The Wall Street Journal’s Holman Jenkins, Jr.’s Business World ($) column today addresses the mess that is the American airline industry, and notes that this is not a problem that has just arisen recently:

Today’s crisis is not materially different from the airline crisis of the early 1990s, or the crisis of the early 1980s with the onset of deregulation.
Airlines have shown an ability to mint short-term profits in an economic bounceback when demand grows faster than they can lay on more jets and gates. But that’s not the same thing as being able to make profits consistently enough to pay back the capital invested in the industry. The airlines have never been able to do this, at least not since deregulation.
Kenneth Button, a professor at George Mason University and head of its transportation center, finds the same feature present in Europe’s increasingly deregulated market, an inability to price above cost. But before giving up on capitalism, airlines or both, perhaps we should look more closely at the problem.
Airlines are selling a highly perishable product, thus tempted to fill seats for any fare that will cover a bag of peanuts, several gallons of fuel and the cost of processing a booking. That means, when their competitive dander is up, airlines sell seats for a price far below their long-term costs. And competition is never in short supply — barriers to entry are low. Anyone can lease a couple of jets with no money down, sell tickets over the Internet and join the fray. Even if an airline fails, its lenders repossess the planes and find someone else to put them to work.
Airports, meanwhile, are local monopolies and, ahem, seldom leave money on the table for their airline customers. Ground services and catering also enjoy sufficient local market leverage to make money off the airlines even as the airlines can’t make money off their own customers. And the industry’s biggest suppliers of all, its own employees, demonstrably have the upper hand when it comes to divvying up the revenues of the business. Notice that workers at United and US Airways (both in bankruptcy) as well as at American, Northwest, Delta and Continental (each losing money and flirting with Chapter 11) still manage to hang on to wages substantially higher than those paid by the industry’s few profitmakers, such as JetBlue and Southwest.

If the cut-throat competition between carriers results in low fares, should we care? Mr. Jenkins suggests that we should:

Instability in the airline industry produces an irresistible urge for activity in politicians, who’ve already dumped $7 billion in taxpayer money on the airlines since 9/11.

Mr. Jenkins then goes on to suggest that consolidation of the industry would likely be helpful to consumers:

Airlines are not incompatible with capitalism so much as incompatible with modern antitrust policy, which assumes that “more competitors” is the same thing as “more efficiency.” That’s why, whenever the industry’s parlous finances start making news, carriers plop another “code-sharing” deal in front of regulators. These instruments of cooperation between competitors have the potential to blunt the industry’s urge to bleed itself to death during travel downturns. The latest embraces Delta, Northwestern and Continental and this week added foreign partners Air France, Alitalia, Aeromexico and Czech Airlines.
Don’t expect airlines to advertise their alliances thusly, but neither should passengers fret unduly. Fewer crazy fares might turn up on the Internet, but average fares would likely continue their long-run decline even if antitrusters wisely looked away for a while and let these experiments flower. The most notable outcome would be less financial chaos and less pressure on politicians to “fix” the airline problem in ways that make it worse.

Read the entire piece.
Meanwhile, in the latest example of the law of unintended consequences, this NY Times article reports on how the Air Transportation Stabilization Board — which Congress created to “save” the airlines after the 9/11 attacks — may decide to pull the plug on US Airways.

Krispy Kreme Doughnuts Inc. announced that its auditor, PricewaterhouseCoopers LLP, refused to complete a review of the company’s financial statements for the latest quarter until an outside law firm hired by the company’s board is finished performing, ahem — “certain additional procedures” — that the auditors have “requested.”
This is not looking good for the mercurial Winston-Salem, North Carolina-based doughnut chain. Given its high profile since going public in 2000 and the current anti-business climate in the U.S. Justice Department, it would not be surprising to see a criminal inquiry emerge from Krispy Kreme’s current financial problems. I wonder if the grand jurors can bring a box of Krispy Kremes into the grand jury deliberations?
Krispy Kreme’s latest regulatory filings indicate that it had $19.3 million in cash as of Aug. 1, which is less than a third of what it raised in its 2000 initial public offering.
The company’s latest disclosure sparked new questions about Krispy Kreme’s accounting and a series of acquisitions that included the repurchase of several franchises, including two owned that Krispy Kreme insiders owned. The company recently reported a sharp falloff in growth and declining earnings, and already faces an informal SEC inquiry focused on its franchise repurchases and a profit warning it gave in May.

