It is the early days of the latest Wall Street crisis, but one thing is clear, the appetite for re-regulation is large. However, it is unlikely to go beyond re-regulating the banking and investment industry that was undone by its own excesses. Indeed, some are calling for more airline deregulation, considering it remains the most heavily regulated deregulated industry in the world.
Immediate worries that credit will not be available for airlines have not been realized so far, according to Teal Group’s Richard Aboulafia.
ILFC, one of the largest customers for both Boeing and Airbus, was part of AIG but is maxing out its three credit lines to borrow $6.5 billion in emergency funding in a deal cut the same day the government took an 80 percent stake in AIG in exchange for an $85 billion rescue loan. Aboulafia acknowledged that the industry’s heavy reliance on third-party financing is problematic.
“The good news, ILFC ownership position notwithstanding, aircraft finance is holding,” he said. "It is definitely a potential concern, but right now if you want financing you can get it," he said. “ILFC looks good into the first quarter 2009. The question is whether there is a group of investors to give them the same financial conditions they enjoy now and, for that, there is no answer."
However, industry execs are worried. Condor Managing Director Jean Christoph Debus, speaking at a conference in Germany, expects to see higher credit costs compounded by increasing difficulty in hedging fuel costs as the result of the Wall Street crisis.

Deregulate Further
Prior to the government bailout of AIG and others, one would have been fairly certain the calls for re-regulating the airline industry would have fallen on deaf ears, despite being touted in Congress earlier this year. Related Story After all, Congress has difficulty in passing FAA reauthorization as illustrated by its failure in the last two years when congestion crises loomed large. It seems aviation, a major economic driver, has little urgency in the larger Congressional picture.
“Some politicians and former industry executives began calling for re-regulation, the holy grail of economic stupidity,” said Aboulafia recently, adding he was frustrated by the talk of re-regulation. “Why not start deregulating in earnest. This is not a deregulated industry. Bankruptcy regulations make industry exits problematic. You can’t leave the business by merging. Airlines also suffer from very tightly regulated cross-border capital flows, very tightly regulated merger and consolidation procedures, very tightly regulated airport slot allocation, and very tightly regulated national market restrictions, and the answer to the industry’s problems is…more regulation?”
He makes a strong argument for freeing up the free market to be free. Indeed, he indicated that airlines are “still living in a protected walled garden in the midst of the earthquake.”

Given the hundreds of billions being added to government and taxpayer shoulders, it is no surprise that those in the airline industry who are teetering on the brink will be allowed to fail simply because they don’t have the scope of a Wall Street investment house to make a difference to the American economy, much less the airline industry. There was little appetite for rescue packages even before the current crisis since everyone agrees there is still too much capacity.
Southwest Airlines Founder Herb Kelleher calls it the latest throws in the deregulation story. "I think it's finally spinning itself out," he said at a low-fare carrier conference in London. He added low-fare carriers are here to stay and, in fact, are finding opportunities in all the cutbacks. He indicated mainlines have cut back 15 to 17 percent on routes competing with Southwest. Far from low-cost carriers being in trouble, Kelleher noted they are not the ones adding fees, taking away services and cutting routes.
At the same conference Ryanair Deputy Chief Executive Howard Millar predicted only five European airlines will survive – British Airways, Lufthansa, Air France/KLM, easyJet and Ryanair. Suggesting that European carriers have yet to make the dramatic capacity cuts of their American counterparts, he also said that fares must drop if airlines want to fill empty seats.

Congressional Distraction
Another thing is clear. Capitol Hill will be too busy on the financial industry for months to worry about other sectors of the beleaguered economy. First they have to pass the imperfect bailout quickly and, like the Patriot Act and the Medicare legislation of the recent past, we will not find out just how much we have given away until later.
Even so, the industry’s woes, now promise to widen no matter how many people on Wall Street seek airline stock bargains. While the bailout is designed to restore the banking industry’s faith in itself as part of an effort to free up capital for lending, relief is not likely to hit Main Street, except in the abstract, unless the ability to recast mortgages and avoid future foreclosures is included. Representative Barney Frank said on Thursday that a remaining sticking point is giving bankruptcy judges new power to modify mortgages for troubled homeowners which is, unfortunately viewed as a bargaining chip. As the week wore on Congressional negotiators deemed such relief highly unlikely but, even if it had been included, it probably would not have been enough to restore confidence in the economy given the doomsday scenario painted by the administration.

