Wednesday, 30 July 2014

Airbus and its A 380 Dilemma

Skymark's cancellation of its order for 6 (4 orders and 2 options) A380s comes as little surprise. it always looked as if it might be a step too far for an airline only recently moving into the long haul business. A small fleet of very big aircraft looked problematical among its larger 30 strong fleet of smaller shorthaul B737s.

It does though leave Airbus with sort and longer term dilemmas about what to do. They have had no new additional customers for the aircraft for two years. Despite a brave public face they must be worried about the programme and how to get sales back on the rails.

The first is to find homes for the six as they won't want white tails hanging around Toulouse. Earlier this year Turkish Airlines was said to be looking for an initial fleet of four to lease almost immediately. It was not clear whether this was to create a "We've really made it" image for the world's fastest growing airline and network or to temporarily ease a capacity shortage on major city pairs or to give the aircraft a real operational, financial and commercial trial prior to possibly following the Gulf majors who have bought the aircraft. Whatever the reason ,we imagine that unless midsummer torpor has taken over, the rather desperate A380 sales team are already on their way to Istanbul. Whether or not these particular six aircraft are attractive to anyone else will depend on how far advanced they are on the line and how much customisation has already been built into them. Other interest might come from existing customers who see a need for an additional two or three or even all six aircraft as soon as possible. IAG's Walsh has already said that he doesn't see the BA fleet going beyond the 12 already ordered. BA's sales people would though almost certainly welcome with open arms additional capacity on a number of BA longhaul routes which have been kept on a very tight capacity rein for a good ten years or more. It is fairly easy to see where and how up to six more 380s could be advantageously deployed. Nothing more than a cheap ballpoint and the back of an envelope is required to do the calculation. Air France, never over the moon about Airbus' long products, could also absorb a couple but are unlikely to do so. Lufthansa could accomodate them if they scaled back their hard to understand order for the end of the line B747-8i but that may also be difficult to achieve. South African might just also be a door worth knocking on. They are looking for an A340-600 replacement, compete on key routes with Emirates, BA, Air France and Lufthansa A380s  and have long experience of small flagship long haul fleets. Their crews and engineers know the A340, 330 and 320 well but the airline would want a rock bottom price.

The bigger question though is how to win more customers, and ideally at least get their long term feet into some big ones even if in a small way to start with. Ideally the aircraft needs the -900 stretched version , whose economics gain from better use of the existing very substantial wing and wing box. Emirates have been banging that drum for some years and Cathay Pacific expressed an interest long ago. Here Airbus are faced with the chicken and egg question. The project has not broken even yet so they are reluctant to throw more money at it before it does. If they don't spend the money (and it's a lot) though they may be faced with literally the end of the line in no more than five years from now. Ironically that is just about when demand might just have to pick up as airlines get more and more slot squeezed in major airports.

The biggest mountain Airbus faces is that while quite a few airlines, including however reluctantly the US majors, can probably see a place for the 380 on their densest routes, the fleets they would require are currently small,- probably between 6 and 12 aircraft. The economics and engineering and crewing resources those would take up amidst very much larger fleets of compatible and interchangeable big and very big long range twin widebodies may just not be worth the candle.

The answers aren't easy. One would be to offer totally packaged buy or lease plus maintain and operate deals. These would give the operators a 380 fleet without the burdens of flying and looking after it. Many aspects would be similar to a wet lease but with the operator being the manufacturer. The operating contracts could if desired include the flight and cabin crew possibly seconded from the owning airline or contracted from a third party- see also our post of 14th  July on subcontracting cabin crew). The bottom line risk would of course remain with the manufacturer, something they almost certainly fear greatly. The A380 is a good investment for airlines which intend to keep it for all or substantially all of its operational life. It is much less good for those who would hope to sell it on at midlife or thereafter as the secondary market for such a large and often inflexibly fitted- out aircraft is likely to be very limited. Hence the risk for the manufacturer in retaining ownership of an aircraft which may be returned by its initial operator well before it is fuly depreciated would be substantial. On a smaller scale, BAe struggled with its more easily transferable 146/RJ series, most of which were leased out and became overhanging liabilities for the group.

This problem of small fleets among big standard ones is the big reason why the new customers list stalled. It is the challenge the whole project now faces even though many potential new customers might agree that for a (smallish) percentage of their long haul routes the 380 is the best aircraft  for the job. If they can't market their way out of the impasse, Airbus's decision  has to be "Double (investing in the -900) or Quits". Both choices give them a shudder. That's why there is the current stasis. One way or another the manufacturer needs to snap out of it .For the moment though they might just let it drag on until they have to call "Last Orders". Emirates can't keep the line going for ever.

