ED. 03 / 10 MARS 2013 · 2013. 11. 5. · ‘‘airlines decided to merge ﬁrst and foremost as a survival solution’’ The decision to sue also rests on what seems a faulty diagnosis

EXCLUSIVE INTERVIEW

WITH THE NEW CATHAY PACIFIC CEO

JOHN

SLOSAR Lorem ipsum dolor sit amet, consectetur adipiscing elit. In sagittis massa urna.

ED. 03 / 10 MARS 2013

Aviation supports 26.8 million APEC jobs As Ministers of Transport from across the APEC region gather in Tokyo, a new report has been released by the cross-industry aviation organisation. p. 12

Airport traffic posts tepid growth in July Airports’ trade body, ACI EUROPE today released its traffic report for the month of July, posting an underwhelming result for Europe’s airports. p. 36

OnAir Launches OnAir Play OnAir Play is set to revolutionize the way airline passengers spend their time onboard by combining inflight connectivity with films, TV, live news, music, games, magazines and newspapers...p. 52

EDITORIALGREECE LIGHTNINGAEGEAN AIRLINES MIRACULOUSLY OVERCOMES SEVERE MACROECONOMIC AND REGULATORY HEADWINDS

EXCLUSIVE INTERVIEWWITH THE NEW CATHAY PACIFIC CEO, John Slosar p. 6

Aviation supports26.8 million APEC jobs p.12As Ministers of Transport from across the APEC region gather in Tokyo, a new report has been released by the cross-industry aviation organisation.

Aviation LabOnAir Launches - OnAir PlayOnAir Play is set to revolutionize the way airline passengers spend their time onboard by combining inflight connectivity with films, TV, live news, music, games, magazines and newspapers...p. 52

A E G E A N A I R L I N E S M I R A C U L O U S L Y OVERCOMES SEVERE MACROECONOMIC AND REGULATORY HEADWINDS

GREECE LIGHTNING

EDITORIAL

It’s an airline in the worst performing country of the world’s worst performing region. It’s a midsized airline, moreover, that you wouldn’t call a low-cost carrier, surrounded by similarly midsized airlines in severe distress. It’s tried to do something about that by merging with a competitor. But regulators have thus far said no.

But wait a minute. That same airline, somehow, registered the highest profit margins (both operating and net) in its entire region. And as a result, its shares are up an astonishing 176% y/y, ranking it among the best airline stocks in the world.

Airport traffic poststepid growth in JulyAirports’ trade body, ACI EUROPE today released its traffic report for the month of July, posting an underwhelming result for Europe’s airports.p. 36

politically powerful than the larger ALPA. The same is true for the union repre-senting American’s flight attendants. But national unions like the TWU, the AFA and the IAM (and even ALPA for regional pilots) also have a hand in this fight. And to be sure, they’re all lobbying hard to make the merger happen. More than 100,000 workers stand to gain better pay and job security.The DOJ’s decision was also surprising because American is a bankrupt compa-ny—how can a company that’s literally bankrupt be considered too powerful to be allowed to try to better itself? To be clear, its survival and ability to exit court protection is no longer in question: Amer-ican is now a solvent company. But the airline’s long-term strategic outlook is less certain. The DOJ cited American’s original intention to exit bankruptcy alone, with plans to grow aggressively thereafter. But even if its creditors were to approve such a plan (unlikely, given that the lack of such growth is what has helped produce profits at its competitors), the plan’s feasibility is suspect given American’s network short-comings relative to United and Delta. In any case, by allowing American’s key rivals to merge and then preventing American from following suit, the DOJ is essentially picking winners, deciding from its regu-latory perch which carriers are and aren’t allowed to succeed. On the surface, US Airways might appear even more strategically vulnerable, although it has managed to outpunch its weight and generates higher profit margins than American, even after all of American’s Chapter 11 cost cutting.

