Just Another Manic Monday

Dow down 800 points only to rally in the last 45 minutes to close down 370 points to just under 10,000. The Dow rose above 10,000 in 1999. Here we sit in 2008 at the same levels. Of the 3,500 or so stocks traded on the New York Stock Exchange, 1,700 traded at 52-week lows today while 1 stock traded at a yearly high. On the NASDAQ, 1,100 stocks traded at 52-week lows and 3 traded at highs. Oil traded down $6 and change per barrel to $85 and change, and the dollar to euro ended at 1.35+. (The relationship of oil prices and the strength of the dollar is proving quite meaningful)

Back in July I wrote about Leverage Detoxification: Banks and Airlines. Today’s analysis of the market’s activity can only highlight the deleveraging/unwinding well underway with no real sense – yet - of where the bottom just might be found. The same might be said of what is going on in the airline industry. But, the airline industry’s problems pale in comparison to what is happening in the US and global financial markets.

Today I heard it said that deleveraging the markets could lead to disinflation. This would be a very bad outcome. It was not that long ago that we were talking about stagflation as oil prices were marching toward unimagined levels while the global economy was showing every sign of the slowdown that now appears on every continent’s doorstep.

So as we search for the bottom in the markets, analysts will say that heavy volume on the down side is critical before the real buying can begin. In Wall Street terms, capitulation is the term that market strategists refer to when all investors sell all of their stocks just to get out when it appears there is little hope of profiting by holding the instrument. We do not see this activity as of yet.

Wall Street observers are referring to the market’s current activity as a “Buyer’s Strike” – meaning that they are neither buying nor selling. It is a buyer’s strike for air travel that makes me very nervous right now as I cannot imagine just how many airline tickets have been bought over the past 5 years with proceeds from home equity loans and lines of credit.

So, on this Manic Monday, Sun Country files for bankruptcy protection with very little cash. They join Frontier in reorganization. I would not want to be in either carrier’s shoes. But then again, I would not want to be in any airline’s shoes that might be forced to file. In the case of each Sun Country and Frontier, both carriers have loyal local followings but add very little to the overall air transportation system. Just as Lehman Brothers was determined to not be vital for tomorrow’s Wall Street, neither Sun Country nor Frontier is vital to tomorrow’s airline industry.

Back to the Future?

In a comment to my most recent, and only, post thus far in May a reader asked if I was suffering from Airline Fatigue Syndrome? I am thinking yes. I look at the news today and I see that Frontier is going to start flying to Fargo. WOW. And Virgin America is going to start flying to Chicago. WOW again. And Sun Country did Mother’s Day with flowers. Double WOW.

I admit I am hung up on wanting a real transformation of the industry – or at least a sense that one is underway. I want the UPS guy to redraw the lines without labor or political interference and present us with a way to work toward making each of those stakeholders more secure in tomorrow’s rendering of the US and global airline architecture.

I do not remember a time when more balance sheet risk presented itself. In the past there was typically a carrier or group of carriers that you were sure would emerge from the trials of a particular period. This time you give a nod to Southwest given the health of their balance sheet and their current hedge positions. After that, it is clear as mud.

I lectured today on issues confronting the industry and its evolution. We talked about the current actions being undertaken that feel like recycled ideas. We talked about Phase I of the US-EU deal and its lack of transformational attributes – unless Phase II is successfully negotiated. We talked about Delta – Northwest and the revenue synergy concept that they are employing -- and how it looks and feels a bit like the combinations of Air France/KLM and Lufthansa/Swiss. We talked about a potential United – US Airways deal and asked if the third time might be a charm?

We talked about the fragility of networks. At some point, the downsizing of a network collapses under its own weight. We talked about the dollar versus foreign currencies and the competitive advantage currently being enjoyed by our non-US competitors in reinvestment, growth and in the purchase of fuel. We talked about the need to raise fares, cover input costs and the need to emerge from the long-term value destruction cycle that has described this industry. We talked about the drive to find the inelastic demand component.

We talked about the difficulty of placing meaningful raises into the pockets of labor given all of the externalities impacting the industry – and we barely talked about the infrastructure. We talked about politics and their impact on the current industry structure. We talked about how the US does not have a strong bearer of the flag in foreign markets. We talked……..

Back to the Future

Maybe we do need to look back before we can go forward. Remember when we talked about yield and not RASM? Remember when we had turboprops with limited range that married them to a geographically centered hub market? Remember when we actually talked more about operating profits than EBITDAR? Remember when load factor was a data point and not the mantra?

Not that there was ever structural stability during these points in time either, but fuel is the real deal. It just might be that catalyst for change that has been missing during the deregulation experiment. And if the change causes an industry to be disciplined enough to charge the passenger "all-in plus some return on capital", then we just might look back and call this time the best thing that happened to the US airline industry.

Let's get smaller (whether by commercial choice or by market forces); focus on yield and not RASM; get rid of duplicative hub feed (whether by commercial choice or by market forces); and forget about load factor that is won largely by not charging anywhere near enough for those final 10, 20, 30 or even 40 seats. Surely these actions would lead us to some capacity level less than today and approaches an economic level.

As cp5000 commented on the previous post: “And assuming the industry is successful in raising fares (which they must), what alternatives will benefit? More teleconferencing, more driving, more conference calls? I don’t know. That question at least is new and fresh. Better than the same old, same old”.

“The market place is working. It is not pretty, nor should it be. More change has to come – hard to say what it is going to be. Stay tuned”.