Challenges in the Friendly Skies
Second quarter reports related to the airline industry are now being released. The data clearly show that most passenger and cargo carriers are facing unprecedented challenges, and prospects for the immediate future don’t look much better.
The airline industry is composed of some 3,000 companies including passenger and cargo carriers, mail services, and courier operations. Nearly 90% of the overall revenue across the industry is produced by the top 12 companies, with 70% generated by passenger traffic. Some 11% is contributed by cargo and mail services with charter flights producing about 4%. The other revenue comes from maintenance, servicing, training, and reservation entities.
According to Reuters, US carriers could post an industry-wide loss of $6.5 billion for 2008, and other estimates have run even higher. Most of the difficulties have arisen because of soaring fuel prices and the slowing of the national economy.
These situations have caused airlines to raise ticket prices in an effort to combat ongoing losses. Round-trip domestic fares have climbed about 8.8% since 2007, and ticket prices for international travel have increased some 11.3% over the same period.
Because overseas flights are typically airlines’ highest-revenue producers, few if any schedule changes are anticipated in the short term, though some reductions in frequency could occur. Right now, because of the weak dollar, European travelers to America are purchasing tickets on US airlines, which is benefiting export-related travel.
Domestic travel, however, is undergoing numerous changes because of the higher fuel costs. They include adding fuel surcharges, charging for checked luggage, reducing amenities on board, changing routes, and eliminating certain flights to some locations. Other methods to save money and increase profits include employee layoffs along with mergers and buy-outs.
The rising prices for jet fuel (up more than 215% since 2000) have played a determining factor in causing more than a dozen small carriers to collapse in the past six months. Fuel costs are now a notably higher share of total costs than in the past, making it ever more difficult to eke out a profit.
In the minds of many people, the timing of these troubles is most unfortunate, especially since, in a few weeks, the US airline industry will be marking the 30th anniversary of the Airline Deregulation Act of 1978. Along with the multiple benefits realized during those three decades, major carriers have lately been fairly successful in pulling out of the nosedive following the 9/11 terrorist attacks. That traumatic disaster led to an estimated loss across the airline industry of approximately $11 billion in 2002, but most carriers had modest profits last year. Although they had not completely overcome myriad problems, they had made progress and seemingly set the stage for further improvement. While some of the earlier problems could be traced to a failure to respond in the competitive environment, the fuel price spike is completely beyond management control.
Problems with airlines are also spilling over to other aspects of the travel industry. Hotels have greatly benefited from the growing business and leisure air travel over the years, but now this industry is also seeing a downward trend. Additionally, various sectors associated with leisure and hospitality are undergoing modest to moderate challenges.
Skyrocketing fuel costs are not only affecting ticket prices, schedules, and services for air travelers, but because airlines stimulate so much economic activity, their difficulties are impacting our nation’s economy. Airlines not only transport people, they also deliver tons of time-sensitive and perishable cargo on a daily basis.
Any major industry-wide meltdown could dramatically affect the US economy by disrupting supply chain operations, forcing job losses, shrinking business activity, and reducing tourism activities, which would thereby reduce tax revenues and create hardship in numerous industrial sectors.
Commercial air travel has been a part of American life since World War I, with public fascination generally tracing its beginning to Charles Lindbergh’s transatlantic flight in 1927. Although modern telecommunications technology has eliminated the need for some trips, a global economy ultimately demands certain levels of face-to-face interaction. Because it is vital that the services provided by the airline industry continue, a variety of endeavors are now underway to enhance operations and profitability. Given their essential nature, the airlines will continue to play key roles in the advancement of the US economy.
posted @ 07:59 PM CST [link]
Friday, July 18, 2008
Fannie and Freddie
Last weekend, there was quite a bit of scrambling by various officials attempting to solve a unique situation. No, not the “retirement/comeback” of Brett Farve. Rather, it was a rescue plan to bolster the nation’s two leading mortgage entities—Fannie Mae and Freddie Mac.
