I was traveling in Asia last week and was surprised by what I was fortunate enough to see while waiting for my flight out of Nagoya, Japan. First, an A380 (registration number 9V-SKC), then the Dream Lifter. Not particularly newsworthy or anything, but, as an airplane geek, I was thrilled. Below are some of the pictures I took. Click on them to see a larger version.

Here is the A380 taxiing for takeoff.

As the A380 was taxiing, the Dream Lifter landed.

I thought it was a rare opportunity to capture both an A380 and the Dream Lifter in the same frame. Here the A380 climbs out while the Dream Lifter taxis to parking.

Shopping for tickets to Cologne for a trip this winter and found this interesting itinerary on cheaptickets.com:

For those of you not familiar with Germany’s geography, Cologne is less than 40km (about a 30 minute train ride) from Dusseldorf, so the notion of connecting through Heathrow to get there, while adding 6 hours to your trip, is ludicrous. This would be about like flying through Detroit to get from Midway to O’Hare.

Another attempt and things got a little better:

Now we can fly from Dusseldorf to Frankfurt (55 minutes) and take the 74 minute train ride from Frankfurt to Cologne.

This is all amusing enough, but it does make me wonder, though, if any poor souls have been unfortunate enough to unsuspectingly purchase tickets for, and fly on, similar nonsense routings.

JP Morgan cut both Genesis Lease (GLS) and Aircastle (AYR) from Overweight down to Neutral today. I haven’t seen the reports but my understanding is that JP Morgan expects the current state of equity markets to hurt both lessors.

2008 should prove to be an interesting year for leasing companies (and obviously the airline industry in general). On the one hand, $100+ oil will compel carriers with an older, fuel inefficient fleet to update at least a portion of their aircraft. On the other hand, if a recession develops and demand severely tapers off, carriers can just ground those old jets. If times get too hard, and those old jets are on lease, some leases could be cut short or renegotiated. My crystal ball isn’t working properly today, though (I think it is out of compliance with an AD mandated inspection), so I guess I’ll just have to wait and see.

How many times have you heard the word “lucrative” associated with international and/or business class flying? Yeah, me too. That was obviously the thinking behind upstarts like EOS (whose lie flat beds in their all-premium class 48-seat 757 aircraft are shown at right), SilverJet, and others. I can imagine how the discussions that led to those start-ups went: “Hey, airlines make all their money flying business passengers on overseas routes, so how about we start an airline where that is all we do! We’ll get all the lucrative customers and be a lucrative company!” Of course, there is a lot of truth to that, but can such up-starts get a positive return on investment before the inevitable competition squashes those “lucrative” margins?

So, why, exactly, is it that international business class flying is so much more lucrative than “normal” flying? I see two predominant factors at play: restrictive bilateral agreements and “soft” competition on international routes. Typical bilateral agreements between nations put a cap on the number of flights between two sovereigns and the respective governments are typically responsible for awarding routes to airlines. These were effectively government sponsored monopolies on routes. Additionally, I believe competition has been relatively soft on these routes because the major carriers are better at not triggering price wars, which is a lot easier to avoid when you don’t have LCC’s flying the same routes.

The business landscape on this lucrative flying is changing very quickly and the factors that allowed for abnormal profitability are waning. The EU-US Open Skies agreement obviously opens up the trans-Atlantic flying to new market entrants and therefore increased competition. Market entry by the all premium class international carriers such as EOS, SilverJet, L’Avion, and MaxJet (which has already gone out of business) simply prompted the carriers whose business these new entrants intended to steal to react with similar offerings. British Airways (flying an A318 to where?!?!) and American Airlines have responded with increased amenities and offerings for the premium international traveler on trans-Atlantic routes, and Singapore International Airlines has just announced that they intend to the same on the trans-Pacific front. Add to that the desire of Low Cost Carriers to enter the fray, the prime example being Ryan Air’s stated intention of offering bargain fares to cross the pond.

