I feel compelled in each conversation that I have with clients, the public, or news outlets to say at the very start that I personally believe that the inclusion of Commercial Aviation into the EU ETS framework was not in the best interest of airlines, passengers, or the industry.   What is important to remember, however, is that this is now law both in the European Union and in each of its member states- including the United Kingdom.

While much noise has been made in the world media over the past few weeks about the formal introduction of aviation within the EU ETS, there appears also to be a great deal of media spin on the stories that are coming out.

Take for instance the reports that many U.S. airlines began collecting a $3.00 surcharge per passenger travelling to/from the European Union to offset the carriers EU ETS obligations.   I do not believe that this is necessarily true.   Some airlines have called this additional charge simply miscellaneous.      I believe that some carriers may well be using the revenue for the EU ETS obligations, while some others may well be using it as a form of fuel surcharge.    Spikes in Jet-A fuel prices in Q4, as well as unusually heavy west-bound Atlantic winds, have been slowly eating away at revenues.  There is also some considerable uncertainty over fuel prices and Iranian politics that are likely also influencing the various revenue teams around the world.

While it is reasonable to assume that carriers would want to offset their obligations, it is also important to point out that all carriers who had flight operations over a certain threshold have also received certain allotments of Aviation ETS credits from the E.U. nation who host the majority of their movements.    In effect, for this first year, both E.U. and foreign air carriers have been given an allotment of free credits that run into millions of Euros.   This is a fact that many trade groups, news outlets, and even foreign governments appear to leave out of their press statements. 

While the time for EU ETS political advocacy on behalf of the industry has long since passed us by, the rest of the world has seemingly only awoken up to the reality of these new laws.    While many trade groups and individual carriers had filed for hearings in the European Court of Justice, the court has made their position clear that their view is that EU ETS is not only legal, but does not violate international law.  It is at this point where I believe commercial aviation trade groups will turn their attention away from European Capital, and instead spend their valuable time and money lobbying their own legislators for a diplomatic solution.

Many other jurisdictions such the United States, China, and India take an opposite view and have begun exercising their diplomatic and legal powers in search of a remedy to this situation.

I do believe that the future of EU ETS is likely to place pressure on E.U. relations with some countries.     The United States Congress has introduced draft legislation in both the House of Representative and The Senate to propose making it illegal for a U.S. air carrier to acquire and spend E.U. ETS Credits.   India has hinted that they are to re-examine several bi-lateral agreements with E.U. nations, carefully only alluding to E.U. ETS as a primary driver.

 I personally believe that no country can afford an aviation trade war at this moment in time.     While it would appear that the European Union had not learned from British History that occasionally “taxation without representation” can create political difficulties, it does not yet appear to have successfully created a credible legal argument against the new laws that each individual member-state has passed in their own jurisdiction that make up E.U. ETS.    There is even some debate regarding which existing body is fit and proper to hear any new legal or treaty challenge. 

Having said that, U.S. Lawmakers may do well to also remember the post 9/11 TSA security fees and demands for APIS (Advanced Passenger Information) often flew in the face of other nations’ sovereignty as well.   While I am not comparing these items directly, what I would compare is the unilateral action taken by one party against another while exercising their treaty rights (i.e. operating international commercial airline flights).    

Whatever the lofty arguments for or against E.U. ETS may be, the real challenge is what individual member states will do with individual carriers who do not comply with the new emissions framework.    That is where I predict we will see the next credible legal set of arguments.

-EU ETS will include Aviation from 01 JAN 2012

-The UK Deadline for filing your benchmarking and emissions plans is 31 March 2011

-Are you included on the latest list of operators issued by EUROCONTROL in early February 2011?

-Do you know if you are covered by EU ETS?

-Do you know what flights are exempt from EU ETS, and are your included?

-If you are not sure what to do in regard to EU ETS, or even are unsure if you are covered by the new regulations please feel free to get in touch.  We can help!

 The EU Emissions Trading Scheme (EU ETS) is set to include aviation from 01 JAN 2012.   EU ETS brings with it a whole new level of new dynamic market pricing that aircraft operators will need to  factor into their formulas, and if initial estimates are correct we could be talking about anywhere from €5-18 per passenger (depending on the route) if prices for EUAs stay at today’s levels.   

Before we get to that point, however, there are many foreign carriers and aircraft operators who may not be aware that they have been listed on the latest version of EUROCONTROL’s ANNEX I.    Are you?   If you are not sure you can refer  http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2011:039:0001:0120:EN:PDF

While many of the US carriers have filed suit to contest this EU Directive (and the individual EU Member State Laws related to it) and that the has not yet been ruled on by the European Court of Justice.  The US airlines involved are still, as we understand it, voluntarily complying with the requirements of the scheme.  For other carriers this means those who are not exempt from the scheme have hopefully already applied for the “allocation of free credits” as well as submitted benchmarking plans, obtained certifying bodies, and put in place monitoring plans that are acceptable to their respective EU State they have been allocated to by 31 MAR.  Carriers are due to hear in September of this year from their regulatory EU Member State as to what their share of the “special reserve” or other “free credits” are to be.   

Last Monday the EU made the formal announcement about the final CO2 caps, and the simple math says that while approximately 80% of the carbon credits needed by the industry will be part of the free allocations, that leaves 20% subject to market forces.  With an EUA trading at around €15-16 at the moment, there is some level of exposure to the several thousand of the world’s carriers operating into the EUROCONTROL zone. 

