Tuesday, February 24, 2009

Not the time to start a new airline

The 'revamped' Alitalia that was launched with much fanfare and bravado a month ago is finding it hard going.In the first month of operation of the new carrier the load factor on the Milan-New York flight has sunk to 26% from 65%. Capacity to Turin has been cut by 22% but traffic has fallen by 43%.

Markets seem to be in denial about the state of the banking industry. In H1 2008 nearly a third of UK short term corporate debt was provided by foreign, largely EU based banks. They are now retrenching as fast as possible to deal with their own domestic liquidity problems. Add to this the near 30% mortgage market share of Bradford and Bingley and Northern Rock and the chance of boosting domestic lending in the UK is absolutely zero. To replace these two gaps in the lending market would require the remaining loan books to grow at double the rate seen in the bubble years! This is before the defaults on corporate and credit card loans start to kick in. Lending will contract across Europe this year and banks, all banks, will need to raise their capital base again.

Fear of hyper-inflation has been a factor in the surge in gold prices. This last week has shown that it is an overblown fear. We are witnessing an economic downturn the like of which hasn't been seen since the early 30's but this time at a faster rate and with a more widespread reach.LDV, Volvo, SAAB are just a few of the companies that teeter on the brink. A large number of Euroland and US companies that have been relying on China, Russia and other emerging markets to bail them out will shortly join this list. Widespread corporate consolidation and the erasure of the weaker players will leave those still standing in a much stronger position - there will come a time when investors flee the corporate debt market and rush back into equities - that time simply isn't here yet.

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