Virgin America tops, according to Conde Nast

Courtesy Virgin America

Courtesy Virgin America

Virgin America is the best airlines in the US according to a readers survey by Conde Nast. It is a credible list.

The top five airlines are as follows:

1. Virgin America, for its service and roomy cabins that include such features as touch-screen menus ordering, seat-to-seat messaging, no shortage of power outlets, Netflix streaming and mood lighting.

2. JetBlue Airways, for its ten-inch seatback screens, entertainment streaming options, free internet, unlimited blue chips and snacks.

3. Hawaiian Airlines, for its lie-flat seating in the premium cabin, welcome mai tais and guava cookies, and reputation for punctuality.

4. Alaska Airways, for its friendly staff, comfortable seats, reliability and guarantee that checked luggage will arrive no later than 20 minutes after touchdown.

5. Southwest Airlines, for its fun staff, affordable fare, two free checked bags allowance and any change of ticket without penalty.

Worthy of note is the ranking in the top five positions of both Alaska Airlines and Virgin America, which have since merged but continue to operate under their different names for the time being. Their merged identity is set to be a major aviation powerhouse in the US,

Also worthy of note is the absence of the big three US airlines: American Airlines, United Airlines and Delta Air Lines. Size is not a plus in this case, it seems.

Chinese conglomerates beat SIA in Virgin Australia acquisition

Courtesy GETTY IMAGES

Courtesy GETTY IMAGES

IN a separate article I wrote about Singapore Airlines’ interest in taking up Air New Zealand’s stake in Virgin Australia, its concern being that “if it did not step into the void left by Air NZ, it might op[en the door to a competitor” (What price for SIA in its pursuit of a Virgin bride? TODAY, Apr 27, 2016), I mentioned the likelihood of Chinese carriers making that move. And so it has come to pass.

The HNA Aviation Group which owns China’s fast growing Hainan Airlines (the fourth largest in the country) was the first to move in, acquiring 13 per cent of Virgin Australia with plans to increasing its stake to almost 20 per cent. Virgin chief executive John Borghetti welcome the acquisition as “a big coup” that “sets us up for very, very good growth going forward in that very lucrative inbound but also outbound, traffic between Australia and China.”

Indeed, there has been a healthy growth in traffic between Australia and China in recent years. According to Mr Borghetti, more than one million Chinese travelers visited Australia in 2015 and this number is expected to grow to 1.5 million by 2020. Clearly HNA sees the potential and the opportunity could not have come a better time.

Now a second Chinese conglomerate Nanshan Group hopes to reap the benefit of increased tourism in Australia. The firm has bought a 20-per-cent stake in Virgin Australia from Air New Zealand. Air NZ chairman Tony Carter said: “We believe Nanshan Group will be a very strong, positive and complimentary shareholder for Virgin Australia. The sale will allow Air New Zealand to focus on its own growth opportunities, while still continuing its long-standing alliance with Virgin Australia on the trans-Tasman network.”

Both HNA Aviation Group and Nanshan Group will now join SIA and Etihad Airways as co-partners in the Australian carrier. While Etihad has not expressed any interest in buying off Air NZ, SIA appears once again to have lost the lead in a game that started out as the Singapore carrier’s to play.

Bags fly rough on Southwest Airlines

Courtesy Getty Images

Courtesy Getty Images

Thrice in six months seems a little too often. The first time it happened, the bag cracked on its side. The second bag lost a wheel. And the face of the third bag was smashed, probably because a heavier bag landed on it in the process of loading. And they were good bags, one of them brand new.

Which, of course, led me to wonder about the handling of the bags by Southwest Airlines or its airport agency. To add insult to injury, on the one occasion that the damage was brought to the attention of a ground staff member, the retort was: “How could we be sure it was caused by us?”

Guess we should be grateful that Southwest is about the only US airline that allows you to check in not only one bag but two at no additional fee. An increasingly rare perk these days!

US airlines cap capacity: Economics or collusion?

