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(c) Elliott Publishing.

Ichan's World
Cheap Charlie · December 25, 2000

While attending the PhoCusWright Executive Conference a couple of weeks ago, one of the speakers was Carl Ichan, financier and former owner of Trans World Airlines. He had some dramatic predictions and observations about the upcoming state of the airline world.

His observations are rooted in long experience in saving, from a financial point of view, a once world-class airline that stumbled upon entering the deregulated world. TWA is still not a powerhouse, but without the intervention of Ichan, it probably would be a casualty of deregulation. Of course there are opinions on both sides of the question.

At any rate, Ichan has experience with the airlines as an owner. He is also the owner of LowestFare.com, which is selling TWA tickets that the airline still owes him as part of his buyout contract.

Boiling Ichan's comments down to a simple statement, he contends that the airlines are ripe for a major valuation drop when there is a downturn in the economy.

He says unions have managed to gain effective control of the airlines. Any excess profits are being siphoned off to union coffers rather than being returned to stockholders.

Airline management has added to this problem by overleveraging their balance sheets to purchase more and newer equipment.

This combination of strong union power, confiscatory contracts, and overleveraged balance sheets is a prescription for disaster when the good times end.

Ichan reminded the audience several times that the valuation of airlines today is approximately the same as it was a decade ago -- a decade of unprecedented growth in the economy.

He then posed the question, "What happens when the economy sours or there is an extended strike?"

In both cases, airline owners (stockholders) will suffer. Because of the overleveraging, there is not enough cash on hand to withstand a strike, nor is there enough cash to stand up to tough economic times.

"I don't normally give out investment advice," Ichan said. But he looked around the room and said, "Anyone who wants to make some good money should short the airlines."

He predicted that an economic slowdown is inevitable and that a drop in the airlines' stocks is just as certain.

He also said that companies that find a travel niche removed from selling airline tickets and become the best in that niche can expect a good future. Those who maintain the status quo -- depending on the airlines for their existence -- will find themselves out of business.

'Nuff said.

Charlie Leocha is the Boston-based author of Travel Rights: Know the Rules of the Road and the Air Before You Go. Cheap Charlie appears every Monday on this site. E-mail him at leocha@aol.com or access his Web site.