Aloha Files

Most of you know that oil prices have been over $100 a barrel for the past 10 days or so, and finally dropped to the mid 90's today. What you probably haven't noticed unless you drive a diesel is how high diesel and its close cousin Jet-A have been trading at during the past six months. In some places, I've seen diesel at $3.99/gallon. Take away the federal and state taxes, and that puts Jet-A just below $3.00/gallon, which is unsustainable for the airlines.

Unfortunately, it's a little too late for Aloha Airlines, who filed for bankruptcy today, the second time in about three years they've had to do so. The likelihood of surviving one bankruptcy is fair, but the likelihood of surviving two in short order is another story. Continental and US Airways filed twice within a few years of a previous filing, but the latter was bought out by a competitor. TWA filed twice, and eventually liquidated after selling itself to American.

Unfortunately, I don't think Aloha will be the only US airline to file for bankruptcy in the immediate future. Several other carriers are in just as bad shape (if not worse) than Aloha was, including Virgin America, Skybus, Midwest, Frontier, and yes, even Mesa.

Maxjet already fell victim to oil prices a few months back, but they also had a questionable business plan. Unfortunately, so do a few of the other airlines I listed....


The list of potential suitors for Aloha isn't short by any means:

• Last May, United Airlines announced it had taken a minority stake in Aloha, but I never saw any disclosure on how much of a stake it was. Would it be in their best interest to up their stake?
  
  
• Gordon Bethune is Chairman of Aloha, and former AirCal president David Banmiller has been CEO of Aloha for many years. Could Gordon's ties to CO or Banmiller's ties to AA be a factor?
  
  
• Will the merger with Hawaiian (as was attempted in 2002) finally happen?
  
  
• Could Southwest step in? Aloha's all-737 operation is a unique opportunity, plus it would give Southwest the ability to close the door completely on their somewhat diminished codeshare with ATA. All that's left for ATA's scheduled operation is West Coast - Hawaii, and Aloha's 737 fleet is overwater equipped...
  
  
• Even more bizzare, could Mesa try to offer up a reorganization plan? Not that they have the money or credit to do so, but Aloha vs. Mesa goes to trial next month, and based on the $80M+ already awarded to Hawaiian, Ornstein's got to be worried about another multi-million dollar judgement...
  

Time will tell. I don't think we'll be saying Aloha to Aloha quite yet, but we're in the midst of one of the worst economic storm to ever hit the US, much less the airlines. There are going to be a few more casualties, and I don't know that mergers are going to be an option for all of the victims.

It's that time of year again... airline earnings season. The best place to keep track? Holly Hegeman's Plane Buzz.

Mesa already announced a $81.561M loss, which wasn't exactly a surprise. Then again, anytime Jonathan Ornstein loses, people rejoice. Including me. I'd tell you what I think, but he might sue me. That's how he works.

Of course, I'm most interested in what happens with AMR. They'd expected to post a full year profit and possibly pay out profit sharing, but I don't think that's going to happen. Fuel prices were simply too brutal. So were some of the December storms, and most airlines decided to sit aircraft down and cancel flights rather than try and operate a schedule (thanks to all of you who support passenger bill of rights legislation...).

So, start watching the wires around the time the market opens tomorrow morning. It's gonna be ugly.

AMR Executives Return To The Trough

As Mike Rowe would say... "Tracking airline stocks.... that's a dirty job....."

Once again, brace yourself for impact. AMR will be paying out bonuses to their executives...

        Open      Open      Open       Close          1 Year     2 Year     3 Year
Symbol  1/3/2005  1/3/2006  1/3/2007   12/31/2007     Change     Change     Change
AAI     10.82     16.26     11.89       7.16           60%        44%        66%
ALK     33.70     35.83     40.25      25.01           62%        70%        74%
AMR     11.65     22.25     30.65      14.03           46%        63%       120%
CAL     13.75     21.27     41.95      22.25           53%       105%       162%
DAL                                    14.89                   
FRNT    11.21      9.20      7.37       5.26           71%        57%        47%
HA       6.80      3.75      4.75       5.10          107%       136%        75%
JBLU    23.20     14.72     14.34       5.90           41%        40%        25%
LCC               37.20     53.89      14.71           27%        40%   
LUV     16.34     16.37     15.46      12.20           79%        75%        75%
MEH      2.94      5.65     11.46      14.80          129%       262%       503%
MESA     8.03     10.51      8.65       3.09           36%        29%        38%
NWA                         14.51                   
RJET    13.50     15.21     16.72      19.59          117%       129%       145%
SKYW    20.10     27.06     25.72       6.85           27%        25%        34%
UAUA                        44.80      35.66           80%        
XJT     12.97      8.15      8.01       2.48           31%        30%        19%

As most of you who know me know, I'm opposed to this plan, mainly because it doesn't go top-bottom, and second, because it's based on stock price alone, and not financial or operational performance. If you've watched the DOT statistics, AMR stinks. And I mean "Dirty Jobs" stinky...

