Tuesday, February 28, 2006

American Airlines to start China service in April with Shanghai-Chicago route - Forbes.com

Marilyn are vacationing at St. Pete's Beach. A few days off is a blessing. The past few months have been a stressful time for us both.

We are in a nice suite with a beautiful view and the weather is wonderful. The high today is forecast at 75 and at 78 tomorrow. We plan to go on a Dolphin watch cruise today. Here, on fat tuesday, we have already had too much to eat before 8 in the morning. We might have slept a little latter but we went to bed early and the sunrise was beautiful; too old to stay out late. Yesterday, we ate at a wonderful historic seafood restaurant. The owner won it and 7 acres of prime oyster beds with a full house tens over aces after he came home from WWII.

The "other enjoyment" is the action in oil and air. Saturday morning, I suggested that the price of crude would fall $5 a barrel this week. in just two days, it is down $2.50. Ample oil supplies should be announced again tomorrow.

Air continues to announce excellent results. AMR has gotten a strong response to its new service from Chicago to Dehli, India. Yesterday, AMR announced service from Shanghai to Chicago (and to the rest of the USA). The lowest priced seats are offered at $372 to Chicago and at $496 to the rest of the US. Each of these flights will produce revenues greater than $200,000. A couple of years ago, it would have been unthinkable to start this new service.

Expect CAL results for February to show strong gains. The company has increased its estimate of quarter-end cash by $100 million. Companies don't just happen to find an extra $100 million lying around. This kind of money comes from increases in revenues, top line growth. Cost cutting has been strong at CAL but a new $100 million must surely come from revenues. The new "extra cash flow" should be cumulative. At some point, the company will start using the extra cash to pay off debt. The payoff of debt will reduce interest costs which should further increase cash flow. A few years ago, I bought Nextel when it had a negative book value but good cash flow. The stock went from $2.90 to $28 lickity split when it started buying up its old low rated bonds at 50 cents on the dollar.

AMR and CAL are each hitting new highs or pushing new highs daily. Not all time highs but 4 year highs. Even LUV is raising fares but for LUV to start new service they generally must compete directly with established flights. AMRis among the airlines that are holding back on orders for new planes. To add sevice, AMR is redeploying assets or using assets more efficently. CAL is expanding capacity, while redeploying sevice to high margin international routes and is also retiring old fuel hogs.

The expansions in capacity world wide have been and are expected to be less than the expansion in demand. Load factors are as high as they have been since before I was born. The St. Pete newspaper published an article a few days ago that said the last time load factors were this high was in 1946 when "It's a Wonderful Life" was just out in the theaters. Very few folks are alive today who remember the "good times" in the airline business. In case you don't know by now, I believe whole heartedly in the generation theory. There was a good reason for Moses to wonder the desert for 40 years.

Ironically, the high price of oil is pushing the further deployment of fiber optic cable. Prices to transmit data have stabalized after years of over capacity induced declines. Verizon and AT&T are showing signs of life and companies like Corning (GLW) are on fire. My Mom owns Corning purchased at $3 per share and more purchased at $21 per share and the stock could easily go back to old highs. My feeble memory is that the old high was $170.

Marilyn and I are planning our move to our "retirement home". It is a two bedroom flat on the fourth floor corner across from Old Salem. It is next door to the new Y and within a short walk to down-town Winston-Salem. Our fuel consumption should decline by half. It was 40 years ago when race riots hit down-town Winston hard. Fourty years ago, my friends and I camped out on Friday night. We woke early to visit the Krispy-Kreme on Stratford Road. The only people there were the cops and the National Guard. They asked what we were doing out because a curfew had been imposed late Friday. We didn't know but the good news was that we were there because the sun had awakened us (we slept in bedrolls without tents). Yes, the point is that the exodus from down town Winston was in full swing 40 years ago and the new down town is under construction now, 40 years later.

Marilyn and I will cut our local fuel consumption by more than half when we move to our new home. However, if we make the trips we hope to make, all the savings will be spent on airfare; I'll write more on this from Alaska this summer.

Most of the oil bulls got on board late. The best buys were made in 1999, the price of crude is down 14% from the highs reached 6 months ago. In two or three years, there will be lots of talk on CNBC about the turn-around in airlines. The best buys were made three years ago but the next three years should be fantastic years for the patient investor; don't be too cautious about getting on board the turn in stock price always leads the turn in earnings!

Big money will be made in other areas. Goodyear Tire is a steal at today's price, Etrade is cranking out stock trades by the milli-second and Corning is enjoying the growth in flat screen sales. Stocks are cheap relative to bonds and relative to real estate; and, real estate is not nearly as expensive as is commonly perceived. The air has been let out of the ballon but the bubble is not anywhere near a pop. Real estate has been going through a correction.

Folks do not expect stocks to go straight up without correcting over-exuberance and neither should real estate investors. There are more 50 year old people in the US today than at any other time in the countries history. There are more echo boomers at the age of 28 than ever before. The prime age for buying a first home is 28 and the prime age for buying a resort home is 52; real estate has only paused for refreshment.

Commodity prices are set up for a substantial drop. The decline will asuage inflation fears, lower long interest rates, lower mortgage rates and lower money market rates. Investors who have been afraid of stocks, bonds and real estate will not sit around to watch trillions of dollars return to 2% rates of return.

A real estate recession is comming but it is still 3 to 6 years away. My family is reducing beach front real estate holdings and adding to stock positions. We may add real estate holdings in "down town" locations.

GO AIR GO! Our AMR is up about 120% in less than 6 months. We are on a Ken Fisher bucking bronco and we are holding on for a fantastic ride. Sorry, to rub it in but it is time to hit the beach.