PRODUCTIVITY AND GLOBALIZATION

May 2004, Continental Airlines saw a sharp increase in revenue passenger miles and flew with 74.4% of all available seats occupied. May 2005, Continental enjoyed a tremendous year over year increase and flew with a load factor of 79.1%. No one in the business today had ever seen such a high May occupancy rate. Yesterday, the day before the start of the Memorial Day Week-end, Continental's month to date load factor was 80.8%!

The important thing for investors to appreciate is the operating leverage involved. The concept is simple, at 74% occupancy consumers typically have more than one convenient flight available to get from point a to point b. At 80.8%, the choices become much more restrictive. Therefore, in the past year, airlines have raised the prices of almost all seats on all routes. The revenue on a particular flight might have gone from $100 times 225 seats to $110 times 240 seats or from $22,500 to $26,400. The percentage increase in passengers in this example was 6.7%, the percentage increase in the fare was 10% but the percentage increase in revenues was 17%! Even more important, the first flight might have produced only a $500 operating profit whereas the second flight might have produced a $4,000 profit or an increase of 800%. Total international revenues have increased by around 17% this year.

A reader asked me yesterday if airline success depends on declining oil prices. NO! Oil prices are high partly because demand for travel, international travel in particular, is very high. If demand for oil keeps continues to hold oil prices high, the airlines will continue to have a convenient excuse for increasing prices.

Take a look at the success of the railroads the past couple of years (our NSC and CSX positions have seen very nice gains). Higher fuel costs have been a major benefit to the rails. The cost of fuel per pound of freight moved by truck is very high relative to the cost of fuel per pound for freight moved by rail. To some extend, folks are choosing to fly because the price of gas has climbed. The fuel cost of flying an airline passenger is a small portion of the total cost.

Those of you who have not officially joined our investment group should do so as soon as possible. Only those who have "shown us the money" will be able to participate when it comes time to "make the big money" in real estate. Those who only wish to buy a share in a beach condo for personal use should also join.

By the way, we still have many empty 2006 dates available at Myrtle.

Dell Computer: I like the recent Dell Computer moves. The company will use AMD and INTC chips, the company will earn an ongoing fee for installing Google software and the company is opening a new plant in India. The company is the low cost producer. The cost of a basic computer has gone down a lot and I do not know how much Dell will make off the Google software deal, but I suspect that in a relatively short number of years, Dell will make more per PC for installing software than it will by selling the hardware. Now that the INTC, MSFT, Dell links have been compromised, can you imagine deals whereby Red Hat or others pay Dell to install software?

The economic impact of the Dell moves show the continuation of disinflation forces afoot; productivity and globalization. This economic cycle is being stretched. Let the good times roll!