GLG News by Addison Schonland

Implications: The story speaks of a few planes at O'Hare, but its worse than that. This was not an isolated event.

Analysis: When this story broke earlier this week, the lack of media attention was frankly alarming. How could this not be a front page major headline?

After all, this is a case of criminal action. NOBODY is allowed airside at a US airport who does not have clearance.  While TSA has this, there is a further rule - only FAA licensed people can touch or tamper with planes. Doing so without such a license is a federal offense. That's serious stuff.

So consider this - who is in charge at the airport? FAA or DHS? In case you did not have enough to worry about at the airport - its bad enough TSA has to irritate everyone getting to the plane. Now you have to wonder whether TSA may have damaged the plane!  This is insane.

Indeed, please listen to this podcast with the man who broke the original story. As he puts it, we are almost certainly headed for a disaster as long as TSA remains unfettered. TSA has, in short, become a risk. Isn't that comforting? Warning - you will not like what you hear.

http://iagblog.podomatic.com/entry/2008-08-21T14_11_07-07_00

Implications: This "merger" is not of equals but is necessary for both airlines.

Analysis: BA needs this deal. It is one of three big Euro-airlines, the others being Lufthansa and Air France/KLM.  Lufthansa has Swiss in its stable and will no doubt be adding Austrian before too long. Air France/KLM started the consolidation in order to ensure they added a lot of heft to their joint business.  Both Lufthansa and Air France/KLM have benefited from their actions.

BA needs heft now too. Hence the Iberia connection. By becoming bigger, BA ensures nobody else will try take a bite out of it. Note Iberia has a stake in BA and has said it will increase this. Similary BA has a stake in Iberia and has an option to go as high as 30%.

Iberia, fearing Lufthansa mainly, wants the BA deal because it has been trading with BA for years. There is comfort in that. Better for Iberia to hook up with BA than anyone else.

The combined company will clearly try to source items, like planes and fuel, together. They will also try to add American Airlines to their group and thereby lock up the North Atlantic and Latin American markets with the USA. A smart ove if they can pull it off - and the bet is that they can.

Implications: Airbus' employees are from across Europe and now stretches as far as China.  The cultures these people come from cannot be ignored or papered over.

Analysis: It is generally accepted that the best managers are those that strive to streamline business around core competencies. Great business school stuff isn't it?  But business school teaches little about politics - unless perhaps you went to a famous French Ecole, where the swampy areas between business and politics are manifest and "taught".

Airbus is facing culture shock on a grand scale. Adding a factory in China will only add more complexity. As the article points out, Germans and French have decidedly different ways of doing things. Imagine then when Airbus decides that its language will be English. Not even the Spanish will appreciate that.

Airbus (and its parent EADS) are having a tough time with labor. Its Power8Plus is going to hurt somebody - everyone knows this, but nobody is sure who. Its top managers remain under a cloud from insider trading. The weak dollar is adding costs to the firm, whose production costs are in Euros. It nearly won the USAF tanker - but that is now bungled (no fault of Airbus or EADS) and a plant planned for Alabama is on hold. Its A400M transport plane is running late - very late. Its A350XWB is adding sales but is already late, compared to the 787 against which is was to primarily compete.

This volley of aggravation makes painful reading. Now revisit the premise of the article. Yes cultures are clashing. Airbus has a huge number of part time workers (that's a big surprise by the way). Imagine the rising complexity from the EU that want to protect jobs as Airbus wants to shed them.

By the way please do not ignore the latest strike at Lufthansa. This is a harbinger of things to come.  Airbus' labor is going to be asking for salary raises.  Those raises are priced in Euros. More ouch to come.

Implications: Putin started to consolidate Russia's aerospace firms some years back.  He also insisted in interfering with the fleet decisions at Aeroflot. Most people were of the opinion that this was typical of Russia's political leadership - was he right to do it?

Analysis: Russia has always been an enigma for western analysts. The babushka doll has been the best illustration for them  -what you see was not really what it is, there were always layers within.

Western analysts don't like obfuscation and subtlety. We like things transparent. We are always in a hurry to offer insight - and hate it when there is not enough data, because this means we have to be patient.