A marketing proposition discussed at a recent IATA (International Air Transport Association) conference in Miami has opened a can of worms. It seems that airlines are recognizing that it is in their joint interest to cap capacity so as to maintain airfares if not keep them high. It is a lesson learnt from the global financial meltdown that led to a reduction of capacity and cancellation of unprofitable routes, a lesson that many of the airlines are stretching into recovery, and antitrust observers have expressed concern that this may become permanent.

In more justifiable business parlance perhaps, airline executives are calling it “capacity discipline”. That, however, implemented jointly across the industry suggests possible collusion to limit competitive pricing which the Justice Department is investigating.

The suspicion is not helped by US airlines turning in record profits as the economy recovers, unmitigated by the fact that while jet fuel prices are falling, airfares are not moving in the same direction. In the past two years, US carriers together close to US$20 billion, and higher profits are expected this year as fuel prices remain at their low levels, having already dipped by some 35 per cent compared with last year’s prices. On the other hand, airfares are at a record decade high.delta

American<a Justice Department spokesperson Emily Pierce confirmed the probe to look into “possible unlawful coordination by some airlines.” The four major airlines in the US – American Airlines, United Airlines, Delta Air Lines and Southwest Airlines – also confirmed they have been contacted to provide information and would comply. You bet these airlines were not picked randomly. If there were any collusion, they would be the ones in the strongest position to jointly impact the market. Together, they fly about 80 per cent of the nation’s domestic passengers.southwest logo

united logoExcluding Southwest, the US Big 3 are making the authorities reflect on the wisdom of approving the mergers of their erstwhile entities, creating mega carriers that as a consequence results in reduced competition as the merged airlines rationalize their operations to reduce routes and capacity. US politicians are not falling short in criticism of the new reality. US senator Richard Blumenthal warned of widespread “anti-competitive, anti-consumer conduct.” The issue is that airlines are not matching the increased demand for seats in an improved economy, and that can only lead to increased prices. Mr Blumenthal said: “Consumers are suffering rising fares and other added charges that seem to be the result of excessive market power concentrated in too few hands and potential misuse of that power.”

Indeed, as another senator, Charles E Schumer, pointed out, “It’s hard to understand, with jet fuel prices dropping by 40 per cent since last year, why ticket prices haven’t followed.” While some airlines outside the US have bowed to pressure to adjust airfares or reduce fuel surcharge, US airlines have stuck to their guns to not do so but instead return millions to their shareholders. It is a clear indication of where their priorities lie. Yet what could be wrong with that but for the alleged collusion to foster an oligopoly where the customer is deprived of choice, the very situation decried by the airlines themselves and the authorities alike?

Not surprisingly, the US situation in the light of falling fuel prices may suggest the tacit support that the major airlines give each other to not return the savings or part of it to their passengers, that no airline should be disadvantaged by a competitor cutting airfares. The mega conglomeration seems to have made that easier, so Mr Schumer said: “We know that when airlines merge, there’s less price competition. What we need now is a top-to-bottom review to ensure consumers aren’t being hurt by industry changes.”

The problem is magnified when you consider the rising trend of cross border mergers and acquisitions not excluding mega alliances that can wield as much power to jointly ensure that prices are kept high even as oil prices dip, and by their size are able to erect entry barriers to new competitors. Fortunately the environment outside the US is less homogeneous and the market too diverse. There are also socio-political differences, if not often conflicting. US carriers have derided as unfair competition the apparent non-conformity to US standards and other operating situations such as low wages that make it possible for foreign carriers to charge lower fares.

Courtesy Emirates Airlines

Courtesy Emirates Airlines

Interestingly, the Justice Department’s investigation of alleged collusion among US carriers comes at a time when the US airlines (with exceptions) are seeking to block the expansion of Gulf carriers into the US citing unfair competition as they believe those airlines – namely Emirates Airlines, Etihad Airways and Qatar Airways – are advantaged by state subsidies. Emirates CEO Tim Clark has rebutted the accusation by the US Big 3, calling their move “repugnant” while insisting that Emirates is “absolutely not subsidized, and our operations do not harm these legacy carriers, but instead benefit consumers, communities and America’s national economy.” He aptly touched on the goals of Open Skies, which include among other things “greater competition, increased flight frequency (and) consumer choice”, the very issues that the US Big 3 may be guilty of flouting domestically if allegations of collusion were true.

