When "Hedging Goes Wrong"
To provide our readers with the most diverse, compelling and informational articles about the airline and air cargo industry, we access numerous periodicals and web sites from around the world. This month, readers will find articles from The Independent, a United Kingdom based newspaper; International Herald Tribune, a New York Times company; The Atlanta Journal-Constitution; Aerlines Magazine, a web-based industry site from The Netherlands; Ashgate Publications, also in the UK; HKSG Group in Hong Kong, and Impact Publications in Australia.
It was a two-sentence article found in one such media outlet, Impact Publications' Air Cargo Asia Newsletter, which prompted this month's feature article:
Hedging Goes Wrong
As airlines rejig their pricing and cost-recovery strategies in the light of falling avgas prices, stories are emerging of carrier losses due to hedging strategies have backfired. USA carriers US Airways and Southwest together have reported more than US$700 million in fuel-related red ink.
Wednesday, November 05, 2008
So what happened in the short period from the peaks in the summer to today? Wasn't it only in July 2008 that the price per barrel of crude oil was teetering on $150/barrel? In our June 2008 eNewsletter, one group of industry articles was titled The Impact of Fuel. Now we are in mid-November and the average price per barrel is being reported at a price of $55 and a two-dollar swing is big news. Was it conservation or was it price fixing? Was it OPEC or the Olympics?
For air cargo customers, the fuel surcharges applied for international air freight on a per kilogram basis are falling now as fast as they climbed in the summer.
During those desperate months of ever-increasing fuel costs, there were carriers who specifically chose not to go into the hedging market to buy oil futures simply because they could not afford to tie up that much capital for that duration of time. These carriers suffered as fuel costs increased, and began shedding any extra weight they could in order to burn less fuel. Carriers took other steps such as one-engine taxiing, being towed from gates, and carrying just enough fuel to make the scheduled trip.
There were carriers that had the disposable cash to take advantage of the fuel hedging opportunities, such as Southwest. While airlines including Continental, United and others paid an exorbitant jet kerosene price per barrel, others saw the price rise and were comfortable in their forward-thinking strategies.
Now the proverbial tables have turned. Suddenly, carriers possessing the flexibility to buy their fuel at current market costs see those costs being reduced almost on a per flight basis, while those locked into futures contracts pay a higher price than the rest of the market.
HKSG Group's Weekly News Summary (November 17, 2008) reported:
Cathay Pacific profit warning after wrong-way fuel hedging
Cathay Pacific Airways Limited expects 2008 financial results to be "disappointing" on the back of lower revenue and losses on currency changes and fuel hedging plans that went wrong when oil prices fell, according to a recent filing to the Hong Kong stock exchange.
"The effect of hedging contracts is that Cathay Pacific's future effective cost of obtaining fuel could be higher than they would have been if Cathay Pacific had not entered into them," said the company statement.
The following article, found on www.TheStreet.com, dives deeper into the dilemma faced by carriers now locked into futures contracts for fuel.
Even the Best Fuel Hedges Can Lead to Turbulence
In the second half of 2008, a barrel of oil has sold for anywhere from $147 in July to around $60 recently. In a matter of hours on Sept. 22, it rose by a record $25 a barrel before falling back in the afternoon and plunging the next day. Such swings can produce a lot of turbulence for fuel-hungry industries such as airlines.
The problem, of course, is that no one can accurately forecast what the price will be in three days, much less three months, a fact that has played havoc this year with the finances of airlines and other industries that need a steady supply of fuel to function. For example, when oil prices were peaking in the summer, most airlines struggled to pay the bill, but Southwest Airlines drew accolades because of its successful use of hedging against rising oil prices. Its competitors were forced to raise fares and add fees because they were either too strapped for cash to lock in fuel prices when they were low, or less prescient about the summer price spike.
Laura Wright, Southwest's chief financial officer and one of the architects of the hedging program, estimated last summer that Southwest had saved $4 billion since the late 1990s in what it would have paid to fuel its fleet of 737 jets had it not locked in fuel prices years in advance.
