[P]I came across this article awhile back, it upsets me everytime I read it. Im sure that once you read it you''ll feel the same way.[/P]
[P]Common Sense Airing My Complaints[BR] [BR]By James B. Stewart [BR]August 13, 2002 [BR]Note: This column was originally published on SmartMoney Select, our premium, subscription-based website. To access this and other content from SmartMoney Select on a daily basis, click here.[/P]
[P]WITH US AIRWAYS GROUP (U) now in bankruptcy, the prospect that United Airlines parent UAL (UAL) will be the next to go has been gaining currency. Its quest for $1.8 billion in federal-loan guarantees seems snagged, with The Wall Street Journal editorial page the latest to denounce any federal handout. The stock fell more than 40% this week to below $3, which means it has crossed my automatic $5 sell threshold. It''s hard to believe that this was a $40 stock little more than a year ago, and that it traded close to $100 back in October 1997. [/P]
[P]I''ve never invested in an airline stock, nor have I ever recommended one. It''s a peculiar industry, paradoxically both too competitive and not competitive enough, heavily regulated but held to free-market standards. Still, I once thought about buying UAL stock. Not only did it have an enviable route system, including Pan Am''s lucrative old Pacific routes, but I was also intrigued by the high degree of employee ownership. United''s pilots own a quarter of the company, with other unionized workers holding smaller shares. Just as stock options were supposed to align top executives'' interest with those of shareholders, so would ownership align the interests of unions, who''d previously shown a ruinous ability to divert profits from shareholders into their own pockets. [/P]
[P]This appealing theory began to unravel when I boarded a United flight from Sydney, Australia, to Los Angeles several years ago. When I asked for a pillow, the United flight attendant curtly suggested I get it myself from the overhead bin. So I mentioned the high level of service I''d just experienced on my previous flight on Singapore Airlines. If you want a geisha, go out and hire one, was the retort. So much for the friendly skies. [/P]
[P]I should add that on many other United flights I''ve found nothing to complain about. But I also detected no evidence that having an ownership stake had enhanced employee service in any way. More fundamentally, it doesn''t seem to have stopped United''s pilots'' union from negotiating a damagingly high compensation package, and then using its clout on the board to make sure management accepted it or else. [FONT color=#ff0033]The fact that the company is teetering on bankruptcy is evidence that the airline''s employees have used their status as owners simply to plunder the company for their own benefit, at the expense of other shareholders[/FONT]. They may not have done anything unlawful, in contrast to chief executives who''ve fraudulently driven up their companies'' stock prices, cashed out their options and then fiddled while Rome burned. But they share a high level of self-interest and indifference to shareholder value. [/P]
[P]So the economic theorists are going to have to go back to the drawing boards. My own view is that no structural arrangement will ever entirely protect shareholder interests if significant executives or groups of employees have no respect for shareholder interests to begin with. This has long been a problem in some segments of the entertainment industry, which, like airlines, has shown a distressing willingness to favor executives, top employees and talent at the expense of shareholders. (Consider how few feature films are actually profitable.) There''s no substitute for a long-term commitment to fairness and integrity, measured in a myriad of decisions, large and small, that demonstrates to investors that shareholders come first. [/P]
[P]Some smart people are investing in airlines now, including the Texas Pacific Group, which is helping US Airways through bankruptcy. Airlines are cyclical, and have been doubly hurt by fallout from Sept. 11 and the recession. Most of their stocks seem cheap, with AMR (AMR), parent of American Airlines, and Continental Airlines (CAL) both under $10 a share. If you believe the economy will recover, and that travelers will return to airports in pre-Sept. 11 numbers someday, as I do, then you might consider buying shares in Southwest Airlines (LUV), which is actually profitable even now, or Continental, which I rate the best airline and route system. Or, like me, you can sidestep the airlines themselves as too risky and buy Boeing (BA) (whose shares I own), which is a good proxy for the health of the airline industry and has the added appeal of a big defense business. [/P]
[P]I''m not holding my breath, but if US Air''s bankruptcy leads to more rational costs and pricing in the airline industry, and even some respect for shareholders, then so much the better. [/P]