Sir Tim stated in his rebuttal that Emirates is “offering US consumers, communities and exporting companies direct flights to more than 50 cities not directly served by any American carrier… connecting America to some of the fastest growing economies in the world, in Africa, Asia and the Middle East.” And he pointedly asked where the US carriers were. Yet could US carriers be faulted for not operating to destinations of poor demand? But should they then begrudge another airline filling avoid and envy its success in growing the traffic? So much about being the dog in the manger, while not denying it is an intricate issue.

Without competition to differentiate the carriers by product, service, fare, schedule convenience and network, reputation and frills, airlines have a tendency to move towards uniformity. Fuel surcharge is an example. All it took was one airline raising the surcharge in the days of spiralling fuel prices, and others followed quickly. Unfortunately, it is not quite the same when the oil price dips, so US carriers have taken what appears to be a collective decision not to pass on the savings to their customers.
Ever since the introduction of the fuel surcharge as a separate fee from the airfare, airlines learn very quickly to unbundle charges to be levied separately. What appears to be in the interest of the consumer who will pay for only what he or she needs, such as a checked baggage fee, has turned out to be a big money spinner for the carriers. Today, there are charges levied by some airlines for not only checked baggage but also seat requests and physical check-in at the airport. Passengers are often not any wiser about the real cost of their ticket, an issue that authorities in the European Union, US and Canada are taking airlines to task for misleading representation. Checked baggage fee and no meals on domestic flights are the norm in the US. However, US carriers may be disadvantaged internationally by foreign carriers that provide free checked baggage carriage and even meals for the short-haul. It is the competition that will make the airlines work for their money by being more productive and less wasteful, more innovative and more customer-oriented.

As the Justice Department investigates US carriers for alleged collusion, the corollary is whether real competition still thrives in the US. While shareholders’ pockets are loaded up, collusion can have many damaging effects, resulting in bloated, inefficient and costly operations. Or do they even matter considering the speckled history of US airlines seeking Chapter 11 protection and teetering on the brink of bankruptcy?

This article was first published in Aspire Aviation.

A conscionable call as oil price plummets: Will airlines reduce airfares?

AS the oil price plummets – some 55 per cent since June last year – the question topmost in the mind of the consumer must be: Will airlines reduce airfares?

Many of them have chosen to be silent on the subject, the excuse being that the historical volatility of the market is such that the trend can turn any time. But it has taken a while, and long enough for some conviction from the airlines, now that analysts are convinced that the cost of fuel is likely to stay low for at least another year.

Travellers on American carriers can stop wishing to share in the bounty, even as US carriers are reporting hefty savings as a consequence. Southwest Airlines estimated it would save US$1.7 billion on fuel in the current year, and Delta Air Lines more than US$2.0 billion. Other airlines that include Untied Airlines and Alaska Airlines are forecasting similar cost reductions. But, say the airlines, fare reduction is not on the card. Instead, shareholders will reap the benefits while the airlines themselves see this as a well deserved windfall and respite to recoup past losses and pare down debts.

Courtesy Getty Images

Courtesy Getty Images

United Airlines spokesperson Megan McCarthy delivered the cold reality of the business when she said: “It has been our position all along that fares are not cost-driven. They are demand-driven.”

That, we all know, is the simple economics of the law of supply and demand. So consumers have themselves to blame. Airlines are enjoying near-full loads that there is no incentive for them to want to lower the fare. In Europe, even budget carriers such as easyJet and Ryanair are looking forward to even higher profits from not only savings on fuel costs but also higher fares. So McCarthy was darn right there. But airlines too have learnt to make the formula work better for them, ceteris paribus, as they reduce capacity particularly in the US with merged operations to hold up demand and maintain airfares.