Unfortunately for Southwest, oil prices fell in the third quarter almost as rapidly as they rose in the first and second. The Dallas-based carrier was among many airlines in the third quarter that had to account on its books for fuel contracts that were priced higher than the current market. Over the next four years, Southwest could pay the equivalent of $60 to $90 a barrel for a large portion of its fuel needs. That may or may not be a smart bet, but Wright and other Southwest executives say they still believe in the hedging program. After all, it is one of the main reasons that 2008 is expected to be the airline's 36th straight profitable year.
An Insurance Policy
Hedging works as insurance, designed to reduce the risk of losing money if the price of any commodity goes up or down. Fuel-price hedging can take several forms, including contracts to buy a set amount at a future date at a certain price, and collars, which provide the right to buy fuel within a set range of prices.
This betting against fuel-cost volatility is done in many industries, but it has taken on enormous importance for airlines. For years, fuel represented 10% to 15% of most airlines' operating costs, but this summer, as crude prices soared, its cost-share shot up to between 35% and 50%, according to the Air Transport Association, a trade group that represents most U.S. carriers. Although they tried, airlines were unable last summer to raise fares or cut operating costs enough to offset such a jarring increase.
Christian Terwiesch, a Wharton professor of operations and information management who has studied the airlines, notes that the industry is especially vulnerable to fluctuating energy costs because "jet fuel is a very significant part of the cost structure of an airline. Jet fuel prices are traditionally very volatile. They have gone from $2 a gallon in 2007 to $4 in July 2008. In February 2004, it was still $1 a gallon."
Terwiesch says such volatility "is absolutely bad. [The airlines'] net margins are thin to begin with. If you take that cost and double it, it's easy to understand why all hell breaks loose."
At Southwest, Wright recalls that the company first dabbled in fuel-cost hedging when prices spiked in the early 1990s but did not get systematic about it until 1999, when oil cost less than $11 a barrel. "Today we have changes of $11 in one day," she notes. "The reason we did it wasn't to make money. We're not that smart. We're a long-lead-time business. We have to know how many airplanes to order, and we have to put out our schedules months in advance. You don't want to go into a situation where prices are out of your control. We wanted to be able to build a business plan where we would pretty well know what our costs would be. We thought of it as insurance."
In many other industries, hedging against large or unexpected increases in fuel or other commodity prices is practiced on a regular basis. "Railroads do it, and some public transit systems do it for diesel fuel for buses," says aviation consultant Robert W. Mann, president of R.W. Mann of Port Washington, N.Y. "Precious metals and gold producers do the inverse, selling forward if they like the current prices. A large baker may do it, locking in wheat prices. Anybody who is a consumer of a commodity and whose prices can be distorted by rises in prices in that commodity can be a hedger."
Barry Siler, a Houston oil-and-chemicals trading consultant who helped Southwest devise its hedging strategy in the 1990s, adds that the big baking companies that choose to hedge against rising wheat prices may also need to lock in prices for natural gas used in their ovens. In addition, he cited chemical producers who try to guarantee what they will pay for natural gas and oil, and petroleum refiners themselves. Refiners consume energy to produce energy and, ironically, want to pay as little as they can for a product that they sell for as much as they can.
Even individual consumers can be hedgers. Putting 5% of an investment portfolio into gold-backed mutual funds or stocks, as some advisors suggest, may work as a hedge against the uncertainty now gripping equities markets. Siler points out that in states or cities where electric utilities are deregulated, homeowners often have a choice of energy providers and can agree in advance to buy power at a set price for months at a time.
In some surface-transportation businesses, there is less hedging of fuel costs than one might expect, according to consultants and industry officials. One reason for its limited use by trucking companies and railroads is that they have been able to include fuel surcharge clauses in contracts with shippers, passing along higher prices for diesel fuel this year.
