Lashed to the Mast: Hospitality and Airline Industry Outlook

It should by now be plainly obvious that the travel industry will be undergoing some profound changes due to the soaring cost of fuel. The International Air Transport Association (IATA) estimates that the increase in fuel bills for the global airline industry will top $91 billion this year. With the current average price of jet fuel at an eye popping $158 per barrel, many of the world’s airlines find themselves in a full throttle race in reverse to try to shrink their way to profitability.

United Airlines is disposing of their entire 737 fleet and furloughing thousands while American Airlines is also parking nearly 100 aircraft with a commensurate level of layoffs to name but two examples. The low cost carriers are also not immune with several bankruptcies and liquidations already having taken place while many of the survivors are hanging by a thread.

IATA estimates that the current situation will likely have a greater effect on the industry than did the attacks of 9/11 with industry losses of over $6 billion possible in 2008. This downturn, while similar in scope to 2001, differs as its primary cause is an engineered lack of supply driven by fuel costs as opposed to a lack of demand due to terrorism fears.

As airlines must raise fares to cover their fuel costs, many markets that were once profitable become money losers as price sensitive customers stay home. This effect is most pronounced in leisure markets as they typically have the lowest margins and highest price sensitivity.

Honolulu, for example, is losing over 27% of its air service while other leisure destinations such as Las Vegas and Orlando are losing about 15% each. Business travel is not escaping unscathed either. IATA estimates that business travel has dropped to levels unseen since 2003.

Lehman Bros. analyst Gary Chase estimates that airline seat capacity will be reduced 11% by fourth quarter 2008 and that the industry needs to shrink by at least 15% next year to achieve profitability. Some of this pain is no doubt due to a sluggish economy, but unlike past industry downturns, consensus opinion is that the airline industry will soon be smaller than it is today.

Into this breach steps the hospitality and lodging industry. The hospitality industry, which has recently enjoyed several years of robust growth and profitability, now finds itself lashed to the mast of a listing airline industry. And like the airline industry, the hospitality industry has been on a growth spree to increase its room capacity and market share.

As of April of this year the domestic US lodging industry had over 650,000 rooms in the construction or planning pipeline for an increase of 22% over the year earlier figure. These rooms will soon be looking for customers in a weak market.

Industry consultant PKF Hospitality Research estimates that a 10% decline in the number of airline seats domestically will result in a 3.9% drop in demand for lodging compared to the 3.3% drop in 2001. That translates into about 40 million fewer rooms occupied or a loss in revenue for the industry of about $4.3 billion.

This has already been reflected in the stock prices of most major hotel chains which are off between 15% to 20% this year. The weak US dollar has been a lone bright spot for some properties which cater to overseas tourists, but occupancy rates overall have started to decline for many domestic hotels. Profits are likely to be down 20% from their 2007 levels according to industry trade journal Hotels.

Aircraft Spotted

Taxiing out for takeoff last week at ONT and I spotted this C-26B Metro. It took some searching but I found this picture of the aircraft. Its used by the California Guard in drug interdiction.

The Metro Lives 

Election Results

Well I got trounced...which is not really such a bad thing. Unions seem to bring out the very worst in people with grown men ending up sounding like school children. So let the other guy trudge down to union hq and field phone calls from crybabies who feel put out at having to do their job.

Spam

Just checked in after not posting for a few months. Sorry about that. Found 23 comments to a recent post and thought I must be a genius...but it was spam. So I've turned on the word verification on comments to prevent spammers.

Campaign Speech

I recently ran for our union domicile chairman and here is my campaign speech:

My name is Robert **** and at the risk of an intervention, I’d like to ask for your vote for domicile representative. When an organization is facing challenges, agility and focus are traits that are essential for survival and success. These times are very challenging for the airline industry but as the old proverb goes, with challenge comes opportunity.

I am concerned that our union may be losing its focus.

