Thursday, 27 January 2011

The Rolls Royce A380 Problem- 2 Airlines. 2 Reactions

The respective reactions of the two leading Rolls Royce powered A380 operators to the Singapore event were interesting and reflected significant differences in opinion between Qantas and Singapore Airlines graphically illuminated cultural differences between two near neighbours in the Southern Hemisphere as well as causing furrowed brows in operators further north.
Qantas' CEO personally took a high profile all guns blazing line with the first objective being to secure Qantas' own reputation ahead of any concern about the reputation of the aircraft or its engines or the approaches of other owners.To most people an A380 is an A380 and they have no idea what is slung under the wing of the aircraft in which they are flying. Qantas risked blackening the reputation of all A380s to the detriment of all their operators. It is unlikely that Airbus or Emirates, the operator of a 14 strong fleet of the GE powered version, were happy with this and Lufthansa and Air France with their smaller initial fleets were probably not too delighted either.
Singapore Airlines, the longest standing A380 airline was, in very Singaporean style, highly restrained, kept a low profile on the issue, took no PR risks with the aircraft or engines and had most of its fleet swiftly returned to service after checks had been carried out and Airbus issued temporary operating instructions. What was said behind the curtains to Airbus and Rolls Royce and what arrangements and agreements may have been reached is not known, but there minimal risk was taken with shaking public confidence in the hardware.
Which approach secured the better response and any compensation undertakings from Airbus and Rolls is unknown. Airbus has taken the line that keeping the existing in-service aircraft flying is more important than meeting the next six months delivery schedules and Rolls powered aircraft still awaiting delivery have been held back to achieve this. That though would probably have happened anyway, shouting or no shouting. There were also implications from Australia, though not the airline itself ,that maybe anyone other that a (very heavy) Qantas crew would have been hard pressed to deliver a better result in landing the aircraft safely. They certainly did an excellent job but others would question the notion that the Qantas way is the only way just as they would question whether their very self-focused PR response to the whole affair was the right way for the industry.

Saturday, 22 January 2011

BA Strike Vote- The Real Figure and Two Origins

Despite new Unite leader Len McClusky's claims of a resounding victory against BA's evil management the facts are rather different on both scores.

First the vote:
Total BA cabin crew : 13,350
Total vote of a strike: 5,751
% in favour of a strike: 43

Of that 43% in favour ,only a minority is likely to take strike action when it comes to the day.

Putting aside the problems of old fashioned behaviour by unreconstituted unions and nearly four decades of confrontation averse "Peace in our time" CEOs on the mangement side,there are two fundamental underlying causes of this ongoing and unnecessary dispute. One is sociological and centres around group behaviours, cultures, self image and attitudes which have built up over years. The other is the accumulation of old fashioned heavy industry type detailed contracts and agreements covering almost every aspect of the job which link to a complex system of cash allowances and concessions which reinforce slavish compliance to the rule book and the exinction of anything like a deep and proactive service culture.They also help to destroy loyalty to the employer as they create the basis for everlasting conflicts, great and small.

BA has for the last two years been trying to deal with the contracts issue and is probably now close to a conclusion by one means or another. Once that is dealt with they and other legacy airlines should to look very closely at the the first question and figure out how to get from where they are to where the newcomers are.Just don't let anyone with "Human Resources " in their title be part of the study though.

Tuesday, 18 January 2011

BA/Iberia Merger- The Stealth Galleon.

Considering that presuming all is still on track, there is a deafening silence around the BA/Iberia merger which, if on schedule, is just a week away. It's as if its creators would rather that analysts, staff and customers just didn't notice it. It has progressed this far almost unchallenged. At BA's AGM questionners were far more concerned about whether cabin crew should be asked/told to work harder/cheaper/differently than whether they liked any or all of the aspects of the merger. Board members arrayed across the stage were happy to leave it that way and do nothing to encourage any sort of debate on the subject.

Neither the aviation press nor the usually excitable British media rushing to get out of their prams on the slightest half pretext have been shouting about the fact that IAG, BA and Iberia's Spanish registered new owner,while comfortably headquartered in the UK, will not be paying its taxes to HM Treasury but to Spain. BA's Chairman has been clear about the tax advantages of so doing. Financially therefore next week the core company moves offshore.Usually that would arouse at least some attention and shouts of "unfair, offside, how could they do that?" etc but in this case again silence.

The vast majority BA and Iberia shareholders seem to have no idea what their shares will be worth when exchanged for new IAG replacements or even the formula. No wonder the Board looked pleased when they eventually filed off to lunch . A long morning but not so much as a popgun in the potential armory ranged aainst them when they filed in. No need for flak jackets to survive,- just a low boredom threshold and lots of patience. The lack of knowledge about a formula makes decisions on whether to buy or sell right now very difficult.One wonders what has driven the recent rise in share value to around the £ 3 mark. Who is reading what tealeaves?

