Emery Grounding May Benefit CNF?

You might think that an air freight company that has grounded its fleet of 37 airplanes might be in pretty serious financial trouble, but just the opposite may be the case for CNF Inc. (CNF) and its Emery Worldwide unit. Emery announced on Aug. 13 that it was grounding Emery Worldwide Airline after the Federal Aviation Administration and the National Transportation Safety Board threatened to revoke its license to fly – citing violations of federal safety regulations. Within days Emery had made arrangements with other carriers to transport all of its cargo and announced the layoff of 800 pilots and support personnel. About 1.7 million shares of CNF changed hands the day of the grounding, more than 10 times the average volume of the previous two weeks. But the price slid just 4% to about $30 a share, a level where it has hovered since then. Grounding the airline didn't ground the stock because investors had already priced the airline operation out of the shares, said Wall Street analysts. CNF has long said it intends to focus on its global logistics, freight forwarding and supply-chain management units, and the stock trades on the prospects for those businesses, not air freight, analysts say." Jones suggests that, "What investors might be overlooking is that the FAA action may be working to CNF's benefit. The FAA put its boot down on Emery at a time when overcapacity in the airfreight business coupled with a weak economy was driving down the cost of leasing planes. Compared with the savings from grounding its fleet of older, less efficient aircraft and idling mechanics, pilots and support personnel the real cost of grounding Emery's planes may be less than $10 million a quarter, say industry insiders and fund managers who have been bulking up on CNF shares. That cost could shrink further in coming months as Emery better deploys the modern aircraft it is leasing."

The article states: "Emery officials have not discussed the cost impact of grounding the airline, and spokeswoman Nancy Colvert said the company had no plans to do so outside of future earnings reports. At the time it grounded its airline, Emery said it would work with the FAA to resolve the issues and get Emery Worldwide Airlines flying again. Colvert said Emery has made lease and service agreements with eight companies to provide cargo aircraft, but she wouldn't disclose company names other than Ryan International Airlines Inc., a closely-held Kansas company which had provided Emery with some leased aircraft before the FAA action was announced." Jones says, "Statistics for freight flown in and out of Dayton International Airport – Emery's North American hub -illustrate just how soft the market has become. In July, 677 Emery flights landed at Dayton's city-owned airport, down 17% from the 814 landings in May, says Jim Davis, finance supervisor for the city's Department of Aviation. In the three-month period ending in July, Emery handled 130,961 tons of freight in Dayton, down 26.5% from the 177,961 tons in the same three-month period a year ago. (Statistics for August when Emery grounded its airline and switched to leased planes won't be available until mid-September.)" The article states: "[B]y idling its 800 pilots and support personnel, Emery is saving between $20 million and $22 million every quarter on payroll costs. So on an operating basis the switch to leased aircraft may be costing $7 million a quarter or less. Even after adding in the capital cost of keeping its fleet on the ground, Emery is probably paying less than $10 million a quarter." CNF could rise from these ashes as the leaner company it intended to become without the burden of selling an operating airline or slowly clipping its wings, Jones concludes.
Postal Insight