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HalinTexas

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Does Obama Want to Own the Airlines?

Welcome to government for the benefit of government officials and their hangers-on.

By HOLMAN W. JENKINS, JR.

Article

Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry last year. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession. United Airlines last week mortgaged its spare-parts inventory to raise cash at a usurious 17% interest rate.

Yet the Obama Justice Department has come out of the blocks trying to scuttle a promising experiment to stabilize the chronically unprofitable U.S. airline sector. The new administration seemingly won't let companies fail, and won't let them succeed either.

The airline industry's self-help solution has been an evolving trio of international alliances, partly blessed with "antitrust immunity" by the U.S. Department of Transportation. One, the Star Alliance led by United and Lufthansa, is currently poaching Continental from a rival alliance, SkyTeam. DOT was set to approve their application last week when Justice belatedly intervened with a 58-page complaint about why the pact should be restructured.


Getty Images
To anyone drilled in the antitrust mindset, Justice's argument won't seem outlandish. It frets about reduced competition on this or that international route, and sees little chance of competitive entry by new carriers despite fat profits that presumably would be on offer. It argues, in a fashion typical of antitrust these days, that nonstop flights are a market unto themselves, so connecting flights on the same routes don't count.

But the real fulcrum is Justice's insistence, or plea, that DOT should set a high bar for antitrust immunity, because antitrust enforcement has been such a gosh-darn boon to consumers.

Justice offers no supporting evidence for this proposition, which has resisted academic verification. And in dismissing the "putative" benefits of immunized airline alliances, Justice fails even to acknowledge the one benefit that Obama Transportation Secretary Ray LaHood has emphasized: "These alliances are life savers for airlines. That is the premise from which we start. We believe it. The airlines believe it."

In part, such alliances are substitutes for international airline mergers (which are prohibited under U.S. law), but are more interesting than mergers, thanks to the flexibility with which carriers can enter and exit cooperative agreements with each other.

The antitrust mindset naturally sees such cooperation as always harmful, inflating prices and gouging consumers. But then why does organized labor oppose the deals? Shouldn't workers favor alliances if they reduce competitive pressure on wages? Yet Justice's intervention came after United's pilots ran a full-page ad in Roll Call attacking the company's own deal.

And why do carriers lobby against each other's pacts? Shouldn't they favor anything that leads to oligopoly pricing? And what to make of Continental's decision to jilt SkyTeam and jump to Star, shifting the competitive balance on the North Atlantic?

Obama antitrust chief Christine Varney doesn't have much good to say about her Bush predecessors. But she praises their record of cartel-busting. She might examine that record for what it actually says about the incentive to collude.

It shows, for one thing, that companies are inclined to snuggle up mainly to share losses and preserve capacity in a downturn or to curb the free-riding of powerful customers. When profits are available, on the other hand, they quickly go back to competing to maximize their respective shares rather than colluding to limit their individual upsides.

These incentives would very likely prevail in the highly flexible airline alliances. Such alliances are no miracle cure for what ails the domestic carriers, but they would open a window to let us see beyond antitrust's indiscriminate prejudice against cooperative acts by competitors.

Of course, this would fly in the face of Ms. Varney's agenda, which is to expand the bailiwick of the Washington antitrust bar. Even now, she has turned her attention from airlines to the mobile-phone business on the theory that any industry that hasn't collapsed into government receivership must be doing something wrong.

Mr. Obama blabs about the evils of lobbying, but his administration is fast becoming the greatest fillip to lobbying ever seen. Ms. Varney has now horned in on the DOT's action, forcing the airline business and all its camp followers to come and pay tribute. Her choice of targets is obviously designed for political effect. Airlines and mobile-phone operators both touch the public in ways that leave the public frequently annoyed.

What we're seeing here and elsewhere from the new administration is not some rebirth of thoughtful liberalism, but a spastic descent into machine liberalism -- government for the benefit of government officials and their hangers-on. Mr. Obama, however, may not be so pleased with the result if it means he must soon add the airlines to the collection of failed industries being run out of the White House.
 

