I’m back with part two of the Phoenix Aviation Symposium airline CEO panel. In part one, the CEOs talked about consolidation. In this post, they talk about competing and cooperating with low cost carriers.

On Competing with Low Cost Carriers in Europe
British Airways CEO Willie Walsh: I think what we’ve seen in Europe in 2009 has been more the impact of the truly global economic downturn [than low cost carriers (LCCs)]. People in the EU talk about BA losing to Ryanair, easyJet. There’s no evidence to support that. BA is holding market share relative to these guys because we’ve been competing with them for 20 years. I think we’ve been able to adapt to their sort of competition that they present us. It’s really a case now that the consumer has choice and can really understand what’s available. So a lot of the consumer media in the UK has recognized that there’s very little difference in terms of overall price between established carriers, network carriers and low cost carriers.

What we witnessed was a truly awful economic environment. Ryanair and easyJet suffered as well. They scaled back their growth, saw significant falling profitability and they struggle just as much as everybody else. The main issue for BA was the impact on premium travel. IATA estimates that 7 to 8% travel in premium and generate 25% of revenue. For BA, 13% travel in premium classes and generate 45% of revenue. We’ve seen some evidence of premium customers on short haul within Europe and moving away from the premium cabin. That doesn’t mean they’re moving from network carriers to low cost carriers. It means they’re moving from the front of the aircraft to the back, and I think that’s a structural change. Long haul premium travel is cyclical and there’s clear evidence that it’s now recovering. I’m convinced from everything I’ve seen that the competition between LCCs and national carriers will continue.

Qatar CEO Akbar al Baker: The same is true for LCCs in our region. Now, it’s a fashion in our region. The geography does not permit low cost carriers flourishing because we do not have deregulated skies. We do not have secondary airports, we have the same cost base. We are hardly losing our market share. Everyone asks when Qatar launches an LCC. We will do it when an LCC entrance into our market will impact share and it’s not happening because people in our region still want to travel on a full service carriers. They realize there is so much of a hidden cost in my region from low cost carriers. The fare will become nearly the same.

On the Convergence of Business Models Between LCCs and Legacy Carriers
JetBlue CEO Dave Barger: I don’t think the LCC concept will be gone even though there’s a migration that’s going on . . . . I don’t think the true LCC model goes away.

Republic CEO Bryan Bedford: I think the models are converging. What we’ve seen through forced financial restructuring are legacy carriers that have to rethink their business model. The product is moved more toward what the LCCs have been doing and LCCs have been moving more toward the legacy model – business class cabins, TVs, wi-fi. We’ve seen more amenities on the LCCs; less amenities on the legacies. So there’s a product convergence but the networks are so powerful.

Moving away from domestic to more balanced between international and domestic. As these alliances crystalize, some of the LCCs are going to wonder where do we go? How can we move people from small town America to the world? We see Southwest trying to create their own marginal expansion internationally. At the end of the day it’s a network business, and we’re trying to figure out ways to differentiate the product because the customer has decided to show a great amount of loyalty.

US Airways CEO Doug Parker: I think you’re right, there’s definitely a convergence. I think of it more that we end up having lower cost structure but more it’s hub and spoke airlines vs point-to-point carriers. JetBlue and Southwest connect a lot of people but they don’t have a hub and spoke which gives them a cost advantage. It used to be in the 90′s and 2000s that used to be largely generated by labor costs. You could have a model that worked; ran a hub and spoke out of Phoenix but had much lower costs than the other hub and spoke carriers because we had much lower labor costs. That you can’t do anymore because of what’s gone on with the legacies.

You have to get the cost advantage by avoiding hub and spoke. I don’t think you can start an airline doing the same thing in a different city and use a cost advantage. Southwest contracts have higher labor costs but they have much lower costs because of their model. The consumer won’t be able to differentiate but the LCCs won’t be flying to places like Asheville, North Carolina.

I know, I know. You want to hear all about the Continental/United merger right? Well, I’m not writing about it until it’s officially announced even though that may happen by the time I wake up today. I’m actually working on a huge backlog of interesting material from last week’s US Airways Media Day and the Phoenix Aviation Symposium. Today, I thought I’d give you a peek at the final panel of the week, the executive panel. This is a long post, but it’s simply the first of three.

The Phoenix Aviation Symposium is a great event that gives really excellent access. I mean, I (and a few others) had a beer with British Airways CEO Willie Walsh while he talked about the volcanic ash situation. I also had a drink with JetBlue CEO Dave Barger later on. That sort of thing doesn’t happen very often in one place. Why are all these CEOs milling around? For the executive panel. This year, it was made up of US Airways CEO Doug Parker, JetBlue CEO Dave Barger, British Airways CEO Willie Walsh, Qatar Airways CEO Akbar al Baker, and Republic CEO Bryan Bedford.

