By DAVID MOON, Moon Capital
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
I assume all of the people in the airline industry must be smart.
on television. They wear dark suits and crisp blue shirts; they have to be
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
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).