Come Fly the Eastern Skies

As airlines in America pile up their losses and service complaints, things are looking far different for our friends in Asia. Dr. Marc Faber, a frequent world-traveler, compares the airlines of the East and West…and it’s no surprise which will comes out ahead…

"Airline service is getting worse because more people are flying at a time when carriers have slashed their work forces," according to Dean Headley, a co-author of a study on the airline industry and associate professor at Wichita State University.

According to Headley, the U.S. airline system is being taxed because more planes and more people are flying than at any time since the 9/11 terrorist attacks. However, the aviation infrastructure – runways, airport slots, and air traffic control systems – is essentially the same as it was in the delay-plagued era just before the terrorist attacks, while employment at the seven largest carriers was down 12% in January 2004 compared to a year earlier. Ontime performance worsened in 2004, with 78.3% of flights arriving on time, down from 82% in 2003. (That 78% of flights arrived on time in 2004 surprised me, since on a recent trip to the United States not a single flight I boarded was on time.)

In 2004, complaints about airline services increased by 27%, a far higher increase than the 3.3% growth in passengers. Moreover, according to Homeland Security’s acting inspector general, Richard Skinner, the ability of the Transportation Security Administration (TSA) screeners "to stop prohibited items from being carried through the sterile areas of the airports fared no better than the performance of screeners prior to September 11, 2001", despite the government having taken over the task at about 450 airports in early 2002 and hired 45,000 workers.

In the meantime, U.S. airlines have piled up huge losses and the market capitalization of AMR Corp. has declined to $1.6 billion, Delta to $509 million, UAL to $116 billion, and Northwest to $486 million. By comparison, Southwest Airlines has a market capitalization of $11.5 billion and Jet Blue of $2 billion, while FedEx alone has, at $26 billion, a larger market value than all of the U.S. passenger carriers combined!

Asian Airlines: Indian Company Jet Airways

Across the Pacific Ocean, in India, an airline started in 1993 by a former travel agent, Mr. Naresh Goyal, recently went public, commanding a 45% share of the Indian airline market and having, following its IPO, a market value of $2.8 billion. Jet Airways is known for its impeccable service standards and punctual arrivals and departures, but it will face increasing competition from a dozen or so new low-cost airlines that have either already begun servicing or will soon start to service the Indian passenger airline market, which is growing by approximately 25% per annum.

In 2004 it had "only" 15 million passengers; however, it is expected to grow to 50 million passengers in five years’ time. What is remarkable is that India’s Jet Airways, with a market capitalization of $2.8 billion, has only 42 aircrafts, compared to 71 for America’s Jet Blue and more than 1,000 for AMR Corp., the world’s largest carrier, with revenues in 2004 of US$18.6 billion.

Now, I am not suggesting to invest in Jet Airways – at its current price, it is probably overvalued – but it is nevertheless interesting that, in Asia, airlines seem to manage not only to make money, but also to provide excellent services, while in the United States, the airline industry has not only lost billions of dollars in the last few years, but also offers poor services.

Not that conditions are far better in Europe: Air France is by far the world’s worst airline, while the once proud Swissair, which in the 1960s and 1970s was frequently voted as the world’s best airline, has been taken over (fortunately) by Germany’s Lufthansa following massive losses caused by its management’s complete incompetence. Still, of the ten airports that were voted the best in the world, Europe managed to have three, with Munich fourth, Amsterdam eighth, and Copenhagen ninth. All the other ranks among the best ten airports were won by Asian airports. Not surprisingly, our great service economy – the United States – had none!

Asian Airlines: A Trip to Wuhan, China

I recently travelled to Wuhan, a large city in China and an important transportation and distribution hub. It is located about halfway between Hong Kong and Beijing on the Yangtze River and is worth a visit for its museum, which houses the tomb of Marquis Yi of Zeng, discovered in 1977, which contained not only 21 female consorts, but also an assortment of weapons, armors, and an L-shaped three-tiered bell rack made from massive lacquered wooden beams, capped and reinforced by bronze sheaths and supported by bronze figures on domed bases. Sixty-four bronze bells on the rack were in graduated sizes, and most still hung on bronze suspension armatures attached to the rack. The remarkable state of preservation of the bells, and the wealth of information supplied by the inscriptions on them, have surprised musicologists from around the world.

So, if you find yourself in Wuhan, which is not a particularly nice city, go and visit its museum and the 64 well-displayed bells of Marquis Yi, which are not only impressive for their age (over 2,400 years old), but are also highly interesting from a musicology point of view.

