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Friday 28 December, 2007  

Good morning

I hope that Father Christmas found your chimney and sock and duly deposited appropriate gifts therein.  As for me, I was embarrassed at the generosity of a reader who sent me a gadget that I don't already have as a Christmas gift.  A lovely surprise, and always a delight to get another gadget, too.

I'll try and keep this newsletter, in the middle of the holiday season, short.  (Update, many hours later - seems like I failed in this attempt!).

For some of us, an early and unwelcome Christmas surprise was Maxjet's bankruptcy announcement last Friday morning.

I've certainly been an enthusiastic supporter of Maxjet right from when they first started flying.  Their underlying service offering to us travelers - a fairly priced high comfort high quality travel experience - is something that of course we all must welcome.  But, along with my enthusiasm has been a healthy dose of concern about their business plan - as early as 28 April 2006 I was saying 'One thing seems fairly certain - MAXjet can't be making any profit with these low fares.  Enjoy them while you can.'  I reiterated that a couple of weeks later when I said 'My concern about Maxjet is simply their fares are too low to permit the airline to be successful'.

On August 18 2006 I reported on an attempt to discuss the airline's profitability with their then CEO, Gary Rogliano, but all I got back through his pr people was an empty statement 'Because MAXjet is a private company, it does not report on profits' along with his statement that the airline was 'on plan and meeting expectations'.

My conclusion then was that they were not doing well.

But why did Maxjet ultimately fail, and what does this mean for other airlines attempting to emulate the same concept - in particular Silverjet with similar all business class planes and Eos with all first class planes?

The official line from Maxjet is it failed for a number of reasons, and you can probably guess what they are before you even read them.  Yes, rising jet fuel prices is one of the alleged villains, along with other operating cost increases, competitive pressures, a decline in consumer spending, and 'a substantial deterioration in financial market confidence' that precluded any further fundraising.

But what does this really mean?  Where did Maxjet go wrong?  And are similar airlines doomed to the same fate?

Maxjet's problem was simple.  It wasn't selling its tickets for enough money to cover its costs.  It did have some other one-off blips in its business plan as well that accelerated its cash burn, but at the end of the day, it was simply not trading profitably.

The airline's already low fares were being heavily discounted to some travel agencies and tour operators, reducing still further the return the airline was getting from each ticket sold.  Although it is better for an airline to sell as many tickets as possible, at any price higher than break even, the real art in airline pricing (or 'yield management' as it is known) is to ensure that each client is paying the maximum possible while still getting the most amount of business from that client.  Maxjet had not yet sufficiently fine tuned its yield management to get a better return per available seat per flight.

There was another reason why Maxjet was selling its tickets at a very low price.  Growth in competition - not only from other similar airlines such as Eos and Silverjet, but also from the 1,000 lb gorilla that entered the room - American Airlines, was limiting its ability to move its fares higher.  Never an airline to treat new entrants kindly, American started operating a flight to compete directly with Maxjet, offering business class fares to London's Stansted for about one quarter of what it charges for business class fares to London's 'main' airports (LHR and LGW), and adding frequent flier mile bonuses too.  As I said on 10/5/07,

What an amazing thing this is, isn't it.  We are expected to believe that American is fairly charging $2,730 to fly to one airport, but is also fairly charging $10,000 + (four times as much) to fly to another London airport that is almost the same identical flight distance from New York.

Don't reward bad behavior.  Make a point of booking Maxjet and Eos rather than American, because without them, there's almost no chance that AA's flights to STN will continue, and even if they do continue, what do you think the chances are that fares will remain at a quarter the price of fares to LHR?

The most amazing part of this?  That such behavior on a dinosaur's part is not considered to be unfair by any of the various watchdog organizations (in both the US and UK).

Let's see how much longer AA keeps up its discount flights to Stansted now that Maxjet has gone.  Already both BA and Virgin Atlantic have indicated they are slowing down on plans to introduce all business class service across the Atlantic; although neither airline is saying 'we don't need to do this so much now that one of our competitors has already been squeezed off the route'.

Maxjet had other challenges too, of course.  It is very hard for new airlines with limited route systems to get much corporate business; not only because the major airlines pressure corporate clients to give them all their business, but also because these tiny airlines can't offer attractive frequent flier programs.

Clearly, there's no chance for frequent fliers on Maxjet to get complimentary upgrades because the airline is a one class airline.  And there was even less chance for frequent fliers to get any sort of benefit at all, because Maxjet was very slow to get any type of frequent flier award program off the ground.  This inexcusable tardiness doubtless hurried its death along.  A customer loyalty program of some sort needs to be part of any airline's initial roll out of service.

