16 September, 2005
What a week it has been. Is there a single reader who doesn't already know that both Delta and Northwest went into bankruptcy on Wednesday?
I've also been busy on the personal front, and this week closed on a 'retreat in the mountains' in the lovely little ersatz Bavarian town of Leavenworth, not far from Seattle. I do plan to rent this out on weekends when I'm not there myself, and will of course share the url for its website with you as soon as it is released.
I've also been closing the details on our New Zealand tour, and when asked for final payment, one couple had to cancel. They have lost their $250 per person deposit, but rather than simply pocketing this money (like just about every other tour operator), I'd like someone else to benefit from it.
So if you'd like to come join us on the New Zealand tour, you can apply this deposit to your own tour cost - in full if you take the complete tour, or one half of the deposit if you take one of the two half tour options.
Tour details here. You'll have to be quick to take advantage of this last minute opportunity. Turn someone else's misfortune into your good fortune - please let me know if you can join us and save the $250 per person at the same time.
In addition to house purchase, airline bankruptcies, and tour finalization, my column this week has been delayed due to needing to research a few extra bits of information. So instead of offering you a feature article, can I instead ask for your help with a view to a future column.
I don't know about you, but I like the comfort and reassurance of having an emergency/disaster preparedness kit at hand ready for most eventualities. While hurricanes are hopefully an unlikely event in the Pacific Northwest, earthquakes or volcanic eruptions are sadly far from unknown. Who knows what unexpected outcome mightn't require any of us, anywhere, to suddenly find ourselves isolated from the normal conveniences of modern civilization.
Are you prepared for an unforeseen and unpredictable disruption to your life? Please answer this brief mini-survey by clicking on the link to send me your response as an email with your answer appearing in the subject line (feel free to add comments in the body of the message, too).
My plan is to write an article about what you should keep in a disaster preparedness kit, with an emphasis more on things you might not think of, rather than the obvious things such as dried and canned food and water. This would include the wonderful Steripen, for example, and whatever other gadgets and conveniences I can uncover, possibly even this backpack that makes electricity from the energy you expend walking.
Dinosaur watching : The storm clouds started to build on Friday last week, increased over the weekend, and by Monday the only uncertainty was when, rather than if, Delta and Northwest would file Chapter 11.
This eventually occurred on Wednesday, making three of the top four US carriers (UA, DL and NW as numbers 2, 3 & 4 - AA is the largest) in Chapter 11. US Airways, the seventh largest US carrier is also in bankruptcy.
Let's first continue our recent tracking of Delta's share price :
Thursday night close data :
It closed on Wednesday at 71c, then opened on Thursday at 75c and reached almost $1 before sinking back down to 71c again. Volume was sharply higher than normal, and for every sensible soul selling out of DL as urgently quickly as possible, someone else was buying in. Remember - as I analysed a couple of weeks ago, this is a company with a negative net worth somewhere in excess of $8 billion. It was hard to understand why people were paying over $1 a share prior to bankruptcy, and is now impossible to understand why people would pay 71c a share after bankruptcy.
More expected was the reaction shown by NW's stock. From a Wednesday close of $1.87, the stock opened on Thursday at 87c and closed at 88c. And that is probably overvalued, too.
Winning the award for being late with yesterday's news is JP Morgan. On Monday this week, Delta's share price dropped almost 25% in a single day (from about $1.10 at Friday's close to about 85c on Monday's close), presumably due to people anticipating the upcoming bankruptcy and selling down their shareholdings. On Tuesday, JP Morgan cut their rating on DL from 'overweight' to 'underweight'. The next day, of course, DL filed Chapter 11.
So if you were letting JP Morgan influence your DL holdings, all the way until a day before bankruptcy, JP Morgan was recommending you overweight your portfolio with DL shares. If they'd been just a month earlier in that recommendation, you could have sold your shares for twice what you could have sold them for on Wednesday this week. If they'd been about seven weeks earlier, you could have sold your shares for four times their value.
What will these two new bankruptcies mean to you?
To answer the most important concern on most people's minds first, your frequent flier miles are safe for the foreseeable future.
Your future flight bookings might be at risk, however. Although neither airline is likely to stop flying operations entirely, (or at least not any time soon), various commentators are projecting cuts between 7% to 15% of both airlines' services. These cuts are likely to be more strongly focused on domestic operations; it is usually easier for the airlines to make money (or, at least, to lose less money!) on their international services.
So keep a careful watch out on what might happen to any flights you have booked in the future on DL/NW. If a flight is cancelled and you're not happy with the substituted flight(s), insist on a refund and quickly switch to another airline.
The probable reduction in routes is thought to be most likely to happen on routes where the two airlines compete with low cost carriers. This will provide a boost to the low cost carriers. The rationale for this expectation is that it is easier to compete with other dinosaurs than with new low cost carriers.
