Ryanair's 737 order,- Bad news for some others?

Michael O'Leary was on good form recently when announcing his airline's order for 175 new Boeing 737-800s, of which 75 are likely to be for fleet replacement and 100 for further expansion. This comes at a time when Easyjet is yet to find the right price in talks with Boeing and Airbus and as O'Leary puts it "Europe's flag carriers are getting significantly smaller".

Both things are significant.

Firstly, with Ryanair having taken up most of the slack on the existing 737 production line pending the time in 2017 when the enhanced MAX versions replace it, Boeing is no longer under such intense pressure to do a deal simply to keep deliveries moving and the plants and people occupied. As on cruise lines and many other businesses, few customers, if any, pay the actual list prices . In this instance it will have been worth Boeing's while to have offered Ryanair a very good deal to keep the lines flowing smoothly. The costs and organisational difficulties of substantially slowing them down and then ramping them up again are enormous. Now they don't need to offer anyone else a similar one , unless the prospect of recapturing Easyjet from Airbus makes it  strategically worthwhile in the long term . In all such things , one more order for you means one less for the competition so there is always a double whammy in prospect.

Pricewise this could all leave Easyjet in a difficult and exposed position. Airbus will also know that they probably don't now have to cut a deal with them to the bone. As result neither manufacturer is likely to offer the orange people as good a deal as Ryanair obtained. That means that Easyjet's cost of ownership of its next batch of aircraft would be higher than Ryan's for each of the ten plus years that they are likely to remain in the fleet . Reaction in Easyjet's boardroom at being beaten to the draw may well be "Ouch".

Secondly the general retreat and consolidation of Europe's legacy airlines in the face of the low cost airlines on short haul and the Gulf newcomers on long haul has been conspicuous for ten years or more. BA started its retreat in 1997 with the decision to forget about volume, shrink the rear cabins concentrate on the premium classes and go for higher returns on what they do through increased average yields and return on each square inch of floorspace. This has signalled an acceptance of steadily decreasing market share on many routes  The refusal to fight back has given the Asian and Gulf airlines every encouragement to go for the jugular and pile on routes, frequencies and sheer volumes of seats. The growth of these carriers volume low yield business has provided the revenue rock on which to grow still further until now their scale of operation can be overwhelming. They are able add more frequencies which again add to their business at the expense of those who do not can not react and the downward spiral for the legacy airlines continues.

On short haul the former national carriers, notwithstanding the setting up of some secondary hubs,-eg Munich, Barcelona, -have stuck to their business models of concentrating primarily on their home base hubs or at the most flying between their home countries and others but not between two or more othes either using sixth freedom rights or by setting up local national subsidiaries. Some innovative responses such as DBA and franchises have been tried and then abandoned, not through failure and reluctance to take the next essential steps to develop them by making the necessary next steps. A sort of managerial and financial vertigo sets in , aided by old empires within the core airline seeing such things as a threat to themselves. They become terrified at the prospect of investment . Much of this comes from the definitions of accountancy . Leases and loans for new aircraft . The fact that they are self liquidating year by year as the remaining term of the lease reduces and that they are more of an operating cost than a crippling financial burden is not understood in the conventional ivory towers. Perhaps they should refer to the BOAC 1966/7 Annual Report and Accounts which explains it all in stark simplicity : "These loans will be repaid during the lifetime of the aircraft". If they were seen on this basis the nightmares would fade and the opportunities would take centre stage and the thinking would be set as free as that in Dubai, Abu Dhabi, Doha and Istanbul . The simple fact is that on the day the accountants declare "We have no debt", the operating part of the airline will be declaring "We have no aircraft".

The World's Greatest Con. Codeshares don't give you what it says on the tin. Baked Beans do.

Every so often airline X will  outrageously claim that by doing a deal with airline Y it has extended its network by 2000 flights a day,- or whatever. The truth of course is that it hasn't done anything of the sort . It may have slapped its code and thereby an override commission of around 5-10% on anything it sells on someone else's flights under its misleading code, but that's the sum total of it.

The latest bit of such hype comes from the former "World's Favourite" whose divorced from its age old partner/adversary/partner Qantas on the Kangaroo route comes through this weekend. Their new best friend of necessity is age old adversary/competitor and now partner as well (Yes, - all these things simultaneously exist in Alliance relationships although some are naive enough to believe they don't and it's all love and brotherhood), Cathay Pacific. This is the same Cathay Pacific who made BA's extensions to Taipei and Manila unviable by prevailing on the Hong Kong government to pin back their permitted uplifts on the trans China Sea routes and who are about to outfly the auld enemy by 5 daily services to 2 on the key Hong Kong-London route.

