According to Reuters, talks over a US bailout of banks broke down and will begin again today.
Reuters reports that Washington Mutual (WM) became the largest bank failure in US history. Many of its assets were sold to JP Morgan (JPM).
Reuters reports that RIM (RIMM) fell as it posted a weak forecast.
If you were against airline mergers, you might be preaching to the deaf now. Northwest Airlines Corporation (NYSE: NWA) has voted in favor its merger with Delta Air Lines (NYSE: DAL). Delta has also now approved the merger. As part of the terms, Delta will issue 1.25 shares per NWA share. This merger actually brings up many issues in the sector and inside the companies.
Alitalia went belly up over the weekend. The causes were the same as for most recent airline failures. Fuel is too high, and do are debt-loads. Passenger traffic is being undermined by a slowing economy.
The vultures have come to feed on the carrion. Investment groups and Air France have given indications that they would like to own a piece of the Italian carrier. They would like to have most of the debt go away first. If Chapter 11 has any consistent benefit for airliners it is that debt holders are obliterated.
According to Reuters, Singapore sovereign fund Temasek say it sees value in US and UK stocks.
Reuters writes that two large bond investors may get involved in raising capital for Fannie Mae (FNM) and Freddie Mac (FRE), if the Treasury is involved.
Reuters reports that Deltal (DAL) has tapped a $1 billion loan ahead of its merger with Northwest (NWA).
..
Not long ago daily media stories were predicting which major airline would be the first in line to fail. Las Vegas type odds were given to a list of inevitable airline bankruptcies.
There should be no argument the US airline industry is facing unprecedented challenges as they restructure their business models to survive with record high fuel costs and a questionable forward looking Global economy.
Stocks in a number of airlines rose over 40% last week with some, including AMR (AMR) moving up over 50%. The price of oil sold off sharply enough to warrant some of the improvement in the shares. Earnings for some of the companies were moderately better than expected.
All of that is a bit thin as a defense for such rabid buying.
Delta Air Lines (NYSE: DAL) is in an odd spot this morning. The company beat earnings and claims a gain before extraordinary items, yet it still had a wide loss on a net income basis. The carrier posted Q2 earnings of $0.35 EPS excluding non-recurring items, $0.25 better than the First Call’s $0.10 estimate; revenues were $5.5 Billion versus the $5.39 Billion consensus.
Delta sees Q3 operating margin of -1.3% ex-items and sees Fiscal 2008 operating margin of 0% to -2%. Delta also expects to cover approximately $3 Billion of the estimated $4 Billion raw impact of higher fuel input costs in Fiscal 2008 and expects to end 2008 with a liquidity position of about $3.2 Billion.
The company claimed 49% of its fuel consumption was hedged at $3.13 per gallon and said it realized a $313 million gain from its hedges. Here is its fuel hedge position:
Q3 2008 48% $2.94
Q4 2008 46% $3.42
FY 2009 21% $3.48
FY 2010 5% $3.05
Delta said it plans to close its merger with Northwest (NYSE: NWA) by the end of 2008. Shares of Delta are up nearly 5% at $4.90 in pre-market trading since the company is not sounding off the death of itself. This also has Northwest shares up about 2.2% pre-market at $5.51.
Jon C. Ogg
July 16, 2008
According to Reuters, Robert Steel was named the new CEO of Wachovia (WB) and the bank said it would have a quarter loss of $2.6 to $2.8 billion.
Reuters writes that the Blue Chip Economic Indicators survey shows more economists think the economy will enter a recession.
Reuters reports that the reputation of JPMorgan (JPM) CEO Jamie Dimon is rising as Wall St falls.
Reuters writes that the Pentagon has reopend bidding for the Air Force’s large refueling plane.
Reuters reports that Yahoo! (YHOO) will offer its search services to outside firms.
Reuters reports that shares in Fannie Mae (FNM) and Freddie Mac (FRE) fell again on capital concerns.
The Wall Street Journal writes that Apple (AAPL) will open its Apps Store to outside developers.
The Wall Street Journal reports that gasoline use is at a five year low.
The Wall Street Journal reports that Merck (MRK), Eli Lilly (LLY), and Pfizer (PFE) will form a joint venture to speed drug discovery methods.
The Wall Street Journal reports that the FDA has approve the Intel (INTC) home care tools.
The Wall Street Journal writes that export growth in China slowed in June.
The Wall Street Journal writes that the US government is considering the future of Fannie Mae and Freddie Mac.
