Premium-Class Service, Long Before Fliers Board

Turkish Airlines

 

 

The Turkish Airlines premium-class lounge at Ataturk Airport in Istanbul has a pool table and masseuse, and is open to members of the airline’s corporate incentive program.

 

 

By CHRISTINE NEGRONI

TO celebrate the beginning of service between Dulles International Airport and Abu Dhabi on April 2, Etihad Airways’ chief executive, James Hogan, made the 13-hour flight to Washington to host a party for 450 people with entertainment by Harry Connick Jr.

      

But do not try to talk to Mr. Hogan about New York. After four years of flying out of Kennedy International Airport, Etihad is still waiting to lease space for a premium airport lounge. 

      

Emirates Airlines of Dubai, Etihad’s competitor, has a 4,000-square-foot private waiting room overlooking the gate at Terminal 4, and business and first-class travelers can board the plane from there. This month, Delta Air Lines will open a Sky Club in the same terminal; at 24,000 square feet it will be the largest club at the airport and in the Delta system, with seating for 450 people and an additional 2,000 square feet dedicated to an outdoor deck. 

      

Offering lavish airport services to premium-class passengers is a worldwide phenomenon.

In Istanbul, Turkish Airlines built a lounge that includes a pool table and a masseuse. In Frankfurt, Lufthansa’s first-class passengers are assigned a personal assistant; when it is time to leave the cigar lounge or dining room for the plane, they are taken by private car, without having to board with other passengers. In the home bases of Emirates and Etihad, business-class passengers get deluxe accommodations; first-class passengers, ultradeluxe. 

      

“We believe that the comfort and convenience of dedicated lounges enables our passengers to enjoy the Emirates experience even before they have boarded the plane,” said Mohammed H. Mattar, divisional senior vice president at Emirates Airport Services. Etihad has a similar philosophy, which is why its executives are so frustrated at their lack of space in New York. 

      

“I can’t control customs or security; some are good, some are bad, but what I can control is our touch points,” Mr. Hogan said. “So the experience in the lounge is important to us.” 

      

Mr. Hogan complained in February that the airline was getting the runaround in New York, but by April the airline was predicting a new Etihad lounge would open at Kennedy in 2014 or 2015. “A potential space has been identified,” Niall Doheny, an Etihad spokesman, said by e-mail. JFK International Air Terminal, the company that runs Terminal 4, declined to answer questions about Etihad’s complaint. 

      

Improving the airport experience has long been a priority for airlines with heavy passenger traffic passing through their home base en route to somewhere else, according to a report on airports by the consulting firm Oliver Wyman. “In the Middle East in particular, the newly developed hubs have based their business models around transfer passengers,” the report says, but it is also true for airlines like Cathay Pacific, Singapore, Turkish and Lufthansa. Song Hoi See, chief executive of the airport services company Plaza Premium Lounge Management Hong Kong, said American airlines came late to the game. 

      

“The reason why the U.S. is lacking is because traffic used to be concentrated on domestic traveling,” Mr. Song said. “Before 9/11, it was like going on a bus, you get to the airport half an hour before the plane leaves. After 9/11, even domestic traveling meant passengers had to wait longer in the airport.”

Now some airlines in the United States have decided that giving passengers a comfortable place to wait gives them a competitive advantage, especially at older airports, which can be short on amenities like electrical outlets, Wi-Fi, quality food and beverages and a place to sit and work. 

      

“Increasingly what we’re focused on is having a highly segmented space, such that there are people in there doing work, people gearing up for the day. There are people in there unwinding and doing different things,” said Tim Mapes, senior vice president for marketing at Delta, which has spent $20 million on new or renovated lounges in Atlanta, Minneapolis, Seattle and Los Angeles, as well as in New York at Kennedy and La Guardia Airports. It is a lot of pampering and it is not over yet. Having spent 15 years managing airport lounges that cater to the minority of travelers for whom service is more important than price, Mr. Song says the trend is still evolving. 

      

“Now you go to the lounge and they provide hot food and shower, wellness services, pedicure, manicure and also business center services, more than printing, but secretary, meeting and videoconferencing,” he said. 

