By DAVID MOON, Moon Capital Management
September 29, 2002

On Tuesday this past week, a number of executives from the major airlines testified before the House Aviation Sub-committee. 'Testified' is actually a poor term for what they did. 'Pleading for money' is a better term. 'Groveling' is probably the best description.

How can an industry full of so many smart people create or motivate so many dumb actions?

I assume all of the people in the airline industry must be smart.
They're on television. They wear dark suits and crisp blue shirts; they have to be smart.

If all of the executives of major 'full service' airline carriers are such geniuses, why is no-frills Southwest Airlines four times the combined size of Delta, Continental, American, Northwest and United Airlines? Amazing, isn't it? Based on the market evaluation of these companies, investors value Southwest Airlines at more than $10.6 billion. Delta is worth less than $1.4 billion. United, even after a round of government bailouts, is worth a paltry $124 million. For comparison, at its peak price in 2000, local IPIX was worth $3.1 billion.

Amazingly, Southwest Airlines has less than $6 billion in revenues, compared to $13.8 billion at Delta and almost $19 billion at American. Southwest obviously does more with less, however. On $5.5 billion in revenue, Southwest earned a little more than $500 million last year, compared to combined losses of $2.9 billion for Delta and American.

These airline industry executives must be good at some things ' like negotiating and groveling. It seems that someone in the airline industry is almost always in a fight with the Union or one of their suppliers. I wonder how much of the most recent airline government bailout money was used to pay for union negotiated wages and perks at US Air? How about corporate stock options or limousines? One month and one day after receiving approval for $900 million in government loan guarantees, US Airways filed for bankruptcy.

Airplanes are big toys that attract big boys with big egos. Howard Hughes, then the world's richest man, built and flew the world's biggest plane. Everyone seems to want in the game. Even the purveyors of fine poultry cuisine, the folks at Hooters, recently announced they were considering entering the airline business.

Not to be outdone by a couple of beer slinging, sexiest restauranteurs, the Alabama public-employed pension fund recently offered $240 million for a 37.5 percent ownership stake in US Air. This is after Alabama invested (and lost) the $340 million it invested in US Airways bonds.

There are multitudes of problems in the airline industry. They generally treat their customers poorly. Their service is intentionally complicated. They waste money on things that provide no value to most passengers (horrible food) and neglect to spend money where customers would most appreciate it (like larger seats.) Given Southwest's fanatical commitment to low fares, low operating costs and low employee turnover, Warren Buffett's recent observation about the airline industry is poignant: 'You cannot be the high-cost producer in a commodity business. Sometimes it's not even good to be the low-cost producer.'

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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