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Nick's Place: Lets Throw Money Into the Market (Intelligently): The New Blog and the New Delta....

November 16, 2006

The New Blog and the New Delta....

So, the "new" old blog.. For the technically inclined this is Movable Type blog has been hanging around for a while, as the New "Blog", Did I get shit done today?. Given the fact it got to one entry in five months, I took the same installation and re-skinned and repurposed it, much like what America West did with US Airways.

So this blog is titled "Lets Throw Money Into the Market (Intelligently)". Its a place where I'm going to put my comments on the stocks that I own, or stocks that I am thinking of purchasing. The point behind it is to both give my rationales for later review for myself, but also open my choices up to feedback..

At this moment my portfolio is composed of the following (If you work through the numbers as of last Friday's close you'll come up with a 9.35% return including CQB, excluding CQB you'll come out with a 44.64% return. I keep numbers both inclusive and exclusive of CQB calculated, for reasons to be discussed in another entry.):
StockShares OwnedTotal Spent
with Commissions
Cost Basis
per Share
A note about cost basis: I calculate cost basis based on what I spent to purchase the shares (including commissions in this case), any dividends that were utilized to purchase additional stock, and in the case of Employee Share Purchase Programs shares, as if I purchased them at full price. In the above C was purchased via a 401k, but was purchased at full price, most of CQB was purchased at a discount, but some was purchased at full price.

Right now, I don't have a clear rationale for all of the stocks that I've bought. I have a general idea, but I don't know the specific reasons. Some of them are pretty stupid, for example I own DUK because I realized one day that I had every light in my apartment on, and I repeated the question that my parents often posed when I left lights on: "Do you own the power company?" Since this was my apartment and my electricity bill, I decided I should buy some Cinergy, the power company... Now, I don't even get my power from Duke, Cinergy's successor anymore.. I bought DIS because I wanted to vote against Eisner, but I think I missed the record date for that. So some of this portfolio is composed of companies that I did business with, but much of it is composed of companies that I consciously decided to buy for their business prospects.

So, I've got this muddled understanding of why I own what I own, and I think I need to start keeping track of why I bought the stocks I bought, my thoughts at major events in the company's history, and other related thoughts. Thats where this blog comes in...

So my first knowledge of US Airways's merger offer occurred this morning when my radio woke my up to NPR, the first thing I said was "oh, thats a bad idea" then hit the snooze alarm and went back to sleep.

This quick dismissal was based on a few major concerns:
  1. US Airways and Delta have dissimilar fleets, specifically
    • US Airways mainline flies primarily Airbus A320 family jets, some old Boeing 737-classics that are being phased out, a smattering of Boeing 757s and 767s, a handful of Airbus A330 aircraft, and it will be getting some Embraer E190 jets soon. US Airways has a stated goal to operate a completely Airbus fleet. This is logical because each aircraft type increases costs.
    • Delta mainlines flies primarily Next Generation Boeing 737s, Boeing 757s and 767s, internationally relies on Boeing 777s, and has a cackle of those Volkswagen bugs of the sky the DC-9 derivatives, specifically late model MD-80 jets.
    These fleets look nothing alike, the 737s don't match up, they're both from different families and have different maintenance requirements, the narrow body jets are mostly different pitting new-737s and DC-9 derivatives, against old-737s and A320 family jets. The one commonality in the narrowbody field is the 757s, which are ironically becoming more valuable now than they used to be due to their ability to serve thin international routes. In the widebody field both airlines operate the 757's larger sister the 767, although US Airways operates the older models of 767, and Delta operates the newer models. Beyond the 767 they widebodies are a crapshoot, with US Airways operating Airbus A330 jets, with an order for the Airbus A350XWB (whenever the hell Airbus decides to build that) and Delta operates the cool Boeing 777.
  2. US Airways and Delta workforces are rivals, deep bitter rivals. I've heard stories where US Airways pilots have refused the company provided shuttle to the hotel because they had to share with Delta crews. These companies have been at each other's throats for a while.
  3. Delta of late has been a shitily run, directionless airline without a business plan to keep itself afloat. My understanding that the business plan post 9/11 was to "Sit tight, run the airline like we've been running it, and wait for US Airways to go out of business." Yes, essentially we're going to be successful after our competitor goes under. To be fair Delta has tried many things, but they all fall under the directionless business plan, a poorly thought out airline-within-an-airline product, Song, that was operated on the wrong equipment, spending money on things like designer uniforms, and closing a hub and shuffling aircraft around the country pushing up, and pulling down hubs with no clear goals evident. Add in the fact that between 9/11 and their bankruptcy filing Delta managed to double their outstanding debt and Delta has spent the last five years pursuing Murphy's law: Murphy didn't even have to do anything, Delta made sure everything went wrong without him. Yes, I'm being harsh, but idiotic management should be called such. I'll be the first to admit that the old US Airways did many of the same things for many years.

