01-02-08: Manufacturing Sector Disappoints + $100 Oil = Continued Airline Stock Carnage

Just thought I would memorialize a few facts from the first trading day of 2008. Crude oil trades at over $100 per barrel for the first time. [Crude oil actually traded at less than $11 per barrel in December of 1998.] Gold trades at a 27 year high. 1 Euro can buy 1 US Dollar and 47 cents. A report issued by the Institute of Supply Management suggested a contraction in the manufacturing sector which is an important barometer of US economic activity.

Airline stocks continued their downward drift in the face of more and more signs pointing to a weakening US economy. Most experts I heard interviewed today suggested that they see little in the way of oil price relief unless there is a significant global economic slowdown.

Now some stock facts on select US airlines…….

Of the 9 US publicly traded US stocks I consider significant, 8 set new 52-week lows: American, Continental, Delta, Northwest, US Airways, Southwest, jetBlue and AirTran.

United closed 37 cents above its 52-week low.

For these stocks setting new 52-week lows; American, Continental, Delta, Northwest, US Airways and Southwest all traded at least 3 times their average daily volume.

jetBlue’s market capitalization closed the day at less than $1 billion. The carrier’s stock still trades at 61 times its forward earnings suggesting there still may be more stock price damage ahead.

Of the 9 airline equities analyzed, the three largest in terms of market capitalization are: Southwest, $8.7 billion; United and Delta, $3.7 billion each.

Southwest trades at 20 times its forward earnings and United trades at 14.5 times. American, Continental and US Airways all trade at, or below, 7.5 times forward earnings.

The market capitalization of the 6 US network carriers combined ($17.3 billion) is the equivalent of 17.5 cents per dollar of revenue ($98.9 billion).

The LCC carriers: Southwest, jetBlue and AirTran would cost considerably more as their combined market capitalization ($10.3 billion) is the equivalent of 70.9 cents per dollar of revenue ($14.5 billion). Southwest comprises nearly 85 percent of the three carrier's market capitalization. Southwest’s market capitalization is the equivalent of 90 cents per dollar of its revenue.

Putting a Few Packages (of Airline Industry Issues) Under the Tree for Readers to Unwrap

Labor

In an industry that is associated with 3-letter identifier codes and with labor’s expectations that “concession recovery” is right around the corner, we should start to think about replacing NMB with PEB. Oh I know that a PEB requires time with the NMB, but …… I never remember a time where neither labor nor management has any meaningful leverage entering a negotiating cycle. I open with this one because trains and Christmas trees are synonymous.

Along those same lines, and with labor’s “one trick pony” leverage point being executive compensation, maybe we should be questioning whether the seniority system really works for airline labor and management. Imagine a real free market where individual airlines actually bid for individual labor's services? Would this type of a "free market" cause airlines to rethink their individual approach to invest in product similar to that provided by the global elite carriers? Free agency has generally been good for compensation levels – average and otherwise.

Isn’t it interesting to see AMFA being challenged on multiple fronts? Most observers expect them to lose their challenge from the Teamsters at United. It seems to me that this is nothing more than a story coming full circle. Just as AMFA challenged the IAM and won at each United and Northwest, by making promises it could not keep while exploiting situations where concessions could not be avoided. It is most interesting to note that by early 2008 AMFA could be gone from its two largest properties. OverPromise and UnderDeliver will be a term discussed more and more over the coming 3 years.

US Economy

With nearly $1 trillion in mortgage resets coming in 2008, doesn’t consumer spending have to be affected at some point?

It has been a long time since I remember reading so many stories and analysis which offer the mixed signals du jour on the direction of the US economy. From recession to inflation, the gamut is covered. The job market and manufacturing have each cooled which suggest a slowdown. Yet the consumer continues to lead the way as retail sales remain strong. But profit margins are less suggesting costs are exceeding the ability to price. Go figure. There is always demand at some price – the US airline business sure captures that concept.

US Government

With New York JFK and Newark operations capped by the US government, and the industry applauding the actions, which major US market will be affected next? What exactly does “new and real” capacity mean when considering a leasing of capacity program?

Remember when jetBlue was lauded as the best capitalized startup in US history? If something were to result in jetBlue failing, what would happen to those JFK slots “given” to the carrier?

Was Virgin America late to the party, or is their timing right? I am intrigued by their recent city pair market choices.

Is it really possible that Singapore Airlines will be serving the New York – London market and the Houston – Moscow – Singapore market in addition to New York – Frankfurt, Los Angeles – Taipei, Los Angeles – Tokyo, San Francisco – Hong Kong and San Francisco – Seoul by the end of 2008? Yes -- the signs of what lies ahead. Where is the home country?

Miscellaneous

Wouldn’t it have been ironic if the New England Patriots went 19-0 and won the Super Bowl, when in the same year the Miami Dolphins went 0-16? Well we know half of the story.

Aren’t you just tired of the same voices making statements that it just cannot be done because it hasn’t worked in the past?

Happy Holidays,

Swelbar

Wondering Thoughts From 5 Time Zones Away

The underpinning of this blog is that change in the US airline industry is underway -- whether some like it or not. Over the past week there were some stories that grabbed my eye and are listed in order of importance from my point of view. There were many stories that warranted discussion like the orders coming from the Dubai Air Show, another meeting between US Airways CEO Doug Parker and Senator Arlen Specter, oil prices testing $100 per barrel, airline stocks getting beaten down, schedules at JFK, United suggesting it might, and could, put up to 100 airplanes on the ground given the changing economics and the list goes on that further underscore change.

