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  • NY Fed Case Study: When an Internet Blooper Rocked Airline Stocks

    The New York Fed 's Liberty Street blog is featuring an interesting exercise in the power of breaking news headlines and "financial markets process news of unexpected events." NY Fed researchers went back to 2008, when a "news" story about United Airlines' 2002 bankruptcy story mistakenly was re-posted on the Internet. United stock took an immediate hit. It did recover, but not for some time. Here's a look at a chart from the post that shows the lag in United stock recovery: From Liberty Street: In short, we find that even in a situation where noise could be clearly singled out, it took markets about a week to fully process the signal component of news. Of course, in most circumstances, signal and noise arise simultaneously and cannot be separated so easily. Thus, normal delays may be longer than what we detect here. Is a week a long time or not? It certainly is when the delay pertains to the reaction of asset prices to a piece of news. Most likely it isn’t when it comes to investment decisions of companies or industries. The key question is whether normal information delays are long and pervasive enough to affect those investment decisions. If they are, such delays could be costly for the economy. Why did it take so long for the information to be processed? Our staff report investigates several potential explanations, but fails to find empirical evidence supporting any of them. In particular, explanations based on poor trading liquidity after the false news event, potential links to the financial market turmoil in September 2008, and uncertainty aversion by investors do not appear to be supported by the data. We therefore have to leave this question unanswered. So even as the question remains unanswered, this exercise seems a good one, as we see news reports sending waves through the markets on a weekly basis, or even a daily basis. In the 24 hour news cycle, more mistakes are likely to happen. But even beyond mistakes, exaggerated headlines or misleading reports likely will have some impact. Will that impact be lasting or temporary? Read How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper here .

  • As Airlines' Financial Picture Gets Rosier, Industry Leaders Call for Less Regulation

    Only a month ago, there was much talk of airlines going out of business. The ash cloud from the Eyjafjallajoekull volcano in Iceland shut down travel through much of Europe after the global recession had already cut deep into revenue. But now the International Air Transport Association (IATA) is releasing update projections for 2010, and they show the airline industry turning a profit this year. Here's a look at the change in projections from March to June, from the IATA report : Not that the ash cloud has had no long term effect. The IATA projects profits for every region except Europe, where the projections show $2.8 billion in losses this year (adjusted down from a projected $2.2 billion in March). In his State of the Air Transport Industry speech yesterday, IATA Director General Giovanni Bisignani said that global air traffic had returned to pre-recession levels, and that there was much reason for "cautious optimism." But he called on industry members and government bodies to work together to make air traffic, as a business, more sustainable--pointing to 0.5% profit margins as too low. We overcame challenges with change and we have the passion and commitment to build a sustainable future. But we cannot build that future alone. The changes we need are not always within our control. Governments over-regulate our business and under-appreciate our role. Who can change the attitude of governments? Voters. The same voters that are our customers. Today, we have 2.4 billion potential industry advocates and the number is growing rapidly. To turn them into real activists, we must improve our industry’s value proposition: price, speed and quality. We have the price right. Flying today is 40% (36) cheaper than before deregulation (37). We made travel more accessible but speed and quality suffered. Infrastructure has not kept pace and the result is queues on the ground and delays in the air. And new security processes have created new hassles even as we are Simplifying the Business. Now, our challenge is to gain the support of our customers to hold governments accountable for their actions. Can we do it? Yes we can. But it means facing the future with the courage to change. My 2050 vision for aviation is built on four cornerstones: profitability, infrastructure, a new energy source and the customer. He does seem to bank a lot on customers feeling pleased with airlines these days. Read Bisignani's full speech here .

  • Surowiecki: Price Wars are 'the retail version of the doomsday machine'

    James Surowiecki 's Financial Page column in this week's New Yorker is a keen look at price wars as a high stakes game of chicken. He goes back to the airline industry's destructive price wars of the early 90s to shed light on the current Amazon-WalMart showdown . Surowiecki writes that there is only one way to win a price war: don't play. Instead, you can compete in other areas: customer service or quality. Or you can collude with your putative competitors: that’s why cartels like OPEC exist. Or—since overt collusion is usually illegal—you can employ subtler tactics (which economists call “signalling”), like making public statements about the importance of “stable pricing.” The idea is to let your competitors know that you’re not eager to slash prices—but that, if a price war does start, you’ll fight to the bitter end. One way to establish that peace-preserving threat of mutual assured destruction is to commit yourself beforehand, which helps explain why so many retailers promise to match any competitor’s advertised price. Consumers view these guarantees as conducive to lower prices. But in fact offering a price-matching guarantee should make it less likely that competitors will slash prices, since they know that any cuts they make will immediately be matched. It’s the retail version of the doomsday machine. Read Priced to Go here .

  • Jackie Huba and Bag Fees as Penalties

    Jacki Huba of the Church of the Customer Blog argues, from the customer's perspective (of course), that "fees are penalties, always." And cites the growth of no-fee-for-bags airlines as evidence of her argument Southwest Airlines and JetBlue each saw significant jumps in passenger miles and the percentage of seats filled last month while Delta, American, USAirways, and United--all of which charge for checked bags--saw declines in both categories. Huba writes: Before you say, "You can't correlate those two things, Jackie!" let it be noted that Southwest has commissioned several studies that show the traveling public hates bag fees. Southwest seems to be doing pretty well as angry passengers migrate away from the bag-fee chargers. Southwest is even running an ad campaign with this message, called "Why do they hate your bags?" Those nickle and dime fees add up, the airlines will say, but really, they do little more than penalize customers with complexity and disguise the end price. It's no different when a phone or cable company charges activation fees. May as well call them aggravation fees, as in "It's aggravating to have a new customer." Read the full post here .