United Airlines Dot Com

It seems we don’t have much respect for good old capitalism. And now, with the airline industry, we have a chance to let capitalism work (though I doubt we will).

I’ve changed my mind about the dot-com bubble in light of the airline industry’s woes. The bubble wasn’t a mistake at all. It was only capitalism. It was gloriously messy, silly, energetic and lovably effective capitalism.

If American passenger airlines had been run like dot-com startups, we would have better airlines. We might even get a chicken salad sandwich every few hours or thousand miles. Just consider the differences and eerie parallels between the dot-com mess and the airline mess.

Most of the bubble Internet businesses had (1) no business plan, (2) no profits and sometimes (3) no sales, either. Ditto the airlines, except that they have sales. Actually, we can credit them with two and a half out of out of three weaknesses, because airlines are cyclic and sometimes even the sales aren’t very good.

At the height of the dot-com bubble, I wondered how anyone could have thrown good investment money after hopeless dot- com ideas. But I wasn’t fair when counting the gains. The tech bubble actually did a lot of good. Look at the positives:

Airline Industry Woes: Fools and Their Money, Parted

First, a number of fools were parted from their money, as they should be. Fools who get too much money and keep it too long are apt to overestimate their wisdom. Sometimes they run for public office…like Nelson Rockefeller and Ross Perot.

Second, more to the purpose, unfettered opportunity often creates riches that draw more opportunists. Capitalists multiply around new opportunities until they cheapen the product (literally and figuratively) to the point where we can all afford it. In an eye blink, the Internet went from a system available only to million-dollar-budget military users to universities to the street level. If airlines had done the same, we’d all have commuter planes in our backyards and they’d be teaching Flyers-Ed in high schools.

Once the opportunists drag a new idea down to the street level, even more entrepreneurs pile on. Again, this only happens where capitalism is free and unrestrained. It didn’t happen with radio or television because licensing brought about the restriction of ownership.

But where the government doesn’t stand in the way, competitors eventually overpopulate. That’s what happened with the dot coms. Now, dot-com competitors have to fight each other for survival, looking for ways to reach us and make us their customers…and keep us that way.

Tough for them, great for us. Books-a-Million and several others didn’t make it, but they pushed Amazon to higher standards. Amazon had to excel to keep its lead.

All across the industry, dot coms had to find things we would want and would use. This kind of open competition speeds innovation and practical adaptation.

Airline Industry Woes: Creative Product Uses

Open competition encourages creative product uses – of which the original inventors never dreamed. The Internet began as a secure communications system, but for us, it became the world’s most convenient bookstore, forum for public auctions, provider of online medical diagnoses, source of music, center of postage-free e-mail, mortgage calculator, instant stock quote ticker, instant news deliverer, cheaper and cheaper brokerage commissioner…

When capitalism works right, greed is good. Greedy hordes of new entrepreneurs who want to be millionaires keep up the pressure on the first-movers. To win the contest, the entrepreneurs have to work harder and better, offer more to their customers, upgrade products, cut prices…

Then comes the great shootout. Supply exceeds demand, the weaklings fail and the strong settle down to viable business plans.

But the airlines didn’t follow this path. During their early years, government regulated them heavily. In that time, the customs, procedures and labor practices born in a monopoly became part of the business. Then, with deregulation, the field opened up for a while. But the competition was never as robust as in the dot coms. Routes are still regulated and limited. Flying time is limited (well, I don’t mind that…since I’d prefer my pilot was not flying double-shifts on uppers to stay awake).

Recently, I requested an aisle or window seat on a crowded plane but couldn’t get one. When I boarded, I found the window seat in my row was given to a non-paying employee returning home. Would a restaurateur turn away a paying customer to feed the assistant cook at the best table in the house – for free – on his night off? Of course not! Paid sales always come before employee perks and freebies in well-run businesses, unless the freebie has advertising value. Likewise, not long ago I worked with a man who had once been an airline desk employee. He still flies frequently on standby for almost nothing…yet he hasn’t worked for the airline in nearly 10 years. Imagine if McDonalds had to serve free hamburgers for life to every kid who took a summer job with them.

Airline Industry Woes: Turning a Socialist’s Stomach

Now the airlines are in trouble. But they won’t go as quickly and quietly as the dot coms. In fact, there are rumors of some very bad ideas. Here’s a big-government plan that would turn even a socialist’s stomach: nationalize the airlines.