‘‘airlines decided to merge first and foremost as a survival solution’’

The decision to sue also rests on what seems a faulty diagnosis of why fares have increased since the three big mergers of

the past five years (Delta-Northwest, Unit-ed-Continental and Southwest-AirTran). These mergers have undoubtedly played a role. But so has a growing economy, which was severely depressed when Delta and Northwest began their integration. Even more influential has been the extremely high price of fuel, which averaged about $2.74 a gallon in the past three years, compared to $1.02 during the first half of last decade, when airfares were generally cheaper. And perhaps most importantly, fares have risen in the past few years because of one simple fact: Southwest’s fuel hedges wore off. The DOJ notes how the “Southwest effect” on airfares no longer exists. But if fuel prices fall a lot, it will return in a heartbeat. Indeed, airlines decided to merge first and foremost as a survival solution to the dilemma of high and volatile fuel prices—mergers, in other words, are the result of the problem, not the cause of it. And just as consolidation was a reaction to high fuel prices, fragmen-tation would be a reaction to lower fuel prices—airlines would add more routes, and new airlines would join a marketplace still characterized by relatively low barriers to entry.

Actually, downward pressure on airfares never fully disappeared, mergers or no mergers. The “Southwest effect” might be dead, but the “Spirit effect” is alive and well—Spirit is growing capacity by more than 20% annually, entering and lowering fares in some of the busiest markets in the country. Will Frontier, which Republic might sell to one of Spirit’s former key inves-tors, follow in its footsteps? Allegiant, too, though concentrated in smaller markets, is spreading low fares to many communities that are losing 50-seat regional jet service. Virgin America, for that matter, grew 27% last year before halting growth this

year, while Hawaiian Airlines grew 22%, JetBlue 8% and Alaska Airlines 6%. It’s still a dynamic marketplace, even before considering all the recent and expected new international service to U.S. cities by carriers based abroad.

Nor are airlines kidding when they say that airfares, their recent upward momentum notwithstanding, remain a good deal for consumers. As the industry lobby A4A points out, domestic round-trip airfares in 2012 were actually 15% below 2000 levels, adjusted for inflation. The fact is, techno-logical advances—most importantly in air-craft economics but also distribution and other areas—are constantly putting down-ward pressure on non-fuel costs and (by extension in a highly competitive business) airfares. Nor are airlines kidding when they say wait a minute: it’s not like we’re earning outsized profits and monopolylike margins. In the second quarter, in the heart of what seems a golden age for the U.S. industry, carriers collectively earned a net margin of not quite 7%, hardly that much more than the sector’s cost of capital. By suing to stop this merger, the DOJ is signalling its discontent with the indus-try’s success in modestly lifting airfares to ensure modest levels of profitability. Does it prefer, alternatively, the earlier scenario where investors, employees, suppliers and communities heavily subsidized consumers via unsustainably low airfares? Anyone who was able to fly cross country in 2005 for $99 on Independence Air might long for the days of old. But blocking this merg-er won’t bring them back.

The DOJ also overlooks the consumer ben-efits of consolidation, never mind the bene-fits to workers, investors, communities and economies. Fares might be up since the time a half decade ago when two-thirds of American travellers were flying on airlines that were in bankruptcy. But so is invest-ment in products, reliability and services; the ability of U.S. carriers to compete with foreign rivals; and, most importantly, the number of new long-haul routes that are now economically viable. Delta’s numer-ous new Seattle flights to Asia would not have been possible without Northwest’s network, not to mention Alaska’s network. Seattle - London flights, moreover, are coming back only thanks to Delta’s virtual merger with Virgin Atlantic on European routes, a venture the more supportive Department of Transportation tentatively approved last week.

AIR TRANSPORT NETWORK | 04 SEPTEMBRE 2013 | 34

TOP NEWS OF THE MONTHp.20

.ORG CONNERThis month ITF present; Outsourcing your Crew... p. 26

ECONOMIC REVIEWp. 19

INDUSTRY DATAp. 55

THIS MONTH.ATN REPORT; JUSTICE DENIEDThis month, the two airlines were supposed to triumphantly become one. Instead, they’ll have to settle for last week’s relatively good news that a trial—if the airlines and government can’t settle matters without one—will start sooner (as the airlines wanted) rather than later (as the government wanted). p. 18

A E G E A N A I R L I N E S M I R A C U L O U S L Y OVERCOMES SEVERE MACROECONOMIC AND REGULATORY HEADWINDS

GREECE LIGHTNING

EDITORIAL

It’s an airline in the worst performing country of the world’s worst performing region. It’s a midsized airline, moreover, that you wouldn’t call a low-cost carrier, surrounded by similarly midsized airlines in severe distress. It’s tried to do something about that by merging with a competitor. But regulators have thus far said no.

