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Friday
Feb062009

Disequilibrium Everywhere; Stimulus Nowhere

It will be clear soon as to why my writing time has largely been invested elsewhere.

I have been thinking about a theme for this post for a few days as I criss-crossed the country. I started considering “Pigs at the Trough” as a theme as I read story after story about the pork finding its way into the various versions of the stimulus bill. I then moved to something like, “For Organized Labor: Will It Be OHbama or NObama” as it pertains to the controversial “card check” legislation? Then it was something like, “And this Little Piggy Cried Wee, Wee, Wee All the Way Home” after reading about Jim “Hell NO”berstar introducing legislation to block additional immunization of airline alliances and explore ways to undo those that exist.

What a sad state of affairs this country finds itself in. What a sad state of affairs airline labor finds itself in . . . where union leaders have time and again failed to lead because they’ve put politics and self-promotion first rather than face hard truths and labor’s role in improving productivity and helping turn around the long decline of the domestic airline industry. What a sad state of affairs the US and global airline industries find themselves in because of patronizing, parochial protectionists like Oberstar whose antiquated, short-sighted views fly in the face of everything we know about the industry’s current financial challenges and competitive burdens.

I am not only disheartened but dismayed. There is plenty of blame to go around. Some goes to the airline executives that have returned to cutting fares in a misguided stimulus plan to fill seats – and too few controls on the number of cheap seats up for sale. There is little to “stimulate” when you consider that some major portion of historic demand for air travel was created by consumer access to easy credit – whether through the new Mastercard that arrived every few months in the mail or the willingness of Americans to take out a third home equity loan to finance yet another family trip to see Mickey Mouse.

By looking at the traffic, capacity and load factor data for January 2009 it becomes pretty clear that the aligning of supply and demand still requires work. Moreover, a realignment will have to occur in international flying as the economies in Europe and Asia particularly are sick and getting sicker.

What is it going to take to get the politicians – whether those in Congress or big labor– to understand that the US airline industry is headed down the very same destructive path that the US auto industry is headed? Many airlines did the right thing last year when, faced with record fuel costs, cut capacity and made some hard choices about pricing and costs. That was an industry that demonstrated discipline with conviction. But to work for the long term, capacity discipline must be practiced with pricing discipline too. After all, that is the theory at work with the industry’s too little, too late recognition that it is the revenue line holds promise for profits.

In my view, the system should have let the weaker airlines liquidate because, in the longer run, they aren’t strong enough to survive. Just look at US auto industry, which supports too many brands; has too much manufacturing capacity; carries legacy labor costs that can possibly be sustained only by a growing industry; and is modeled on an outdated demand curve built on cheap oil and readily-available capital.

The airline industry, too, has too many brands; too many hubs; a product priced below cost; and a high-cost, inflexible labor construct that limits a company’s flexibility and ability to adapt the size of the operation to economic realities. Current contracts and labor assumptions force airlines to pay nothing short of ransom to make necessary operational changes, and only because that is the way it has always been done. Just like the job bank provision in the auto industry.

To bet on a profitable 2009 just because of the price of oil today is, to me, nothing but an attempt to mine fool’s gold. I get the math..... On the other hand, liquidating an airline or two, and investing the proceeds in gold could be a proposition with some upside for airline shareholders.

The Virtuous Circle of Value Destruction is taxiing into position to prepare for a rendezvous with history – I fear.