Credit where credit is due. Wille Walsh and Martin Broughton have steered this stealth merger with great skill. The so called analysts have enthusiastically bought any argument that " a bigger grouping is better/inevitable". Lufthansa have interestingly taken a different, more self interested and focused, path of both being a leading member of Star while growing their own position through the purchase of other airlines . In the BA case ,- which will be a fascinating potential business school study for years to come,- nobody has so far questioned the series of strategic miscalculations which have allowed the once very dominant company to have its position as the world's largest international airline with the most extensive global network to be eroded via a naive belief in the warm fuzzy aspects of alliances. It may be that the Government's decision not to further develop Heathrow or any other runway capacity in the London area, coupled with other travel unfriendly decisions such as to raise Air Passenger Duty through the roof is read as one to withdraw from the big league of air commerce but simultaneously milking its legacy to death while the supremacy of London/Heathrow/UK and BA are allowed to erode.In this case a shrugged acceptance that to see BA slide away into a larger foreign owned conglomerate could be seen as selling at the top of the market/while the going's good does make shrewd financial sense. In fact it's probably the only way it can be seen as that and in the long term national interest. If UK civil aviation, currently one of its most successful growth industries,has been selected to follow the shipyards, car manufacturing and a host of other once leading industries onto the downhill slope of decline, then the peak is the right time to offload it while the going's good. Is that what we really want though? Has anybody really thought about it? Where's the promised new joined up thinking and business orientation? Whatever happens now though is too late for BA. The stealth galleon is inside the harbour walls and about to dock.

Saturday, 15 January 2011

Boeing and 787 Pricing- Questions for airline strategists.

Flight International reveals that Boeing has issued new list prices for its 787 series. Faced with a three year delay in service entry for all that means for cash flow and profitability of the programme, the company is clearly regretting cut price deals done to try to keep the A350 at bay. With the order book for the type virtually full for the next ten years, it must be clear to Boeing that they could be making a lot more money on the aircraft than they are and, with the delay and production diffoiculties having pushed up their costs, they have traded too much volume for yield per aircraft. Perhaps this is something the airlines understand better than manufacturers but in times gone by Boeing were seemingly more commercially shrewd than they have been recently. Has something gone awry in their management's thinking one wonders?

The decision to spread the production of the 787 amongst numerous geographically far flung suppliers has cost Boeing dear.Initially it must have looked as if the cost benefits of doing this outweighed the costs of logistics and managing the integration of the programme. The integration though has not been well controlled . There have been problems of oversight of each of the producers and once the programme started to slip the producers were likely to be left with the nightmare of having incurred their setup costs and then having their income deferred.

The initial list price for a 787-8 in August 1995 say Flight was $125-135million. Regardless of this, volume deals with key customers are said to have been cut as low as $80-85 million. In 1995 the -8 capacity for delivery in 2008 was looking like a good baseline buy. As we have said before, three years further down the track the -8 is beginning to look on the small side and the -9 is looking a better proposition for many. The initial list price for this version in May 2006 was $178.5- $188 million. Interestingly Boeing is now also considering a -10 6,500 mile 310 seater (3 classes),presumably to counter in the A350 capacity advantage.Emirates and Cathay in particular have long said that the 787 capacity does not go high enough.(They would also like to see stretched A380s). Flight also mentions Boeing's keeness to slot some higher priced new orders into the delivery schedule ahead of existing lower priced aircraft. This would help raise the average yield per aircraft and cash flow.

For the strategists and planners of airlines who have not yet ordered their fleet expansion aircraft or replacements for 767s, early 777s and A330s, the rise in price of the 787 raises some interesting questions. A new customer for a -8 could se themselves paying $100 million per aircraft than a competitor on the same route. This is a huge difference to cover during the course of a 10 year frontline life and makes it very difficult for a new customer to match the ticket prices of an original one paying a much lower price per aircraft. This will make the possibility of completely refurbishing existing aircraft for a further ten years life very attractive .It also means that if Airbus can keep the price of new A330- 200s and -300s down they could do very well as by now they will have covered most of their original development costs. Purchase of more of these at a relatively low capital cost compared with a newly priced 787 could be worthwhile attractive despite their 20% higher fuel costs and projected engineering savings.

For anyone not in a hurry, this could in John William's words be a time for doing very little but living with what you've got, buying a bit more of it on the used aircraft market if necessary, and seeing how the scene unfolds while others prove in real time by trial and error at their, not your,expense which formula and aircraft works best.In time the discounts will come back again.

Thursday, 6 January 2011

Next up for the A380- Asia again.

The announcement that the first new A 380 customer for some time is Asiana of South Korea with an order for six for delivery between 2014 and 2017 comes as no surprise.The increasing density of A380 pegs on the Asian map and the lack of them in the Americas, the light sprinkling in Europe, the largely Emirates clump in the Gulf all indicate the relative health ,current prospects and ambitions of airlines in the respective parts of the globe.

There is also an apparent difference between eastern and western views of the status of future liability for operating leases and other financing. The western view, enforced by accounting rules, is that a lease is a debt and has to be shown as such on the balance sheet. The eastern view is that while this may be so in accounting terms, it is in reality an operating cost especially as it is paid off year by year, in effect flying hour by flying hour, so that in the last year of a lease the future debt/liabilty is a fraction of that in year one although the outgoing in each year is the same. Hence the approach to aircraft leasing or other financing costs by many eastern carriers is far less cautious that it is by many western ones.

The two new airlines to receive A380s this year are both in Asia. Korean, who will have 5 mainly on US and European routes by the end of the year, and China Southern. British Airways will be the next new operator in Europe but not until 2013 and there is no sign at all of a US carrier signing up. Even Air Austral of tiny Reunion Island in the Indian Ocean is ahead of them in the queue. Put that up on the radar screen and see what it tells you. For one thing expect more orders from Asia and those will force others serving Asia to look again,- and talk to their accountants maybe.