Though recording wasn’t allowed, I typed as quickly as I could and got a pretty good transcript down. There wasn’t any huge news here, but I think the candid back and forth between the panelists makes for some really interesting reading. I’ve trimmed it down a bit to focus on the most interesting pieces. Let’s get on with it.

On Recent Industry Crises and Priorities
Qatar CEO Akbar al Baker: Unfortunately, this industry has been very unlucky – faced with either natural or national calamities. As far as Qatar is concerned, we have been a bit fortunate. Besides the premium yield taking a beating, we are not dropping our trousers to get passengers on the airplane. We are fortunate because we operate a very lean structured airline; productivity of staff is very cleverly measured. We have no unions so people are accountable to management and a CEO who is very ruthless.

We have one of the lowest aircraft/employee ratio of any scheduled carrier and a very clever fuel hedging structure in place. I know that people think I have an oil well behind my office and that we get very cheap fuel, that we get a lot of government subsidies. I am a businessman. I would be ashamed for someone to give me handouts to run my airline. We are very cash fluid generated by the ancillary business we have. The airline has the alcohol distribution in a country that people think is dry.

JetBlue CEO Dave Barger: I’m sure Willie will talk about dealing with volcanic ash . . . Talking about oil speculation. When oil runs to $147 a barrel, then it’s down to $37 or $38 a barrel, it’s very diffcut to run the business. And also worldwide climate change. The impact it has on the industry as well. This is an industry that’s incentivized to really be carbon friendly. It’s our number one cost.

The second issue as well – it was intriguing – the labor panel; it’s no secret we’re 12,000 crewmembers at JetBlue and we have no unions. It’s not pro or anti-union but the issue of labor relations at our company. It’s a different lens. It’s a second thought that we spend a lot of time on.

The third area is how that then leads into consolidation. Whatever happens with the industry landscape, the crewmembers are looking at consolidation. “Am I protected? What’s next? What does this mean with our interline agreement with American Airlines?” We’re really spending a great deal of our time on these.

Republic CEO Bryan Bedford: What did strike me about the panels is who wasn’t here. We had government, the regulators, labor. We have lawyers, we have airline CEOs, finance guys, manufacturers, but we didn’t have the customer here. It really struck me we didn’t have the customer here. It’s amazing how we do as a business moving people around at the highest degree of safety and yet people hate us. I wonder why is that? Maybe it’s all the bickering between management, between labor, between the airlines. For so many smart people, we could do better, maybe better telling our story.

The fact that we have to have legislation on the passenger bill of rights says it all. If I have a 15 minute line wait to check out of my local grocer, I don’t expect Congress to solve that problem. I take my business elsewhere. Where’s the incentive for airlines to outperform if the customer is going to buy based on price?

US Airways CEO Doug Parker: I think we’re in a really interesting time. This looks the same to the outside world, but I would argue that what we’ve gone through in the last couple years is phenomenal and unprecedented. We’re talking about $80 oil now. I vividly remember when we did the America West/US Airways merger. Part of what we’re telling people was we’re building an airline that would be profitable at $50 a barrel oil. So that’s where we were just 5 years ago. Nobody thought it was even possible to be profitable at $80 a barrel.

We also just went through a recession unlike anything our business has ever seen. Certainly more prolonged than 9/11 impact. We’ve never seen in one year industry revenues fall 20%, which they did and we weathered. If we had 2008 RASM [unit revenue] or $60 barrel oil, everybody would be talking about the record profits this industry is making now. So at any rate, I think the industry has made some major fundamental changes that still have us losing a lot of money. Unfortunately, to suggest that both would happen would not be something we’d think could happen. I just hope that we keep that discipline. I worry somewhat that things get better and we start to do the things we did in the past.

Finally, consolidation is happening and it’s huge into what it’ll do to our ability to make this industry long term profitable. All the issues in this industry are the things that make long term problems. Things like labor relations and government regulation become less of an issue because you have a business that can run like a business. The problem is we’ve never had an industry ever that has been long term sustainably profitable.

British Airways CEO Willie Walsh: My predecssor at BA used to say that he had a lot of luck in his role as CEO and all of it was bad. He left 5 years ago; he lied. You just cannot, if you read this script, people would say you’re making it up . . . We’ve seen a unique combination of cyclical impact and structural impact at the same time in a period that was incredibly tough to deal with. Oil is now structurally higher. The days of $20 oil is gone. It’s likely to be closer to $100. We have a big issue now in terms of financing – it’s much more expensive. Just when we think we’re getting our head above water, something comes along – volcanic ash.