The reduction in routes might also mean that if NW/DL was previously your airline of choice due to the route system matching your most common itineraries, you might want to start thinking about switching to a different carrier who might edge ahead of NW/DL in terms of convenient route network.
Bear Stearns quickly prepared a nine page report discussing the implications of these two latest bankruptcies. The report also has a list of every airline that has gone bankrupt since deregulation (the list is longer than you'd think) and plenty of other fascinating data.
Bear Stearns have kindly allowed us to offer this report directly to you (free, of course), and you can download it here.
Interesting question : What are the odds of two airlines filing bankruptcy on exactly the same day? Completely independent of each other, that is?....
Although most 'blame' is being given to high jet fuel costs, one of the real reasons both airlines filed Ch 11, and one of the reasons they chose now rather than later to do so, is the cost of their defined benefit pension obligations. Northwest had a $65 million payment that was due on Thursday, the day after its filing. And DL has said it does not plan to make its next scheduled payment, either. Both airlines have multi-billion dollar liabilities to their pension programs.
However, Chapter 11 might not give them the Get out of Jail Free card they are hoping for. The Pension Benefit Guaranty Corp issued a statement claiming both airlines are obliged to continue to meet their pension obligations, even after entering bankruptcy. Executive Director Bradley Belt said 'As long as companies remain in operation with ongoing pension plans, they have a legal obligation to meet their funding requirements'.
That legal obligation didn't seem to weigh very heavily on United when it passed $6.6 billion in pension liabilities to the PBGC, and in doing so lit the fuse of the bankruptcies that occurred this week. Make no mistake - these two bankruptcies are all about writing off the two airlines' pension obligations. They are nothing to do with high fuel costs. NW and DL need to write their pension obligations off so as to be able to fairly compete with UA and US. High fuel costs affects all airlines equally. Pension costs don't.
Talking about high fuel costs, the airlines are increasing their pressure on the government for relief from jet fuel taxes. Their lobbying group, the Air Transport Association, worried last Friday that the industry would lose $10 billion this year, due to high fuel prices. The ATA asked a Senate hearing this week for a one year holiday from jet fuel taxes.
If they should get such a concession, does that mean they'll reduce the fuel surcharges they take from us?
Is the bubble bursting at JetBlue? CEO David Neeleman said he expects the airline to post its first ever quarterly loss, after 14 quarters all showing profits since its IPO. The reason? Guess... High fuel costs.
Neeleman was gloomy as to how high they could boost fares, believing that people are more price sensitive to air travel costs than formerly, and too big an increase in fares would reduce the number of travelers, making the airline worse off than leaving fares close to current levels.
JetBlue took delivery of the first of its Embraer 190 regional jets this week. The good news - this new smaller plane will enable JetBlue to add new services to smaller destinations than it previously could with its much larger Airbus planes. The bad news - the Embraer uses more jet fuel per passenger to operate, and now switches the airline from a simple single airline operational plan to a more complex scenario with two different plane types. JetBlue hopes to have eight of the planes flying by the end of this year, and has 101 of them on order.
Not a good recipe - increasing your operational complexity (= costs) and your fuel costs at a time when you can't charge much more per ticket and are under increasingly tough competitive pressure as the dinosaurs bring their own costs down.
Bankruptcies, bursting bubbles, and big bills for jet fuel notwithstanding, it should have been a good first six months for the airlines this year. Overall, they carried 5.4% more domestic passengers in the first half of 2005 compared to the first half of 2004, according to D0T statistics released this week.
Passenger numbers were up 5.4%, passenger miles flown (RPMs) were up 5.7%, while available seat miles were up only 1.8%, making for a 2.9% increase in load factors.
Southwest carried the most passengers (42.6 million of them).
There's a new airline about to be launched in India. It will be called either 'Sky Palace' or 'Palace in the Sky', and is to be a luxury airline, owned by the former Maharajah of Mysore (India abolished titles in 1950). The planes will have luxurious first class seating, and a small little coach class at the very back where servants of the passengers up front can travel. The airline's target travelers are people who may frequently travel with one or two servants, according to the (former) Maharajah, who hopes his personal backing will add an extra cachet of exclusivity to the venture.
The airline expects to start flying with two planes in late 2006 and may grow to as many as 21 planes, serving 36 cities, within a couple of years. An oft quoted statistic is there are a million millionaires in India. If so, and noting how much spending power a million dollars buys in India, the airline may well succeed.
A less successful airline is perennially loss-making Olympic Airways and its successor, Olympic Airlines. The European Union has now determined that the airline(s) received $860 million in illegal government aid over the last decade, and has given the Greek government two months to show how it will be repaid.
Greece has been trying to sell its airline for some time, and boldly says it will keep the airline flying. But, presumably, no longer with government aid.