John O’Sullivan, former editor of National Review, recognized that any organization which is not tightly focused on an easily quantifi able goal, will over time suffer mission creep. Instead of doing a few things well, it will do many things poorly. O’Sullivan’s Law, as it came to be known, seems to be at work in our union just when we can least afford it. Our mission statement lists three goals of the union: contract negotiations, contract maintenance and enforcement, and promoting professionalism and safety through communication. It is through this third avenue that much mischief occurs. Endless tail-chasing, bickering, and navel-gazing over non-essential activities is a luxury we can no longer afford. And we certainly cannot afford it at almost $200.00 per hour. Let me be clear: the (few) things that Swapa elects to do it should do exceedingly well. The rest should be tossed or done on a truly volunteer basis.

Here are some thoughts on a few itemso of recent interest:

Pay Givebacks: Any talk of pay givebacks prior to the company even bringing up the issue is silly andsaid, he has no intention of asking for our raise to be returned. Nonetheless, the call for givebacks has a good chance of being made within the next year or two as fuel hedges expire. If and when it comes, I will be adamant that any cuts be made equally across all employee groups if at all. The idea that pilots should give up more because we make more should be sent back to its origins in Russia, China, and San Francisco.

Preferential Bidding: I am skeptical of the concept. While the principle seems benign, I fear it could well turn into a Trojan horse concerning our work rules. The Law of Unintended Consequences can be a harsh teacher as any pilot who reads our contract has found out after a chat with scheduling during a reroute or JA. What seemed like plain English only a few minutes before can suddenly have an entirely new meaning. The devil is in the details, but with PBS the details are written in computer code owned and administered by the company. In any event, PBS should be thought of as a work rule concession to be negotiated for other benefits to the pilot group.

Age 60 Retirement: I am in favor of the age 60 rule being repealed but against the use of any mandatorily collected union dues being used to fund lobbying efforts. There are two simple reasons: It is still a controversial topic among the membership, and it is peripheral to the mission of the union.

Budget: We have clearly blown our budget by wanting more union than our dues will support. Metastasizing committees concerning everything from jumpseat to the military are great to have around, but they bleed funds and distract the BOD and executives from the core mission of contract negotiation and maintenance. Conversion of the Secretary/Treasurer position from a pilot to a full time financial expert would be a priority as would the conversion of non-core committees to true volunteer status. Ultimately, dues should be reduced from 1% to perhaps .8% or even less.

Safety: The question I’ve always asked is that if we as pilots feel that our employer runs the operation in such a manner that we need to deduct several hundreds of thousands of dollars from our paychecks to bring it up to snuff, isn’t that a sum that perhaps the management and stockholders of the airline should shoulder? ASAP has clear benefits, but I’m unsure about the rest.

Information and Communication: Spending nearly $100,000 on the Reporting Point and another $214,000 on the web site simply seems redundant to me. The newsletter should be in electronic form only. The Government Affairs committee is a great clipping service but seems expensive at $100,000.


Thanks for your consideration.

Strike!

Lots of ink has been spilled over the recent mechanics' strike over at Northwest. The WSJ seems incredulous that in an incredible dancing bear fashion, the airline looks as if it will weather the strike of a major skilled employee group with nary a ripple. Heretofore, such a strike would routinely bring an airline to its knees because such a high fixed cost/low margin business model could not withstand the loss of even a few days of revenue. That the flight attendant and pilot unions did not join in is given as evidence of a new enlightenment on the part of labor.

I don't see it quite that way. The airlines and unions are merely coming to face with a new reality.

The entire airline sector is currently in a tailspin. Since 9/11, the sector has lost billions of dollars and laid off thousands of employees. The remaining airline employees have seen their paychecks trimmed 25% or more with a concurrent loss of work rule protections meaning they're working a lot harder for a lot less money. The Northwest mechanics were facing 25% pay cuts along with furloughs for half of their membership. Knowing how union leadership operates, those type of cuts almost necessitated a response leading to a strike.

