More on Baltia Airlines

My first post regarding start-up Baltia Airlines has generated quite a few comments, and now that more information about the airline is available, I figured that I'd write a follow-up post. For those of you who aren't familiar with Baltia, it was originally established in 1989 but has only made real strides towards getting off the ground within the last year and a half or so. (I do recommend that you check out my previous post - it gives a better history of Baltia.) I'd say that the airline's odds of long-term success are pretty long, but the company has continued to make progress.

I wrote back in December about how Baltia got a used 747, pictured here thirty years ago in Pakistan International Airlines colors and, more recently, sitting in the Arizona desert awaiting service. (There's a recent set of photos on Flickr showing the airplane getting prepared for service with Baltia.) Well, the airline recently released a video featuring that 747 - those green stripes are still a dead giveaway that the plane is ex-PIA - as well as the airline's CEO and what appears to be a number of their employees.

No doubt the video is meant to reassure potential investors - see, we have an actual plane! and employees! - and certainly it looks as though something is up and running, if not yet fully operational. Supposedly they're still raising cash and are trying to get off the ground now by the fall, but I'm not too optimistic. (Some interesting points from the SEC filing: $2 to $4 million is expected to be raised this year, while their CEO, Igor Dmitrowsky, received $123,395 in compensation last year.)

In my opinion, the choice of aircraft could have been better. Unless things have changed since I last spoke to them in August, they're planning on having 296 seats on the main deck of the 747 in a four-class layout. And there are only going to be 12 seats on the upper deck, according to VP of Finance, Barry Clare:

"First class has only twelve seats," explains Clare. "It's sort of a gimmick because we want to show that we have that kind of service available. Even though service will be superior throughout the entire aircraft, first class service will really be far superior. The entire upper deck... will be dedicated as a first class lounge, with a bar and gourmet chefs, live entertainment, strictly for the first class passengers... If the [first class] seats get filled, great; if not, it's there to show that Baltia Air Lines has that kind of service."

If they can make it happen, it certainly does sound luxurious. But one has to wonder how much money would be lost if the first class seats (which ostensibly could be replaced by a bunch more coach seats) fly empty.

Looking at their 747 from an age aspect - it isn't necessarily much to worry about, since there are some impeccably maintained DC-3s out there that are sixty years old and perfectly safe to fly on. But airplanes, just like cars, require more maintenance (and therefore, more cash) as they age. The Boeing maintenance cost model dictates that as a plane's flight hours increases by 1%, its total airframe maintenance costs increase by 0.25%. This plane is 35 years old, so chances are that it will need some work. That's not to say that you can't successfully use an older aircraft; Northwest (now Delta) has a couple of DC-9s in the 40-year old range, although those are scheduled to exit service by the end of the year. If the aircraft are cheap enough up front - the Baltia 747 cost $475,000 - then perhaps it could work.

A better idea might have been to pick up a smaller aircraft with better economics - maybe a used Boeing 767-200ER, since there are a couple of them sitting around, or some other sort of twin-engine jet. Capacity would be diminished, to be sure, and since it seems like Baltia is planning some sort of cargo service, it could have an impact. But Baltia has also been championing direct, point-to-point flights that - let's face it - aren't likely to attract a whole lot of people, or at least not enough to consistently fill up a 747 enough to make it profitable. It might have a monopoly on the New York - St. Petersburg route, but some other routes that it's seeking to enter, such as New York - Moscow and New York - Kiev, are already flown by two airlines each (Delta and Aeroflot with the 767-300 and A330 for Moscow, and Delta and Ukrainian carrier AeroSvit, with the 767-300 for Kiev). In the instance of New York - Moscow, for example, Delta and Aeroflot operate more efficient aircraft and are able to offer connecting flights, along with frequent flier miles that can be used on a bunch of different airlines (SkyTeam), and probably will be able to offer a lower price.

So, we'll see when they can finally get off the ground. Baltia has some interesting ideas ("Dinner will be served by invitation on the Captain’s Deck in the fashion of the grand trans-Atlantic ocean liners," or "On Westbound flights, we will serve a continental lunch after takeoff, a mid-Atlantic lunch halfway across, and a New York deli meal an hour before landing"), but I'm not optimistic about their viability. (If you have any further information about Baltia that you'd like to share, please feel free to drop me an email.)

The end of Virgin Atlantic's 'splendid isolation'?

photo by 900hp from Flickr, licensed under CC

The proposed tie-up between British Airways and American Airlines is moving closer to getting the green light from US authorities, and as such, Virgin Atlantic President Richard Branson is apparently worrying (saying - Branson doesn't seem like the type that worries a lot) that his airline might have to find a partner in response.

He's no doubt speaking in response to the continuing trend of consolidation in Europe. Air France and KLM have been merged for six years now, and the Lufthansa Empire has expanded its reach into Belgium (Brussels Airlines) and the UK (bmi) in addition to Austria (Austrian Airlines) and Switzerland (Swiss). Closer to Virgin Atlantic's home turf, British Airways and Iberia have already announced an intention to merge, and it's the prospect of a three-way combination between BA (Virgin's longtime archrival), Iberia and American that has been giving Branson the most grief.

