Gabriel’s scarcity rent - it’s management stupid!

As the average reader of this blog knows, and wordpress knows such individuals exist to my amazement (THANK-YOU), I do several things in my job, one of them is the integration of the baggagge system in the Terminal South (or Terminal D) in Barcelona’s airport.

Well, it used to be one of them… but it has been growing and growing, absorbing my time and effort, sometimes with complex things, of course, but very often with little and silly things, sometimes simply to overcome the lack of communications between parts in a huge project, sometimes just repeating the same things again and again.

Organisations prepare themselves to manage projects. They start shyly with one and, if they are able to envisage an strategy, they include project management into their capabilities. There are models to describe how project management competencies are integrated into organisational capabilities. Different organisations are at different levels, and thus are able not only to manage projects but also to increasingly learn from them.

But, at the end of the day, panic happens. That’s when they forget everything and start to triple-check everything based on the gut feelings of people, high enough in the ladder, that don’t really know about the systems to be implemented. Trivial things get inflated and strategic things suddenly obviated.

That’s what has happened to me with the Terminal 5 syndrome (to know more about Heathrow’s Terminal 5 click here). It will take some time to settle. In the meantime some issues have been enshrined as the most relevant by the organisation and are draining a lot of resources. Yes, organisations are able to learn a lot about project management but, when panic starts, they sort of regress to a previous state, top level managers want to micromanage what they still don’t know anything about, and reality gets distorted to adapt to the top management expectations.

A hard critique? Fortunately the tide is just a tide and we will be able to focus the existing energies on the real issues… having top management’s attention is very helpful as long you can manage it in the right direction, and to help you instead of interfering.

I was interviewed by Widget Finn for the Times, and she wrote the following article:

The disastrous debut of Heathrow’s Terminal 5 was a nightmare experience for all involved, but for Gabriel Mesquida it has proved a valuable live case study for his MBA dissertation.

Mesquida is a programme manager for Aena, the Spanish equivalent of British Airports Authority, that is in charge of the expansion of Barcelona’s airport. He is responsible for the coordination of projects in the information systems, communications and security programmes. His dissertation for the distance-learning MBA that he is doing at Henley Management College is on managing airports for the future, so he is watching carefully how the Terminal 5 saga unfolds.

He says: “Our terminal is similar in size to Heathrow, which is considered the plane capital of Europe, and I visited T5 several times when it was under construction. I was impressed, at the time, by how much detail they were going into over safety and they were scrupulous about everything.”

But when the terminal opened it became apparent that there would be other useful lessons to be learnt – including how to manage a meltdown. “An MBA has a foundation of theory but it should be practical, so having a live case study means you can watch events as they unfold and draw conclusions from them.”

The conclusions may be different when the case study is current rather than from a textbook comments Dr Richard Barker, director of MBA programmes at Judge Business School. He says: “One of the benefits is that you don’t know the outcome, which simulates the management situation more effectively. With a five-year-old case study there’s a result to the story which is difficult to escape. You can look at different options that management had at the time but knowing what happened influences your ability to assess the case.”

Mesquida is already putting into practice some principles of leadership from his MBA that were highlighted in the Terminal 5 episode. He says: “Resources are important, but people are far more so and leadership is everything when you have a flock of people wandering around a huge new infrastructure. However carefully you prepare, the unexpected can happen, and that is when your staff should have the flexibility to use their initiative. If the company has a blame culture people will be reluctant to take risks or do anything except cover their own backs.”

Durham University Business School uses live case studies in boardroom simulation exercises where students focus on a real company. Dr Julie Hodges, director of MBA programmes, explains: “They look at the strategic data, where the company is now, what challenges and issues it’s facing, then students come up with recommendations based on the information.” But textbook cases also have their value. “These give an historical perspective so that the issues can be put into context. More data is available and we can identify the medium and long-term lessons.”

Textbooks’ case studies are polished, tried and tested so they are easier from a teaching viewpoint. Barker points out that they are also pigeonholed into subject areas. “They may be labelled a strategy or marketing case, which isn’t always obvious when you’ re trying to deal with something in the boardroom.”

