Thursday, January 06, 2005


Delta has finally said enough is enough. It is time to rebuild the air traffic industry after several very tough years. DAL has lowered prices and liberalized many of the quirky rules required to get the best deal. USAIR and Northwest Air have answered the challenge with equally low fares. Northwest code shares with DAL, whereas USAIR is a direct competitor.

My Great Grandpa was know for advising farmers to "get into the chicken business when others are getting out", and some of my all time best buys have been in the eye of a storm. Sometimes the storm is a macro storm or economic recession. At other times, the storm has been a micro storm or industry recession.

Airline bankruptcies and route suspensions have cut capacity. Cost-cutting has made profits possible at lower fares. The liquidation of another carrier would be very positive for the remaining carriers.

Delta is putting the question to USAIR and USAIR employees; do they want to stay or go? United is still operating under bankruptcy court protection and liquidation is possible but USAIR is coming real close to liquidation.

Although my profits in CAL have been diminished by the declines of the past two days, I will stay the course. In fact, it is likely that I will buy buy more DAL and CAL or swap shares of one for the other to capture a tax loss.

In the same way that the exact wrong time to buy an industry group is at the peak earnings for that group, it is the right time to buy near the earnings trough. The latest round of discounted fares will initially lower earnings. However, most of the fares will be cut far less than 50% and traffic will gradually come back.

I expect revenues to rise in 2005 and cost to fall. In 2006, I expect revenues to rise again and for costs to level out. I expect revenues to be well above break-even levels by 2006. I will not speculate on USAIR or UNITED. The risk of liquidation is real and without liquidation the risk is that bond holders will take all the equity.


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