Pondering the Next Move; But Before I Do…….

Wednesday’s Hearings: “Forgetting About History”

If there is another “something” in the works, surely no one really believed that anything would be announced before yesterday’s House hearings on Delta – Northwest? Jim “Hell NO”berstar was anything but “Hell No” in yesterday’s hearings. To be sure, he was anything but Hell Yes. He seemed to save his “powder” for the testimony of the Departments of Justice and Transportation. But even that was dry and in the end about all we could do was “take heart” that the investigation would be thorough.

I am not one that is going to give a protectionist much slack. But I kind of felt sorry for him when it became clear that he had not quite grasped that Phase I of the US-EU liberalization deal was in effect and that all six US legacy carriers could fly to Heathrow. But where I really struggled was with the continued pointing to American Airlines and their purchase of TWA’s assets. Remember, not a merger but rather, an acquisition of assets. There was much discussion about how St. Louis was reduced from 500 flights per day to 250 flights per day.

When American made the decision to purchase TWA’s assets, congestion was the rule/industry fear of the day. The “Summer from Hell”, or the Summer of 2000, was in the books. Chicago O’Hare was in the headlines most days during that summer. Delays in Chicago were either based on thunderstorms or Rick Dubinsky choking the golden goose. From American’s strategic perspective, St. Louis could potentially be that reliever of congestion in Chicago as connecting traffic is well connecting traffic and can be accomplished in either city.

But “NOberstar and the Fear Mongers” sang the tune that American sat in the very same hearing room and vowed to keep St. Louis whole. We heard it over and over. If we forgot about Phase I being in place; surely we did not forget about September 11, 2001 and the effects it had on the US domestic airline industry in general and the network legacy carriers specifically. Yes, St. Louis was downsized and most non-hub flying was eliminated. Pittsburgh was carefully eliminated. Atlantic Coast died under its own lack of weight. And an over-exhuberant industry replaced mainline flying with regional flying.

St. Louis was a dying hub. McDonnell Douglas was gone. Its local economy was built on reputation and not on strong underlying economic attributes. American made the only decision that was in its best corporate interest. Remove capacity from a weak point and focus on a strong one – Chicago. Nuff’ said.

Pondering the Next Move

My guess is Jim “Hell NO”berstar is keeping his powder dry until the next move is announced. The next move will face more intense scrutiny based on the “I told you so” line that was most prevalent yesterday. Honestly, I do not know of another deal scenario that is interesting – let alone transformational – and provides the kind of investment thesis that helps this period come alive.

We have United and US Airways merger discussions being tossed around by “those close to the situation”. Now we have a United and Continental alliance in the news. Readers know I like what Tilton says as he talks about the industry from 40,000 feet – and I am in fundamental agreement that the current construct is good for no stakeholder group.

If I lean to one of the two scenarios being painted in today’s mainstream press, I lean to a United - Continental alliance. Gravity takes me there because it differentiates the combination from Delta and Northwest. Delta and Northwest individually, and collectively, are/will be highly reliant on connecting traffic as their hubs are located in smaller population centers. [And this is why their commitment to maintaining the most extensive network possible is absolutely factual] United and Continental would be building around hubs/gateways where core onboard traffic would be largely local.

Now, I understand that the transatlantic onboard traffic mix can be different based on other competitors in the market. We do not have to look much further than Washington Dulles and the fact that Lufthansa carries more Washington local traffic to Germany and beyond than United. United’s airplanes are filled with more behind and bridge traffic based on the connection to its US domestic network at Washington Dulles.

But doesn’t this also suggest intra-alliance competition for traffic that is being bastardized by comments from the fear mongers that the transatlantic will soon face a scenario where barriers to entry are much too high?

LIQUIDITY AND SOUTHWEST AND UNITED

Over the last couple of months, this blogger has written about how liquidity will be back in the headlines just as it was following the events of September 11, 2001. American has looked to relax fixed charge covenants. Delta and Northwest are looking to a combined balance sheet. United has worked to relax covenants in its loan agreements. US Airways balance sheet is actually in pretty good shape for the moment. Southwest recently borrowed $600 million against owned aircraft to bolster an already strong liquidity position. jetBlue has sold aircraft and sold equity to Lufthansa to bolster liquidity. AirTran has sold delivery positions and just completed a convertible to bolster its liquidity. And the market yawns.

Holly Hegeman of Planebuzz.com asks the question: PlaneBuzz: Follow up on Southwest Nuts: Why Do They Need More? If she had not written before I had a chance, I would have asked the same question but probably not as eloquently. Me thinks, Southwest plays a meaningful role in the next move. These guys – and sorry Laura – are smart. Based on their model, there are just simply not many markets left in the US.

Now, I have no clue as to what the plans are – or if there are any - as I am not a source close to the situation. But I am willing to bet that the next move involves Southwest purchasing assets. Whether they are Washington National assets; Laguardia assets; or something else they are the only name that can assure “NOberstar and the Fear Mongers” that competition will remain robust. If Southwest is involved, the strategy is brilliant. And I am not one that will discount Tilton.

I am the guy that has lived a life liking and rooting for: Illie Nastase; Jimmy Connors; Derek Sanderson; Craig Stadler; well you get the picture.

As I have said, this time is cruel but it will lead to something better. Simply because the current construct just does not work for anyone. So for the consumer groups: you will pay more and it is not because of a changing industry structure, rather it is an industry that must simply charge at least as much as it costs to produce the product. And for labor, the best bet to recapture what you think is entitled is to bet on the future. It just might be good.