Friday, 25 July 2014

MH 17 and Overflights

What to do?  Overfly or not overfly?  Which countries and when?   Who makes the decisions?.
IATA’s Tony Tyler has said the decisions are a government's responsibilty. But responsibilty to do what?  He's partially right.  Government must have a responsibility to share information with carriers. But the final decision must lie with the operator, and on the day , with the captain.  Relying on a phone call from the Prime Minister to say "cancel the BA123 this evening" is unlikely to be the best way forward.  Individual carriers and their crew make hundreds of operational safety decisions every day.  Sometimes these are made for them if a national regulator closes airspace for whatever reason,but at other times their own judgment is called for.

But is MH17 a game changer? The technology to bring down a civil airliner at 35.000ft or higher is not new but it being in the hands of irrational excitable people is.  Captain Jordaan, a former SAA Flight Operations Director, has said "Flying gets safer year by year with MH17 being an aberration".  But is it more than that?  Shoulder held rocket launchers or Manpads have been in the hands of some militias for more than 40 years. Remember Air Rhodesia’s Viscounts back in the 1970s ? More powerful weapons and systems will surely follow.  Comments on how to 'slap Putin' are many but we have seen nothing yet on what the industry thinks of ways to limit the possibilty of a repeat incident somewhere in the world.  Emirates is certainly giving it thought by inviting carriers to a session to discuss the issue.  Half of the UAE airline’s services fly to/from the west and the whole area is becoming increasingly unstable. Iraq, Syria, Israel and Libya are just the high profile ones.  Delta cancelled its Tel Aviv services before directed to by the US Government.

If nothing else there is a need to clarify lines of responsibilty and the form and content of information sharing.  Government Travel Advisories to passengers are of varying quality and reliability and often bring only confusion to many. Some are justified, some diplomatic posterior covering and some not. The world needs to do better than those. The FAA Advisories for airspace are though similarly vague and inconsistent, eg the guidance for Kenya is based on the Mombasa manpad attack some 10 years ago.  The common message in most is 'better not fly below 20-24,000ft, ie Manpad not full blown surface to air missile limits.

Be ready for the legal claims challenging responsibility for the tragedy.  Also be ready for aircraft insurance premium to rise on the perceived increase in risk.

John Williams

Thursday, 17 July 2014

IAG's first group order. What it really means.

IAG's confirmation of an order for 20 A320neo aircraft to replace 19 older A319s is worth very careful reading,- especially by BA's staff. The deal breaks new ground for the company and its portfolio of airlines/brands.

For the first time the order is not 100% company specific. It's IAG's.

The statement, which follows briefings to staff a few weeks ago on the need to improve shorthaul profitability, is the next step in getting costs down closer to those of the low cost operators with whom BA is forced to compete on price as well as quality.

It reads: "These aircraft are intended for British Airways' fleet but only if the airline can make a profitable return from its short haul business. If it can't make a profitable return on short haul, IAG will reallocate these aircraft elsewhere in the group."

In other words, if sufficient improvements can not be gained or agreed by the unions, the aircraft and their routes will be transfered to IAG's growing low cost carrier Vueling .They will then operate them as a BA codeshare. That's what has happened to Iberia in Spain so it is reasonable to assume that the same recipe would be employed in the UK.

Short haul accounts for 73% of BA's operational activity. External factors which undermine its profitability include Heathrow's shortened day caused by the night jet bans and restrictions and the need to build holding time into the schedule on each and every round trip. Internal or self inflicted factors include Heathrow being being treated differently from all other airports on the network. Union agreements contain stipulations on Minimum Base Turnaround. The pilots'deal is different from that of the cabin crew. As result the aircraft and crews don't stay together through London. Once they reach Heathrow the aircraft, pilots and cabin crew all go their separate ways . They continue on different flights,- or go home. It makes rostering a nightmare and means that on days of weather or other disruption the shorthaul operation substantially falls apart and there are numerous cancellations. Some of these are down the the lack of a complete crew and others are inserted to protect the next day. The resultant immediate costs and loss of future business because customers are unhappy is enormous. The time spent sitting out the Minimum Base Turnaround also mean that crew run out of hours before they could complete the homeward sector. The result is more nightstops and more crew. That's a lot of money. Nor do BA's cabin crew clean the aircraft during the turnarounds. This means these are longer and more expensive than they need to be. Many BA crews don't put a lot of effort,- sometimes none at all,- into on board Duty Free sales either.