The consumer’s best hope lies in competition as how it should work in the liberal world, but with consolidation which has seen the merger of big entities in the US, raising questions about the assumed competition itself. Today four airline companies control more than 80 per cent of the US market. Little wonder how US carriers have collectively signalled that airfares will not fall in response to the falling fuel cost.

Where competition does not work, the consumer can hope that some conscionable authority will be able to address the fair fare issue. On that second score, you might fault McCarthy for turning a blind eye, but United, like any other, would contend with some validity that it cannot be both operator and watchdog. Company with conscience is a preacher’s prerogative, more idealistic than operative.

Still, the likes of United may be reminded that back in the days not too long ago when the fuel price reached giddy heights, airlines were raising fuel surcharges as many as four times within a year. Strange as it sounds, they have always maintained that the surcharge is not part of the fare, but not as far as the consumer is concerned. Even so, the corollary must apply as the fuel price dips. No lesser a person than Toby Tyler, director general of the International Air Transport Association (Iata), has said that airline fuel surcharges should begin falling as the drop in oil price works its way through the aviation fuel system. Tyler said: “In many cases, airlines operates now with a basic fare and a fuel surcharge of some kind and the fuel surcharge in many airlines is directly linked to the price they’re paying for fuel.”

Courtesy Airbus

Courtesy Airbus

But it looks like it is not happening quite as quickly as Mr Tyler was convinced that it would when he said in October last year: “You’ll see the fuel surcharge very quickly come down.” Still, better late than never. Better somewhere else if not in the United States. Japan Airlines (JAL) announced lower fuel surcharges for international flights from February 1, recognizing the genesis of introducing such levies back in February 2005 in response to rises in the cost of fuel. Now that is one conscionable airline. JAL said it would revise the surcharge, whether upward or downward, if the fuel price fluctuates further. Fair enough. American and other carriers waiting on the sideline, take note.

Qatar Airlines has also announced it will reduce the fuel surcharge although it has not committed to a date for implementation.

Courtesy flyertalk

Courtesy flyertalk

Australian airlines are among the first to drop airfares in response to the falling oil price. Two forces are at work: competition and the authority. Nowhere else in the world is there more bitter rivalry than that between the two Australian carriers of Qantas and Virgin Australia. Virgin took the lead, and Qantas followed suit. Virgin said it would not get rid of the fuel surcharge altogether, but incorporate it into the fares; however it is packaged, the bottom line should see a reduction. Virgin said the “reductions reflect the benefits of the decline in global oil prices” following monitoring over recent months and “in anticipation that fuel costs will continue to remain at lower levels than the record highs seen in recent years.”

At the same time, the Australian government is putting pressure on the airlines to respond to the drop in fuel costs. Rod Sims, chairman of the Australian Competition and Consumer Commission (ACCC) said: “It is not against the law to introduce a surcharge – what is against the law is to mislead customers.” The ACCC announced it was investigating the matter. In a statement that it released, it said: “The ACCC has confirmed that it is considering whether representations made by airlines imposing fuel surcharges, following the fall in wholesale aviation fuel prices, are misleading. Under the Competition and Consumer Act 2010 businesses must not make misleading, deceptive or false representations about the price of goods or services. This includes when making representations about the reasons for rising fuel costs.”

In this connection, Qantas said: “The bottom line for consumers is that Qantas fares already in the market are some of the cheapest in years. Fuel surcharges are already included in the advertised price and those fares remain extremely competitive.”

The issue is not about the fares already being the cheapest in the market but rather whether they should be even cheaper as a result of lower fuel costs that have saved the airlines millions to billions of dollars.

Meantime the British government is studying the need for intervention. British Airways circumvents the issue with no clear commitment, saying it has launched several sale initiatives. Virgin Atlantic said it has reduced the fuel surcharge before last Christmas and will “continue to monitor the situation and fuel surcharges under review to make them as affordable as possible.”