Speaking of the Dubai Air Show and the aircraft orders being placed there – doesn’t it bother US readers that the orders are not from US carriers but rather from previously obscure points on the map that have every plan to change the shape of global aviation? It sure does me. Is the US being relegated to a supporting role in tomorrow’s global aviation market? I sure hope not.

These Are Not “Competitively Virgin” Markets

Holly Hegeman in Planebuzz ran a great piece last week where she summarized a research note from Gary Chase at Lehman Brothers click here. In his note, Gary finds that Virgin America is pulling down capacity in its transcon markets without any noticeable shift of that capacity to other markets.

The markets where the low cost sector has chosen to operate have generally been the densest US domestic markets. You would have thought that Virgin would have learned something from jetBlue and others that the competitive profile of the network carriers is vastly different today than just 4 years ago. The days where the legacy carriers that are most dependent on transcon revenue, whether from nonstop or connecting flights, are going to stand idly by and see further market share and revenue degradation take place are over.

In a Spring 2003 MIT forum, I did a piece on the Low Cost Carriers, subtitled “Thou Shalt Not Inherit the Earth” click here. LCC growth was the talk of the time. This piece was shared with mainstream press but largely ignored. Now it is mainstream, and even “futurist” by some, to talk about the revenue generating difficulties faced by the LCC sector. Whereas, Virgin America is well capitalized and arguably has a brand, it further underscores the point that the opportunities are limited for this sector to grow at previous rates.

We talk about consolidation with respect to the legacy sector of the industry when in reality the more interesting plays may be in the LCC sector – a sector that is highly dependent on revenue in the largest US markets. A capacity shift here, a capacity pulldown there and ………

Say It Ain’t So Joe

AirTran Chairman, Joe Leonard, sells his remaining stock holdings a week after stepping down as CEO click here. As for AirTran, it is unfortunate that their bid for Midwest fell apart. This company has performed admirably, but remains badly in need of diversification of its route portfolio and Milwaukee, along with Minneapolis, remain two of the largest markets without meaningful LCC presence.

While Northwest suggests it is only passive in its partnership with TPG, you have to look at that partnership and wonder what TPG sees other than to know an exit strategy is there for them at any time. Midwest’s recent performance does not warrant that kind of interest from a TPG and its business plan is circa 1999.

Do these changes at AirTran signal something?

This Is Not Bill Nyrop’s Airline: At Least Today?

Following a wrenching summer of customer and labor strife after emerging from bankruptcy, the external messaging we hear from Northwest is quite different from what we have ever heard in Minneapolis? In an article by Liz Fedor in the Minneapolis Star-Tribune: NWA Puts An Emphasis on Service click here highlights comments from the Board’s new Chairman, Roy Bostock, citing his desire “to create a better environment for Northwest's employees and customers and develop more sophisticated techniques for measuring customer experiences”.

Is this real or will Northwest realize the same fate that is playing out in Ft. Worth between labor and management after an attempt to find a new way? Given the contentious nature of the labor-management relationship that has historically been the norm at Northwest, this would at least appear to be a good start. It is always easier to begin these programs when amendable dates are years away. However, with Northwest in the center of consolidation talk (click here and click here) we will be watchers of the airline’s progress on service and employee relations.

Maybe This Time, “Delta” Really Does Mean Change

In an AP story covering Delta’s President and Chief Financial Officer, Ed Bastian called consolidation a “front burner” issue for the carrier click here. And as the company discusses consolidation, its message to all stakeholders has been consistent. But while the company suggested it would like to answer the consolidation question before it makes any decisions regarding spin offs, it made an agreement last week that would grow its internal maintenance operation click here.

This on top of its transatlantic deal with Air France and KLM and a decision pending on whether to sell Comair suggest that this company is doing anything but managing its enterprise for the future. I could not have been more wrong on my views of this company. I have spoken publicly about an airline with presence everywhere, pricing power nowhere and generally lacking a plan and direction. We will not know for sometime whether or not their international strategy is the right one, but the results since emerging are impressive.

Business Week made a case that the logical acquisition target for Delta should be Northwest click here. This story is a good read, not so much for the combination case it makes but more to the references made about an industry badly in need of continued restructuring ….

American and the TWU: Talk of gAAin v. pAAin

Trebor Banstetter of the Ft. Worth Star-Telegram did a nice summary of the TWU’s remarks as it presented its Section 6 opener to the company last week click here. If there is a union at AA with a substantial opportunity, and a competitive platform, to discuss “gain sharing” with the company it is the TWU. But I would argue it is not the entire TWU membership that is in the same position. It is the mechanics, the skilled workforce, that have this substantial subject matter to discuss.

One does not have to read too many articles to realize that American has chosen to invest in its maintenance organization – obviously a profit center that warrants the use of internal capital to fund an operation that has been successful in bringing in new work – and new revenue. The TWU suggests that they would like to return to 2003 levels of pay and work rules (not likely given the industry’s profit position). The company seems open to linking earnings to performance and productivity goals click here (an opportunity to make at-risk compensation a reality).

Whereas the AP story suggests a union “less friendly” – that may be true. But at least on its face, there is an understanding that preventing an environment that has caused significant pain for their co-workers at other carriers that filed for bankruptcy is a better path to follow. My hope is that the TWU and AA find some inventive ways to proceed that can reward the skilled workforce that is making Tulsa a new revenue source.

I further hope that the TWU does not use the skilled workforce to cross-subsidize the other members it represents as the sub-labor markets are quite different. There are too many lessons to be learned from the IAM on this subject ….