dramatic rates. These carriers, together with Southwest and regional competitors Alaska Airlines and Hawaiian Airlines, now transport over 40% of all domestic passengers, and that share continues to grow. The demonstrable success of low cost carriers is a market driven response to consumer demand, but the Complaint inexplicably ignores their profound and permanent effect on industry competition.
In fact, Southwest has for many years carried more domestic passengers than any other airline–which begs the question, why didn’t DOJ block the Southwest-AirTran merger, which would only increase and consolidate this concentration?
The court should find for AA and US. This lawsuit is an embarrassment to DOJ for its political motivations, poor research and lack of understanding of the airline industry.
S&P says don’t pay attention to our ratings: On the same day Delta Air Lines was named to the S&P 500, The Los Angeles Times had this article commenting on Standard & Poor’s legal defense of its investment grade credit ratings of companies involved in the 2008 financial collapse in the US that led to the global recession in 2008, affects of which are still felt today.
S&P’s defense included the argument that nobody should pay attention to its ratings, according to the article.
The ratings issue is important because airlines, lessors (and, of course, others outside aviation) covet investment grade ratings for the capital-intensive aerospace industry. Airlines and lessors need “cheap” money to buy airplanes. Air Lease Corp recently obtained its first investment grade rating, for example, something for which it issued a press release. Delta gained headlines for its return to investment grade status. Airlines have long used S&P, Moody’s and Fitch for rating equipment trust certificates used to finance airplanes.
The columnist for the LA Times is incredulous that S&P’s legal defense in the federal lawsuit is, essentially, nobody should pay attention to its ratings. It is indeed remarkable.
Final C-17 for US Military: Boeing’s C-17 program has been struggling to stay alive for the past several years and the challenge will get worse when Boeing hands over the final order to the USAF. The airplane’s survival depends now entirely on non-US sales, and these come few and far between. It’s also the last program of McDonnell Douglas; Boeing killed the MD-11, MD-80, MD-90 and MD-95 lines not that long after the two firms merged, though it did keep the MD-95 alive for a short time, renamed the Boeing 717.
Why States opposes AA-US merger: Micheline Maynard writes in Forbes why she thinks states have joined the US Department of Justice lawsuit to block the merger between American Airlines and US Airways. The actions have nothing to do with consumer protection, the alleged motive of the DOJ, she opines. Rather, the states’ interests are far more parochial.
ElectroImpact competes for 777X work: ElectroImpact makes wings for the Airbus A380 and A350 XWB and it’s headquartered in Boeing’s back yard at Everett (WA). Now it’s hoping to build wings for the 777X. This Seattle Times report tells the story.
Washington State’s future in aerospace: The Pacific Northwest Aerospace Alliance hosts its second annual series of luncheons with members of the Washington State Legislature to talk about what needs to be done for the future of aerospace in this state. The first lunch is in Bellevue (WA) September 24 and the second is September 26 in Spokane, the other major aerospace cluster in the state.
Confirmed Bellevue Panelists
• Sen. Nick Harper (D), District 38 – Everett
• Sen. Paull Shin (D), District 21 – Lynnwood
• Rep. Mike Sells (D), District 38 – Everett
• Rep. Bruce Chandler (R), District 1 – Yakima
• Rep. Larry Springer (D), District 45 – Kirkland
Confirmed Spokane Panelists
• Sen. Michael Baumgartner (R), District 6 – Spokane
• Rep. Timm Ormsby (D), District 3 – Spokane
• Rep. Kevin Parker (R), District 6 – Spokane
• Rep. Mark Schoesler (R), District 9 – Ritzville
Information and registration for Bellevue is here.
information and registration for Spokane is here.
Clever headline: The Street.com column has a clever headline this morning in a post written by Ted Reed concerning the on-going sales battles between Airbus and Boeing.
FedEx took delivery of its first Boeing 767-300ERF yesterday.
As we reported way back on June 16, our market intelligence tells us FDX is lined up to become the first commercial customers of the 767-2C, the new platform on which the KC-46A tanker is based. The 767-2C is about six feet longer (165 ft 6 in) than the 767-200ER (159 ft 2 in) on which the 2C is based but shorter than the -300ER.
Slowing Jet Sales: Within a few days, Bloomberg, Reuters and The Seattle Times each had stories about slowing jet sales.
Here is the Bloomberg story, focusing on cargo sales.
The theme of each is worrisome, but with Richard Aboulafia’s comments to The Times, we disagree with his view on American Airlines. American has an ancient fleet of Boeing MD-80s and aging Boeing 757s that have to be replaced, and we believe the Airbus and Boeing orders won’t go away if the merger with US Airways is blocked.
Airbus still trying Japan: Airbus, which has never had a lot of luck penetrating the market in Japan, still appears to have an uphill battle, according to this article. The Reuters piece quotes Airbus’ John Leahy at the Paris Air Show; when we spoke with Leahy by phone from the IATA AGM immediately before the PAS, Leahy wasn’t quite as upbeat as quoted in the Reuters article. Leahy tamped down speculation that he’d have a Japanese order for the A350 at the PAS (and he did not) but neither was he ready to predict any timeline when one might be forthcoming.
Aspire Aviation continues to believe Boeing may place the 777X wing production in Japan as a means to secure 777X orders and block the A350.
Mitsubishi’s delay: Mitsubishi’s latest delay on the MRJ90 program is being blamed on not following FAA process, according to this article.
Poor South Carolina 787 deliveries: All Things 787 reports that Boeing’s Charleston (SC) 787 assembly plant has delivered only four 787s this year.
Crandall on DOJ AA-US lawsuit: Former American Airlines CEO Robert Crandall (who retired in 1998) has a very good analysis of the faults of the Department of Justice lawsuit to block the American-US Airways merger in this Bloomberg TV interview. He’s first up in the 22 minute segment.
Desperation: Kingfisher sued International Aero Engines for $236m over allegedly defective and poorly designed engines on the Airbus A320. This doesn’t pass the laugh test and smacks of desperation. The V2500 has been on the A320 for decades and seems to have been designed just fine and performing well.
It’s an unusually busy news day for a Friday. Bombardier received its clearance from Transport Canada to conduct the first flight of the CSeries. BBD has not announced a date, which will be contingent upon weather and the airplane, but word has leaked out that BBD has a VIP event of some kind on Sept. 17, a Tuesday. The Toronto Globe and Mail reported the date but BBD told the paper that date remains tentative and it is not necessarily the date the first flight will take place. Reuters reports the first flight should precede the 17th. The Financial Post reports that the CSeries will fly during the Sept. 17 event, which is to celebrate the launch for the flight testing program.
BBD will webcast the first flight here.
Here is BBD’s press release about receiving Transport Canada’s authorization.
The other big news today is the win by American Airlines and US Airways for a November 25 trial date over the US Department of Justice lawsuit seeking to block the merger. The lawsuit is also holding up American’s exit from bankruptcy. The federal judge overseeing the bankruptcy case set a hearing on Sept. 12 on motions to approve AA’s exit.
DOJ sought a March trial date, a delay which would have effectively killed the merger as much as the lawsuit itself might. DOJ opposed the early date.
Separately, Boeing is conducting ground tests in preparation for the first flight of the 787-9. No date has been set for the flight.