Monthly Archives: July 2009

By Popular Demand: United Breaks Guitars

Okay, I give in.

Either I talk about this, or you guys are going to continue to pelt me unmercifully until I do!

No question that the number one item generating reader response in the email bag this week is the case of United Airlines and Dave Carroll’s smashed guitar.

It appears that Dave Carroll of the band Sons of Maxwell hopped a plane with his bandmates from Halifax to Omaha by way of Chicago last year. As the plane unloaded atn O’Hare, Dave happens to look out the window in time to witness the baggage handlers throwing around instrument cases, namely THEIR instrument cases, like beach balls.

He said something to the flight attendants on board — but was met, as he put it, with “disinterest and disregard.”

Fast forward to Omaha, and no, Dave is not surprised at all when he finds that the base of his 710 acoustic Taylor guitar is smashed when he retrieves it from baggage claim. However, the show must go on, and Dave makes do with a stand-in.

A week later Dave made a formal complaint to United, which he says was never acknowledged. Over the next several months, Dave says that he called, emailed, and generally tried to get attention paid to his situation, and the best he received was a denial based on the fact that he didn’t “complain in the right place, or at the right time.”

Having spent some $1200 to repair his guitar, Dave was still not a happy man. Nor was his guitar the beauty she used to be.

So Dave did what song writers do.

He sat down and wrote a song about the whole thing, “United Breaks Guitars.” Actually he wrote three songs. “United Breaks Guitars” is actually “Song One.” “Song Two” is supposed to be posted shortly.

The video of “Song One” was posted on YouTube this week and it has already generated about 1.5 million views. “Song Two” is apparently already written and the video is “underway.” “Song Three” is still in the creative process.

For those of you with really enquiring minds, or if you just want to see some cute shots of Dave (hey, he’s a doll — with a Canadian accent no less) you can read the long version of the story on his website.

The PR machine at United has ground itself into action over this. In an update video, Dave says that the airline has, belatedly, offered to hand over some bucks. Dave says in the video that he doesn’t want the money. But he does want United to take the money and give it to a charitable organization. And yes, then United needs to tell all of us just which organization that was.

In the meantime, he told the last person he dealt with at United, Ms. Irlweg, that he was going to write three songs, and that is what he still intends to do.

Can’t wait to see and hear song two — which apparently deals mainly with “Ms. Irlweg.”

A story like this warms my heart. For more than one reason. The main one being that it illustrates so clearly why old style methods of “command and control” management and/or PR just are not going to cut it anymore these days.

You can’t control the web. You can’t keep this guy from writing his songs. And an offer to compensate him at this point — not enough. The airline comes across as slow-footed and dim-witted.

It’s a PR nightmare — one that all companies, not just airlines, need to understand.

Enquiring minds want to know… I wonder if United made it even worse and “requested” that he not post any more songs — when they finally made him their “compensation” offer this week?”

Continental/United Antitrust Immunity Granted: With a Few Strings

Continental Airlines was granted limited antitrust immunity today by the U.S. Department of Transportation — a move that will allow it to join United Airlines and other airlines in the Star Alliance in creating schedules and determining fares.

The order did, however, set limits on the antitrust immunity in regards to some international routes.

The order excludes rights between the U.S. and Beijing. In addition, the order also does not grant immunity for those flights between U.S. and Canada, and to those flights between New York and Copenhagen, Geneva, Lisbon, and Stockholm.

These “strings” were more or less foreshadowed in the recent Department of Justice filing, in which the DOJ discussed the possibility of “harm to consumers” on routes between the U.S. and China, Canada, Denmark, Portugal, Sweden and Switzerland.

The decision did, however, give the green light to a proposal that will see Continental, United, Lufthansa and Air Canada create a joint venture for some international flights.

This was the right call for the DOT to make, although the DOJ ruling last week was a bit troubling. As I have said for years, if U.S. ownership laws continue to hamstring U.S. carriers from linking up directly with international counterparts, then antitrust immunity — which allows them to participate more fully with international carriers — is the answer.

Airline Analyst Dan McKenzie Resurfaces

This week I was happy to see an old name reappear at the top of a handful of airline research reports. That name? Dan McKenzie.

Most recently Dan was the airline analyst for Credit Suisse. Dan has now resurfaced as the airline analyst for Next Generation Equity Research.

This week Dan initiated coverage on JetBlue, Southwest and AirTran.