I’ve read in the newspaper about the skies being covered in volcanic ash. We dealt with a computer model that said there was volcanic ash. That’s a scandal, but our industry has to deal with those issues and we look forward to the next crisis. The good thing is that we’re still here. To think we came through 2009 with all the challenges shows you how determined and resilient this industry is but things have got to change.

On Consolidation
Doug: The industry is destined to consolidate. There’s value in having a larger network with customers and shareholders by doing things more efficiently. I think it makes sense. I believe we’re headed to an industry, simply hub and spoke airlines, legacy carriers. We didn’t need 7 of them in 2005, we don’t need 4 of them now, we need 3 and that’s where we’ve always been headed. You have all sorts of guys, JetBlue, Frontier, etc flying around doing what they do well, making sure if you get your costs too high, they’ll steal your market share. I think it’s a good model. Generally these leaks have been accurate, so we’ll have another merger done on Monday.

[Doug later emphasized that he "wasn't trying to suggest that anything is going to go on with US Airways anytime soon. To the contrary, things are going great as a standalone and we can do that for as long as we want. It's years off."]

Bryan: We’re certainly acting as the networks are realigning. The synergy opportunities are just so significant. I think the industry is looking for ways to find stability. Labor wants it, customers want it, and financing teams want it. The struggle if you’re a regional is one of the ways networks drive synergy is they segment the market differently. If 70% of your market is willing to connect, it doesn’t matter where they connect, so those hubs become marginal. Pittsburgh, St Louis, Raleigh/Durham. And if you’re a feeder in those markets, you lose that flying. The best case was that it wasn’t growing and the worst case is that it was shrinking. We want to grow the pie. How do we get a bigger slice of it? We need to figure out ways to incent customers to pay more for the product.

Willie: Part of the problem [in Europe] is we still have to have a structure that complies with air service agreements on a global basis. . . . A lot of the complexity we’re dealing with there is that BA can continue to fly to Japan and China, and Iberia can continue to fly to Latin America. There’s still a lot of complexity holding us back. Who knows, 10 years from now we might be looking at genuine global consolidation.

Akbar: I know you’re pulling me into politics here, but I need to leave the United States this evening. Some airlines of course would like to block other airlines growing. I do understand maybe from their nationalistic point of view, but at the end of the day the world is deregulating. The commerce is becoming more, there are no borders, in this way we are taking advantage in our region by growing. If there was a real wish of consolidation or a political directive of consolidation especially since we are government owned, it would have happened between Etihad and Emirates. Emirates is a well established airline would have been ideal to be named as a national carrier. The same with Qatar, they have an economic requirement, want to make it an dominant hub in the region. We were part of Gulf Air, but Gulf Air was not serving the national aspirations so this is how Qatar Airways was born, but we also, I agree with Willie, maybe in 10, 15 years time, that consolidation wind will also blow toward us. But as of today I don’t think it will happen.

We are blessed with one thing; we are located in such an advantageous geographical region, at the crossroads of east and west. We have huge O&D potential: Africa, Russia, China, and this is exactly what we’re tapping. This is what’s making the airline prosper. We are one of the few carriers that span to all the continents. You note just 10 years ago, nobody had even heard of Qatar Airways, and I’m sure 99% of the people don’t even know how to pronounce my country. This consolidation in my region today I think will not happen for the foreseabble future, so we have to work independently very similar to US Airways.

Dave: I think a term we use internally is one of open architecture. I’m biased on Kennedy and it’s geography. The ability to associate what we started prior to our conversion to Sabre with Aer Lingus in that traffic over JFK and Boston; Lufthansa owns 17% of JetBlue. We’re not part of Star but the world seems to be changing. Not just the open architecture but contrarian relationship. The interline deal with American is pretty basic, but I do think we can put together networks to break the model. That doesn’t mean we won’t go into an alliance but this open architecture to connect to Doha or over to Heathrow or wherever, it’s pretty exciting.

From a labor crewmember perspective, it’s really hard because people don’t quite trust what this is all about. I do think for us, consolidation, hey we suppport it but we don’t plan to be part of it. We’re going to let the industry around us consolidate. Our model is different at this point in time.

Republic, overlord of Frontier, Midwest, and a bunch of regional flying, made headlines last week by placing an order for 40 CS300 airplanes. These are the “C-Series” airplanes that Bombardier has been putting together to compete with the Boeing and Airbus narrowbodies. If it actually works as advertised, then that’s great news. But there’s a big “if” here. This order shows some confidence in the airplane, but more importantly, it also gives us some insight as to where Republic is taking its branded product.

For Republic, this was probably a pretty easy decision to make. The order for 40 planes with 138 seats each is worth $3.1 billion at list prices, but that means they probably paid $29.95. Like Airbus when it first tried to break into the US market, Bombardier must have been willing to give a sweetheart deal to anyone who would take a chance.