Courtesy Delta Airlines

Courtesy Delta Airlines

It is a world of ironies. The consumer may as well confront the hard truths about the market. The door does not always swing both ways. As the global economy improves, the demand for seats picks up. And when demand exceeds supply, the game belongs to the airlines so much so that Delta CEO Richard Anderson has suggested to passengers who are looking at reduced fares to “shop around”. He said: “The marketplace is incredibly competitive, and there are always differences in fares.” The consumer can only hope that competition is well and alive without the need for state intervention. If Anderson had come across as being somewhat arrogant, he probably knew he could afford it. But heed his advice anyway.

This article was first published in Aspire Aviation.

Qantas-China Eastern partnership: Dressing up an old arrangement

qf logocea logoQantas and China Eastern Airlines announced a new agreement that the airlines said will enlarge their existing codeshare arrangement signed in 2008 for a deeper level of commercial cooperation on flights between Australia and China. A statement issued by Qantas referred to the new relationship as a “joint venture”. In the application to the Australian Competition & Consumer Commission (ACCC), it was referenced as a “Joint Coordination Agreement”. Whatever the terminology, one wonders if this agreement is any different from the usual run-of-the-mill alliances that are not much more than a formal handshake.

There is the standard co-ordination and sharing of facilities such as airport lounges. A key feature is the co-location of both carriers’ operations within the same terminal at Shanghai International Airport. This reduces transit times by about an hour to facilitate a wider range of onward connections. Qantas CEO Alan Joyce said: “Coordination means the opportunity to improve schedules and connection times, and to deliver improved products such as a joint lounge and streamlined check-in facilities in Shanghai.” The Australian flag carrier is banking on more of its customers opting to fly to not only Shanghai but also beyond from there, in a region where it is much weaker compared to Asian carriers such as Cathay Pacific and Singapore Airlines (SIA).

Many codeshare partners are already making similar arrangements. Star Alliance airlines, for example, operate out of a dedicated terminal at London Heathrow. So what’s the big deal about the Qantas-China Eastern agreement which, subject to regulatory approval, will commence in the middle of next year and be effective for five years?

According to Qantas, the agreement is designed to complement the Qantas-Emirates partnership for Europe, Middle East and North Africa, and the Qantas-American partnership for the United States. That covers almost the whole world and makes Qantas truly a global airline. But to what avail? Interestingly, Qantas itself has limited operations to some of the regions. It operates to only London in Europe, Dubai in the Middle East, Johannesburg in Africa and Santiago in South America. The airline’s presence in North America is limited to Dallas/Fort Worth, New York, Los Angeles and Honolulu.aa logo

The Qantas-American agreement signed in 2011 is a codeshare arrangement for transpacific flights between the US and Australia to also include New Zealand. It does little more than what the global alliances, in this case OneWorld of which Qantas and American are members, have been set up to achieve. American does not operate to Australia.

emiratesThe Qantas-Emirates alliance caused a stir when it was announced in 2013 because of changes made to the traditional kangaroo route when Qantas shifted its operations hub from Singapore to Dubai. While Qantas is leveraging on Emirates’ extensive networks in Europe, the Middle East and Africa, it looked like the move was aimed at checking the competition posed by SIA. However, the real winner is not Qantas but Emirates, which is aggressively making inroads into the Asia-Pacific market. More than a year after, Qantas continues to make losses. It posted the biggest loss in its history of A$2.84 billion (US$2.66 billion) for the last financial year ending June 30.

How different from these other agreements is the new partnership between Qantas and China Eastern, and how will it play out for Qantas?cathay2

The flying kangaroo has long eyed the growing China market as a way to improve its bottom line. A partnership with a Chinese carrier makes sense for a quick and easy penetration into the large market in addition to its current daily service between Sydney and Shanghai. The agreement is also supposed to complement Qantas’ existing services to mainland China via Hong Kong, competing with Cathay Pacific and Dragonair. In its application to the ACCC, Qantas says it “does not consider the Hong Kong and Shanghai gateways to be mutually exclusive” the way that Dubai has replaced Singapore as the hub for its European flights. Quite clearly, Cathay which has a stake in Air China Cargo is a veritable rival to reckon. The rivalry has heightened in the Jetstar Hong Kong saga. China Eastern’s participation as partner in the budget joint venture does not seem to be able to do much to facilitate its application for approval to fly. After two years of its launch, approval is still pending.

siaThen there is SIA, the other competitor with a strong presence in the region, mentioned in the Qantas-China Eastern application to ACCC. Qantas notes how SIA’s subsidiaries Tigerair and Scoot are flying from Australia to Singapore with onward connections to China. As if pre-emptory to the new agreement, the existing Qantas-China Eastern codeshare already covers flights out of Singapore.