Some analysts are looking for a price correction with the introduction of AAs to the ETS marketplace, with some projections taking them up to €18-20 per credit.  I believe the number will be somewhere between €19-22 when AAs are introduced to the market, based on the projected shortfalls, and also a number of non-EU carriers who did not meet the criteria for a “free allocation” scramble to cover their exposure not fully understanding that the first point of surrender of these credits is not until MAR-APR 2013. So airlines, and other air carriers, have time to play the market a bit and participate in EU Member State auctions to make up their shortfalls.  Though we would not want to be in the market for significant AAs or EUAs in early 2013!

Many of our foreign carrier aircraft operators have required some assistance with the regulations, compliance, and even just the overall processes involved in the scheme.   If you are need of assistance or support, we would be happy to help!  Please feel free to contact us today at +44 208 588 0602 for an initial consultation.

Obesity, as measured by medical professionals in terms of BMI (Body Mass Index) and the prevalence of taller people are an undeniable part of our future. Trends also show that this very BMI may have a flaw in the future, due to the fact that some people are now growing taller than their ancestors. In some cultures, primarily Asian and South American, there have been dramatic changes that are beginning to be seen by medical professionals.

While there is a lot of discussion around the core reason for these changes, that is not as important to the commercial airline industry as what to do with the changing size and shapes of passengers. Some carriers already have a policy about “obese” passengers, but they are defined by a set of inconsistent factors. One of the more common measurements (and one that got a certain amount of notoriety from actor Kevin Smith while attempting to fly Southwest Airlines) is if a passenger “can comfortably lower the armrest”. I am relatively confident that this will be an issue in years to come.

Airlines and Obese Passengers
Another common policy that airlines follow is to have larger passengers purchase two seats on a flight, or to pay to upgrade their travel to another cabin. As capacity reduction continues to put some pressure on the ability of airlines to deliver these seats on short notice, there will also be a need to identify passengers ahead of the flight.  This has some potential legal and social implications that may be unpalatable to most carriers.

Often lost in this discussion is the comfort of other passengers who are sharing the space with the obese passenger.   There is a potential customer service issue for airlines as other passengers potentially complain about the loss of personal space already at a premium.

There are potential issues around aircraft safety, as passengers changing shape and sizes may cause some to question if some aircraft emergency exits are even accessible to these individuals.

What can airlines do for Super-size Passengers?
What new innovations are available to carriers to deal with this evolving need in all classes of service? There are some changes with so called “sliding seats” that may allow for airlines to offer slight adaptations to seat size. However, these represent safety challenges with the size of the aisle being potentially reduced.

I believe that there are not commercially available economy seats to deal with this issue, as airlines do not fell that they need or want to invest in this area of development. I believe that a more proactive approach is called for, and developing adjustable seating or even select seating that is truly wider will offer both passengers and airlines a better solution to addressing this emerging “mega-trend”.

At the same time, there are premium seating solutions in forward cabins that do make flying more comfortable for people of all sizes. However, these may be economically unfeasible for many passengers.  In this case, I do see a day where additional potential legal challenges may be faced by air carriers in places like the USA by an obese person who may claim that their size is due to a disability and is therefore protected by law. Carriers will need to proactively examine the potential range of solutions that could be available.

Airlines and the Taller Passenger
In a completely separate issue, there is obviously better news for taller passengers and travel on some airlines.  Some airlines have a gate control policy that allows them to “gate control” the seats with more legroom for passengers they feel could benefit from the additional space.

There are also a number of carriers offering “extra legroom” or “premium seats” in the economy cabin. That said, some carriers also charge for these seats, which some taller passengers may feel is unfair. In addition, with the increase in Low Cost Carriers (LCCs) over the last decade, there has also been ever so slight erosion in seat pitch (the distance between one row and the next). This presents the taller passenger with comfort challenges, but may give some carriers an advantage with this segment of the traveling public.

What can airlines do for taller passengers?
For this particular trend, most carriers have a product that is already available in their economy class, including on some smaller regional jet services. Overall, while there may be an increase in demand for more legroom in economy class, I do not foresee airline economics allowing for what American Airlines used to refer to as “More Room throughout Coach”- a product that offered the entire cabin more space.

Would you like to know more?
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If you are you interested in knowing more about this subject, here are a few links that talk about the core of the issue and offer additional insight on the causes and social impacts in a broader sense:

Inside Government Workshop on Obesity
http://www.insidegovernment.co.uk/health/obesity/index.php

US National Institute (NIH) of Health on Obesity
http://health.nih.gov/topic/Obesity

One of the most intriguing social and economic topics that will have a major impact on the future of most nations, regardless of geography, is the issue of an increasingly ageing population.

What is significant about this trend is that in the next twenty years the population over the age of 65 will at least double in most industrialised nations. These numbers are unprecedented in all of human history, and the demands and needs of this market segment will likely impact airport and airline operations.

While the population is ageing, it does not necessarily mean that they are doing so in quite the same way as previous generations.  Medical advances and social and financial drivers are keeping people fitter longer, extending their overall health and mobility well past that of previous generations. In many nations, the average retirement age for both men and women is rising and this can occasionally be linked to a change in the social contract between individuals, their company’s  retirement plan, and structured national social support for the aged.

One of the most likely impacts to airlines may be those who currently classify themselves in the “Low Cost Carrier” (LCC) category.  With a focus on quick turnaround times and often utilising second-tier airports from forward and aft exits on a hard stand, they stand to lose the most from a changing passenger demographic.  This is particularly true in the European sector of the airline business, as in the United States the prevalence of jet-bridges is more widespread.

