:: November 2011 Letter ::
That bratty kid from Catcher In The Rye was right. The world is filled with crummy jerks. But I’ve got great news. We’ve got a system set up to admirably deal with crummy jerks.
This month saw two dire-sounding events – the AMR bankruptcy and the US budget supercommittee failure. Each showed people at their worst, unable to do what’s right, unable to agree, and unwilling to compromise. The failure of the supercommittee ended hopes of a bipartisan deal to cut $1.2 trillion in the coming decade, triggering automatic “sequestration” cuts of that amount split between defense and other spending. Supercommittee member Sen Jon Kyl (R-AZ) refused to cut defense at all. This helped to ensure massive automatic defense cuts due to the committee’s failure (there were many other reasons the supercommittee failed, but that was a big one).
Meanwhile, AMR’s failure to get an agreement on labor costs from the pilots union ended a decade-long struggle to be the only US legacy major to avoid bankruptcy. AMR pilots apparently decided that losing their pension was better than any compromise. I’m sure the pilots have their own view of AMR management as the crummy jerks in this dispute, and the pilots’ view may be accurate. But one should ask: how’s that intransigence working out for you?
So, November saw the abject failure of the vaunted budget supercommittee, charged with rescuing the US from fiscal disaster, and the bankruptcy of a major network carrier. Depressed by these two scary-sounding events? I’m here to rescue your holiday season. There’s plenty of silver lining in these dark clouds. In fact, I’d argue that you should view these as positive events.
Before we panic about the post-supercommittee sequestration cuts, with their “automatic” $600 billion in defense spending reduction, remember that no cuts actually kick in until 2013. We’re entering a key election year. Aside from Ron Paul, all of the Republicans are trying to move to the right of a “liberal Democrat” president. This is tough when that “liberal Democrat” has presided over record defense budgets and a very high level of military force use. SecDef Panetta has already taken a firm stance against big cuts. We can look forward to the coming presidential debates: “I would never cut defense.” “I, by contrast, would never, ever cut defense.” Sudden Republican front-runner Newt Gingrich found a better way to position himself to the right of Obama, talking openly about “regime change” in Iran. Bombs away.
Republicans don’t need to do much to undo the “mandatory” sequestration cuts. They’re easily undone by legislation. What are the odds that the guys who refused to cut defense by a nickel will sit idly by while it gets cut by $600 billion? Democrats, in return, may push to let the Bush tax cuts expire to pay for defense; if not renewed again, they expire at the end of 2012. Or, reflecting the fierce determination that the Democratic party has shown over the past few years, they may roll over and play dead. Either way, those sequestration cuts won’t destroy the defense budget.
Of course, you can’t have a silver lining without a dark cloud. There may be serious damage to the defense base and to people’s lives in 2012, when defense companies and the Pentagon budget people may need to act as if those unlikely sequestration cuts will actually happen (although Panetta has implied that in early 2012 they may go with a 2013 budget that is not sequestration cut-compliant). Small and mid-sized companies, which already face credit problems, will be particularly vulnerable. Program execution will suffer due to budget uncertainty. Military and company personnel will be let go, if only temporarily. There’ll be a lot of damage done and very little money saved.
Then there’s AMR. There are two great paradoxes in the airline business. One: you need a lot of money to successfully go bankrupt. With over $4 billion in current and coming cash, AMR is…err…fiscally solid enough for a successful bankruptcy. The second paradox: to succeed in the US airline industry, you need to go bankrupt first. After the filing, airline analysts rushed to praise the move (“um, can you give a bankrupt airline stock a ‘Buy’ rating?”), pointing out that AMR now has a free hand to get out of onerous labor, jet lease, and other obligations. The OEMs liked it too. Boeing’s Jim Albaugh told Bloomberg, “I’m really confident that American’s going to come through this restructuring a better company, a more competitive company, and if they’re more competitive and making more money, they’re going to buy more airplanes.” He’s right. The airline analysts probably are, too.
One negative consequence of not going bankrupt earlier is that AMR was left out of the great merger game; there was no way a post-bankruptcy carrier could combine with another carrier that still had all its restrictions and obligations in place. After AMR’s bankruptcy, the path is now clear towards a merger (USAirways, for example); the final stage in the overdue restructuring of the US airline industry?
Don’t forget the dark cloud. In addition to pensions destroyed, a lot jets will be dumped. Flat traffic, very high new jet production rates (see my last month’s letter), and a few airline bankruptcies mean lots of early jet retirements and an even darker environment for used jet finance. Hurt enough finance people and this might even hurt our industry.
If you don’t expect too much from people they might just surprise you. As this is written, Boeing has reached an agreement with the IAM covering a four year contract and guaranteeing that 737 MAX production will stay in Renton. The agreement ends fears of a strike next year and likely means a settlement of Boeing’s NLRB dispute. Hooray! Two groups of people, with an unpleasant history of conflict between them, actually reached an agreement that benefits them both!
Unfortunately, most of the time, people don’t act that way. But our cretin-proof system (well, cretin-resistant) blunts much of the damage they do. Consider: we’ve just had two apocalyptic-sounding failures, with minimal consequences. Yet we don’t see a compelling reason to change any of our military aircraft or jetliner forecasts. Holden Caulfield took a grim view of the world. But it wasn’t always right.
Teal aircraft updates this month include Jaguar, ARJ21, KT-1/T-50, King Air, Legacy/Phenom, AW129, Lynx, NH90, and the renamed AW609. Have a great holiday season.
Yours, ‘Til We Get an App To Deal With Crummy Jerks,
© Richard Aboulafia 1997-2006, All rights reserved.