Then there are Heathrow's night jet restrictions. When added to the one hour time difference between UK and Europe they make large number of expensive nightstops on the continent inevitable. All these things make it very dificult to meet the company's stated aim of 12% return on revenue. The possibility of  Vueling progressively moving into BA's less profitable short haul activity is therefore very real . BA's staff and unions need fully understand the situation and react positively. Any old fashioned behaviour won't deliver the answer they want.

Making money on short haul has been a constant problem for legacy airlines. In BA's case it was no different for BEA before the 1972 merger. Much short haul revenue is to do with network contribution, something with which many finance people struggle. The geographical position of London and the airline's superior range of North Atlantic destinations and frequencies makes the British capital and the airline very competitive west of Europe. Its less advantageous location and BA's substantial pruning of its Far East, Asian and African networks over the past 15 years has undermined its position of both the as a global hub and hubmaster. Much of that role has slid eastwards to Turkey and the Gulf  and their airlines. The process is ongoing.

The Walsh/IAG view of airline economics appears to be that increased profitabilty comes primarily from cost savings,- of which there are certainly many potential sources in the group despite work already done in BA over at least two decades. Rightly or wrongly, that rather than expansion of the network or overall business, is the perceived gold mine.

 BA has one of the best and most flexible fleet replacement programmes in the world. 777-300ERs, 787-8,-9 and -10,  A350-900s and -1000s and a handful of A380s are on order. Each of them though is so far a direct replacement  for a 747, 777 or 767. There is no plan to increase the number of  long haul hulls in the fleet in the forseable future. That's not exciting  growth-filled stuff. IAG would argue that restricting production, pushing up yields for what is available and cutting costs is the only way to achieve the magical and  historically elusive 12% return. That could even be true. It may be the objective that isn't sustainable against the strategic downsides. Critics would say that in a growing market this tourniquet means managing relative decline, which will fuel competitors' growth and risk an accelerating downward spiral. The company has claimed that the lack of Heathrow slots limits its long haul growth. This is simply not true yet.  There are plenty which BA uses for non strategic and marginal short haul destinations or frequencies. What IAG really appears to lack are the aircraft and the real will to grow the long haul business. BA has chosen to be primarily a Europe/UK/USA carrier and it has no nostalgic feelings about its once much wider global role.

Against this background, the pressure on BA to deliver lower short haul costs is really on. The A320neo is the carrot and Vueling is the stick. IAG, the owner of both airlines will make the call. They will do it without emotion.

Monday, 14 July 2014

Cabin Service, Quality and Costs. Finnair strikes out into subcontracting territory.

Passengers who contemplate such things will for many years have wondered why legacy airlines have often struggled to achieve in the air the levels of customer service provided by hospitality industries on the ground?Why when customers receive energetic, friendly service in restaurants and cafes from people on minimum wages who are rushed off their feet all day do they get something very different from the much higher paid cabin staff on the "national"/major carriers from the same countries? Why can't we find Mandarin Oriental, Shangri La, or even the local cafe's service when  aloft?

Airline managements have pondered the same thing and asked the same questions. Many, especially among the old legacy operators, pay their cabin crew well,  sometimes extremely so, give them good conditions,put them up in nice hotels with all sorts of generous allowances, look after them in sickness and in health, and listen to and help with their various woes. Yet despite all this all too often the recipients don't return the compliment with outstanding service.

Those involved with industrial relations wonder endlessly how they can avoid interminable hassles with unions over minutiae of terms and conditions. People willingly and enthusiastically sign on to work on aeroplanes. For many it is the ambition of a lifetime. And yet when they get on an aircraft they find unions telling them what they can and can't do and on occasion refusing to allow an inch of flexibility to make a trip successful. As result all the motivational efforts go down the drain and potentially excellent staff find life becomes a drudge. The management challenge is to get everyone into a "Can do" and "Do what it takes" frame of mind and get rid of the constant change averse Somme-like battle over every comma and dot in contracts. Take away the hassles and the savings from reducing the legions of I.R.staff numbers and their accomodation and salaries would be a huge bonus in itself.

