By Ben Berkowitz
April 23 A range of U.S. companies are warning
investors that sequestration is starting to bite, but executives
are still unclear how deep the wound will be.
The U.S. federal government began implementing
across-the-board spending cuts last month, known formally as
sequestration but more commonly called "the sequester." It has
meant everything from furloughs for air traffic controllers to
fewer planes for the U.S. Navy to smaller subsidies for farmers.
So far this earnings period, executives from Lockheed Martin
to IBM and Delta Airlines are flagging
how those U.S. budget cuts cost them some sales in the first
But the bigger concern is how much they might lose in the
months to come as the budget cuts begin to really take hold -
and getting a detailed forecast has proven hard to come by.
"Sequestration is a reality, but it's unfolding slowly at
this time," United Technologies Chief Executive Louis
Chenevert said in an interview Tuesday. "We will understand more
what sequestration does as we get to the end of the year."
Market strategists said the fears about sequestration feed
into a broader decline in confidence, underlined by a recent
rise in unemployment claims and decline in factory activity in
parts of the country.
"These CEOs saying it's all three to four months out, it
kind of plays into that," said JJ Kinahan, chief derivatives
strategist at TD Ameritrade. "The sequester is one more data
point for people to worry about."
Yet investors are not spooked. Since March 1, when the
sequester kicked in, the S&P is up 4 percent, continuing a sharp
run that started last November.
AIRLINES HURT WORST
So far, the biggest impact seems to be on airlines, which
are cancelling flights and rebooking customers because of the
air traffic control furloughs.
They started on Sunday and have already begun to affect air
travel, prompting members of Congress to demand the Federal
Aviation Administration delay further cuts. But Transportation
Secretary Ray LaHood warned on Tuesday in a CNBC interview that
the furloughs will only get worse.
For some companies, the squeeze is at two ends. Delta Air
Lines said ticket revenue is down because of reduced
government travel spending; and at the same time, it is having
to cancel regional flights and rebook customers because of the
air traffic furloughs.
Jean Covelli, president of The Travel Team agency in
Buffalo, said many business customers are rethinking plans for
trips now that the furloughs have started.
"There's a whole domino effect that this is causing. I don't
think it's going to get any better," she said.
Airlines have supported this notion. US Airways said
its government revenue fell more than 30 percent in March, a
result of the budget cuts as well as the Easter holiday shift
into March from April last year.
"Leisure demand is still good," US Airways President Scott
Kirby said on a conference call. "Business demand remains
volatile, however, and as long as the sequester stays in place I
expect the government related demand will continue to be
Lockheed Martin Corp, the Pentagon's biggest weapons
supplier, said Tuesday that sequestration hasn't really hit yet,
but will build over the second and third quarters as the
government implements fiscal 2013 cuts that keep it from
spending on new equipment.
That sense of uncertainty - something is happening though
it's too early to quantify and may still get worse - echoes last
week's warnings from IBM.
"It's hard to measure. I can tell you that our U.S. federal
business was down 13 percent, which was certainly a drag on the
U.S. performance," IBM Chief Financial Officer Mark Loughridge
said on a conference call after the company turned in one of its
most disappointing quarters in recent memory.
To some degree, though, the delayed impacts of sequestration
could be a good thing. The longer it takes to make cuts, the
more time there is for federal agencies to change their
priorities and shift their cuts from one area to another,
potentially sparing projects that otherwise might have been on
the chopping block.
The Boston Marathon bombings and recent attempts to blow up
a Canadian train could highlight the need for increased defense
spending, analysts and investors offer as one example of
potentially shifting priorities.
Wall Street has largely factored in sequestration's effect
on United Technologies, for example, since the company's Otis
elevators and Carrier air conditioners continue to sell at a
good clip. U.S. military sales comprise roughly 17 percent of
United Tech's revenue, down from 21 percent a few years ago.
"Because United Tech is such a large company, there's a lot
of different parts operating in different cycles," Edward Jones
analyst Christian Mayes said. "That's the benefit of owning
shares in this company."