Northwest Partnership Leads to Solutions for High Jet Fuel Costs
In news coverage about the airline industry, there are countless worldwide news reports about the plight of most airlines suffering from high fuel costs. A typical headline – Airlines React to Rising Fuel Costs by Cutting Service and Flights.
So, it’s about airline jobs, and commerce – enhanced aviation service for businesspeople and consumers. Fuel expenses constitute as much as 30 percent of an airline’s operational costs.
But an aviation biofuel industry is taking hold in the Pacific Northwest, thanks to a partnership called Sustainable Aviation Fuels Northwest (SAFN), which produced results from a 10-month study in May, 2011. In effect, the report is a SWOT analysis for developing public policy and biofuels for the airline industry.
The study’s partners: Boeing (NYSE: BA), Alaska Airlines (NYSE: ALK), Portland International Airport, Seattle-Tacoma International Airport, Spokane International Airport and Washington State University.
“It is critical to the future of aviation that we develop a sustainable supply of aviation biofuels,” said Boeing Commercial Airplanes President and CEO Jim Albaugh. “Airlines are particularly vulnerable to oil price volatility, and the aviation community must address this issue to maintain economic growth and further mitigate the environmental impacts of our industry.”
So how will it be possible?
“The Pacific Northwest has the diverse feedstocks, fuel-delivery infrastructure and political will needed to create a viable biofuels industry capable of reducing greenhouse gases and meeting the future fuel demands of the aviation industry,” states the SAFN’s press release . “Creating an aviation biofuels industry, however, will depend upon securing early government policy support to prioritize the aviation industry in U.S. biofuel development.”
SAFN indicates a biofuels industry for aviation is the next logical step.
“Alaska Airlines has made significant strides in reducing its environmental impact by enhancing the efficiency of its operations, including using satellite-based flying technology and investing in the most fuel-efficient airplanes in their class – but efficiency is only part of the answer,” said Alaska Air Group Chairman and CEO Bill Ayer.
“In order for the aviation sector to continue its impressive record of fuel efficiency and emissions reduction while continuing to grow, it is important that a sustainable supply of aviation biofuels is developed,” added Mr. Ayer.
SAFN explains how it can be accomplished.
“To make a sustainable biofuels industry a reality, the study outlines an integrated approach recommending the use of many diverse feedstock and technology pathways, including oilseeds, forest residues, solid waste and algae,” according the SAFN press statement.” In addition, the study outlines the long-term importance of securing aviation biofuels as a top government priority and using the aviation industry to drive growth in domestic production.”
The SAFN study encompassed the full gamut from biomass production to airline usage.
“However, as with any new energy supply, political support at the state and federal level is critical in the early stages of development,” cautioned the press release. “While the study does not advocate for permanent government support, it recognizes that focused public investments and parity with other biofuels programs will be needed to place the industry on an economically competitive basis.”
Port of Portland is one of the three Northwest airports that are participating in SAFN.
“The Northwest is uniquely positioned to serve as a blueprint for developing a U.S.-based, sustainable aviation biofuels industry,” said Steve Schreiber, Port of Portland aviation director.
The Port of Seattle says biofuels for aviation are an environmental solution.
“Airports have been leaders for years in finding ways to reduce their environmental footprint, from clean fuel sources for taxis and shuttles to electrification of ground equipment and pre-conditioned air, but in order to take the next big step we have to address emissions from aircraft,” said Bill Bryant, Port of Seattle commission president.
“We can’t get there without biofuels. It not only will help the sustainability of the Northwest but also the aviation industry,” he asserted.
Spokane International Airport says biofuels is important for competitiveness.
“We can no longer base our future on imported petroleum, especially if the United States wants to remain an aviation leader,” said Lawrence J. Krauter, chief executive officer, Spokane International Airport. “The SAFN study proves domestic biofuels are feasible and offers an economic opportunity for us to remain competitive as an industry and move toward a sustainable, domestic fuel supply.”