Onboard the aircraft there may be a number of design changes that need to be considered to accommodate this new passenger demographic. 

These could include:

• The installation of new or additional moveable aisle armrests to facilitate access to seats, particularly in economy class
• The installation of new or additional power outlets on long haul aircraft to accommodate the use of a growing number of medically necessary devices (such as respiratory support devices, etc.)
• The addition of larger, more accessible lavatories on the aircraft.  With ongoing current security restrictions on passenger cabin movement, there may be a requirement for both forward and aft accommodation.
• The study of one-touch, or motorised, retractable tray tables and IFE devices in bulkhead seating.  Often these can be challenging for some passengers to deploy.

In addition to cabin changes, there may also be a number of changes recommended for In-Flight Entertainment (IFE) devices. These may include updates such as:

• The ability for the passenger to manipulate the font size of a subtitle on a safety video or entertainment programme
• The opportunity for a passenger to use their blue-tooth enabled hearing aid devices to interface with the IFE without the potentially invasive insertion of ear buds

Operationally, there are also a number of challenging issues for the industry in regards to a mobile ageing population. 

These could include:

• Safe accommodation and gate check delivery of a growing number of sophisticated mobility devices (such as “scooters”) to enable passenger the maximum of personal mobility without additional assistance. In association with this change, there may need to be an overall review of “checked luggage liability” associated with these high-value devices.
• For those who do not have access to personal mobility devices, there could be an increased demand of airline staff on the ground and in the air to support and assist customers through all aspects of their journey.

These are just a few of our thoughts on how this particular segment of the travelling public may influence the future of aircraft interiors, airport procedures and carrier policies.

If you would like to know more about this subject, or any other in our series, please feel free to contact us

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We can also recommend this link for The European Union Statistical Office

According to Eurostat, the EU’s statistical analysis unit, in the year 2060 over 30% of the entire population of the European Union will be over the age 65. In 2008, Eurostat reported the  same population was at 17.1%

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Human Factors in Ultra-Long Haul Air Travel

It is generally agreed that non-stop flights to places like London – Sydney are well within the range of technical possibility, but the economics still prove elusive. As the industry and passengers work through the practical issues to make such “ultra-long haul” travel possible, what are the human factors and ergonomics that will be required to make passengers more comfortable without sacrificing yield?

The latest generation of airliners already goes a long way to addressing some of these issues. For instance, with the new  generation of Boeing airpcraft, two of the most important issues related to passenger and crew comfort have been addressed in new and innovative ways.

The question of relative humidity and air quality on the new Dreamliner series of aircraft show a great deal of potential for  increasing passenger comfort on any flight segment. While most commercial aircraft in operation today can give passengers a perfectly acceptable level of atmospheric conditions (equivalent to those at approximately 2,700 meters (9,000 feet) above sea level) there are some bio-dynamic stresses that such altitudes place on the body.*

The new Dreamliner claims to be able to deliver a cabin atmosphere of approximately 1,800 meters (6,000 feet) above sea level, which would represent a major increase in overall cabin air quality when measured in terms of relative humidity and constant oxygen content. Boeing claims that there is almost no difference between 1, 800 metres and sea level, although some of us who ski or hike may beg to differ just a little.  Either way, this could mean a significant reduction in overall passenger comfort as well as lessen flight fatigue, making these ultra-long haul sectors more appealing.

In addition, there are a number of new cabin LOPAs (Layout of Passenger Accomodation) that in my opinion represent innovative moves forward for passenger comfort. Some of my personal favourites across all cabins include:

·      The new “Sky Couch” being rolled out by Air New Zealand, and designed by Altitude Interiors.  I am intrigued by the overall concept of offering this new product in the economy cabin, and believe that it represents a step change in cabin interior innovation for families, couples, and even individual passengers.  I look forward to seeing how the economics of this new product play out in the marketplace.
·      I am also truly impressed with the new British Airways First product. This collaboration between BA, B/E Aerospace, and Tangerine Design.  While the aesthetic is pleasing, what I appreciate most about the new product is the increase in the shoulder width available to the passenger when reclined fully into the flat-bed. This detail alone sets this new seat and LOPA apart from other competing herring-bone products which I feel do not offer the same shoulder comfort for those passengers who might have a slightly different build from your average European passenger.

·      I would also be remiss if I did not mention the existing and just emerging LOPAs for the A380 aircraft. From Singapore Airlines, Air France, and Emirates each new delivery seems to bring us something new and game changing in each of the cabins.

·      I also believe that the new SWISS First and Business product built in collaboration with Sicma Aero offers trans-continental passengers a new and very comfortable experience in both cabins. From the very Swiss design incorporating the lightly coloured woods and whites, to the luxurious First Class suites, I feel there is potential here for these designs in ultra long haul aircraft as well.

On feature of particular value to the passenger in the know is the Business Class product: Row K.  A lone Business Class Seat on the left of the aircraft, with generous personal space to your right, it exceeded all expectations.

Overall, I think that the major issue with ultra-long haul will be with the new aircraft and the emerging balance of new LOPAs and the unique yield opportunities that some of these innovations represent. It is my sincere belief that “fortune favours the brave” and that we continue to see cabin innovations of this quality for a long time to come.

Please contact us for further info.

Other links worth visiting:

Air New Zealand and their stand-alone firm Altitude Interiors Skycouch

Tangerine Product Designers and the New British Airways First Class Seat

B/E Aerospace and British Airways New First Class Suites

* These levels are perfectly acceptable, and do not 
represent any compromise to passenger or crew member safety.

Posted on February 15, 2010. Filed under: AO Interviews |

First, I’d like to thank Carter for answering my questions, I’m glad we’ve managed to publish this Interview. This is part of my new desire to invit and interview more aviation profofessional. We discussed the globlal situation of airlines industry for 2010. Please, feel free to comment and add your point!  Carter Stewart is founder and chief consultant at TWC Aviation, and a managing director at the London-based consortium Constellation Aviation Limited. He found his passion for the airline industry in his youth, and learned the trade with a variety of management posts at  TWA, American Airlines, and Silverjet. He specializes in the commercial airline sector and has managed airline projects around the world including airline start-ups, developing strategic futures, and managing airline mergers and acquisitions.  He lives in London, United Kingdom, with his wife and spends 75% of this time as a “wing warrior”.

AO:  Let’s start with the global state of the aviation industry, what you do you foresee for airlines in 2010?
According to you, what will be the main trends and events? We have seen some positive moves on the U.S. front, as this past weekend we saw the news about the Department of Transport (DOT) clarifying its position on AA/BA, which can only be beneficial in levelling the playing field between alliances. I think that we have not seen the end of economic challenges around the world, specifically in U.S, Europe, and Gulf Region. As a result I think that airlines can expect to see continued pressure on both premium passenger numbers, and also on total traffic- and further airline failures in 2010 are likely. I also do not foresee successful launch of any new trans-Atlantic carriers in this environment, such as companies like Aer Fair or Scotland’s Nimbus look for start-up cash in a tight credit market. I also believe that we will see a widening gulf as more European carriers experiment with some degree of “un-bundling” of fares such as BA, and those who opt for the more legacy “single price” model like SWISS.

AO: I know that you’re particularly been following JAL’s situation. JAL is now cutting thousands of jobs, costs and routes as ANA is performing well. For a few months now, ANA has gone increasingly international, in other words, competing on JAL’s playground. Do you think Japan can support two major legacy airlines?
The short answer is a resounding yes.  I maintain that there are a number of common misconceptions about the Japanese economy, and about the fundamentals behind the JAL bankruptcy that needlessly cloud this issue. The Japanese Home Island economy does has some challenges ahead of it. Japan is still the second largest developed economy in the world, with their nearest neighbours, China, coming in a very close third place.  So, here you have two of the largest economies of the world, which are closely commercially linked and geographically close. That single fact alone offers Japanese and Korean carriers some enviable opportunities. JAL may be at a small competitive disadvantage as it restructures,  but it is important to remember that Japanese laws surrounding international aviation regulation are not at all liberal, and you only have to look as far as the new Japanese-U.S. bilateral to see how restrictive and conditional the Japanese regulatory environment is. As a result, the international Japanese market is not as vulnerable to the forces of foreign competition as some other word markets, and Japanese carriers will still have retain advantage in the very lucrative trans-Pacific market.

AO: The BA-Iberia merger will take place soon. Do you see any other bridge-building possibilities among European carriers in 2010?
Well, I think there is ample room for those European carriers who are not already owned by Lufthansa. On a more serious note, obviously, the U.S. part of the equation of AA/BA/IB and ATI was long overdue, now need to keep a close eye on what the EU decides to do with this matter.   Clearly, Iberia has not been spooked by BA’s pension deficit, and is moving forward. As for other potential possibilities, it is relatively common knowledge that Aer Lingus has been looking at a potential of “re-joining” an alliance to shore up its future fortunes, but there are obvious ownership roadblocks to that. Also, it remains to be seen how well the LCC markets will adapt in an environment where closer cooperation may work to their advantage.

AO: You know that my blog is more focused on the LCC market. What’s your point of view on Ryanair’s recent announcement of fare increase and what could it mean for the airline?
My personal take is that Ryanair can have no choice but to begin charging an increased fare, as they have exhausted all other obvious forms of gaining ancillary revenue. Clearly what they do well is actively manage fixed costs such as labour, which so often are the most difficult part of some carriers bottom line. Their fleet is young, but not as young as it once was, and this will slowly increase operating costs as well.  Overall, Ryanair faces a number of challenges as a business, not the least of which is pushing the limits of consumer tolerance for “un-bundling” and customer service. It will also be interesting to see what the Ryanair culture and product will be like once O’Leary steps aside, and the process of separating the brand from the man will be an interesting one.

AO: We recently observed a budding cooperation between two main Asian low cost airlines, do you think such an alliance could take place in Europe?
I do believe that there is a room for cooperation between LCC carriers, but the EU regulatory environment is not as easy or conducive to that cooperation as say the Asian market. There are many potential legal and regulatory hurdles that LCCs may encounter in the event that they seek closer cooperation. I think it more likely that we could see a carrier seeking to acquire another, but the idea of a traditional alliance would be potentially difficult. In my view, traditional alliances are generally about five interconnected goals:  code-sharing, schedule coordination, some form of revenue share, ground handling savings,  and enhancing passenger experiences (i.e. frequent flier programmes, lounges, etc). Given their tight margins, I don’t see any of the EU LCCs being willing to subject themselves to the pressures of a potential alliance in this current environment.

