GLG News by Christopher Dane

Implications: Paraphrasing President Bill Clinton's campaign strategist, James Carville... It is the Loonie stupid!  It is also the economy, price of gas. The reverse phenomenon is occurring in the US...where it is the dollar stupid!

Analysis: It is a very simple explanation why travel is down to Canada.  The Loonie is, for the first time in years, on par with the US Dollar and in fact, has been running higher than the dollar.   With a weaker than Loonie dollar, one would expect travel to be down YOY from the US.   Moreover, while the US dollar has gotten weaker the Canadian dollar, has become stronger in the world, making travel there less of a bargain for discretionary travelers than it was previously.

Conversely, because of the weaker dollar, International Travel to the US is showing strong YOY growth.  If you are in the UK, America is basically having a half price sale on everything!  If you are in Europe coming here, you are enjoying a 35% sale.  That is despite the economy and the cost of fuel, which, at these exchange rates, is  (and as hard as it is to imagine,) a real bargain indeed for the Europeans in particular.

Thus, even with the high cost of fuel, a slowing (if not recessionary) economy, weak dollar and housing slump, there are bright spots.  In this case, the strong Canadian Dollar is hurting "inbound" travel to Canada, whereby the weak US Dollar is driving the inbound international travel.  This is just another case of the economic forces behaving in a very predictable manner.

Implications: - Current Fee structure is illogical. Airlines pay 90% of the cost for two-thirds of the usage. - The Air traffic control system is going to get far worse with the continued growth of corporate aircraft and "very light jet" (VLJ's) -Airlines pay for 90% of the air traffic control system and use only two- thirds of the system. - This proposal  being considered is based on user fees which is far more logical, and equitable.

Analysis: The current method of funding the air traffic control system is outdated and unfair.  While it may have made sense many years ago before the rapid growth of corporate aircraft, it will only get worse still with the coming of "Very Light Jet's. (VLJ's).  VLJ's will carry 4 to 8 passengers and will operate like a "taxi service" from mostly from satellite airports.   They, along with the growth of corporate aircraft  will only further clog the current Air Traffic Control System.

The current system has airlines paying 90% of the cost of the air traffic control system and yet using only two-thirds of that system.  How logical is that when faced with the growth of private aircraft including VLJ's?  The proposed system suggests paying a "user fee".  Therefore if you use it you will pay...what could be more fair than that?  AOPA, would have you believe  that this is some how unfair and that their cost will increase dramatically.  While it is true their costs will increase dramatically, those hurt the most will be corporations that have a growing fleet of private aircraft and the VLJ's.  The notion that this will some how impact smaller airports is simply not true.

The ATC system is already in serious trouble which is resulting in costly delays, wasting precious fuel because of these delay and cannot continue in its current state.  Let mew share with you a little tactic that corporate aircraft pilots do to help to add to these delays.  It is no secret that the northeast has they most congested airspace in the country, and all 3 of three local airports in NY  (LGA, JFK, EWR)are in the top 5 in airport in terms of delays.  What private pilots do (most of which are private corporate aircraft) is file a flight plan that does not include flying to the NY area airports.  Once airborne they change their flight plan to fly to NY.  They do this because they cannot get a "slot" when they want and do this as a way to circumvent the system, which only creates additional pressure on the air space around all of the NY airports.  Keeping in mind that while these private aircraft may or may not be flying to one of the big 3 NY airports, they are using the same air space as those airports!.

Considering all the discussions about global warming, carbon emissions and fuel conservation...the user fee concept even makes more sense to help develop and fund a new GPS based ATC system.  Anyone outside the aviation industry would look a a user fee concept would agree that the current way no longer fair and the proposed change is the right thing to do on so many levels.

Implications: *    Will the Bush administration or the next administration approve   approve any airlines attempt to merge? *    Unions and communities will fight any merger attempts. *    Other carriers like American and Southwest will likewise lobby against any mergers. *    Premises for mergers is not valid since there are too many profitable network carrier that are smaller than any of the individual carriers that are in play.

