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US Politics gets in the way of crisis solution. Consumers will pay, but businesses hurt first.

30-Sep-2008
CAPA Executive Chairman, Peter Harbison
CAPA Executive Chairman, Peter Harbison
  • US bailout of Wall Street defeated in Congress, prompting Dow Jones’ largest one day fall of 777 points;
  • No immediate prospect of a renewed attempt to solve mortgage problems;
  • US airlines hit with double digit share price falls, but Southwest still smelling sweet;
  • Oil prices down USD10 to around USD96;
  • Asia Pacific airline stocks generally relatively solid;
  • As bank nervousness increases, business credit is drying up;
  • Consumers not yet directly affected, but credit strangulation progressively impacts the whole market;
  • Importance of strong balance sheet increases.

Politics, combined with some doubts about the value of the US administration's proposed bailout of Wall Street, caused a rout on the US stock exchange yesterday afternoon. The impact was greatest on financial stocks, but some prominent consumer product companies, like Apple (-12%), lost heavily.

As the Dow Jones index fell over 777 points, most US airline stocks fell 8-12% across the board, with Northwest (-11.2%) and Continental (-10.7%) worst hit. American and Delta each lost just over 8%, while Southwest Airlines weathered the storm best of all, slipping only 3.0%. Canada's Westjet lost a relatively modest 5.8%. In the face of a failed solution to short term problems, oil was sold off, with prices dropping 10%, to close around USD96.

For airlines, this reduction on the cost side is a part-counterpoint to the economic crisis. But the growing negative impact on demand is progressively overtaking this good news.

The bailout sought to reduce the US market's exposure to subprime mortgage debt, by essentially spending up to USD700 billion to buy most of the poorer risk stock. The US Federal Reserve is also, along with European central banks, seeking to inject some liquidity into the inter-bank lending markets, so that commercial banks will be prepared to lend to business.

So long as the banks are nervous about risk, money gets tighter and tighter; businesses cannot obtain credit - so that for example, consignees of freight shipments are unable to finance their purchase and need to pay in advance out of cash flow. This inevitably places pressure on them, slowing freight movements.

This process, while not a dagger to consumers' hearts, is a more brutal and slower strangling of money supply, as the financial supply chain seizes up with anxiety. The speed of that desiccation depends on the degree of nervousness of the financial institutions. And, after yesterday's failure by US legislators to face up to the pain, the anxiety indicators are starting to go off the scale.

The direct impact on consumers is meanwhile still relatively muted, and their spending habits are not yet being inhibited by credit constraints, although the general concern in the air is hurting confidence. Anecdotal evidence at airport retailers in established markets such as Japan already points to a downturn in sales of high value and luxury items.

In early trading today in Asia Pacific markets, Air New Zealand after three hours had lost only 4.0%, apparently propped up by the lower oil price. Virgin Blue, which yesterday had shed 5%, to AUD38 cents, opened today down another 6.6% (but strengthened slightly as the morning progressed). In early trading, Qantas shares sold at AUD3.11, down 3.7% on yesterday's close. AirAsia was down 2.4%.

In general, Asian carrier stocks have not suffered significant downturns in recent days and the lower oil price may help support prices today. But US legislators now rise for two days for the Jewish Rosh Hashana holiday, leaving the world in suspense.

A US response of some sort is now essential, but as time passes and more banks are threatened - two more banks in Europe were bailed out by governments yesterday - it will become harder to reassure markets and consumers.

Airlines are at the pointed end of this delicate consumer and business equation and strong balance sheets will determine who rides the storm best in coming days.


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