Some major railroads, including Norfolk Southern and BNSF, have done more fuel hedging than others, but it has been limited and they have not come to depend on the practice as much as airlines do. Norfolk Southern hedged a small portion of its diesel-fuel needs up to 36 months in advance from 2000 to 2004 and saved money, says Bill Romig, the railroad's treasurer. Like other railroads, however, Norfolk Southern determined that there would be less uncertainty in its own finances if the company used only surcharges to offset higher fuel prices. Hedging "was adding unnecessarily to our financial volatility," he recalls. Now "we are adequately recovering our fuel prices from surcharges."
Similarly, some but not all large cruise-ship operators hedge their need for fuel. Miami-based Royal Caribbean Cruises, one of the world's largest cruise lines, has used hedging this year for about half of the 1.22 million metric tons of fuel it anticipates using in its ships. Even with the hedging, the company expects to spend $772 million on fuel. Patrick Sinclair, RCCL's vice president for energy management, argues that the wisdom of using hedging was made quite clear on September 22 -- the day oil futures rocketed by $25 a barrel. Hedging "gives us much more stability in a whole range of planning processes. We don't react to daily fluctuations... It allows us to plan more consistently and not react to market conditions."
Southwest More Aggressive
In the airline industry, most carriers have used fuel-cost hedging on a more limited basis than Southwest, Terwiesch notes. That is primarily because the other carriers determined they could not afford to pay the fees -- in effect, the insurance premiums -- required. In other words, the airlines were betting that oil prices would not increase as much as they did earlier this year, he says. Currently, most airlines are using various forms of hedging for about half of their fuel needs.
Wharton public policy professor W. Bruce Allen has another theory about the airlines' limited hedging. Most airlines "do not seem to be very nimble," he notes. Evidence of that, he believes, can be found in how long it took many carriers to change their basic business models after the end of the dot-com boom and September 11, 2001, by reducing their labor and other costs to compete with Southwest and other smaller, low-cost airlines. The cost savings for several major airlines did not come until they had been through Chapter 11 bankruptcy protection or had won labor-cost concessions from unions by threatening the bankruptcy route, Allen says.
Wharton insurance and risk management professor Neil A. Doherty suggests another reason for companies to avoid hedging: How the practice is viewed by investors. The number of academic studies of the topic is relatively small, he says, but they indicate that the market's opinion -- as measured by a company's ratio of book value to market value -- does not seem to appreciate hedging efforts if it is not a core corporate activity. Airlines, among other industries, are in business to provide a service, and how well they perform is not directly linked to how much hedging they do. When investors "buy an airline, they are looking for other reasons to invest: the quality of management, the routes, labor efficiency, the things they really control," Doherty points out. "Fuel is a large cost but an airline is not in the business of controlling fuel costs. Airlines hire managers who understand the business but are not specialists in fuel."
The savings for Southwest from hedging were especially important this year as the surge in oil prices threatened the viability of most other airlines. Only in the last two months or so, as oil prices retreated from their highs, have airline analysts changed their predictions of this summer that several major airlines could need bankruptcy court protection or be forced to liquidate in 2009 if fuel costs continued to rise.
As celebrated as Southwest has been for its hedging strategy, Terwiesch notes that "other major airlines also have been hedging more than five, even 10 years. They were just hedging less.... Southwest would typically be 80% or 90% hedged, the others 10% or less. So you cannot say others are idiots and forgot to hedge.... Southwest was not fuel-hedging to make money off that. It is about risk management. You buy a homeowners' insurance policy, not because you will make money, but because you want to be protected."
Another point to note, Terwiesch says, was that Southwest did not save money on its actual fuel costs every year since it started hedging in earnest. When fuel prices went down unexpectedly before 2001, Southwest wound up paying more than spot-market prices for some of its fuel.
Nor should anyone forget what poor financial shape the older "legacy carriers" (those in business before airline deregulation in 1978) were in after the 2000-2001 recession, according to Terwiesch. "We had one house burn down after another." For airlines with poor credit "it is very difficult to engage in hedging. You have to pay a risk premium. Like a mortgage for someone with bad credit, it's not at 6%, but 8% or 9%."
