Tuesday, April 8, 2008

Now on to Airline Fare Inflation

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These are all little stories in a larger patchwork of much higher living expenses for the US consumer.... in fact global consumer, as the "World of Shortages" leads to a permanently higher cost of living. As we get story after story, from sector after sector, this just continued to build my thesis of a long period of strain for the US consumer, and no "2nd half recovery". No one likes to talk about it, but living standards will degrade for many (especially the "working class") as real wages continue to falter at a rate of increase below "life costs" - essentially meaning you fall behind more year after year. Why should the top 20% care? Well their taxes are going to be raised to help keep the bottom half from falling off a cliff.

In the long run a much lower cost of housing will be a necessary requirement for the great masses to keep up with other costs in their lives that will be ramping. But to get from here (expensive housing relative to incomes) to there (cheaper housing relative to incomes) requires a wretching adjustment - an adjustment current homeowners will suffer through in most regions (ex agricultural & energy related regions of the country). And the government is only kicking the can down the road with their "housing" programs to try to stop market forces from happening. All of us will be better off in the long run if our housing costs return to 30-35% of income rather than the 40-50% many are now being forced to pay. This would leave more for everything else we need in life. But housing prices/rents must come down for this to happen. I expect a lot of non essential spending, such as travel, to take a hit in the coming years. And despite the best efforts by banking lobbyists to make bankruptices expensive and much more difficult on the consumer - we'll have a large wave of personal bankruptices in the next few years to boot. The consumer will simply be overwhelmed in the bottom half of our population... the leading edge is now here. So no it is not going to be "fine in 6 months". In fact we have just started [Apr 4 - Late Payments on Consumer Loans at 16 Year High]; if you want to talk about lagging indicators as people are trying to justify with the employment reports - let me tell you that foreclosures and bankruptices are a lagging indicator - "today's fallout" will take quarters to show in the actual numbers... the bankruptcies of today are fallout from events 6,9,12 months ago - when the economy was "booming" and home prices were 10-20%+ higher.

  • The burden of oversized mortgages and credit-card debt is proving to be overwhelming for an increasing number of consumers, as rising gas and food prices squeeze household incomes.
  • That is showing up in bankruptcy filings that surged 22 percent for the first quarter of the year, as consumers crumbled under the financial strain of heavy debt, problem mortgages and rising prices for gasoline and food, according to figures released last week by the American Bankruptcy Institute.
  • "Households are living on such thin budgets, there's a vulnerability that middle-class families, in particular, are having to deal with more and more," said Samuel Gerdano, executive director of the American Bankruptcy Institute.

Now the way the government reports inflation they have a cute thing called "substitution" - when something gets too expensive (beef) their measurements assume you move down (substitute) to a lower value item (say... spam) - so hence your inflation is flat or maybe even goes down. That's the magic of government reporting. So as airlines raise fares I can only assume they will adjust their reporting to assume you will bike, or heck walk from New York to Miami, or Boston to San Diego. So inflation does not rise .... seniors won't be getting accurate cost of living adjustments, and we can talk up how inflation is benign since the government reports "make all the inflation boo boos go away". But in fact, behind the scenes they are working extra time to in fact exaggerate the problems - talk about 2 faced. [Apr 4: A Horde of Helicopters has Moved In] This is essentially a gutting of the middle and lower class - inflation is the most regressive tax.

Now an economist might argue - as demand falters (as less of the population can afford say gasoline, or airline tickets) prices must fall. The best cure for high prices is higher prices... which will strip demand and then lead to eventually lower prices. Sounds nice on the surface. Unless you are in a global competition for goods with money rich countries... and you're country is a massive debtor. In that scenario prices continue to rise and your in stagflation world. Have you noticed how much oil (near all time high) has fallen as the US falls into recession? This has all the pundits scratching their heads - their ethnocentric, US based views do not allow for a "global competition for resources" scenario... simply put, "their playbook" says crude should of fallen 20-40% by now as the US enters recession. So they grasp at this in confusion (doesn't fit "the playbook") and call it "speculation in commodity markets". Further, how do you run an airline with lower fare prices (responding to a falloff from consumer demand) if you cannot make money even at current fares? All tough questions. But I'm sure the answer is somewhere in the "early cycle playbook".