The Wall Street Journal writes that the EU is considering regulation to force banks to set aside more capital.
The Wall Street Journal writes that US websites are getting more traffic from overseas but have not figured out ways to make money on it.
The New York Times writes that foreign investors are buying more and more American assets.
The New York Times reports that Northwest (NWA) will cut 2,500 more jobs.
The FT writes that investors are bracing for more US earnings gloom.
Bloomberg writes that history shows the S&P 500 could lose another 12% before the bear market ends.
Bloomberg reports that a former Fed president says Fannie Mae and Freddie Mac are "insolvent."
Douglas A. McIntyre
Telik (TELK) Someone selling out of the stock in big numbers. A mystery wrapped in an enigma. Down to $1.24 from 52-week high of $4.96.
Circuit City (CC) Still selling off after big loss. Down to $3.41 from 52-week high of $16.01.
MBIA (MBI) Analyst says bond insurance firm could lose another $7.5 billion. Falls to $4.71 from 52-week high of $68.98.
Northwest (NWA) Oil up. Airlines down. Sells off to $5.64 from 52-week high of $24.25.
Officemax (OMX) Small business spending falling off. Runs off to $14.67 from 52-week high of $40.97.
GM (GM) Oil up. Car stocks down. Pounded to $12.78 from 52-week high of $32.20.
Douglas A. McIntyre
According to Reuters, Staple (SPLS) has received EU approval for a takeover of Corporate Express.
Reuters writes that DreamWorks is in conversations with India’s Reliance. The deal would allow top management at the studio to leave Viacom (VIA).
Reuters writes that Mircosoft (MSFT) has bought TV ad tech company Navic.
Reuters writes that Google (GOOG) sees value in its "experiment": with Yahoo! in the ad business.
Reuters reports that Northwest Air (NWA) has further cut its capacity.
Reuters reports that the former CEO of AIG (AIG) may get as much as $68 million in severance.
The Wall Street Journal reports that floods in the Midwest could add to the price of ethanol.
The Wall Street Journal writes that Hershey laid out a plan to stay competitive in the candy market.
The Wall Street Journal writes that results from Fedex (FDX) could jolt the market.
The Wall Street Journal reports that Ford (F) will increase exports to China.
The Wall Street Journal reports that Wal-Mart (WMT) will cut capital outlays this year.
The New York Times writes writes that regulators may not force AIG (AIG) to shore up one of its key units with $900 million in new capital.
The New York Times writes that the US may lag the emerging world in tech growth.
The FT writes that LinkedIn raised capital valuing it at $1 billion.
The FT reports that SUV sales are still gaining in China.
Bloomberg writes that newspapers could face defaults as their ad revenue falls.
Douglas A. McIntyre
There are the 24/7 Wall St. odds that several companies will have to file for Chapter 11 between now and the end of the year. These will become a permanent part of the website and the list will be updated once a week.
AMR (AMR) 1 in 2 Lee Enterprises (LEE) 1 in 15 Ford (F) 1 in 35
UAL (UAUA) 1 in 4 Lehman (LEH) 1 in 25 McClatchy (MNI) 1 in 35
Northwest (NWA) 1 in 5 Continental (CAL) 1 in 25 AIG (AIG) 1 in 35
Gatehouse (GHS) 1 in 5 Wachovia (WB) 1 in 25
Delta (DAL) 1 in 10 General Motors (GM) 1 in 30
One of the most brilliant theories in business is that large companies are destroyed by more nimble competitors. Over time, the small companies become the large ones. The genius and capacity for quick decisions move them to the top of the hill.
The theory works until its doesn’t. What is not taken into account is that the economy itself might eat its own young.
According to the FT, Toyota (TM) will cut its production estimates for the US. The Wall Street Journal writes that GM’s (GM) domestic market share may fall below 20% for the first time since the company was formed by Alfred P. Sloan.
It could be argued that GM sowed the seeds of its own troubles when it moved heavily into the SUV and pick-up markets. The company never planned for really bad years again once it made it out of the cruel 1970s with its skin intact. UAW contracts and pension funds were not set up for lean years.
But, the real problems facing Toyota, GM, and others is the macro trouble of oil prices. The industry is being laid waste not so much by competition as by the broader failure of government and business to find a solution to the huge demand for crude.
The same holds true for the airline industry. Not matter how perverse it sounds carriers are now glad that Boeing (BA) and Airbus are late with their big new planes. It allows companies carriers to keep passenger capacity low and, perhaps, to raise ticket prices. The situation bites back at innovation. Better aircraft are worse of the industry.