      

Premium services can even go beyond the airport; airlines, including Lufthansa, offer limousines, and Delta is considering what kind of amenities it can offer in city centers.

“Traditional airline thinking results in traditional customer experiences,” Mr. Mapes said. “We have to be a lifeline and have customers’ backs 24/7.”    

A version of this article appeared in print on May 1, 2013, on page F7 of the New York edition with the headline: Premium-Class Service, Long Before Fliers Board.

Filing lays out long road to the American Airlines-US Airways merger

By Terry Maxon
tmaxon@dallasnews.com
10:46 am on April 17, 2013 | Permalink

For those historians amongst us, American Airlines had laid out the long road from idea to merger navigated by American and its persistent suitor US Airways.

According to an S-4 registration document filed Monday, the first stop was an April 14, 2011, meeting of the US Airways Group board in which airline executives outlined the potential of a US Airways-American merger.

The S-4 says Tom Horton, the American’s president, approached US Airways chairman and CEO Doug Parker at an industry event Sept. 7, 2011. “Mr. Horton explained that AMR had recently completed the then-largest ever order of new aircraft and that upon entering into new labor agreements AMR might soon be positioned to engage in discussions about strategic alternatives, including a combination with US Airways Group.”

In return, “Mr. Parker agreed that a combination of the two airlines could be beneficial to both parties, and that the two should speak again after AMR had secured new labor agreements.”
AMR chairman and CEO Gerard J. Arpey called Parker in October 2011 and said “he was aware of the earlier discussion between Mr. Horton and Mr. Parker. Mr. Arpey said that once AMR had achieved new labor contracts, he would be open to discussing potential strategic transactions.”
In the same call, Arpey “encouraged Mr. Parker to consider the possibility of US Airways departing the Star Alliance and becoming a member of the Oneworld alliance as an initial step, but one that might result in a larger transaction sometime in the future.”

Of course, American and parent AMR filed for bankruptcy on Nov. 29, 2011. For about the next five or six months, we had Parker pursuing AMR/American and Horton trying to fend him off with protests that merger discussions should wait after AMR/AA emerged from bankruptcy proceedings as a reorganized, stronger company.

After that, American and the unsecured creditors committee entertained the idea as American was also developing its plan to emerge as a stand-alone carrier. We had the signing of the non-disclosure agreements, followed by a long period of negotiating.

Keep reading for a long account of the pursuit, wooing and marriage.

Horton, who took over as chairman and president of AMR and American on the evening of Nov. 28, 2011, called Parker and other airline CEOs the next day to advise them of the bankruptcy filing.
On Dec. 21, 2011, “Mr. Parker called Mr. Horton and asked if he and members of his management team could meet with Mr. Horton to discuss a potential combination,” the document said.
“Mr. Horton said to Mr. Parker that while he believed a combination could be beneficial to both companies and that he was always willing to talk, AMR and its board of directors were completely focused on completing the company’s restructuring.”

In January, US Airways hired legal and financial advisors to look at an AMR merger, a fact that Parker disclosed to Horton in a phone call. US Airways representatives began talking to the unsecured creditors committee, which had to be on board if there were to be a merger.
On April 20, 2012,

Parker and American’s three labor unions made public their secret talks to negotiate collective labor agreements that would go into effect if US Airways and American merged. Parker contacted Horton to tell him of the deals, and to present a merger proposal that would have US Airways shareholders holding 50.1 percent of the stock in the combined companies.

Horton repeated to Parker that his company’s focus was on the bankruptcy case, but he informed the AMR board that day of US Airways’ proposal.

With pressure mounting on AMR, the company and UCC on May 1 agreed to a process to consider strategic alternatives and compare them to the stand-alone plan that AMR was pursuing. But the AMR board concluded in meetings May 15 and 16 that US Airways’ April 20 proposal was too low.
“Accordingly, AMR’s board determined that the April 20 Indication of Interest did not merit further discussion,” the document said. “However, Mr. Horton explained that at a significantly different equity split a combination with US Airways Group could be attractive to AMR and its stakeholders.”
On July 10, “AMR announced that, in cooperation with the UCC, it would begin a review of strategic alternatives, including a potential merger.”