As expected, US Airways Group Inc. filed its chapter 22 case (i.e., chapter 11 for the second time) in the U.S. Bankruptcy Court in Alexandria, Virginia. US Air’s previous case concluded a little over two years ago.
Like its larger competitors, US Air continues to be hammered by high fuel prices, competition from discount carriers, anemic revenue and a heavy burden of debt and operating-lease commitments. With the filing, two of the nation’s six “legacy” carriers — those whose costs and cultures are rooted in the pre-deregulation era — now wallow in bankruptcy, although a number of other legacies could end up in the same court. The other legacy already in bankruptcy is UAL Corp.’s United Airlines, and Delta Air Lines is struggling to avoid the similar fate.
US Airways will maintain normal operations and honor all customer-service agreements and marketing arrangements with other carriers. US Airways’ current schedule consists of nearly 3,300 daily flights in about 180 airports in the U.S., Europe and the Caribbean.
The company’s theory of the case in its reorganization is to propose a reorganization plan by year-end that will transform the legacy carrier into a discount airline. Traditional labor and regulatory agencies will undoubtedly oppose the old-line, hub-and-spoke carrier attempting to shed its rigid work rules, inefficient work practices and richer benefits to make the transformation to a discount airline. If that occurs, then US Air may be forced into a liquidation under the weight of its massive debt obligations and lack of profitable operations, although previous legacy airline reorganizations indicate that such a liquidation will not come without creditors enduring even more losses during the reorganization case.
Another big complication in US Air’s reorganization is financing. Unlike the usual big reorganization, US Air did not file an emergency debtor-in-possession financing motion on Sunday to bolster its cash position. Because all of its assets are already pledged, the company did not even try to arrange such interim financing. However, US Air did disclose that it had reached an agreement with its lenders to give the airline access to an undisclosed portion of $750 million of cash it has on hand to use as working capital in lieu of a debtor-in-possession financing. The company said it currently has $1.45 billion in cash, cash equivalents and short-term investments.
The US Air filing gave Democratic Presidential nominee John Kerry an opportunity to comment intelligently on a business policy issue, and his campaign screwed the pooch on that opportunity. Check out the following gibberish:

“It is a tragedy that the employees of US Airways, who have already made great sacrifices to help the company stay afloat, will now suffer more harm. And it’s unforgivable that the Bush administration has sat on the sidelines rather than act to address this crisis.”

The Kerry Campaign failed to mention that the Bush administration authorized the dubious post-September 11, 2001 federal loan-guarantee program that was supposed to help the ailing airline industry, but really just delayed the inevitable in regard to such carriers as US Air. As for the real reason behind the Kerry Campaign’s above statement — US Air employs thousands in the key battleground state of Pennsylvania.

The Woodlands, Texas-based Anadarko Petroleum Corp. announced that it is selling a large number of its smaller oil and natural-gas properties in Texas and Oklahoma in return for $850 million and a stake in two Wyoming producing fields. Merit Energy Co., a Dallas-based privately held company, is buying the majority of the properties.
With the sale, Anadarko is nearing its previously announced goal of selling off $2.5 billion in North American assets. It plans to use the proceeds to lower debt and refocus on a plan to develop overseas and deepwater Gulf of Mexico exploration.
The properties Anadarko is selling represent 30% of its fields world-wide, but only 4% of proven reserves and 7% of current production. The deal is scheduled to close by the beginning of December.
Merit owns and operates oil and natural-gas fields with $2.1 billion in oil and natural-gas reserves. The company had raised $2.5 billion for additional purchases of oil and gas properties.
It’s too early to say whether Anadarko’s ambitious plan to restructure the company is going to work. However, I am pulling for them. It’s always refreshing to see management of a company address a daunting problem — i.e., the uninviting future of an independent E&P company treading water while living off of declining reserves — and come up with a creative plan to redirect the company toward a potentially more profitable goal. The plan is not without substantial risk, but given Anadarko’s alternatives, it makes a lot of sense to me.