Regional Prospects
Earlier this year regional presidents were cavalierly talking about a five percent drop in traffic resulting from the higher fares with a so-be-it attitude that low-fare travelers will go down in the bargain. They pointed to adjusting schedules downward in like measure. However, mainlines went far beyond that and, while airlines have done a good job matching capacity to demand and maintaining discipline, said Aboulafia, the traffic declines may get bigger still, especially with the loss of so many banking jobs.
Capacity cuts include grounding or selling off to emerging countries 512 commercial aircraft, or seven percent of the fleet, including 205 regional jets and 26 turboprops, according to JP Morgan which released a report last week. The regional jets being grounded or sold constitute 11.4 percent of small jets but only 2.5 percent of turboprops. Interestingly, building back from its bankruptcy with one of the youngest regional fleets in the business, Northwest is grounding no regional aircraft. Nor will United, it seems, although Delta is shedding more than 100, Continental 64 and American Eagle 37 RJs and 26 turboprops. JetBlue, still committed to Embraer’s ERJ 190 arranged the sale of four to Azul. Related Story

Biz and First
But the real concern is the front cabin. “Business traffic may go down,” said Aboulafia. “The high-roller traffic is potentially heading down but it really depends on the broader economy and, right now we have no way of quantifying it. But it is going to hurt, there is no question. As for the rest of the world, it had its head, or at least its nose, above water. We’re talking about a downturn, slowed traffic, and reduced jetliner demand, but we are not looking at a fourth quarter financial meltdown. Predictions are for $5.2 billion in losses this year, which jeopardizes the marginal ones.”
British Airways CEO Willie Walsh said the drop in banking jobs will hurt. “There's no doubt in my mind that the impact of a weakening economic environment, combined with the credit crunch will play through to the premium cabin,'' Walsh told Bloomberg Television. “It has to have an impact at some point.''
This downturn is unlikely to be like the post-9/11 bonanza experienced by regionals as mainlines quickly cut services and built them back using their regional partners. Regionals are still benefiting from that with the prices mainlines pay them as part of their service contracts. However, that is already seen as a victim of the increasing financial troubles of the mainline carriers. Related Story But we won’t know the total scope of permanent changes to the mainline/regional retrenchment for some time; at least until the economy turns around. Indeed, it is likely that we haven’t seen the end of regional capacity cuts given the pending merger of Northwest and Delta.
The question remains as to whether there are mainline routes that can be replaced by regionals and that depends on the fleet. Certainly, it will require more investment in the larger regional jets such as those being flown by Northwest Airlink and Delta Connection and that requires capital.

Travel Spending to Drop
For now, all we know is the predictions of the Association of Corporate Travel Executives (ACTE) which indicated one third of business travelers expect to reduce travel next year and those that expect to spend more will likely be traveling less in order to keep up with rising costs. Kelleher said most U.S. businesses are "cutting back dramatically on what they spend for transportation” which favors low-cost carriers.


Herve Sedky, American Express vice president and general manager for global advisory services and meetings solutions, said in a recent webcast that travel managers are coping with new fees and fewer flights. He indicated efforts to negotiate lower surcharges have met with resistance.
The Wall Street crisis forced his company to delay the release of its global travel outlook.
The company did say that airlines will be aggressive in reducing benefits or even in cancelling corporate fare contracts for companies that do not reach the benchmarks set in those contracts. Frank Schnur, American Express vice president, global advisory services, North America indicated that customers will not reduce the importance of the lowest fare. “The trend is toward the lowest logical airfare but supported by a preferred-carrier strategy,” he said. “Customers have to balance that to keep the value of those corporate contracts." Companies can save at least 17 percent on air fares just by using advance purchase tickets, he said.

