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  • DAL/NWA: Proposed Merger So Large, Yet It's Worth Less Than Yahoo [View article]
    Last Friday DAL and NWA closed at $8.75 and $9.69 respectively with a combined market cap just under $5b. Tangible assets play a far less important role in valuation today than they did a several decades ago. These days intangible value accounts for about 75% of total capitalization.

    What's the "normalized" market value of a company? Over the last 55 years the ratio of value to revenue was 1. If you're interested in the details see my paper on the value/revenue ratio at

    Apr 21, 2008. 09:57 AM | Likes Like |Link to Comment
  • Unintended Consequences Of A Delta/Northwest Merger [View article]
    E.G. said “The valuation of the two airlines (NWA & DAL) is something very tangible using asset-base or units per capacity and can be decided objectively if reasonable approaches are applied.”

    Tyroni said my analysis is “is complete trash and meant to skew the results.”

    Let’s review the bidding to this point.

    On February 28, 2008 DAL closed at $13.35. With 299.47m shares outstanding its market cap was $4.00b. That same day NWA closed at $13.43. And with 262m shares outstanding its market cap was $3.52b.

    On April 16, DAL closed at $8.62. On that day Yahoo! Finance reported shares outstanding were 292.22m, so its market cap was $2.52b. That’s a 35% decline in market cap since 2/28/08. NWA closed at $9.55 with 236.43 shares out so its market cap was $2.26b. That’s a 29% decline.

    If you added the 2/28/08 market caps of DAL and NWA they came to $7.52b. On April 16 their market caps added up to $4.78b. Over the ensuing seven weeks investors knocked $2.3b off their combined value, for a 32% decline.

    If you guys bought at DAL and NWA (based on your theories) at 2/28/08 prices in anticipation of making a bundle once the merger went through, I guess you made a bad call.

    Looks like investors don’t agree that the valuation of these two airlines is “something very tangible.” And it just might be that my analysis isn’t "complete trash ... meant to skew the results."

    Thanks for your comments.

    Apr 17, 2008. 10:50 AM | Likes Like |Link to Comment
  • 'Power Offers' In Air Travel: Should Continental Partner With The TSA? [View article]

    Your comment is a welcome voice for change in replies to recent posts in my series on improving the air travel experience. I was beginning to think I was the only one who believes that most of the hassle of flying occurs on the ground. And more important, that removing those hassles would create a “power offer” that would be far more appealing than frequent flyer miles.

    It also came as a surprise to me that none of the domestic legacy carriers are involved in the TSA Registered Traveler program. So I thought they must be in process. Apparently not. I just searched for the phrase “Registered Traveler” in the Q3 and Q4 07 earnings call transcripts on Seeking Alpha for CAL, DAL and UAUA. Guess what? Not a single mention of this TSA program in any of them. These being three of the biggest domestic carriers in competition with Virgin Atlantic, BA and Air France you would think they might be exploring this option.

    Right now I’m working on the next post in this series for Sunday April 13, 2008. It takes the notion of a “power offer” to the next level by reviewing two privately held companies that offer supporting ground services in cooperation with the TSA. It turns out that Virgin Atlantic, BA and Air France already have partnered with one of the as well. But not CAL, DAL or UAUA. I guess merger mania has blinded senior management of these carriers to even the possibility of offering a more appealing and profitable service. I also wonder why we don’t hear more from the pilots on this possibility. They have as big a vested interest in more appealing and profitable air travel experiences as anyone else.

    Thanks for your thoughtful comment.

    Apr 9, 2008. 11:27 AM | Likes Like |Link to Comment
  • 'Power Offers' In Air Travel: Should Continental Partner With The TSA? [View article]
    Feedback on my error,

    I apologize to the shareholders and employees of AirTran Airways for my error. I also apologize to SA readers. If I had cross-checked The New York Times report on the bankruptcy of ATA Airlines ( more carefully I would have discovered it was not AirTran Airways, a subsidiary of AirTran Holdings (NYSE: AAI), (

    The SA editors have removed the incorrect references from this post. Thank you for your prompt feedback on my error.

    By the way, I searched the AirTran website for information on their TSA Registered Traveler service and found no reference to it. Do you know anything about availability of this service to AirTran passengers?

    Should I stick to financial reporting? Maybe I should. It's sure is a lot easier to find errors in a financial analysis of historical data than in the complex issues associated with redesigning an unprofitable business model.