Competition is secondary to the damage done to the airline industry. Oil is primary. Did the carriers prepare for higher fuel costs? Perhaps not to the extent that they might have, but foreseeing a doubling of their key commodity in a year is not part of most short-range planning. The industry leaders like AMR (AMR), Delta (DAL), Continental (CAL), and Northwest (NWA) could lose close to $10 billion this year.
The issue of creative destruction and innovation is put onto it head when industries cannot support new player no matter how ingenious they are. The trend actually work against advancing competition and protects the old guard, not matter how battered it is by circumstances.
It is unfortunate that the historic way for solving sea changes in industries, those that are not are forced by clever new players but by the broader economy, is through bankruptcy. That, at least, allows a reordering of priorities on the most brutal level. It hits the reset button which may let competition begin again in earnest. This is a state of affair which may not have exited since the Depression
Not much of a system.
Douglas A. McIntyre
The press alternates between reporting that United (UAUA) and US Air (LCC) are in merger talks one day, and not in merger talks the next. According to Reuters "United Airlines and US Airways have suspended merger talks due to concerns about labor opposition and integration costs." Of course, that could change tomorrow.
With the Delta (DAL) tie-up with Northwest (NWA) moving forward, it looks like other airlines believe that they are running out of time. High oil prices and a recession-driven loss of passengers means that operating income and cash flow in the industry could near $10 billion this year. Some of the carriers may not be able to weather that with with their current financial structures.
Airlines have quickly moved to two new strategies. One is very public and involves the cutting of routes and laying off of tens of thousand of employees.
The other planning goes on behind closed doors. This work is based on the idea that several carriers will have to go into Chapter 11. Each needs liabilities to greatly outweigh assets to make the move, but requires enough cash on the balance sheet to get through a restructuring.
Accountants with abacuses are sitting in windowless offices picking the best date for going into court and asking for protection. Based on current debt service and negative cash flow, some of them could be moving to bankruptcy in the third quarter.
Douglas A. McIntyre
Based on several pieces of analysis, the US airline industry will lose over $7 billion this year. If jet fuel stays high and a recession cuts passenger counts, the figure could go much higher.
Several major airlines, particularly AMR (AMR), trade near liquidation value. The company’s market cap is now 7% of total revenue. Numbers at Delta (DAL) and United (UAUA) are not much better.
In a call which could not even be called "better late than never", S&P has put a number of airlines on its watch list and may downgrade them. The agency even thinks one or more carriers could turn to Chapter 11. According to The New York Times, A senior credit analyst with S.& P., Philip A. Baggaley, said the action was taken because of “potential severe financial damage” that could result from record fuel prices.
To put that another way, S&P has not even downgraded the carriers yet, It is simply looking at that possibility.
With substantial debt loads, the first big airline bankruptcy could be less than a quarter away. Several small carriers have already filed Chapter 11. American is cutting its capacity by 12% and taking a number of older planes out of service. Thousand of people could lose jobs.
S&P may see several airlines fail financially before its changes its ratings.
Douglas A. McIntyre
AMR (AMR) falls after saying it will cut service to save money. Down to $6 from 52-week high of $29.32.
US Air (LLC) drops as oil spikes and investors fear huge losses in airline sector. Falls to $5.60 from 52-week high of $36.81.
Continental (CAL) Falls to $14.06 from 52-week high of $40.91.
Delta (DAL) Sells down to $5.95 from 52-week high of $21.80.
Northwest (NWA) Slips to $6.59 from 52-week high of $26.50.
United (UAUA) Dives to $6.47 from 52-week high of $51.60.
Douglas A. McIntyre
In a move that should be imitated by large US carriers like AMR (AMR), Delta (DAL), and Northwest (NWA), British Airways will ground part of its fleet to save money because of the rising cost of fuel.
According to The Times. "The airline would park its oldest, least fuel-efficient aircraft."
Analysts are concerned that BA may loss money for the next two years. By taking some aircraft out of service the carrier could ameliorate some of that.
Wall St. may watch to see if big American companies have the sense to do the same thing. Most have debt loads large enough to move them toward Chapter 11, if fuel costs stay high and a rough economy hurts passenger traffic.
Douglas A. McIntyre
According to Reuters, the head of strategy at Microsoft (MSFT) says it deal to acquire Yahoo! (YHOO) is over.
Reuters writes that Toyota (TM) posted a 28% drop in profit due to a strong yen and slow sales in the US.