Just who are Fannie and Freddie, and why has there been so much hoopla related to this special couple? Although the answer might seem fairly simple to some and complex to others, there is no real mystery associated with these two mortgage giants—at least once you understand why they were created and their purposes.
In 1938, during the administration of President Franklin D. Roosevelt, the US Congress chartered Fannie Mae (Federal National Mortgage Association) as a government agency and charged it with the responsibility of funneling money to mortgage lenders with a portion of the business devoted to affordable housing. It was a part of the “New Deal” effort to pump money into the economy and to secure the “American Dream” of homeownership. Over the next three decades, Fannie Mae operated unrivaled, packaging mortgages into securities for sale to investors and guaranteeing them and also making investments in mortgages and mortgage-backed securities.
In 1968, President Lyndon Johnson wanted to leave office with a budget surplus. It hadn’t happened in many years, wouldn’t occur again until the Clinton administration, and involved a lot of smoke and mirrors. One of the tricks was to sell Fannie Mae and make it a public company, thus infusing a one-time shot of revenue into the federal coffers.
A couple of years later, it was decided that since Fannie was now essentially a private monopoly, she needed a little competition. Thus, in 1970, Congress established Freddie Mac (Federal Home Loan Mortgage Corporation) as a private enterprise to promote homeownership by creating a national secondary market for conventional home mortgages. Its sources of revenue are fees to guarantee loans it purchases, earnings on investments in mortgages, and profits from packaging mortgages into securities to sell to other investors. Basically, Freddie Mac guaranteed banks that the principal and interest on loans would be paid back regardless of whether the borrower met his obligations and repaid the loan.
Together, Fannie Mae and Freddie Mac hold or guarantee more than $5 trillion in mortgages, a nonpareil role in the mortgage industry. They represent more than half of all current mortgages and a much larger percentage of those that are getting done in the current environment. Because of their size and the pseudo-backing of the government, they have been able to borrow at interest rates lower than most institutions of this nature.
Many people relied on them without trepidation because of the belief that should they get into trouble, the government would enter into the picture and solve the situation. In reality, Fannie Mae and Freddie Mac are “government-sponsored” and not technically “government-backed.” Still, in the words of some critics, because of the potential for a government “bail-out,” these two entities were granted a significantly favorable advantage. A lot of investors believe that they will receive profits from mortgage securities, while the taxpayers will endure any losses (not a bad deal if you can get it).
Unlike the news that has lately dissected the mortgage industry, Fannie and Freddie are not big players in subprime loans; their regulations (the other side of having government support) pretty much exclude loans with no down payments and poor documentation. As soon as lenders started these practices, this dynamic duo left it to other investors to take on the risk of shaky mortgages (which they were happy to do). The loans backed by Fannie and Freddie are generally of good quality and pose little risk in good times. However, during difficult times such as those we are facing today (when more people are defaulting on their loans causing unprecedented foreclosures), these mortgage behemoths need help to stay afloat and ensure the public confidence in their trustworthiness and capabilities. If the value of a home drops by more than 20%, which they have in droves in many parts of the country, then even a standard conventional loan can turn upside down.
Since Fannie and Freddie are basically the “heart and soul” of the housing finance system, their health needed to be assured so they could pump additional capital into the mortgage market. They are classic examples of institutions that are “too big to fail.” Thus, after Fannie and Freddie lost substantial portions of their stock value on Friday, senior officials of the Treasury and the Federal Reserve, along with selected Bush administration personnel, spent the weekend on the telephone trying to craft a solution to the situation and relieve the mounting pressures of the housing crisis.
On Sunday evening, a plan was announced. It asks Congress to grant officials the power to put billions of dollars into the two mortgage companies through investments and loans. On Tuesday, President Bush, while declaring the US financial system to be sound overall, encouraged members of Congress to act swiftly so that access to mortgage credit would continue to flow during the present time of crisis.
Until the plan is adopted (and, quite possibly beyond that time), the Federal Reserve has consented to give Fannie and Freddie access to its “discount lending window.” This action is basically symbolic to show the markets that the government will have a supply of cash available should the beleaguered companies require it.