The straightforward answer to anyone arriving on the scene with a clean sheet of paper would be to get rid of all these exasperating and immensely time consuming hassles. The ideal would be to have someone else deliver a high quality working cabin service machine machine every morning, take it away every evening, fix any problems out of sight and deliver it back, bright and cheerful, the next morning

Back to the legacy customers. Wouldn't it be nice for them to find the problem solved so that they could sit back, relax.  Then they wouldn't have to migrate to the Gulf or Asian carriers newcomers with their smiling welcomes and unflagging service?

Finnair may just have opened the door to these sorts of things becoming possible. They are starting by subcontracting cabin services on a few short haul routes.  Predictably those who made this necessary by refusing to change are not happy. There have been efforts to crack the problem of  how to provide great, brand compliant service at lower cost before. One successful answer is franchising. It is still in the game but the legacy carriers, often weak in the face of challenges from unions or internal vested interests, have tended to back away from it even when proven to be highly successful. The industry, its managements, shareholders and customers (the people who keep it all afloat/aloft) have a lot to gain by figuring out their own ways of following Finnair's bold, if as yet tentative, initiative. 

Wednesday, 9 July 2014

UK Rail,- Ups and Downs.

UP is the likely announcement of £3bn for road and railway projects across the northern Liverpool-Manchester-Leeds-Hull corridor. Of this around £650 million will be in schemes already announced and the rest is expected to be new money. It is important though that rather than just announcing money in Gordon Brown style and leaving it to gurgle down assorted drains and disappear from sight, it is allocated to specific tasks which then visibly get done.

UP is a scheme to spend up to £90 million on providing high speed Wifi to trains on most busy lines.

DOWN is funding this from a £53 million fine imposed on Network Rail for poor punctuality on some lines. The idea of the government fining itself  is absurd. It just creates a revolving loop of funds from Treasury to user and back to Treasury.  Where is the sense in that? It may well fit with notions about punishment for poor performance but especially when better performance needs more money the State scores a double hit on itself. Here we see £53 million being taken away from potential track improvements and moved to installing the Wifi instead.

UP is the sight of overheard catenary going up between Reading and Didcot as part of the GW main line electrification. It spans all 4 tracks on this section and is of conventional rather than some of the proposed more aesthetic though maybe less robust designs we have seen recently. After the experience of the low cost East Coast mainline equipment though maybe robustness is a better bet than beauty.

DOWN are the chances of any pro-HS2 argument being heard, never mind listened to, in the Chilterns,  rural Buckinghamshire and Oxfordshire areas. Some Councils prefer to spend six figure sums of public money on opposing the project rather than repairing or even temporarily filling in  third world levels of potholes. The "Say No To HS2" lobby continues to peddle its lines, repeated verbatim  the length and breadth of the area : "There is no business case" , "We can improve the existing lines" "It will destroy the countryside/communities/bats". Costs are invariably portrayed way beyond the realities and declared to be "unaffordable". Any talk of the line being needed to cater for the future needs of future generations is summarily dismissed. So is the notion that anything should be done in the south to accomodate the needs of the north. The idea of northerners being able to admire the "Area of Outstanding Natural Beauty" as they flash through it is dismissed as nonsense. The Chilterns are for the local inhabitants. The rest should be buried as deep as possible . Even cut and cover tunnels are objected to and as for mere cuttings....
All this is pretty depressing for any with a vision of building for the future and for the promoters of the scheme. They must feel that they are walking through deep clinging mud. Fortunately politically  the Conservatives, LibDems and Labour (whose scheme it originally was ) all support it. Only UKIP,- in favour of such projects in 2010,- opportunistically oppose it) so it has a chance,-in the end of happening. That will be after the 1,950 objections to the Hybrid Bill , including no doubt some on behalf of bats and newts, have been heard and dealt with. The Bill is not expected to complete its passage through Parliament until 2017,- and that is regarded as optimistic.

UP is the news that the prototype of Britain's new Hitachi UK assembled, Japan sourced, long distance express electric/diesel trains will start trials in the UK in 2015.

DOWN is the news that the interiors aren't wholly designed for passenger comfort and convenience. The entry doors are at the ends of each coach. They are narrow, so difficult and slow (not good operationally either) for passengers, particularly those with baggage, to negotiate. The doors themselves slide into pockets which mean that the end seat rows, which also feature the baggage racks on one side, have no window. The experience will be akin to sitting in a cupboard for up to 4 hours or even more. Customer friendly? On other new trains which will also be around for 30 years or maybe more, a "thrifted" specification for seats means they will be thinner and harder than on existing ones. Just the thing to persuade potential passengers to leave their ever more comfortable cars at home.