What's All This Then?

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Monday, July 14, 2008

For a number of reasons, not the least of which is the length of time it takes to recover from the kind of back surgery that I had on May 7th, I will not be doing any traveling for a while - certainly not any overseas travel. In a way, considering what’s been happening with the nation’s airlines, that’s something to be grateful for. I’m not going to be a part of any herd of travelers being treated like cattle and having to pay a bunch of extras for the "privilege" of standing in line, being examined for my terrorist potential and paying $15 for a checked bag!! What’s next - $5 for a bag of peanuts? Assuming that you can find a plane to take you where you want to go. It seems that in addition to trying to nickel and dime passengers to death to try to cut back on the losses major airlines are experiencing, they’ve also come up with the brilliant idea of grounding large portions of their fleet. Planes that aren’t flying aren’t using all that expensive gas. Less gas, less losses. What a brilliant idea.

The last time I traveled overseas, I flew United. The plane wasn’t full in either direction. The whole fleet was in service at that time. And all of the United personnel were pleasant and efficient - despite the fact the company was losing money hand over fist and was on the verge of filing for bankruptcy. . But United had a brilliant strategy for avoiding that desperate move. They hired one Glenn F Tilton - gave him a $3 million "signing bonus - and two months later United filed for bankruptcy!! Tilton then went about the business of cutting salaries and jettisoning pensions of United employees. With that kind of cost cutting help - on the backs of United workers - the company emerged from bankruptcy in 2006. The business community hailed Tilton as a hero. In their view, he was a business genius. To United employees, he was a villain. I’ve written about the business joke that United has become more than once in this blog - the last time on May 11, 2005 - second item.

Fast forward to 2008 and things are even worse. Fuel prices of all kinds are going through the roof, so United devises a brilliant strategy to cut costs. They lay of at least 1100 workers with more to follow and ground a host of gas guzzling planes. That may save them some money but it hardly endears them to the flying public - not to mention the suddenly out of work United employees. It’s no longer easy to find a United flight to get you where you want to go. And if you do find one, it probably won’t be leaving when you’d like it to leave or arrive when you need to arrive.

Meanwhile, little old low cost Southwest Airlines which in my part of the world flies out of Midway in Chicago, is not grounding any planes or laying off workers - and unlike the rest of the airline industry - is posting profits. How are they doing so well while United, under the tutelage of the $3 million dollar man, Glenn Tilton - is doing so badly? Simple. They were smart enough to have hedged their bets in the futures market to the extent that their jet fuel costs this year is close to a dollar per gallon less than what United is paying!!

Jet fuel isn’t traded in the futures market, but unleaded gas - and as we all know so well - crude oil - is. Southwest hedged against rising jet fuel prices by trading in crude oil futures. Does this make Southwest one of the speculators that are said to be at least partially responsible for what we’re paying for gas at the pump? Not at all. It is precisely for businesses like the airline industry that the energy futures markets exist. While an airline may not take direct delivery of any crude oil , it is perfectly legitimate for it to buy oil futures as a hedge against the huge amounts of jet fuel that they buy and that is a derivative of crude oil. It is the people and organizations that never take delivery of crude oil or any of its derivatives and who are not in any kind of business that require them to buy huge amounts of crude oil or any of its derivatives that are the speculators. Their interest is simply in making money from the price fluctuations in the commodity. For the speculator - it could be any commodity - as long as there is plenty of price movement.

So if Southwest has been able to anticipate the increase in the price of jet fuel and hedge against it so successfully, what does that tell us about the management of the major carriers - and particularly of United’s management that so brilliantly entered into and pulled the company out of bankruptcy on the backs of their employees? For my money, it says that they don’t know what they’re doing other than making sure that no matter how badly they screw up, they’re not the ones to suffer. And that’s not just confined to the airline industry. No matter how poorly any publicly traded companies perform - their CEOs keep raking in their millions. And if you think that’s an exaggeration, read this piece by fellow blogger Don Jones.

No doubt the CEOs mentioned here would agree with McCain’s economic advisor Phil Gramm that complaining about the poor performance of their companies and the deteriorating condition of the economy while they pull in paychecks in the millions, makes we common folk "a nation of whiners." Well, maybe if we "whine" enough, United and other major carriers will sit up and take notice that they’re screwing up royally. Or go out of business, which is maybe what United ought to do. There stock is trading for less than $4 today. Eight months ago it traded at $50!!

But they’ll probably hang on as long as there’s money to keep Mr. Tilton living the high life. After all, that’s become a standard of major American corporations. Publicly traded companies can be going into the toilet, their stockholders, employees and customers paying the price - but never the CEOs - America’s corporate untouchables!!