But wait a minute. That same airline, somehow, registered the highest profit margins (both operating and net) in its entire region. And as a result, its shares are up an astonishing 176% y/y, ranking it among the best airline stocks in the world.

Demand for air travel, of course, correlates highly with economic growth. So the economic distress might only be tolerable for an airline—only just perhaps—if capacity were down just as dramatically. But that’s not the case in Greece. Since 2008, scheduled seats (according to Diio Mi) are indeed down, but by just a modest 4% for all of 2013 compared to all of 2008, a period during which the Greek economy will have contracted (according to current forecasts) an unbelievable 29%. That 4% overall drop in seats since 2008, by the way, is driven by a more substantial drop in domestic capacity, with international capacity actually up slightly.

The airline is Greece’s Aegean, masterfully navigating a depressed operating environment like no other airline in the world.

First, it’s important to appreciate that while countries in Europe’s southern rim are often lumped together as the continent’s laggards, Greece is in a category all by itself. The economies of Italy, Spain and Portugal all contracted between 1% and 3% last year (according to World Bank data), similar to other dismal years they’ve had since 2008. Greece? Its economy shrank 6%, after falling 7% the year prior. In all the world, only Sudan did worse after the war-torn country literally split in two. Greece’s unemployment rate is 27%. Its economy is still shrinking and might, according to forecasts, finally plateau next year before perhaps finally growing in 2015.

Aegean itself, now with a fleet of about 30 A320s and A321s, is about 13% bigger by seats, and fully 81% larger by ASK capacity (in other words, taking distance into account too), than it was five years ago, a period during which it became the country’s de facto national carrier. Back in 2008, Olympic—even though its best days were already long behind it—was still considerably larger; it still flew A340s from Athens to New York, for example. Today, Aegean is far larger than Olympic, which is basically a regional turboprop airline. (Today, by the way, Olympic is officially called “Olympic Air.” Every time government officials wasted huge amounts of taxpayer money rescuing the woebegone airline, they had to restructure it as a new legal entity, first from “Olympic Airways” to “Olympic Airlines” and then to this, which at least, for the past few years, has finally been in private hands.)

It was Aegean that used to be the smallish regional airline. With roots dating to the pre-deregulation 1980s, it began to resemble its modern self in 1999 when it bought Air Greece and began scheduled domestic passenger service on a couple of Avro regional jets. A 2001 merger with another Greek airline called Cronus gave it a fleet of older B737s; it used these and the Avros to grow, throughout the 2000s, into a profitable competitor—by 2003, it was already in the black—against bumbling Olympic. It ordered its first A320s in 2005 on its way to becoming an all-A320/21 carrier by 2011. Also in 2005, it began partnering with Lufthansa, a relationship that would lead to Star Alliance membership in 2010.

That was also the year when Ryanair launched its first flights to Greece, a rather late start in the country for the massive pan-European ultra-LCC, which still doesn’t fly to Athens. Its avoidance of Athens (and rather restrained Greek presence overall) is thanks largely to Greece’s high airport costs. Aegean complains loudly about these, but to whatever extent they discourage Europe’s LCCs from competing more vigorously, they’re not entirely a bad thing.

After a long string of profitability for Aegean, even during the fuel spike year of 2008 and even during the nadir year of the global downturn in 2009, Greece’s particularly awful economy— which had not, like others, bottomed out— pushed the airline into the red in 2010. It lost money too in 2011 and 2012 but, impressively given the circumstances, never registered loss margins worse than the low single digits. Unlike its country, Aegean has a good balance sheet with no net debt. And figures so far this year suggest it will return to profitability for all of 2013. In fact, whereas Aegean lost money during 2012’s second quarter, its 10% net margin for this year’s Q2 ranked fifth among all the world’s airlines.