Russia is a great example of how and why analysts need to be patient. The country is capable of producing aerospace products that are nearly as good as anything in the West, but at a fraction of the price. Sure they don't have an F-22 (yet), but their SU-35 in good hands could spoil an F-22's day if its pilot is not as superb as the plane. Another example, when NASA went and paid for a ballpoint pen that could write upside down in zero gravity, the Russians did not waste their money on such foolery - their cosmonauts used a pencil.

The collapse of the Soviet Union exposed that economy's glaring weaknesses.  But look at how they have come back - sure they were lucky to have all that oil. Putin's decision to merge his country's aerospace interests may have been a smart move. This has created a firm that is more attractive to work with for both Airbus and Boeing.  The latter is playing a role assisting with the new Russian SuperJet.

This latest news about the likelihood that half of Russia's airlines may go bankrupt is not bad news. It means that there is some capitalism at work. Yes, its likely that consolidation will occur - whether inspired by the Kremlin or not.  The Russian oil refineries need to improve efficiencies to be the equivalent of Western ones. Of course few western oil firms want to get in too deep for fear of those nasty Kremlin folks.

That said, Russia remains a work in progress. Its economy is adapting - in fits and starts - and the mess that its commercial airlines are in are all part of maturing.  We analysts should not put them down harshly or poke fun.  Give that country time and its airline sector will self correct.

Unfortunately we need no extra time to understand that the Kremlin will remain inscrutable and we can be certain its moves are always driven by self interest.

Implications: There are three things that could cause what one sees in the pictures - looking at the photos it's clear metal was ripped outward -- by bomb or fatigue or fairing failure/pulled the metal -- it's got to be one of those three. Not a splendid choice is it?

Analysis: The story essentially is that a Qantas 747 bound from Hong Kong to Sydney had an explosion of some sort occur that lead to the plane making emergency landing in Manila.

First kudos to the crew for handling this event with aplomb. Such action only gives further credence to this airline's near impeccable safety record.

Now let's think, what could cause such damage?  The pictures display something really odd - you can see bags through the hole in the hull.  Now we know all bags go into a 747 inside containers. Therefore it would seem the container broke apart.  Some bags may in fact have been sucked out.

Further, we are advised that this section of the plane contains the plane's oxygen bottles. 

So the options seem to be: oxy bottles failed, or the outside wing fairing broke apart or something nasty was in the baggage.

As far as we are aware, no 747 oxy bottles have failed before. Wing fairings have broken before but VERY infrequently. Which kind of leaves us with a pretty scary last option, doesn't it?

Many years ago a United 747 bound for Australia lost a cargo door on climb out of Hawaii which tore a huge hole in the plane. Nine people died from that event. So structural failure has happened and could happen.

But Qantas is a fabulously safe airline and its 747-400s are newish - dating from 1989.  This story is hopefully leading to rapid action by the airline and the police in Hong Kong, Australia and the Philippines. Nobody wants another plane bombed.

Implications: Just when we all thought the A380 program is getting sorted out, along comes this story. And right in the middle of the Farnborough show - ouch!

Analysis: And we all thought the problem was solved, right? After all, are we not now in the period where the first batch of planes are rewired and the regular wiring is in place going forward? Dream on it seems.

Its clear from the story that the Franco-German entente is not quite there yet.  Jean-Pierre Guizerix leads the French team is quoted as saying “We are in deep shit.” Ah, yeah. Then throw this little gem into the mix - "at least 60 per cent of the Germans were not even Airbus people but temporary staff drafted in from outside." Wow! now this is news. We have not seen this anywhere before. Can Airbus seriously think that this is the solution?

Clearly the A380 assembly is a mess - still.

Implications: The next round of dislocations finds the industry not yet recovered from the pervious mess called 9/11.  The people costs we saw last time will be much worse this time.

Analysis: Numerous times we have written about how difficult it must be to have chosen this profession and trying to make a living in the US. Reuters'  feature underscores just how difficult this career path is. One has to feel sympathetic about the choices faced. Clearly the career path is over-unionized and therefore so inflexible - rather than bend careers, airlines either make them or break them.

As you read this story, you become aware about how pilots feel about flying - generally they love their jobs. But the industry does not love them back. The peculiar rules that govern pilots' careers needs to be revised. The nonsense about seniority is obviously causing part of the problem. If anything good can come out of this mess, perhaps it could include a better management/labor functionality and a better way to employ people whose view towards the company is through a strictly unionized lens.