    Apr 7, 2008. 10:31 AM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work [View article]

    Chart 3 in my previous post “Fixing the Airlines: Reconfigure or Regulate” shows a 55 quarter time series of Southwest’s risk-adjusted differentials. Its RADs peaked at +3.5 in March, 2003 and closed at +1.2 in December, 2007. Or, the company’s risk-adjusted share of value fell from 3.5 to 1.2 standard deviations above the expectation. Over the same period Southwest’s enterprise marketing risk was 21.2 compared with a large-sample, cross-industry mean of 6.6.

    In short, LUV’s risk-adjusted value shares dropped by nearly two-thirds in a period when its risk was three times greater than expectations. LUV’s share price peaked at $19.40 on October 27, 2003 and closed at $12.75 on March 31, 2008.

    If Southwest’s management applied accounting "shenanigans" to its financial statements over the years, investors seem already to have factored them into its share price. It appears you have identified two of them. Of course, there were other powerful forces at work in their competition for customers and capital that had a huge effect on their stock price. Among them was the “financial cleansing” of competitors’ balance sheets by the bankruptcy courts.

    Taking all this into consideration don’t you think it’s okay to compare Southwest’s success/failure with that of competitors who have used their own accounting ”shenanigans” to distort the full picture? While markets are far from perfectly efficient, investors like you clearly know who to find the peas under the mattress.

    Thanks for your comments.

    Apr 2, 2008. 11:06 AM | Likes Like |Link to Comment
  • Creating 'Power Offers' In Air Travel [View article]

    Your two cents are worth at least a buck! A 'distributed clothes cache' is the whole idea behind the ‘Certified Airtravel Valise.’ And now that I’ve learned from the comment by Rich (above) that pre-screening won’t be allowed by the TSA, that name has to be changed. Maybe your Distributed Clothes Cache [DCC] is a better name. Not only does it get away from the pre-screening function, it’s a more appealing phrase.

    Your comment also adds another dimension to this service that makes it even more seductive: the option of creating new ‘stashes’ while visiting exotic destinations. There is no reason to restrict the creation of DCCs to the home base. In fact, there is every reason for the airline to encourage it. The more deeply the carrier becomes involved in making air travel an exciting and pleasurable experience, the more committed passengers become. In Professor Larreche’s words, they begin to experience vibrant satisfaction! As a result they constantly are telling others about the service. Which is a fundamental force driving the momentum effect. Word-of-mouth costs nothing -- and it’s far more effective than advertising.

    Thank you for your insights.

    Apr 1, 2008. 11:28 AM | Likes Like |Link to Comment
  • Creating 'Power Offers' In Air Travel [View article]

    You’re right. I know little about airline operations and nothing about TSA policies. A colleague who knows a lot about both reviewed this article before I posted it and warned me about the TSA roadblock. In an email yesterday he said that:

    “Inspection is not an airline function – it’s a TSA thing. So your CAV idea really should be sold to TSA. TSA has developed a verified traveler program which you may have heard of. Unfortunately TSA is a power to itself and cares not one whit for inconvenience to anyone but itself. It’s almost as if it answers to no one.”

    This is pretty much what you said in your comment. As a result of his comment yesterday I added this to my post:

    “The security must be such that the TSA will approve CAVs as pre-inspected baggage. Securing TSA approval would require careful planning of security safe-guards by the airline.”

    It’s clear from your comment that “careful planning of security safe-guards” requires inspection of all CAVs by TSA agents to ensure against the very dangers you cite. I hadn’t thought about the (now obvious) security risks of entrusting a personal valet to pack the valise. Clearly, pre-screening is not an option. So, the airline must feed the packed CAVs through the regular TSA screening process. That’s something that can be built into the program – even if an airline employee has to walk the baggage through the regular inspection line.

    Thanks for tipping me off about why my suitcase always gets the full inspection. I had no idea it was the computer that motivated the special treatment. But, just to correct one misimpression you took away from my post, I already carry an HP laptop in a shoulder bag. With my books and papers it weighs about 10 pounds. Guess I better take along another carry-on for the MacBook … or leave it at home.

    Thanks for you comments. This is just the kind of informed feedback I need to figure out if a “personal valet service” is even possible, never mind whether it could succeed if offered.

    Mar 31, 2008. 02:15 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work [View article]

    You’re right, my analysis “doesn't account for the network re-alignment and capacity management.” Even if I had access to the necessary data, I’m not qualified to do that analysis without the help of airline specialists. But, there’s another way in which my analysis may not “fully reflect the advantages of larger share of market capacity.” It is a static, single period analysis. If the air travel market were growing at a fast clip, the results could be quite different.

