Ever higher but British Airways numbers make me pause

Equity markets continued their rally this last week leaving me still on the sidelines. Everyone is rejoicing in the green shoots that are appearing but all I can manage to see is weeds. My former colleagues in investment banking tell me that trading desks are still commiting proprietary capital and that they are being joined at the party by hedge funds freed from redemption fears. Why fight the wall of money? More fool me.

I'd be tempted to think about stepping back into the market ( after all equities are a pretty good hedge against inflation ) but then reality intervenes. This time it was the British Airways April traffic figures. Over thirty years I've found that British Airways is as good an indicator of sentiment in the business market and of the health of the underlying economy as it is possible to get. In April their premium traffic fell a staggering 17.7% - the sixth month in a row of double digit falls. The CEO said he sees no signs of improvement in the economic environment and said that things will deteriorate further before they get better. To make matters worse yields at the airline are also under pressure due to a ferocious discounting war going on among the European carriers.

An 'L' shaped recovery until Q2 2010 ?

Based on 30 years of following them in the City, the airlines continue to provide me with a pretty good feel for what is really going on in the economy.

• IATA's latest survey of management in the sector says that expectations for the next 12 months have moved away from indicating further sharp declines in profitability. There is a view that traffic expectations will remain stable at these levels for the next year and that yields will remain weak for both cargo and business.
• Only 50% of airlines have secured funding for aircraft deliveries in 2009 and H1 2010.60% of airlines believe the funding environment has worsened in Q1 to such an extent that it is now unavailable - probably a view Boeing and EADS are coming to share.
• At the operational level OAG says that for April airlines around the globe have scheduled 6% fewer flights than this time last year. This is the ninth month in a row of reductions with 136,000 flights and 9 million seats removed from last years levels.
• Within Europe scheduled flights were cut by 8% for a 7% fall in the number of seats available. The UK was worst hit with the number of domestic flights contracting by 13% and seats by 14%. Internationally British airlines have cut their flights by 10% and seats by 9% to the lowest levels since 2001.
• British Airways management has a pretty good history of telling it as it is - the CEO said on Reuters that he didn't expect to see an upturn until 2010 and that the economy will get worse before it gets better.

AIG has received three offers for its ILFC leasing unit - all are below $5 billion - a pale imitation of the divisions value a year ago.

So there we have it. Some signs from the airline managements that the collapse has moderated to a manageable pace but no signs yet that either the business or vacation traveller is stepping up and spending more. Still makes me think that I'll be able to buy back into equities at a more attractive price as markets readjust valuations for continuing weak demand and poor bottom line numbers. It also hints to me ( as a purely unscientific guess ) that the US and EU economies post-recovery will be unleveraged and probably 10% or so below its 2007 peak in terms of turnover. That would indicate that a lot of companies that have expanded are going to find themselves with a lot of excess capacity and the associated debt and inefficiencies that go with it. Risk seems to be in fashion but I'll eschew smaller co's and stick with big balance sheets, growing market share, pricing power and visible earnings.