News Update: Boeing didn’t tell Southwest Max safety alert was turned off

https://www.cnbc.com/2019/04/28/boeing-didnt-tell-southwest-that-safety-feature-on-737-max-was-turned-off-wsj.html?__source=newsletter%7Cmorningsquawk

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Max Jet Grounding: Airlines feel the pinch

With no certainty as to when the grounding of the B737 Max 8 aircraft will be be lifted, airlines are feeling the pinch.

The ban took effect soon after the crash of a jet operated by Ethiopian Airlines in March which happened five months after the crash of a Lion Air jet under similar circumstances.

Boeing is developing a software fix to the anti-stall system known as the Manoeuvring Characteristics Augmentation System (MCAS). It had hoped to implement this by May; this now looks unlikely.

Courtesy Boeing

Southwest Airlines, which is the biggest Max operator with a fleet of 34 jets, is extending Max cancellations through to August 5, and American Airlines with a fleet of 25 jets to August 19. Other airlines such as Air Canada which had expected to resume Max operations in July will have to follow suit.

Southwest which cancelled more than 10,000 flights reported a loss of US$200 million in revenue during the first quarter.

American Airlines, cancelling 155 flights a day, expected earnings to be hit by some US$350 million.

In a worse situation is Norwegian Air Shuttle which said its first quarter losses had widened to 1.49 billion kroners (US$172 million) from 46 million kroners a year ago. This is not helping the carrier’s plans to return to profitability as it has been forced to rebook passengers on other flights and rent alternative aircraft to maintain its schedule. Chief executive Bjoern Kjos expects the grounding to last till the end of August.

Now the question remains as to whether passengers will take readily to flying again the Max jet. More than 50 per cent of Americans had said they would not, even with the fix in place. It is not enough for Boeing to convince its airline customers. The bigger challenge lies in restoring the trust of the airline’s customers.

Southwest CEO Gary Kelly had said while Southwest is an “all-Boeing carrier”, it didn’t mean the airline would use the 737s in “perpetuity”.

Baggage Woes

Courtesy Ryanair

Ryanair

Ryanair flew into a rough patch with Italian antitrust lobbyists following its decision to levy new fees for hand luggage. Unless you pay €6 (US$7) for priority boarding, you will be allowed to carry only one piece of hand luggage, which must be able to fit the space under the seat in front. Any second piece (up to 10 kg) to be checked in will be at a cost of €8.

Antitrust advocates said this could amount to unfair commercial practice as hand luggage should be “an essential element of transport”. It would distort fares and make it difficult for comparison across the industry.

In defence Ryanair said its policy was intended to “improve punctuality and reduce boarding gate delays”. In fact, it maintained that it would not make any money out of it and may in fact lose revenue when more passengers switched to carrying smaller bags instead of the the normally larger suitcases which must be checked in at a higher fee.

However, research by US travel consultancy IdeaWorks suggests that a third of the airline’s profits came from so-called “ancillary revenue” comprising £1.7 billion (US$2.2 billion) from charges for add-ons such as checked baggage and seat selection last year.

Swoop

Across the pond in Canada, new Calgary-based budget carrier by WestJet is also facing complaints about fees charged for a carry-on bag. The fee is C$35 (US$27) if paid in advance, C$50 if paid at the time of check-in at the airport, and C$80 at the gate.

Passenger rights advocate Gabor Lukacs has filed a complaint with the Canadian Transportation Agency, claiming that this is unlawful since the Canada Transportation Act requires domestic airlines to offer a basic fare for travel within the country that has no restrictions with “reasonable baggage”.

As in the Italian argument, Lukacs finds Swoop’s practice “deceptive”. While what constitutes “reasonable” may be debatable, the general rule thus far has been that the allowable one piece has to fit in the overhead compartment or under the seat. Ryanair has restricted the carriage at no fee to the space under the seat, but Swoop is not even considering that. In defence, Swoop says it is “confident that Canadians are appreciative of the ability to be in control of what they pay for.”

American carriers

Meantime south of the border, American carriers are taking turns to up their checked baggage fees. American Airlines joined JetBlue, United Airlines and Delta Air Lines in raising their fees from US$25 to US$30 for the first bag, and from US$35 to US$40 for the second bag. Budget carriers Spirit and Frontier are already charging between US$40 and US$50 per bag. For now, Alaska Airlines has kept its fees at US$25 for the first and second bags, while Southwest Airlines still allows passengers to check in two bags for free.

These fees generally apply to travel within North America and to destinations in the Caribbean. Internationally, the likes of United Airlines cannot afford to ignore the competition especially in Asia where many legacy airlines such as Singapore Airlines and Cathay Pacific are still generous with free carriage of two checked bags.

Indeed, ancillary services have become a significant billion dollar business world-wide in an airline’s portfolio as more operators including legacy airlines go “a la carte” to keep the fare seemingly low but charge extra for features that used to be part and parcel of the normal ticket price. And the list is getting longer to include also priority check-in, priority seats (with more leg room), meals and headsets. It will not stop growing as the permutation multiplies, as can be seen in the different ways charges are applied even within the same service category, such as the baggage fees imposed by Ryanair.

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.