Aegean certainly isn’t doing any of this thanks to regulatory help. On the contrary, in 2010 it tried to bulk up and rationalize the marketplace by proposing to buy Olympic, but the European Commission—never mind that Aegean was then losing money and Olympic, which doesn’t report financial results, was probably losing even more money—said no. The two are now trying again, with an E.C. decision due next month.

So if Aegean isn’t profiting thanks to a healthy economy or reasonable airport costs or favourable regulatory rulings, how is this airline, which on the surface might not look so different from Hungary’s Malev (which failed) or the Poland’s LOT (which hangs on for dear life), not only surviving but performing better than all but a few of the world’s airlines?

Start with the fact that what might look like a gradual upward slope in capacity for Aegean belies the fact that it has dramatically diversified its network since the start of the crisis, becoming much less of an Athens-centric airline. Greeks might not have much money to travel abroad, and Athens (in recent years less famous for the Acropolis than for striking taxi drivers and violent street protests) might not top the list of dream destinations for most Europeans. But other places in Greece still do. So Aegean has nonstop international flights from no fewer than seven other cities in Greece. Or perhaps better stated: it has flights not from but to these cities from abroad, because the point is that it has successfully managed to shift its point of sale abroad in much the same way that Ireland’s Aer Lingus has done with similar success. Greek and Irish consumers suffer, but Greece and Ireland remain popular destinations.

Greece, in fact, has actually benefited from the Arab Spring, in that some of the Europeans bathing on Greek beaches might have otherwise gone to places like Egypt. Aegean’s busiest non-Athens base, Thessaloniki, has nonstop flights from a dozen cities outside Greece (Munich-Thessaloniki is a particularly busy route). Illustrating the dichotomy between economic woes for Greeks and buoyant demand for travel to the country from elsewhere, Greek domestic passenger traffic was down 12%—the fourth straight year of decline—and domestic fares dropped 10%, according to the airline. But international traffic at Greek airports outside Athens was up a solid 10%.

Not only, by the way, is Aegean not itself a struggling smallish European legacy carrier. It’s also partly the cause of one such carrier’s struggles. Cyprus Airways would probably be on life support regardless. But it certainly hasn’t been helped in recent years by the fact that Aegean has flown from Larnaca to not only points all over Greece but also, bypassing Greece entirely, to London and Paris (although, showing that it’s not afraid to abandon what doesn’t work, it has dropped Larnaca-Paris). Speaking of London, by the way, Athens-London Heathrow is by far Aegean’s biggest revenue-producing route, according to an analysis of PaxIS data provided by IATA Consulting.

Perhaps the most important explanation for Aegean’s success is that with its corporate travel-focused alliance membership, lounges, GDS participation, business-class product, complex connecting itineraries and so forth, it might look like a legacy airline. But in the most important way of all—its cost structure—it’s not one.

Aegean is a rather young airline with a rather junior workforce and a single narrow-body fleet type and without old legacy structures like defined-benefit pensions. So its costs are lower than those of competing European legacy airlines and only modestly higher than those of European LCCs, over which, because of its higher-amenity product, it can take revenue premiums.

In other words, not only is it most definitely not Malev. It’s a lot more like the other end of the spectrum: successful carriers with rather low costs that sit on the periphery of higher-cost, higher-revenue regions that get to enjoy the best of the low-cost and high-revenue worlds. Disproportionately, these airlines tend to rely either mostly or entirely on narrowbodies: Copa, which often generates the world’s highest net margin, is the most successful among them. Aegean, having once given some thought to longhaul service, doesn’t seem to be in any rush.

For now, it’s happy flying six million passengers a year from 13 airports in Greece and 33 elsewhere, mostly in western Europe (including new additions like Geneva, highlighting its focus on high-revenue markets) but also places like Moscow and Tel Aviv. It’ll be even happier if it learns in a couple of weeks, when the E.C. is due to rule on the matter, that it can finally buy Olympic. But either way, Aegean’s history of thriving in good times and surviving in bad times suggests that, with the very worst days for its home economy perhaps finally in the past, Aegean’s best days might yet be ahead of it.

Text provided by Airline Weekly

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ABU_260413_017 17 19/4/13 11:38:03

CONCEPTUALIZING AND DEVELOPING A NEXTGEN CARGO RESERVATION SYSTEM FOR A LEADING AIRLINE


providing revenue earned on a real-time basis and capacity utilization through opti-mal handling of allotments and capacity for individual agents and shippers.