While it may be argued that being a commercial pilot is a global skill that can find work elsewhere, we tend to forget that working in a place like Dubai and having a family in say Oregon, incurs terrible personal costs.

Implications: Its not easy being lucky in the airline business at present. Its not easy being in the business at all. But here is one very lucky man.

Analysis:  Now this is a surprise - but it makes sense. British Airways reached an agreement to buy L'Avion at a cost of £54m. The cost covers the purchase of the airline and £26m of cash in its business. One could now consider L'Avion the sole success in this sector. L'Avion was privately-owned and operates two 757s between Paris Orly and Newark.

Following completion of the deal, expected this month, it will become a British Airways' subsidiary and be integrated into OpenSkies, the airline's new EU-US subsidiary airline. OpenSkies launched services June 19 this year with daily flights from Paris Orly to JFK as an L'Avion codeshare. The combined airline will operate up to three daily flights between Paris Orly and the New York airports using three 757s. Its not clear how soon the L'Avion planes will get repainted and equipped like the OpenSkies planes.

British Airways' chief executive, Willie Walsh, said: "L'Avion is a successful airline that has built up a premium business between Orly and New York in a relatively short period of time. It has many synergies with OpenSkies and buying it provides OpenSkies with a larger schedule and an established customer base in the Paris-New York market." It is also the quickest way to grow OpenSkies and get its hands on the slots on both ends.

Christophe Bejach, co-founder and chairman of L'Avion, said: "We are happy to merge our operation with OpenSkies. This transaction will strengthen our current base and enable the combined airline to grow faster and stronger. Our staff will benefit from the ambition and recognised expertise of the buyer and our customers will have access to an even better service, on a larger scale."

He does not mention that getting out of the business with the shirt on his back and his investment in the current environment make him look like a genius. It must be great to have the personal risk gone. Well done Mr. Bejach, you're a very lucky man.

Implications: It has been apparent for some time that recently super rich oil based economies of the Gulf might be immune to the world's economic woes. Guess what? They are not, if your customer hurts then evetually you hurt too. Given that the Gulf's only real contribution to golbal economic activity comes from oil exports, the hurt will be painful, too. The west will learn to be creative and ever more fuel efficient. This will make slowly less depedent on the Gulf. But the Gulf economies will grow more dependent on the West.

Analysis: Kuwait's ALAFCO agreed to sell eight Boeing 787-9, with a list price of $1.6bn, to Saudi Arabian Airlines. The company said in a statement the aircraft would be delivered between 2014 and 2015.

ALAFCO also said it would lease out four Boeings for 12 years to the Saudi carrier with delivery expected in 2012. The list price of one plane is $200m, while the leasing price is 1% of the purchase price paid monthly, ALAFCO said in the statement posted on the bourse web site. This seems to be a very high lease rate - essentially in 100 months the plane is paid for whereas it should have a lifetime of over 240 months. This is a rather aggressive deal for ALAFCO - good business if they can get it. ALAFCO said earlier this month it agreed with Saudia to lease five new A320s for delivery next year, as part of the Saudi carrier's fleet renewal program.

The Gulf aviation industry is booming as surging economies spurred by record oil prices attract tourists, business people and workers to the world's largest oil-exporting region. Dubai-based Emirates, the United Arab Emirates' Air Arabia and Qatar Airways have bought billions of dollars worth of aircraft from Airbus and Boeing, looking to bring more people to their respective countries or hub passengers from around the world.But reality has started to enter this world. Emirates is about to delay their Durban launch, as well as LA and San Francisco. Its great to offer the world's best hub, but as the spokes grow thinner due to far off, local economic conditions, a growth slowdown is inevitable. Watch for delivery delays next.

Implications: As airlines shrink they lose the most important feature they offer - choice. Invariably the airline with the fewest choices is the least selected. United is the latest to annouce severe cutbacks. Such a shrink bodes ill for the airline as it requires a strong domestic system to handle feed and distribution. Beware the trap PanAm and TWA fell into.