He can predict some of the labels that will be put on Terminal 5. “I see it as an operations management case – make sure your operation works before you start overloading it, or a people management case – train your people properly and handle recovery situations effectively.”

Mesquida agrees that more lessons will emerge from Terminal 5 as time goes by, but together with his MBA learning, it is already shaping his decisions for Barcelona airport. He says: “We need performance indicators and a more systemic approach. Stakeholders and users shouldn’t have the impression that you’re out of control or they’ll feel abandoned. They must be kept fully informed of what’s happening and how you plan to remedy the situation.”

Terminal 5’s launch onto the world stage may have been a fiasco but, clearly as a learning resource for business students, it will run and run.

Thank-you Widget

I often travel the route Barcelona Madrid (and backwards) for the day. By plane it’s rather tiresome and expensive: with an open fare you end up paying around 400€ for a 630 km flight (+ 630 km back).

Barcelona - Madrid is the world’s busiest route with 971 operations per week. The second one is Sao Paulo - Rio (894 per week) then Jeju/Seoul Gimpo (858 per week) and fourth is Melbourne/Sydney (851 per week).

In fact you have to go very low in the ranking to find another crowded European route. That would be Rome - Milan with less than 600 operations per week, which, by the way, is more than the most crowded North American continental route: Las Vegas - Los Angeles (553 per week)

Source: www.oag.com, data from September 2007

But things change. And this milk cow for the airlines faces its first serious menace ever: the high speed Spanish train service, also called AVE.

These brand new trains travel the distance of 630km (410 miles) in two hours and 35 minutes. Not too bad when it’s compared with the plane that takes roughly two and a half hours (not just flying but also spent in the check in and departure processes), and possibly more.

But, from an economic point of view, there are many hidden costs that must be taken into account. After all, what is it that you do in a plane? Well, you sit in a narrow seat, trying not to disjoint your legs, and pray that the person that will be sitting beside you is not extra overweight. In the train you have plenty of space. Being uncomfortable has a cost.

How much? Well, it depends on what you’re willing to pay to be more comfortable, of course, and how much your time costs.

How much are you willing to pay for that extra nap? Well, in a 45-minute-long flight, you’re going to have maximum thirty minutes of uninterrupted sleep. You won’t be able to sleep while you queue, while you’re being inspected at the burdensome security checks, while you wait your turn. But on a continuous 2 hours 35 minutes journey you’ll be able to.

As for opportunity costs, you won’t be able to do anything in the plane, apart from opening your laptop for half an hour. It’s completely wasted time. In the train you can use your computer as much as you want, use your phone, combine them and access the internet. Work, eat, talk, whatever you wish.

But externalities must also be taken into account. Environmental footprints can be four times higher for planes than for trains. That means that the train will always be more sustainable and, if we ever are to reflect the true external costs, energy efficiency will give the train an important lead over the plane.

Add those costs up: discomfort costs, opportunity costs, externalities and you will have a very competitive mean of transport. Which only means that competition has been increased, with a comparable service at a better price. In the end, consumers will be benefited from the additional choices, lower prices and the increased service levels that competition will bring.

That was what I was thinking when I decided to open the textbook I was carrying with me. The Managing Financial Resources module awaited me. Fortunately it was half way to Barcelona, 300 km per hour (186.41 mph), still an hour to go.

It’s increasingly easier for alienated bare-footed queuing passengers to blame Heathrow (BAA) for the illnesses of the deficient British airport system. Even easier to blame there is the Spanish owner: Ferrovial. But a systemic look at the problem reveals that the responsibility is wide spread, and it may not be that easy.

The airport sector has been traditionally underinvested. A very important stakeholder, the surrounding communities, has been reluctant to give way to hostile-perceived enlargements. Justifiably worried about the environment, may that be atmosphere or noise, or simply about the territorial impact in hindered neighbouring villages, new infrastructures take so many years to be constructed that capacity always lags demand. The results: outdated infrastructures that are working over-capacity, and need to be maintained, overhauled or simply redesigned while in operation, leaving a poor image to travellers passing by.