Washington State University makes a prediction.
“WSU will combine our world-class biofuel and agricultural researchers along with significant institutional assets to leverage the Northwest’s abundance of agricultural and natural resources necessary to create a dynamic new aviation fuels industry,” said Dr. John Gardner, vice president for Advancement and External Affairs at Washington State University.
“The long-term payback will be a stateside industry that greatly enhances our traditional economic strengths; from farming and forestry to engineering and aerospace, creating new opportunities and new jobs for the Northwest,” added Dr. Gardner.
SAFN originated in 2010 with more than 40 partners.
My sense:
Congratulations to SAFN stakeholders. No one wants to inflate the Washington state or federal budget. But surely with this study, we’re half way to more environmental and fuel-efficient solutions.
Who knows? Boeing will sell more jets. Alaska Airlines will become even more successful. WSU will enhance its already terrific reputation. And the regional airports will get even better.
Besides, a biofuel proposal that includes the productive use of algae? Terrific. I don’t know about you, but my allergies might disappear.
Fly, fly, fly away!
From the Coach’s Corner, here’s more on SAFN: www.safnw.com.
“Where there is an open mind there will always be a frontier.”
-Charles F. Kettering
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Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
Alaska Airlines CEO Bill Ayer Denies Insider-Trading
Oct. 7, 2010
Alaska Air Group Chairman and CEO Bill Ayer says he did nothing iniquitous following a Bloomberg News report that the U.S. Securities and Exchange Commission is investigating him for possible insider-trading violations.
The SEC probe concerns whether he helped hedge fund Donald Smith & Co. profit from confidential information in its purchase of shares in Puget Energy just before regulators okayed a $3.89 billion takeover in 2008. Shares in Washington state’s largest utility jumped 21 percent following news of the buyout.
Mr. Ayer is included in the investigation because Donald Smith was Alaska Air’s No.1 investor while he was also serving on Puget Energy’s board. Mr. Ayer is now chairman of the board.
“I never provided any material non-public information about Puget Energy to Donald Smith & Co., or anyone else,” Mr. Ayer responded in an e-mail to Bloomberg.
It’s important to note that Mr. Ayer and the hedge fund have not been accused of misconduct.
“The Alaska Air Group board of directors has full confidence in Bill and his high ethical standards,” said Marc Langland, the board’s lead independent director.
In addition to his duties at Alaska, Mr. Ayer is chairman of the Seattle branch of the Federal Reserve Bank of San Francisco.
Alaska Air shares dropped 8 percent immediately following the Bloomberg report. At the end of the day, shares were down 4.61 percent.
In the 2008 deal, Donald Smith doubled its shares to 6 million in Puget Energy. They were valued at $160 million following the leveraged buyout. After Washington state regulators challenged the sale, other investors – Tradewinds Global Investors LLC and American Century Cos. Inc. – sold their holdings in Puget Energy.
My Biz Coach sense: It’s hard to believe that the SEC‘s investigation will be able to implicate Mr. Ayer. Let’s hope this gets settled quickly. Alaska is too great an airline and is worthy of maximum investor confidence.
From the Coach’s Corner, here’s the Bloomberg report.
Strategic Planning Lessons: Why United Airlines Was Forced to Merge with Continental
Dec. 7, 2011
United Airlines (UAL) was forced to merge with Continental Airlines because of anemic strategic planning.
It’s a $3 billion merger with about 1,200 jets and more than 86,000 workers.
Sadly, after eight decades, UAL’s logo is history. The Continental logo remains.
The merger has meant a mega review of 2,000 policies and procedures.
UAL’s loading procedure prevailed. Window passengers seated first, and aisle passengers seated last. To UAL’s credit, this makes for the fastest-possible boarding time.
Its policy for loading pets will remain – they will be loaded onto the jets tail-first. Amen.
But starting with the new branding slogan, “Let’s Fly Together,” one has to wonder if the new airline will get it right. The slogan does not convey a fun experience with value and safety.