Analysis: What is the day's news if not another airline shrink story? Here's today's big shrink news - The latest layoffs involve nearly 15% of United's 6,518 pilots. The carrier has said it plans to cut its staff by 1,400 to 1,600 as it aims to reduce domestic capacity by 14% in the fourth quarter.

So, as the airline "slims down" how will it ever grow again? With each layoff, and each plane that gets parked, three US airlines are almost certainly going to grow; Southwest, AirTran and jetBlue. Provided their money holds out, perhaps Virgin will also grow.

United is clearly going to hold on to its overseas routes. But with ever more limited feed opportunities, how will these work? Can United sustain with only limited feed and local O&D? For example the Dulles operation depends a lot on feed. As does Chicago. Same for SFO. The picture looks gloomy.

Implications: I know of no example of an airline that shrank itself into profitability. After all, this is a business that seeks economies of scale.

Analysis: This airline business is not one that obviously follows the traditional behavior of other types of business.  On the one hand it is often run like a utility. On the other hand, it is a type of business that can be incredibly profitable.

As Continental and its industry peers cut back on people and planes, can they hope to get out of the death spiral they are in? The chances are slim, sorry to say. The primary reaon I think this is because we have an industry that is the epitome of oligopoly behavior.

In an oligopoly, the few competitors regulate each other. They do not compete on price. They like stable market shares. They like to keep everything stable. Sound familiar? Except in the US airline business you have some really messy things that spoil the party.

First is the success of the LCCs. These airlines drive the bigger ones nuts. Because they don't obey the "rules" and snatch market share where they can get it. This means the bigger airlines cannot hope to shrink neatly and keep market share stable. Therefore an industry shrink is going to very messy.

Second, one of the LCCs has grown very big; Southwest Airlines. So big that it now de facto sets fares. It also hedged its fuel very well - 70% at ~$50. So now Southwest can keep fares at levels that keep it profitable but bleed to rest to a slown death.

Third, as the bigger airlines shrink painfully, Southwest can cherry pick the cities that bigger carriers drop. It moves in, and for a small fare rise, picks up traffic it was unlikely to get without a fight. Examples are Dulles and Denver and soon to include Las Vegas. Customer loyalty to the bigger carriers is evaporating faster than a drop water in the desert.

Shrinking simply cannot be undertaken without massive adjustments. The best way the US airline can shrink is for one of the big airlines to simply close down. Of these, there are two candidates - United and  US Airways. Of these two, Southwest is bleeding both, and United is bleeding faster.

The horrible thing is that as these painful adjustments come through, tens of thousands of skilled people are going to lose jobs that may never come back. Pilots will need to find work overseas. Mechanics may never see jobs in the US again - unless Congress forces US airlines to use American mechanics. This may happen given outsourced errors that caused havoc at earlier this year.

As you read the headlines about pain at the airlines, focus not on the price increases faced by consumers. Think about the human dislocation - every bit as awful as that faced by the big automobile firms. Shrinking isn't just hard to do - it may be impossible.

Implications: Whether we are in the midst of an oil bubble is not really the fundamental question.  The real problem goes back to the 1970's and the last big oil shock.

Analysis: Soros says we are in the midst of an institutional created market bubble. Are we really? He's something of a speculator so he should know.

What is interesting here is that paper and oil are out of whack. Whereas the actual amount of oil available has changed little this year (there has been no shortage) the amount of paper chasing the oil has increased amazingly. There has been some sort of disconnect.

Soros talks of institutional buying driving up the prices. The Economist is also correct when it lays out the fundamentals - oil is perverse. When its price is low, nobody invests in finding new sources. When its price is high, everyone is looking for more.

I'm not sure if there is a bubble in the market or not. I don't know who to blame for the high prices - does one need to blame anybody at all? The bottom line is that we need to wean ourselves from this product and fast. The airline industry is literally dying - the layoffs to come are going to be horrible. The financial damage will takes a long time to fix. Comments from the current IATA AGM indicate airline managers see the current situation as worse than 9/11.

The tragedy seems to be that nothing was learned from the last oil shock. We are as dependent on this stuff as ever. One would have thought that after 30 years western economies would have developed new energy sources to remove the diabolical power the oil producers have in holding western economies for ransom.