Who would want them in their current configuration? The ghost of Joseph Stalin? A lunatic who escaped and accidentally got elected to Congress? Sir Richard Branson, founder of Virgin Airways, once told Warren Buffett that the fastest way to become a millionaire was to start out as a billionaire and buy an airline.

I have one suggestion for the airlines: let ’em go.

You probably think that would disrupt the economy. Bingo! Of course it would disrupt the economy. Absolutely. That’s the plan. It’s called capitalism. Stand out of the way, and let supply and demand do the work. Not allowing airlines to ‘hurt the economy’ in the short run will seriously harm it in the long run.

We will never be so lucky, though. Government’s bound to do something. We taxpayers will either fund more bailouts or inherit a cancer-ridden business, complete with the continuing wondrous management of the industry experts who pumped their businesses full of carcinogens in the first place.

And now we are at war. Airlines are crying foul again. Don’t let them fool you: the war and terrorism only accelerated what was already happening. The airlines are in this condition because, in the past, too much governmental support, regulation and monopoly allowed them to grow fat and lazy. They never developed the muscles they needed for more difficult times.

The federal budget deficit grows every day. The war adds to the cost. I, for one, certainly don’t want to put an airline bailout on the shopping list.

Best regards,

Lynn Carpenter,
for the Daily Reckoning
March 24, 2003


For the last few days, the world has watched its television screens and placed its bets.

“This is amazing,” said colleague Dan Denning, watching simultaneously the Dow and CNN. “Every time a major strike against Baghdad is shown on TV, the Dow rises.”

Stock buyers may get lucky – prices may rise from here to eternity. Then again, they may not. Last week pushed the Dow into positive territory for the year. The price of gold, meanwhile, fell $6.90. For the moment at least, we are in a bull market in all things American: its military power…its stocks…and its dollar.

But we cannot predict the future. We’ve tried many times and just never seemed to get the knack of it. While it seems possible that war fever may raise the temperature of stocks for a while, perhaps even a long while, it is also possible that the real malady afflicting the U.S. stock market – and the American economy – may be aggravated by the war.

Debt levels grew in the last quarter at their fastest pace in at least 15 years. Household borrowing shot up at 10.7% – something that hasn’t happened since 1987.

Altogether, excluding financial debt, the U.S. total debt rose to $20.7 trillion, of which $6.05 trillion is mortgage debt. Householders mortgaged their homes at a rate 4 times faster, in the last quarter, than that of 5 years ago – adding $3.37 trillion in new debt over the 5-year period.

Meanwhile, the federal government’s budget deficit shot up to $96.3 billion in February, bringing the total for the first 5 months of fiscal 2003 to $193.3 billion, up 50% from last year.

Consumers, though cheered by the good news from the Iraqi front, still have to pay their bills. Unlike their government, they have no printing presses that can produce $100 bills when they need them. In fact, with jobs scarce, extra money is becoming harder to get.

Even state governments lack the necessary machinery for dollar creation. The weekend news tells us that the great state of Missouri, its back to the wall, had to ask Washington for spare change to help it meet its unemployment compensation promises.

Everybody seems to need money. Where will it come from? ‘From the taxpayers’, is the responsible answer. Citizens will just have to accept a lower standard of living as they pay down their debts…and pay the costs of war.

‘Out of thin air’, is a more realistic reply.

‘Out of the sands of Iraq’, is sure to come up sooner or later. Perhaps George W. Bush and the other oilmen in the administration have already thought of it. More below…


Eric Fry, on the scene in Manhattan…

– To judge from the stock market’s dazzling performance last week, the bombing of Baghdad is the most bullish event for U.S. equities in more than 20 years. The Dow soared 661 points, or 8.4%, to reach 8,521, the largest one-week gain for the blue chips since October 1982. The Nasdaq jumped 6% to 1,421.

– The same investors who feared buying stocks three weeks ago, now fear NOT buying them. “The term ‘buying panic’ was in heavy circulation Friday,” writes Barron’s Michael Santoli, “when traders goosed the market 2% higher in the televised glow of Baghdad burning. As [last] week progressed, investors priced in greater optimism for a quick military victory in Iraq…The current surge has tacked on 997 points, or 13.2%, since March 11, and puts the blue-chip benchmark up 2% on the year…The leap in stocks last week was accompanied by collapsing prices in Treasury bonds, oil and gold, the asset-class trinity to which money fleeing war risk previously flocked.”