With some carriers, the thinking was, "We are losing money anyway," Terwiesch says. "If fuel prices go up, we can go into bankruptcy, we can go to our unions and get concessions. If fuel prices go down, then bingo. But Southwest over the entire time period was making money. If you are making money, risk is very, very concerning. Any sudden change in fuel costs would upset those nice quarter-after-quarter results. It makes a CFO nervous to have uncertainty."
Southwest CFO Wright could not agree more. When it bought its "insurance policy" by hedging the great majority of its fuel needs a decade ago, the company won the equivalent of a $4 billion lottery prize -- much to the surprise of some of its executives. "The numbers are staggering," she says. "We envisioned controlling our costs. I don't know that we ever thought it would be $4 billion."
www.thestreet.com
11/14/2008
Slowdown hits air, sea and road transport
Transportation giants, such as UPS, Maersk and YRC Worldwide, are reporting sharply lower freight volumes, a sign that the pipelines of global commerce have begun to slow, the Wall Street Journal reported.
Goods shipped by truck, train and ship have all fallen off in volume, and freight companies are now forecasting a slump as the credit crisis slows manufacturing and puts the brakes on consumer spending.
Shipping companies are considered a barometer of economic health, which makes the current downturn particularly worrisome.
Package delivery giant United Parcel Service stated it had "precipitous declines" last month in volume of next-day-delivery products, a high margin business, in a month when shipping normally has begun picking up ahead of the holiday season.
United Parcel Service reported a 9.9 percent decline in third quarter profits, with a net income of US$970 million, compared with $1.08 billion, in the year earlier period.
Chairman and chief executive Scott Davis told investors and analysts that a U.S. economic recovery may not happen until 2010, and chief financial officer Kurt Kuehn noted that "with consumer confidence approaching new lows, we're concerned that Santa's sleigh will be lighter this year."
The cargo slowdown has forced many lines involved in the Asia-Europe and Asia-Mediterranean trades to slash capacity. Top shipping company Maersk is planning to end its Asia-Europe 8 service that covers China-North Europe, a move that will take around 8,400 TEUs of weekly capacity out of the trade. Other lines are also pulling out some vessels from the Asia-Europe trade.
Trucking giant YRC Worldwide reported third-quarter net income of $36.6 million, down from $40.7 million a year earlier.
Excluding one-time gains, YRC would have posted a loss of about $25 million.
"It's a pretty scary time for the economy," said chief executive officer William Zollars.
The top four U.S. railroads - Union Pacific, Burlington Northern, Norfolk Southern Corporation, and CSX Corporation - all reported third quarter drops in volumes from last year.
"It's going to be a tough year in 2009" for the economy, said James Young, chief executive of Union Pacific.
"Consumers have pulled back even more, and we're going to manage the company accordingly."
Rick Paterson, a UBS transportation analyst, predicts that freight volume in the railroad industry will be five percent lower in 2009 than it was in 2006, which he says "screams recession."
The number of shipping containers entering the US through its top 10 container ports between January and September was 7.2 percent lower than it was during the year-earlier period, according to Paul Bingham, managing director of HIS Global Insights, which tracks port data.
ProLogis, one of the nation's largest owners and managers of warehouses and other distribution centres, said that its "funds from operations" for the quarter had dropped by more than half.
The company cited what chief financial officer William Sullivan said were problems in the credit markets and the related economic turmoil. Company executives, he added, are assuming the current economic slowdown will persist through next year.
The trucking industry, which moves about 70 percent of the nation's freight, is in its worse slump "since the Depression'', said Ray Kuntz, chief executive of Watkins and Shepard Trucking in Missoula, Montana, and former chairman of the American Trucking Association.
He laid off 40 people in September, usually a month when he hires people to prepare for heavy holiday volume. Freight volumes were flat in September when they should have begun rising, he said.