Another problem with these tiny airlines that just serve a couple of cities is that there is no 'funnel effect' feeding passengers in to the first city and out of the other.  Other airlines have massive networks that feed passengers in or out of their trans-Atlantic flights, Maxjet had none.  But it did seem to have one massively overlooked huge opportunity.

Maxjet would have been a perfect partner for Jetblue.  Jetblue's main hub is at JFK, giving it a great collector/distributor capability for any airline offering international flights from JFK, and Jetblue is (or, now that Lufthansa has a share of the company, perhaps I should say 'was') an airline unfettered by alliances or allegiances to other airlines.  And, most of all, Jetblue is an airline that also needs partnerships; and a tie-in between Jetblue and Maxjet would seem to be potentially a match made in heaven.

It is understood that Jetblue is unusually hard to negotiate with when other airlines wish to work with it, and that is very silly for Jetblue; because Jetblue itself is both in a parlous financial position and has available excess capacity to soak up more business that would come from a partnership with an international carrier.  Jetblue stands to benefit as much as the other airline from such partnerships and it too should be chasing them down.

Tough (some would say unfair) competition, mis-steps on its part, and unexpected costs and delays all made things difficult for Maxjet.  But, the killing blow can be considered as coming from a most unlikely source.  The most direct cause of Maxjet's death was its inability to get further financing, and in this respect, the airline is another victim of the current credit squeeze and lower risk taking on the part of lenders resulting from the bad housing loan crisis.

Who'd have thought that a bunch of stupid bankers making bad home loans would result in the failure of Maxjet?

And now, what does Maxjet's failure mean for similar airlines, most particularly Silverjet and Eos?  Clearly the investor community is running scared - Silverjet, an airline with shares trading at one quarter their value of not very long ago - had its shares drop 8.2% on Wednesday.

Silverjet has been at urgent pains to distinguish itself from Maxjet, and sent an impressive comparison chart to some of its key accounts earlier this week.  According to Silverjet's data, it has been carrying much higher passenger loads than Maxjet (7459 pax on three planes in November compared to 8467 pax on five planes for Maxjet) and is earning 2.6 times as much revenue per plane, while operating more fuel efficient planes (a cost of 10,934 per sector for Silverjet's 767's compared to 14,314 for Maxjet's 767 planes - a surprisingly large differential).

Silverjet - which recently secured more financing - says it expects to be generally breaking even for the next three months of operation, and then anticipates becoming cash flow positive into the future from there.

But while Silverjet may be in a stronger position than Maxjet, it suffers from the same weaknesses and vulnerabilities.  Lack of appeal to corporate travelers (ie no perks and a very basic frequent flier program) and no feed in or out of its main airports to funnel more passengers into their system.  Being very thinly capitalized, if a dinosaur decided to invest $100 million or so in starving out Silverjet, it is very likely this would succeed, especially in the risk averse situation where financiers would be unlikely to lend more money to Silverjet.

Eos - the all first class airline otherwise similar to Maxjet - rushed out a press release that is heavy in empty statements of positivism but completely absent in specifics.  Is Eos making money or losing money?  The press release is entirely silent on this point, and so cynics like myself will probably find Eos' attempt at reassuring the marketplace to be an abject failure.

There is one surprising claim in the Eos press release.  Eos says it carries one out of every nine business class passengers traveling between JFK and London - a puzzling statement being as how Eos claims to be an all first class rather than business class type airline; so who knows what they really mean by this claim.

The bottom line remains the same for us as passengers, however.  We need to encourage and support these alternative airlines.  You should go out of your way to book them (as long as there is no financial penalty to you in doing so) - but be sure to pay by credit card, 'just in case'.

There's no feature article this week.

Dinosaur watchingWho hates the dinosaurs the most?  You might say their passengers.  But you might be wrong.  This article suggests that their own employees hate them even more.

This is worth remembering next time you're running the risk of 'shooting the messenger'.  The flight attendants and gate agents aren't responsible for their planes running late, the poor food choices, or any of the other things that frustrate us all.  They're just the meat in the sandwich between the faceless executives who are all safely insulated from real world feedback and unhappy customers, and ourselves, the hapless passengers.