  • The shutdown of ATA Airlines, Aloha Airlines and Skybus Airlines -- all three within one week -- signals a turbulent ride for business and vacation passengers alike as the nation's largest carriers struggle with soaring fuel prices and a limp economy.
  • Consumers can plan on shelling out considerably more money to fly and they'll have fewer choices when doing so. At the same time, they will be asked to pony up for services that once were part of the cost of a ticket, according to experts.
  • "The days of discount flying are over," said Julius Maldutis, president of consulting firm Aviation Dynamics and a veteran industry analyst. Of course, there will always be specialty-discount carriers like Southwest Airlines and JetBlue, but Maldutis warned that flying for cheap on major carriers will go the way of the horse and buggy.
  • "It's not only because of higher oil prices," he said, "but also because of the shrinkage in terms of the domestic capacity by the major carriers and the smaller specialized carriers shutting down."
  • The airline industry, never fully recovered from the aftermath of Sept, 11, is now grappling with the precipitous and seemingly unwavering climb in the costs of jet fuel. At more than $108 a barrel, the cost of crude oil is two-and-a-half times what it was in 2003 and last year emerged as the industry's biggest cost item, outpacing labor. Fuel now accounts for 30% to 35% of an airlines' cost, nearly three times its historical average.
  • "All the low-hanging fruit has been picked," Stempler said. "They're trying to conserve fuel by putting planes on the ground and reducing service to small communities."
  • On Thursday, Northwest Airlines became the latest major carrier to say it was trimming the number of planes it would put in the air. The Minneapolis-based carrier also said it was hiking fares and tacking on fuel surcharges and baggage fees.
  • Airlines often operate like a herd. If one decides to charge $25 to check a second bag and customers don't complain too much, then the others will follow suit. Fuel surcharges, for example, didn't start to surface until the middle of last year and by the end of 2007 averaged about $20 per domestic roundtrip. It's now about $50 on domestic flights and nearly four times that on international flights.
  • The second-bag-will-cost-you initiative was launched in February by United and, besides Northwest, has been copied by US Airways, Delta and on Friday, Continental Airlines. American Airlines has filed a request to charge the baggage fee in Canada and has said it was considering the move in the U.S.
  • A weaker economy, however, could prompt carriers to cut fares but it may also force other airlines into precarious financial positions. (and then we're going to a see a series of bankruptcies, these companies are serially bankrupt - every 3-4 years like clockwork)
I'll keep repeating it, unless your in Iowa, Nebraska, Oklahoma, parts of Texas or any agriculture or natural resource based area - expect to see a coming wave of clothing stores closing, restaurants closing, and "service" mom and pop stores closing. Each taking away jobs... which leads to more job losses. And as home prices decrease, state govt budgets must be cut - so less "services" offered, and more job cuts at the state and local level. The federal government can continue ballooning our deficit to the moon to create new jobs (kick can down road theory), and healthcare will continue creating massive job gains at the cost of $8000+ per capita costs to each American. (double any other country on the globe). But outside those 2 sectors (federal jobs/healthcare) we are going to have some serious pain. The masses can be conveniently ignored by ivory tower NYC jet setters but in sectors relying on the bottom 60% in this country to spend spend spend, their long term growth patterns will be shifting down, and their near term growth patterns are going to look alarming in the coming 2-6 quarters. This is still being completely dismissed on Wall Street, in lieu of "2nd half recovery" Kool Aid. Just like the mortgage mess was dismissed 6 quarters ago by the same folk who now say "oh my gosh what a shocker" - the same folks at the center of it all. But when we look back in fall 2009 it will be plainly obvious.

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