Expect abnormal profitability from international routes and business/premium class customers to be competed away (think “reversion to the mean”, for you statistics-minded people out there). In the end, “lucrative” is great if you are in business, but “sustainable” is probably better. Mark my words, competition for international and business travelers will get vicious, first on the EU-US routes followed next by US-Asia routes. Airlines that are relying on this business to subsidize other pieces of their enterprise need to get in front of this and expect a reversion to normal levels of profit from this component of your business (it’s scary to think what “normal levels of profit” means in the airline industry). It won’t happen over night, but expect it to happen.

As I predicted back in August, Jim Whitehurst has reemerged at the helm of a company. Starting January 1st, 2008, Mr. Whitehurst will begin his new role as President and CEO of Red Hat, an open-source software company. I’ve heard many people comment on the airline industry’s difficulty in attracting and/or retaining top talent among the management ranks; this would seem to bolster their point. Gordon Bethune used to say that the sickest patients need the best doctors. It will be interesting to see what medicine Mr. Whitehurst has for Red Hat and how that company’s performance compares to that of Delta’s. Vastly different companies, to be sure, but I don’t think the impact a CEO can have on a company can be overstated.

The Johnson School at Cornell University just held its capstone event for 1st year MBAs, an “Integrative Case Competition”. The case? Essentially, “What airline should Continental acquire and why?”. The case was set up from and investment banker’s perspective, pitching the deal to Continental. Given all the talk of consolidation within the airline industry the case was both relevant and timely, although I don’t think that many expect CAL to be the first to initiate a deal.

Before reading on, take a second to consider who you think would be the best acquisition target for CAL.

The winning case team pitched that CAL, NWA, and a European Private Equity firm partner up for a Joint Venture to establish a Special Purpose Acquisition Vehicle and acquire BMI. A highly improbable deal, to put it mildly, but certainly the most creative recommendation.

I believe the most popular pitch was that CAL acquire Alaska Airlines. Their homogeneous fleets of Boeings (increasingly dominated by 737-800s), complementary route structure, and similar reputations seemed to make the most sense from a long-term strategic point of view. Alaska Airlines would give CAL a west coast presence from which to further expand internationally.

The next most-pitched deal was a CAL-NWA merger. Few would argue this doesn’t make any sense from a “synergies” point of view, but I question if CAL is in a position to lead such a deal, or could come out a winner if Delta decided to join the bidding. I have similar doubts for CAL’s ability to acquire United or Delta, which were also pitched.

The best part of the competition was the quality of the judges panel, which included professionals from Citi, Northwest Airlines, AWAS, and McKinsey, among others. Several of the judges have been working in the airline industry for 20 years or more.

The MBA students got a crash course in the airline industry and quickly discovered its inherent difficulties from a management perspective. Unsteady cash flows, very high debt to equity ratios, heavy use of operating leases, regulatory constraints, and labor issues make it very difficult to place a value on an airline, and also limit the many of the strategic alternatives management has available. Like most industry watchers, I believe we’ll see some M&A activity within the industry within the next year or two. I am tempted to say that it is an exciting time for the airline industry, but then again, when isn’t it?

When I wrote about door to door service back in September I didn’t realize that Emirates has been offering such a service, called Chauffer-Drive (Note to Firefox users: this link may crash your browser) to its first- and business-class customers for years. While it’s nice to have my line of thinking validated, it also illustrates how hard it is to have a unique idea in a world of over 6 billion people.

Pardon my digression from the stated purpose of this site, but I have encountered the (non-)word "aircrafts" so frequently, both spoken and written, over the past several weeks that I can no longer remain silent on the issue.

Technically speaking, “aircrafts” isn’t even a word. So, for the love of Bernoulli and Newton, please stop using it!

I know. It is such a trivial thing that it really shouldn’t bother me, but this foible should never have surfaced to begin with. What I mean by that is that there is no excuse for the places “aircrafts” has been raising its ugly head. I was at a presentation recently were the speaker kept saying “aircrafts”, and I felt like Indigo Montoya. But the person was covering a line of business outside of her own, so I didn’t make much of it. However, a week later, I read some material originating from someone who is no stranger to the industry and there it was again. Repeatedly. Agghhh!! Remember, just because Microsoft Office doesn’t put a red squiggly underneath it, doesn’t make it right. There were actually a few other incidents, too, if you can believe it. I admit it. It was just too much for me to handle.

