"…the questioning which is all about when do you guys going to start losing money again. I don't think we ever going to lose money again by the way, at least for a long time, I still believe it. We have an industry that's going to be profitable in good and bad times. We have an airline, it could be profitable in good and bad times. Those days are gone.”
-Doug Parker, 9/28/2017
It is good that American Airlines had their safe harbor disclaimer at the front of their investor day presentation, because CEO Doug Parker’s statement today was very aggressive. It is even more aggressive considering the company only emerged from bankruptcy at the end of 2013.
Forty years of airline history has been erased in four years. That sounds like a CEO who has witnessed Crude drop more than 70% in the two years after his company exited bankruptcy and enjoyed the zero interest rate environment as he re-levered his company. There is no doubt the airlines have become more disciplined and efficient operators to the point where longtime critic Warren Buffett now has stakes in American, United, Delta and Southwest.
Just ten years ago, Buffett commented in his shareholder letter that “if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down.” To win Buffett over, the airlines certainly needed to change their ways, but it is also hard to deny that the external forces which operated against them prior to American’s bankruptcy, shifted in their favor in recent years. We understand Parker was trying to change the investor mindset, but proven results throughout an entire business cycle is the best way to do that.
Parker’s comment immediately evoked memories of Chair Yellen’s statement exactly 3 months ago when she said:
“Would I say there will never ever be another financial crisis, probably that would be going too far. But I do think that we are much safer and I hope that it will not be our lifetime and I don’t believe it will be.”
This all dovetails nicely with a President who takes credit for stock market gains every other week. There are a lot of people feeling good about a lot of things. In a world where the stock market only appears to move in one direction, it is not surprising to see such optimism. But it is a surprise that such high profile experienced people are extrapolating today’s reality indefinitely into the future.
It was only 9 years and 2 weeks ago that Lehman Brothers failed. Thus, anyone with more than a decade of experience should be well aware that we live in an uncertain world and it is dangerous to speak in absolutes. The stock market is providing confidence to many. We have 34 years of daily trading range data. When you measure 10 day average of the daily trading range, the past couple of weeks have been the tightest in history (chart below). This environment is the outlier, and thus it should not be extrapolated.
Alan Greenspan was certainly adroit enough to avoid absolutes. During his first speech of 2000, he confidently noted:
"We are within weeks of establishing a record for the longest economic expansion in this nation's history. The 106-month expansion of the 1960s, which was elongated by the Vietnam War, will be surpassed in February. Nonetheless, there remain few evident signs of geriatric strain that typically presage an imminent economic downturn.”
He was correct that an economic downturn was not on the horizon - it was a financial one was that was significantly damaging.
This is a Hedgeye Guest Contributor research note written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.