In summary, the IT provider was chosen as a strategic partner to:

Design and build an automated cargo reservation solution that would be not only configurable and cost effective to build-use-deploy, but also would be able to provide real time reservations, operations, and revenue computation.

Remove paper based processes, where applicable, while maintaining compliance with IATA’s e-freight initiative.

Reduce shipment mishandling instances by streamlining processes and minimizing reliance on human input.

The Problem Statement

The Airline wanted a state-of-the-art end-to-end cargo reservation system to replace their existing legacy mainframe based cargo reservation system. The open system based application had to integrate reservations, operations, and revenue management functions. The application platform also had to support analytical functions that included

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The IT Provider put up a 110 member team for this two-year strategic development effort spanned mul-tiple geographies, bringing together a multi-disciplined team of business analysts, technical architects, developers, and testers.

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application spanning numerous locations. The insight gained provided the IT Provider with solid end-user use cases upon which to build the solu-tion.

The team developed end-to-end require-ments and goals related to booking, availability, flight schedule, rates, and communication. This was followed by an in-depth competitive analysis to understand strengths and weaknesses of competitors and potential competitors. They delivered the next-generation cargo reservation solution within the two-year duration, as estimated by our team. The application was one of the largest Java development efforts in recent times, re-quiring 300 person years of development effort.

Results

Enabled proactive decisions based on real-time, fact-based information

Allowed customers to book a year in advance while existing systems permitted only 60 days advance booking

Improved the handling of allotment lead-ing to effective capacity utilizations

Ensured seamless integration with sys-tems used by numerous airlines

Provided significant cost savings, as it supported a nearly paperless practice and streamlined processes

Increased accessibility via multiple chan-nels such as PDA, rich client, and web

This state-of-the-art solution has been sold to many other leading airlines around the world.AIR TRANSPORT NETWORK | 04 SEPTEMBRE 2013 | 27

Far and away, the best.

Cambodia Airlines to Launch International Flights

The middle class in the South is projected to continue to grow

Note: The middle class includes people earning or spending $10-$100 a day (in 2005 purchasing power parity terms).

Europe

Middle East +North Africa

Asia-Pacific

Central + South Africa

North America Sub-Saharan Africa

2009World : 1.845 billion

28%

54%

66%



Cambodia Airlines is a joint venture between the Cambodian owned Royal Group and the San Miguel Corporation, who have a controlling interest in Philippine Airlines. They’re going to start off relatively small, with just 2 domestic aircraft and 2 international aircraft. Initially, international flights will be between Manila and Phnom Penh only, but Kith Meng, chairman of the Royal Group, says they have every intention of expanding services from other ASEAN and east Asian countries.


ADM13204D_TechnologyAD_AirlineBusiness_197mmX267mm_E_v1.indd 1 3/22/13 3:28:50 PMABU_260413_019 19 19/4/13 11:38:49

Calin RovinescuChief ExecutiveAir Canada

“There is some thought that some of the changes we see in air cargo may be structural, maybe a permanent movement to sea freight. But the problem is when the next upturn comes, you realise that it is not so structural!”


Portrait of

Calin Rovinescu

Calin Rovinescu became the chief executive at Air Canada in March 2011. He joined the Swire Group in 1980 and has worked with the group’s aviation division in Montreal, the United States, and Thailand.

He was appointed managing director of Montreal Aircraft Engineering Co. Ltd. in 1996, managing director of Swire Pacific’s beverages division in July 1998, and COO of Cathay Pacific in July 2007. In July 2010,

he was appointed chairman of Swire Beverages, in addition to his current role at Cathay Pacific.

Mr. Rousseau is also chairman of Hong Kong Dragon Airlines Ltd. and on the boards of Cathay Pacific Airways Ltd., John Swire & Sons (H.K.) Ltd., Swire Pacific Ltd., and Swire Beverages.

