18 March 2008

Delta offers to buy out 30,000 workers...

and we're still afraid to say the "R" word??!?!

Delta Air Lines just announced it will offer voluntary severance payouts to roughly 30,000 employees!!!!!!!! - more than half its work force - and cut domestic capacity by an extra 5% this year as part of an overhaul of its business plan to deal with soaring fuel prices. Oh boy, here we go.

Executives at Atlanta-based Delta said in a memo to employees that the airline's goal is to cut 2,000 frontline, administrative and management jobs through the voluntary program, attrition and other initiatives.

A spokeswoman says that if more than that amount agree to take the voluntary severance, it will be allowed. The severance program primarily affects mainline Delta employees. It will not affect Delta pilots, who have a union contract with the company, and employees at Delta regional carrier Comair, which is based in Erlanger, Ky.

Delta had 55,044 total full-time employees as of the end of last year. The memo from CEO Richard Anderson and President Ed Bastian did not mention Delta's talks with Northwest Airlines Corp. about a combination that would create the world's largest airline. Bastian was updating investors Tuesday at a conference in New York.

All this as oil prices recently cracked $111 a barrel, nearly twice what prices were a year ago.

In recent weeks, abundant evidence has pointed to a recession—a broad-based contraction of economic activity—from rising unemployment claims to the continued pain in housing. Wall Street economists, whose employers have been experiencing their own private recession since last summer, haven't shrunk from using the R word. But in certain quarters of Washington, euphemism and understatement, verging on outright denial, are par for the course. In an episode of the hit 1970s show Happy Days, Fonzie, laboring to concede error, repeatedly choked on the word wrong, unable to get past the "rrr" sound. (Trust me, it was funny.) In last year's hit comedy Knocked Up, a character, queasy about using the technical term for terminating a pregnancy, refers to a procedure that "rhymes with shmashmortion." Bernanke and the man who appointed him, President Bush, are clearly coping with similar verbal tics. Call it a slowdown, cite challenges, or insist the fundamentals are sound. But please don't call it a recession. Speaking at a press conference on Thursday, Bush said, "I don't think we're headed to recession, but no question we're in a slowdown."

Recessions are unspeakable for several reasons. Many have come to believe (erroneously) that central bankers and executives, by deploying information technology and superior management, have engineered the business cycle out of existence. In addition, the impact of a contraction is so ghastly as to spur denial. For any debt-laden entity—a consumer, a company, a government—a decline in revenues can have a very swift and painful impact. (Think about how soon you'd be begging for debt forbearance if your salary fell 10 percent tomorrow.) For a president, it is political poison to admit that an economic event that rhymes with shmashmession could be within the realm of possibility. Since recessions sap tax revenues, they tend to make huge deficits—like the $407 billion whopper projected for this fiscal year—even larger. And so, while the Blue Chip Economic Forecast in February cut its estimate for 2008 growth to 1.7 percent, the Office of Management and Budget is sticking to its optimistic forecast of 2.7 percent—nearly 50% higher.

But much as central bankers, investors, and politicians would like to wish it away, the business cycle is like Madonna—one of those phenomena that just won't leave the stage. The laws of physics still apply to the U.S. economy. And as a troubling bit of data from one of the last remaining hot sectors released last week shows, the gravitational pull of a falling economy can bring even the most powerful commercial force known to man crashing to earth.

Since its birth, Google has been in a perpetual growth spurt, posting insanely impressive metrics of all sorts—from its share of Internet searches to profits. But last week, the Internet ratings firm comScore reported that Google's paid clicks—the number of times Web surfers clicked on ads served up with a search—fell 0.3 percent between January 2007 and January 2008, even as the number of searches rose 40 percent in the same period. As recently as August, Google's ad clicks were rising at a 60 percent clip. Google's click-through rate—the percentage of ads that get clicked on, and hence a measure of consumer follow-through on searches—was also down sharply in January.

These numbers tell us something troubling about Google, and about the economy at large. Google became the Net's 800-pound gorilla by defying underlying growth trends of the larger commercial universe. But now, says Andy Kessler, a Silicon Valley hedge-fund manager turned author, "Google is big enough to be affected by cyclical economic forces." Since it peaked at $747 last November, Google's do-no-evil stock has plummeted 37 percent, erasing $86 billion in value.

Like other media companies and retailers that depended on housing and consumer-related business, Google seems to be suffering from the consequences of declining activity. (These things are notoriously difficult to quantify, but my unscientific tally is that 75.196 percent of all Internet ads are for home-equity lines of credit and mortgages.) If the economy is grinding to a halt, one would expect clicks of all categories to decline. "Search may be the best advertising medium in the history of the world," says Internet analyst and Slate contributor Henry Blodget. "But that doesn't help much when searchers are broke."

If even Google is showing a decline of economic activity in a big chunk of its domain, it can mean only one thing: We're in the portion of the economic cycle that rhymes with confession.

No comments: