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Friday 19 March, 2004 

Good morning

My comment last week about needing to soon mow the lawn drew a reply from a reader who lives close by.  He pointed out he has mown his lawn several times already this year.  And, as I look at the relentlessly increasing length of mine, I should urgently start playing catchup.  But, instead, it's off to Victoria, BC for a three day weekend this afternoon.

Last week's article on USB flash drives had a timely postscript this week when the people that make Swiss Army Knives announced a new model that will include a portable computer memory card.  Another company plans to mount a micro-camera on a USB flash drive stick - there's an annual high tech/gadget show underway in Germany at present and all sorts of new devices are being previewed.

One of the other fascinating gadgets is a new PenPhone from Siemens.  In the shape of a pen, it has all normal cell phone features, plus some unique extras.  To dial a number, you just write it with the pen!

Usually I'm pretty enthusiastic about the products I review, but this week I'm having to choose my words a bit more carefully.  Which is not to say the product is bad; and the ultimate measure has to be 'is it fair value for money'.  And so

This Week's Column :  Mini Digital Camera :  Described as the world's thinnest camera, it is the size of a credit card and not much thicker.  The camera is easy to use, but the picture quality is not high.  However, at $45, it is probably fairly priced for what it is.

Also new on the website this week is a page that answers just about every question you might have about how to unlock a GSM cell phone, including the question about why you'd want to do that in the first place, and what a GSM type phone is.

Developing the website has taken several surprising turns over the years - for quite a long time, the most popular page on the site was one I never expected anyone to look at it, summarizing the key differences between different airplane types.  It continues to get 150 or more visits every day.

At the end of last year, I added a page that allowed people (primarily with Nokia GSM phones) to get their phones unlocked, and that page now has almost 300 visits every day.  And so, recognizing an apparent massive amount of interest in cell phone issues, I'll be adding more pages about cell phone related topics over the next little while.  I hope you find it interesting and helpful.

Dinosaur Analysis :  An Editorial

An interesting thing is happening at present.  The dinosaurs, all of which cut back massively on their flights post 9/11, are now awakening from their slumbers, feeling the resurgence of revenues flowing through their veins as business conditions improve and air travel numbers pick up.  They are turning their attention to combating the growth of competing lower cost carriers (LCCs) that occurred while the dinosaurs were desperately pre-occupied with simply struggling to survive.

You can't teach an old dinosaur new tricks, and so, in the largest part, their response is the same well worn response that used to work so well.  They simply flood any route on which a lower cost carrier has dared to start service with plenty more of their dinosaur flights, and match the LCC's fares.

This was formerly successful, when one dinosaur would be battling only one LCC at a time, and on a small portion of a generally profitable route system.  While the new upstart was being bled dry, the dinosaur was suffering only a relative pinprick, on a small part of their system.  Eventually, the new carrier would be killed off, and then the dinosaur would cut back flights and return fares to their previous high levels.

This tactic may not work this time, because the dinosaurs are finding not just one new upstart carrier, but a whole bunch of them, and covering not just one or two competing routes, but 70% of their entire route system.  And, the LCCs aren't underfunded new startups, but are well funded and already established profitable operations.  One more point of difference.  The LCCs are indeed that - lower cost carriers.  The lowest operating cost of the new airlines is enjoyed by JetBlue with a 5.9 a mile cost, compared to the dinosaurs - for example, American Airlines with a cost of 9.5 a mile.

This huge cost differential enables the LCC's to operate routes with low fares and still make a profit, but when the major airlines attempt to match or drive the fares down further, the LCCs remain profitable long past the point where the dinosaurs are hemorrhaging money.  A dinosaur has to sell a flight for almost 50% more than a LCC to earn the same level of profit.

How much extra would you pay to fly on, eg, Delta or United, compared to flying on eg JetBlue or AirTran?  Few of us would pay even a single penny more, and surely no-one would pay 50% more.

Astonishingly, for the longest time, the dinosaurs pretended to anyone who would listen they could charge 30% or more than the fares offered by LCCs and that the traveling public would gladly pay this extra cost for the benefit of the 'full service' airline with an extensive route network.

This is now being proven incorrect, and the dinosaurs' attempts to squeeze out the new LCCs seem to be harming the dinosaurs more than their competitors.  Partially as a result, several market analysts are now lowering their forecasts for the 2004 profit of major airlines, notably Credit Suisse First Boston, who this week revised their earlier projection for AA of a slim profit of $120 million to a loss of $316 million for 2004.  UBS revised their estimate down from a $166 million profit to a $190 million loss, also this week.

The lower yields caused by the impact of LCCs and the dinosaur response represented 60% of CSFB's changed projection, the other 40% being due to the steadily increasing cost of jet fuel.  The LCCs seem here to stay, and so too do much higher fuel costs.

What can the major airlines do?  They have allowed their costs to escalate beyond any sustainable level of good sense, while degrading their product so that it is perceived by passengers as a generic product best selected on price alone.  Add into this ugly reality the surprising fact that many times the LCCs actually offer a superior product, at a lower price and with a lower underlying cost, and it is difficult to see how the dinosaurs can survive.

The predicament of the dinosaurs is totally self-made.  In this article, after accurately explaining that thrift was never essential to the big airlines, which covered costs by raising ticket prices, new AA CEO Gerard Arpey explains

It wasn't because we were stupid.  That kind of thinking just drove us in the 1980's and 1990's.

That kind of thinking (ie 'cost plus') probably existed long before then, and if not stupid, was certainly venal.  Such thinking is a hold over from the earlier days of regulated airlines and air fares.

Shame on the dinosaurs for being slow to respond to the new opportunities and challenges offered by deregulation.  Their passive non-response not only drove our fares way high, but also now imperil their existence, the livelihoods of present employees and the pensions of former employees.

These criticisms should not exempt the labor forces of the dinosaur carriers, but who deserves the greater share of blame - a pilot for demanding $300,000 a year plus massive benefits to fly planes for less than half normal working hours, or the airlines for acceding to those demands?

The dinosaurs have two things in their favor.  Size and time.  Their size remains such that they still dominate the aviation marketplace, and have genuine opportunities to use their size (eg international routes, partnerships with other airlines, etc) to translate into true travel benefits for customers and economy of scale savings for themselves.

As for time, part of the LCC advantage is that they typically are recently formed companies, flying nearly new planes, and with relatively junior and still freshly enthusiastic work forces.  Their planes will never have the same low cost as they currently offer (especially the ones still under warranty), and as their staff become more senior and - potentially - disillusioned and avaricious - there is a danger that both their operating and labor costs might increase closer to those of the dinosaurs.

In a 2002 interview, Warren Buffett famously said, in reply to the question 'Do you still regard USAir as your worst investment?'

I made the comment that if a capitalist had been present at Kittyhawk back in the early 1900s, he should have shot Orville Wright. He would have saved his progeny money.

But seriously, the airline business has been extraordinary. It has eaten up capital over the past century like almost no other business because people seem to keep coming back to it and putting fresh money in.

You've got huge fixed costs, you've got strong labor unions and you've got commodity pricing. That is not a great recipe for success.

I have an 800 number now that I call if I get the urge to buy an airline stock. I call at two in the morning and I say: "My name is Warren and I'm an aeroholic." And then they talk me down.

For those of us who have the choice, we might be well advised to do as he says.


Dinosaur Watching :  The only piece of good news is that air travel continues to grow, with fourth quarter 2003 travel being the best since 2000, and the second quarter this year expected to show the biggest travel numbers, ever.

A World Travel and Tourism Council report is similarly optimistic, forecasting a 5.9% overall growth in worldwide travel and tourism this year.  The countries enjoying the most benefit from increased tourism this year will be Montenegro, India, China and Vietnam.

Meanwhile, bad news abounds.

United is now seeking to delay its emergence from Chapter 11.  It is currently unable to do much until its application for a $1.6 billion government loan guarantee is resolved, and that is perhaps dependent on United first getting relief - via government legislation - from its pension fund obligations.  Adding to United's woes is the complaint by its retired staff about United's attempt to cut back on their benefits, and a potential dispute with its ordinary creditors about United's renegotiation of airplane leases.  Other creditors feel that this plan would be unfair to them and too generous to the airplane lessors.

United does not feel able to meet its 30 June emergence from Chapter 11 and is asking for more time, saying that it expects to complete matters by some time 'later in the summer'.

US Airways managed to renegotiate the terms of its $1 billion government loan guarantee.  US Airways presumably hopes this will give itself enough time to successfully continue its attempts to reform itself.  US Airways also disclosed that its 2003 annual report will include a 'going concern' objection from its independent auditors, in which the auditors say they have 'substantial doubt about (US Airways Group's) ability to continue as a going concern.'

Air Canada's investor that they hope will bring them out of bankruptcy, Trinity Time Investments, said it was reviewing its planned investment into Air Canada because of AC's unions refusing to discuss changes to their pension plans. Trinity has said previously it would withdraw its offer if the unions didn't accept their terms.  Someone is bluffing in this high stakes game, but who?

The worst kept secret of the last few weeks has now been confirmed.  Fred Reid, formerly President of Delta, is leaving and will become CEO of a new Sir Richard Branson/Virgin USA airline.  In related Delta news, Delta said that it expects its first quarter loss will now be $400 million, $50 million more than earlier predicted.

This week also saw Standard & Poors downgrade DL's creditworthiness by two steps.  This significant revision is all the worse when you appreciate it is the second time this year that Delta has been downgraded.  'Delta's prospects have gotten significantly dimmer,' said S&P airline analyst Philip Baggaley. He called Delta's downgrade 'an unusually steep slide.'

Notwithstanding a doubtless large and highly paid team of both investor and public relations staff, Delta had no comment to make.

And a hint of good news for American Airlines.  This sympathetic article interviews CEO Gerard Arpey, and quotes him saying a mix of encouraging things.  Amusingly, Arpey keeps a dinosaur on his desk - but not for the reason you might think.

In contrasting news, UBS have just upgraded their rating for Southwest Airlines, becoming the third brokerage to do this in almost as many months.  This shows, yet again, that the dinosaur problems are not an industry wide problem, but merely apply to one sector of the overall airline industry.

And while the dinosaurs are finding it tough going, that has not daunted a rush of new airlines starting up.  53 new airlines have been launched since 9/11, mainly in Europe and Asia.  Strangely, the dinosaur problems have created opportunities for start-ups, who see the chance to create an airline with lower operating costs and access to inexpensive good airplanes.  No word as to how many of the new startups have already failed - in the US the failure rate is about 97%!

In a statement eerily reminiscent of the famous 'I'm from the government and I'm here to help you', Tom Anderson, chief marketing officer for Spirit Airlines announced that they were reducing their ticket change fee from $75 per ticket down to $25.  He said

We want our customers to know that we put our money where our beliefs are. We believe in our customers and understand the need for flexibility and true value. This substantial reduction in fees is evidence of our commitment to our passengers.

The justification may sound a trifle over-done, but the policy change is certainly welcome, as is the fact that it applies to all existing tickets as well as to new tickets.

This week's bad news for Boeing.  The Chinese government has ordered a feasibility study into building their own large (ie 150+ seat) passenger planes, with an objective to have planes commercially operational in 14 years.  China represents a potential market for 1400 of such planes in the next 18 years, a fact that has been exciting Boeing, but which is now encouraging China to consider doing its own thing.

Killing the goose that lays the golden eggs?  A demonstration by residents of Key West was staged to protest the growing number of cruise ship visitors.  More than one million cruise ship visitors are scheduled to visit from 525 cruise ships this year, bringing the city almost $10 million in docking fees and passenger head taxes, and countless more millions in retail sales.  Not a bad income for a city with a population of 25,000 - most people would be only too delighted to have such a massive boost to their economy.

The Key West item was sent to me by reader Peter, who was writing from the Queen Mary 2.  Lucky Peter.  I'll confess that if I was on a QM2 cruise, I'm not entirely sure I'd be swapping emails with travel column writers!

Reader Jonathan cites cruising and Caribbean travel as another reason for the upsurge in passport issuances.  He says

Another reasoning on the increase in passports is a similar logic to your Detroit reader, but applied to cruises.  I'm fairly certain that Barbados now requires passports and have read that some of the other islands MAY follow suit (don't remember where I read that, so take with a grain of salt).  Also, we've been encouraging more and more of our clients to get passports for trips to Canada, cruises, and any Caribbean trip for id security reasons - why on earth would you want an original copy of your birth certificate out in the open where it could be lifted?

I mentioned, above, Warren Buffett's advice not to invest in airlines.  Perhaps you'd prefer to sink some money into a hotel, instead?  British media are reporting their first 'buy-to-let' hotel, which gives investors the chance to pay 235,000 ($430k) for a 99-year lease on one room in the new Guesthouse West Hotel in London's Notting Hill district. In return, you can stay in the room for up to 52 nights a year plus receive a 7% return based on the room's rental on the other nights.

This Week's Security Horror Story :  Last Saturday another woman passed through security at LaGuardia with a stun gun and a knife in her purse and neither were detected. The woman realized she was carrying the items and reported them to a flight attendant. The pilot of the Spirit flight alerted Denver airport and police met the woman at the gate.

She was questioned and released and not charged. At no time was she considered a threat.

Reader Mark sent in an item about a passenger on an El Al flight getting home to find, inside his suitcase, a replica pistol.  El Al personnel had placed it into his suitcase as a random test of their security measures.

It would seem that the famous El Al security measures failed.

While El Al was losing a replica pistol, Delta managed to lose a passenger - an 80 year old man with Alzheimer's who was supposed to be escorted between flights in Atlanta.  He was discovered nearly 24 hours later, as this article reports.

Actually, the man should count his blessings.  Note at the bottom of the article the reference to the mystery missing woman who was lost from an AA flight in 2001, and who has never been found!

That elusive element - justice - has shown its inconsistency yet again.  An airline pilot was found to have been drinking after some of the passengers on his 737 complained about his erratic flying style while he was taking them from Morocco to Duesseldorf.  And so, a German court fined him $1850.

Meanwhile, the ex(!) Virgin pilot who was charged with being drunk on duty back in December has been told he must remain in the US pending his trial in August.  His wife and two children live in the UK.

Angry passengers were reported to be in a state of near-mutiny on a flight that started in Edinburgh and which was supposed to travel only a very short distance to Nottingham, but it wasn't because their pilot was drunk.  More details here.

To make up for the pilot stories immediately above, here's an 'I was there' story by reader Tom, set back in the good old days when passengers sometimes got to enjoy time on the flight deck.  Tom writes

I was riding in the jump seat of a DC-10-30 flying from Honolulu to Sydney.  If all goes well, it is a tedious flight, making a right turn out of HNL and then going straight to a landing in Sydney eleven or so hours later.  On this particular flight, there was an FAA person in the cockpit, too.

In the middle of the night, the dark, quiet cockpit suddenly came alive with all sorts of warning bells, whistles, whoop-whoops, announcements and flashing lights coming on simultaneously.  The crew sprang into action, checking things, calling out orders, questions and responses to each other, etc. The cockpit was abuzz with noises, flashing lights and lots of action among the crew. I found the whole thing fascinating but the FAA guy was clearly not comfortable with the situation.

At some point, the FAA guy yelled out, "Captain, what is it? What is going on?"

The Captain, a Chief Pilot with 121 Marine combat missions in both jets and helicopters in Vietnam under his belt, calmly replied, "It can only be one thing."

After what seemed like an eternity, the FAA guy pleaded, "Well, if it can only be one thing, what is it?"

Captain: "I don't know."

Kissing may become a very ill-advised activity in Indonesia.  A new anti-pornography bill proposes a ban on "kissing on the mouth in public" and on "public nudity, erotic dances and sex parties". The suggested jail terms for these offences range from three to 10 years.  Passionate kissing would carry a maximum penalty of five years in prison or a $30,000 fine.  These moves are seen as an alignment more closely with the principles of the Islam religion.

I wonder what the Indonesian authorities would think of the unusual porcelain receptacles in the Men's, at the new Virgin clubhouse at JFK?  Here's more information about these distinctive things.

Until next week, please enjoy safe travels

              David M Rowell aka The Travel Insider

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