He's been outspoken against the BA-AA deal for quite some time, but it seems now as though he's come to terms with its apparent inevitability - and what that means for his airline in terms of survival. Virgin Atlantic has remained fiercely independent for its entire existence (although Singapore Airlines owns 49% of the airline, the maximum amount allowed), and while it has codeshare agreements with a handful of airlines, it has never joined an alliance. But if it wants to compete with a larger British Airways, it might need to look at finding a partner. “If it becomes impossible for us to remain an independent airline and survive, we may come to a situation where we have to consolidate," Branson said.

Naturally, this begs the question - with which carrier would Virgin Atlantic consolidate with? bmi (also known as British Midland) would appear to be the logical choice, according to Branson: “I don’t think bmi has a future as a stand-alone airline if it stays in the same shape... something will happen – the two of us would be stronger together than separate.” On the surface, this seems like a good match. bmi is a member of Star, the alliance that Virgin Atlantic seems to be on good terms with (stakeholder Singapore Airlines is also a member), and is also a rival of the dreaded British Airways. Virgin Atlantic is also strictly a long-haul carrier (much like Singapore), meaning that it loses out on some passenger traffic that would be connecting through Heathrow or Gatwick on their way to other European destinations (although codeshares do help here). bmi, on the other hand, has a few longer-haul destinations but for the most part sticks close to home. So, Virgin's long-haul network should perfectly complement bmi's short-haul - right?

Complicating things is the fact that Lufthansa now owns bmi outright, and is in the process of restructuring it - and, in the process, cutting quite a few inter-European routes. Gone are Paris, Brussels, Amsterdam - service to some of these, as well as few other cities, has been supplanted by Lufthansa-owned or operated carriers. For example, the 'bmi' flights from Heathrow to Frankfurt and Milan are operated by Lufthansa. This is all well and good for bmi, perhaps, but it makes it less attractive as a merger partner, as it wouldn't have many European routes of its own to bring to the table. And bmi wouldn't have all that much to gain from a merger, either. Virgin Atlantic has a nice long-haul vacation getaway network set up at London Gatwick, but their other long-haul service at Heathrow, while substantial, pales in comparison to that of British Airways. Its relative isolation (i.e. no alliances) also makes it less attractive as a merger partner, since bmi could ostensibly benefit from being an alliance member (as it currently is, in Star).

So while bmi might seem the obvious choice, it's not necessarily an ideal fit. But if Virgin Atlantic faces a 'merge or die' scenario, then bmi might start looking a lot more attractive.

A tidbit to ponder: according to the Times article, Singapore apparently is seeking to sell its stake in Virgin Atlantic, which might expand merger possibilities. And another interesting point about Virgin Atlantic: Branson has stated that its new strategy will be to look towards leisure travel for growth, rather than business travel. Right now, he says, the airline's business is 70% at London's Heathrow airport and 30% at Gatwick, although "this will have to start balancing out."

And Branson is still sticking to his trademark optimism. He has still promised to battle it out in court against the BA-AA deal's regulatory approval if needed - however much of a 'done deal' it already is - and he has also noted that BA's ongoing labor strife (they're "shooting themselves in the foot," he says) has only helped to benefit his airline's revenue.

Is US Airways the 'ugly girl'?

flickr photo by Caleb's Photography

It's been posted elsewhere already, but in case you haven't heard, Continental CEO Jeff Smisek got in a little hot water after referring to US Airways, in decidedly un-diplomatic language, as an 'ugly girl.' “I recognized that United was the best partner for Continental, and I didn’t want to marry the ugly girl; I wanted to marry the pretty one,” he said.

A bad choice of words, no doubt. Smisek evidently apologized to US Airways CEO Doug Parker, who called the words "chauvinistic and offensive." "Jeff sent me an apology, stating that he “got carried away in the moment,” “really felt badly” and “had no good excuse.” I believe Jeff was sincere in his apology, have accepted it on behalf of all of us and am ready to move past it," Parker wrote in a letter to US Airways employees (you can read the whole thing at the end of the post).

Parker also defends US Airways' performance in the letter, pointing out that his airline's profit margins, on-time performance, and stock performance were all better than Continental's recently. But why did United, which had recently considered a merger with US Airways, ultimately choose Continental instead? Why did US Airways get dumped? Two things to keep in mind, according to Parker:

1. United chose Continental because it has "dominant positions in major business markets like Newark and Houston that allow them to collect even higher revenues than we can with our network," which is presumably more leisure-based.
   
2. Even if US Airways did get dumped, it doesn't mean that it isn't a "valuable standalone company" with "strong" prospects.
   

In closing, Parker notes that he's "looking forward to aggressively competing against the new United Airlines – and winning." He has effectively shrugged off the 'ugly girl' remark, and done so in a professional and detailed manner. But could US Airways be considered the 'ugly girl'? Here's the text:

May 4, 2010

Fellow Employees:

A number of you have contacted me asking about Continental CEO Jeff Smisek’s “ugly girl” comment yesterday. In case you haven’t seen it, when announcing their plans to merge with United Airlines yesterday, Mr. Smisek said, “I didn’t want him (United CEO Glenn Tilton) to marry the ugly girl. I wanted him to marry the pretty one.” The ugly girl was a clear reference to US Airways. Like me, many of you found his comment both chauvinistic and offensive to the hard-working people of US Airways.