More capacity is coming: brand-new T5 will open in March 2008

But what does it take to open a new terminal? There’s a lot of regulation in that too. Regulation that can be changing at any moment, as the new security requirements. BAA is required to enforce the law, a law that has changed to tougher requirements that imply additional costs.

But, that’s another point, tariffs are regulated. Airports are not free to choose what they charge the customer. In the case of the British Airports it was decided at some point that they wouldn’t compete with each other. Instead they were to be bound by decree tariffs. So the passengers would spill from one another filling all them up.

It has certainly happened. But the model needs a lot of overhauling too. Competing airports would make additional capacity out of thin air, and improve the customer service. Airports would feel the need to adapt to their customers: both airlines and travellers, and would need to align costs and prices. Do I really need to praise market economies here?

In my opinion, that’s what the Spanish owner Ferrovial is looking forward to. They had to incur in huge debt to buy BAA at a higher price than expected. And right now they are bound both by harsh requirements and fixed tariffs. In a free market they’d be competing against other airports bearing a much lower debt. And they’d have the first say on which airports to sell. If I was them, I’d pressure for that using public opinion, a very important stakeholder in this sector.

And when social brokers, namely the media, align with public opinion pressuring for change, the government complies.

Subtle movements show greater undercurrents in the Spanish Airline’s ball. You’ll see several previous posts about this in Scarcityrent.com (Airline movements in Europe: British Airways and Iberia on hold, Airlines corporate hunt: British Airways and TPG finally join forces to buy Iberia, Iberia and its brides… where’s the value?)

But let’s review the latest movements and their meanings. Major strategies in the Spanish airline sector are wobbly now.

Iberia has decided to open its books to TPG. They were trying to win some time waiting for things to happen but it seems they have changed their mind. Why?

• There’s not a competing strong offer for Iberia. In fact shareholders wanted to sell right away. Now they fear they could be left out in the cold with a company they no longerwant. Lufthansa is cooler every day.
• Being privileged for being the Spanish flagship carrier in a heavily regulated sector, they wanted to wait until Spain’s next election, awaiting a possible change. But change seems more unlikely each day, so there’s no point in waiting. Maybe it’s even better not to wait because the forthcoming government might even be the same but stronger.
• They had the previous objective of raising the share price to 4€, whilst the prospective buyers valued a maximum of €3,6. Have shareholders renounced to that objective?
• In other European countries things are cooling down too. See Alitalia, left with no brides, or Lufthansa drifting away towards another option (see below)

Less risk means less reward too. Looks like shareholders are aiming at speeding things even at a lower price. That’s good news for both TPG and British Airways, and for a sector that needs consolidation and clarification. Many things depend on the management of those big airlines.

And meanwhile, Spanair, the second Spanish airline, is for sale too. SAS, it’s current owner, has decided to disinvest in the company. Gonzalo Pascual, the president of the company, owner of the Spanish touristic group Marsans is about to buy it, but some things have happened too:

• Lufthansa has expressed their interest to buy the company. Although of a smaller size than Iberia, this airline has the advantadge of being in the same alliance than Lufthansa: Star Alliance, while Iberia is in the wrong one: OneWorld, lead amongst others by British Airways, direct competitor of Lufthansa, with many flights shared with Iberia and, of course, shareholder of Iberia with a 10% stake. (and, maybe, unwilling to sell to their German competitor)
• TAP, Portuguese Airline, has expressed its interest too.

Of course that means that this €450 million Airline is about to increase its price. There’s nothing like competition. Good news for SAS, of course.

This man is the one that has the key. Gonzalo Pascual, beside SAS (Scandinavian Airlines Systems) executive Joergen Lindegaard, controls Air Comet, Pullmantur, Austral and Aerolíneas Argentinas, with heavy traffic across the Atlantic Ocean and a total fleet of 90 airplanes. Spanair is their natural ally, with an additional fleet of 65 airplanes and a lot of Spanish connections that can feed their intercontinental routes.