The C-Series is the first non-Boeing/Airbus airplane in the 100-150 seat category to get an order in the US since Douglas back in the day. So maybe it’s fitting that the interior of the cabin looks remarkably like the MD-80. Try to ignore the hilarious rainbow of colors strategically placed by Bombardier in this shot (Asian, black, white, Indian, young, old, bald, gray hair, blah, blah, blah) and you’ll see that it actually looks like a vast improvement over the MD-80:

The seating is 2×3 across, just as in the MD airplanes, but you can see that the windows are nice and big, and, most importantly, so are the overhead bins. They show roller bags being placed wheels-in, so these should be just like what you’ll find on a new 737 or A320, just with only one middle seat per row instead of two.

The other thing that isn’t like the MD-80 is that the engines are slung under the wings, so you won’t be stuck in row 32 staring at an engine casing. The engines are really what have the chance to make this thing succeed. After heading toward the junk heap of formerly important aviation-related companies, Pratt & Whitney has decided to make a comeback with its Geared Turbofan. This is a complex engine that has never been able to be produced reliably for commercial operations before. (They can do it for military.) Pratt thinks it will make it work, and that means a 20% reduction in fuel burn. If it works, that’s huge, and this airplane will fly long before Boeing or Airbus even get close with their next generation airplane. If not, well, this plane may not fly at all.

So what will Republic do with this? Well, the plan is to put them into service in the branded operation – that means Frontier and Midwest. They don’t have much of a choice here. If any airline decided to outsource its 138-seat flying requirements, then there would be an absolute revolt from the front lines. Most airlines don’t have the ability to do it now anyway.

In the branded world, they won’t say if it’s going to be a Frontier or a Midwest product, but let’s be honest. By the time these things show up in 2015, I’ll put money down there’s really only one brand left (if any, I suppose). But there are some clues in the press release about where they’re taking their product.

The airplane will be configured with 138 seats. The first five rows will be in STRETCH configuration with a few inches more legroom and nothing else. That tells me that Midwest’s Signature Service days are numbered. They’ll end up standardizing with STRETCH as the premium option.

Will these airplanes end up replacing the Airbus fleet? It wouldn’t surprise me if that happens one day, but the C-Series can’t really offer the A320-size capacity that Frontier might want to continue to have at the upper end. For what it’s worth, Republic says that no retirements are planned because of this. Well yeah, it’s still 5 years away.

To sum it up, the planes must have been really cheap, and they won’t be delivered for 5 years. Might as well get in on the action now with the hope that this thing works as advertised. If it doesn’t, then I’m sure they can just walk away. If not, then they’ll be in a good place.

US Airways Pilots Infighting Grows Worse by the Day – BNET
It appears the US East pilots are tired of fighting the west pilots. Now they’re turning on each other. Unreal.

Airline Capacity Cuts Slow in December, Some Carriers See Growth – BNET
December traffic numbers show some interesting trends.

United Pushes International Presence with Muddled Marketing Message in Denver Fight – BNET
United is heading back to its Independence Air playbook in its fight in Denver.

Boeing’s Loss of 787-3 Orders is Good News – BNET
When is a canceled order a good thing? When it allows Boeing to walk away from the 787-3.

Sean Menke Leaves Frontier Airlines, This Can’t Be Good – BNET
Sean Menke is leaving Frontier and Republic, and that doesn’t bode well for the airline.

Bloggers offer paid travel services – Washington Times
Nicholas Kralev takes a look at my Cranky Concierge service as well as a frequent flier redemption service from View From the Wing blogger Gary Leff.

September 2009 Traffic Numbers – BNET
September traffic numbers are out and the results are pretty good for JetBlue and Southwest.

Episode 68 – Cranky Yet Again – Airplane Geeks Podcast
For some reason, they let me back in the door once again for another fun-filled talk about airplanes. Giddyup.

Frontier President Sean Menke Heads to Republic – BNET
Frontier’s chief is heading to Republic to oversee all their brands. Consolidation seems to be happening faster than I thought.

Mokulele and go! Join Forces to Cut Capacity in Hawai’i – BNET
Mokulele and go! are done competing. They’re going to effectively combine to once again make Hawai’i and two carrier market.

Republic Adds 10 More Embraers to its Growing Fleet – BNET
This week, Republic continued to build its arsenal of airplanes here on the mainland. They acquired 10 more Embraers 190s from US Airways.

Why Being Geeky is Cool – JetWhine
Rob has a really nice mention of my Airplane Geeks appearance and he talks about Cranky Concierge.

JetBlue’s All-You-Can-Jet Pass Considered a Success – BNET
Friend-of-Cranky and Aviation Queen Benet Wilson talks to JetBlue SVP Marty St George about the success of the All-You-Can-Jet program.