I know that is a pretty extensive rationale but this is the general analysis I did before hitting the snooze button.

So when I actually woke up, I did a bunch of reading, I listened to the conference call, I read the press release and worked through the investor slide show.

My gut tells me to support this. I bought LCC because I saw that a well run airline, America West, was buying the old US Airways, a poorly run airline that had managed to stay in business because they had a serviceable set of assets and a descent route presence. Essentially, I think the disciplined management of America West was able to take the rough old US Airways and carve out a diamond (one that still needs some final cuts and some polishing, but its there). I see many of the same qualities in Delta as I did in the old US Airways. This takes care of concern number three.

Concern number one was addressed in the conference call. I believe Scott Kirby (or maybe it was Doug Parker) stated that they looked at the fleets and overall each fleet type has enough aircraft that it isn't a concern. The exception he stated was the 777 and A330 fleets, but that is a small quantity of 20 aircraft or so.

I just stepped out for a bit, and did a little more analysis of the fleet. I took the fleet charts from each airline's respective Wikipedia article, combined the fleets in an Excel spreadsheet. (I've excluded aircraft that had been ordered, but didn't have a seat count.)

Current AirlineTypeOperated (Ordered)Passengers
US AirwaysEmbraer 1900 (57)99 (11/88)
US AirwaysAirbus A31993120 (12/108)
US AirwaysBoeing 737-30056126 (12/114)
DeltaMcDonnell Douglas MD-88134 (134) (Shuttle)
DeltaMcDonnell Douglas MD-88120142 (14/128)
US AirwaysAirbus A320-20075142 (16/126)
US AirwaysBoeing 737-40040144 (12/132)
DeltaMcDonnell Douglas MD-9016150 (12/138)
DeltaBoeing 737-80078 (42)150 (16/134)
US AirwaysAirbus A321-20028 (15)169 (26/143)
DeltaBoeing 757-200121 (13)183 (24/159)
DeltaBoeing 757-200184 (26/158)
US AirwaysBoeing 757-20046193 (8/185)
DeltaBoeing 757-200199 (All Economy Ex-Song)
US AirwaysBoeing 767-200ER10203 (24/179)
DeltaBoeing 767-300ER59214 (36/178)
DeltaBoeing 767-400ER241 (41/200) International
DeltaBoeing 767-30024250 (24/226)
US AirwaysAirbus A330-3009266 (42/224)
DeltaBoeing 777-200ER8 (3)268 (50/218)
DeltaBoeing 767-400ER21285 (36/249) Domestic

Its a bit messy, but I think the most important thing to note how the the combined fleet provides a greater ability to match seat counts of aircraft to demand via additional options than either airline has on its own. The more I look at it the more the differentiated fleet seems to be an asset and not a liability, as is commonly thought.

The final concern, concern number two, is one of those harder things to work through. I see many comparisons between US Airways's CEO Doug Parker and Gordon Bethune, the Continental Airlines CEO responsible for that airlines stunning turn around from crap that Frank Lorenzo created, to one of the best run airlines in the world. The more I listen to the guy the more I know that he is a capable leader and focused on team work. (A major cultural artifact note from the current US Airways is the focus on the company's heritage; Every aircraft carries a heritage logo that harkens back to the airline that every employee was originally hired by, in the same vein, there is a fleet of Heritage Aircraft, celebrating the airlines combined history.) I think US Airways is generally willing to work with their unions, despite some saber rattling by the unions, I don't think you're going to get any murder attempts al la teamster style (don't laugh, I used to work with a gentleman who negotiated union contracts, and he shot at several times during teamster negotiations, and only during teamster negotiations.) Finally, on the labor front I think Delta's employees would welcome a change in leadership. Yes, this is mostly unsourced but the last time I flew Delta I managed to get a flight attendant to talk for 30 minutes or so on the idiotic management.

So there you have it, my analysis of the merger, and why I support it. Yes, there are risks, but I think there is a solid set of assets, professional employees, and a proven management team behind this one, that has the benefit of many lessons from their most recent merger integration effort.

Posted by nickb at 05:20 AM
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