Thanksgiving is upon us; the end of normalcy for 2009

For those of us in the US, normalcy in 2009 has come to an end. This week is Thanksgiving, with Friday the 27^th being the first official day of the Christmas shopping marathon.

The world will continue on, but with a new fervor that will end on January 2, 2010 - the second decade of the new century.

Back in the last century….

Remember 1999? But the first event of the new century was that we survived the threat of Y2K without incident. Boarding an aircraft with water bottles was not seen as a terrorist act. One could navigate security checkpoints fully clothed and without the need of food items since most airlines were likely to actually provide a meal. Check-in generally involved a human-to-human exchange and baggage acceptance was considered to be an integral part of the conditions of carriage.

The newest alliance, SkyTeam, was only six months old and Star, the granddaddy, was three and consisted of nine members, two of which have since disappeared. There was no Etihad and Emirates (Chart 1) operated the following schedule of nonstop frequencies, with the Winter 2009 frequencies shown as well.

Chart 1: Emirates Airline schedule, 2000-2009

Emirates Nonstops per week
Dubai to	Wi 2000	Wi 2009
Abu Dhabi	2	0
Amman	5	14
Athens	5	11
Bahrain	11	21
Bangkok	7	21
Beirut	4	17
Cairo	6	10
Colombo	7	11
Damascus	4	14
Damman	2	7
Delhi	7	25
Dhaka	7	17
Doha	18	35
Frankfurt	7	14
Islamabad	4	5
Istanbul	5	11
Jeddah	4	7
J'burg	7	21
Karachi	16	28
Kuwait	10	21
Lahore	3	4
Larnica	2	7
London	28	63
Male	4	10
Manila	6	10
Mumbai	19	35
Munich	7	14
Muscat	7	14
Nairobi	7	13
Nice	1	5
Paris	3	14
Peshawar	2	0
Riyadh	3	7
Rome	2	11
Sanaa	3	7
Singapore	7	14
Tehran	6	19
Zurich	5	14

Source: OAG

This is hardly recognizable as the airline that now is intent on flying everybody everywhere with a stop in Dubai.

As 2000 began, JetBlue was yet to begin service, Ryanair had no website, and AirAsia, as we now know it, was still years away. Legacy carriers operated substantive schedules at Baltimore and had not virtually ceded that market to Southwest.

Here in San Francisco most international flights were operated with 747s rather than the 777s that dominate today. In 2000 only United operated 777s, and only to Paris and London. JAL's new B777 fleet was deployed exclusively on domestic routes.

From New York to Europe, Continental alone would offer you a B757 and only to Dublin, Shannon, Glasgow or Lisbon. After all, this was not a transatlantic aircraft! Headed for Asia from New York, one could fly nonstop to Seoul (Kimpo, not Incheon) or Tokyo. Anywhere else required a stop or connection.

From the US there were five weekly nonstops on TWA to Cairo—the full schedule operated by all American carriers to anywhere in Africa.

And, most amazing of all, a decade ago many airlines were (fleetingly) in the black.

An active decade; what lies ahead in the next?

There is no need to rehash the events of the past decade that have made the previous information seem a bit quaint. But the cumulative effect of the decade’s events has become especially evident in 2009 and portends even more significant restructuring as we enter the century’s second decade.

Consolidation: Long predicted and foreshadowed by the Air France/KLM merger and the Lufthansa investment spree, the trend appears to be gathering strength. In the US, the Northwest/Delta union reduced the number of legacy carriers from 6 to 5 and, despite lots of early reassurances, will result in further network and job cutbacks. Even more meaningful is the announcement that British Airways and Iberia have finally achieved a plan that will allow for their combination. All of Europe’s “Big 3” have now chosen partners and the validity and stability of those unions will unfold over the next decade.

The weak financial condition of both BA and IB, coupled with labor difficulties in both camps, presents the possibility that this marriage will be especially difficult. The long-haul fleets are rather incompatible and the inability of Heathrow to be assured of its third runway makes for a more limited set of operating bases than is enjoyed in the other alliance groupings.

Chart 2: Available Runways at London Heathrow and Madrid vs the other Big 2 airlines

BA/IB	AF/KL	LH Group
MAD 4	AMS 6	FRA 4
LHR 2	CDG 4	MUC 2
LGW 2	ORY 3	ZRH 3
		VIE 2
		BRU 3

Chart 2 demonstrates that the combined runway capacity available to BA and IB is considerably less than is available to the other two. Since long-term capacity is ultimately limited by the runway real estate, the built-in constraints are evident. Finally, the limbo status of BMI and its cache of Heathrow slots provides opportunities for speculation and the possibility of a strengthened competitor for BA at its hub.