Raskal

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...Mr. Obama, however, may not be so pleased with the result if it means he must soon add the airlines to the collection of failed industries being run out of the White House.
Best line of the article. Airlines have been pretty much failing or already gone for what? 25 years now?

I'm not sure what color glasses this schmuck is wearing but they sure as hell aren't clear. (and for the record, I'm no fan of Obama).
 

BrickTop

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This article was the most incoherent out lash of malarkey I have ever read. I didn't find one sentence in this reading any bit factual or understandable other than "Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry last year. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession." And even here, the last sentence is a classic example of corporate and political ignorance and stupidity. Have these people been to an airport terminal let alone a Fu@#ing gate in the last year? They're packed and oversold with plenty of demand for additional aircraft. Who spiked this writers morning joe with ground peyote.
 

JustaNumber

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And even here, the last sentence is a classic example of corporate and political ignorance and stupidity. Have these people been to an airport terminal let alone a Fu@#ing gate in the last year? They're packed and oversold with plenty of demand for additional aircraft.
The demand for airline travel is not that simple. The question is not, "is there demand for airline travel;" the question should be, "is there enough demand for airline travel that passengers are willing to pay enough to allow the airlines to make a profit?"

Here's how it works: Airlines own a set number of airplanes and employ a fixed number of workers. So the capacity is fairly fixed (barring very disruptive capacity cuts). The price of each seat then varies based solely on the demand for travel. If massive numbers of people have plenty of disposable income, demand will exceed supply and airlines respond by raising fares until demand equals supply. If, on the other hand, we are in a recession and few can afford to spend discretionary income on air travel, demand will be less than the supply of seats. Airlines have long realized that selling an empty seat for even $1 represents one extra dollar of revenue, compared to it leaving empty ('cause it's going anyway). So they reduce prices until every seat goes out with a body in it, and then demand equals supply again. But they're not making any profit. Of course, they have little choice, hoping to ride out the recession, preserving market share until good times return.

So a casual observer would think that since they see lots of people at the airport, and every seat is full, there must be great demand for air travel. Well, yes, but only at peanut fares, which doesn't do the airlines any good. Think about it: even in the worst depression you could imagine, if every airline seat cost travelers 50 cents, you could add an unlimited number of airplanes, every plane in the sky would be full, and you could say that there is a huge demand for air travel. Yes, but only at 50 cents a seat, not at higher prices necessary for airlines to actually cover their costs. So is there really a huge demand for air travel?

Moral of the story: Be careful of the "corporate and political ignorance and stupidity" statement. I'm just sayin'....
 

Hair-on-Fire

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I'm trying to remember the administration that gave the airlines a 5 Billion dollar bailout after 9-11. Anyone?
 

igneousy2

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I actually thought it was quite an informed article considering it came from the non-aviation media. The airlines are in trouble there is no denying that. There is not enough demand to support the current capacity in the system. IF there WAS a lot of demand none of us would be laid-off and there wouldn't be this downard pressure on wages.
 

tomgoodman

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Short-term thinking?

Airlines have long realized that selling an empty seat for even $1 represents one extra dollar of revenue, compared to it leaving empty ('cause it's going anyway). So they reduce prices until every seat goes out with a body in it, and then demand equals supply again. But they're not making any profit. Of course, they have little choice, hoping to ride out the recession, preserving market share until good times return.
I agree, that's why they sell below-cost tickets, but I think they would be better off letting those seats remain empty. The reason is that all customers find out about the cheap fares and become unwilling to pay more than that in the future, even though they were formerly willing to do so. The perceived value of the product has been reduced, so discretionary travelers will balk at fare increases even when "good times return". Once they become used to crowded flights and poor service, they will complain but won't pay to improve these things. I also think that "preserving market share" is far less important than it used to be, back when passengers had "brand loyalty". Computerized fare modeling enables airlines to squeeze out the last available dollar from today's customers, but ignores the loss of pricing power with tomorrow's customers.
 

