British Airways faces reality - a 'repression'.

The airline operating level results continue to signal that this economy isn't getting any better despite Wall Streets enthusiasm. It looks as if things are getting worse but thankfully not as quickly as they were. BA's latest pronouncement said " market conditions continue to be very challenging with trading at all levels well below last year". The airline is cutting capacity for the peak summer months, defering aircraft deliveries, and reducing the capex spend . Not much there to show that green shoots are sprouting. Banks are repairing their severely impaired balance sheets rather than lend to the economy, unemployment is rising,corporate bankruptcies are growing, and finance directors are slashing travel budgets.

Elsewhere in the bellweather airline sector Swiss is cutting winter capacity by 9%, Austrian is laying off 1,000 staff while Czech is reducing its fleet by 10%.

Although we've stopped plumetting economies continue to drift downwards. If not a depression then it's certainly a more than standard recession - perhaps we should start calling it a repression. At the end of this global demand is likely to be severely repressed by perhaps as much as 7-10%. At some stage governments in the UK and the US are going to have to toy with inflation financing to get out of this mess - that's why in the long term I think the Euro will continue to appreciate. There is talk of 20% cuts in government spending in the UK but I'm not sure the electorate is ready for reductions of this projected scale. Anyway, the opposition would need to have a huge swing to unseat the incumbents huge arithmetic lead - Labour isn't dead yet. Currency and bond markets may well have got Sterling wrong.

Other unconnected pieces of recent data that surprised me:

• Phoenix house prices have fallen by 53.7% from their peak. By contrast Charlotte is down 11% and Dallas 8%.
• State level personal income tax collection is down 26% from prior year levels in the January - April timeframe.
• June autosales are set to rise above 10m units annualised in June - still down from last years 13.7m level.
• For the first 4 months of the year Central California bankruptcy levels are up 75% from 2008 levels.

BA,SAS,Swiss still in the midst of the storm

Markets have continued to drift gently higher since I last wrote - proving my upside market sense and timing to be out of step with prevailing sentiment . After the sharp increases of April and May which gave us the strongest bear market rally in history, there seems to be less conviction that the equity rally has much further to go amid signs that interest rates in the UK and US might have to reverse course and move higher. In the broader economy it's interesting to note that:

• Irish prices fell by 4.7% in the year to May - the steepest fall since 1933
• US household net worth ( including real estate,stocks, and bonds ) was off $14 trillion from its 2007 peak
• US May retail sales were off 10.8% from year ago levels - gas station sales were down 33.8% and car dealership sales off 19.6% from prior year levels.

I keep on looking for signs of 'green shoots' in the airline industry but all I see so far is proliferating weeds. If I could discern that corporate or vacation passengers were returning to their established travel plans then I would feel much more confident that we had hit a low point from which the economy was set to recover. In the airline sector, like the auto and banking sectors we are just beginning to see that consolidation and capacity reduction are needed to remove chronic over supply and restore profitability.

IATA has said that the worlds airlines are seeing few concrete signs of recovery and many of them are at a knife edge. Yields are crumbling and losses are widening at a hectic pace. IATA also revised its forecast for industry losses in 2009 to $9 billion a doubling from its forecast of $4.7 billion made just two months ago. After September 11 airline revenues fell by 7% and it took three years to recover. This time round revenues are down by more than 15% and the demand side is showing little sign of improvement.British Airways CEO says the carriers business faces 'serious threats' while Aer Lingus managements says this is the most difficult environment in its 73 year history.

• May 2009 Air France-KLM y-o-y passenger numbers down 7.8%. Asia Pacific down 10.9% and Trans-Atlantic down 9.3%.
• May 2009 SAS Group y-o-y passenger numbers down 17.1%.
• May 2009 SkyEurope passenger numbers down 37.5%
• Swiss CEO says that premium passenger and cargo demand has stabilized at a very low level and that prospects of a recovery this year are unlikely.

From the perspective of the airlines this economy ain't on the mend and higher fuel and financing costs aren't going to make it any easier to make a profit let alone survive. I'm told that Uniteds order for 150 new planes is dependent on the manufacturers finding the financing! I think we will avoid a depression thanks to government largesse but consumer expenditure hit by higher taxes,higher borrowing costs and higher unemployment is going to take a long time to recover. This now becomes a stock pickers market with sectors where demand is little impacted by a huge downturn in credit looking attractive no matter what happens to the broader indices. Pharmaceuticals fit the bill, as do restructuring plays, consolidation candidates, agriculturals and some precious metals.

Dire wasn't good enough to keep this rally stoked - BA, Air Canada, Airbus

It looks as if common sense has reasserted itself and markets are waking up to the fact that 'dire' data doesn't equate to good data. Sure, some of the numbers last week could have been worse but they sure weren't an excuse for the recent rally to continue. The whole thing has slightly had the feel that the trading desks were getting ahead of themselves. Today's desperate rumours that the Abu Dhabi Investment Authority may buy Opel is a sign that the recession is really biting and that we are segueing into the stage where consumer demand slumps, savings rates soar, and bankruptcies start to appear on the front page of the papers.None of this is good for earnings over the next nine months at least.

I'm still hugely negative on the banks believing that their balance sheets simply aren't stressed to stand the level of corporate and consumer delinquencies that are on the way. We have to see a wave of capital raisings a la HSBC in order for the banking sector to continue to function and that's going to be massively dilutive.

The G20 meeting was great. Nobody promised the earth and the leaders were remarkably sensible in their criticism of protectionism and their mutual agreement not to do too many stupid things. This is a huge result.

The retracement continues to work its course:

BA expects to make a £150 million operating loss in the year to end March '09 and will also take £75 million of redundancy costs. Downward pressure on yields and volumes continues.

Air Canada trans-Atlantic passenger traffic down 15.6% y-o-y

Austrian Airlines is reducing pilots salaries by 8.5% and pension contributions by 75%!

The owner of London's Evening Standard newspaper said he would be cancelling an order for 20 Airbus A-320's following the German Federal Aviation Agency's revoking of the operating license for BluWings.

UK new car sales fell 30.5% in March y-o-y

The Brits do envy well, goodwill, one hell of a problem

One of the UK's papers has a story ' Heathrow runway backers got special BA privileges'. The 'expose' shows that " the heads of several big companies that called for a third runway at Heathrow are members of a confidential British Airways club of elite businessmen who receive special favours. They are served by a team of BA staff who cater for their every need".

Reading further it emerges that BA has a special 'Premier' card for leading corporate Chairmen and others. The heads of WPP,Diageo, and Deloitte are all mentioned.

What is it about the Brits that makes them so envious? I'd be really worried if BA wasn't looking after the heads of major multi-nationals in a special way. With their huge travel budgets and international operations it would be positively remiss of BA not to court the heads of these corporations with premier treatment.

The airline has of course been doing this for at least twenty years so it may be stretching a point to claim that this is why business supported a third runway. Perhaps British companies just want a modern infrastructure base?
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Trust is vitally important for business. One of the worrying issues about the current downturn is the destruction of trust in long established franchises. Old established companies like Merrill's, Lehman's and Bear were all thought to have an institutional memory that would enable them to police themselves and prevent excess. If they weren't able to police themselves then who can? What price can be applied for goodwill on corporate balance sheets in future?
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Article on US credit losses in the WSJ shows Goldman estimates of $1.1 trillion for residential mortgages,$390 bn on corporate debt,$234 bn on commercial real estate,$226 bn from credit cards and $133bn for auto loans. When faced with numbers this big, why is there any surprise that banks are being nationalised?