First, you should know that Jeff sent me an apology, stating that he “got carried away in the moment,” “really felt badly” and “had no good excuse.” I believe Jeff was sincere in his apology, have accepted it on behalf of all of us and am ready to move past it.

Having said that, the emails I’ve received from many of you suggest this comment hit a nerve so I wanted to give you my views. As one of you simply put it, “Why are we the ugly girl?” The answer, of course, is we are not and there’s no better evidence of that than our recent performance.

In fact, we are performing better than Continental on almost all of the important metrics of our business. Financially, we each reported first quarter financial results in the past two weeks, and while we both lost money, we both lost much less than last year. However, US Airways’ rate of improvement was much better than Continental’s driven by both higher revenue growth and better cost control. On an absolute basis, our profit margins are now higher than Continental’s.

Operationally, we’re performing much better than Continental in the primary customer service metric of on-time performance. US Airways jets arrived on-time more often than Continental’s during the first quarter 2010, and we also outperformed them in on-time during all of 2009 and 2008. We are also now neck and neck with Continental in areas like baggage and complaints.
This is all being noticed by the outside world, as US Airways stock price is up 42 percent so far this year, while Continental’s is up 15 percent, even after announcing their merger.

Bottom line, I think both of our airlines are doing a great job in a challenging business – but if I were them I wouldn’t be pointing fingers.

So why did United choose to merge with Continental rather than US if we’re performing better financially and operationally than they are today? I think the answer is straightforward and one we’ve discussed many times – while we have a strong route network centered around PHL, CLT, PHX, DCA and the Shuttle, Continental has dominant positions in major business markets like Newark and Houston that allow them to collect even higher revenues than we can with our network. United preferred that network to ours and while we may disagree with that decision, it was United’s to make and we need to respect it and move on.

None of this means we don’t have a valuable standalone company. To the contrary, we’re producing better standalone results than our peers like Continental. We announced last week that we expect to report a profit in the current quarter of this year, which is further evidence of our standalone value. As consolidation makes our industry less fragmented and more efficient, our standalone prospects will only become stronger.

As we move forward, let’s not worry about the words of our competitors – no matter how inappropriate they may be – but rather let’s continue to show the world what we can accomplish by working together and performing our jobs in a professional and focused manner.

Thanks so much for your commitment to US Airways. I’m proud to be a part of your team and am looking forward to aggressively competing against the new United Airlines – and winning — for many years to come.


Doug

A few thoughts on the United-Continental merger

I thought I'd share a few thoughts on the just-announced United-Continental merger. There's a lot out there about the terms of the deal and other specifics, but just to recap, the $3 billion merger (which has yet to be officially approved) would create the world's largest airline. The airline would be based in Chicago and keep the United name (but the Continental logo) and would be led by Jeff Smisek, the current Continental CEO.

(Yes, that is a 787.)

Here we see the consummation of Glenn Tilton's dream - for several years now, nearly every other word out of his mouth has been either "merger" or "consolidation." And it's a great fit, network-wise: there's little route overlap, which should help the deal get anti-trust approval pretty easily. (For another perspective, check out Dan Webb's post at Things in the Sky.)

But I'm going to focus on one aspect of the merger here: branding. There's a picture of Jeff Smisek and Glenn Tilton shaking hands in front of the new United logo, which is nothing more than the Continental logo with "United" in there instead. And the paint job would be exactly the same as Continental's - again, with the name "United."

Maybe it's just me, but it looks pretty bad. I've come to associate the United name with that familiar block typeface and the "tulip" logo, which has been around for almost 35 years now. I can see that perhaps management wants to appease Continental employees concerned with the disappearance of their name. And this would certainly be a relatively low-maintenance rebranding, too; just replace the word "Continental" with "United" everywhere and you're done. Apart from the fact that United's the one that's technically doing the buying here (despite the 'merger of equals' talk), one of the reasons that the United name is the one that's staying is because it has a stronger global reputation.

I'm hoping that once the merger gets final approval, some more time and effort goes into designing a better brand - if they're going to keep the United name, they should also keep the logo.

Baltia moves closer to launch

A few months ago I wrote about start-up Baltia Air Lines, which seeks to initially connect New York with St. Petersburg, Russia. It seems like they're moving closer to getting off the ground, now that they've registered and taken delivery of their first aircraft, a Boeing 747-200. The airplane, which was delivered in 1975 to TAP Air Portugal and has subsequently flown for Pakistan International Airlines, is to be registered N705BL. Baltia paid $475,000 for it (and it came without engines, apparently), but the airline has announced that it has started overhauling the plane, "preparing [it] for upgrades to conform to the company's business model, and for maintenance."

I haven't been able to find out much more about Baltia's progress, although apparently the Wall Street Journal is getting interested, which could add a bit more credibility to the start-up operation, not to mention some more facts about the subject. (If you do have any updates on Baltia, please do let me know.)