Monday, September 19, 2005

The Fed after Katrina and the woes of US airline industry

The Fed Reserve meets tomorrow to decide on interest rates. In the past week, market participants have been split as to whether Fed would pause rate hike in the wake of Katrina, or will it continue to push to nip any signs of incipient inflation. Inflation has so far been contained in oil, but inflation ex oil might now start creeping up as the federal government starts spending billion of dollars to clean up the Gulf. The stock indices moved up nicely over the past week, on the theory that spending to clean up the mess would benefit businesses.

Airline industry has been in perpetual turmoil since 1978, after deregulation. This is what Warren Buffet told his shareholders at their 2003 annual meeting -"A great management in that business will not necessarily get a great result. In the airlines, you have a huge amount of capacity...something close to a commodity product with high fixed costs and no marginal costs.
That extra seat doesn't cost you anything, so the temptation to sell that at a terrible price is

This is what I though of the other day, when I wrote on fixed costs and variable costs:

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