If there's blame to throw around, we'd start there. Oil producing nations are, by and large, not seen as paragons of democracy and development. Most of the oil is found under the sand of crooked states. How is it that we got into this mess - again? Politicians seeking scapegoats might start by looking around their offices first.

Implications: Financial firms grew over the past decade as apparent disparate firms were cobbled together. The idea may have been to offset the risk - each part of the firm operating on a slightly different schedule of the economic cycle.

Analysis: Well the idea was smart.  At the time that is. What happens when you get a perfect storm? When the financial market as a whole is threatened then there is no shelter.

Bankers are famous for lending you an umbrella when the sun is shining and taking it back when the rain starts.  Well, right now its suddenly more than raining.

The breakup of AIG - or at least the splitting off of ILFC - is fraught with risk.  ILFC is exposed to some of the nastiest parts of business at this point - specifically the airline industry. The current situation is that every airline is hurting. Those bodes ill for leasing firms that must be able to finance assets like planes cheaper than an airline can. ILFC makes its money between its cost of capital and that of an airline.

Can ILFC gets cheap capital without AIG?  Could ILFC get capital more cheaply than airlines?  Its not such an obvious call.  Especially when so many planes are headed back to the desert with one airline bankruptcy after another. Would you lend your money to ILFC - even if they are world's biggest and best airplane leasing firm? 

Its a risky play and no fault of ILFC whatsoever. Right now the perfect storm is only growing bigger and nastier.

Implications: Airbus' A380 is an amazingairplane as anyone who seen it can testify. Its wings are awesome; the dimensions stop everyone in their tracks.  But can airlines get over the size issue and focus on economics?

Analysis: In this podcast three of the original four analysts review their findings, first published in 2002. While its true their original report was funded by Boeing, the analysts do not sound like pro-Boeing talking heads. In fact, they question the notion of VLAs (very large aircraft) in the current environment.

The take away from this is that Airbus may have taken a very big risk and, given the time to get the plane delivered and flying as well as the sharp drop in the US dollar, EADS may never recoup the launch investment for its EU sponsors/shareholders.

EADS and Airbus are going to have a tough time making the A400M fly on budget and the drain on resources will hamper the launch of the A350 -  the plane Airbus really needs to get right.

Implications: Boeing is about to faceoff with its unions. These have never been nice events, and those to come this year may be among the most nasty.

Analysis: Airbus' Power8 mess is not unique. Boeing is facing off against an angry factory floor. Essentially the factory floor people feel the delays in the 787 lie with excessive outsourcing, which is probably true. The stage is set for a fight.

Labor wants its fair share and the company obviously wants to hold on to whatever it has. Its last financial results were stellar and this is what the unions will point at. The company on the other hand will talk about the huge compensation costs to come. The unions, correctly, will point out that this is really not their problem as they certainly did not create the mess. 

So what to do? Boeing would be wise to take a conciliatory approach. This would change the tone markedly. But of course that is not the way Boeing works. Boeing's modus is to aggressively move into negotiations. This time it would be a gamble and could be a serious mistake. The restlessness of the unions can be seen in the SPEEA fracas. The union has been going through its own turmoil. Those who want to confront Boeing seem to have the upper hand.

If the people entering negotiations are coming in with fixed positions so far apart, the game of chicken starts immediately. There is no doubt the company has more to lose. Where is Boeing going to go for production? Its overseas supply chain has proven to be a headache. The fear within the company has to be that if it gives in, and the next downturn comes (as it must) Boeing's costs will be a severe burden. The oil price shock may cause those huge order books to thin out fast.

Implications: It is really only "excess capacity" - or is it muddled thinking about revenues as well? With average load factors at 80% and only one airline covering its costs of production, there seems to be a straighforward first step. Airfares, on average, are simply too low.

Analysis: The industry is trying hard to play withing the classic rules of oligopoly. Nobody messes with capacity or prices to maintain market share. Problem is that flights are still averaging 80% load factors. The industry should have increased fares by 30% this year to offset fuel costs just to remain in place. They did not for fear of messing with market shares. 

The muddled thinking among pilots about seniority is matched by nuttiness about market share by airlines.Its industry revenues that must be sharply increased. If not the industry cannot sustain. United is already burning through $5m per day and on its way to become America's Alitalia; where nobody wants them and employees hate the company.