Reuters writes that News Corp (NWS) sees economy hurting advertising.
Reuters writes that Sprint (S), Clearwire (CLWR), and several cable companies have created a venture to build a national wireless broadband network.
Reuters writes that News Corp (NWS) says it is not in deal talks with Yahoo!, Microsoft, or AOL.
The Walll Street Journal writes that the head economist in the White House sees no recession.
The Wall Street Journal writes that the president of Moody’s has resigned.
The Wall Street Journal says DirecTV (DTV) plans to raise $2.5 bilion for a stock buy-back.
The Wall Street Journal reports that Microsoft looked at buying Facebook.
The Wall Street Journal writes that Intel (INTC) still faces problems in getting WiMax accepted as a global broadband standard.
The Wall Street Journal writes that AMD (AMD) wlll come out with a new, more powerful line of chips.
The Wall Street Journal writes that the Chinese may take a stake in BHP Billiton (BHP) which could block its buy-out of Rio Tinto (RTP).
The Wall Street Journal writes that George Soros says the market will test its lows again.
The Wall Street Journal writes that the SEC will force brokerages to disclose their funding levels so that investor can get a better picture of how they are doing.
The Wall Street Journal writes that unlocked Apple (AAPL) iPhone are hurting some suppliers and carriers but are helping Apple earnings.
The Wall Street Journal writes that Merrill Lynch (MER) thinks the auction rate securites market will open up enough so investors will be able to get their cash out within a year.
The Wall Street Journal writes that the Take-Two (TTWO) video game "Grand Theft Auto IV" brought in $500 million during its first week of sales.
The New York Times writes that Blackrock (BLK) is managing $30 billion in Bear Stearns (BSC) funds. If they fall in value, the Fed will be stuck with the bill.
The New York Times writes that Delta (DAL) and Northwest (NWA) defended their merger in front of Congress.
The FT writes that the US and EU are united in trying to strengthen the dollar.
The FT writes that productivity rose more than expected.
The FT writes that MySpace will reach the ambitious revenue targets set for it by parent News Corp.
Douglas A. McIntyre
The board and management of Continental Airlines (CAL) have decided that staying single is the best way of life. After long merger talks with United (UAUA), Continental has elected to go it alone.
Continental may still enter a "code sharing" alliance with one or more airlines so that customers can have common ticking across more than one carrier.
The decision is based on the premise that airline mergers created nightmarish customer service problems which drive fliers to the competition. It is a sound position and calls into question the wisdom of Delta’s (DAL) merger with Northwest (NWA).
While industry marriages may allow for the cutting of some routes and personnel, they can lead to labor relations headaches including strikes by employees who are trying to keep their jobs. The hook-ups also do nothing to solve the more pressing problem at all airlines–rising fuel costs.
Whether solo or linked, several of the large US carriers could go into Chapter 11 this year. A combination of $120 crude and a recession which is almost certain to curtail air travel put the airlines under pressure which their managements cannot relieve.
The airline industry is about to undergo another profound restructuring, whether it wants to or not.
Douglas A. McIntyre
Eos was an extremely odd duck of an airline. It flew only one route, from New York’s JFK to London. It was an all business class affair, but, with a recession in full-swing flying is becoming a luxury, even for some businesses.
The bankruptcy of Eos over the weekend serves to remind the industry that rising fuel prices cannot be offset by increased ticket prices.
The managements at Delta (DAL) and Northwest (NWA) have decided that there is strength in numbers. They are merging and my be followed into the marriage chapel by Continental (CAL) and United (UAUA). There is scant evidence that merging two big carriers saves money while retaining customers But, at least it is a desperate attempt at staying open for business.
AMR, (AMR), parent of American, may be destined to stay single. It has the most debt of any of the big carriers. No other company wants to take that on in a merger.
All of that makes AMR the most likely candidate to go into Chapter 11 next. With oil at $120, Wall St. can bet on it.
Douglas A. McIntyre
AMR (AMR), parent of American Airlines, is in talks with US Air about a merger. Based on balance sheet and stock price performance AMR needs a partner more than most of the other large carriers.
According to Reuters "American Airlines has had early-stage merger talks with US Airways and is in advanced talks for an alliance with Continental Airlines."
Northwest (NWA) and Delta (DAL) have already begun the merger process.
With fuel prices high and moving higher, the major carriers are closer to Chapter 11 than they will admit. All lost large sums in the first quarter.
Douglas A. McIntyre
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