A Few Issues in the Press
1. With the Euro reaching an all time high relative to the dollar yesterday, how will this impact international travel? Can the potential loss of US-origin customers that now deem an EU trip unaffordable because of the currency relationship be offset by EU-origin demand that will find the US cheap?
a. Headline in today’s Wall Street Journal: "Lufthansa Expects Growth in 2008". As the company’s net profit doubled in 2007 v. 2006, the company cites its broad business model that includes aviation services, catering, airports and other areas as a mitigation of downside macro risks. For the US, that might mean increasing the foreign ownership limits?
2. In late 2007, United warned of the potential to “put down” as much as 10 percent of its capacity if oil prices stayed above $100 per barrel. Well, yesterday oil actually traded over $110 per barrel. The $100 price point has become a level that most oil watchers expect to be sustained. My question for the politicians is: will there be more industry capacity removed as a result of oil prices or consolidation?
a. My suggestion to the "know all" politicians: Be very careful for what you say no to.
3. Yesterday, Jamie Baker of JP Morgan downgraded the US airline industry for all intents and purposes. Terry Maxon of the Dallas Morning News blogged on Baker’s research note that suggests a best case scenario, based on current oil prices and a minimal demand loss due to an economic slowdown, is for the US industry to lose $4 billion. The worse case scenario calls for an industry loss of $9 billion.
a. So much for the robust, and sustainable, industry turnaround we hear from labor leaders and others.
4. Speaking of labor, Baker makes a very powerful point, and one that I have used a number of times. He says that since 2002, the industry’s fuel cost will have increased in the neighborhood of $25 billion. This contrasts with his estimate of labor savings over the same period of $7 billion.
a. Will we ever hear the end of the refrain that the industry recovery has been built on the backs of labor? First, and again, what recovery? Then, and again, what is the industry’s ability to repay that $7 billion? This just underscores what will prove to be the most difficult labor negotiations cycle since deregulation.
5. As if the industry needs more weighty issues to test its resolve, the story at Southwest over maintenance practices is most troubling. I am in no way going to suggest anything regarding this situation until all of the facts are known. But, this story will not be going away for awhile.
a. If the economy can be expected to have a dampening effect on demand, will concerns over maintenance have a compounding effect?
b. Jim “Hell NO”berstar gets yet another bully pulpit issue.
6. On another labor issue. I find it interesting that, included in labor’s chants against consolidation of the industry it says it will be looking out for its members (OK, that is their job) and the traveling public?
a. I guess the threats from labor of a strike, or a slowdown, are beneficial to the consumer because the system can quickly reaccomodate demand and there will be minimal disruption to the affected consumer? NOT
7. Yesterday the Continental pilots rallied in Battery Park along with other ALPA carriers and independent unions to call for the repayment of the concessions that the Continental group calls a loan made to the company in 2005.
a. What loan? Did you negotiate terms like those negotiated when money is borrowed?
b. Isn’t it ironic that the labor groups chose Wall Street as the venue for their rally? There must have been a lot of sympathetic observers given that Wall Street employees largely rely on variable earnings to comprise their total compensation and not fixed rates of pay? Oh I digress.
8. The Allied Pilots Association have told us many times and through many different mediums that just a modest increase in passenger fares will pay for one of the most outrageous asks made by a union of a company in my career. NOT
a. In the face of current oil prices, at what point do “pass throughs” of increased fuel costs negatively impact demand? At what point do the US macro economic issues negatively impact demand as consumer disposable income is negatively impacted from a long list of possible reasons?
b. If demand begins to weaken, I do not think fare increases will be the tactic employed by the industry to address the issue.
b. Maybe the CR Smith Museum should be enlarged rather than being refurbished?
9. Politicians and labor should think real hard about the fallout that could stem from the current economic environment versus what the perceived fallout could be in a consolidation scenario.
More to come.