Ty Webb

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Actually, it's a backwards pricing model to start with. People should pay the most for booking in advance, with last minute seats being liquidated close to departure. Every flight is like a going-out-of-business sale, because once the flight is closed, there is no more ticket revenue (but if you get 'em on board, you can sell 'em more crap, they're a "captive audience".
 

JustaNumber

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Actually, it's a backwards pricing model to start with. People should pay the most for booking in advance, with last minute seats being liquidated close to departure. Every flight is like a going-out-of-business sale, because once the flight is closed, there is no more ticket revenue (but if you get 'em on board, you can sell 'em more crap, they're a "captive audience".
That makes sense on one level, but that removes the incentive to book early, and the airlines would have a difficult time predicting loads. Eventually most pax would end up not reserving at all, just showing up at the airport like a non-rev, hoping to get on the next empty flight to their destination. Then it would really be like greyhound!
 

JustaNumber

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I agree, that's why they sell below-cost tickets, but I think they would be better off letting those seats remain empty. The reason is that all customers find out about the cheap fares and become unwilling to pay more than that in the future, even though they were formerly willing to do so. The perceived value of the product has been reduced, so discretionary travelers will balk at fare increases even when "good times return". Once they become used to crowded flights and poor service, they will complain but won't pay to improve these things. I also think that "preserving market share" is far less important than it used to be, back when passengers had "brand loyalty". Computerized fare modeling enables airlines to squeeze out the last available dollar from today's customers, but ignores the loss of pricing power with tomorrow's customers.
I disagree. Think about how you purchase anything. There is one main consideration: if you want to buy something, can you afford the lowest price you can find for the product you want? Other than making you a little angry, it doesn't really matter what you paid yesterday.

Also, it would be pointless for airlines to try to hold back empty seats. The airline across the concourse would still dump their empties on the market, so until price collaboration becomes legal, they have to sell all the seats. (You don't really want illegal price fixing, do you?)

I would actually give the airlines credit for the way they price their seats. The model is so complex, and prices change so often, that consumers can't figure it out, and usually just end up paying whatever the price is when they're ready to buy (assuming they can afford it). The airlines, meanwhile, benefit from constanly being able to charge the most possible for the current perceived demand. It's actually a beautiful example of the free market at work, just like the stock market.
 

crj567

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This article was the most incoherent out lash of malarkey I have ever read. I didn't find one sentence in this reading any bit factual or understandable other than "Only luck and falling oil prices saved Washington from having to face mass bankruptcy of the airline industry last year. Now the specter is rising again. Fuel prices are up. Traffic continues to plummet amid a global recession." And even here, the last sentence is a classic example of corporate and political ignorance and stupidity. Have these people been to an airport terminal let alone a Fu@#ing gate in the last year? They're packed and oversold with plenty of demand for additional aircraft. Who spiked this writers morning joe with ground peyote.

Wow-

You never heard of cutbacks?

If you cut back 10% in available capacity and the planes are 95% full, that is still a net decline in total passangers.

-"Corporate and political ignorance," indeed.

You may have missed the recent news-about airlines cutting back capacity (again and again and again.) I guess the author assumed a certain minimum level of intelligence for his readers-bad mistake, these days.
 
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BrickTop

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Wow-

You never heard of cutbacks?

If you cut back 10% in available capacity and the planes are 95% full, that is still a net decline in total passangers.

-"Corporate and political ignorance," indeed.

You may have missed the recent news-about airlines cutting back capacity (again and again and again.) I guess the author assumed a certain minimum level of intelligence for his readers-bad mistake, these days.
Im not sure where you're based but perhaps you should visit the terminals of ORD, DEN,LAX,ATL,EWR, I have yet to work a day that my airplane's are not booked full or oversold. I think you are misreading the point that the capacity cuts already in place have served what reductions may have been a reasonable measure. The continued capacity cuts are warranting themselves as nothing more than a corporate excuse to reduce on the basis of our recession. There has not been a 20% decrease in air travel compared to the 20% decrease in air traffic over the last 18 months.
 
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PeanuckleCRJ

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Full airplanes in no way mean profits or high demand. If you are charging nothing for the seats, then the planes will absolutely be full. But you'll still be losing your butt in revenue... which is what is taking place.
 

tomgoodman

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Off the cliff

I disagree. Think about how you purchase anything. There is one main consideration: if you want to buy something, can you afford the lowest price you can find for the product you want? Other than making you a little angry, it doesn't really matter what you paid yesterday.
For products I must have, yes, I'll squawk but pay. Discretionary items are another matter, and if I come to believe that yesterday's "sale price" represents the true value, I wont pay any more today. Another sale will come along eventually, and I'll visit Aunt Martha then, or just phone her.
When the recession is over and people have more money in their pockets, companies will try to substantially raise prices; I predict that the gas stations will succeed but the airlines will fail.

Also, it would be pointless for airlines to try to hold back empty seats. The airline across the concourse would still dump their empties on the market, so until price collaboration becomes legal, they have to sell all the seats. (You don't really want illegal price fixing, do you?)
I suggest rational pricing by airline executives, without saying a word to each other, as is done in many other industries. But the market-share hysteria may now be incurable without some government-imposed "rate floor".

I would actually give the airlines credit for the way they price their seats. The model is so complex, and prices change so often, that consumers can't figure it out, and usually just end up paying whatever the price is when they're ready to buy (assuming they can afford it). The airlines, meanwhile, benefit from constanly being able to charge the most possible for the current perceived demand. It's actually a beautiful example of the free market at work, just like the stock market.
That's one way to look at it. Another view is that the computers have enabled marketing departments to make stupid decisions with blinding speed. The "revolving door" to executive offices at many carriers rewards only short-term thinking, and even sensible cows are swept up in the stampede.
 

crj567

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Im not sure where you're based but perhaps you should visit the terminals of ORD, DEN,LAX,ATL,EWR, I have yet to work a day that my airplane's are not booked full or oversold. I think you are misreading the point that the capacity cuts already in place have served what reductions may have been a reasonable measure. The continued capacity cuts are warranting themselves as nothing more than a corporate excuse to reduce on the basis of our recession. There has not been a 20% decrease in air travel compared to the 20% decrease in air traffic over the last 18 months.

Yes- I misundersood your point a bit.

However-the load factors are only a very small part of the equation. The main thing I see hurting the airlines is weak demand-especially after summer is over. If demand falls off a cliff, airlines are forced to decrease what they charge for a flight. These days, when you have tons of internet search engines which will dump the lowest fares right at you within seconds, there is no easy solution to this problem.

Brand loyalty is out the window, people only care about getting somewhere cheap. When the internet makes it so easy to find a fare which is $2.35 cheaper than the next guy, the lowest bidder wins-always.

I don't know how you fix this situation, but I also don't see where the WSJ is wrong. High capacity means nothing when you can't cover your costs.
-The airline industry as a whole has not been able to do this for almost 10 years-and Obama sure as hell won't fix that!
 

igneousy2

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The solution is to let the next airline that fails...actually fail.

If congress/bankruptcy courts intervene again then the bleeding will continue until the airline industry looks more like Amtrak, Citi Bank, and the Post Office..."private companies" that get tax dollars every year to keep them going.

later
 

CheapFlyer

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If the planes are oversold, even full, doesn't that mean they aren't charging enough? Do you think they have perfected the supply and demand and get consistent 95+% load factors, and the rest are free loading employees? I doubt it, as I see a lot of flights oversold with just revenue pax.