When Calin Rovinescu took over from Tony Tyler as Air canada’s chief executive in April 2011, the airline had tripled its full-year net profit to HK$14.1 billion ($1.8 billion). Just 18 months later, amid a weak operat-

ing environment and high fuel prices, Hong Kong’s flag carrier has posted a half-year loss of HK$935 million and may end the year in the red. Slosar cannot help but make a quip about the timing of his

predecessor’s departure for IATA, saying with a laugh: “It is probably a testament to the great skill of Mr Tyler in knowing when to leave.

“I am not sure I can ever hope to aspire to such fantastic insights. I will do my best.”

He has since risen up the ranks, running Hong Kong Aircraft Engineering and Swire Pacific’s Beverages division, which manufactures, bottles and distributes Coca-Cola products in Hong Kong, Taiwan and large parts of China. Slosar is credited with turning around the latter and making it one of the top bottlers in

the world.

Hong Kong’s position as the region’s leading cargo hub and Cathay’s exposure to the segment means that a bigger worry for Slosar is a structural change in the current business model, especially

the tendency to rely on converted freight aircraft. Slosar points out that high fuel costs “really kill that model”.Cathay’s orders for the Boeing 747-8F have helped the company, especially since the aircraft are deployed to North America where an upturn in the economy means they are “working a treat”. Europe, however, remains in the doldrums and that is hard to overcome even with the growth in intra-Asia trade.

In this challenging environment, Cathay’s strength has been making decisions that will keep it relevant in the coming years. More of those decisions will be made in the coming months, says Slosar: “We keep a


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American and US Airways are still searching for answers to a peculiar lawsuitWith a trial date now set, the question remains: Will it or won’t it happen?

“It,” of course, is the American Air-lines-US Airways merger, which looked to all the world like a fait accompli before the U.S. Department of Justice (DOJ)— to-gether with six states and the District of Columbia—stunned the industry by suing to stop the deal on antitrust grounds.

This month, the two airlines were supposed to triumphantly become one. Instead, they’ll have to settle for last week’s rela-tively good news that a trial—if the airlines and government can’t settle matters with-out one—will start sooner (as the airlines wanted) rather than later (as the govern-ment wanted).

According to the lawsuit, a merger would leave 80% of the U.S. domestic market controlled by just four carriers and the new American with an exceedingly pow-erful 69% of slots at Washington’s Rea-gan National airport. The DOJ used data from a Government Accountability Office (GAO) report in June, statements by US Airways management and analysis of past mergers to conclude that this deal would significantly harm consumers. “I think it is clear to us that there are hundreds and hundreds of millions of dollars in consum-er harm if we let this deal go through,” the recently appointed assistant attorney general Bill Baer, known for his aggressive stance on mergers, said to reporters. He also claimed both carriers could survive independently.

The airlines, however, with support from their workers and other stakeholders, are fighting back, with the two sides set to have their day in court Nov 25.,in a trial expected to last about one to two weeks. They can find hope in a 2004 case in which the DOJ lost an attempt to prevent the IT company Oracle from buying its rival Peo-pleSoft. In the meantime, an out-of-court settlement is a possibility, with a divesti-ture of Reagan National slots surely one element of any such deal.

The decision to litigate was surprising for a long list of reasons. For starters, labor unions, a major political constituency of the Democratic party, strongly support a merger. True, the main pilot unions in-volved are both independent unions, less

Justice Denied


politically powerful than the larger ALPA. The same is true for the union repre-senting American’s flight attendants. But national unions like the TWU, the AFA and the IAM (and even ALPA for regional pilots) also have a hand in this fight. And to be sure, they’re all lobbying hard to make the merger happen. More than 100,000 workers stand to gain better pay and job security.The DOJ’s decision was also surprising because American is a bankrupt compa-ny—how can a company that’s literally bankrupt be considered too powerful to be allowed to try to better itself? To be clear, its survival and ability to exit court protection is no longer in question: Amer-ican is now a solvent company. But the airline’s long-term strategic outlook is less certain. The DOJ cited American’s original intention to exit bankruptcy alone, with plans to grow aggressively thereafter. But even if its creditors were to approve such a plan (unlikely, given that the lack of such growth is what has helped produce profits at its competitors), the plan’s feasibility is suspect given American’s network short-comings relative to United and Delta. In any case, by allowing American’s key rivals to merge and then preventing American from following suit, the DOJ is essentially picking winners, deciding from its regu-latory perch which carriers are and aren’t allowed to succeed. On the surface, US Airways might appear even more strategically vulnerable, although it has managed to outpunch its weight and generates higher profit margins than American, even after all of American’s Chapter 11 cost cutting.

