In-Flight Entertainment Check: What You’ll Get on Each Airline – Conde Nast Daily Traveler
I did a round-up of domestic inflight entertainment options for Conde Nast.

Why Vegas Flights Might Cost More – Conde Nast Daily Traveler
Vegas opened its brand new $2.4 billion terminal this week, but it doesn’t really need it. Still, somebody has to pay for it . . .

I was talking to someone from one of these lucky airports recently and he told me that there are 10 cities in the United Airlines system that have nonstop service to each of United’s 8 hubs. As a reminder, those hubs are San Francisco, Los Angeles, Denver, Houston/Intercontinental, Chicago, Cleveland, Washington/Dulles, and Newark. Can you name them all? These don’t have to have year-round nonstops to all hubs – seasonal service counts. For comparison, I missed three.

Anyone seen the price of fuel lately? As I write this, oil is hovering around a mere $80 a barrel. That’s a far cry from where it was just a few short weeks ago. And when fuel goes down, it means those who hedge lose out. Let’s talk about why that is exactly. We’ll use Delta as an example.

Delta announced earlier this week that it would take a $155 million loss this quarter because of fuel hedges. It will also post a paper loss of $800 million for future quarters, but that loss is just an accounting quirk and has nothing to do with reality. Aren’t hedges supposed to save you money, not cost you? Well yes, sort of. But it’s all about the type of hedge you use.

The Basics
The basic idea behind fuel hedging is to control the cost of fuel in the future. The most basic way to do that is to buy fuel in advance – lock it in for a set price and then be done with it. If the fuel price goes up, you don’t pay more. If it goes down, you don’t pay less. In the latter case, you could have bought it for less if you hadn’t hedged, but there is no additional penalty. These kind of hedges, however, can get expensive considering the volatility of fuel the last few years. So airlines use a whole bunch of different tools, each more complex than the last.

I believe Delta is losing money this quarter because of “swaps” that it has. Basically, that means Delta makes a bet with somebody else, a counter-party. Delta goes to that counter-party (maybe it’s a bank) and makes a deal. Think of it like an over-under. Let’s say Delta signs up for an over-under of $90 a barrel. If it goes over that, then the counter-party has to pay the difference between the $90 and the market price to Delta. If it goes under, then Delta pays the counter-party the difference. So, Delta was looking good when oil was over $100 a barrel, getting $10 a barrel from the counter-party. But now, Delta has to pay the counter-party $10 a barrel if oil is at $80. And that’s why Delta is out $155 million this quarter.

The $800 million loss is really just a guess and means nothing. Each quarter, Delta has to “mark to market” the value of its future hedges thanks to accounting rules. So if the hedges came due today, Delta would be out $800 million as compared to where they were last quarter. But they aren’t due today. They’re due in subsequent quarters and the value could be completely different by then. So the only real number here is the $155 million that is related to this particular quarter.

The upshot is that Delta now expects to pay $3.37 a gallon this quarter instead of the $3.28 it predicted before the impact of the hedges. Does that mean hedging is a bad strategy? It all depends on who you ask.

To Hedge or Not to Hedge
US Airways has stopped hedging completely. It says the cost of a hedging program is enough that it doesn’t make much sense. Is US Airways right? Well for the full year 2011, it paid $3.11 a gallon while Delta paid $3.06.

That’s a fairly small difference for such a dramatic strategy difference. It also doesn’t take into account the fact that Delta has a whole team devoted to hedging. There are infrastructure costs that aren’t reflected in the fuel price that narrow the gap even further. And remember, fuel prices had some real ups and downs last year. So I generally tend to think US Airways has a good idea. But let’s look at this very interesting chart to show a little more detail.

What you see here is a blue line indicating the average price of a barrel of oil in each month. Don’t worry about the exact numbers here and the fact that the price of a barrel of oil doesn’t exactly correlate with the price of a gallon of jet fuel. Instead, focus on what this is telling us.

The airline logos you see are the average price per gallon in each of those quarters. As you can see, US Airways generally paid more than Delta when prices were flat or increasing. When prices were declining, US Airways paid less than Delta. There is something of a lag here, which I assume explains why US Airways paid more than Delta in Q2 2011, but the idea is sound. And I imagine in Q2 2012, US Airways will be paying less than Delta, but that airline won’t release guidance until next week.

