American Airlines Cutting Jobs and Routes

I know the "real economy" does not matter to Wall Street's fantasy world, but as we've discussed in the past an era of higher (if permanent) energy will cause major dislocations in our economy and be leading to major recession, potentially global in nature. I have not had a time to write about all the implications in 1 entry but some I have commented on in the past are the major hit to retailers, restaurants - the change in driving habits - the change in habitat (a flocking to cities and inner ring suburbs, along with smaller homes that are cheaper to heat/air condition) - people in low paying service jobs (that now dominate the rungs of society) will need to quit since it won't be cost effective for them to drive to work - and a few other ideas. The most important thing to remember as investors is the damage it will inflict across the nation/globe. It is a tax on all things - consumers and producers. Store closings are just beginning along with a reduction in expansion plans - AOL has a list of 36 chains closing stores here. And we have not even "begun" a recession yet. Yet the stock market could care less - they find these rising prices as a "benefit" because it indicates there will be no recession in the US. That is 1960s thinking; American - centric and without understanding of global conditions. But as long as that persists, stocks can levitate on "hope". As stores close, restaurants close, and all types of discretionary income falters - people lose jobs. In large swaths. We have transformed ourselves to a service economy based on consumption. How people can tell us a recovery is coming soon in the face of these headwinds, is nearly criminal. But buy stocks; it's all priced in. $130 is good, and $150 oil is great. $200? Even better. This is why I don't believe we will have a straight line up - demand destruction is beginning - now in earnest. It will roll through industry by industry that rely on the American consumer - we've discussed RVs, boats, Las Vegas gaming, entertainment, sporting events... it's all coming. And if oil *does* get to $150+ it will hit harder. $175 harder. $200? Forget about it.

We did talk about airlines [Apr 8: Now on to Airline Inflation]

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.

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.

Again, for the stock market UNTIL evidence is so overwhelming in their face, they will whistle past the graveyard singing a happy tune and talking about the "recovery in 6 months" til blue in the face. Maybe if you repeat something to yourself enough, you begin believing yourself. It seems to work in the Oval Office. Well, the evidence is beginning to mount

• In response to rising fuel costs and a slowing economy, American Airlines said Wednesday it will chop mainline domestic capacity by 11% to 12% in the fourth quarter and lay off an undisclosed number of workers.
• "The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy," CEO Gerard Arpey said in a prepared statement. (what about $140? $160?)
• "Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve," Arpey said. "We must work to overcome our near-term challenges and to secure our company's long-term future." He noted the industry has been hurt by overly rapid growth at other carriers. (No you are right, "hope" is how the government solves problem because they have an unlimited budget and printing presses - you suckers in private industry - not so lucky)
• As for revenue initiatives, American said that since April 16 it has participated in or led 15 fare increases, 14 of which were at least partially successful. On Wednesday, the carrier introduced a $15 fee for the first checked bag for some passengers, but excluded premium passengers, full-fare passengers, and international passengers. It also increased fees by $5 to $50 for services ranging from reservations services to pet and oversized bags.

The only reason we are not seeing major slowdowns (yet) globally are many countries subsidize the true cost of energy to their consumers... namely China and India. At some point this will subside or reverse. The true forces of the market are not allowed to play out in these countries - since their consumers are not feeling the pinch - so they have no reason to restrict demand. But it sure is happening here.

Conclusion: This is all priced in. Recovery begins July 1, 2008. We are not in recession and in fact will be roaring out of one soon. Buy stocks.