Alitalia now looks likely to be bought by Air France/KLM.  Although the airline's board unanimously chose their offer in preference to a competing bid from Italian carrier Air One, their decision now must be approved by the Italian government.  Many in the government prefer the thought of 'their' national flag carrier remaining in Italian hands, and Milan based officials are also coordinating opposition, fearing that a more rational management of Alitalia would see the airline massively reduce its presence in Milan, choosing instead to base its operations through a single hub in Rome.

Meanwhile, Alitalia continues to lose some $1.5 million every day.  But it bought itself a few more months financial breathing room by selling three of its Heathrow takeoff/landing slots for an estimated $132 million.  Alitalia still holds ten more slots.  With the new open skies agreement between the US and EU, Heathrow slots have become even more precious and sought after, offering a nice little windfall for airlines such as Alitalia.

Talking about Heathrow, probable good news for Heathrow passengers.  BAA, the company managing Heathrow, says it expects the one carry-on bag per person limit at Heathrow will be lifted on January 7, the earliest date possible under new measures announced recently by Britain's Transport Secretary.

The necessary changes to Heathrow's security scanners have been made and the only thing left is to apply to have the one-bag restriction lifted.  BAA has replaced all of its archway detectors and baggage X-ray machines and said it hoped that the new technology would allow passengers to keep their laptops inside their hand luggage, reducing the amount of time it takes for travelers to pass through security.

Wouldn't it be nice if we could get some of the same technology here in the US.

And talking about airports, what would be stupider for an airport than to put an airline in charge of an expansion project?  As to exactly how stupid such an action would be, look no further than MIA, as is detailed in this excellent expose article.

Virgin Atlantic (VS) - or, more specifically, its founder, Sir Richard Branson - is famous for making fanciful promises about double beds being fitted to its planes.  So far, none of these promises have actually made it into reality, but he is now at it again, talking about how he plans to outfit the A380 super-jumbos when they are delivered.

Being as how VS has already voluntarily delayed the delivery of the A380s it has ordered, and has hinted it would like to do so still further, it might be a long time before we have a chance to see how much of Sir Richard's latest claims actually make it all the way to reality, but if what he says can be viewed as likely, then it would seem his airline's A380s will be fitted with private rooms, showers, masseuses and manicurists, and even roulette and blackjack tables, as well as, ahem, double beds.

The airline plans to use the planes on routes from London to Los Angeles, Tokyo, Johannesburg, Sydney and JFK, and is also keen for Airbus to develop an even larger version of the A380.

From time to time I update my webpage full of facts and figures on passenger airplanes.  But it is a very rare occasion that I get to add a new airplane manufacturer to the list, however I have now done that, adding AVIC I to the list of manufacturers, based on their rolling out their first plane a week ago, a regional jet seating about 80 passengers.

Who is AVIC I, you might ask?  It is a Chinese company, and this first plane is intended to compete not with Boeing or Airbus, but with other regional jet manufacturers such as Embraer.  But, if you read all the way through this article, you'll note the threat at the bottom of the page - not only are they partnering with Canadian company, Bombardier (the third largest airplane manufacturer in the world) to develop a larger regional jet capable of seating up to 149 passengers (making it bigger than early Boeing 737s), but the company also plans to be producing jumbo jets by 2020, putting it in direct competition with Boeing and Airbus.

Five and ten years ago, many of us worried at a Japanese company challenging Boeing's supremacy in the airplane manufacturing world.  That doesn't seem to have happened, and the Russian aerospace companies have still not recovered from the underinvestment, bad management and exploitation they suffered at the end of communism and for some years after in newly independent Russia.  Instead, the new challenger seems most likely to be Chinese.

What is the most popular new feature people want to have on their cell phone?  No, it isn't internet access (which 19% of cell phone users want).  It is a built in GPS, which 24% of cell phone users want.  Only 6% of people have a GPS built in to their cell phone at present.

I have a GPS in my Blackberry 8800, and love it.  I've found it invaluable, for example when a taxi driver in Istanbul didn't know how to get back to my hotel.  And when the coach driver said he didn't know how to get to or find his way around Bratislava, again the GPS service in my cell phone enabled me to call his bluff.

It is tremendously useful when walking around some of the historic towns and cities in Europe - the narrow winding streets can quickly destroy your sense of direction, but the GPS helps you know where you are and where you need to go.  Definitely a 'must have' feature in a cell phone.

Talking about cell phones, many old cell phones and other devices that use cell phone service will soon become useless.  Wireless companies are ending their older analog service and also ending some of their earlier types of digital service.  This article has more details.