But, you there are always other possibilities, if the Spanair acquisition were to fail, why not buying Iberia instead? It would be hard and difficult, but Gonzalo Pascual is the one Spaniard that could. That would mean removing the foundations of the whole Spanish aviation sector though.

And this way this airlines’ love triangle gets more interesting. We’ll see what happens next

It’s funny that the Wall Street Journal published this week an article about the consolidation of the European airline industry. I’ve written about Iberia and it’s many contenders in two previous posts: Airlines corporate hunt: British Airways and TPG finally join forces to buy Iberia and Iberia and its brides… where’s the value?

What has happened this time about Iberia? In fact very little.

I don’t know what the WSJ article said because I’m not a subscriber. But this wave of consolidation that they talk about has come to a stall in Spain. Why?

BA and Iberia: having second thoughts?

One of my assumptions was that, where there is a flagship airline, there are also political interests. No need to prove me wrong. Politics have a lot to do with that. And it’s Iberia who has been stalling the situation.

Because Iberia’s dominant position in Spain, specially in Madrid, has a lot to do with political connections. They have been granted the best slots and the lion’s share of Madrid brand new terminal: T4.

Madrid’s brand new Terminal 4, granted to Iberia and OneWorld

The Spanish government has already required that Iberia needs to be Spanish to keep enjoying the privileges it already enjoys (exclusive routes, slot assignement, top location at Spain’s first airport).

In time this privileges will cease to exist, specially when European regulations in open skies come to be in effect. But I don’t know any single country that doesn’t -or didn’t- protect its flagship airline.

The government’s point: we’ll still protect the status quo, but only for a Spanish company. And Texas Pacific Group or British Airways are not exactly Spanish. But, how do you know if Iberia is Spanish right now? How can you know who, in fact, owns free floating shares?

Anyway, these are advantadges that no company should have, regardless of its nationality. They are just imperfections of the market that the consumer ends up, as always, paying. But that’s how it is, and that’s how I like to tell

State Highway 121, Texas, U.S.

More noise from Texas

And right now another Spanish company, the infrastructure operator CINTRA is fighting for a highway concession in Texas: State Highway 121. The company already exploits two highways in the US: Chicago Skyway and Indiana Toll Road, and is already constructing a third one in Texas: SH 130. The concession was granted to CINTRA, but it has been recently revised. The Texas Transport Commision still has the final word but taking back a concession already granted to a Spanish company wouldn’t help politically Texas Pacific Group interests in Iberia.

Which strategy now?

Just let the time pass. Iberia has not given any of the contenders its data, and it is for a very good reason. The longer it takes, the better. Why? Spain will hold a general election in nine months. Maybe the government will change but, in any case, the government will be less pressured and open to negotiations.

Smart move from British Airways. The hunt has resumed and two hunters have made an alliance: Texas Pacific Group and British Airways will go together.

That’s a good idea because private equity can cooperate easily with the British airline’s knowledge support. And there are synergies: Iberia has what BA lacks: a good connection with America, specially Central and South America. And TPG has what BA lacks: money. Apax wouldn’t fit in the agreement, though.

British Airways has many shared codes with Iberia, plus a 10% stake in the company, and call options to a 27% more from Caja Madrid (10%), BBVA (7,3%), Logista (6,7%) and El Corte Inglés (3,1%). But British Airways’ shares have not been very optimistic lately, as you can see in the following graph:

BA in London Stock Exchange (blue) compared to Dow Jones Index (red), not too bright 

(It’s not something about British Airways. EasyJet and RyanAir have been squeezing as much money from traveller’s pockets as they have been able to, but there’s a dead end right in front of them, and the Airline’s sector situation now is not that bright. Iberia and Alitalia are looking for buyers. Time for restructuring. But that’s not for today.)

Remember my last post on Iberia and why it had to keep being Spanish? Well, looks they’ve found the solution. TPG and BA would acquire a maximum share of 49% while the rest would be left for Spanish investors. They are also known:  Vista Capital (which includes Banco de Santander and his old ally Royal Bank of Scotland), Ibersuizas and Quercus (a venture capital fund also participating in another low-cost Barcelona-based airline: Vueling). That way they can protect their exclusive international flying agreements signed with the Spanish government. (those kind of agreements that you can’t acquire in the free market). Here is the post: Iberia and its brides… where is the value?