The BA's  Southwest Pacific supremo proudly proclaims ""Our new codeshare with Cathay Pacific will allow British Airways to serve all major Australian cities" (like it once did). Er, no. Offering BA's code is a very different thing to offering BA's actual brand , product and people. It's literally what it says on tin that counts . That's "Cathay Pacific" on each and every one of these new codeshare flights between Hong Kong and Australia.Anyone who chose them because they like BA is therefore not going to get what they bought.

The same thing applies to any codeshare flight anywhere in the world. Other than for the actual operating carrier whose name is painted on the outside, the code on the ticket may carry none of its brand propositions or characteristics. The customer may stand before the departures board and  see that he or she has several options for travel to their desired destination. Several timings are all the same so then there is the choice of oriental, continental European, British, American and even South American brands and annd they mean in terms of  people and types and styles of service. Great, they like the South American offering but don't care much for the European so reach for the I-pad and book it. Tough luck though when it comes to actual travel. That's the European livery, aircraft, people and product out there on the ramp and that's it. No choice.OK there were things about it being a codeshare and who the actual operator was in the small print but that is not the point. Code and aeroplane do not match. Pure and simple.

It is unlikely that this sleight of hand would be allowed in any other industry. If you buy a Mercedes that's what you get. Not even a lookalike will do and certainly not a Trabant.

Alliance and codeshare addicted airlines eulogise about the huge customer benefits of booking within one of them. Easy interlining, through checked baggage, fares etc. Yes, but the customer had all of those and across  virtually every airline and hub airport in the world in the bad old days before codeshares and alliances crept in. Underpinned by the bribe of frequent flyer programmes, the balance between hub airports has been changed, some (notably Heathrow) now offer individual passengers half or less the connections they did in the days of freeflow between all carriers. Benefit or loss and to whom?

There is a lot more to come on the whole question of alliances and codeshares, whether they are really in the public interest or work in favour of the airlines fixing fares and regulating capacities and whether the large or the small airlines benefit most. The same goes for frequent flyer programmes , first introduced in their present form by Pan American  in the early 747 days, the 1970s.? Are they really a customer benefit or do they just protect the airlines from having to compete on price, frequency, network, product and style. If they do, the regulators have been negligent in not picking them up for anti-competitive behaviour?

We will come back to those questions. Meanwhile the simple fact about codesharing  is that, unlike when you buy a tin of Baked Beans, there is no commitment that you are buying what it says on the tin.

No bonus for IAG's Willie Walsh.

OK, so Willie Walsh has still enjoyed a total over over £ 1 million remuneration for 2012 and is not therefore facing destitution, but his basic pay has been frozen for a second year running and he isn't getting a bonus.

The reason is covered in our previous item but one can add to Iberia's thumping losses a couple of unfortunate things on the BA side of the balance sheets.

First there is the announcement by Brand Finance this week that the world's most valuable airline brand is now Emirates at $4.2 billion. Lufthansa is second and BA is not in the top ten. What strategic errors over the past twenty or more years and still ongoing have led to that?

Second there is the news that Easyjet has joined the FTSE 100 for the first time. That's not down to Walsh, but his predecessors in BA did give them a bit of help along the line, firstly by selling them the very promising low cost "Go" which could have become the future of BA shorthaul had the company had the courage to go for it and give it the investment it deserved and secondly by letting the orange people have its high quality Iberian peninsular focused franchise GBAir. These two moves saved Easyjet a lot of time and trouble on the way to achieving its present size and network reach. No doubt they are most grateful for the helping hand. A little more help has been given this week by Iberia and BA cancelling many of their flights to Spain due to the second of several Iberia 5 day walkouts. Easyjet have, as at the time of the winter snow disruptions, been the most reliable way to get there. Every little helps as Tesco say.

Interestingly Walsh says in defence of the merger/IAG takeover that one benefit it has had is to reduce the competition Iberia previously provided to BA. Where was that to exactly? Both seemed to do reasonably well on the routes served by both and Iberia was barely on BA's radar screen as a competitor anywhere else other than maybe to South America which has always been of relatively low importance to the British brand. In Europe Easyjet had, with its dynamic but friendly low cost approach become a far greater competitor to BA than lackluster, legacy Iberia ever was and has inevitably taken much of the growth. On long haul routes Emirates and its Gulf companions, Qatar and Etihad have been conspicuously successful and continue to grow by the day, fuelled by geography, investment and some of the best service in the industry. Iberia's significance as a European competitor was therefore small and as a worldwide one almost nil. That was therefore not a very convincing claim. Mr Walsh would have been better off  either staying positively silent or just saying that life has been tough and that cutting through Iberia's labyrinth of deeply entrenched inefficiencies is a nightmare which is impeding IAG's forward growth and ability to generate the cash it needs for investment in the future, but that he is the man to do it. Which he probably is.

