MiAAmi said:
Its interesting that AA and most of the majors survived 9/11 but could now be forced into BK by major US Oil companies. The Bush oil people seem to be racking in the $$$$$$ at the expence of the American People. In my opinion the greatest theat to US security is trusting the Bush administration. Our jobs are at stake once again and this time its by domestic terrorism - Big Oil Company's and Bush. I don't see the big oil companys taking less profit in order to curtail the effects on the US economy.
Oil prices are being driven higher by 3 factors:
1. an increase in global demand for oil as economies around the world accelerate growth (primarily US and Asia)
2. the depreciation in the US dollar as a result of the current account deficit (buying oil is a natural short on the dollar)
3. the growing industrialization of the Chinese economy that is A. shifting to a more energy intensive structure and B. growing at a 7% annualized rate
Given the limited amount of new supply entering the market and the fact that most producers are at or near capacity, oil prices are going higher and staying higher because of the abovementioned factors.
On inflation-adjusted terms, prices are at the same level they were in the 1980's, so the price rise may be meaningful from its base level, but not historically.
Although oil companies can influence supply via reduction in capacity, it is unlikely that this pricing power would last given that jet fuel is a commodity and new entrants would arbitrage the artificially high price.
Airlines could hedge their exposure by locking a fixed rate now for x yrs into the future. That is difficult for two reasons, 1. the forward price is higher than current prices and 2. most counterparties (e.g. investment banks, energy companies or commodity trading firms) would be hesitant to enter into long-term trades with airlines given their credit profile. (There are credit risk hedging techniques, but they might consume cash from the airlines).
All in all, jet fuel prices are high for fundamental reasons outside of Exxon and Texaco engaging in ogolipolistic behavior. The oil companies will make more because they have margins that are on percentage terms and the profit in volatile markets, but that's the economic system we live in.
Eventually, a price clearing level will be reached and new supply will enter. Airlines should focus less on the price of fuel and more on things under their control.