So it looks like British Airways is trading handling victory to TPG over Apax (and partners Hemisferio and Torreal) with his call options, plus knowledge and synergies with his network for a bigger chunk of shares without spending money. All of that without having to renounce to international agreements signed by the Spanish government on behalf of a Spanish Iberia.

European real integration: British airports more Spanish and Spanish planes more British

Well done BA!

Iberia is for sale. After years of flirting with British Airways, now it realises that there’s not enough satisfaction in that relationship. Shareholders want to sell. And B.A. is not ready to take that step. Too many doubts. I’m sure that with a good price for that 10% they have they’d even get out.

The second bride is Lufthansa. Lots of cash and need for expansion. Alhough Iberia is in the wrong alliance. But Iberia would be a big step towards South America for Lufthansa. Conte and Mayhuber, the two bosses, denied yesterday any approach. Sometimes denial is the previous step to marriage. Although German firms have not been very lucky lately buying in Spain.

And then there is Texas Pacific Group. Good news for eficiency, bad news for workers. Iberia needs a deep refurbishing and that would mean a lot of lay offs. Many of Iberia’s workers are only worried about preserving a way of life that is already dying in most of the old flagship carriers. They have managed so far to keep their privileges while receeding to Madrid and their most profitable flights with South America. But, with a private equity firm, that would no longer be possible.

A private equity firm could drive a lot of value from Iberia, something that main shareholders didn’t feel like doing because it was not politically correct. They’d be so pleased to go home with their capital gains…

But, investors be aware, there are two risks hanging over the company.

The first, it’s most profitable route, a nice route from Madrid to Barcelona and back that until now has managed not to be canibalised by competitors, is about to get new and powerful competence: the high speed train. Probably it will cut its passengers in half, and profits with them.

And last but not least, Iberia needs to be Spanish. The routes they operate to South America and give Iberia a specially high strategic value have been built from agreements between the Spanish and South American governments. One by one, brick by brick, unsurprisingly, Madrid’s hub has been constructed from agreements based on Iberia’s spanishness and Madrid’s capitality. There would be not enough reasons to keep that exclusivity for long with skies being more open each day and with an Iberia decreasingly Spanish.

Airbus and Boeing are two tough rivals in competition for the world aircraft market. But, would that market benefit from a single player?

Polititians, of course, would say no. That’s why Airbus gets billions in development loans/funds from a few European governments. That’s the first thing that archrival and more experienced Boeing would say about Airbus. But what about NASA contracts and tax deferments on export from the US government? Looks like no one is playing fair.

But does the fairness always benefit efficiency? From a microeconomic point of view it seems clear that without all that covert financing neither company would survive. At least from the figures I have. And that would mean a monopoly in the aircraft market. Probably for Boeing, but that’s not the question. And probably that would also mean a better use of public money: no use at all.

The market of aircraft parts has benefited a lot from this anew competition. New players are entering the providers competition, i.e. chinese providers or eastern Europe providers. They wouldn’t stand a chance, or maybe not? Would that be a bad thing?

The fact that the parts market is increasingly efficient means that less efficiency is on the upper scale, hence the need for public money. Public money that derives into good externalities for third parties. Maybe even for third parties that are not giving away the public money needed. A form of development? Spreading knowledge that will strengthen the market? What about learning by doing?

What about future value? Air transportation market has been growing steadyly (qith one exception, you know). New environmental regulations mean more aircraft need to be renewed. Globalization means more competition, and at the same time, airline specialization means that aircrafts need to be increasingly personalized and adapted to all sort of profiles (i.e. low-cost profiles).

So it could be said that in fact governments are only financing discounting on future growth and positive externalities. That what today, in the name of market efficiency, would be a monopoly, won’t be when growth arrives, and wouldn’t need to be taking externalities into account. Maybe even this duopoly public-driven situation is helping growth by itself, creating a new market, and making it easier for airlines to grow. For the governmens implied, of course it means allocating resources from other areas but, even being those more efficient, could airplane making have more future? The “infant industry” justification.