Unfortunately for the union, there already existed thousands of unemployed airline mechanics on the street willing to work for even those reduced wages. The pilots and flight attendants correctly realized that their jobs and careers were truly on the line. They surely don't like it any better than the mechanics but this is an example of being mugged by a cold hard reality. They are surely also looking forward to a time when they'll be able to fight another day.

Northwest is also using this opportunity to reorganize their maintenance operations to utilize third party providers to accomplish non-routine maintenance such as aircraft and engine overhauls. This will insulate them further from future union activity.

There are still massive losses within the sector accompanied by over capacity and one or more players still need to exit the market. The race now is to not be the last finisher in the race. Two men running from a bear each realize that they don't need to be faster than the bear; just the other runner.

Do You Feel Safer Now?

Lots of ink has been spilled on the issue of airline security since 9/11. So the question to ask is are airline passengers any safer after the untold billions of dollars which have been spent on security in the aftermath or have we all lost our collective minds? From the view through the peep hole in our new carbon/kevlar bulletproof doors, I'd have to say yes....and yes.

First the good news: There hasn't been a hijacking or bombing of a US airliner since 9/11 and maybe this is even due in some part to the creation of the TSA and its mind numbing bureaucracy. But we don't know if outside of Richard Reid, the terrorist who failed to light his shoe bomb, whether Al Queda has even tried to attack airliners since 9/11. And it must be noted that Reid was foiled by an on the ball flight attendant and not any security measures put in place by the government.

A large element of security is the perception that is given to the enemy by existing security measures. Perhaps by installing such a Byzantine, impenetrably dense (stupid, not thick) security system in US airports, we have successfully telegraphed to prospective terrorists that we are serious about security and that any attempt to breach it will fail. Perhaps, but unlikely. My feeling is that while jihadists the world over head to the terrorist superbowl in Iraq, few resources are left for planning new attacks on US soil.

As far as the actual effectiveness of our current security measures, one need only look to Israel, a country which is actually serious about airline security to find our measures wanting. For starters, US airports and airlines are simply too numerous to secure in any meaningful way. Airport screeners must be successful 100% of the time while the terrorist need only be successful once to cause a disaster. Secondly, in spite of the carnage committed by 19 young Arab men, political correctness still holds the day when it comes to any whiff of profiling, be it racial, national origin, or even using publicly available commercial databases for data mining. This is just insanity.

And lastly, the long lines in the terminals are in many ways a Potemkin village of security for public consumption. Inside the terminal, pilots are routinely frisked and patted down to prevent their carrying of any item which may assist them in gaining access to the cockpit when that is actually their job description. Outside the terminal, however, thousands of workers come and go through gate or door with only a key code or swipe of a magnetic card. Sure they're checked for criminal history when hired, but how difficult would it be to find a young jihadist without a criminal record to hire on as a baggage loader and toss his bag lunch (bomb) into the belly of the plane he is loading?

There, do you feel safer now?

Airline Economics II

Still Going Broke and Still Full


The airline sector is becoming more and more of a basket case every day. United, USAir, ATA and Hawaiian are in bankruptcy while American, Delta, and Northwest hover perilously close. And yet traffic levels have recovered fully from 9/11 and are on line to set records this summer. What gives? For starters, $55.00 fuel is not helping. From under $20 a barrel a year or so ago, these price increases have added millions of dollars of unplanned costs onto airlines.

So why don't the airlines just raise prices? They can't.

Airlines are suffering from a chronic overcapacity and inability to use mergers and acquisitions to rectify the problem. The announced merger of USAir and America West may solve some of this problem but the government largely exacerbates the problem by both propping up weak airlines and by making mergers very difficult.

And now the latest move by United and USAir to dump their pensions on the government may make the situation worse. Other airlines which have maintained their pension plans will now be at a competitive disadvantage as they have to make billions of dollars of payments to fund their pensions while United and USAir, both bankrupt, have dumped their obligations on the taxpayers.

So now the broke airlines without pension obligations and under court protection will bleed the remaining airlines. When will the sector get better? Anyone's guess but a few players will probably have to exit the scene before anything happens.

A friend of mine and a big jet.