Analysis: The notion that any kind of airline consolidation in the US involving Delta, United, Northwest, or Continental  will occur is not a foregone conclusion.  While their are many investment bankers that want this to occur for selfish reasons, there are many other powerful groups against such consolidation.   Not the least of which is the Justice, Commerce and Transportation departments. It won't matter whether it is the current Bush Administration or the next administration, either one will have a difficult approving any such rumored merger combination.  If you believe that consolidation will limit competition, cost cities jobs, raise fares and close airline hubs like Memphis, Cincinnati, Cleveland and/or Salt Lake City then you will have the unions, communities, industry trade groups against any mergers that seek approval. (I assume any Congressional intervention will cancel one another)

If you do not buy into the fact that only consolidation can save these carriers (that 3 out of 4) which recently existed  bankruptcy and thus already lowered their cost then you will have all of the above groups lobbying against any mergers plus Southwest, American and USAirways.  While Southwest is already on record of looking to participate in any consolidation, as a practical matter their choices will be limited.  American is not about to give up its "largest carrier in the world" status without a fight and I do believe they would have little interest in trying to assimilate USAirways into the AA given that USAirways is still suffering a  hang over from their America West merger.
Moreover, all those groups against any mergers will point to the fact that there are already many smaller profitable carriers in US, North America around the world.

In short, while I believe their will be attempted consolidation in the airline industry...that it will actually occur is as likely as the odds makers saying the Patriots will beat the Giants by twelve and half points in the Super Bowl

Implications: *Service will get worse...I know that is hard to imagine. *Fares will go up. *Communites will loses both Hubs, flights and jobs. *If it happens it will be Delta merging with Northwest and United merging with Continental and no one want US Airways

Analysis: There is no such thing as a good airline merger in recent history.Take for example the most recent US Airways and America West merger.  More than 2 years later, they are still sorting out labor and service issues..and they are relatively small carriers when compare to the mega-mergers being currently contemplated!  Or how about the American Airlines /TWA merger before that...while the service issues were not nearly as bad, the St. Louis hub has virtually disappeared. 

The institutional investors would have you believe that Delta needs to merge with either Northwest or United to take advantage of the "economies of scale". (Conventional wisdom says that Delta merges with Northwest and that United merges with Continental).  What is interesting is that Delta and United are already in the top 5 airlines in the world.  This begs the question...how big do you have to be to get economies of scale?  If these mergers are to pass antitrust muster...which in an election year, is unclear here is what you can count on over time.

* Say good bye to the following airline hubs  and jobs in those citIes:   Cleveland (Continental), Cincinnati (Delta)...a big loss for Ohio, and Memphis (Northwest)

* A loss of service to countless other cities.
*  Miserable service as they integrate different disparate equipment and processes (anybody remember Frank Lorenzo combining Peoples Express, Continental, Eastern et al...well that was pale in comparison to these mega-mergers!)  The integration of these mergers (4 airlines into 2 airlines will take at least 3-4 years at a minimum per merger
*For this wonderful (read:awful) service you will have to pleasure of getting to pay more for it as well...is this a great country or what?

Since 3 of the 4 carriers that are in the merger rumor mill have been in bankruptcy recently (only Continental had been in Bankruptcy in the 80's and 90's....a lifetime ago!), it would seem that there cost structure is already competitive without having the "economies of scale".  Yet Southwest is always able to find a way to be competitive without an international network, no real alliances to speak of, and only a shrinking fuel hedge to rely on...makes you wonder what they know ???

Implications: * Blackstone/Hilton deal is unique on several levels * Hotel Industry metrics have probably peaked in terms of RevPAR. * New Construction in the piptline is at an all time high * Starwood's management is weak and no apparent strategy. *  Marriott is not about to sell the family business

Analysis:

 I do not believe the Blackstone acquisition will put others in play for several reasons.  Clearly Blackstone would be prohibited from purchasing any other major chain from a Hart-Rodino antitrust perspective.  More importantly the Blackstone acquisition is unique for several reasons. 
1. They were already in the hotel and REIT business with their other properties like LaQuinta.
 