And Then There is NextGen
What all this means is the Aviation Trust Fund coffers will decline along with the appetite for spending from it. After all, the government has been borrowing from all the trust funds in an effort to make the debt look smaller for so long they are littered with IOUs that could pale in comparison to the numbers tossed about with the Wall Street bailout.
Unfortunately, the drop in traffic will likely lead to a similar decline in congestion and, along with it, the political resolve to do something about it. This would be catastrophic since the necessity for NextGen – more efficient routes for reduced fuel and carbon emissions – has never been more acute. The question then becomes whether efforts to impose capital sucking emissions taxes cool until the crisis is over. I think if you asked the Europeans they would say no because they have already turned a deaf ear to the 70 percent drop in aviation emissions in the last two decades and the pleas that the monies paid in emissions taxes could be better used equipping with more efficient aircraft.

New Business Model
Aboulafia said the airlines fell into the solution to their growing fiscal worries with unbundling of the ticket price with fees. “The disaggregation of costs appears to be working,” he said.
Even so, those fees will not bring in all the predicted revenue because of the declining traffic. Still it has ushered in a new airline model that will, in all likelihood include what he termed “theater pricing” – paying a premium depending on where you want to sit. People are going to hate it, he said, but they will pay it. He also indicated that the transparency in pricing brought on by the internet will fall away.
“This is a great way to re-introduce opacity into airline pricing,” he concluded. “Potentially, this is the start of a very different pricing structure. There are a million different ways to charge money, and, it seems to me, that seating location should be high on that list. This will be something new in terms of yield management which will be a lot more multifaceted and chaotic and will depend on when you buy the ticket and what percent of the plane is already full.”

For now, all we have is empty assertions that the government bailout will be paid back. Gee, that sounds familiar. Hmmm. Oh, yeah, I remember. The last time we heard that was when the administration told us the money spent on the Iraq war would be paid back with oil profits. I say it is time we call that loan long past due. We’ve needed that money for a long time now.

Side Bar – ACTE Results

Tighter purse strings and reduced spending is the message of 131 respondents to the ACTE survey, who indicated they would be spending and traveling less.
ACTE Executive Director Susan Gurley reported a three-way dead heat for next year’s travel in a sparse survey. “Thirty-six percent said they’d be spending more on business travel next year,” said Gurley, “while 33 percent indicated they’d be spending less, and 31 percent said they’d be spending the same.”
Gurley indicated while a third of the respondents were openly spending less, those spending the same would ultimately be traveling less as the cost of travel has climbed significantly. “Even those who stated they are spending more may find they are barely keeping up with cost increases,” said Gurley.
The number one cause of the cutbacks in travel spending, according to 47 percent of the survey’s respondents, is a combination of economic uncertainty and rising fuel costs. (Fifteen percent cited the economy alone as did 12 percent for fuel costs.) Twenty-six percent cited other reasons such as internal changes and a restructuring of business focus.
“Equally significant is the manner in which corporate travel managers are directing the cutbacks,” said Gurley. “Thirty-one percent are cutting back on travel straight across the board. Thirty-nine percent are cutting back on internal meetings, while 16 percent are reducing international travel. Nine percent have eliminated training trips as part of their agenda.”
“Many international travel markets thought the economic downturn was restricted to the United States,” said Gurley. “Yet the fuel crisis hit everyone at the same time. Furthermore, the credit crisis has leapfrogged to a number of European financial institutions. And the recent developments on Wall Street are casting a pall of uncertainty on future investment.” Gurley added that ACTE has been anticipating these developments – and preparing for them – for more than a year. “ACTE has been focusing on three techniques: value management, strategic meetings management and demand management, to discourage the deleterious decision to simply cut travel across the board,” she said.