Thursday, May 14, 2015

US3 vs ME3

The rhetoric has calmed down since the earlier days, from accusations of complicity in 9/11 to massive subsidies and the inability to compete against rich states to the US3 just requiring the US government to seek consultation with the UAE and Qatar regarding subsidies to the ME3.

The rhetoric included issues ranging from subsidies to labor unions and gay rights.
It appears that subsidies are like beauty, strictly in the eye of the beholder. While the ME3 talk about equity the US3 talk about subsidy and then Chapter 11 is thrown in the mix as an undue advantage accorded to US industry. The US3 counter and rightly so that this is the law of the land but then without it the US3 would not be with us today.

As for labor unions; the ME3 employ expatriates who sign up for a package that  pobably is superior to whatever they can get at there home countries, so why would they care about unionizing.  But then labor unions are governed by each country's law, just like Chapter 11 I guess.

Similarly, the anti gay issue has nothing to do with fair competition. The ME3 have gay people in their staff, and as long as they do not break any pertinent country laws, they remain employed. But then do the US3 want the US government to discuss labor unions and LGBT rights laws in the UAE and Qatar, of course not, then why bring it up other than to muddy the waters. After all the track record in the USA when it comes to these two issues is not the most pogrssive, with laws enacted in individual States that roll back the rights to unionize and gay rights.

The position of the US3 is opposed by almost all segments of the industry from Aircraft manufacturers', OEM's, the travel and tourist industry, airports and cities. Then why all the screaming?
The US3 are making record profits and there is very little overlap in the international routes they operate with those of the ME3. Is it an anticompetitive sentiment and a myopic view of what constitutes competition? Partly yes, look at the postion taken against Norwegian 's application to operate to the USA or the stance of Delta against the EXIM bank as an indication. The ME3 counter with; compete on  service; invest in new modern aircraft, state of the art IFE systems and customer service on board and on the ground and passngers will come back.

The issue that really scares the US3 and their EU Lgacy airlines partners is 5th freedom rights from Europe and the ensuing comptition on the North Atlantic market. FedEx and that segment of the market oppose the US3 position because they do not want any changes to these 5th freedom rigths. Emirates Airline's Milan/New York route was opposed by both the US3 and the EU Legacy airlines because it directly affects North Atlantic traffic. Tim Clark, Emirate's president intimated last week that the airline might exercise its 5th freedom rights under the bilateral if it proves profitable. He basically declared if a European city asks Emirates to operate because they feel there isn't enough capacity to the USA then subject to profitability Emirates will operate. Etihad has that option but then they do not really need the bilateral to operate on the North Atlantic, they have their own EU approved equity partners; Alitalia, airberlin to name a few.

Welcome to the global travel market.

Monday, October 27, 2014

Etihad, Lufthansa and EU Nationals Control

The LBA on 16 October 2014 reversed a decision to cancel 34 code share flights of Etihad and Airberlin that was taken a few days earlier. The reason for the earlier cancellation was that these code share flights violated the traffic rights agreement between Germany and the UAE. A meeting later in the month between both governments to discuss the bilateral will clarify things for the future. Lufthansa blames these code shares for the overcapacity on the Abu Dhabi route and called them unjustified.

Lufthansa has lobbied the EU to reexamine the control issues of foreign equity stakes in EU carriers and has lobbied for the courts to block Emirates Milan/JFK flights earlier in April 2014; those flights are now operated on a temporary authority pending an appeal's court decision.

Lufthansa has been more vociferous than most regarding the 3 Gulf carriers expansion into Europe. The EU now is examining whether Etihad controls Airberlin and Alitalia through its equity stakes and is also looking at the Delta/Virgin Atlantic deal. This has prompted the Swiss authorities to look at Etihad's control of Darwin Airlines now branded Etihad Regional.

The issue of foreign investors having control of EU carriers is  becoming a thorny issue. There is a needed balance required between control and the investment risk of bailing out a European carrier and preserving jobs and airline services to communities. The major EU legacy carriers are coming under pressure from EU LCCs and apparently from the Gulf carriers that they are not willing to invest more but are looking to cut costs and curtail services. Air France/KLM declined to increase its stake in Alitalia and Lufthansa was not interested in a minority stake. Etihad worked very hard to get the unions and the creditors to accept its terms for its USD 750 millions direct investment for a 49% equity stake in Alitalia. The problems of Lufthansa and AF/KL are compounded by the mega orders from the Gulf carriers for Airbus aircraft with the associated economic fallout of order cancellations.

