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RECESSION ANALYSIS

06/05/2008


Last week’s (May 26, 2008) issue of CRAIN’S Magazine had two articles on the financial state of being in New York City. The article entitled “Subprime Crises Ebb; More Loom” highlights the effect that the “mortgage meltdown” is having on Wall Street’s top firms. This article describes the high rate of foreclosure in both the commercial and residential sectors as well as the looming deficits that are sure to face all of the major banks in New York City.

Unfortunately, this foreclosure mess has not yet played itself out. It will take an additional one or two years before the statistics begin to reflect a reduced rate of foreclosures.

A common opinion among Wall Street executives is that “the worst is behind us.” This opinion, however, seems rather short sighted and ignores the effects of the $135 per barrel cost of oil and a slowing economy.

While it is very clear that the recession is not yet behind us, the Federal Reserve refuses to acknowledge the evidence by calling our present situation a “recession” at all. Instead, the tepid growth numbers in the Gross National Product seem to provide succor to the Feds, despite the fact that people across the country are currently witnessing the collapse of the values of their houses, condos, and co-ops.

A second article on the front page of CRAIN’S NEW YORK BUSINESS, entitled “Airline Woes Threaten Queens,” provides a more realistic view of the job losses that New York City will soon suffer in the wake of $135 oil and its effect on the airline industry. The problems facing the airlines have only begun to take their toll and President Bush and the current administration refuse to do anything about the increasing cost of oil. Some have predicted that the cost of oil will rise to $200 per barrel over the next 2 to 3 years, which would be an unmitigated disaster for the entire airline industry. The effects will be felt throughout New York City, but especially in Queens.

What can we do to prepare for the continuing recession and its effect on our beautiful City?

·
Conserve cash wherever possible. Whatever business you are in, cash is certain to be “king” for the next two years.

·
Write to President Bush and tell him to do something about the increasing energy prices. While the high oil prices may be causing people to conserve, it’s also causing irreparable damage to various industries, especially airline and transportation companies.

·
If you are a business owner, be sure to cut your overhead as much as possible to withstand the continuing recession. ---Edward E. Klein

AIRLINE WOES THREATEN QUEENS

60,000 jobs in borough depend on airports;
hotels, restaurants already feel the sting

Crain's New York Business

While all eyes are fixed on Wall Street, the woes afflicting the airline industry foretell another economic problem—in Queens.

Last week, the borough's largest employer, American Airlines, announced plans for a sharp cutback in flights and significant layoffs. Meanwhile, the borough's second-largest employer, JetBlue Airways, has been scaling back growth, often citing fuel costs.

The moves come as the entire airline industry is scrambling to survive amid escalating fuel prices. The price of oil is 89% higher than it was a year ago and briefly hit $135 a barrel last week.

The U.S. airline industry is expected to lose $7.2 billion this year, according to Jamie Baker, an analyst at J.P. Morgan Chase & Co.

Queens, which is home to both John F. Kennedy International and La Guardia airports, is widely believed to have more than 60,000 jobs both directly and indirectly related to aviation. When the airlines go into a tailspin, the borough gets slammed.

"The airline industry is one of our main employers, both directly and in its spinoff businesses," says a spokeswoman for Queens Borough President Helen Marshall. "Any loss of jobs is troubling."

For every 1,000 job cuts in air transportation, the borough loses another 470 jobs in ancillary industries—from restaurants and hotels to supply companies to fleet services, says the Queens County Overall Economic Development Corp.

Service requests by airport tenants have dropped noticeably over the past six months, says Dolores Hofman, coordinator for the Air Services Development Office, which is responsible for connecting Queens-based vendors with airport tenants.

"People are just buying less," Ms. Hofman says.

Ancillary pain

Queens businesses were feeling the effects even before American Airlines announced its cuts. Hoteliers have been complaining for two months about having to drop room rates, according to Jack Friedman, executive vice president of the Queens Chamber of Commerce.

"And you know the restaurants are hurting, because they want to do all sorts of promotions with us they've never done before," Mr. Friedman says.

During the downturn of 2001 and 2002, Queens had about 14,000 job cuts, only a third of which were directly with airlines. But unlike that crisis, no amount of improved security or marketing will lower fuel prices or boost carriers' flagging earnings.

American plans to cut domestic flight capacity by about 11% and will lay off thousands of workers by the end of the year.

"With oil at $135-plus per barrel, we have to do what we have to do," says a spokesman for American Airlines. The airline has a total of more than 8,000 employees at the two airports, he says, so it is "reasonable to assume" that some cuts will be made here.

Losers the first to go

Company executives insist that it's too soon to determine where and how many employees will be laid off, saying only that unprofitable routes will be the first to go. When American announced similar cuts in 2002, it canceled local service to Syracuse, Albany and other smaller cities. It also eliminated 1,000 jobs at JFK and La Guardia.

JFK is one of American's biggest hubs, with 95 flights leaving the airport daily. Just a year ago, the carrier moved into its state-of-the-art, $1.3 billion terminal and announced its plans to become New York's leading airline. It appears that those plans are being moved to the back burner.

Local leaders in Queens maintain that the borough deserves some home-court advantage.

"Given the fact that tax benefits were given and government entities have been extremely lenient in their dealing with American Airlines to provide them with maximum incentives to build—we would expect and hope they will use that as a guidepost when they make their cuts," says Ms. Marshall's spokeswoman.

JetBlue has been struggling since February 2007, when it was caught off-guard by a Northeast ice storm and forced to ground hundreds of flights. Thousands of passengers were left stranded, resulting in a revenue loss of about $30 million.

Though fewer planes may fly over Queens in the coming months, the neighborhoods still exist in the industry's shadow.

"When the air traffic starts diminishing, all these other industries get affected," Mr. Friedman says. "And it's already started to happen."


Copyright 2008 Crain's New York Business

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