AA to Pay 30 Cents Less Per Gal of Fuel Than DL/UA in 2015

[FWAAA]

I remember people slamming AA for not hedging fuel after coming out of BK (even while in BK) but It may turn out to be the best decision after all.  We will all find out later...

Just to keep things factual: AA hedged before bankruptcy and hedged during bankruptcy. Horton obtained bankruptcy court approval to continue the successful AA hedging program. US was the airline that swore off hedging in 2009 after losing about a billion dollars in bad hedges when oil prices crashed in late 2008 and early 2009.

After he took over AA, Parker sold the AA hedges during 2014 and made money, as the hedges were profitable. Lucky break to sell them in the first half of the year before the price decline in the second half of the year.

Very few people predicted the recent collapse in oil prices - certainly nobody posting on this website predicted it. Had prices moved the other way (say, to $4/gal instead of $2/gal where they are now), Parker wouldn't look so brilliant for going naked, as AA would be looking at paying about a dollar more per gallon than UA or DL.
 
Long-term, I think fuel prices will move higher and higher. Only problem is predicting when they start that inevitable march skyward.
 

At some point, if oil reaches the mid $40 per barrel arena, one has to wonder what would AA have to lose by then hedging when their business model is built on $100 per barrel oil.

If they buy significant hedges at $45 and it goes down to $35 or $25, so what, they're still poised to make Billions in profit at $45. But if it moves back up, they would then have a backstop for it, as WN did in the early 2000's.

Problem is that while spot prices have collapsed, long-term futures haven't declined quite so much, so it's not like you can lock in the current low prices for the long-haul. Prices will have to stay low for quite a while before airlines can begin to lock in the low prices for the future. But I agree - if prices stay low throughout 2015, Parker would be wise to re-enter the hedge market. Too bad the AA personnel (who had real expertise in hedging) were let go.

 

[eolesen]

I see hedging as Powerball for Airlines. Sometimes it works, sometimes not so much.

 

[700UW]

Get the information, it stated because of no fuel hedges first then no profit sharing, but US has or is paying higher wages now due to the merger so costs will rise.
 
And what happens when you dont make a profit?
 
Take it in real hard dollars and not a promise of dollars.

 

[WorldTraveler]

very well said, FWAAA.

AA was very successful at managing fuel costs before and in BK... they did a far better job in BK than their peers did early in the 2000s.

It is precisely because AA had more liquidity going into their BK that they were able to continue to hedge, in part because their BK was really their 2nd restructuring in a decade with the first one being out of court.

AA learned from the BK of the previous airlines and did BK better.

A hedge is a contract by two parties. There is no assurance that AA or any other airline can or will find parties that are willing to take the hit when fuel prices go up by allowing airlines to pay low fuel prices that everyone knows are not sustainable for the long term.

Oil companies are being hurt by low crude oil prices and they will do what they have to do to restore balance in prices - this isn't the first time low fuel prices have occurred.

Also, low fuel prices will hurt some oil producing countries like Russia and Iran and will also hurt some airlines far harder than US airlines who hedge much higher percentages of their fuel consumption.

If European airlines take larger hedge losses on top of poor economic factors and low cost carriers that are already hurting them, the shift in power across the Atlantic could shift from European to US airlines.

AA will definitely book fuel price advantages in early 2015. It is unknown what will happen in the latter part of the year either for AA or any other airline or for the price of fuel. Every winner in markets producers a loser. Those who are hurt the most will make economic adjustments or will cause those to occur in the market.

As for airline profitability, it will be the highest in the US in 2015 that it has ever been.

 

[swamt]

Just to keep things factual: AA hedged before bankruptcy and hedged during bankruptcy. Horton obtained bankruptcy court approval to continue the successful AA hedging program. US was the airline that swore off hedging in 2009 after losing about a billion dollars in bad hedges when oil prices crashed in late 2008 and early 2009.

After he took over AA, Parker sold the AA hedges during 2014 and made money, as the hedges were profitable. Lucky break to sell them in the first half of the year before the price decline in the second half of the year.

Very few people predicted the recent collapse in oil prices - certainly nobody posting on this website predicted it. Had prices moved the other way (say, to $4/gal instead of $2/gal where they are now), Parker wouldn't look so brilliant for going naked, as AA would be looking at paying about a dollar more per gallon than UA or DL.
 
Long-term, I think fuel prices will move higher and higher. Only problem is predicting when they start that inevitable march skyward.
 

Problem is that while spot prices have collapsed, long-term futures haven't declined quite so much, so it's not like you can lock in the current low prices for the long-haul. Prices will have to stay low for quite a while before airlines can begin to lock in the low prices for the future. But I agree - if prices stay low throughout 2015, Parker would be wise to re-enter the hedge market. Too bad the AA personnel (who had real expertise in hedging) were let go.

Ok, my bad.  I thought it was AA back then.  Thx for squaring me up.  I really did think AA got out of it completely at one time.  I was wrong, thx for correcting...

 

[FWAAA]

Ok, my bad.  I thought it was AA back then.  Thx for squaring me up.  I really did think AA got out of it completely at one time.  I was wrong, thx for correcting...

No worries. In fact, AA did have to exit the hedging market in 2002-03 because of its cash crunch. Hedging contracts generally require that you have sufficient cash so that you can deposit cash with the party that's "winning" even before the contracts mature, and AA didn't have sufficient spare cash with which to do that in 2002.