Etihad will modify its agreements with its equity partners to comply with the EU and Swiss regulators control requirements. Etihad did the same in India when the regulators questioned its control of the Jet Airways board. Etihad will not jeopardize its strategy for expansion; one that is based on equity partnerships providing access to new markets, cost savings in aircraft acquisition, maintenance and other services and more traffic through its Abu Dhabi hub.

The airline industry is more global than ever; the EU has to balance its requirements and need of EU nationals control of its airlines and the foreign investment in these airlines. These investments preserve jobs and services in Europe at a time when its economies are under pressure and their own carriers are not willing to invest.


Friday, October 10, 2014

The Surplus Parts Market A Force Of Stability

In a recent article in AINonline "Surplus Parts Costs Forecast To Drop" it was suggested that prices will go down as more and more aircraft are parted out pushing "the current prices downwards making the already tense market even more competitive".

In principle, this is true to a certain extent.

Boeing and Airbus have both announced production rate increases on their current aircraft types.   Taking into consideration that as an aircraft type evolves and technology improvements are introduced; parts interchangeability is no longer maintained between the latest aircraft off the production line and an aircraft produced 2 or 4 years earlier. This is valid especially for avionics components, where software changes are the most common.

OEMs have to meet both the challenge of  supporting the production rate increases and that of supplying parts to support the industry with the latest and earlier component configurations; this will impose production pressures and supply difficulties.

As the number of retired aircraft increases to almost a 1000 aircraft per year in the next decade, so will the number of part-outs and the availability of surplus parts. However, these surplus components and parts will not support the latest and recent configurations of the active fleet, but will support the earlier and older configuration versions.

The availability of surplus parts for mature aircraft configurations of the popular fleets will tend to;

  • ease off the pressure for OEMs to support the earlier aircraft configurations; and
  • reduce prices in the aftermarket as a whole but remain competitive for avionics components and a variety of other parts.
The surplus market is detrimental in maintaining a stable components and parts supply for the mature aircraft.

Friday, October 3, 2014

DWC On The GO

Al Maktoum International Airport at Dubai World Center (DWC) is set for major expansion to eventually accommodate up to 240 million passengers. DWC currently handles a few low cost airlines but is the home of Emirates SkyCargo in addition to a few more cargo airlines, creating one of the largest cargo hubs in the region.

An investment of 32 Billion USDs has been set for this task, almost double the projected 18 Billion USDs projected earlier at the start of the decade.. The investment is to support the building of another 4 runways and 2 satellite buildings that will accommodate 120 million passengers annually and 100 A380s parked at any one time (click here for a look at the Master Plan). This phase will be completed in 6 to 8 years in time for Emirates to move out from Dubai International in the mid 2020s leaving Dubai International for the use of Flydubai and other operators. The airport design will allow Dubai Airports to add capacity in 20 million passengers increments to support the expansion plans of Emirates.

Dubai International is expected to handle 120 million passengers by 2020 in time for the 2020 Expo Trade Exhibition. The smooth expansion of Emirates depends on capacity at Dubai International. It is projected that Emirates will carry 93 million passengers by 2020.

Dubai sees the aviation sector as a major contributor to its economy and it is expected to generate 323,000 jobs and contribute 28% of GDP in 2020 compared to 250,000 jobs and 22% of GDP in 2011.

Thursday, September 25, 2014

The Pilot Shortage Myth, Maybe Not

Captain Lee Moak, President of ALPA, International in an Opinion titled The Pilot Shortage Myth  in the September 8, 2014 issue of Aviation Week & Space Technology argued that it is not a pilot shortage but a pay shortage. I agree with Captain Moak, that entry level pay for pilots at the lowest paying US airlines especially regionals is at the poverty level and this is driving young people from the profession among other factors. Airline management sometimes use the pilot shortage as an argument to roll back safety regulations (Pilot Fatigue and FO qualification and training rules) or cancel flights and curtail services.

I do not share the view that the shortage is a myth. It may be a myth today but it will be a reality in 15 to 20 years. US carriers are rolling over their older fleets and the capacity increases are derived more from larger aircraft than from fleet expansion, but that is now eventually the fleet will have to increase and so will pilot demand. The rapid expansion of airline fleets in Asia Pacific, MENA and Latin America, add to it the eventual recovery of European airlines and the industry will be looking at a global shortage.

As the fleet ages, so do pilots, in reality pilots aged 45 to 50 years now would be retired by then. Investment in human capital especially pilots, engineers and technicians is no longer a luxury it is a necessity for the survival of the industry. This has been a challenge a few years back (The New Challenges... Manpower and Training Oussama's Take 20 June 2011), still is and will be for a long time.  

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