You get what you pay for with airlines and airfares sometimes. And then, sometimes you don't get even that. 51 passengers on a flight operated by discount carrier Ryanair in Europe found their flight cancelled and the next available flight not scheduled for another two weeks. They ended up pooling their money and hiring a bus to drive them the 600 miles.
Here's an interesting air fare. Air Canada is offering what it terms its North American Unlimited Pass. For only $6998 plus tax, you get unlimited travel to more than 100 destinations within the US and Canada served by Air Canada and AC's Jazz, for two months, between 1 October and 30 November.
Talking about jazz, the New Orleans airport is now open again, with NW operating the first services, soon to be joined by CO and WN.
While New Orleans airport is opening, Tegel Airport in Berlin has been temporarily closed after building workers discovered an unexploded one ton bomb dating back to WW2. The airport, the nearby subway line, and adjacent highways have all been closed, and authorities plan to conduct a 'controlled explosion' of the bomb. It is not known when the airport will reopen.
Isn't 'controlled explosion' rather an oxymoron?
My projection for $100/bbl oil by the end of 2006 has now been joined by a Canadian economist, although he believes this won't come to pass until later in 2007. Either which way, are you ready for $5+/gallon gas?
Richard Branson's idea about building a new oil refinery has resurfaced. He is even more aggressive about the price of oil than I am. He is quoted here as talking about prices per barrel of $100-200. Of course, to be pedantic, it is unclear what building a new refinery will do to reduce the cost of oil per barrel at the wellhead, but he is right about the growing profit margin refineries are adding to the cost of the crude they buy, and he is even more right about the desperate lack of surplus capacity in the refining part of the oil industry.
Note the staggering fact that it is 29 years since the last new refinery was built in the US. As Katrina showed us, it only requires a small blip in our refining or production capacity to result in a massive swing in pump prices.
And you've got to admire Branson's approach. Instead of aping the American airlines, who limit their response to asking for a government handout, he wants to take control of his destiny and build his own refinery. Good on him.
Here's the possible start of a long heralded trend - the move towards a cashless society. In Japan, the amount of coinage in circulation decreased in July for the first time ever. Although the decrease is negligable (0.05%) it is still a massive turnaround from former steady increases.
One example of how we are moving to a cashless society is the start of using your cell phone as an 'electronic wallet', with the phones being able to interface in to payment systems. The logic is that everyone travels with their personal cell phone these days, a conclusion that is increasingly true.
Talking about traveling with a cell phone, here's a fascinating new intelligent cell phone that can control your use of the phone if you are driving, depending on how it perceives your speed and road conditions to be.
While I continue to worry about the dangers posed to all of us by increasing levels of cell phone radiation, here's an article that points to another modern danger - deafness from listening to MP3 and other music players through in-the-ear earplug headphones.
This Week's Security Horror Story : The Government Accounting Office has just released a study that says airline flight crews - the last line of defense against terrorist attacks on planes - have received unrealistic self-defense training and too few crew members have participated in training sessions.
One example cited was teaching participants self-defense in open classrooms that fail to recreate the cramped conditions in a cabin or cockpit which require very different tactics in a fight.
So far a mere 474 crew members have attended training classes. The TSA is responsible for arranging this training, and in response to the criticism concedes 'Attendance is not as high as we would like to see it'.
How many is 474? To put this in context, there are over 50,000 flight attendants alone in the US. Less than 1% of cabin crew have attended training classes. And the classes they have attended have generally been inadequate.
Here's an adventure-loving gentleman. Having just won the record for being the world's fastest driver in his special category, he is now considering learning to fly. His category? He now has the world record for being the world's fastest blind driver.
I like to end most newsletters with a joke. And this week is no exception. In a hilarious article, Joel Widzer says it is un-American to fly on low cost carriers such as JetBlue and Southwest, and suggests we all owe a debt of gratitude to the dinosaurs. The dinosaurs, he says, serve the American public with pride, and forgo opportunistic practices in order to serve their customers' needs. He adds that our 'greedy strategy' of booking onto low cost carriers is 'wreaking havoc with the U.S. air travel industry'.
Note to loss-making airlines : When you've finished blaming high oil prices for your massive losses, why not take Joel's line and start blaming your former passengers; it is apparently the fault of your former passengers that they choose to go somewhere offering better service and value, not your fault at all.
You might think this ridiculous nonsense. But you'd be wrong - I have to believe this is an elaborate, albeit bizarre, joke. For, you see, Widzer is also the author of a (admittedly unimpressive) book 'The Penny Pincher's Passport to Luxury Travel' which purports to tell you how to get free upgrades and similar cut-price travel perks. And such a concept, if applying his 'logic' in this column, would surely be hypocritical and at least as un-American as flying on a discount airline....
Perhaps his next book will be 'The Spendthrift's Guide to Paying Over the Odds for Ordinary Travel'.
Until next week, please enjoy safe travels. And feel free to book any airline you wish, no matter what Joel Widzer says.
David M Rowell aka The Travel Insider
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