The Wall Street Journal is reporting that Walt Disney Co.’s CEO, Michael Eisner, will retire in 2006 at the end of the current term of his contract with the company.
Here is the Journal ($) article on Mr. Eisner decision, which is also an excellent overview of his tenure at Disney. My sense is that Mr. Eisner is similar to a good football coach who builds a solid program from one that was floundering, but who holds on to his job for too long, creating disunity among supporters of the program, some of whom remain loyal to him for his past successes and others who recognize that he does not know when to quit and want to fire him.

One of the favorite resorts of Texas families is the Hyatt Hill Country Resort in San Antonio.
Now it appears that another Hyatt resort project between Austin and Bastrop will become a reality. Dallas-based Woodbine Development Corp. has closed a $74.3 million construction and permanent loan with Prudential Mortgage Capital for the construction of the $135 million Hyatt project.
The resort will be located on 656 acres of Bastrop County land that Woodbine bought from the Lower Colorado River Authority in March. The resort site, which adjoins LCRA’s 1,110-acre McKinney Roughs Nature Park, will utilize 405 acres of this land, including one mile of Colorado River frontage. The remaining 251 acres are being reserved for future development.
The Hyatt site is 13 miles from Austin-Bergstrom International Airport. It will include a 500-room hotel, an 18-hole golf course, a manmade river pool, and hiking and equestrian trails.

Former CSFB Silicon Valley investment banker Frank Quattrone was sentenced to 18 months in prison for obstructing a probe of how IPO stocks were doled out. The sentencing follows his obstruction conviction in May, which was largely based on an e-mail he sent underlings that encouraged them to obey document-management procedures that prosecutors alleged would have destroyed evidence sought by investigators.
The punishment was well above federal guidelines, which called for no more than 16 months, and from a probation department recommendation of 10 months, half on supervised release.
Mr. Quattrone, who is 48, is the highest-profile Wall Street figure to face prison since junk-bond king Michael Milken was given a 10-year sentence (later reduced) for alleged securities-fraud violations nearly a decade ago.
In handing down the sentence, U.S. District Judge Richard Owen granted a prosecution request to lengthen Mr. Quattrone’s sentence to between 15 and 21 months on the grounds that he had committed perjury when he testified at his trial. The judge based his decision on Mr. Quattrone’s denial before the jury that he intended to obstruct investigations by the Securities and Exchange Commission and a federal grand jury. Mr. Quattrone’s attorneys argued that the alleged perjury was not proved before a jury. But Judge Owen ruled that it was clear to him that Mr. Quattrone’s denial that he intended to obstruct justice was not true and commented that Mr. Quattrone could have avoided the perjury issue by not taking the witness stand.
H’mm. A criminal defendant should not take the stand to defend himself from a criminal charges because he might commit another criminal offense that the judge will convict him of during sentencing without a trial? Let’s see how that proposition plays out on appeal.
At any rate, at least Judge Owen agreed to allow Mr. Quattrone to serve his time at the federal minimum-security prison camp in Lompoc, Calif. However, Judge Owen denied Mr. Quattrone’s request to remain free pending appeal and ordered him to surrender on October 28.
A jury convicted Mr. Quattrone in May of obstructing a government investigation into how CSFB allocated shares of hot IPO stocks. Prosecutors charged that Mr. Quattrone obstructed the investigation when he forwarded a single e-mail to his subordinates advising them to clean-up files per the bank’s document-management policies soon after he learned about the federal grand-jury investigation. A first trial last October ended in a hung jury.
Mr. Quattrone still faces a possible lifetime ban from the securities industry under charges pending against him by the National Association of Securities Dealers and the SEC. His former firm CSFB paid $100 million in 2002, without admitting wrongdoing, to settle charges that the SEC and NASD had brought against the firm.