IAG results - Disaster for the BA side of the business.

IAG's 2012 results published on 28th February re-open the question for former BA shareholders and indeed anyone interested in the airline: Why did they do it?

To refresh memories , the union of BA and Iberia under a new holding company,IAG, never made sense to those who knew the two businesses. That didn't stop the project, essentially driven by Willie Walsh, being much praised and supported by BA's institutional investors and nearly all 'analysts'. BA's generally supine  Board oozed enthusiasm for it and its alleged savings and synergies and talked of the "merger", actually a takeover by a new Spanish registered company, leaving BA as British as ever. There was a lot of talk about big savings , seldom actually realised or identified in mergers despite all the hype,and the joys of operating over 2 European hubs. Anyone with an atlas was aware that Madrid was geographically useful only for South America and possibly parts of West Africa . Much of South America would continue to be served nonstop by competitors out of Heathrow anyway. The Board it seems were not hot on realities,- or even atlas ownership.  The final BA AGM before the deal hardly touched on the subject, most of the time being taken up by cabin crew militants going on about the evils of the company which they clearly loathed.

The 2012 results bring home some realities. The BA brand made an operating profit of  347 million while the Iberia brand lost 351 million. Any dividend which would have been paid by BA as a standalone business has clearly gone by the board. On top of that 202 million euros were put Iberia's transformation (?) plan and " 343 million impairment of Iberia tangible assets". Is that a way of saying that these assets were overvalued at the time of the "merger" and BA as it was got a poor deal? In the absence of any explanation in tbe brief summary published by IAG it rather looks that way.

Before what looked like a panic union of last resort (We've got to have a merger,- who's left?) BA had twice mishandled almost completed talks with the only real game in town, KLM with its ideally located and spacious European hub base at Amsterdam. On the second occasion Lords King and Marshall strutted away from the deal and left the Dutch to go off to Air France as their only real alternative.The loss of the Netherlands' carrier was and remains a disaster for BA .The two airlines are culturally and temprementally similar, both their networks were globally extensive and complemented and reinforced each other .Amsterdam is the ideal place through which to flow UK provincial business to the world, leaving slot constrained/strangled Heathrow to deal primarily witn London and southern England.  Heathrow and Amsterdam are only an hour apart and can function well in tandem. Almost every UK provincial  airport great or small has flights to Amsterdam. Not so 2 hour distant Madrid .BA's problem of how to compete in its own country's provinces remains unsolved and is probably now unsolvable. The Gulf ,Asian and even American carriers have done it for them and walked off with the business .Newcastle-Madrid-Bangkok? A time consuming and unlikely itinerary and yet "analysts " even talked about it. Why would anyone choose to travel that way?

Despite all the urgings from the uncomprehending sidelines, BA did not have to unite or be united with anybody. With one of the most extensive route networks in the world it was and on its own would remain a successful business despite its Heathrow capacity problems.

Right now , Iberia with many of its change resistant high cost staff opposing almost any talk of diminished rewards , is going through a series of 5 day strikes "to protect jobs". Undermining the current 2013 financial results is a strange way to achieve that. Presumably they are expecting Spain's politicians to ride to their rescue. If so they have tragically underestimated Willy Walsh's resolve and they are likely to find themselves on the street faster than they can ever have believed. Even so, former BA shareholders should rue the day they allowed themselves to be persuaded to raise no objections or even queries to the takeover of their company by the new IAG. The Board must have been much relieved that BA's final AGM in London was hijacked by militant cabin crew , leaving little time or space for the much more pressing issue. The institutions whose votes would anyway have wiped out any from the AGM's floor should hang their heads at their lack of grasp of the realities.

If Iberia really can be restructured and reformed and its high costs stripped out the division could become profitable but it will be a long haul and why would a sensible investor bother ?  That begs the question as to why anybody ever thought that marrying up BA to Iberia was a good idea. Former BA shareholders, especially the big ones,should ask themselves that every day.

Footnote: Always good for a rumble, Unite the union which supposedly represents the interests of its members employed in the UK by BA is today adorning its offices at Heathrow with a banner in furtherance of its war on Willie Walsh personally. As the premesis which overlook the runway are almost opposite the IAG offices, Mr Walsh will no doubt allow himself a smirk. Bête noir status isn't something to make him flinch. McClusky declares " We are all Iberia ". That has to be about the last thing most BA staff would want to be. How Unite thinks that it is looking after its members in the successful British side of the IAG business by expressing solidarity with Spanish workers striking in defence of unaffordable remuneration and  outdated "terms and conditions" defies reason but when did that ever deter militants from destroying the very thing they should be striving to maintain, - the ongoing success of the company?