On July 17, Horton met with Parker and said the company was preparing to look at potential mergers and would soon propose some non-disclosure agreements.

AMR and its advisors in July and August “approached several other airlines to gauge their interest in a strategic combination,” the document stated.

“AMR also had discussions with potential financial investors with experience in the airline industry to gauge their interest in financially supporting an independent plan of emergence or other investment. AMR’s board was periodically apprised of the status of these potential alternatives,” it said.

On Aug. 30, 2012, American and US Airways announced publicly that they were signing non-disclosure agreements to discuss a potential merger. From there, it became a matter of negotiations.
On Oct. 22, AMR sent US Airways the form of a possible merger. On Nov. 1, the US Airways board replied with its own offer, known as the “November proposal.”

■ US Airways shareholders would get 30 percent of the combined company, with the rest going to AMR stakeholders.

■ The headquarters would be in Fort Worth.

■ The merged carrier would be branded American Airlines.

■ Parker would be chairman and CEO.

■The new company’s board would have 11 members, five picked by US Airways.

 

Parker gave Horton the November proposal on Nov. 2, and the AMR board reviewed it the same day. Although the proposal was found wanting, “at Mr. Horton’s urging, the AMR board decided it was prudent to continue pursuing a potential transaction with US Airways Group, but to set aside any discussions about management or board composition until other aspects of a transaction were resolved.”

The AMR board on Nov. 10 endorsed the idea of a merger, upon Horton’s endorsement.
“However, the board instructed Mr. Horton to inform Mr. Parker that uncertainty surrounding the combined company’s labor costs rendered it difficult to determine the right Equity Split, which AMR’s board believed needed to be in excess of 80%, and that these matters had to be addressed if discussions were to continue.”

On Nov. 14, “Mr. Horton called Mr. Parker to indicate that the AMR board had expressed its general support for the transaction. He explained, however, that AMR’s share of the Equity Split likely needed to be above 80%, and that the uncertainty surrounding the combined company’s labor costs needed to be mitigated.”

The next day, the US Airways board balked at AMR’s position that its stakeholders needed more than 80 percent of the merged company. The US Airways board said it didn’t support extending the non-disclosure agreements to take them beyond their scheduled Nov. 30 expiration.

“In addition, the board instructed management to inform AMR’s advisers that if the AMR board’s view of an appropriate Equity Split was as communicated by Mr. Horton, then it was not productive to continue discussions,” the document said.

After a series of discussions between AMR, the UCC and US Airways, Horton called Parker on Nov. 25 “and suggested that further discussions between the companies’ advisers regarding the proposed Equity Split should be deferred,” the document said.

“Mr. Horton further advised that that while he believed there was likely a solution somewhere between the two parties’ respective positions on the Equity Split, it was not possible for AMR to reach a final conclusion on the Equity Split without first mitigating the potential labor costs and risks attendant to a potential merger,” it said.

“Mr. Parker agreed that the two parties should address the labor issues and make progress on negotiating the merger agreement prior to revisiting the Equity Split.”

At an AMR board meeting on Nov. 27, the airline’s advisors said that AMR shareholders might actually get something after all, that their stock wouldn’t be entirely worthless.

Parker persuaded the US Airways board on Nov. 28 to keep talking and extend the non-disclosure agreement past its Nov. 30 expiration. The next day, the two airlines signed the extension.
In December, the unions and management worked out the transition deals that would spell out how labor would be treated in a possible merger, eliminating that potential roadblock.

The issues were narrowing down to two big questions: How would the equity in the new company be split between US Airways and AMR interests? And who would run the new company?
The registration statement doesn’t elaborate on the discussions about governance, other than to note that they happened among the airlines, the unsecured creditors committee and the Ad Hoc Committee of AMR Corporation Creditors.

But on Jan. 24, Horton and Parker met to discuss the equity split and who would run the company. Horton said the 70-30 split supported by US Airways “was insufficient,” the statement says.
“Mr. Horton also informed Mr. Parker that, assuming a transaction, while he would support Mr. Parker as CEO of the combined company, the AMR board believed that the continued involvement of senior AMR executives and managers, including Mr. Horton as chairman of the combined company’s board, was important,” it added.