In part because of high fuel prices, 1,905 trucking companies ceased operations during the first half of the year, according to Donald Broughton, a research analyst at Nashville, Tennessee-based investment bank Avondale Partners.
By the end of 2008, as many as an additional 2,000 of the more than 200,000 for-hire trucking concerns in the US are expected to fail, he said.
Gainey Corporation, a Grand Rapids, Michigan, carrier with 2,200 trucks and more than $400 million in annual revenue, sought bankruptcy-court protection last week.
The credit crunch is choking off cash at a difficult time. After the holiday season, shipping volume typically drops off and trucking costs go up because of winter weather.
Some companies are worried they won't be able to get loans to cover the fees they have to pay every January to renew their state tractor licenses, an expense that can cost a mid-size company several hundred thousand dollars.
In addition, many customers of trucking companies are also in trouble and are postponing payments, exacerbating the cash crunch.
J J Singh, president and chief executive of Transportation Alliance Bank, which loans exclusively to trucking companies, said he's never seen such a huge demand for credit.
Cargo News Asia
October 24, 2008
Hong Kong duo report sharp falls in cargo traffic
Combined Cathay Pacific and Dragonair traffic figures for October 2008 show passenger growth falling behind capacity growth, together with a significant fall in the amount of cargo and mail carried compared to the same month last year.
In October, the airlines between them carried a total of 2,091,339 passengers, up 2.6 percent on the same month in 2007 but some way behind the 11.6 percent growth in capacity, measured in available seat kilometers (ASKs) for the same period. The load factor for the month was down 5.3 percentage points at 75.5 percent. For the year to date, the number of passengers carried has risen by 9.2 percent compared to a capacity rise of 14.2 per cent.
The amount of cargo and mail carried in October dropped by 7.4 percent to 144,466 tons, while the month's capacity, measured in available cargo/mail ton kilometers, fell by 2.6 percent compared to the same month in 2007. The cargo and mail load factor dropped by 2.9 percentage points to 65.9 percent. For the year to date, cargo and mail tonnage has climbed by 2.4 percent compared to a capacity rise of 2.8 percent.
Cathay Pacific general manager - Cargo Sales and Marketing, Titus Diu said: "Usually we see a surge in our cargo business in October but this year demand was weaker than expected in most of our key markets, including Hong Kong. We saw no significant post-Olympics pickup out of China while the mini-peak anticipated after the National Day holidays in the (Chinese) mainland didn't materialize. We worked to offset weakening demand by combining freighter flights or making ad hoc cancellations where possible."
Impact Publications - Australia
November 13, 2008
Hactl figures down for October
Air cargo throughput at Hong Kong International Airport dropped 9.8 percent in October compared to the same month in 2007. Data released by Hong Kong Air Cargo Terminals Ltd (Hactl) showed total throughput at 222,166 tones, although the year to end October was up 0.9 per cent.
Cargo News Asia
U.S. airports grow apace, but the timing seems off
Airports around the United States broke ground on dozens of projects over the last decade, including new runways and terminals, to handle all the new passenger traffic that seemed certain to keep growing.
Now, many of those new developments are being completed. And the timing could not be worse.
Airlines, after all, are grounding hundreds of planes and cutting as much as 20 percent of their domestic flying schedule because of last summer's high oil prices and the weakening economy. More cuts are planned for next year.
The good news for passengers is that all this new capacity in the system can help ease delays - at least for those flights that are not affected by the bottlenecks created by the three New York-area airports.
New runways are open or about to be dedicated at Chicago O'Hare, Washington Dulles and Seattle-Tacoma. A new terminal opened in Detroit recently, and the new Terminal 5 at Kennedy International Airport, home to JetBlue Airways, opened last week.
For many travelers, "congestion is kind of a thing of the past," said Douglas Steenland, chief executive at Northwest Airlines.