Dan initiated coverage of JetBlue with a “buy” rating and a $6 target price.

In his note, Dan commented,

Our 2009 profit forecast is largely in line with a consensus outlook, however, our modestly better 2010 outlook results from jetBlue’s new revenue management system, legacy carriers that continue to exit jetBlue’s largest markets, and revenues that begin to finally trickle in from a Lufthansa code share (which is not yet announced but a logical assumption in our view given the close relationship between the two carriers).

Despite its smaller size and five years of reported losses or weak profits, our outlook is on balance positive based on a number of unique findings in our proprietary capacity study.

We found the industry cutting head to head flying by 15% in jetBlue’s routes, leaving jetBlue with the industry’s best competitive dynamic. In particular, we found AMR cutting as much as of 50% of its flying in jetBlue’s top 50 markets (airport to airport), while other carriers are cutting 15-30%.

At Fort Lauderdale, a focus city, we found both AMR and US Airways shrinking 47% and 14% respectively (as jetBlue grows +16%).

Dan also initiated coverage of Southwest Airlines.

Dan assigned Southwest a “neutral” rating and a $7 target price.

In his note, Dan wrote,

Southwest is the industry’s best fundamental story and as such, continues to be a longer-term play on the industry. However, given our anticipation of upcoming earnings disappointments, we’d wait for a better entry point.

Southwest is transitioning from a growth carrier to a cyclical carrier, but it’s not there yet. Substantial market share gains against weak legacy carriers underpin our view that the industry consolidates over the next two years, and Southwest is positioned to be a primary beneficiary.

Our slightly more aggressive valuation multiple vs the Street partially factors in earnings optionality from further industry consolidation over a 2 year time horizon.

Despite a cost structure that has inflated over the years, Southwest is still the lowest cost producer. And its cost advantage is set to widen as legacy carriers reset labor contracts higher.

In the near term, Dan said the airline’s revenues and cost headwinds are pressuring margins. Because or this, and the fact the airline now has to renegotiate its pilot contract, Dan advises, “We’re not telling investors to race into thie stock, though for those that can look longer-term, Southwest continues to be a great play on the industry.”

And finally, Dan also initiated coverage on AirTran this week. AirTran also received a “neutral” ranking from McKenzie, along with a $7 price target.

In his note on AirTran, Dan wrote,

Following years of growth, AirTran, along with others, is responding to a demand shock by cutting growth and spending. The network changes position the carrier to report profits and begin the process of balance sheet repair (which is in contrast to AirTran’s 2008 loss that nearly erased five years of profits).

AirTran, like others, lacks adequate pricing power given industry overcapacity which means profits will remain levered to fuel prices. However, when removing fuel from the equation, upside to our modest profit this year and next appears unlikely based on our proprietary network study.

We found competitors cutting head to head flying on AirTran’s routes by 1.9% in 2Q09 and by 5.5% when factoring in indirect competition. While it’s always encouraging to see less capacity, AirTran’s competitive dynamic nonetheless ranks last on our industry measures.

AirTran’s smaller size and lack of dominance in its markets leaves its revenues more exposed (vs peers) to larger and better capitalized competitors. As one of the lowest cost, lowest fare carriers in the industry, AirTran’s cost structure is thus a critical source of competitive advantage.

AirTran’s current level of liquidity is not robust and limits the carrier strategically, but it’s adequate. And while AirTran’s liquidity strengthens on our outlook, an even stronger balance sheet would aid AirTran’s competitive position and revenue stability. As a result, we don’t rule out new equity issues (perhaps in the $7 to $10 stock price range).

Look Who Is Now On the Chrysler Board of Directors

I couldn’t help but laugh when one of our readers sent us this note today:

“I noted with interest yesterday the appointment of [former Northwest Airlines CEO] Doug Steenland and [former United and US Airways CEO] Stephen Wolf to the new Chrysler board of directors.

In a perhaps related development, did you hear that Chrysler as part of its push for streamlined operations and greater efficiency is going to adopt the Henry Ford model for paint choices. From now on, you can order your new Chrysler, Dodge or Jeep in any color you wish — as long as it’s gray.

Blue and red pinstripes, $500 extra.”

Rimshot please.

Where Did It Go?

Uh-ho. Our Ode to a Hot Dog column literally disappeared into the depths of the Internet, while leaving only a headline. Well…..$&$O#OLGl.

Be back later — hopefully with a column.

Ode To A Hot Dog, Circa 2009