Three days later, AMR board member Armando Codina, the lead independent director, sat down with Parker. He told him that the 70-30 split had to improve, that AMR shareholders needed to get something in the merger, and that the merged company’s board needed to skew more toward AMR. Or to use the document’s wording, it needed “a board composition that more closely reflected the relative ownerships of AMR’s stakeholders and US Airways Group’s stockholders.”
On Jan. 28, the next day, Parker told Horton that US Airways was prepared to go to 72-28, and agreed to weight the board more heavily to AMR.

In a Feb. 4 telephone call, Parker told Codina that US Airways was prepared to drop its requirement that AMR eliminate its liabilities for “other post-employment benefits,” namely health care coverage for retirees. US Airways would accept the 72-28 split. Codina told Parker he would support the merger at 72-28.

On that call, Codina and Parker also talked about the idea of Horton being chairman for only a limited time after the merger.

Parker and Horton discussed the terms in an exchange of emails. Parker on Feb. 5 said his board backed the 72-28 split and wasn’t requiring AMR to get rid of the post-retirement benefits. In an email the next day, Horton said his board still supported a 75-25 split, but that he’d take US Airways’ proposal back to the AMR board.

Horton also agreed in general with the idea of who would run the company, but worried that American’s managers wouldn’t get a fair chance.
“Mr. Horton reminded Mr. Parker that AMR’s board still wanted assurance that the combined company’s management would be drawn from the ‘best of the best’ of each company, and that he and Mr. Parker would be jointly involved in selecting senior executives for the combined company,” the document said.

The next day, Parker told Horton via email that Parker “would consult with him in the selection of the management team for the combined company.” On Feb. 12, they agreed on the final arrangement in which Horton would be board chairman for a maximum of a year.

Horton, other American managers, Parker and Kirby met with the unsecured creditors on Feb. 11. Two days later, the UCC voted to support the merger.


The afternoon of Feb. 13, Parker met with the AMR board and “expressed his excitement and enthusiasm for the Merger, praised AMR’s brand, heritage and people, and affirmed his belief that consolidation would position the combined company to compete effectively with United and Delta.” He assured the board that he would pick executives from both airlines with assistance from Horton.

With Parker out of the room, the AMR board voted to approve the merger. In a subsequent meeting, the US Airways board endorsed the merger as well after its financial advisors said the offer was fair.
Before the markets opened on Feb. 14, the airlines announced the merger. Horton and Parker held a conference call with analysts at 7:30 a.m. CST, then met the news media at a mid-morning press conference. The pair stood before American employees at an early afternoon meeting before Parker headed home to Phoenix to meet with his employees.

And finally, on Feb. 22, AMR and American asked the U.S. Bankruptcy Court to approve the deal.