TXU Energy, the unregulated arm of Dallas-based TXU Corp., last month notified 185,000 of its Texas electricity customers that increases in natural-gas prices would require the company to adjust rates. But in a new rate-setting tactic for the electric-utilities industry, TXU Energy also plans to impose a bigger rate increase for its customers with the lowest credit scores based on numeric rankings of credit-worthiness that take into account a customer’s history of paying electricity, telephone and cable bills.
Predictably, consumer advocates are not pleased. “If they get away with this, others will follow,” said Randy Chapman, executive director of the Texas Legal Services Center, a legal-aid program that helped uncover TXU’s credit-scoring practice, which was reported by the Dallas Morning News. Another state-funded consumer advocate in Texas is reportedly preparing to file a formal complaint with the Texas Public Utility Commission asking it to issue an emergency order preventing TXU, which is both the biggest utility and biggest competitive supplier in the state, from implementing the rate changes.
Imagine the audacity of a company trying to take away the right of people who do not pay their bills timely to have people who do subsidize the cost of their tardiness.
The Texas electricity market was deregulated in 2002, allowing customers to jump from one provider to another where available. The new TXU pricing arrangement doesn’t affect customers that get service from TXU Corp. in its traditional territory in the Dallas-Fort Worth area. Rates there continue to be regulated by the state during the transition from a fully regulated to a deregulated market.
Instead, the credit scoring has been applied to TXU Energy customers in portions of the state where TXU is seeking new customers. TXU Energy lured many of those customers away from utilities with the inducement of discounts.
The insurance industry has for years used credit scores as a tool to predict losses and help set premiums. A study prepared last year for the state of Texas by the Bureau of Business Research at the University of Texas in Austin found a correlation between insurance claims and low credit scores. Credit tools have been used by the electric industry to set deposits but haven’t been used to set actual rates. Traditionally, rates were based on the cost of furnishing service to broad customer classes, such as residential ratepayers.
However, under the federal Fair Credit Reporting Act, companies that use credit information as a basis of adverse decisions often are required to disclose that fact to consumers. It does not appear that TXU has complied with the Act, at least yet.
Many states that have deregulated their retail electricity markets still require incumbent utilities to offer rates that serve as a benchmark for prices offered by competing suppliers. But those government-mandated rates expire in Texas in 2007 for residential customers.
Under the TXU program, electricity rates will be raised for 185,000 customers, based on higher gas prices. But they will be raised most sharply for roughly 55,000 residential and small-business customers with poor credit scores. That’s about 30% of the accounts that TXU Energy now serves in competition with incumbent utilities.
Stay tuned as this football begins to be tossed around the political playing field.

Affiliated mutual-fund companies Invesco Funds Group Inc. and Houston-based AIM Investments reached a tentative $450 million settlement with federal and state regulators of allegations that they allowed favored investors to trade rapidly in their funds at the expense of long-term shareholders. The firms are both units of Amvescap PLC of London.
Under the deal, Invesco and AIM agreed to pay a combined $375 million in penalties and restitution to settle with the Securities and Exchange Commission and New York Attorney General Eliot Spitzer. They also agreed to reduce mutual-fund fees charged to investors by $75 million over the next five years. In a separate deal with Colorado regulators, Invesco will pay an additional $1.5 million to cover attorneys fees and “investor education,” whateever that means. As usual in such settlements, neither firm admitted the civil fraud charges.
The Invesco-AIM settlement is one of the largest in the fund-trading scandal that has descended upon the huge mutual-fund industry over the past year. Only Bank of America Corp. agreed to pay more in fines and restitution, though Alliance Capital Management Holding LP agreed to a larger settlement if reduced fees are included in the settlement calculation.
The settlement pact also marks the first time regulators have linked AIM Investments to allegations of improper trading. The Houston firm was not charged late last year when regulators sued Denver-based Invesco and its former chief executive. But during the investigation, regulators discovered that AIM had at least 10 arrangements with select investors that allowed them to trade AIM funds rapidly (or “on market time,” as they say in the industry). Invesco and AIM, which merged to form Amvescap in 1997, merged their operations last year.
Market-timing isn’t illegal, but Invesco and other funds said in their prospectuses that they limited investors’ transactions. Market timing is designed to take advantage of discrepancies between a fund’s share price and the value of its underlying securities. The practice can raise expenses and reduce the profits of long-term fund investors.
Invesco’s tech-stock-heavy funds did well in the bustling 1990s, but fell hard during the resulting bear market. Investors in the Invesco and AIM funds have withdraw more money than they invested in each of the past three years. Through the first seven months of this year, net redemptions from the firms’ stock and bond funds totaled more than $8.3 billion.