MaxJet Shuts Down

On Christmas Eve, Maxjet chocked their wheels, and announced they were filing for bankruptcy and liquidating the airline.

I'm sure this was not the Christmas gift the airline's customers and employees were expecting, but I can't say it came as a shock aside from the day they chose to close down.

In fact, I'm surprised they made it this far. With all due respect to the planners & founders, what were they thinking? Premium-only service is something that many have tried, but few have succeeded at.

From memory, here's the list of carriers that have tried to market an all-premium class airline that I know of:

• McClain's. Based out of PHX, flying 727-100's, failed in mid 80's


• Midwest Express. Based out of MKE, flying DC9-30's. Still in business, but switched to a two class product after 9/11


• MGM Grand Air. Based out of LAX, flying DC8's and 727's, failed in early 90's


• Ultrair. Based out of IAH, flying 727-200's, failed in mid 90's


• Legend. Based out of DAL, flying DC9-30's, failed in late 90's


• Privatair. Based out of DUS, flying 737-BBJ


• MaxJet. Based out of JFK & IAD, flying 767-200's


• Eos. Based out of JFK, flying 757's


• Silverjet. Based out of LTN, flying 757's

Now... on that particular list, can you see anything that jumps out?... Anything?

Buhler?... Buhler?...Buhler?...

Yep, it's the equipment choice....

Personally, I think the 757 is too expensive of an aircraft to be flying in a luxury configuration (approx. 48-50 seats on Eos and Silverjet). But MaxJet took it to an even more absurd level with the 767. I don't know what the operating cost per hour difference is for the two types, but it's got to be pretty significant when you figure in the extra weight of the widebody airframe. Yet somehow, they believed they'd sell enough of the 100 or so seats on every flight to break even. Unfortunately, that didn't happen.

In my opinion, the all-premium concept has yet to work.

It's too soon to say regarding Eos & Silverjet, and while Midwest has been operating since 1984, they've also struggled. More on that in a moment. Privatair has the backing of Lufthansa, so even there, it's hard to say if they're a success, or if LH is having to subsidize losses on this in order to save face.

Midwest is clearly the odd man out -- their business plan worked. But you have to look at their history: Midwest Express was born out of the corporate aviation division of Kimberly-Clark, and was a wholly owned subsidiary of K-C for the first ten years of its existance. They didn't become publicly traded until 1995, and K-C divested of their ownership by late 1996. Just a few years later, Midwest was teetering on the edge of bankruptcy, and found itself abandoning the all-first-class service they'd become known for. This year, they survived a nasty proxy battle with Airtran, but only after selling themselves to TPG and NWA...

Why MaxJet thought they could make all-premium class work is still puzzling, especially post 9/11, and considering all of the failures that had come before them.

Perhaps they weren't counting on open skies coming to LHR in April 2008? Between that and the impact of rising fuel prices, it was just a matter of time before their luck and their money ran out.

Make no mistake: Eos and Silverjet will be facing that same challenge as well.

I'm sure there will be those who think Continental, American, British Airways, & Virgin Atlantic conspired to put them out of business, but the fact is that even without head to head competition, Maxjet had a very risky business plan, and it failed.

I do feel bad for the employees who now find themselves grounded, and hope they find new jobs quickly. My advice: stay out of the airlines. A wise man once said they can be hazardous to your wealth...

Life Is A Highway

Did I mention that the Jeep is up and running again?

The radiator turned out to be the real culprit, although there were definitely indications that the water pump had been rusting, and the thermostat was probably in need of a replacement.

So, after all of the diagnosis, the guys over on NAXJA were right on in their guesses.  Well, most of them were, at least... The head passed its compression check, so that's one less thing to worry about for now.

But, my Jeep's problems pale a little bit in comparison to about 750 or so people here in Tucson. 

As I posted last week, First Magnus went from being a local success story to every working person's worst nightmare.  Today, they officially filed for Chapter 11 bankruptcy protection, and they had their mortgage license suspended on Monday.  Of the 100 or so people still working at their headquarters this week, about 60 or so are actually being paid, and most of those are in either finance, IT or Human Resources.  Some employees have been given 12 week employment contracts, so the future is definitely not rosey.