– If we here at the Daily Reckoning were inclined to pat ourselves on the back, we might remind readers that on March 10th, one day before the recent stock market rally began, we predicted, “Notwithstanding the worrisome ‘fuchsia alert’ signaled by the Paris office of the Daily Reckoning, the New York office continues to expect the Dow to head north of 8,100, before resuming its epic bear market…At least, that is our guess.” But since self- deprecation is the rule at the Daily Reckoning, we won’t make hay out of this lucky guess, provided that no one gives us any grief next time we make an unlucky one.

– Ironically, last week’s stupendous rally coincides with the three-year anniversary of the bubble-market peak. On March 24, 2000 the S&P 500 topped out at 1,527. About the same time, the Nasdaq reached its most absurd extreme of 5,048…But then the bubble burst, and the stock market has served up a steady diet of toil and trouble ever since. From their bubble market peaks, the S&P 500 and the Nasdaq have tumbled 41% and 71% respectively.

– Despite the epic losses, the major indices still sell for about 30 times honest-to-goodness GAAP earnings…And we doubt that earnings will jump higher any time soon. That said, we would not be the least bit surprised if a relatively swift victory in Iraq were to trigger a mini economic boomlet.

– If all goes as planned, and Baghdad comes a-tumblin’ down like the walls of Jericho, we should expect to see a wave of “relief-spending” by both consumers and corporations. And we should not be surprised if this abundant feel-good spending produces robust GDP growth in the second quarter. But SUSTAINABLE growth is still another matter. Our economy still labors under the strain of too much debt, too much capacity and too little demand – all of which impede the path to sustainable economic growth…

– “Shock and awe” aptly describes the response of most investors to the scenes of devastation they witnessed day after day on their TV screens last week. We are referring of course to the devastating collapse of bond prices. In a mirror image of the stock-market rally, Treasury bonds suffered their worst one-week setback in nearly a year and a half. And over the last two weeks, the yield on the 10- year Treasury note has vaulted more than half a percentage point to 4.10%.

– “The bond and equity markets appear to be rerunning the violent moves of last October,” says Barron’s, “when stocks bounced sharply and the 10-year Treasury yield soared 70 basis points in just eight trading sessions.” If indeed we are witnessing a re-run, stocks will soon resume their bear market and bonds will resume their bull market.

– The continuing bear market in stocks seems like a better- than-even possibility. But maybe, just maybe, bonds won’t be bouncing back this time. That’s because, however well our ground war against Iraq is progressing, our campaign to win over public opinion is facing stiff resistance. Importantly, many of the same foreign nations that oppose our war with Iraq also buy our government bonds. (And we need to raise about $500 billion per year to keep the lights on at America Inc.)

– If we start to lose the battle of public opinion, some foreign investors might boycott our two most successful exports – dollars and T-bonds. And that would mean a falling dollar and rising interest rates…which would make it much more expensive to wage our next war.


Back in Paris…

*** “I hope they get it over with quickly,” said Col. Aubray after church on Sunday. Col. Aubray, now retired, was most-recently attached to U.N. peacekeeping forces in Bosnia.

“The longer it goes on, the worse it gets. The public will support a short, clean war…but not a long dirty one.”

*** Idle family news: The apartment was quiet this weekend. Edward went with his class on a trip to Brittany. Jules went with a group of American students to the Normandy beaches. Henry went to Germany with his class for a week of total immersion language training. Maria had a modeling gig. And Elizabeth did a horse competition.

That left your editor to go to the country on his own, where he entertained the local choir mistress at tea-time. We sat outside on the most beautiful day so far this year. The sun shone brightly. Birds chirped and cooed. Bugs attached themselves to one another…either procreating or recreating, we couldn’t tell.

“What’s this war all about,” asked Cecile. “I don’t have a television and don’t keep up with these things.”

Cecile has been left behind by modern technology. She is postmistress as well as choir mistress. She delivers the mail for a living; for fun, she tries to teach sung masses to people who are tone deaf.

People do not often think (here, we pick up a theme from last week)…usually, they merely pick up the lame ideas that recently infected their nitwit neighbors. TV, the principal means of mass communication in a modern society, is also the principle means of mass-contagion. So when a group of malcontents takes over a nation’s government by coup or revolution, if they have any brains, they head right for the TV station. There, they begin informing people how lucky they are to have a regime change and what a good idea it would be to come out and wave a flag in celebration.

“But it’s too bad,” Cecile continued. “About the war, I mean. It’s such a pretty day…”

Cecile has an advantage over most people. Without a TV, she is less well informed.

The Daily Reckoning