From Wuhan, I flew to Shenzhen, which lies adjacent to Hong Kong’s New Territories. I hadn’t been to Shenzhen’s airport for 20 years, when it had only a landing strip and a shed as a terminal. Today, it is an impressive airport with heavy traffic to numerous Chinese cities. It has around 15 flights daily to Beijing and more than 20 flights daily to Shanghai – not bad, given that 20 years ago it had just a few flights a week, and considering that Hong Kong Airport has around the same number of daily flights to Beijing and just a few more to Shanghai.

In Asia, air traffic is exploding everywhere, with the number of passengers growing at 20-25% annual rates in countries such as China and India, and with numerous new airports taking the bulk of the traffic increase. Last year, Guangzhou opened a state-of-the-art international airport (Baiyun Airport), which is designed to become the air transport hub for the Pearl River Delta (certainly for cargo) and southern China, and connecting with Southeast Asia. Baiyun Airport’s terminal can currently accommodate 25 million passengers a year with its two runways and can handle the world’s third-highest cargo capacity. Once the second phase of Baiyun Airport is completed by 2010, the airport will be able to handle 80 million passengers! There is little doubt that both the Shenzhen and Baiyun airports will be mighty competitors for Hong Kong Airport – especially as far as cargo is concerned.

Currently, Hong Kong is the world’s largest handler of international cargo, with 80% of that freight coming from the Pearl River Delta, which produces about a third of China’s exports. (In 2004, China surpassed Japan as the world’s third-largest exporter.) However, with a rapidly improving infrastructure in China, I would expect the share of Hong Kong’s international cargo originating from southern China to decline meaningfully as both Shenzhen and Baiyun gain market share. This doesn’t necessarily mean that traffic at Hong Kong Airport will decline, because while the overall Asian passenger and cargo market is expanding rapidly, it is unlikely to grow significantly. This is already the case for the Hong Kong port, which has lost market share to ports located in southern China.

Still, the point I really wish to make is that in Asia, markets for goods and services are expanding rapidly because they are not saturated and they are becoming more and more affordable to the masses, as a result of personal income gains and price declines arising from huge capital investments. (In
2004, China added steel-producing capacities of 51.4 million tons, which is almost equal to the combined output of Brazil and India.) The problem in the United States and in Western Europe is that markets are largely saturated and real incomes are hardly growing, which has several consequences in terms of economic growth and the profitability of the corporate sector.


Dr. Marc Faber
for The Daily Reckoning

June 02, 2005

Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report and author of Tomorrow’s Gold, one of the best investment books on the market.

Headquartered in Hong Kong for 20 years and now based in northern Thailand, Dr. Faber has long specialized in Asian markets and advised major clients seeking bargains with hidden value, unknown to the average investing public.

Dr. Faber is a regular contributor to Whiskey and Gunpowder, free e-newsletter, from Dan Denning and Byron King (among others) that covers resources, oil, geopolitics, military history, geology and personal freedom.

So many bells are ringing on the U.S. housing bubble we think we may go deaf. Or mad. The latest toll comes in the May edition of Playboy magazine. We haven’t seen this ourselves, but we have it on good authority that the Playmate of the Month, Jamie Westenhiser, says she is abandoning a promising career as a model in order to "take up real estate investing."

What would make a nice girl like her end up in place like that? Maybe it was the 12.5% gain in real estate in the last 12 months? How about a 50% increase in housing prices, nationwide, in the last five years? In hot markets – such as California, Florida, and Washington, DC – prices have risen 60% in the last two years.

It’s a "real estate gold rush," says the cover of Fortune magazine.

Americans are suffering from delusions of mediocrity, we believe. They take for normal what is actually extraordinary.

Prices of American residential real estate, in real terms, are up 66% over the last 114 years, says our friend Tim Price in MoneyWeek magazine. But all the increases happened in just two brief periods: right after WWII and since 1998. Other than those two periods, the real price of housing was either flat or falling. And the big difference between the period following WWII and the present era was that back then the U.S. economy was growing and healthy. America had not only a positive trade balance, but the most positive one in the world. Wages were going up, so people could afford more expensive houses. Families were expanding faster than the economy – so they needed more houses too.

But now, families are getting smaller. Incomes are stable or shrinking. The nation spends more than it earns; it desperately counts on rising house prices just so it can continue living beyond its means. Lenders come up with creative financing to permit themselves to lend money to people who can’t pay it back. Houses in some areas are already so expensive that barely one buyer in ten can afford a median-priced house. And Playmates of the Month are giving up strutting their stuff in order to invest in real estate. This is not a normal situation. It is preposterous and asinine.