Why American Airlines Employees Loathe Management Richard Finger, Contributor The mistrust that labor harbors for American Airlines management is a feud with a history filled with a powerful vitriol that only duplicitous behavior engenders. It all began back in 2003 when then CEO Don Carty, after multiple years of billions in losses, used the threat of bankruptcy to wring $1.8 billion in wage and other concessions from the three major constituent unions; the APA (American Pilots Association), the TWU (Transit Workers Union, an AFL-CIO affiliate), and the APFA (Association of Professional Flight Attendants). While a somber Mr. Carty preached to labor that in this dark hour the necessity for “shared sacrifice” he failed to mention the deca-millions in retention bonuses of 200 percent of salary that management had concurrently approved for top executives. The second tranche of perfidy was the major commission of the omission of disclosing the creation of a new “secret” supplemental executive retirement plan (think pension) being squirreled away only for top executives. Apparently, Mr. Carty felt no comfort in being on equal footing with rank and file employees whose primary pensions may potentially be at risk in a bankruptcy scenario. So the CEO in October 2002 clandestinely funded an irrevocable trust for the top 45 executives which specifically delineated in the trust agreement that trust assets “shall not be subject to the claims of the creditors of the corporation in a bankruptcy”…. Employees were so indignant they threatened to abrogate the recently ratified pay cut labor agreements. The retention bonuses were hastily cancelled but the supplemental pension plan remains in place to this day. Further fallout was the swift “resignation” of the woodenheaded Mr. Carty who received no severance package. But thanks to that recently created executive retirement plan, magically Mr. Carty was gifted $8.2 million. The award was actually closer to $12 million as the $8.2 million was an after tax figure. During the intervening eight year period leading up to the bankruptcy, Mr. Carty’s successor, Gerald Arpey, continued the rich American tradition of, one way or another, of rewarding failure. While recording billions in losses in his own right, Mr. Arpey was insistent in attempting to push through hundreds of millions in executive bonuses. Mr. Arpey, enjoyed regurgitating to the rank and file a pithy little cheer “share the pain, share the gain”. More accurate might have been “all the pain, with none of the gain.” The perpetual struggles of employees protest of executive bonuses in light of their own reduced circumstances leaves many both acrimonious and disillusioned. The covert supplemental retirement plan remains a festering open wound. The airline refuses to issue public disclosures as to its current assets or how much money goes to fund it or where the money comes from. Until the bankruptcy, union representatives had been negotiating since 2008 to reach new labor accords. Only since the bankruptcy with management’s legal right to reject labor contracts has the process moved forward. The Merger: Who’s Getting What Judge Sean Lane has blessed the marriage but the couple won’t be cohabitating for perhaps another six months or so. We know the equity split is 72 percent to 28 percent in favor of American shareholders. Given that stock split and an estimated $1.2 billion in cost efficiencies both secured and unsecured American Airlines creditors are likely to be repaid in full. Doug Parker will be CEO of the combined entity, and Judge Lane disallowed Tom Horton’s $20 million bonus not for any moral reasons, but because it is illegal under bankruptcy law. The board of the new company will have the legal freedom to award Mr. Horton whatever compensation they wish. American Airlines has frozen its employee pension plan which has $18.8 billion is liabilities and an estimated $ 8 billion funding shortfall. Because payments under defined benefit programs are calculated on both years of employee service and a certain percentage of final salary the American unfunded gap likely went down by a few billion. Current employees who retire in twenty years have their benefit computed as of today’s years of service and salary so actuarial future pension liabilities will by definition be reduced. The plan has been replaced with a 401k defined contribution plan where American Airlines will match employee’s contributions up to 5.5 percent of their salary. The company will likely save tens of millions annually under this defined contribution scenario as not everyone will save 5.5 percent of salary every month. Also, this shifts the investment risk from the company to the employee. And come now the egregious insult of a $20 million bonus for caretaker CEO Tom Horton. Here is one more depredation. Regardless of whether Tom Horton receives his undeserved $20 million, he has a pension worth at least $5million. Through accounting legerdemain Horton has been given credit for at least four extra years of American Airlines employment. I almost forgot about employees. Guess what they are getting; the shaft, as usual. I have been in contact with several employees both by phone and e-mail during the past couple of weeks. I got a little detail from a TWU mechanic. In the 2003 giveaway, this gentleman saw his wages reduced 17.5 percent or nearly $20 thousand per year and had vacation time reduced by a week. A decades long American Airlines employee, before the latest new labor contracts he was making a little less than $70, 000 annually. After a decade of wage stagnation, the new post-bankruptcy accord initially calls for a paltry three percent salary increase. But because of increased employee health care cost burdens, a frozen pension and the newly implemented defined contribution 401K program, our example is taking home about $4,400 less per year! While this atrocity was unfolding, the airline and the TWU jointly issued a memorandum which I think was intended as some sort of mission statement delineating myriads of “business improvement opportunities”. There is a climax which specifies areas where “Union and Company agrees……to become best in class.” Like….you just gave me my first raise in ten years which perversely cut my after tax wages by 7 percent………and you throw this nonsense in my face. Are Unions Too Cozy With Management At least in the case of the flight attendants and the mechanics I have gotten some feedback that many are less than happy about the job that APFA and the TWU are doing representing their interests. Did labor have a strong enough voice at the table? All three