When the student is ready, the teacher appears. In a dubious way, management at UAL is our teacher in strategic planning.
History of good planning?
In 2002, I wrote an uncomplimentary commentary about UAL’s management. UAL’s bankruptcy filing was a major concern to businesses, investors and workers. It was the largest airline bankruptcy in the nation’s history. UAL comprised about 10 percent of Boeing Capital’s $11.5 billion loan portfolio as a result of jet deliveries to UAL.
Boeing’s move to Chicago, which is also UAL’s home, made it easier for the manufacturer to monitor bankruptcy proceedings and to persuade the airline to make good on its financial commitments. My sense was that other reasons included the attitude of labor, the Washington State Legislature’s approach to business and the need to be close to money markets and be more centrally located for stakeholders.
In May 2005, UAL’s plan to terminate employee pensions – the largest corporate pension default in U.S. history – was approved by the bankruptcy judge. UAL managed to dump its pension obligations on the Pension Benefit Guaranty Corporation (PBGC).
In Oct. 2005, the airline got a $3 billion loan from JPMorgan Chase & Co. and Citigroup Inc., and emerged from bankruptcy in Feb. 2006.
Poor ESOP model
In the wake of UAL’s financial collapse, it might have seemed logical to rebuke employee-owned companies, or employee stock ownership plans. UAL’s failure was not a reflection of ESOPs but it provided lessons in developing a productive business model and operating a complex enterprise. After all, there are more than 11,000 successful employee-owned companies throughout the nation.
The ESOP concept evolved when it was theorized that company employees are more productive when they feel a sense of ownership. But UAL’s ESOP was established for the wrong reasons in 1994.
You might recall the acrimony at UAL when the CEO, Stephen Wolf, threatened to break up the airline and outsource maintenance projects. Instead, Mr. Wolf was given $30 million to walk away as the unions embarked on their plan to save thousands of jobs.
UAL essentially became an employee-owned company, 55 percent of the shares, in 1994. Employees gave up some $700 million in wages and conceded some work rules. In exchange, the workers bought out the boss and stockholders.
The TV ads were glitzy and impressive as UAL’s stock ultimately soared above $100 a share in 1997. Then it happened: The concept was failing and UAL’s TV ads touting the airline as an employee-owned company disappeared from the airwaves. The sky-high stock price began to descend.
Published reports in 2002 indicated union members needed to conduct a reality check about their misdirected anger – they blamed the Air Transportation Stabilization Board for refusing to make a $1.8 billion loan to UAL.
There are good reasons why UAL’s ESOP failed to blossom and the bud fell off the rose. It wasn’t because of 9/11, or because the airline was refused the government bailout. Simply put, harmony and healthy participatory management are needed for ESOP success. UAL’s ESOP proved to be an anomaly – management and employees were not united.
Strategic-planning lessons
Of the 14 major airlines before 1978, only six remained in 2002. Like the 120 carriers that have failed in recent decades, UAL failed because of an unproductive business model:
Infrastructure. Bigger isn’t always better. In 2002, UAL was the second-largest carrier behind American Airlines. It dropped to fourth in passengers flown. UAL had unsuccessfully operated hubs in Washington D.C., Chicago, Denver, San Francisco, and Los Angeles. A modified hub system with more direct flights would have been less costly to operate.
Uniformity. It only seems logical and cost-effective to operate a single aircraft brand for the majority of operations instead of a hodgepodge of planes. There are usually rewards for being loyal to vendors, including cost savings in purchases of jets and parts, as well as maintenance and operation simplification with one aircraft line instead of multiple aircraft makes.
Finally in 2009, UAL began negotiating with Airbus and Boeing for the purchase of 150 fuel-efficient planes to replace part of its aging fleet. Given its balance sheet, it was anticipated that UAL would depend heavily on the manufacturers for financing.
Did UAL finally learn that it will have more leverage if it limits its purchases to one manufacturer? No. UAL bought from both Boeing and Airbus.