‘‘airlines decided to merge first and foremost as a survival solution’’

The decision to sue also rests on what seems a faulty diagnosis of why fares have increased since the three big mergers of

the past five years (Delta-Northwest, Unit-ed-Continental and Southwest-AirTran). These mergers have undoubtedly played a role. But so has a growing economy, which was severely depressed when Delta and Northwest began their integration. Even more influential has been the extremely high price of fuel, which averaged about $2.74 a gallon in the past three years, compared to $1.02 during the first half of last decade, when airfares were generally cheaper. And perhaps most importantly, fares have risen in the past few years because of one simple fact: Southwest’s fuel hedges wore off. The DOJ notes how the “Southwest effect” on airfares no longer exists. But if fuel prices fall a lot, it will return in a heartbeat. Indeed, airlines decided to merge first and foremost as a survival solution to the dilemma of high and volatile fuel prices—mergers, in other words, are the result of the problem, not the cause of it. And just as consolidation was a reaction to high fuel prices, fragmen-tation would be a reaction to lower fuel prices—airlines would add more routes, and new airlines would join a marketplace still characterized by relatively low barriers to entry.

Actually, downward pressure on airfares never fully disappeared, mergers or no mergers. The “Southwest effect” might be dead, but the “Spirit effect” is alive and well—Spirit is growing capacity by more than 20% annually, entering and lowering fares in some of the busiest markets in the country. Will Frontier, which Republic might sell to one of Spirit’s former key inves-tors, follow in its footsteps? Allegiant, too, though concentrated in smaller markets, is spreading low fares to many communities that are losing 50-seat regional jet service. Virgin America, for that matter, grew 27% last year before halting growth this

year, while Hawaiian Airlines grew 22%, JetBlue 8% and Alaska Airlines 6%. It’s still a dynamic marketplace, even before considering all the recent and expected new international service to U.S. cities by carriers based abroad.

Nor are airlines kidding when they say that airfares, their recent upward momentum notwithstanding, remain a good deal for consumers. As the industry lobby A4A points out, domestic round-trip airfares in 2012 were actually 15% below 2000 levels, adjusted for inflation. The fact is, techno-logical advances—most importantly in air-craft economics but also distribution and other areas—are constantly putting down-ward pressure on non-fuel costs and (by extension in a highly competitive business) airfares. Nor are airlines kidding when they say wait a minute: it’s not like we’re earning outsized profits and monopolylike margins. In the second quarter, in the heart of what seems a golden age for the U.S. industry, carriers collectively earned a net margin of not quite 7%, hardly that much more than the sector’s cost of capital. By suing to stop this merger, the DOJ is signalling its discontent with the indus-try’s success in modestly lifting airfares to ensure modest levels of profitability. Does it prefer, alternatively, the earlier scenario where investors, employees, suppliers and communities heavily subsidized consumers via unsustainably low airfares? Anyone who was able to fly cross country in 2005 for $99 on Independence Air might long for the days of old. But blocking this merg-er won’t bring them back.

The DOJ also overlooks the consumer ben-efits of consolidation, never mind the bene-fits to workers, investors, communities and economies. Fares might be up since the time a half decade ago when two-thirds of American travellers were flying on airlines that were in bankruptcy. But so is invest-ment in products, reliability and services; the ability of U.S. carriers to compete with foreign rivals; and, most importantly, the number of new long-haul routes that are now economically viable. Delta’s numer-ous new Seattle flights to Asia would not have been possible without Northwest’s network, not to mention Alaska’s network. Seattle - London flights, moreover, are coming back only thanks to Delta’s virtual merger with Virgin Atlantic on European routes, a venture the more supportive Department of Transportation tentatively approved last week.


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ED. 03 / 10 MARS 2013 · 2013. 11. 5. · ‘‘airlines decided to merge ﬁrst and foremost as a survival solution’’ The decision to sue also rests on what seems a faulty diagnosis