As long as fuel doesn’t get more expensive, of course. But governments could also help with that. Would that make it different from an economic point of view?

I don’t really have an answer, just some thoughts. But when politics mix with economy, the figures are increasingly blurred and it gets harder to be a liberal. I’ll have to think more about it.

Right now there is an ongoing discussion in Barcelona. A new airport terminal is being built that will be able to handle around 30 million extra passengers. But there’s something to be decided: which companies will be located there.

Barcelona’s airport is the eight in Europe considering the passengers that use the installation. That means it’s close to medium cities like Munich or Milan. But, being similar in size, there’s a big difference between Milan, Munich and Barcelona: the number of intercontinental flights.

Of course, in order for the airport to grow it will need more infraestructure. The third runway is already built and the new terminal will give it the capacity it needs to grow and expand.

But the proximity to the recently expanded Madrid Airport is a problem for Barcelona’s aspirations to be a hub. One of the main aviation alliances, One World, has already a hub there, and being at 700km (45 minutes by plane) makes it unlikely for this alliance to have more intercontinental flights in Barcelona. From an economic point of view they’d rather have them in Madrid. To complete the picture, this alliance includes Iberia, the old Spanish flagship company, and has the highest market share in Barcelona: around 40%, and steady, not decreasing but not growing either. In fact this alliance has no plans to have any international flights in Barcelona anytime soon and it’s moving towards a low cost profile.

There is a second alliance: Star Alliance. They are growing at a high pace, and they already have a market share of aproximately 20%. The spanish flagship of this alliance is Spanair, that is also an important Spanish carrier, growing quickly and aiming to overtake Iberia in a not too distant future.

This alliance looks like the only chance for Barcelona’s airport to position itself as an international hub. On the other hand this alliance also has a hub in Frankfurt, which won’t be substituted but complemented by Barcelona’s growth. So there’s an upper limit to Barcelona’s possible expansion with this alliance.

So, should the new terminal be allocated exclusively to Star Alliance?

Many people do believe so. It looks like the only alliance that has the possibility and will to bet for Barcelona. So I can agree partially on that: it’s important to have the best parts of the new terminal allocated to the alliance that has the most interesting prospects.

But why not share the terminal between the two alliances Star Alliance and One World? Many people refuse that thinking that One World just wants to be there to disturb Star Alliance plans for expansion. Or many people just want that based on an irrational approach to the rejection to expand Barcelona’s international connection from One World.

But, from an economic point of view, and beginning of a situation of a new terminal with only one alliance: Star Alliance and with excess capacity. Does a second alliance positioned there leave us better off or worse off?

Maybe the right concept to grasp would be “Pareto efficiency”: we reach the most efficient situation when we are not able to improve any participant’s situation without leaving another worse off.

And without worsening the behavior of Star Alliance, we can improve easily the situation of One World just allocating them the spare capacity of the new terminal (discounting of course future growth), as long as it doesn’t worsen the operation of Star. And we can do that defining the correct precedences and procedures.

Of course Star Alliance would be benefited if we threw out the other alliance to the existing -and worse- installations. That would give them some extra market power… but what for? To have an advantage over competition.

And to give one player advantage over another instead of fair competition always leaves the consumer worse off. And that’s not the objective. Free competition is good for Barcelona’s airport on the long run. That’s the point we should go to.

Why? Because even not having interconental flights, even his leaning to the low cost profile, One World is the market leader in Barcelona, providing the airport with most of its connections. And that gives high value to the airport. And it will drive even more value with the combination of another alliance’s hub in the same location. The two hubs will even be able to interchange passengers, helping build the critical mass of passenger an airport needs to have intercontinental connections.

Because it’s not the politicians who make the intercontinental flights. They can obstruct or help them, but it’s the market, and the consumer’s demand, that will establish new long range connections. And the market works best when all the players are given the most opportunities with a clear set of rules and without discriminations of any kind.

That’s, in my humble opinion, the best way to ensure a healthy growth for Barcelona’s airport.