-CF
 

scoreboardII

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I disagree. Think about how you purchase anything. There is one main consideration: if you want to buy something, can you afford the lowest price you can find for the product you want? Other than making you a little angry, it doesn't really matter what you paid yesterday.
Your missing the point that they are selling a parishable good that you must buy at some point. From a sellers point it is like selling fruit, you need to sell as much as you can before you leave, or you leave with empties. The buyer however needs the seat or he wouldn't be looking, therefore, sell as many out front as you can, charge the last guy on the jet the highest price. If you do it the other way, nobody buys until they get to the airport, which they won't because they need to know they have the seat. Thats transportation modeling.
 

HalinTexas

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From the NYT:

Airlines, Already Suffering, Brace for More Woes



By MICHELLE HIGGINS and GERRY SHIH
Published: July 13, 2009
The airline industry is in the midst of one of its most wrenching summers ever. And the fall and winter may be even worse — unless people start to fly again.



Matthew Staver/Bloomberg News
A United Airlines ticket counter in Denver. While all airlines are suffering, some analysts say United faces particularly tough times along with a heavy debt burden.
While the airlines have been struggling for more than a year as leisure travelers pulled back on spending, the industry has been battered from all directions since the financial system nearly collapsed last September.

Business and international travel, which had been a relative bright spot until then, dropped precipitously. Fuel costs have also been difficult to manage, as carriers first struggled to pay record high prices last summer and now have to contend with extraordinarily volatile prices. And the credit markets, which the airlines have turned to in previous tough times, are particularly reluctant to lend now, giving some carriers little choice but to pay high interest rates.

For the time being, analysts agree that the airlines, by cutting routes and employees, grounding planes and imposing fees, can weather the downturn. In fact, when the latest round of capacity cuts takes effect in September, the seats on domestic flights will drop to 66.5 million — down from a peak of about 84 million in 2001 and the lowest September figure since 1984, according to OAG Aviation, which tracks flight schedules.

But if conditions continue to deteriorate, analysts say, some airlines may not survive.

“There are too many airlines and too much capacity and really no pricing power,” said Hunter Keay, an airline analyst at Stifel Nicolaus in Baltimore. “This is as bad a crisis as the industry’s ever seen.”

Giovanni Bisignani, the chief executive of the International Air Transport Association, told airline chiefs much the same thing in June. “Today’s situation is unprecedented, the most difficult ever,” Mr. Bisignani said. “I am a realist. I don’t see facts to support optimism.”

For travelers, this means that airlines will continue to cut flights in the fall — not by eliminating service outright as they did last year but by reducing the frequency and using smaller planes on certain routes. Passengers may also see new fees.

A bit of good news for travelers is that airlines, worried about keeping the passengers they still have, are continuing to offer low fares, which are often further discounted. Southwest Airlines ran a 48-hour sale last week that slashed one-way fares below $100 on many shorter routes for travel this fall, and other carriers quickly matched the cuts.

But a fare sale is not enough to counter the overall trend of passenger demand falling faster than the airlines can cut capacity.

The industry has also been cutting jobs. In April, the total number of employees at American carriers was 583,030, down from 624,372 in 2007 and more than 24 percent below the peak in May 2001.

Globally, airline employment is also down significantly. The world’s carriers employed 1.48 million people in 2008, the latest figure available from the air transport association, down from 1.71 million in 2000.

Willie Walsh, the chief executive of British Airways, recently lamented that his airline was in a “fight for suvival,” asking staff members last month to consider working up to 30 days without pay. Air France said last week that the airline was considering temporary layoffs later this year, on top of a planned 3,000 job cuts it announced in May.

John Heimlich, chief economist of the Air Transport Association, a trade group of American airlines, said the carriers had been struggling for most of this decade. “One year’s profit or loss is not adequate to determine a company’s financial health,” he said. “It’s the cumulative deficit and consecutive years of weakness that has mattered.”