The plan developed over the weekend is certainly not perfect, and it is unfortunate that the current economic challenges have forced this kind of hand to be played. Even so, this move will undoubtedly prove beneficial and be a key step in helping restore confidence and credibility to the mortgage lending industry and keeping alive the American Dream for many families.
posted @ 08:05 PM CST [link]
Friday, July 11, 2008
Make Mine Metropolitan
In the 1930s tune “Don’t Fence Me In,” which was made famous by Cole Porter, the lyrics ask for “land, lots of land under starry skies above.” Were that song transformed to relate to today’s Texas, the lyrics might change to “lights, lots of lights and a million folks or two.”
The Lone Star State has 25 metropolitan statistical areas (MSAs). They encompass 77 of Texas’ 254 counties and account for approximately 87% of the population. More than two-thirds of the state’s residents live in the metro areas surrounding the central cities of Houston, Dallas, San Antonio, Fort Worth, Austin, and El Paso.
From 2007 to 2030, Texas is projected to experience a population increase of about 12.29 million to reach nearly 36.26 million. Of this growth, the 25 metro areas are forecast to be responsible for 93%, with the six largest MSAs accounting for almost 77.71%. In 2030, approximately 89.30% of the state’s total population will likely reside in metropolitan areas.
The McAllen-Edinburgh-Mission MSA is forecast to be the fastest growing metro with a 2.54% compound annual growth rate over the 2007-2030 period. The per annum population expansion rates of the other metros are expected to vary from 0.71% (Abilene) to 2.36% (Laredo) during this 23-year timeframe. Eight MSAs should exceed the state’s yearly growth rate of 1.82%. In addition to McAllen-Edinburgh-Mission and Laredo, they include Austin-Round Rock, Brownsville-Harlingen, Dallas-Plano-Irving, Fort Worth-Arlington, Houston-Sugar Land-Baytown, and San Antonio.
The six large metros are the major economic generators for the state and currently provide about 80.47% of the total real gross product (RGP or output). By 2030, these MSAs are predicted to account for approximately 81.81% of Texas’ overall output; with the smaller metros forecast to be responsible for some 12.44%.
The greatest gain in output in the long term is anticipated to be achieved by the Houston-Sugar Land-Baytown metro area with an increase of $375.42 billion. The Dallas-Plano-Irving metro is projected to see a gain of $348.15 billion in real gross product through the 23-year forecast horizon. The large metros will likely experience a $1.05 trillion hike in RGP with the smaller MSAs realizing an increase of $151.26 billion during this period.
From 2007 to 2030, an addition of 4.50 million wage and salary jobs is predicted across the state, with 3.34 million of these in the six major MSAs and approximately 812,490 in the smaller metros. About nine out of every 10 workers are anticipated to live in the 25 metropolitan areas in the state in 2030.
The combined real personal income (RPI) for the six key metros is forecast to climb from the 2007 amount of $552.28 billion to approximately $1.51 trillion in 2030 (76.16% of the total Texas RPI increase during the 23-year period). The smaller MSAs are expected to experience growth of $190.32 billion and represent some 15.31% of the state’s total RPI hike from 2007 to 2030.
The RPI yearly growth rates over the long term for the large metros will likely vary from 4.40% (Houston-Sugar Land-Baytown) to 4.60% (Austin-Round Rock). The RPI per annum expansion rates among the smaller MSAs are predicted to range from 3.73% (Lubbock) to 4.54% (McAllen-Edinburgh-Mission). Nine of the state’s metros are anticipated to experience RPI annual growth rates exceeding the Texas yearly expansion rate of 4.39% during the 23-year timeframe.
Regarding retail sales, the major metros are forecast to expand from the 2007 total of $316.29 billion to $1.53 trillion in 2030, reflecting 74.43% of the state’s overall gain. The combined retail sales of the smaller MSAs will likely rise from $80.24 billion in 2007 to $366.90 billion in 2030, representing 17.58% of the projected increase across Texas.
