This is the twenty-fourth edition of weekly recommendations. Watch this space for facts, news, trivia and research around the world. Topics range from economics, public policy and psychology to finance, society and current affairs. Access all weekly recommendations here.
Vulnerable US Auto Sector
A bear in us awaits market correction while the bull never believes in it.
Today, most stock market experts and economists believe that the recession guy is in the house next door and at any moment he will enter our house to ruin the party. Every expert is trying to understand the mistakes during the party and what will happen now when we start to feel the hangover headaches.
Lisa Beilfuss has analysed one such issue – a vulnerable auto sector in the US. She writes in Barron that there is an “underappreciated ticking time bomb” in the auto market. The bubble, according to the report, is in the second-hand car market.
People, with temporary jobs in the past two years and state-support stimulus cheques, have purchased second-hand cars by taking loans from the bank. Now, the pandemic stimulus has stopped, inflation has increased and we are seeing a rise in defaults.
The loan-to-value (LTV) ratios, or ratio of the loan amount and the value of the vehicle, are around 140%, versus a more normal 80%, which means the outstanding loan amount is ~1.4x the value of the vehicle. People who earn $2500 a month have to pay $1000 as EMI. These ratios are disturbing.
Data from car-shopping app CoPilot shows that in the month of June 2022, the used-car prices were up 43%, or $10,046 above projected “normal” levels.
Lopez, a car dealer says, “Everybody thought the free gravy train would never end.”
Now the situation has become more serious as banks had to repossess so many cars that they do not have enough storage space. Banks are leasing land to keep these cars.
There is one similarity between the current auto bubble and the housing bubble of 2008, which is sub-prime loans. But at the same time, the delinquency rate for prime borrowers has also increased.
The report quotes data from New York Fed showing a huge auto debt burden on Americans. Auto debt rose $87 billion for the year ended in March, to $1.47 trillion, a tenth of total consumer debt.
I feel, this time, it’s no different. We commit the same mistakes again and again.
Secrets of Airline Profits
The airline industry was hit hard due to pandemic. But there were a few airlines reporting profits even in these times. McKinsey has analysed why and how these airlines have remained profitable. What are their secrets?
Secret one: High-performing airlines effectively manage their capital base, especially aircraft:
The report compares ROIC (return on invested capital) with capital turnover (revenue earned per dollar of capital invested). They find that these variables are correlated with each other. Therefore, the secret here is to focus on the denominator of the ROIC formula – which is the capital.
Secret two: High-performing airlines know that conduct matters more than market structure:
Compared to Asian markets, US markets have consolidated more due to mergers. The Asian market is the low-performing region. Latin American industry, compared to the Asian one, is more consolidated. But the airlines have failed to perform. This means that airline conduct is more important than the market structure.
Secret three: High-performing airlines give customers choice through ancillaries:
Carriers whose passengers each spend at least $20 on ancillaries generate 8.2% ROIC on average, which is more than five percentage points higher than it is for airlines whose passengers spend less than $5 on ancillaries. That is why airlines charge us more for extra leg room or tasty food or anything which gives us more comfort.
Secret four: High-performing airlines create pockets of privilege in their flight network:
The privilege here is regarding a proper itinerary through the airline’s network. Providing seamless connectivity between more than two airports is very important as that gives an edge over others. Airlines having connections between a big city and a smaller one helps as not many flights operate on those routes.
Secret five: High-performing airlines differentiate themselves by their reputations:
This is a personal pick. I would like airlines to make my journey better at every point. Be it online sales, discounts, punctuality, in-flight entertainment, etc. If an airline develops a quality product and seamless services, then it is ought to gain a reputation.
Secret six: High-performing airlines are great organizations, too:
Organisational values, health and employee well-being will always result in a good performance – be it in any industry.
– Swapnil Karkare
