Now that the fever has broken in the market over the price of Apple (AAPL) stock, it's on its way to test its 50 day moving average of $555. Probably, Steve Jobs has stopped spinning in his grave over how the cash buildup in his company will be desecrated sometime in Apple's fourth quarter through an announced dividend payment of $2.65 a share; let's discuss how Mr. Jobs might have approached the problem of too much cash. It's not too late.
We know what he did not do with Apple's cash. Paying the first dividend since 1995 was not an option or he would have done so while he was alive. Also, we know that he wasn't interested in buying another computer company. Why bother buying someone else's company, especially, if that company is inferior to the one you already own.
Steve Jobs was a riverboat gambler; he only played in the big casino of life. Hanging out with mental midgets and playing it safe (venturing out to the edges of pedantic MBA inculcation and foolish spreadsheets) only bore true Renaissance men busily changing the world. Before discussing what the right move could be let's review what Apple has always been and, hopefully, will remain so.
In my humble opinion, Apple was never a computer company in the traditional sense of the word; they were an industrial design company born at the end of the mass communication era. Computers became Apple's first object of desire just when society and culture leaped from a concentration of knowledge and information to segmentation and individuality. They displayed their affection for computers in this brave new world with a counter-culture homage alternative GUI (Graphical user interface) operating system to MS-Dos. Apple's next perpendicular act of defiance against establishment group thought was the creation of a mouse and a single box computer - Macintosh.
Apple's repeated success came from confronting complacent or flabby markets, myopic industries, and rescuing them and their customers from a future of indifference and mediocrity with radical ideas and borderless visions.
Apple Computer single handedly redefined the aesthetics, sensibilities, and most importantly, the functionality and simplicity of the personal computer; an alien household thing that one day would infiltrate our personal existence and daily lives much like a simple yet, unyielding, powerful idea.
I can recall in the early 1980's when technology journalists and critics wrote about, sincerely, why would anyone want a computer in their home? How would be used? Those were valid questions before social and multimedia; before there were podcast and Google, the Internet, and e-mail. Cable television was barely an infant when Apple began, but I digress.
Were Steve Jobs to seriously consider another opportunity outside of computers, summoning the magic and prowess of his industrial design mastery and vision, this he did in the music and video content distribution industries, the animation film industry, the personal data storage and PDA/mobile telecommunications device industries, the bottom line would be this: which industry can I make the greatest impact and receive the greatest enjoyment? I think Mr. Jobs would strongly consider purchasing American Airlines from creditors through the bankruptcy court and reinvent commercial aviation travel.
From a financial standpoint, a quick back-of- the-napkin calculation shows that American Airlines' $30 billion in outstanding debt, bought by Apple for a generous $.85 cents on the dollar, would generate a far greater return on $25.5 billion invested in short-term treasuries at a one-quarter of one percent. There is zero chance that the new owners of American Airlines Apple Airline will default. Also, the dollars to buy the outstanding debt equals just two quarters, 180 days, of recent net earnings for Apple. Short-term, it's a slam-dunk.
From the April 9, edition of BoydGroup International, a sobering account of domestic air travel and the industry is presented.
The facts are clear:
The "regional airline industry" (a misnomer) is in massive, fundamental, and permanent decline. The reason is simple and cannot be danced around any longer: the services they generally provide - leasing small units of capacity to large airlines - have a declining market need, and deteriorating market economics.
Further into this summary on the regional airline segment:
Going forward, the U.S. airline industry simply cannot afford to support the number of 50-seaters still in operation - regardless. The costs are going up, both in fuel and in maintenance, and therefore the number of viable mission applications are disappearing rapidly.
The bottom line is this:
The U.S. airline industry is no longer in a growth mode. In fact, it is in a contraction mode.
Same, actually with the EU. These markets are mature and saturated. More to the point, changes in the economics of aviation point to actual constriction in many aspects of the industry in these regions.
This is not just a statistic. It is a fundamental change in the dynamics of global aviation. Technology, innovation, and financing are all driven and sustained by one common factor - growth. Investment of money and brainpower generally goes to where the greatest return will be, and that means where the future offers more expansion.
So, the logical question to ask, then, why risk going into a declining airline industry? The answer is simple; if fundamental change is occurring and is inevitable, then, revolutionary things do occur at the intersection of change-agent and fundamental change.
Once upon a time passenger air travel in the U.S. was an elevated event in one's life. People dressed up to fly. Meals on planes were thoughtfully prepared, served on white china. The total aviation experience for airline customers was exciting (and that sensation did not come from TSA pat downs). Unfortunately, traveling today is an experience closer to ridding a Greyhound bus from Bakersfield to Fresno in the summertime; with limited air-conditioning. John Mauldin writes in his latest Thoughts from the Front Line "but air travel has long lost its romance."
The smart move for Apple to approach this endeavor includes purchasing an aircraft leasing company such as Air Lease Corporation (AL) or Aircastle (AYR) before completing the American Airlines transaction. This strategic decision will help manage leasing cost and provide crucial experience in an industry that's about to change. The nature of airline travel will change but it will not disappear.
A subsequent purchase would be for a fuel aviation company such as CVR Energy, (CVI), Valero Energy Corporation (VLO), World Fuel Services Corporation (INT), or PHILLIPS 66® AVIATION. Controlling fuel costs will go far choreographing a successful project. Eventually, the learning curve in these new businesses will translate into new software and hardware products and new business opportunities for Apple. These three acquisitions together provide the pieces necessary to begin redefining commercial aviation for the 21st century on Apple's terms.
Next, Apple cash balance allows management to pick up the phone, call Boeing (BA), and make them an offer they can't refuse. Offer a partnership with Boeing, starting with a commitment to build an identical manufacturing and assembly plant next to Boeing's current facility to double production. Additionally, negotiate a contract with Boeing to purchase 2,640 aircraft over the next 20 years. That's a delivery schedule of 11 aircraft per month from the new Apple/Boeing partnership facility. Finally, Apple will build an Apple-centric design facility on Boeing's grounds, supervising and being responsible for passenger cabin design and electronics.
The public is ready for something new in passenger air travel. As the domestic industry shrinks, competition based on price will lessen. Newer planes will become more efficient to operate and will interact more and more with personal technology. Fewer, but more affluent travelers will demand a better flying experience. As Apple aircraft takes to the skies a 100% business class service can be offered, at a higher price point than the industry average. Apple's global brand has the cache to easily execute this cost differential. They do it now on Apple products.
Imagine how Apple could reinvent the travel experience for airline passengers. Just imagine. Oh wow.
Newly designed Boeing aircraft, state-of-the-art electronics at every seat, and the entire iTunes catalog passengers can sample for free during each flight. Aboard each jet plane is an Apple Genius store concierge answering questions and providing demonstrations. Purchases from iTunes before you deplane are available at a discount. Synchronicity of your flight, itinerary, appointments, reservations, other personal needs can occur before you walk out your front door, leaving for the airport.
I can see decision makers flying the new AA testing their devices while multimedia and graphics software developers such as Electronic Arts (EA), content providers such as Time Warner (TWX), even individual stars like Lady Gaga paying Apple for the exclusive rights to premiere new content on certain flights or coinciding with major events.
In time, the Apple graveyard, home to the Rio mp3 player, Zune, the Palm Pilot, the Blackberry, and the computer laptop, might start digging a new hole for smug 20th century airlines.
This is visionary thinking. Go big or go home. I bet Steve Jobs would smile with approval, and then strengthen the idea.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.