Market conditions. Yes, airlines have had a tough time, especially because of fuel prices and passenger demand. But profitable airlines have consistently utilized economic principles, such as a no-frills approach, while UAL failed to adapt in losing $8 million a day. UAL lost $2.1 billion in 2001 and $1.74 billion for the first nine months of 2002.
UAL’s losses continued throughout the decade. For example, it lost $792 million in Q3 2008. In 2009, UAL failed to capitalize on plunging fuel prices. Its 2009 Q3 fuel bill decreased almost 57 percent or 1.1 $1.1 billion, but the airline lost $57 million.
Contrast UAL with Alaska Airlines, which netted $13.1 million in Q1 2010, and that’s typically its weakest-earning quarter each year. Alaska ranks well in on-time performance.
Failure to keep arms length from employees. With adversarial union leaders represented at the board level, it was impossible to keep labor costs at a realistic level.
Corporate welfare. In 2002, I pointed out this disturbing incident: Behind the scenes, the Air Transportation Stabilization Board had allowed accountants from competing carriers to examine UAL’s financials. They pointed out numerous flaws; consequently, the board gave the carrier several opportunities to revise its deficient business plan. UAL failed to do so.
Again, the company dumped its underfunded pension obligations on the PBGC. CEO Glenn Tilton kept his $4.5 million pension and is paid$10.3 million a year – considerably more than his peer airline CEOs.
Management. With due respect, Mr. Tilton was hired to save the company without sufficient airline experience. He was recruited from the oil industry. Plus, it takes a strong, non-confrontational administrator to cope with such challenges, and his team wasn’t strong enough to offset his weak points.
It’s also unfortunate that Mr. Tilton failed to avoid nearly $400 million in losses on fuel hedges in recent years – despite his decades of experience in oil.
And consider UAL’s rankings in The Air Travel Consumer Report in 2008 by the Department of Transportation’s Office of Aviation Enforcement and Proceedings:
- On-Time Arrivals: Near the bottom with 27.2 percent of its flights delayed.
- Complaints: The worst.
- Baggage Mishandling: United ranked 9th out of 19 places for baggage mishandling.
To view the report, click here.
In Sept. 2011, UAL still didn’t rank well in on time flights – ranked third in flight delays at an average of 84 minutes per delay, according to Air Travel Consumer Reports for 2011.
In terms of strategic planning, UAL has not flown high, but had started to show some signs of corporate wisdom.
UAL started the process of improving its infrastructure. For example, it laid-off 36 employees at Manchester-Boston Regional Airport, and cut capacity in half because its two flights to Chicago’s O’Hare airport have been replaced by United Express and its smaller aircraft. This was part of UAL’s plan to cut its overall capacity by 10 percent.
Failure to honor tradition
Regarding the purchase of new planes, tradition and relationships should have been considered by the airline. Yes, UAL operates outside the U.S., too, with flights to Asia, Europe and Latin America with 3,300 flights to more than 200 destinations.
But my sense is UAL should have only gone with Boeing for three basic reasons:
- In recognition of its Boeing roots starting eight decades ago
- Boeing’s past goodwill in service
- Boeing’s risk-taking in extending more than $1 billion in financing to the carrier
And in customer service, UAL could learn from Alaska Airlines. I’ve flown both and there is no comparison. Connecting flights and poor customer service are a nightmare. My business associates have made similar unsolicited comments.
The new airline has a long way to travel if it’s going to successful.
From the Coach’s Corner, here are more resource links:
For more analysis regarding airline strategic planning:
Northwest Partnership Leads to Solutions for High Jet Fuel Costs
Boeing, Airbus Rivalry: Lessons in Strategic Planning.
“If black boxes survive air crashes, why don’t they make the whole plane out of that stuff?”
-George Carlin
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Terry Corbell is a business-performance consultant and profit professional. Click here to see his management services (many are available online). For a complementary chat about your business situation or to schedule Terry Corbell as a speaker, why don’t you contact him today?