Of course, if you knew the cycles, you would play the game differently. But you don’t know the cycles. So it really becomes an effort of trying to make your fuel costs more predictable in the short term. If it’s a long term change, then hedging just delays the inevitable (see Southwest). But if it’s short term, this would protect you from brief shocks. Of course, the way US Airways views it, it’s not worth all the money involved in securing those hedges in the first place. I’m inclined to agree.

Let’s take a break from some of the more depressing subjects out there (eg, labor strife) and talk about something cool. Once again, science has proven its awesomeness with a “nanostructure surface” that can make metals repel ice. This would be huge for aviation in so many ways.

Thanks to the Ideas Market blog over at the Wall Street Journal, I found out about this paper put together with the thrilling name “Liquid-Infused Nanostructured Surfaces with Extreme Anti-Ice and Anti-Frost Performance.” Sounds thrilling, right? Let’s talk more about what it actually means.

Icing Sucks
Airplanes and ice have a love-hate relationship. Airplanes hate ice, but ice loves cozying up to a wing or a tail and causing all kinds of problems. Airplanes are built in very specific ways to ensure that the wings can provide enough lift for the aircraft at various speeds. When ice builds up on a wing, it disrupts the airflow by altering the shape of the wing surface. Even minor changes can have a major impact on lift. The list of accidents due to ice is very long, but some of the more famous are the Air Florida accident at Washington/National and the American Eagle crash over Roselawn, Indiana.

Icing can be a problem at any stage of flight. Before departure, it’s incredibly critical, and that’s why airplanes will “de-ice” before taking off. Have you ever sat at the gate and all of a sudden seen a nasty liquid being sprayed over the aircraft? That’s deicing fluid. Sometimes, it will happen at the end of the runway right before takeoff. Different airports have different ways of dealing with it and the various conditions will impact how often it needs to happen and where. The fluid is meant to melt any ice that might be on the airplane. There is also an effort to use “anti-icing” to create a temporary barrier to prevent ice from forming again. In severe icing conditions, this may not work for very long. As we saw with the Air Florida accident, waiting too long in bad weather can very easily result in disaster.

In the air, it’s a different story since it’s not very easy to find a way to spray the airplane up there. There are three ways to de-ice in the air. Some airplanes (like the one that crashed in Indiana) use de-icing boots that sit on the leading edge of the wing. They inflate to break the ice and then it blows off in the slipstream. There is also a system that uses “bleed” air, meaning it takes air that is diverted off from the engine. The heat is used to melt the ice. Additionally, there are mechanical heating systems that can heat the wings to melt ice.

Something Better
All of this is no fun and it’s costly. The deicing systems add weight to the aircraft. The need to deice on the ground snarls traffic and delays aircraft left and right. This doesn’t even address the issue of disposal of the deicing fluid. It’s a real mess. So if there’s a way to prevent ice from forming and have it built into the wing, then there should be a huge market for it.

What is being proposed is the use of what they call “SLIPS” — slippery, liquid-infused porous surfaces. Catchy acronym. But, um, what? Well, a previous study gives a little more light into what this is. You start with a “nanostructure surface,” which is really something very, very tiny with little itty-bitty holes in it. Then you infuse a liquid into the holes that naturally does not mix with water. You’ve all done the experiment as a child putting oil and water together only to see them stay separate, right? It’s that idea. So when water comes into contact with this surface, it will be repelled and ice won’t form.

Yes, the idea is simple and extremely awesome. And apparently, it works in some very cold temperatures. These SLIPS are just applied to metal surfaces, so they don’t require any special type of metal. The potential for something like this is tremendous.

I’m sure we’re still fairly far out from having a workable application, but the idea should have bean counters and ops folks alike salivating.

Unlike any other large airline in the US, Southwest has had an incredible streak of good labor relations. Despite being highly unionized, the airline has had labor peace for most of its 40+ years. How has the airline done this? Well, it has long put a high priority on supporting its people and that has meant a no layoff policy, ever-increasing wages, and no outsourcing. In return, Southwest’s employees are very productive and famously-friendly.

This has worked for the airline ever since it began, but now the airline finds itself in a different situation. As CEO Gary Kelly noted in an excellent letter to the troops back in December, Southwest’s wages are the highest in the industry. With growth almost non-existent and profits being squeezed, it’s just a matter of time before a labor fight turns ugly. Right now, it’s the ramp workers who are making a lot of noise.