If airlines cannot cover their cost of production then they are inevitably going to crash. Again! Every US consumer is reminded of the cost of gas with every tankful. Were the airlines to simply increase fares by 30% to reflect reality, loads might drop off to 60%, which by the way, is the more traditional industry average. But the industry would lose a lot less money.

Once the market has rational pricing reflecting the real cost of production, fleets can be shrunk to lose the most inefficient planes. 

There should be no fear of cheating. The efficient producers like Southwest, jetBlue and airTran all fly the most modern planes and have low costs of production - they will keep the market honest.

Implications: United Airlines is in trouble as events conspire to add insult to injury. United's management is incapable of exiting the current malaise intact. But in trying to paper over its woeful situation, I expect to see United’s management become increasingly irrational. Becoming the fare increase leader may seem smart; but it speaks of how bad things are at the airline and these fares rises will meet abrupt ends everywhere United competes with Southwest.

Analysis:  In the fairy tale the ugly duckling grows to become a swan. United is mature and fully grown and will never become a swan. It has become the biggest and ugliest duckling in the pond. Spurned by Continental it now only has one other option in US Airways.

But the latter is quite familiar with the digestion issues that mergers bring and in addition, US Airways managers are in a much better position to say "No" to United than the other way round. Doug Parker's team is therefore in the stronger negotiating position.

Tilton's team has its back against a very thin wall. Indeed I would suggest that United is not little short of desperate and therefore likely to start making desperate moves. Moves that will ensure irrational decisions and further alienate its staff.

These moves will not endear United to its co-founder in Star, Lufthansa. United is the most likely legacy airline to fail in 2008.

Implications: Writing down goodwill does not mean a great deal - it merely takes attention away from what really needs to be done. But big organizations and their proclivity for silo thinking are adding to industry risk.

Analysis: The NYT has a great story you want to take a look at. Paying special attention to this sentence "reported a combined first-quarter loss of $10.5 billion on Wednesday, most of it an accounting recognition that the two carriers are worth far less than when they emerged from bankruptcy a year ago." This is the new math.

What you do is write down your goodwill; no, make that trash it. As of March 31st, Delta had $2.6bn in unrestricted cash and short-term investments and Northwest had $3.2bn. While its true the airlines are struggling with a complex situation of timing - they cannot get their average fares high enough fast enough to offset fuel prices - which eats into that cash. Remember that airlines sell you something today which you will consume maybe two weeks from now; they only have an idea of how much they will be paying for fuel on the day you fly unless they are fully hedged. Because the fuel prices rises have been coming almost daily, this struggle is growing more complex daily.

The write down of the goodwill is a non-cash item that affects the balance sheet. Remember these are two airlines that recently emerged from Chapter 11 with all sorts of promises. While its true they did not expect this level of fuel shocks, the bottom line is the revised companies are really not worth much - and this write down essentially admits this. Of course we expect to see a write up again once the firms have been combined; after all the managers want to be able to make the balance sheet look better post-merger. But playing accounting games does not really help.

The question Wall Street needs to be asking - and it does not seem to be doing this at all - are the current airline management teams able to weather the storm? There are very good reasons to ask this question. Running an airline is horribly complex. The current management teams do not look especially capable. Their focus is still on market share rather than profitability.

This is a subtle thing. But it is crucial. Now is not the time to be in love with the aviation business, it is time to be brutal in one key place - an airline must know the profitability of EVERY flight. Airline managers still don't know this yet. Running an airline can no longer be done on averages. If a flight does not make money, it must be cut. Fortunately airlines have scads of data to measure this.

If an airline can build its flight profitability models then it will immediately know at what fuel price the fares either rise or the flight is stopped. However, know that large companies are replete with silos. Within each silo are numerous people doing essentially similar jobs. These people will increase complexity around them so that they become essential. That means data does not flow where it should. Consequently, when looking at airlines, don't get caught up in the balance sheet games.

Take a look at which management team is breaking the silos, tearing away at the information flow blockages. The success of the industry is not dependent on how well it structures its finances. Success will ultimately come from being able to know with granular detail what every flight costs. Only when managers know this can they focus on the revenue side and ensure that at least each flight must recover its costs. 