That's not to say that this wasn't self-inflicted in a way.... Magnus had a very fragile business model, and apparently they didn't spare a lot of expense.  The rent at their new headquarters was said to run $100K per month, and there were two corporate jets parked in a hangar at Tucson Int'l (with their landing gear now firmly secured by the aircraft equivilent of a Denver Boot, lest they skip out on paying their bills at the airport). 

Being privately held, there didn't appear to be a lot of reason for restraint and perhaps having some cash stashed away for a rainy day. 

Or, in the case of First Magnus, a perfect storm...

As bad as things have been in the airline industry, the housing industry is on target to lose more workers this year alone than the airlines did over the three years after 9/11.

It's estimated that there have been about 87,000 job cuts this year related to the collapse of the housing market, with over 35,000 people being directly affected by the meltdown in the mortgage industry alone. That doesn't even start to consider the hundreds of thousands of people who will now not be able to refinance loans they never should have been approved for in the first place, and will face almost certain foreclosure. Home foreclosure filings in July were 93 percent higher than a year ago, and up 9 percent from June, to almost 180,000.

So.... I'm still glad I don't have a house on the market right now, and I'm not looking forward to the idea of putting one on the market anytime soon.

I really feel bad for anyone selling a house right now...

I'll guess there are hundreds of people who were planning to walk into their title company to close on homes today or tomorrow who just find out they have to put their own lives on hold because of what happened today.

First Magnus is a Tucson based company who just happens to be the 17th largest mortgage lender in the U.S., with about $30B in loans originated during 2006, and they were on track for $36B in 2007. 

Until this week, at least...  Now, 800 people in Tucson are now out of work, as are approximately 5,000 nationwide.  

Some companies have made an absolute killing on re-selling mortgages for 110% financing, zero down, etc.  Just like all the people who are now facing foreclosure because they can't afford to make the payments anymore, First Magnus and about 70 other mortgage lenders who closed their doors this year didn't plan too well for the day when their money ran out....

First Magnus to Stop New Loan Funding

First Magnus Financial Corp., a Tucson-based national mortgage lender, is stopping new lending activity effective Thursday and shutting down operations.

A person who answered the phone at the company's Tucson headquarters told The Associated Press Thursday that the company is shutting down operations. A greeting on the company's corporate telephone line confirmed the loan funding issue.

"In light of the collapse of the secondary mortgage market, First Magnus will not fund any mortgage loans after Wednesday, Aug. 15, 2007," the message said. "Additionally, we are no longer accepting any mortgage applications or funding any mortgage loans previously originated but not yet funded.

An e-mail sent to employees Thursday said most workers would be laid off immediately. Workers at company headquarters were leaving Thursday morning with packed boxes and downtrodden expressions.

"You can't plan for something like this," said Aaron Phillips, 29, who worked for the company for five years.

The company, which calls itself one of the largest privately held mortgage banking operation on the country, funded more than $30 billion in loans in 2006 and has more than 250 offices and 5,000 employees.

First Magnus was founded in 1996 by Tom Sullivan Sr., Tom Sullivan Jr. and G.S. Jaggi. None of the three could be reached for comment by the newspaper late Wednesday.

The company's troubles are the latest in a series of meltdowns in the nation's mortgage industry which are blamed on delinquencies and other problems in the subprime lending market.

The shutdown of First Magnus' operations is the latest in a string of lender collapses. American Home Mortgage quit writing home loans Aug. 3 and filed for bankruptcy protection three days later, blaming its troubles on margin calls from banks that had provided it with the cash necessary to write mortgages. Last week, regional mortgage lender HomeBanc Corp. filed for bankruptcy protection in U.S. Bankruptcy Court in Delaware.

So, it's likely that they'll be declaring bankruptcy in the next few days, and my guess is that I will probably see a few more people applying for one of the tech jobs we're trying to fill right now...

But it's not just relatively small companies in trouble.  Countrywide, the nation's largest mortgage lender, just borrowed $11.5 billion from forty banks in order to continue funding loans.

I don't know about your bank balance, but $11.5B is a pretty hefty number.... Had the news about First Magnus gone public a day or two earlier, I don't know that they would have been able to draw down that much cash...

As much as I hate to pick at the carcass of another company while they're still in business, but my current employer also ended up with a bunch of data center equipment acquired at rock-bottom prices from liquidating Dot Coms back in 2001.  Perhaps that's what will happen with First Magnus, Countrywide, and HBC.  If so, the resulting firesales could save us a bunch of money....

But I doubt we will find financing at 110% of its value...  The days of cheap money are officially gone, and I'm really glad we sold our house in Texas when we did...