[P]Common Sense Airing My Complaints[BR] [BR]By James B. Stewart [BR]August 13, 2002 [BR]Note: This column was originally published on SmartMoney Select, our premium, subscription-based website. To access this and other content from SmartMoney Select on a daily basis, click here.[/P]
[P]WITH US AIRWAYS GROUP (U) now in bankruptcy, the prospect that United Airlines parent UAL (UAL) will be the next to go has been gaining currency. Its quest for $1.8 billion in federal-loan guarantees seems snagged, with The Wall Street Journal editorial page the latest to denounce any federal handout. The stock fell more than 40% this week to below $3, which means it has crossed my automatic $5 sell threshold. It''s hard to believe that this was a $40 stock little more than a year ago, and that it traded close to $100 back in October 1997. [/P]
[P]I''ve never invested in an airline stock, nor have I ever recommended one. It''s a peculiar industry, paradoxically both too competitive and not competitive enough, heavily regulated but held to free-market standards. Still, I once thought about buying UAL stock. Not only did it have an enviable route system, including Pan Am''s lucrative old Pacific routes, but I was also intrigued by the high degree of employee ownership. United''s pilots own a quarter of the company, with other unionized workers holding smaller shares. Just as stock options were supposed to align top executives'' interest with those of shareholders, so would ownership align the interests of unions, who''d previously shown a ruinous ability to divert profits from shareholders into their own pockets. [/P]
[P]This appealing theory began to unravel when I boarded a United flight from Sydney, Australia, to Los Angeles several years ago. When I asked for a pillow, the United flight attendant curtly suggested I get it myself from the overhead bin. So I mentioned the high level of service I''d just experienced on my previous flight on Singapore Airlines. If you want a geisha, go out and hire one, was the retort. So much for the friendly skies. [/P]
[P]I should add that on many other United flights I''ve found nothing to complain about. But I also detected no evidence that having an ownership stake had enhanced employee service in any way. More fundamentally, it doesn''t seem to have stopped United''s pilots'' union from negotiating a damagingly high compensation package, and then using its clout on the board to make sure management accepted it or else. [FONT color=#ff0033]The fact that the company is teetering on bankruptcy is evidence that the airline''s employees have used their status as owners simply to plunder the company for their own benefit, at the expense of other shareholders[/FONT]. They may not have done anything unlawful, in contrast to chief executives who''ve fraudulently driven up their companies'' stock prices, cashed out their options and then fiddled while Rome burned. But they share a high level of self-interest and indifference to shareholder value. [/P]
[P]So the economic theorists are going to have to go back to the drawing boards. My own view is that no structural arrangement will ever entirely protect shareholder interests if significant executives or groups of employees have no respect for shareholder interests to begin with. This has long been a problem in some segments of the entertainment industry, which, like airlines, has shown a distressing willingness to favor executives, top employees and talent at the expense of shareholders. (Consider how few feature films are actually profitable.) There''s no substitute for a long-term commitment to fairness and integrity, measured in a myriad of decisions, large and small, that demonstrates to investors that shareholders come first. [/P]
[P]Some smart people are investing in airlines now, including the Texas Pacific Group, which is helping US Airways through bankruptcy. Airlines are cyclical, and have been doubly hurt by fallout from Sept. 11 and the recession. Most of their stocks seem cheap, with AMR (AMR), parent of American Airlines, and Continental Airlines (CAL) both under $10 a share. If you believe the economy will recover, and that travelers will return to airports in pre-Sept. 11 numbers someday, as I do, then you might consider buying shares in Southwest Airlines (LUV), which is actually profitable even now, or Continental, which I rate the best airline and route system. Or, like me, you can sidestep the airlines themselves as too risky and buy Boeing (BA) (whose shares I own), which is a good proxy for the health of the airline industry and has the added appeal of a big defense business. [/P]
[P]I''m not holding my breath, but if US Air''s bankruptcy leads to more rational costs and pricing in the airline industry, and even some respect for shareholders, then so much the better. [/P]