    Thanks for your comments.

    Mar 27, 2008. 09:30 AM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work [View article]

    Fuel hedging is not the only reason makes money. See my response to the comments of "analysisguy" at the beginning of this series. I also would note the comment directly above by User 167840: "... Southwest employees are valued and respected!"
    Mar 25, 2008. 03:58 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work [View article]
    Airline Guy,

    Thanks for reminding me Herb Kelleher no longer is the sitting CEO. I expect he always will be their CEO in spirit, even as he continues to serve as Board Chairman.

    Mar 24, 2008. 04:42 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work [View article]

    Exactly. Creating new ways to make more money so your profit margin goes up is what Professor Larreche's book on "The Momentum Effect" is all about.

    Thanks for your comment.

    Mar 24, 2008. 04:13 PM | Likes Like |Link to Comment
  • Why Airline Mergers Don't Work [View article]
    Analysis Guy,

    I agree with most of what you say in this comment. Though I don’t understand why you add such a negative twist to the way you say it.

    For example, saying that “Southwest runs the airline like a vulture” seems to be condemning management for “only operating on profitable routes.” If the another airline did build up the route, why did they sell it? You make it sound like being successful is a shame.

    And when you say “If Southwest did not have their fuel hedged, you would see them posting loss …” you speak without full knowledge of the facts. For example, here are the results of their fuel hedging program in the last two years. The gains from hedging totaled $1,260 million. The Before Tax net totaled $1,848 million.

    LUV Gains BT Net Difference
    2007 $ 585 $1,058 $473
    2006 $ 675 $ 790 $115
    Totals $1,260 $1,848 $588

    The difference of $588 million would have been realized without the hedging gains. Though this would have been a real drag on their earnings.

    Even if it were true that fuel hedging was the only reason for their profitability, you're taking a pretty narrow view of their overall operations. For example, if they didn’t have a strong balance sheet they couldn’t run the hedging program. Isn’t that why the other carriers fail to hedge?

    Finally, my analysis isn’t about why Southwest turns a profit. It’s about why a Delta/Northwest merger won’t work. And it seems to me that question does require a complex business analysis.

    Thanks for you comments,

    Mar 24, 2008. 11:52 AM | Likes Like |Link to Comment
  • Fixing The Airlines: Reconfigure Or Reregulate [View article]

    I tracked down Southwest's gains from fuel hedging from 2004 through 2007 in a New York Times article: The 2007 number was for the first 9 months, so I adjusted upward by (9/12).

    Combined with the company's Before Tax net, here's how it worked out:

    LUV Gains BT Net Difference
    2007 $585 $1,058 $473
    2006 $675 $790 $115
    2005 $892 $779 -$113
    2004 $455 $339 -$116
    Sum $2,607 $2,966 $359

    Over the four years $2.6b gain from fuel hedging compared wiht $3.0b before tax net gave them a $359m profit. But they lost money in 2004 and 2005 as you guessed.

    According to the NYT article LUV is hedged through 2009.


    Mar 17, 2008. 06:18 PM | Likes Like |Link to Comment
  • Fixing The Airlines: Reconfigure Or Reregulate [View article]

    Yes, if Southwest had not been "heavily fuel hedged" they probably would have lost money. I'm not sure their losses would have been as large as the others carriers, but as a percent of revenues they certainly could have been.

    I don't have the numbers at hand but I recall Southwest saved a significant amount over the past several years as a result of their successful fuel hedges. Do you happen to know how large those savings were year-by-year? Can this information be found in footnotes to their balance sheet?

    Thanks for your thoughtful and informed comments.

    Mar 17, 2008. 11:01 AM | Likes Like |Link to Comment
  • Fixing The Airlines: Reconfigure Or Reregulate [View article]

    I spent the better part of the last hour reading posts on your web site at flightdeckview.blogspo.../. I found from your earlier comments on my SA posts that you knew a lot about the airline industry. But I didn't realize how deep that knowledge actually is. Quoting from your site:

    "I've been flying for 25 years and have been an airline pilot for over 18 years. - Engineer for a major airframe manufacturer - Licensed aircraft mechanic - Accident investigator - Airline Industry Safety work."

    If it's okay with you I would like to have your opinion on future posts containing ideas about how to fix the airlines before they're published!

    Thanks for your thoughtful and informed comments.

    Mar 17, 2008. 10:53 AM | Likes Like |Link to Comment