In the good old days, crackpot little countries would make money from the rest of the world by selling essentially worthless but pretty stamps to collectors.  These days, many of these same countries are getting more sophisticated in their attempts to take money from us without giving anything tangible in return.

For example, the government of Rwanda has passed a tax on the use of the country's famous mountain gorillas image for marketing purposes.  The tax is ostensibly to be used to finance the protection of the endangered species.

And Egypt (which never had stamps as nice as Rwanda) is about to do a similar thing, requiring payment of royalties whenever its ancient monuments, from the pyramids to the sphinx, are reproduced.  The head of Egypt's Supreme Council of Antiquities said 'The new law will completely prohibit the duplication of historic Egyptian monuments which the Supreme Council of antiquities considers 100% copies.  It is Egypt's right to be the only copyright for these monuments in order to benefit financially so we can restore, preserve and protect Egyptian monuments.'

It is an interesting thought to consider how variously Egypt and Rwanda may reach out to charge people in foreign countries who make use of photographs taken of these things.  And - at the risk of showing my ignorance - I'd always thought that copyright was a transitory thing.  How can things made thousands of years ago still have copyright?  And how can natural things like wild animals also have copyright?

Earlier in 2007, New York State passed legislation requiring airlines to provide food, water, clean toilets and fresh air to passengers stuck on the ground for more than three hours.  The airline lobbying group promptly appealed the law, which many commentators thought would not be enforceable, due to federal pre-emption that restricts the ability of states to interfere with airline operations.

But to the surprise of most people, a federal judge has dismissed the ATA challenge, concluding that the provisions of the law are a health and safety issue, not an airline service issue, and so thereby can be controlled by the state.

Expect an appeal by the ATA.  The stakes are huge on this issue, and the airlines will chase this one all the way to the Supreme Court if necessary in the hope of avoiding any imposition of airline passenger rights at a state level.

One thing not covered by this legislation is the right of passengers to be able to sit on a clean seat.  But, as this article indicates, perhaps it is a right that needs to be addressed.

And talking about clean seats, let me introduce this next item with a question.  Chances are you've walked down a hotel corridor and seen the room cleaning carts outside rooms.  You know, they're full of towels and soaps and all sorts of other things used by the maids when cleaning rooms.  Maybe you've even noticed them with trays full of clean glasses, too.  But, if you're like me, you've never seen what happens to the dirty glasses in hotel rooms.  Where do they go and what happens to them?

Actually, that's probably a question you don't want to ask, and an answer you don't want to receive, as is shown graphically by this video clip.

This Week's Security Horror Story :  Is airport security a total waste of money?  You'd expect the TSA would be able to trot out endless statistics justifying the cost of their organization, and the hassle we as passengers all must endure.  But, apparently, this is not the case.

A team at the Harvard School of Public Health could not find any studies showing whether the time-consuming process of X-raying carry-on luggage prevents hijackings or attacks.

They also found no evidence to suggest that making passengers take off their shoes and confiscating small items prevented any incidents.

As one researcher said, in questioning the current fixation on shoes, 'Can you hide anything in your shoes that you cannot hide in your underwear?'

The TSA said it has been too busy implementing new security measures to have the time to evaluate their effectiveness (no, I'm not making this up), and pointed triumphantly to the fact they seized 13 million prohibited items in a single year as proof of their effectiveness.  The researchers responded that most of the items were cigarette lighters.

More details here.

Whenever I raise a comment or question about global warming, readers rush to the defense of the global warming theory, and generally ask me in outraged tones how it is I can be flying in the face of nearly unanimous scientific opinion.

It seems global warming is actually not a nearly unanimous scientific opinion.  Here's an article pointing out that over 400 scientists from more than 24 countries, including participants on the UN Intergovernmental Panel on Climate Change have recently voiced criticisms of the IPCC (and Al Gore).

I mentioned viral videos last week.  Here's a listing of some of the most popular viral videos, some of which I can understand as being very popular, and others of which leave me rather puzzled.

Here's an example of a modern update to an old fashioned road sign.

Lastly this week, have you ever wondered why, after the plane lands, a flight attendant comes on the pa system and says 'please remain seated until the plane has come to a full stop alongside the terminal and the fasten seatbelts sign has been turned off'?  Click here to find out why.

2008 looms large on the horizon for us all.  I hope 2007 has been a good year for you, and that you come up with some worthy resolutions for the year ahead; and hope even more you can keep your resolutions for at least all of January.

Until next week year, please enjoy safe travels

              David M Rowell aka The Travel Insider

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