unions knew about and approved the $20 million bonus for Tom Horton. All three unions readily agreed to place language in the labor agreements “gagging” employees from complaining about excessive management bonuses. Some are of the opinion that inserting “gag” order language was a quid pro quo for the American Airlines reimbursing APFA $5 million for bankruptcy financial consultants and $2 million to pay investment banking firm Jefferies & Co. American also refunded to the TWU over $2.7 million in bankruptcy related expenses. At least in the case of the TWU, I came into possession of union form LM-2 which is a required annual report to the Department of Labor. Total TWU expenditures were $45.6 million versus $44.8 million in receipts. The point is that $2.7 million is not an insignificant number for the TWU. Top management at all the unions receives a designation A-5 travel pass. With this perk, APFA president Laura Glading and her family can travel first class anyplace, anytime and have priority that can bump a full fare passenger. Ms. Glading can retire at the end of her term with this benefit intact. Her predecessor, Tommy Hitto-Blake retired with A-5 travel. At the time it was kept secret from union membership. Why keep it hidden if there is nothing underhanded going on. I also came into possession of a number of TWU form L-10’s which are disclosures of gifts or perks that American Airlines doles out to union officials. I discovered thousands of dollars in free airline travel, meals, and even baseball tickets. Also, top TWU officers are appointed for life and not elected like counterparts at APA and APFA. If an appointment lacks accountability to those to whom you are to represent, then it becomes little more than a sinecure. Woven all together, a case can be made for an incestuous relationship between union management and executives at American Airlines. Top union officials make $200,000 or $250,000 or more exclusive of perks and benefits worth many thousands more. With these “cushy” jobs does there exist a lack of incentive for these agents of the workers to fight their hardest for them. Judging by the results of the latest rounds of labor negotiations, it is at least a possibility. Deregulation and The Law Of Unintended Consequences When dust has settled, and these two companies begin cohabitating together, the United States will be left with but four airlines that control 90 percent of all domestic traffic. Prior to the October 24, 1978 enactment of the Airline Deregulation Act (“Act”) or the “big bang” in airline jargon, airlines were governed by the now defunct Civil Aeronautics Board. It was a staid if not gentlemanly arrangement. It set fares and granted (or not) licenses to airlines for new routes. The system had functioned for over four decades when in the early 1970’s the Arab oil embargo drastically increased fuel prices and the economy suffered from stagflation. The rate system often subsidized inefficient routes. As air fares were escalating rapidly, congressional pressure mounted to scrap this antiquated bureaucracy. The theory was that an industry once untethered from government shackles would surely thrive under unfettered capitalism. After thirty five years and hundreds of new startup airlines, hundreds of bankruptcies, liquidations, reorganizations, and mergers, in 2013 what are the remnants of the “Act”? The Justice Department evaluates all airline mergers and acquisitions on competitive grounds with the Transportation Department and FAA chirping in background advice. Congress which has the discretion to intervene has opted out of the major mergers between United/Continental and Delta/Northwest. Each mega merger effectively grants near monopoly at many airports and for many routes. Justice denies ATT the right to merge with T-Mobile but yet blesses a United/Continental union that has limited or no competition on many routes. Either doing proper diligence is neglected or it is fair game to call Justice Department competence into question. Will Justice do their usual wink and nod and bless the US Airways/American combination that will create the world’s largest airline? If they do then airline consolidation, with full government blessing, will be complete. Four airlines (United, American/US Air, Southwest, and Delta) will control the domestic skies. Intra market monopolies will predominate to detriment of the traveler. If an aberration occurs and the marriage is denied, pundits question whether either US Airways or American can compete solo against the giant tentacles of United, Delta, and Southwest. So we’re damned if they do and damned if they don’t. With these four mega airlines having near domestic monopoly at many regional airports, contrary to whatever nonsense the consultants parade before Congress, airfares will drastically increase. I live in Houston, Texas and after the United/Continental combination, United now controls over 90 percent of domestic travel in and out of our Houston Intercontinental Airport. Many fights have been consolidated so travelers have fewer choices and fares have been radically increased .The landscape is the same at major airports like Denver, Dallas, and Atlanta. The Future After the multitudes of iterations of three and half decades, the airline industry is now structurally in its most powerful position in the history on aviation; it is poised to reap massive profits from the now entrenched government approved oligopolistic framework. Was this what the framers of the Airline Deregulation Act envisioned? These big four major airlines are all not surprisingly projected to make lots of money in 2013 and 2014. With current industry configuration, I do believe a trained chimpanzee could run these airlines profitably. Within this industry structure of near guaranteed profitability there needs to be significant profit participation formula for TWU, APFA, and APA members. These employees have truly sacrificed and the time has come for a little bit of catch-up. To prevent executives from gaming the system, calculations should be based on the same criteria that any future executive bonuses are based on. Each of the three unions should have a seat on the board of directors to act as a check against management over reach. American Airlines employees have no shortage of grievances to be angry about. It is the cronyism of this management team that serves as a paradigm for why many complain about the unfairness perpetuated in the boardrooms of corporate America. No one can know whether workers will be treated more equitably under the US Airways managers. I only know there is only one way it can go.

