This week, the first week of June, 2008, has been the worst week for the airline industry ever. For the last couple of months I’ve been talking here about “a crisis”. Well, now it is not me who is talking like that, it is the CEO of Continental Airlines, the most healthy and successful U.S. Airline. CO announced it is going to ground planes and scale down its capacity. Most other airlines in the U.S. did the same in the previous days. We are well behind talking about a crisis; now we are managing one.

My personal prediction: before the end of this year at least one of the major U.S. airlines will cease to exist, most likely U.S. Airways, American Airlines or United. In other words: The End is Near.

In the May 9th entry I asked if AA is going to be the next TWA vis-a-vis a safety incident that took place on a B767 flight. Today I think everyone is asking weather AA is just falling apart. This new announcement of charging $15 for checking in the first item of luggage is so alarming that I have no words to describe it, beside this: it is only a matter of days until all the other U.S. carriers apply it.

An American Airlines Boeing 767 took off from Dallas international airport on April 20. As the plane was climbing into the air, several crew members and passengers, sitting at the back, heard a loud alarming noise coming from the belly of the 767. The pilots decided, however, to continue the flight to Paris. When the plane landed in CDG international airport, more than 9 hours later, they found out what had caused that loud noise in the beginning of the flight: a 2 meter long fuselage panel had disembarked from the jet, falling somewhere in rural Texas (the story from the Dallas Morning News).

Is it possible that there is a connection between such an incident and the fact that AA is operating one of the most aging fleets in the world? The majority of AA’s international flight is on board 767s, some of them 25 years old. The youngest 767s are approximately 15 years old. Isn’t it obvious that the age of its planes is taking its toll on their physical condition?

AA has no prospect of getting new long haul planes in the next 5-10 years. A typical AA passenger flying from the U.S. to Europe (excluding LHR) will have only 767 to fly in even if the year is 2014. I think the implications are clear.

In July 1996 a TWA Boeing 747-200 exploded after taking off from JFK to Paris. The plane was old and the cause of the accident was associated with its age. Not long afterwards TWA had gone out of business. Its operation was acquired by American Airlines. Is AA going to be the next TWA?

My February 22nd post was titled “Great News From Continental”. The news was that this airline, unlike any other U.S. airline, has ordered from Boeing some new 777 planes, an order which adds to previous 787 order (of course, at this point no one knows when those planes will enter service) and some 24 new 737-900s that some of them have already been delivered to CO.

All those orders have positioned CO as the youngest fleet airline in the U.S. for the coming years, and this means also the airline with the most economically efficient fleet.

But right after that came some news that were not so good: CO has started talks with United Airlines, focusing on a possible merger amid the one of Delta and Northwest. Unlike the DL-NWA merger, which made much sense, a possible CO-UA merger did not do the same. Basically it was a union between a successful, efficient airline (CO), as shown by the new 777 order, and a severely ailing behemoth airline (UA).

It turns out that I wasn’t the only one thinking that way. As this CO news release from April 27th shows, CO’s senior executives have also thought that a merger with UA is not such a good idea, to put it mildly.

Thus, the good news are that CO stays independent, and hopefully more successful than its American contemporaries.

My last entry to this blog was posted April 11th, less than two weeks ago. Its headline read: “On The Verge of Major Crisis”. Today I would like to set the record straight: We are not on the verge of a major crisis - we are well inside a major crisis.

The global airline industry is facing the greatest crisis in its history. While I am writing this, crude oil price have reached $120 a barrel; next week it may land at $130 or $140. These last few days all major U.S. airlines have reported their first quarter performance, and they are all in the red. Delta Airlines, for example, reported a $6.4 billion loss!

There are two main questions that need to be answered in the short and medium ranges:
1. At what point will there be a decline in demand for air travel, as tourists and business travelers alike begin to cancel at least some of their travels?
2. What the future holds for Boeing’s and Airbus’ huge backlog? Are all of those theoretical airplanes really going to make it to the real world?

The most recent sign that we are already in a severe crisis is this web site. It belongs to Continental Airlines, the only one of the six major U.S. airlines that can be viewed as successful. If CO have reached a stage of establishing a web site with the purpose of working on “the hearts and minds” of its employees and others and preparing them for a coming merger, there isn’t much left to say.

Just look at what happened in the U.S. airline industry for the past ten days or so:

* Aloha Airlines goes bankrupt and stop flying.
* ATA goes bankrupt and stop flying.
* Skybus goes bankrupt and stop flying.
* Frontier Airlines goes bankrupt (but keep flying for the moment).
* Boeing announce another delay in the 787 project, resulting in a longer period of long-haul planes shortage.
* American Airlines grounds its MD-80 fleet for maintenance reasons, stranding more than a quarter of a million passengers.

Did someone say CRISIS?