Money is getting tight as JAL awaits the ETIC decision in January (Photo C. Stewart 2009)

• Updated 05/01/10 at 1400 Local
• Cabinet Minsters Meet with DBJ to secure further funding for JAL- along w/ three of Japan’s biggest banks
• JAL Stock sees its record volume and lowpoint
• How does Japanese Law set out Kaisaha Kousei?
• Who are DBJ, ETIC, and the DICJ really?
• Capital Adequacy found without giving up foreign ownership? 
• So what do we think will happen- with the DBJ and new bank money- Reorg is looking unlikely now!

What a week we have had while most of  Japan has been on holiday!

Minsters Meet with DBP to secure further funding for JAL

While the stock takes a bath, and rumours of the ETIC report leaking just prior to the final day and a half of trading on the 29-30th of Dec,the mood around JAL was not exactly a festive one.    It was highly probable that a draft of the ETIC report was complete as most Japanese will not be at work for even the remainder of this week- so the idea of having it leaked prior to the break seems logical.   ETIC, in their report allegedly state the Corporate Reorganisation Code (In Japanese this is known as Kaisha Kousei or 会社更生法, かいしゃこうせいほう) should be used to turn JAL around.

Against that backdrop Minister Meahara and his cabinet colleagues were in talks over the holiday with DBJ (Development Bank of Japan) officials.  Were they seeking arrangments for  additional funds in place for JAL that missed the supplemental budget? 

On Sunday Japanese Minster for Transport Seiji Maehara told reporters that the Development Bank of Japan will double its credit line for Japan Airlines Corp. to 200 billion yen ($2.2 billion).  In addition the Sumitomo Mitsui Banking Corporation, Mizuho Corporate Bank, and Bank of Tokyo-Mitsubishi UFJ are all commiting to similar amounts. 

Japanese transport minister Seiji Maehara told reporters Sunday the state-owned Development Bank of Japan will double its credit line for Japan Airlines Corp. to 200 billion yen ($2.2 billion).

That should be enough to keep the airline afloat while the government works out details of a bailout for the cash-strapped carrier, government officials said.

“That should be enough to keep the airline afloat while the government works out details of a bailout for the cash-strapped carrier”, government officials said.

Japanese Law and Corporate Reorganisation

As far as the Japanese bankruptcy code, I should be clear that I was using the term DIP previously, and many of my Japanese colleagues have been kind enough to give me a lesson in the legal complexity of DIP and Restructuring.

There is one major difference that I have recently been educated on regarding Japanese Insolvency Laws that now show that my previous, and rather US-centric use of the term DIP were not entirely accurate.

 The first and most important distinction is that the laws were updated in 2000, and at that time several updated concepts were introduced to Japanese law.   One was the concept of Debtor in Possession (DIP) for a Civil Reconstruction, which is available to both Corporations and Individuals.   It is generally a faster and more flexible process than a Corporate Reorganisation.  Unfortunately for JAL,  most experts agree that it is not suitable to their particular situation.

The most suitable form of JAL may only be the Corporate Reorganisation Code, where a court appointed administrator is granted a small stay on debt payment, and then embarks on the same general procedures of U.S. Chapter 11 proceedings with a few minor nuances. The process is strictly prescribed and a great deal of time can elapse prior to the company emerging from administration.   Under the Japanese systems however, it is noted by several prominent experts that this procedure is “both highly reliable, and has an excellent chance of success.”

So in the past, while I have been quoted as saying, “ETIC or The Government” would become the DIP in this case, that was technically inaccurate.   It would be more appropriate to say that under the prescriptive terms of the reorganisation process, the Government would be free to infuse cash as the airline set new terms with its creditors without the need to “possess” (or re-nationalise) the carrier in any direct or overt way.  

The reality, of course, some would say that is exactly what it would be. The largest creditor by far would be the Guarantees of the Japanese government via the DJP and ETIC.   So effectively, DIP it is not wrong- it is just a quirk of Japanese law that make it inaccurate.

Is there an alternative?  I can see one possible longshot

As for the possibility of opening up capital partnership opportunities for other carriers, there looks like there is some behind the scenes movement to do so.

There is also the possibility that if enough capital can be located (which I do not see as the most probable outcome) that they could initiate a Civil Reconstruction.  While this is a much faster process, it would leave the Hatoyama Government in the position to “wean off the carrier” more quickly from state funds.   Frankly this whole idea of changes in foreign ownership laws during a time of Japan exerting its sovereignty again smells funny to me, but politicians have been known to do some fairly strange things when their backs are to the wall- which by the way I do not think Prime Minister Hatoyama is.

So who are all these players like the DBJ,  ETIC and DICJ anyway?

The DBJ is a seperate entity from both the DICJ and ETIC. All three are "semi-governmental" bodies, the latter only having been established in 2009

Sometimes it is best to get it direct from the source:

The Development Bank of Japan Inc. was established on October 1, 2008. Under the terms of the Development Bank of Japan Inc. Law approved by the Japanese Diet on June 6, 2007 .  It was to be a fully private institution, except it was recently allowed to an extention on those plans.  It currently is a state-owned bank.  At the end of fiscal year 2011, the government plans a review of DBJ’s organization which will include the future of government-held shares. The Japanese government will continue to hold its shares until then.

“Enterprise Turnaround Initiative Corporation (ETIC) is a 100% owned subsidiary of the Deposit Insurance Corporation of Japan (DICJ) a semi-governmental organisation.  ETIC was founded in 2009 with the remit to provide support for revitalization of Japanese enterprises operations by assessing their assets, assisting formulation of their operation and finance restructuring plans, coordinating their creditors and other stakeholders, and rendering human and financial support to them, in an impartial and neutral manner.”