 

Here come the Vikings

For Bjorn Kjos, Norwegian Air Shuttle’s boss, success may depend on ruthlessness

Apr 27th 2013 | OSLO |

HE WAS a pilot in the Norwegian air force, then a lawyer. Like many Scandinavians, he has penned a thriller in his spare time. But Bjorn Kjos (pictured) is celebrated in his home country as the man who brought low-cost flying to one of Europe’s most expensive countries.

Last year the airline he co-founded and runs, Norwegian Air Shuttle (NAS), placed the biggest aircraft order Europe has yet seen. It will buy 222 Boeings and Airbuses for around $10 billion, aiming to compete with Ryanair and easyJet, Europe’s champions of cheap aviation.

In this section

 

This is on top of an earlier order for a fleet of Boeing 787 Dreamliners, which NAS will use (now that their battery problems have been fixed) to launch flights to Asia and America later this year. Offering such a long-haul, low-cost service will be fiendishly hard. Mr Kjos has the ambition and appetite for risk of a Viking hopping on a longboat and paddling off to pillage Northumberland.

To escape high Nordic labour costs and taxes, NAS is increasingly basing planes and hiring people elsewhere: in Spanish resorts and at London’s Gatwick airport. Its back office is in Latvia; its IT department is in Ukraine. It plans to run its Asian flights out of Bangkok, and hopes to fill the planes mostly with newly rich Asians enjoying their first foreign holidays. Already it is flying British tourists to Spain and Spaniards to Britain. NAS’s planes, which like Santa’s chief reindeer have shiny red noses, are set to become a familiar sight.

As Mr Kjos tells it, he became a buccaneering airline boss largely by accident. In 1993, when he was a partner in a law firm, some friends asked him to draft an investment plan to revive their collapsed aviation company, which was flying commuter routes under contract to another carrier, Braathens. Finding fresh investors proved hard, so after all the work he had put in, Mr Kjos and his brother decided to take a 55% stake (since reduced to 27%) in what became NAS. In 2001 Braathens was taken over by SAS, a struggling carrier part-owned by the governments of Sweden, Denmark and Norway, and took the commuter routes in-house. Thus Mr Kjos was forced to relaunch NAS as a low-cost airline, mainly serving Scandinavia.

As fuel prices soared in the mid-2000s, and competition from the likes of Ryanair and easyJet intensified, Mr Kjos realised that the only route to survival was to buy lots of new, fuel-efficient planes to achieve economies of scale, and to base some of them in cheaper countries. Boeing and Airbus are straining to keep up with booming demand for new aircraft, so by reserving a large chunk of their delivery slots NAS is denying potential rivals the chance to refresh their fleets with better planes.

Axeing costs, not skulls

 

Preben Rasch-Olsen of Carnegie, an investment bank in Oslo, reckons this gamble will pay off. Even before NAS’s planned expansion across Europe and beyond, there is much scope in the Nordic countries for swiping passengers from SAS—perhaps enough to fill all the new planes it will receive in the next five years.

