Plane economic sense
The emergency aid being provided to the airline industry by the federal government is both essential and legitimate. This is not a bailout, as it is often being called in the media. Nor is it an undeserved life raft to guarantee the survival of every airline (we have already seen Midway shut down, and America West and U.S. Air are in serious financial straits). Rather it is an infusion of cash that is essential to an industry that is woven into the fabric of our economy.In the aftermath of earlier terrorist threats --- Pan Am 103, the Iran hostage crisis, the Gulf War --- a full year passed before air travel returned to normal. We can reasonably expect a much longer delay this time. Already, the airline industry has laid off more than 100,000 people; the impact on employment in ancillary industries could push job losses above 500,000. Meanwhile, airline traffic is estimated to be down 40In addition to prudent federal support to keep the industry afloat post-September 11, the complete federalization of airport security is essential. There are many industries --- mining, meatpacking, and pharmaceuticals, to name a few --- where federal health inspectors are on site daily to assure public safety. While it is the responsibility of the airlines to manage costs within reasonable limits, the new security measures that will be required will be too great to be borne solely by increased airfares.That said, other industries hard-hit by the terrorist attacks do not perform the same vital role in sustaining economic activity and public security. Thus, they are not deserving of federal emergency dollars.The insurance industry, while it may suffer substantial losses, has mitigated those losses in part through reinsurance. Claims are paid from surplus, and the industry is well equipped to meet those losses as its surplus has built up substantially over the last five years. Even if the ultimate cost is upwards of $50 billion, it will not cripple the industry. That is not to say that all insurance companies will survive, but the well-managed ones will. Importantly, the U.S. (and the EU) have stepped up to provide short-term war risk coverage to keep the airplanes flying, and a long-term solution may well require the government to be the insurer of last resort in cases of terrorism.Other hard hit industries -- hotels, travel agencies, and cruise lines --- should not receive federal support. The near-term earnings and revenue outlooks for these industries are poor and they may well suffer a period of losses. However, they have benefited from a long period of growth over the past half-decade, and those with strong balance sheets will survive and return to profitability in the future. Business travel, hurt now by an economic downturn, will rebound as the economy picks up next spring. Leisure travel will rebound in lockstep with the confidence of Americans as appropriate security measures are implemented in airports and on aircraft.So what does all this mean on Wall Street? The stock market thrives on economic growth and political stability. The events of September 11 have introduced serious potential threats -- even if only in the short run --- to economic stability. The "war on terrorism" is unsettling to investors as its scope and impact are as yet unknown.But the market has responded favorably to the federal government’s promised cash infusion into the airline industry. Specifically, airline stocks, which plummeted over 40on September 17, have rallied back 5 – 10since the government indicated its willingness to provide emergency aid. How individual airline stocks fare in the long run will in large measure be determined by the state of their balance sheets and cash flow prior to September 11. However, keep in mind that this is an industry subject to recurring cycles of feast and famine and the next few years will likely be even more volatile.Insurance stocks have rallied of late on the assumption that events that trigger large-claims payouts also benefit pricing. Reinsurers should face a more favorable supply/demand environment, and, for the most part, will rebound in good financial shape. However, the issue of liability may hang over the industry for a long time, but it is unlikely to significantly impair its future. Life insurance companies, in general, should not be negatively impacted.Other leisure-time related industries --- hotels, cruise lines, gambling establishments, car-rental companies --- have all entered a period of extreme uncertainty. Stock prices in these sectors are likely to be under pressure for at least several quarters.One small glimmer of hope may be found in the national surveys, which seem to show the public is more optimistic about economic recovery than are many economists and analysts. Such optimism may become a self-fulfilling prophecy as consumer spending edges the nation toward renewed growth.