By any measure, the metro areas are highly important to the economic growth of the Lone Star State. While rural areas will continue to have viable opportunities and will experience overall healthy expansion as well, this pattern of increased urbanization is expected to become even more pronounced in the future.
posted @ 07:56 PM CST [link]
Friday, July 4, 2008
Long-Term Forecast
The headlines are full of bad economic news ranging from high gasoline and food prices to housing market woes. Pundits debate the best way to fix problems and deal with uncertainty. You might think we are in for a deep, dark recession. However, the US economy is actually growing, albeit at a pace a bit anemic when compared to years past. The future is not nearly as bleak as some prognosticators suggest and, if you consider expectations for the long term, the picture is one of continued health with moderate prosperity.
I have just finished my annual long-term economic outlook for the United States, Texas, and the state’s major metropolitan areas and regions. It covers projections for the years from 2007 to 2030 with particular focus on vital economic generators as well as industrial sectors. By virtually every measure, the Lone Star State is forecast to achieve compound annual growth rates (CAGR) that exceed those of the US.
With regard to real gross product (RGP), commonly referred to as output or the final value of all goods and services produced in an economy during a given period of time, the US is likely to experience a per annum growth rate of 3.27% for the long term. Texas RGP is anticipated to expand at a 3.77% annual pace. This expectation follows the general historic pattern that has seen the Texas economy growing faster than the nation as a whole.
More than half of the RGP growth projected for Texas will likely be generated by services—22.84%; finance, insurance, and real estate (FIRE)—16.53%; and trade—13.65%. These industrial sectors are predicted to contribute $674.51 billion of the expansion in the Texas economy through 2030. Other leading sectors anticipated to achieve significant expansion over the long term include durable manufacturing; transportation, warehousing, and utilities (TWU); information; and nondurable manufacturing.
In 2030, the population of Texas is forecast to be approximately 36.3 million, an increase of nearly 13 million people from 2007 (a 1.82% yearly growth rate). During this same period, the US will likely see an additional 68.5 million residents, which represents 0.89% annual expansion.
The US employment growth rate from 2007 to 2030 is expected to be 1.19% per annum. The Texas employment CAGR for these years is forecast to be 1.52% and will be noted by the 4.5 million new workers across the state, more than half of which will be in the services sector. The government and trade industries combined should account for an additional 1.2 million workers over the 23-year period.
The industrial sector predicted to experience the fastest growth in wage and salary employment in Texas during the long term is services, with a 2.03% CAGR. The yearly growth rates for the other sectors are projected to range from 0.45% (mining) to 1.52% (achieved by both FIRE and TWU).
Real personal income (RPI), which is the total income accruing to households, is expected to expand in Texas at 4.39% annually over the 2007-2030 horizon, while the US should see 3.51% per year gains. The Texas RPI (in 2000$ and by place of residence) is anticipated to grow from $745.11 billion in 2007 to more than $2.00 trillion by 2030.
The total volume of retail goods sold in Texas is anticipated to surpass $2.06 trillion in 2030, a significant increase from the $435.62 billion in 2007 and representative of a 7.00% per annum growth rate (which includes some component of inflation).
Of course, in making long-term economic projections, it is recognized that numerous salient factors can affect the ultimate outcomes. Depending on patterns in these underlying forces, the forecast for the long term could undergo some changes. Included in these key issues are high energy costs, health care affordability concerns, and the ongoing housing market difficulties. We have no idea where technology will take us during this time, but we know it will be an interesting ride.
Among the other matters in this mix are the demographic changes the nation will experience during the next 23 years. Of particular note are the significant expansion of the minority population and the upward trend in the median age of the overall US population.
In spite of the challenges our state and nation will certainly face through 2030, there are many reasons to believe that we will escape a major recession for the foreseeable future. Still, business cycles are inevitable and can undoubtedly interrupt forecasted patterns periodically. All-in-all, the US capacity for global competitiveness remains alive and well.
posted @ 08:01 PM CST [link]