There may be more profit to be squeezed out of America’s Great Real Estate Bubble but Daily Reckoning readers are cautioned to leave the last of it for others – namely, the foolhardy and the brain damaged. Don’t expect to wait until the last minute to sell property you bought as a speculation…or property you don’t really want to own. You won’t know when the last minute comes. Property bubbles end with such a little whimper, you hardly notice. People put their houses on the market. As far as they know, buyers are still standing in line. Then, they notice that the buyers have disappeared.

More news, from our team at The Rude Awakening:


Eric Fry, reporting from Manhattan…

"Will the interest-rate ballgame end decisively in the ninth inning, or are we in for a tedious, extra-innings affair? Here is why we are sticking around for the long haul…"


Bill Bonner, back in London:

*** In London, the real estate bubble started losing air last summer. According to the paper, it is still not clear what is happening. Fewer properties are selling, at lower prices, but many think it is just a lull.

A friend of ours put her apartment in central London up for sale last fall – hoping to get out at the top. In two months, she says, only one person looked at it – a crazy woman from the same building. So, she gave up and took the place off the market.

Her failed sale is almost invisible. Sellers are reluctant to mark down prices. They can’t believe that the market has changed direction. Instead, they expect buyers to come back. Prices don’t fall quickly. But the inventory of unsold properties builds up. Houses are unlike stocks in that it costs something to own them – taxes, insurance, heat, and maintenance. As the slump continues, owners must keep digging into their pockets to pay the monthly costs. And they are still unsure what is going on. Then, stories begin to circulate. Marginal owners become desperate; they cut their asking prices sharply to unload properties. But people still do not expect a prolonged bear market. Buyers with cash take advantage of the ‘bargains’ that come on the market. People are still optimistic and hopeful.

The property boom in the U.S. has been around for nearly 8 years. It might take just as many years for the bubble to deflate. For leveraged investors it can be a long, painful time.

*** "Construction spending hits record high," says a Reuters headline. What the headline describes is the "growth" in the U.S. economy. People are spending money they don’t have on things they can’t really afford – notably, things with windows and doors. They think they are richer; they see the new granite counter-tops and the marble shower stall. But they have actually gotten poorer. They’ve put themselves into debt just in order to increase their consumption. The faster the economy "grows," the poorer they get.

*** The Dutch drove another spike into Europe’s heart yesterday. Hopes for a strong central government bled out on editorial pages all over the continent. In America, meanwhile, the vote was seen as more proof – if any were needed – that Europe still "can’t get its act together."

Seems almost impossible to believe but Americans once celebrated the virtue of not having a strong central government. But that was a long, long time ago…and not worth mentioning.

Switzerland has no strong central government. Can anyone name the president of Switzerland? Not even the Swiss could do so. What a lovely country; blowhard politicians barely make the papers. Nor is Switzerland part of the European Union. The Swiss have wisely decided to keep to themselves. We don’t notice them suffering from it too much.

*** A reader makes a valid point:

"GM is not, as George Wills disingenuously claims, a welfare state. GM’s health-care and pension obligations represent legitimate expenses and liabilities incurred in the course and as a result of contracts for services

"Like many American businesses, GM is in the process of setting the stage for its grand arabesque: Reneging on the contractual obligations it incurred when it persuaded its workers to accept lower wages (thereby reducing GM’s immediate expenses) in exchange for higher delayed compensation in the form of health-care benefits and pensions.

"In short, GM made a deal with its workers and now that those workers are too old to begin anew to prepare for retirement, GM desires to escape its legitimate, contractual, capitalistic obligations.

"This illustrates two key features of the modern U.S. economy: The first is the severing of the connection between effort and reward. The second is the absence of trustworthiness.

"Yesterday’s workers were fools ever to think that American businesses would not be able to escape pension obligations. As recent decisions have shown, the courts are only too willing to take from the elderly the rightful compensation due to those who have given loyal service.

"Today’s workers are fools to think the U.S. legal system will ever again smile on the underclass.

"When the Bush Administration finishes packing the U.S. judiciary with right-wing zealots, the little guy’s pension will be gone and his day in court will be over before it begins.

"This is the nature of an ownership society: Only the weak and the poor have to work."

*** We went to the National Theatre on Tuesday night. We saw an excellent lighthearted farce based on the old movie with Vincent Price – Theatre of Blood.

Many of the plays put on in London are not very good. Many are simply empty spectacles, designed for tourists and gum-chewers. But the theatre is also still recovering from a lamentable 20th century tendency towards social commentary and method acting. The playwrights – such as Shaw, Williams, Miller, all the Scandinavians and Russians – seemed to want to outdo each other to see who could present the gloomiest view of domestic life. The players act as though they are announcing their own suicide every time they say, "Please pass the salt." And viewers come out depressed, usually asking for a divorce or a rope on their way home.

The Daily Reckoning