It’s no surprise that today’s Southwest is not exactly the same as the one from days of yore. The airline is in a very different place now. While Southwest was once the scrappy upstart, clawing its way to the top, it is now the largest passenger carrier in the domestic US market. It isn’t the lowest cost operator and it’s not nearly the low price leader it used to be.

A Brief History
Up until the last decade, Southwest relied on rapid growth to fuel its business. It never had to worry about layoffs. When times were tough for the other airlines, Southwest thrived by introducing low fares into more and more markets. It mercilessly stole traffic from the big guys. That growth also kept labor costs low. Even though wages kept climbing, the constant influx of new blood to fuel the expansion meant that there were a lot of people working for entry level wages.

Things should have started to change in the last decade. Legacy airlines going through bankruptcy one after another brought their cost structures closer to that of Southwest. At the same time, fuel cost increases meant that demand would be slowing. Southwest should have been transforming to face that challenge. It didn’t.

Southwest was was able to rely on its fuel hedges as a crutch. While many people suggested that this fuel hedge was brilliant, all it did was prevent Southwest from adjusting to the new reality of high fuel prices. Once the hedges ran out, Southwest had to make big changes.

Merging to Find Growth
Since that time, Southwest has been a different airline. It has slowed to almost no growth after realizing that there were few big opportunities left for the airline in the US, especially considering the rapid rise in fuel costs that it faced when the hedges ran out. So what did it do? It turned to a merger, acquiring AirTran to grow its business.

When Southwest first announced it would take over AirTran, I got excited at the prospect of Southwest figuring out a way to serve smaller cities but that hasn’t happened. We’ve seen Southwest ditch the smallest airplanes, cut the small cities AirTran served, and really back away completely from this idea of serving smaller towns. The merger now seems to be mostly about Atlanta and eliminating a competitor.

So here we are with an airline that has seen internal growth stagnate and profits start to lag. What can Southwest do to combat this?

Labor the Untouchable
The one untouchable has always been labor. Back in 2004, the first CEO after Herb Kelleher, Jim Parker, tried to take a stand in labor negotiations with the flight attendants. The flight attendants weren’t happy with the raises being offered (and yes, they were offered raises). In the end, Herb stepped back in, gave the flight attendants more, and Jim resigned soon after.

While there have always been minor spats over the years, the big dust-ups like that have been very rare. Is it time for a labor confrontation to come to a head once again?

It wouldn’t be a surprise, especially considering that letter that Gary Kelly wrote last year. Labor has enjoyed a great ride with Southwest, but will it be ready to face the challenges that Southwest is facing today?

Outsourcing
Last week’s rumblings were from the airline’s ramp workers protesting at Chicago’s Midway Airport. The rampers have decided to take their negotiations public by announcing that Southwest has asked for the right to outsource 20 percent of their jobs. That’s certainly one way to reduce labor costs, but as you can imagine, when I spoke with Charles Cerf, President of TWU Local 555, he and the rest of the rampers were not very happy with this plan.

Southwest, for its part, says there is no effort to outsource jobs at Midway, but of course, that doesn’t mean it wouldn’t change its mind if it could get the right to do it in contract negotiations. I assume it has to have at least some interest or it wouldn’t bother asking for it. Then again, it already has the right in some cases and it doesn’t use that.

Something I didn’t realize is that Southwest’s current contract with its rampers allows the airline to outsource jobs in new cities with fewer than 12 daily flights. Yet when it opened Panama City in Florida and Greenville/Spartanburg and Charleston in South Carolina, it kept jobs in-house. (That provision makes it even more surprising that Southwest has walked away from AirTran’s smaller cities.)

You would think that any level of outsourcing would take away from the Southwest culture, but Southwest has to find a way to contain its costs. I can see how the airline might come to the conclusion that it would rather outsource some jobs to lower costs instead of putting downward pressure on compensation for its own employees.

Maybe this is Southwest just trying to position itself in negotiations. It could give up the outsourcing ask in exchange for something else. I really don’t know. Since this is part of a labor negotiation, Southwest won’t comment (and really, it shouldn’t). But it wouldn’t surprise me in the least to see Southwest trying to do things differently.

Southwest has a cost problem on its hands, and it has a tall task ahead to try and figure out a way to tackle it. Inevitably, this means there are bound to be more serious clashes with labor than we’ve seen in the past.