But there is a cost to airlines and passengers who pay for these projects through leases and higher ticket fees. And some airline executives, who once pleaded with airport officials for more runways and gates, are speaking out against more construction on top of projects that have cost tens of billions of dollars over the last decade.
The projects are "spending other people's money," said Gary Kelly, chief executive at Southwest Airlines.
According to the Air Transport Association, the airlines' trade group, carriers paid landing fees totaling $615 million in 2007. The median airport cost per passenger for each flight is $5.87, according to Moody's Investor Services.
Bob Montgomery, vice president for properties at Southwest, said his airline paid an average $4.80 per passenger in airport costs in 2005. Next year, Southwest expects that figure to reach $7.50 - a 55 percent increase in just four years. At the higher end, it pays $12.30 per passenger at St. Louis, where American Airlines has sharply reduced flights, meaning others have to pick up more of the costs.
The biggest miscalculations in new construction occurred in hub cities where airports spent billions to meet the needs of a single carrier, only to see the airline drastically shrink its presence.
St. Louis spent $1.1 billion on a new runway that opened in 2006, even though traffic is down 53.9 percent since 2000. American Airlines dropped many flights following its acquisition of Trans World Airlines, which had been the main carrier there.
Pittsburgh spent $1 billion on a new terminal in the early 1990s for US Airways. But passenger traffic there is down by almost half this decade because of cutbacks by US Airways.
Cincinnati, for example, spent $500 million in the mid-1990s on construction that included a new terminal for Delta Air Lines. And it added a third runway in 2005, its busiest year. Since then, passenger traffic has fallen 36.4 percent as Delta cut back. On a recent weekday morning, half the parking spots were empty in the airport's main garage, which was expanded only months before 9/11.
Even in the future, the prospects for Cincinnati's airport are not good.
Delta received approval from the Justice Department Wednesday to merge with Northwest, giving the combined airline six hubs in the United States. Cincinnati is less than 250 miles from Detroit, Northwest's main airport for international traffic.
Although Delta insists it has no plans to eliminate any hubs, Detroit, now its second-biggest airport after Atlanta may have the upper hand if Delta chooses to streamline its operations. Detroit opened its new North terminal in September, its second new terminal this decade.
Detroit's new terminal, which cost $1.2 billion, has wide security screening aisles, and plenty of shopping and restaurants. The half-mile-long facility replaced a crowded terminal built in the 1960s, not long after airlines began flying jets.
"It's a huge improvement," said Janet Lankford, of Milford, Michigan, who was among the passengers using the terminal when it opened Sept. 17.
Mike Preamble of Atlanta called it "a nice step up for Detroit. I've been here in the past where the airport has been a dump."
Despite the ups and downs of the industry and individual carriers, airports need to keep modernizing, said Todd Hauptli, an executive vice president for the American Association of Airport Executives, a trade group.
"Terminal buildings are often 10-, 12-, 15-year projects," he said. "You can't turn the spigot on and off. You have to look out a little farther than the airlines have to, or are able to. The airport's mission is to process the passengers and think about not just next week or next month but next year and next decade," he said.
Indeed, officials in Las Vegas are planning to build a new $2.4 billion international terminal. Air travel there has risen 50 percent since 2000, which airport executives say justifies new facilities. But traffic fell in the last year, and Southwest has set aside a plan to expand its flights at Las Vegas to 350 a day, from 240.
Hauptli of the airports' trade group said that the Federal Aviation Administration still predicted passenger traffic would rise to 1 billion annually during the next 15 years, up 300 million travelers from the levels of the last few years.
"That's almost the population of the United States," he said. "I don't see how you add that to the system without building some new additional capacity."
International Herald Tribune
October 30, 2008
Delta gets its chance to dominate aviation
World's biggest airline: Acquisition of Northwest opens routes but carries risks.
Delta Air Lines' executives long talked of being in the pilot's seat when the next big wave of consolidation swept the airline industry.
Last week, Delta CEO Richard Anderson got his wish. Federal regulators cleared Delta's merger with Northwest Airlines, creating the world's largest airline just 18 months after Delta emerged from bankruptcy.