While Qantas will gain wider access across China, so will China Eastern within Australia. Passenger air services between Australia and China have been growing at an average rate of 11% for the four years to April 2014. In the past 12 months to June 2014, passenger numbers grew by 8%. In the application to ACCC, Qantas expresses fear of being “marginalised”. On its own, it says it “will not be able to keep pace with the capacity growth being driven by carriers such as China Southern and Sichuan Airlines.” ACCC will have to decide whether the case is about Qantas or Australia, notwithstanding the former`s status as the country`s flag carrier. Yet Qantas has argued that the proposed agreement is far from being anti-competitive, though clearly that fear has been exacerbated by the growing importance of Chinese carriers if only the competition could be limited to a single but partner airline, other strong regional carriers, and rival Virgin Australia’s reciprocity with Delta, Air New Zealand, Etihad and SIA in the wider network.

As with the American and Emirates alliances, the agreement with China Eastern once again is a case of Qantas needing its partner more than the other way round. The partners continue to retain their distinct identity vis-à-vis brand, product and pricing differences. Qantas runs the risk of its customers switching loyalty to its partner by the lure of lower fare, better facilities and services. Emirates, for example, may offer more than just a convenient hop from Dubai to other destinations for Qantas customers when it also competes on the kangaroo route. Before Emirates, there was speculation that Qantas might form the alliance with Cathay instead. That would make a formidable force, but Qantas would have faced the same risk. Besides, a partnership between giants is apt to be paved with problems unless the advantages to one partner are worth its compliance, if not silence.

Will China Eastern similarly flip the game for Qantas? The China carrier has much to gain. Qantas desperately seeking to check competition and new growth may find its prowess neutralized, dressing up an old arrangement.

This article was first published in Aspire Aviation.

Frequent Flyer program: Airlines go for the big spender, not frequent flyer

AS the global economy recovers and more people begin flying, airlines do not have to work as hard to retain old customers or entice new ones. There appears to be a rethink of the flyer program to base its rewards not on frequency of travel or the miles travelled but how much you spend on a ticket. The name of the frequent flyer program is apt to become a misnomer as airlines shift their preference from frequent flyers to big spenders. The new Qantas Frequent Flyer program does exactly that, moving from a miles-based system to a zone-based system whereby flyer points and status credits are based on the cost of the ticket. There is also a shift in downgrading rewards for travel on partner airlines to encourage customers to fly Qantas first and its partners second.

Courtesy Delta Air Lines

Courtesy Delta Air Lines

The trend is also catching up in the United States. Delta Air Lines and Southwest Airlines (though a domestic operator) already have such a system in place. The American Airlines Group comprising the merged entity of erstwhile American Airlines and US Airways is following suit. Alaska Airlines is mooting over a “Sphere” program to award points based on spending rather than just flying. Delta’s SkyMiles program vice-president Jeff Robertson said: “The travel industry, including nearly all hotel and credit card programs, has already moved to a spend-based model. The introduction of a new model for earning miles will increase rewards for those who spend more as well as differentiate the SkyMiles Frequent flyer program for our premium traveler.”

Is this a sign of the premium market recovering or merely yet another push to energize that segment of travel that in better days make up the bulk of a legacy airline’s earnings? However you look at it, it makes economic sense to reward those who spend more. What price then is loyalty for those who fly frequently but do not splash to drink champagne and feast on caviar? The base may shift, particularly when you can join any one of so many airline programs for a fee, such as Cathay Pacific’s Marco Polo Club, just to enjoy priority check-in and boarding, access to an airport lounge in some cases, and possibly an upgrade. Who needs to fly frequently thus or even spend the big bucks?