Winston-Salem Journal | Job cuts likely in merger

Winston-Salem Journal Job cuts likely in merger

Piedmont Airlines was founded and grew up in my home town of Winston-Salem NC. The merger with USAir took the headquarters of the combined company away but there are still hundreds of USAir employees in Winston-Salem. A recent deal has assured Winston-Salem that a reservation center will remain open in Winston.

Now the next merger has been announced. AWA-American West-is buying USAir. USAir is about twice the size of AWA but it has been in bankruptcy twice in the past few years. The new board will be controlled by the current AWA board but the surviving company will be called US Airways.

On Cavuto on Business, Jim Rogers suggested that the airline business is making the turn toward profits. For the past few months, I have been "pounding the table" in regard to airlines and have encouraged my friends and family to invest in airline stocks. Our airline investments in order of largest holdings are CAL, AMR, NWAC and DAL. DAL is considered the riskiest of the four and AMR is considered the safest.

AWA has purchased the assets of USAir with no money down. It has "hired" 30,000 USAir employees at the lowest rates of pay offered in many years. It has had to assume a lot of debt and the new company certainly faces many challenges.

The plan is to cut 5,000 employees through attrition, cut 59 planes, close the USAir headquarters and save $600 million per year. The prior cuts in pension benefits were substantial.

Perhaps the most positive fact one needs to know is that AWA has successfully competed with LUV for the past several years. AWA is a low cost carrier and goes head to head with LUV in Las Vegas, Phoenix and Philadelphia. USAir does 90% of its business through the Charlotte NC hub.

Larry Kudlow says the airline business model is broken. He says no one can make
money off the hub and spoke system. I disagree. Cities like Chicago, Charlotte, New York, etc. will always have sufficient traffic to serve as connection points for numerous other cities. Low cost carriers can always compete point to point but those who need a connecting flight are apt to travel via one of the major carriers. One might be able to save money by taking two seperate short hops but the waiting time between hops adds a cost that many businesses cannot afford.

USAir will emerge from this tough time as one of the majors. The combination of the 7th and 8th largest carriers boots the merged company to number four and gives it a good chance of a profitable future.

One must wonder if DAL will not combine with another carrier. In prior attempts at big mergers, anti-trust concerns killed the deals. Under the current circumstances, it is difficult to argue to kill mergers when the failure to merge may raise costs to consumers dramatically when one of the carriers liquidates. Through code sharing, NWAC, CAL and DAL work together. Without checking the figures, I believe I am right in saying that together these three form the largest US based national and international carrier. (See my post a couple of months back where I showed that LUV is by far the largest US carrier in terms of total stock value--it is no where near the others in terms of sales.)

AMR is a surviving national and international carrier and UAL is a limping national and international carrier. NWAC and CAL cover hundreds of international cities from both the east and west coast. Both firms are experiencing very high load factors on international flights. When high load factors eventually cause high seat prices, the result will be a double whammy. A plane flying 300 seats at an average of $200 per seat generates $60,000 in revenue and is a big loser; whereas the same plan flying 350 seats at an average of $600 per seat generates $210,000 and is a big winner. The cost to operate the two flights are not very different.

My family will buy AWA. We have close friends who recently invested their 401-K funds to start a small business. We wish them the best and pray for them but we take substantially less risk investing in 5 large airlines than they take in starting a small business. It is often said that 90% of all small businesses lose money and close down within 5 years. It is possible that one or more of the carriers we have purchased will go bankrupt but I believe there is a ninety percent chance that 4 of the 5 survive. Even if only 3 survive, the 3 survivors will do very well and make up for the loss of the other two.

BUY THE BIG BULL--STOCKS ARE UNDERVALUED ON AVERAGE BY 25%!

One of the best measures of stock value is the price to sales ratio. The airlines have extremely attractive price to sales ratios.