Ah, well, that clears that up.  They are all three semi-independent governmental bodies. 

What about all these alliance offers?

It remains unclear that if JAL does enter into a Corporate Restructuring which of either offer would be more useful or welcome to ETIC.   It could be that more fundamental issues are addressed first, and then the question of alliances would come in at a later time.

It is being widely reported that both “are still in talks”, and even some news outlets are reporting that one has been selected- SkyTeam/Delta.   Now, if this were true, let have a look at some of the reasons why that could be the case.

I don’t think that  AMR has not made any friends in Japan, particularly in the early days of their overtures.    In my opinion Delta and SkyTeam only fared marginally better, and stopped short of what I called in some of my previous blogs naked threats.    

One of the more interesting quotes of this week came while attending a friends New Years Celebrations He asked me “If TPG are high-end airline investors, then why did they sell Midwest to Republic?  They had ample time to do what Republic has done, and make it a success, did they not?  What do we know of their true core skills and intentions?”

The man has a point.

So what do we think will come of all this in the end?

I don’t think we will see a firm decision made until after the 12th of January.  On Monday JAL said that more than two-thirds of its current employees have agreed to accept the company’s proposal to cut pension benefits substantially as part of efforts to turn the struggling carrier around. Around 11,800 of the approximately 16,000 employees had responded positively to JAL’s proposal .  At this time it is unclear if the company’s retirees will accept the proposed pension benefit cuts in a similar vote.
I have the highest respect for the men and women of JAL.  As a person who has stood on the precipice with my colleagues and watched two of the three major carriers I have worked for take their last flight,  I find my thoughts returning to how the employees must be feeling.  All of this uncertainty at a time where they were culturally in Japan there is a celebration to end and even ”forget” about the past year.   For thousands that was not possible this New Year.   My thought go out to them, and what they must be feeling.  

Japanese Prime Minister Yukio Hatoyama (Reuters)

For my money, I see JAL at the fork in the road.   The alleged ETIC recommendation to employ Corporate Reorginasation is the strongest possibility, and most likely.  Prime Minister Hatoyama, and his cabinet, however appear  at least ready to make a political move and step in to save JAL from the process.  The fact that three of Japan’s biggest banks are also willing to put up the cash says that we should watch out for something other than the Corporate Reorganisation- or it could just be DIP money.   Whichever way he, and his cabinet, choose to go will be a clear signal not just to JAL- but to Japan- about the futuer of his time in Government.   Make no mistake, however, the Japanese are clearly in control here.

Carter Stewart, is a Pricipal  at TWC Aviation Consulting- an aviation consulting firm headquartered in London.

At the time of this article, the author did not have any shareholdings or active contracts with any of the companies covered in the scope of the work.

Copyright TWC Aviation 2009  – TWC Aviation 2009

Photo Credits:  C. Stewart, Copyright 2009 (unless otherwise attributed)

The House Of Commons Transport Commitee Concludes the "Future of Aviation" Enquiry

 In Todays Issue:

• - The Bullet
• - Summary of the Key Findings
• - Carbon Emissions: A Damning Indictment 
• - The “Open Skies”?
• - TWC’s Take on the Report
• - Who says politics can’t be funny

The Bullet

 This morning, The U.K House Of Commons Transport Committee published its initial findings to the Government on their enquiry “The Future of Aviation”.   The enquiry began in late February of this year with a broad scope to elicit information from the public, the industry, and other interested parties on the Future of UK Aviation.

Louise Elleman MP is a long standing member of the Transport Commitee, and was elected its Chairman in May 2008

Committee Chairman Louise Elleman MP, said in a statement, “Aviation is an important part of the UK economy, both in the south east of England, and in the regions.”

The Committee goes on to say that the Government’s long term basis of Aviation Policy- a 2003 white paper- “continues to provide a sound basis for aviation policy but warns the Government that it must update its assessment of the economic value of aviation for the UK economy regularly to ensure its figures are subject to independent external scrutiny.”

Carter Stewart, Managing Director of TWC Aviation, a London-based Aviation Consultancy agrees.  “We believe that the overall net economic contribution of aviation to the U.K. has been under-valued by the Government by as much as £800M GPB annually”

The Key Findings of the Report:  Overall Good News for the Industry

In summary the statement from The Committee makes the following additional recommendations:

The report supports Heathrow Expansion, but calls into question further expansion of Stansted in favour of Gatwick

The Committee supports the Labour Government’s London Heathrow expansion proposal; but calls into question the Stansted expansion and instead suggests London Gatwick may be more appropriate.

While The Committee “recognises the importance of Air Passenger Duty (APD)” it suggests that the Government needs to be “mindful of the vulnerability of the aviation industry in the current economic climate.”

Carbon Emissions: A Damning Indictment of the EU – Sane Words to the Industry

The report could not be complete without also addressing the issue of Carbon Emissions and noise pollution.  The Commitee says in their report  that aviation should not be “demonised or assigned symbolic value beyond its true impacts.”  It went on to comment that they had concerns that “The EU Emissions Trading Scheme has an appaling track record and may prove insufficient to to drive investment into low carbon aviation”

Regarding Carbon Emissions, the report sets forth a “number of principles that should be applied in this area.”  It also refers us to the publication of the UK Climate Change report that is due to be published on Tuesday, 08 December.    They also called on industry to “sensibly reduce its greenhouse gas emissions over the coming decades.”

The “Open Skies?”