Last month Ryanair announced a big order of its own, saying it would buy 175 Boeing 737s, probably costing around $8 billion. But whereas Norwegian is mainly ordering the re-engined “MAX” version of the 737, to be launched in 2017, Ryanair is choosing a less fuel-efficient version. Its boss, Michael O’Leary, seems to be betting on a lower fuel price than Mr Kjos. Indeed, says Mr Rasch-Olsen, a big fall in oil prices would be bad news for NAS. Other airlines with older fleets would no longer find them uneconomical to fly, so there would be lots more planes chasing the same passengers, and perhaps a price war.

Some have also assumed that Mr Kjos was betting on SAS going bust. But last year the rival airline’s threat to close itself down if staff did not accept big cuts paid off, and SAS is still flying. However, Mr Kjos argues, this is good news, not bad: it is better to have a still-limping competitor than to see it disappear and its routes and airport slots snapped up by a more efficient rival—such as Ryanair, which is sniffing around Scandinavia looking for domestic routes to fly. When Hungary’s national airline, Malev, collapsed in early 2012, it took Ryanair only hours to announce that it would take over many of its flights.

New lands to conquer

 

The move into long-distance flying is the latest example of Mr Kjos seeking to expand wherever he can. Jonathan Wober, an analyst, reckons it will be hard to recruit and manage staff at a distant Asian base, and that NAS will be competing against Asian carriers with lower costs. Many have tried unsuccessfully to fly long-haul cheaply, from Freddie Laker in the 1970s to AirAsia’s Tony Fernandes in recent years. True, says Mr Kjos, but they did not have the Boeing 787 or its forthcoming Airbus equivalent, the A350, which are designed to fly long routes profitably with fewer bottoms on seats than earlier craft.

From the Vikings to Roald Amundsen, Norwegians have always been up for a foreign adventure. But nowadays their country runs along consensual Scandinavian lines, with high costs and taxes and strong unions and labour laws. So far, says Jacob Trumpy, author of “Hoyt Spill” (High Stakes), a history of NAS, Mr Kjos has been seen as a local hero, but of late he has been acting in a rather un-Norwegian manner, demanding labour-law reforms, hiring cheap foreigners and threatening to shift more aircraft out of the country.

Parat, the main union at NAS, complains that Mr Kjos has been drafting in Spanish flight attendants to operate Norwegian domestic flights. The airline says it has brought in a few, to help cope with the summer peak, and that they are enjoying Norwegian pay and perks. The book claims that in tense talks with the unions last year, Mr Kjos threw a chair at a wall; he denies this. He says he believes he has good relations with staff but, given the threat from Ryanair and easyJet, he is “prepared to be unpopular” to save jobs.

A report this month by CAPA, an aviation consultancy, shows how cost-effective NAS has become under Mr Kjos. Since most of its staff are still Scandinavians, their average cost is almost as high as SAS’s. But since it makes far better use of them than its rival, those costs as a share of revenue are closer to easyJet’s, though still well above Ryanair’s (see chart). In the past year NAS’s post-tax profits have almost quadrupled to NKr457m ($80m), though these were far behind the €540m ($700m) that Ryanair is likely to have made.

A long way still to go, then. But is Mr Kjos moving too fast, in danger of losing his cuddly, Richard Branson-like image and becoming a media hate-figure like Mr O’Leary? That is a risk, but Norwegian opinion may be moving in his direction. Polls suggest that in this autumn’s election the left-wing coalition government will be replaced by a more free-market one.

Since 2006, Mr Rasch-Olsen reckons, Europe’s low-cost carriers have increased passenger numbers by 12% a year, whereas its full-service airlines have grown by only 2% annually. Air France-KLM and IAG (the parent of British Airways and Iberia) are now getting tough with their unions and seeking to expand their own low-cost subsidiaries. IAG said on April 23rd that it would increase its stake in Vueling, a low-cost Spanish carrier, from 45.9% to 90.5%. It has also told Iberia pilots that it will cut their pay by 18% because they rejected a cut of 14%. But despite these efforts, traditional carriers are likely to see more of their passengers carried off by the Celtic, Anglo-Saxon and now Viking raiders.