With characteristic boldness, Ryanair greeted the merger announcement by saying: “Today’s announcement bears out Ryanair’s forecast that there will be just four large EU airlines – and of these four only Ryanair is committed to low fares and no fuel surcharges.” And service?

Then there is also the mystery of United and Continental, not merged or rumored to even be dating, and yet the signs of attraction, given the defection from SkyTeam and former ally Delta, are hard to ignore. It is also no secret that United’s Glenn Tilton regularly waves the For Sale sign.

Global Alliances: Much stronger than at their inception, the global alliances are proving to be fascinating entities in their own right. All three have seen changes over time and the number of outstanding (in both senses of the word) partners is diminishing. Of late, Star has been the primary beneficiary of change.

Continental’s move to Star added a presence in New York that had been a prominent weak spot in the US and, after losing Varig (now merged into the highly successful GOL), South America will again be powerfully represented with the addition of TAM.

Star also has a very strong presence in China. And should the airline ever pull itself together, Air India is a Star candidate, opening the always-promising Indian market.

The battle for JAL occupies centre stage

But by far the greatest show on earth at this moment is the battle over JAL, and Star, as we have previously noted, is blissfully removed from the intrigue. The Centre has published numerous articles on the debate surrounding JAL’s future and even as the plot thickens, the airline’s performance continues to weaken. With even more cutbacks looming, the debate centers less on JAL and its network as an asset and shifts the focus to simple access to the Japanese market (and beyond).

There was a time when Japan’s value as a waypoint to China had real appeal. But the steady expansion of direct China services as well as the complex connection networks available at Incheon, have diminished that value. Indeed, at the recent ACI conference in Kuala Lumpur, the CEO of Beijing Capital Airport clearly stated that he wants his airport to be the hub for North Asia making external connections less important.

So, the final resolution may well have its greatest resonance in terms of its effect on the alliance equilibrium. Should oneworld keep the Japanese carrier in its stable, the current balance will remain unchanged, albeit with JAL providing a smaller piece of the overall puzzle.

However, the applecart will be significantly more upset should Delta and its SkyTeam partners prevail. Not only does this outcome greatly diminish the importance of oneworld, but it also presents both the US and Japan with some interesting problems.

Northwest has been the most established US presence in the Japanese market since the end of the war. As noted in an earlier discussion, Northwest was actually a key part of JAL’s evolution, having provided some of its initial aircraft. And at present, the Delta (Northwest) seat offer between Japan and the US is larger than that of JAL.

Consequently, any Delta ownership stake in JAL creates – at least temporarily - internal competition between the two carriers. At present, NW1, a B747, departs LAX at 11.20 and JL61, operating with a B777, heads for NRT at 11.50. A similar conflict exists at SFO, NYC, and HNL.

Meanwhile, the JAL offer is greatly overshadowed by the additional flights that Delta operates from MSP, SEA, ATL and DTW. Depending on the way in which the transaction and ownership might be structured, the US, and particularly Delta, could conceivably have some control in a majority of the US/Japan flight offer—a complex situation for regulators on both sides of the Pacific.

It is no wonder that Delta and its SkyTeam cohorts, currently the most geographically constrained alliance, see this as a magnificent opportunity to incorporate new routes into their global network. And while any kind of a final outcome is far from clear at this point, what is obvious is that the outcome, whatever it might be, will have consequences for the North Asia region in general and the Japanese market in particular.

Add to the mix the new links between JetBlue and Lufthansa as well as the agreements between WestJet and Air France, and you have a marketplace with the possibility of still more mixed marriages. And, escalating things just a bit more, there are reports that oneworld is in discussion with Brazil’s GOL about membership. This is a far cry from the requirements that forced Aer Lingus out of the alliance when they restructured as a lower-fare entity.

Ownership: Still unaddressed, and percolating near the surface, is the ratification of a new agreement between the US and EU. Heathrow access for American carriers was granted with the understanding that the gnarly problem of US airline ownership would be resolved in a way seen as satisfactory to the EU. Given the variables introduced by the previous two points, anything is theoretically possible, but those in negotiation are not seeing much flexibility in the American position.

Should this become an intractable stance, the EU has the right to reset the players and revoke the concessions that have been made. Calling this bluff would be a big move and the ensuing chaos could fray things in rather spectacular ways. Given the fact that soon Asia Pacific will be the leading aviation marketplace, with some of the industry’s strongest players, a big rift in the North Atlantic market could serve to weaken legacy carriers on both sides of the Atlantic, opening possibilities for…well, who knows?

Not much likelihood of calm waters ahead either

Interestingly, with all of these pots simmering, the wild first decade of the 21^st century may look positively tranquil in 2019. We can probably safely assume that at least a few B787s will be operational by that date and that Japan will continue to have air service. But aside from that, there may be few certainties.

First we have to make it through the holidays. Happy Thanksgiving!