The $2.6 billion stock swap deal - basically a takeover of Northwest, which becomes a wholly owned subsidiary - gives Delta a global span that could help raise Atlanta's profile as an international hub.
"You're going to have a really strong airline in Atlanta, and you haven't been able to say that for a while," Delta President Ed Bastian said in an interview last week.
The airlines say it will be business as usual - at first. Travelers will not notice immediate changes to schedules, planes, check-in procedures or frequent-flier programs because of the merger.
Delta executives plan to gradually combine the airlines' operations over the next two years. When the merger is completed, officials think it will generate about $2 billion in annual cost savings or additional revenue by melding Delta's and Northwest's largely complementary routes.
Consumer advocates worry that the merger could lead to higher fares because there are fewer competitors and one airline will control a greater share of the market. Government antitrust regulators, however, concluded last week that the merger "is not likely to substantially lessen competition."
Combined, the companies will have $35 billion in revenues, 75,000 employees and 770 mainline jets flying routes spanning the United States and reaching to Europe, Asia and Africa.
The merger enables Delta, which is weak in Asia, to add more connections between Atlanta and the continent, particularly to Northwest's Tokyo Narita Airport hub.
Atlanta is expected to remain Delta's key hub. The company will continue its role as one of the metro area's largest employers as it gains five domestic and overseas hubs from Northwest.
If Delta pulls this off with flying colors, both the airline and Atlanta stand to gain, industry experts said. If not, billions of dollars in cost savings and added revenue could be forfeited, customer service could suffer and labor conflicts could intensify.
The stakes are huge. For Delta, the prize is bragging rights as the first truly global airline and "probably a billion dollars of revenue" that it didn't have before, said Darryl Jenkins, a longtime airline industry consultant.
Atlanta, meanwhile, gains a bigger, healthier airline that has been a key driver of the regional economy. Local officials hope the merger will create a better lure to recruit other employers. Customers from corporate giant Coca-Cola to vacation travelers are likely to gain better direct access to more overseas and domestic flights, although some critics say the merger could drive up fares.
"It really confirms Atlanta as a global headquarters due in large part to Delta," said Craig Lesser, a managing director at the McKenna Long & Aldridge law firm and chairman of the World Trade Center Atlanta and the Georgia Chamber of Commerce's international committee.
As Atlanta tries to attract more corporate headquarters and companies become more globalized, Delta's ability to connect people to more places makes Atlanta a better place for businesses to locate, he said. However, don't expect the payoff to come quickly or without some pain, airline industry veterans said.
Anderson's team faces a tough two-year slog blending two big companies with differing employee cultures, aircraft fleets and computer systems. Most of Northwest's employees are unionized; most of Delta's aren't.
Delta wants to preserve its nonunion work groups, while labor groups are planning campaigns to unionize more of the combined airline's workers, including flight attendants, ramp workers and others. The unions see an opportunity to broaden their influence to a longtime holdout that's now an industry juggernaut.
"There are lots of promises made by Richard Anderson in his attempt to get the merger approved, but the only way to hold him to those promises is through a new contract," said International Association of Machinists spokesman Joe Tiberi.
Few airlines have pulled off such mergers without significant labor strife, service meltdowns and customer service headaches, including canceled flights and lost baggage.
Still, most observers seem confident that Delta will do a better job of avoiding such pitfalls.
"I am bullish on their ability to put it together," said William Swelbar, a research engineer at the Massachusetts Institute of Technology's International Center for Air Transportation. "Yeah, there will be some speed bumps on the way, but they've been very methodical about this."
He and other experts noted that Delta and Northwest launched 26 teams to begin planning the integration process soon after the merger was announced. A key hurdle the airlines jumped, they said, was getting the pilots, who are in separate units of the same union, to agree to a joint contract.