2. Hilton's acquisition of Hilton International was presumed to be a precursor to putting itself up for sale.

3. Hilton has a strong management team in place even with their CEO retiring at the end of the year.

While I believe the Hilton stock was not as undervalued as Blackstone would suggest even with strong REIT values, strategically it does make sense given their other hotel/REIT business.

The industry I believe will peak late summer early fall in terms of occupancy and RevPAR as other sectors of the industry are indeed already experiencing some weakness.  Additionally "new builds" in the pipeline are at record levels which would further indicate a future softness as they come online.  Finally, I do not believe Marriot would sell the "family business" and nor is Starwood a good candidate for acquisition given relatively weak management and no discernable strategy and turnstyle senior management changes.  Therefore this is a "one-off" kind of deal.

Implications: •Marriott is very good at managing multiple brands. •Marriott has successfully kept brands/cultures separate. •Marriott Needed a boutique brand. •Marriott has a history of success in developing brands.

Analysis: Marriott is the 800 pound gorilla in the hotel industry and they got there by being very, very methodical.   They are not the fastest but the are they are the most deliberate.  So Marriott's venture in the the boutique hotel market is typical of how they do things.  They were no where near the first to venture into this arena, because they wanted the concept to prove itself with others. (e.g. Starwood, Intercontinental etc.) and wanted to figure out who and how to manage this process internally as well as the overall strategy.  They wanted make make sure it was not a "me too" strategy, thus the choice of Ian Schrager was a terrific choice, even for company as conservative as Marriott.

Moreover, Marriott is excellent at managing multiple brands and cultures.  Clearly when they purchased the Ritz Carlton brand the inital concern that they would diminish the brand's cache proved to be unfounded.  The have continued to let the brand remain separate in order to maintain its unique identity.  While others, like Starwood, particulary with their Sheraton Hotel brand, has not had a clearly defined niche over the years, Marriott has been very disciplined in keeping each of their brands within their assigned niche.  In fact Starwood, admitting the error of their ways with Sheraton and using a page out of Marriott's play book is committed to having a more consistent product/niche for its's Sheraton Brand.
 
Therefore, given Marriott's conservative and methodical culture, their finally recognizing need the need to be in the boutique niche, and their history with other Marriott brands, this too should prove to be another successful brand.  The 800 pound gorilla will just keep getting bigger and better.

Implications: * CAFE  standards never had the intended outcome.
* relies on something to happen in the future when what is needed something for today.
*  Making car makers accountable for conservation rather than the end user is illogical.
*  Drivers are ultimately responsible for conservation.
*  The solution is to follow the Europeans...charge what the charge for fuel and invest that money into the highway and road infrastructure.

Analysis:  CAFE standards never had the intended outcome...and that is to reduce the use of gasoline thru conservation as a result of better gas mileage. In fact the reverse has happened...miles driven continue to increase as a result of better gas mileage. Secondly changing the average mileage at some point int he future...in this case 2016-2020 depending on whose program you are looking at, does nothing to help today situation of global warming and increased foreign dependency.

Automobiles account for only 18 percent of America;s total energy consumption...who can tell me what we are doing on the other 82%. Moreover, CAFE is making the automobile companies responsible for conservation rather than the end user...and isn't that who is ultimately responsible for the use of energy...It is the drivers that must be motivated to conserve fuel. The way the European Union (EU) does that is thru the cost of fuel...which forces smaller calls with better gas mileage.

Thus if the cost of fuel was equal to or greater than the cost of fuel in Europe and the added cost of that fuel reinvested in the infrastructure of the highway system in the country...this would force us to conserve fuel while the government spent the money easy traffic congestion which would further conserve fuel, force the manufacturers to invest in new technologies and lighter materials...which would again force more conservation.

Therefore the we are attacking the problem from the wrong side...rather forcing the end user to behave responsibly.   Isn't that more logical?