Thoughts on Airline Merger, Core Pricing

Reports say that Delta Air Lines (DAL) and US Airlines (UAUA) are in "serious merger talks". DAL has said they are talking to both Northwest Airlines (NWA) and UAUA. They are saying to the one that we will merge with the other unless you offer the better deal.

A merger of UAUA and DAL would reduce AMR to an also ran. AMR and UAUA are still fighting labor unions that hope to recapture the kind of wages that were available in the old days, the days of regulated oligopoly. In a free market, wages must approach their economic value.

The airline market is not a totally free market but it is no where near the regulated oligopoly of days gone by. Continental (CAL) has the best relationship with employees. This is a major advantage in the current environment.

CORE PRICES

This mornings CPI report shows that in the past year, energy went up by 17.1%, food went up by 4.9% and core inflation went up by 2.4%. Looking back tells us some things, but it does not tell us the future.

If the recent decline in the price of oil should hold or continue, then the price of energy will be down in 2008. Farmers who sold products at very high prices in 2007 will plant extra in 2008 so food prices will not increase in 2008 and could easily fall. Food and energy are often excluded from inflation reports because food and energy prices that go up one year are likely to fall the next.

Even the core rate of 2.4% is likely to fall in the months ahead. Inflation is a lagging indicator. By the time inflation is extra high, the economy is likely to be slowing. That is where we are today, a slowing economy will bring down interest rates and inflation rates as the two trade together. Commodities such as oil also tends to trade with interest rates.

Furthermore, even the core CPI does not capture the substitution effects that are bringing down cost. The cost of a cell phone call that saves a trip to a store is a tiny fraction of the cost to the trip to the store. The volume of cell phone calls, mouse clicks and other electronic communications that are replacing physical activities is growing by leaps and bounds and is expected to continue to grow in the months and years ahead.

The INFORMATION REVOLUTION we are living through is increasing the wealth of the people just like what happened during the INDUSTRIAL REVOLUTION. INVEST, INVEST, INVEST in order to make millions off this wave of growth!