On a blog entry posted November 15, 2007, I discussed a story about British Airways flying empty airliners on trans-Atlantic routes. My words then were:

“BA thinks that from its high position in the airline industry it can get away with practically any kind of behavior. This conclusion is not based only on the empty flights episode. A few months ago BA was fined with hundreds of million of dollars by both the British and the American authorities because of antitrust activities – fixing flight fares with other airlines. That episode, too, have shown a kind of corporate policy that basically says: we are above all the others; the rules do not apply to us; we can do as we wish because we are the famous, rich and successful British Airways.”

Less than six months later we all can see the grim consequences of BA’s hubris. Last Thursday (March 27) was the first operating day of London Heathrow’s new terminal 5, a state of the art terminal dedicated to BA, the biggest airline in this airport. The festive day turned in no time to be a disastrous one, when practically most of the systems in the facility broke. BA had to cancel dozens of flights at its most important hub in the world, while thousands of lost luggages piled up in the terminal, apart from their owners. While this entry is being posted, the chaos at Heathrow is still going on.

The mere notion that in the year 2008, in a country such as the U.K., in an airline such as BA, in an airport such as LHR, the take off of a new facility, after years of building and testing, could get so faulty is quite astonishing. But that is exactly what happened. And the main reason, in my opinion, is the hubris and arrogance of BA, the same as I described it in November.

BA’s attitude is bad not just because of its self conception as “the best”, but because they basically think: even if we screw things up, we’ll manage to escape the outcome. The sad truth is, they’re right.

Airlines are known to be whiners. They always complain about how little money they make and how much money they spend. It is true, though, that the margin of profit in this industry is way smaller than, say, in the software industry or in the entertainment industry.

But now it seems that a real crisis is threatening airlines all around the world. For the last 2-3 years oil prices have been on the rise, and now, when a barrel of crude oil hits $110, the panic is showing. Of course, oil prices effects not only commercial aviation. There isn’t one aspect of our life that is not being affected by energy prices. But the airlines are showing signs of severe stress.

U.S. airlines are the first to show those signs, as we can see in this reporting. While European and Asian carriers are bathing in endless cash, U.S. carriers seem to struggle for every penny. One of the biggest problems for the airlines of America is that their fleets are much older than the world average, resulting in higher fuel expenses for every kilometer. When Delta says it may ground planes and cancel flights, one can imagine it refers to some antiques such as the DC-9s in its disposal, which are burning much more jet fuel than a new generation 737 or A320.

No airline faces grimmer prospect than American. It has the oldest fleet, and it is unclear how it can survive in the medium and long terms when it hasn’t ordered any new planes for years. Even if a miracle will happen, and American ordered dozens of new 777s and 787s today, paying for them with some gold treasure found in the Pacific, it still won’t get any of the planes in the next 8-10 years, due to the enormous backlog at Boeing. The problem is, not even this “optimistic” vision is relevant for American.

My previous post, as well as many other ones during last year, was dedicated to the grim situation of the U.S. airlines. Besides Continental Airlines, which, as I pointed out in the February 22nd entry, is busy renewing its fleet and delivering a better product to the customers, all the other major U.S airlines are struggling to survive, let alone developing for the future.

My “obsession” with this topic proves to be more than a psychological disturbance. In a recent article in Newsweek, called “Why U.S. Airlines Can’t Compete”, Adam Kushner draws a very negative picture of the U.S. airline industry, comparing it to the once mighty American steel industry, which tried to survive by lobbying for governmental aid and tariffs. When you look across the pond, says Kushner, you can’t help but feeling jealous at the superb condition of European and Asian airlines like Air France, Lufthansa, Singapore and many others.

The struggling airlines of America are sure to be a good story for the next few years, but the question is, which one of them remains to be a part of its end?

In an industry which is mostly in a state of crisis - financial, labor or security - there were at last really good news. Not surprisingly, they were coming from Continental. The airline announced yesterday that it has ordered dozens of new planes from Boeing, including eight 777s. Of course, compared to airlines like Emirates or Singapore it doesn’t look much, but compared to CO’s home front - the rest of U.S. airlines - it is a very big deal.

In fact, CO is the only U.S. airline that is really renewing its fleet. It has ordered 25 Boeing 787s, but those will probably be delivered sometime around 2012. In the meantime, CO will get more 777s to its long haul fleet, and almost 80 (!!!) new 737s. No other U.S. airline can even dream of such shopping spree, not even the ones that have some kind of orders for new planes.

The picture gets even darker when we look at the “big three”: American, United and Delta. They just have no fleet renewal taking place whatsoever. Not with the short haul fleet and not with the long haul fleet. With American Airlines the picture is pitch dark: DC-9s and B767 are all over the place. It’s a crisis waiting to happen, and it will happen 5 to 10 years from now.

Amid all that there is the constant buzz around airlines mergers. Let me say it clear and short: The DL-NW merger makes sense. The CO-UA doesn’t. After the news of CO’s recent purchase it looks like madness. The dinosaurs are going to be extinct. Only the ones that can adapt will survive. CO will be the main survivor unless someone in its management makes a critical mistake and engage it with an ailing airline, in that case they both drown together.