It is my hope that this post will provide a public service, and my readers will never be tempted to duplicitously pluralize aircraft by conjoining that insidious extraneous letter S.

I am the proud new owner of a Third Class Medical Certificate. Since I haven’t been flying for quite a while, I had let mine lapse. The nice Fall weather and the fact that I live about 3 miles from Ithaca’s airport which has a well regarded flying club has made me antsy to get current again. The real trick now will be finding time to adequately refresh my skills while I’m so busy with business school. Worst case is that I’ll have to concentrate my flying over my winter break in December.

The exam itself went fine. I do notice that now that I am well into my 30’s, the eye exams are a little harder than they used to be. I’m still at 20/20, but just barely, at least close up. The color-blindness tests are always fun. I rush right through them and have done enough of them to know not to get nervous when I don’t see a number as they through a few of those in just to mess with you.

So, with the medical in hand, hopefully I can scrape together some time over the next few months to get concurrent again and be able to enjoy flying in a different part of the world. All of my flights to date have been within the state of Wisconsin, so I’m eager to seek out new $100 hamburgers in central New York

I was struck by the seeming contradiction in the October 16th conference call with Delta Airlines. Namely, Richard Anderson, CEO of Delta, spoke of consolidation within airline industry and then later implied that Delta is likely to divest its regional subsidiary, Comair. So, consolidation “makes sense” to Mr. Anderson, but so too does spinning off its regional? On the surface, this seems contradictory, but a closer look at how competition within the airline industry works reveals that, at least superficially, this makes a lot of sense.

The distinction that must be made here is between the different relationships that mainline carriers have with regional airlines compared to other mainline carriers. Other mainline carriers are direct competitors whereas regionals are really act as suppliers to mainline carriers. Thus, when a mainline carrier acquires a regional, it is essentially an act of vertical integration. Although the airlines avoid trying to say it out loud, the primary benefits from mainline consolidation are anticompetitive in nature. I.e., cancel overlapping flights and hopefully raise prices. The benefits from integrating a regional into a mainline are, supposedly, lower costs and more control. However, most of the benefits from such a relationship would appear to befall the regional more so than the acquiring mainline. The biggest downside from a mainline owning a regional subsidiary is that they can not employ the thumbscrews when it comes time for the next contract negotiation. Delta, for example, has contracts with several regional carriers, including Comair. These regionals have to compete against each other for Delta’s business and regionals live or die by their relationships with the majors. Mainline carriers clearly have the advantage at the bargaining table as they can easily make a credible threat of flying the routes themselves. Regionals lost the credibility of making a similar threat when Independence Air went bankrupt after striking out on its own. Competition for these contracts is fierce. So, it should not be surprising that Delta feels it would be better off with Comair as a separate entity. As such, Delta will be able to put outside pressure on Comair that it likely can’t do as the owner.

American Airlines seems to share the same view as Delta, as Gerard Arpey indicated in their last conference call that they are also considering selling their regional subsidiary, American Eagle. Unlike Delta, however, American seems more realistic about the difficulties of consolidation of mainline carriers and projected a more pessimistic tone for such transactions.

There is one other timely reason for mainline carriers to spin off their regionals: airport congestion. Given the increased traffic delays and increasingly louder outcry from public officials, there has been a call on airlines to replace regional jets with larger aircraft making fewer flights. Shifting the ownership of those regional jets gives the mainlines a little bit more “plausible deniability” for their role in the problem.

Thus, the industry is left in an awkward position where it makes little sense for mainline carriers to own their own regional carrier when it is easier for them to pit the regionals against each other for their business. This, in turn, leads me to believe that consolidation within the regionals is the next logical step. Only when there are fewer regionals at the bargaining table with the majors will the regionals have the ability to negotiate from a position of power. Of course, if that happens, then it will make sense for the mainlines to consider acquiring regionals again….