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Sep292008

« Memorializing Yet Another Date in 2008 »

Black Monday III (1929, 1987 and now 2008)? Another example of how money and politics just do not, and cannot, mix? I do not like government intervention into private matters. But on this bank bailout I was resigned to the fact that it was/is a necessary action. Was it politicians protecting themselves at all costs? What should be bipartisan becomes partisan? What should be about the good of the American people becomes about what political party is more responsible for success or failure?

I woke up in Jacksonville, FL this morning to the news about Citi and Wachovia. I actually had the pleasure to speak to an enlightened Jacksonville Aviation Authority Board of Directors about happenings in the airline industry and the resultant effects on their business.

By the time I landed back in Washington, the Dow had closed down 778 points, its biggest one day drop in history, or 7%; the Nasdaq was down 200 points or 9%; and the S&P had closed down 107 points or 8.8%. All the while, oil had dropped to $95 per barrel and gold prices surged. The US House of Representatives had voted down the bailout package in a roll call vote of 228-205. The markets, anticipating passage of the bill, were looking for anything to suggest an end to the psychological unease and the resultant turmoil in the US and world markets. The volatility present in the markets when the wheels went up only continued.

Like a lot of things that seem obvious when politics become intertwined with logic, we probably should not have expected a “yes vote” on the bailout package in the first version offered to a vote of the US House of Representatives. After all, it is a presidential election year. A plum job that might be better suited to a resume of a funeral director.

The fallout was not limited to the US. Bailout activity took place in the United Kingdom, Belgium, Germany and Iceland. Asia is not immune. Given less than full information on this region we really cannot know just what might be ahead there. Like in the US, big name banks were in the news around the world. Europe’s stock market suffered its second worst day in trading activity.

Some are declaring Wall Street dead as we know it. I do not know what to make of the elected representatives in the US House. Paul Krugman writes: "So what we now have is non-functional government in the face of a major crisis, because Congress includes a quorum of crazies and nobody trusts the White House an inch. As a friend said last night, we’ve become a banana republic with nukes."

If it wasn’t so serious, it would be really funny. This is the macro economy’s watershed. People got tired of the airline industry traipsing about Capitol Hill after 9/11. This is much more serious for even the airline industry. You know how it goes, the airline industry is inextricably linked to the health of the US and global economies. Well, with little health in the macroeconomy, we just may not need all of those airlines anyway. Oil remains a concern, but these economic headwinds may be greater than anything the industry has faced thus far.

As for all of those grossly overpaid senior managers in the airline industry, they are looking pretty damn smart for their decisions three months ago to bolster the liquidity positions of their respective companies. The window can be declared closed for the immediate future and as a result of their actions companies can manage their businesses with a focus on internally generated capital because that is all that will be available for awhile.

Nancy Pelosi spoke, but I do not think the fat lady has sung on this one just yet.

Reader Comments (5)

William Swelbar said....
"As for all of those grossly overpaid senior managers in the airline industry, they are looking pretty damn smart for their decisions three months ago to bolster the liquidity positions of their respective companies. The window can be declared closed for the immediate future and as a result of their actions companies can manage their businesses with a focus on internally generated capital because that is all that will be available for awhile."


The following events were recently posted in airline SEC filings.


AMR issued $300 million in new equity.
AMR recently took $255 million in a a credit facility.

And...

UAUA's "grossly overpaid managers" recently "bolstered their liquidity" by paying a "special distribution to stockholders" (ie themselves) of $251 million.


Looks like there will be money for legacy carriers who have dominant market positions and NO money for cockamamie business plans like Skybus, and others.

Going forward...it's all about risk and adequately pricing the risk premium. I don't thing there's a risk premium high enough to fund another dumb airline start up.

:>}

09.30.2008 | Unregistered CommenterAnonymous

Yes, plans to bolster liquidity have been available to both legacy and low cost carriers. As is typical with comments on this blog, they are narrowly focused and selectively point to only events at certain carriers.

I agree with much of what you say. As for UA's decision by its management and its Board to pay a special dividend, it is all in the timing. I am sure that if they had not acted to announce payment of the dividend in late 2007, the decision to pay out $250 million to shareholders might have been different.

But United is viewed as a shareholder friendly airline by Wall Street - or what is left of it. And please do not point to the trajectory of the share price over the past 9 months as it is evident for virtually every carrier in the industry.

Your point about a risk premium high enough to fund another bad business plan is right on point - unless there is the death of an airline or two then there will be more. Non-traditional sources of capital are still out there.

09.30.2008 | Unregistered CommenterSwelbar

So how's the "access" to capital been going for some of legacy carriers??
Here's a small view of the type "access" they have.


From UAL's most recent 10Q....
(in millions)
$2,000 in unencumbered assets
$241 Secured Debt Financing
$50 release of "restricted" cash
$600 Amended Milage Plus
$350 release of previously "restricted" Milage Plus
$255 revolving credit facility


From DAL's most rectn 10Q....
New Credit Card agreement that includes NO Holdback
$500 revolving credit facility from Northwest
$1,000 first lien
$518 in refinanced debt
$233 Boeing credit facility
$290 CRJ-900 future deliveries
$848 new aircraft financings

Let's see what the "access" to capita markets is like for the likes of LCC (USAirways)
From their 424 Prospectus filing.....
Looks like USAirways has just enlisted Merrill Lynch to help it sell 19 million in "new" equities.
From their most recent 10Q....
$1.67 Billion in NEW DEBT from Citicorp Credit FacilityUSAirway's debt.
Additionally...
$387 in Embraer aircraft financings
$145 refinanced notes

09.30.2008 | Unregistered CommenterAnonymous

Thanks for the details. These were important agreements to get done as we still live in a cash/liquidity is king environment.

09.30.2008 | Unregistered CommenterSwelbar

I best get on a plane and leave the country before Marshall Law is declared!
Thanks for the commentary Bill, keep it up!
ps...this is Brad/ We met at ACI Booston. Take care

09.30.2008 | Unregistered CommenterBrad McAllister

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