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Thinking about the Federal Reserve’s Beige Book

A couple of headlines in the past days got me thinking. The first is: "Emirates to pull A380 from NY routes on downturn". The second story is based on analyst reports from Kevin Crissey at UBS and Bill Greene at Morgan Stanley on the declines in unit revenue at Continental Airlines in February and the expectations that March revenue will come in even lower.

Think about it. New York is the first US gateway city for almost every airline. Emirates is not vacating the route but, is downgrading from the flagship A380 aircraft it flies in the world’s largest O&D market after just months in the market with the aircraft.

Add to that the report that Continental, which over the years has established itself as the bellwether on the direction/trajectory of US carrier unit revenue, announced unit revenue declines of 12 percent in February and an estimated 18 percent decline in March, which makes me wonder what’s coming from other carriers.


The Federal Reserve’s Beige Book

This brings me to the Beige Book, in which each of the 12 Federal Reserve districts (Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas and San Francisco) publish a report on current economic conditions eight times a year.

According to the Federal Reserve, the report is based on “anecdotal information” on economic conditions in each district based on reports from bank and branch directors and interviews with business contacts, economists, market experts, and other sources.


So What Does This Have to Do With Anything?

Now think for a moment about where airline hubs are located. For example, Continental’s Houston and New York hubs no longer provide the carrier the same geographic advantages they did even a year ago. Why? Because in the first part of 2008, the Houston economy was still soaring on oil priced at $100+ per barrel, and the New York hub served a still-humming community of investment bankers and financiers. One year later, the price of oil has plummeted by $95 a barrel and the government now rules the canyons of Wall Street.

I’m not saying that the Beige Book provides certain insight into the regional economies that house major airline operations, but there is a clear correlation between the Fed’s primary districts and the hub cities that define commercial air travel. I believe that individual airline financial performance in 2009 will be largely predicated on the strength of these local and regional economies. And they will be different -- and uneven results will occur.

That may be good news for US Airways. The January 2009 Beige Book reports deteriorating economic conditions in the U.S. Southwest, which should have a significant - negative -  impact on the carrier based in Phoenix. On the other hand, US Airways is the least exposed to international markets that were, until recently, considered the most lucrative revenue opportunity for US airlines. Isn’t it interesting that the legacy carrier most exposed to the rigors of the US domestic markets is seeing a different picture?


Concluding Meanderings

As is so often the case, macroeconomics rule airline markets. And geographic macroeconomics likely will have significant impact on individual airlines in 2009. Those carriers with a disproportionate presence in the Northeast U.S. may have a better year than those with a similarly situated route portfolio in the Southwest U.S.. Those with a US domestic presence may do better than those with an international presence. Those with a dominant Pacific presence may do worse than those with a dominant Latin presence. You get the picture.

The only thing that is increasingly clear to me is that some of today’s carriers are going to do distinctly better than others, thus making themselves better short-term credit risks. Those with better access to credit may be able to grow or acquire assets and take advantage of opportunities not available to competitors with riskier credit. And those with geographic advantages -- whether domestically or internationally -- may be best positioned to gain market share and competitive advantage this year. In this economy, the Beige Book might just provide a roadmap not historically relied upon.


Quote for the Week of January 20, 2008

"Bubble to Bubble to Bubble"

At the World Economic Forum in Davos, Switzerland, yesterday [January 24, 2008], Stephen Roach, the head of the Asian operations of Morgan Stanley, slagged Mr. Bernanke for being "goaded into action just by what the markets are doing." Mr. Roach described the Fed's actions as "excessive monetary accommodation that just takes us from bubble to bubble to bubble." It is "a very reckless way of running American monetary policy," he said. "I'm quite astonished that they did what they did."

Are we just borrowing time? Is this healthy?