I believe that focus on market share obfuscates, it does not help. Waffling airline management teams that espouse market share are only moving the deck chairs. They are not focused on the core issue that makes this industry so risky. In every other business, successful managers know their cost of sales with excruciating detail. Airlines have for too long played the market share game and the industry's financial performance speaks for itself.

Implications: The 757 is probably being abused. But it is a testimony to the plane's performance that it can handle this sort of route - something for which it clearly was never designed. But with airlines under the gun as never before, expect to see airplane abuse growing. Indeed, airlines are about to start abusing every asset they have in ways not dreamt of before.

Analysis: This was a clever idea - making the run with a 757. Highly effective at unzipping EU hubs, 757s have been in many ways a demonstration that a rapier is a better weapon than a cutlass. Continental started it and has been copied by a number of other airlines since.

However it turns out that too frequently this has been a haul too far. Flights, it is reported, between Britain and the US operated by Continental are under scrutiny by US pilots, politicians and regulators over figures showing the airline's planes ran low on fuel while approaching New York on 96 times last year. The number of "minimum fuel" declarations by Continental pilots leapt five-fold at Newark airport over the past two years, prompting criticism over the carrier's use of relatively small planes for transatlantic routes.

The problem is on flights west from EU to the US because of headwinds. There are reports that occasionally, pilots touch down in eastern Canada to pick up fuel - but according to the US DoT, Continental warned crew this could hit them personally in the pocket. A bulletin issued to crew in October stated: "Adding fuel indiscriminately without critical thinking ultimately reduces profit sharing and possibly pension funding." That kind of talk is, frankly, toying the masculinity of ex-military pilots. You know what will happen; they will push the 757 until it gets to Newark on fumes.

After all, the 757 has a range of 3,900 nautical miles which, normally, is well above the 3,014 nautical miles for an average flight between London and New York. But then must add the caveats of mercurial weather and airport holding patterns. We are well aware of the issues of NY's ATC. Barcelona to Newark is 3,338 nautical miles and US DoT revealed Continental's pilots on this route declared minimum fuel 23 times last year. It is important to note that on average, the flights that ran low had 64 minutes' fuel which exceeds statutory reserve level of 45 minutes.

But in the end, one needs to think about this idea on a fundamental level. BA's OpenSkies operation will also use 757s. Boeing does not even make these planes anymore. As an engineer at Boeing told us, "This aircraft CLEARLY was not designed for such a task. The fact that new engines enable it to fly doesn't necessarily means that it has to with the full load of passengers. Similarly flying 737 from the West coast to Hawaii is as bad, in my opinion."

Having shown that the 757 is obviously been pushed flying these routes, its just good to know there is an even chance you might need to tank up along the way at Halifax.

Implications: The weaker dollar problem is causing the same challenge to airlines; airline sface higher fuel prices but they can react faster.  Airbus' sales create a long tail of exchange rate risk. Without immediate action taken to reduce such risk, EADS is looking for trouble.

Analysis:  EADS and Airbus have been complaining about the weak dollar for months. In the first third of 2008, the dollar has dropped a further 9% against the Euro, making it even worse. Like the airlines which seem to face a new oil price hike each day (the issues are related), EADS sees its business plan erode constantly.

According to Reuters, Airbus originally bet on a euro at $1.35 by 2011. It shifted this to $1.45 at the start of the year, implying €1bn in further cost cuts to compete with Boeing. The euro now hovers below $1.60 but Gallois suggested Airbus saw no need to panic. "If the euro stayed at $1.58 or $1.59, we would have to take that into account but we can't change our working scenario every time we wake up in the morning," Gallois said.

EADS is trying to update its Power8 solution and get its costs in line with the reality of selling in dollars with costs incurred in euros. This proving to be an almost impossible task. Airlines can announce fare hikes but once an Airbus is sold, the price has been set. The cost of production however occurs later, and therefore EADS cannot recover the value. Now think of what the five year backlog looks like; it is great in dollar terms, but in euro terms it is literally decaying.

Of course there are limits to Power8 just as there are to cutting costs at the airlines. The best move for EADS is to move its costs out of the euro zone - something that will drive EU labor nuts. For example, EADS would do well to move the A330 production to Mobile Alabama, regardless of the tanker decision. The risk of irritating Euro-labor is less than watching its backlog lose so much value.