The pilots, who hold a lot of clout, still have not resolved a conflict over melding their seniority lists, which dictate job assignments, pay, vacation and other touchy issues. The unions are talking while an arbitration panel looks at the case. Meanwhile, the world hasn't stood still while Delta and Northwest awaited approval of their merger, announced in April.
After dealing with skyrocketing fuel costs this summer, the airlines now face the prospect of a global recession. Both airlines have cut thousands of jobs this year, and there could be more cuts as overseas and domestic air traffic decline. Delta has announced plans to reduce domestic capacity by 14 percent in the fourth quarter compared to a year earlier. It's also slowing its international growth.
"They're going to shrink a lot more than what they originally thought," said Vaughn Cordle, a former pilot who runs a consulting business, Airline Forecasts. Delta could cut capacity by another 5-10 percent next year as part of the merger, he said. Employment usually tracks fairly closely to capacity changes. However, Delta's Atlanta operations will likely feel the knife less than smaller hubs such as Memphis, a Northwest hub, or Cincinnati, a Delta hub.
"The good news is Atlanta will obviously remain the largest hub," said Henry Harteveldt, an analyst with Forrester Research.
Bastian, Delta's president, said he does not expect large-scale layoffs in Atlanta. "You're not going to see any significant reduction in jobs or head count here in Atlanta, frankly, because we have a lot of work to do over the next two years as we integrate the two companies," Bastian said.
"Eventually, you'll see some reductions across the two companies, but it's pretty far down the road, and I would expect we're going to manage it through attrition and other types of early-out arrangements."
Over the long haul, said Harteveldt, the merger will enable Delta to continue its international expansion, to the benefit of future employees and customers in Atlanta.
"When Delta emerges [from its integration with Northwest], Delta will remain a significant employer in Atlanta and I think a very attractive employer," he said.
The Atlanta Journal-Constitution
Sunday, November 02, 2008
Book Review: Evolution of International Aviation - Phoenix Rising
Edition: Second Edition
Dawna L. Rhoades, Embry-Riddle Aeronautical University, USA
The purpose of this book is twofold. First, it lays out the forces that shaped the international aviation industry and that changed all the rules in the drive for liberalization. Second, it looks at the many interesting and difficult choices ahead that the airline industry in general and the international aviation industry in particular face. These choices include many dichotomies: pulling back from the trend toward liberalization or embracing the liberalization trend, merging in search of profitability or fragmenting the industry in search of economies. These possible futures are explored including the pros and cons of each future from a national, consumer, employer, and employee perspective.
Evolution of International Aviation is organized into three parts: Part One reviews the early development of the international aviation system. It examines the 1944 Chicago Conference, and the resulting structure and role of ICAO; the development of the International Air Transport Association, and its role in shaping the international aviation system; US domestic deregulation and European efforts to create a free market system of aviation; deregulation in Asia. Part Two examines the alliance movement among international air carriers, the growth, opportunities, and challenges of alliances. Part Three considers the future of international aviation in light of changes to the landscape, reviewing relevant events from an aviation system perspective. It explores the challenges facing the industry in the current era and discusses some of the brave new possibilities for international aviation.
Ashgate Publications
NZ flight to test biofuel
What is claimed to be the world's first commercial aviation test flight powered by a sustainable second-generation biofuel will take place on 03 December.
The jatropha-based fuel for an Air New Zealand B747-400 flight out of Auckland has been certified as suitable for use by Rolls-Royce (aero engines).
Chris Lewis, a specialist in fuels at Rolls-Royce, said the fuel is a 50:50 blend of standard Jet A1 fuel and synthetic paraffinic kerosene derived from jatropha oil.
"Laboratory testing showed the final blend has excellent properties meeting, and in many cases exceeding, the stringent technical requirements for fuels used in civil and defense aircraft. The blended fuel therefore meets the essential requirement of being a "drop-in" fuel, meaning its properties will be virtually indistinguishable from conventional Jet A1 fuel, which is used in commercial aviation today."
Impact Publications - Australia
November 13, 2008
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