The decline in demand for premium seats on international flights has taken a significant toll. When the economy was rolling, airlines could charge thousands for seats in the front of their planes, and business customers, in particular, paid for both the comfort and convenience. Those high fares subsidized the discounted seats in the back.

But when the economy deteriorated last fall, premium travel dropped off with it. The number of passengers traveling on business and first-class tickets between North America and Europe was down 18.4 percent in April compared with the same month last year, the International Air Transport Association said. And traffic between North America and Asia was down even more in that period, nearly 26 percent.

“With the front end of the plane emptying out, you really can’t afford to keep filling up the back of the bus with ever-cheaper fares,” said Peter Morris, chief economist at Ascend, an airline industry consultancy in London.


Competition on trans-Atlantic routes is already fierce, with roughly 50 airlines offering connections between major European and United States cities. The liberalization of air travel between the two continents through the 2007 “open skies” agreement has kept steady downward pressure on fares on the most heavily traveled routes.

For inter-European travel, the switch by many business- and first-class travelers to economy seats has hit mainline carriers like Lufthansa and Air France-KLM hard, analysts said. But what is bad news for some has proven to be a boon to others.

“The big players that depend heavily on corporate traffic are being hit worse than average,” said Mr. Morris of Ascend. “But at the other end of the spectrum, there are low-cost carriers like Easyjet, Ryanair and Air Berlin that can potentially mop up bits and pieces from the people who are willing to step down a bit and accept lower frequency and fewer amenities.”

While all the American carriers are suffering, some analysts have said they are looking most closely at the financial condition of United Airlines and US Airways.

United relied heavily on corporate and trans-Pacific fliers before the downturn. Fitch Ratings cited the declines in both early last month in explaining why it had lowered United’s credit rating further into junk status. It also said the airline faced “steady and heavy debt maturities” later this year and next.

In late June, the carrier was able to raise $175 million by issuing new debt but only at a high interest rate of 17 percent.

United officials said they remained optimistic about the carrier’s prospects. “I think we have shown our ability to raise liquidity in clearly what is a tough market environment,” said Kathryn Mikells, the chief financial officer. “United is a resilient company.”

The problems at US Airways are somewhat different. It has struggled since a $1.5 billion merger in 2005 with America West, a low-fare carrier, analysts say. The combined company now finds itself with the thinnest cash position of any major airline, said Basili Alukos, an analyst at Morningstar Research, meaning it may have to resort to further borrowing to meet debt payments.

But, Mr. Alukos said: “All their assets are already mortgaged. They don’t have much borrowing capability left.”

Dan Cravens, director of investor relations for US Airways, would not comment specifically on what analysts have said, but pointed out that the carrier had found cash in tough times before.

Traffic and revenue have also fallen at carriers like Southwest, JetBlue and AirTran. But the drop has not been as steep, partly because they rely less on corporate travelers.

One of the few ways the airlines have generated new revenue is through fees for things like exit row seats to bringing pets on board. Baggage fees, for example, added $566.3 million to airlines’ pockets in the first quarter of this year, according to the Bureau of Transportation Statistics.

Michael Boyd, an aviation consultant in Denver, estimates that fees now constitute nearly 5 percent of revenue at some large airlines. Still, the fees alone cannot offset falling income.

The best outlook for the industry is if passenger demand picks up soon. Combined with the shrinking number of seats, that would allow airlines to bolster air fares — a necessary step, analysts say, toward a turnaround. “If there’s going to be a recovery, it will most likely take the form of fewer discounts,” said Gary Chase, an airline analyst at Barclays Capital in New York.

Passengers already feel the impact of the capacity cuts. After squeezing her way off a cramped US Airways flight to New York over the July 4 holiday weekend, Michelle Zeccola, a frequent flier from Columbia, S.C., recalled when planes were less crowded. “I could literally sit across three seats by myself if I wanted. Now it’s totally booked.”
/QUOTE]
 
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