“Discussions to extend the Open Skies agreement are ongoing between the European Commission and the US Federal Aviation Administration. This might allow further access to EU and US markets. The asymmetric nature of the Open Skies agreement is disadvantageous to the UK economy and particularly to the UK regions, and should be renegotiated at the earliest possible opportunity.”, the report says.

The report also reiterates MPs previous calls for the ATOL levy to be increased and extended to include all international flights.  Currently, ATOL is only applied on package holidays from the U.K.  

It also asks The Government to clarify the “basis of its claim that an additional £10 bn could be raised if VAT and Fuel duty were applied to Aviation.”

The key conclusion is clear.  ”We beleive that the aviation industry is a very important to the UK Economy.  Therefore we find it unsatifatory that the Government leaves such a key industry to the vagaries of the market.”  

Our Take of the Reports Findings

“Overall we believe that the report is a good news story for both the industry and consumers,”, Stewart says.   “At this critical economic time for our country the aviation industry, and airline consumers, have been suffering at the hands of the taxman disproportionately to other industries.”

“In a recent speech to The UK Aviation Club in September, The Lord Adonis defended the recent APD increase by saying it was ‘a matter of published policy’ and as a result ‘it would not be changed.’  I am glad to see members of the Transport Committee are calling into question the potentially damaging effect this policy has on UK airlines and airports to compete with other European rivals.” 

“One of the most telling items from our perspective is the language used around the US Open Skies agreement.”, says Carter Stewart.   ”With talks between the US and Japan about to start today this is not the ideal moment for a key U.S. shortfall to come into such scrutiny.  We agree that US liberalisation promises have failed to truly materialise for the UK, and promises about foreign ownership are key”

“With US carriers vying for ownership and control deals with JAL, I simply hope that the Japanese keep in mind the key points of reciprocity in their agreement and have clear understanding and timetables from the outset.”, Stewart says. 

“It is also refreshing to see MPs pushing back on behalf of the industry and consumers by demanding clearer answers on proposed estimates on tax revenue from VAT on tickets and fuel levies”, Stewart says.

Todd Koonce, Manager of Technical Operations at TWC Aviation believes that the report does hit some of the right notes about aircraft technology.  “It is obviously to everyone’s benefit to phase in more efficient aircraft as soon as is financially and operationally viable.  The key issue for many carriers has been the delivery delays of these very aircraft, like the 787 and A380, from the manufacturers themselves.

“I also believe that for short-haul segments, the efficiencies of turbo-prop aircraft have been overlooked by the airlines.    There is also a public perception that regional jets are somehow safer, and more comfortable, when there is an argument to be made that latest generation of turboprops could offer lower emissions and better operating margins.”

 Proof Positive of Humour in Politics

For those of your interested in the initial white-paper, here is a little bit of the background and history.

In 2003 Alistair Darling was then Secretary of State for Transport and presented the intial "Future of Air Transport"

H.M. Government has for some time used a white paper entitled “The Future of Air Transport”, published in 2003, as the basis of U.K. Government Aviation policy.  Ironically, it was then Alistair Darling, then Minister of State for Transport (and now current Chancellor of the Exchequer) who introduced the reports findings to the House of Commons on 23 of July 2002.   Even at that time, then Minster Darling was making a case that the U.K. needed to keep pace with capacity demands, and understood the importance of our air gateways which needed to compete with the increase in market share by Continental European airports.  

 What a difference a few years, and a change to Chancellor can make.

 (A full text of his statement to the House in 2003 can be found here, at the 1530 time marker.

The AMR and Delta offers are, in our view, both unsolicited and ill-timed. JAL, and ETIC, have bigger issues to address than the questions of an alliance.

At TWC Avaition, we beleive that there are many alternatives still availbe for JAL, and it appears that Minister of Transport Meihara and the Opposition Demoncrats are doing all they can to keep the carrier operating.   Our view is that there would be more political will to legally restructure JAL and start fresh than allow a major change in foreign ownerships laws that woudl allow a firm to acquire even non-voting equity to the maximum allowed by current Japanese law.  Lets take a look at why that might be how this may play out.

Two Bidders, and empty lot number, and no Auctioneer

What a difference a week can make, not to mention a few billion US dollar bids.  The bids were not fully cash, mind you.  More a mix of revenue gurantees, non-voting equity stakes, and guranteed securities-backed access to cash.

So this week we see  both the Delta (DL) and American Airlines (AMR) unsolicited, and in some ways unwelcome, bidding war to attract JAL to/or remain loyal to an alllinace.

We liken it to watching two bidders at Sotheby’s waving their paddles and starting a bidding frenzy prior to the auctioneer ever taking his place.

Even though JAL had previously announced its intent to “put aside these discussions”, it seems that fine point has been overlooked by both these would be suitors.

The tone being played out this week has certinaly changed as well.   Far from the threats that American Airlines CEO Gerard Arpey was making last week, this week AA’s ASPAC MD has taken a more traditional Japanese approach in his public statments.  He said,  “if invited, we would like to [better] the current offer”.  A C+ for the change in tone and effort.

We would give also give the Delta CEO’s comments failing grade for claiming among other things that Delta (DL) are “No 1 to-and-from Japan”.   Simply Cringe-worthy and Ameri-centric.

A Ward of the State

The point that I think that most of us commentating on this from the outside are missing is that JAL has become for all intents and purposes a “ward of the state” via the Hatoyama’s Opposition Democrats placing it in the Enterprise Turnaround Initiative Corp (or just ETIC).  In the very near future, they will technically have the majority say of JAL’s operations up to an including the reorganization of its management team- right up to the CEO. 

A few faux pas

Along with the departure of some key execs, perhaps DL and AA will also pack their bags for home

I would urge everyone to take a breath and to look at the JAL from a Japanese viewpoint vs. the more propagated stories being put out by the more western press on this issue.   Both JAL and the Japanese government are well aware of the losses JAL will continue to sustain- but they do not view foreign equity investment or guarantees that contain covenants to places like Haneda or skirt current Japanese equity law by being non-voting and revenue guarantees as a viable solution. 

In our analysis the entire reason why intial, and solicited talks with JAL,  initially fell apart wast the prescence of  Macquarie Bank in the role as a potential funding source.   This was, in our opinion, a grossly misplayed hand by all involved.    Macquarie is at best a controversial prescence in many nations, at least in aviation circles.  This is due to their airport dealings in both Australia and in the Haneda financing chain.  So, as AMR steps away to find new backing to go along with their own 2.5M USD warchest, TPG was hastily invited to the party after the initial JAL rebuff.   Then came SkyTeams non-US based chequebook. 

JAL’s biggest shareholder bails

Then the Tokyu Corporation, JALs largest shareholder (a real-estate and rail company) carefully announced its intent and began unloaded shares as a result of seeing JAL as no longer part of their “strategy”.   

The Minister Speaks and New Laws are on the way

JAL's Narita Lounge, where customers go about their business

It is also this formal move that has also gave cover to Minister of Transport Maehara the freedom to carefully craft a statement to a Diet commission where he was mis-translated by western sources.  What he actually said was, “We have carefully considered all possibilities, and we have ruled nothing out, including court supervised protection and restructuring”.   As you are well aware Japanese nuance is often mis-translated, and that as a general rule Japanese Gov’t Ministers do not misspeak.  They are careful, and deliberate.

In addition, should JAL fail to reach the required pension cutbacks- new laws are already being prepared in the background of the Diet by several ministers to override the tradition provision requiring a 2/3 majority agreement to change a pensions terms- again further referenced by the above article.  Bear in mind, these people came to power on the promise of corporate reform- and even with great Union support.

Suspicion and the “Tempest in a Teapot”

Make no mistake- we believe that these offers are a tempest in a teapot, and moreover the Japanese and JAL care about keeping JAL flying- and keeping it Japanese.   They are also as I understand it a bit “troubled” by a perceived incongruity in the offers on the table and the behaviour of DL in particular.  They do not appear understand how their partners AF/KLM could be looking for 1000+ redundancies- but yet still seeking a deal with them.  This is not something that the Japanese understand at a deeper level, and it also could make them believe that their partner(s) are unworthy of their trust.   What would happen if the tables were turned, they ask themselves.   Would my partner not come to my aid lie a kieretsu partner would.

What the West fails to undertand about kieretsu

JAL is a vertical kieretsu- which includes things like JAL catering, JAL Asia Airways, JAL Hotels Group, and many other ancillary businesses- including being the second largest shareholder of Haneda.  You will have note by now that one of the chief characteristics of a kieretsu is their secrecy in terms of deals done behind closed doors- and companies pooling resources to help one another for the common good.

 The Cultural Context

JAL's domestic network make it truly "too essential to fail"

You may find the following paragraph is perhaps un-important but I offer it as history.  Contextually you are already aware that Japan, while outwardly friendly, is in the pains of a major internal cultural upheaval.  The veneers that have been allowed to exist for generations about family units, company loyalty, and thoughts around the keiretsu are still quite strong. Social contracts are being violated about pensions, company loyalty to employees, and even the very core ideas of family.   In many ways it is not unlike the late 1950’s-1970 America- with its resulting seismic social shifts.  Although we think  these adjustments to approach and culture may be a more difficult process due to the deeply ingrained nature of their own identity.  Something, which, is worthy of a great deal of respect. 

So what’s next for JAL

A painful, and public, time of ETIC being in the cockpit and boardroom.   Resignations of senior staff as required by their inability to effect change.   Fundamental Japanese laws changing as the relate to unions pensions, and a goverment that needs to look tough on such old-style business practices.  We will see a streamlining of operations, and even potential use of Haneda for more international flying- but not the US- rather the rest of Asia.  

While they are at it, they may have to look at the now strained relationships with their OneWorld partner, and see if the trust is still there.   I hope it is. as I think OneWorld is the right answer for JAL short of an all Asia alliance, of which there is no obvious answer.

The author, Carter Stewart, is a full time airline analyst and strategist at TWC Aviation Consulting- and is based in London.

At the time of this article, the author did not have any shareholdings or active contracts with any of the companies covered in the scope of the work.

Copyright TWC Aviation 2009  – TWC Aviation 2009

Photo Credits:  C. Stewart, Copyright 2009

Overview

No one has JAL by the tail, except the Japanese Government

Overview

No one has JAL by the tail, except perhaps The Japanese Government

No bidder had Japan Air Lines (JAL) by the tail, but the Japanese Government, through ETIC,  is centainly firmly now at the helm and in the boardroom.

In our view the AMR and Delta offers are both unsolicited and ill-timed. JAL, and ETIC, have bigger issues to address than the question of an alliance.

The simple fact is that JAL is a quality brand, and an essential link to the Japanese Home Island which in our analysis cannot be allowed to fail.  Japan Air lines accounts for the majority of the key domestic capacity in Japan.