After AA jammed the 2003 concessions down everyone's throat, AA's cash position improved, due to lower employee wage expenses plus the willingness of lenders to loan AA more money in mid-2003. That higher cash balance enabled AA to re-enter the hedging market slowly beginning in 2003, but by then, AA had missed the golden opportunity to hedge large amounts at low, low prices, while WN had been able to do just that during 2001 and 2002, kicking off Southwest's legendary multi-year fuel gamble victory, when it was paying less than any other airline, and could grow like gangbusters while the legacies contracted. AA did save money on fuel as the price climbed in 2005-08, but nowhere near as much as Southwest saved.

My guess is that if fuel prices stay low for the next year or two, that's going to cost WN, DL and UA several billion dollars in hedging losses (combined), and might persuade their executives to follow Parker (no more hedging).

If fuel prices stay low for that year or two, then AA's massive gamble on higher fuel prices (its massive orders for hundreds of narrowbodies) won't pay off like planned. The fuel economy will still be there, but the dollars saved won't be as substantial, meaning that the fuel savings won't pay the lease payments like they've been doing for the last few years. MD-80s won't be quite the millstone they've been since 2005 if fuel drops to $1.50/gal or even stays around $2/gal.

 

[IORFA]

Ok, my bad.  I thought it was AA back then.  Thx for squaring me up.  I really did think AA got out of it completely at one time.  I was wrong, thx for correcting...

See how that works WT?

 

[IORFA]

If fuel prices stay low, I could see 30ish of the newest S80's staying for some under 2 hour flights from DFW and ORD. Parker says no, but things can and do change. Bonus is we have ready access to plenty of spare parts. I'm suggesting just 3-5 more years. Into the 2020-2022 timeframe. The 80's may even be an answer to the 20 random E-190's. Although I would prefer they get more. Starting with the 10 Boeing is taking in trade from Air Canada along with a top up order. I have a feeling once the pilots JCBA is finished, either through a yes vote or arbitration, that the fleet plans will start to be finalized and announced publicly.

 

[WorldTraveler]

again, very well said, FWAAA.

all of the legacy airlines had to end their fuel hedges and did so right before the price of crude soared. It is precisely why flying without hedges is far riskier to a company's financial health than it is to have bad hedges.

If hedges lose money based on declining fuel prices, the airline will gain some of the price drop because no airline hedges 100% of their fuel costs.

however, when fuel prices soar, 100% of the cost will go to the bottom line.

See how that works WT?

yes, I did. But I have said nothing factually wrong with the hedging situation.

 
 

If fuel prices stay low, I could see 30ish of the newest S80's staying for some under 2 hour flights from DFW and ORD. Parker says no, but things can and do change. Bonus is we have ready access to plenty of spare parts. I'm suggesting just 3-5 more years. Into the 2020-2022 timeframe. The 80's may even be an answer to the 20 random E-190's. Although I would prefer they get more. Starting with the 10 Boeing is taking in trade from Air Canada along with a top up order. I have a feeling once the pilots JCBA is finished, either through a yes vote or arbitration, that the fleet plans will start to be finalized and announced publicly.

AA is selling their M80s to a competitor for use in supporting their M80 fleet so the chances are that Parker is indeed right that AA cannot easily decide at this point to retain a lot of aircraft that they had previously planned to park, esp. since most of those decisions were finalized just about a year ago in BK.

Low fuel prices are a short-term benefit that will help US airlines immensely but they are not a long-term likelihood. airlines do not make long-term fleet decisions based on short-term changes in fuel prices. Over the short-term, it is possible that AA might decide to keep some younger M80s for a summer or a year but long-term they will leave at pretty close the same rate that AA has said they would.

 

[eolesen]

If fuel prices stay low for that year or two, then AA's massive gamble on higher fuel prices (its massive orders for hundreds of narrowbodies) won't pay off like planned. The fuel economy will still be there, but the dollars saved won't be as substantial, meaning that the fuel savings won't pay the lease payments like they've been doing for the last few years. MD-80s won't be quite the millstone they've been since 2005 if fuel drops to $1.50/gal or even stays around $2/gal.

Good point on the lowered cost savings, but their fleet renewal had to happen at some point, and I don't believe it was entirely justified on fuel savings.

 

[CMH_GSE]

This is a pretty good assessment on the current oil situation, citing the many factors involved:

http://www.vox.com/2014/12/16/7401705/oil-prices-falling

 

[WorldTraveler]

that is a good article but doesn't address the long-term situation.

There are losers and winners in any major change in economics - the article notes that Saudi Arabia will be running a significant budget deficit in order to carry out their strategy to try to force some crude producers out of business.

The current low prices are not sustainable.

Airlines that intended to park airplanes over the long term will continue to do so while those that could justify older aircraft will continue to find that justification.

 

[Kellerguy]

Current prices or @$55 are sustainable for some time as Saudia oil is profitable at $10PB. It could mean a drop of domestically, especially if it goes lower, however the Republican House & Senate are likely to enact spell tax legislation to provide forward tax credits or some other offset to keep them pumping. Saudi interest is to break OPEC "Sunni" states which represent a significant threat to the Kingdom.
 
Oil stays low til'16, and slow rise there after once back to $75.

 

[CMH_GSE]

that is a good article but doesn't address the long-term situation.There are losers and winners in any major change in economics - the article notes that Saudi Arabia will be running a significant budget deficit in order to carry out their strategy to try to force some crude producers out of business.The current low prices are not sustainable.

There is a lot in this article. A key piece that the author admits is missing will be a big decider if the low prices are sustainable or not.

"The catch is that no one quite knows how low prices need to go to rein in the US oil boom. Analysts often focus on a metric called the "breakeven price" for oil-drilling projects. "

They put a chart up showing the "estimated" break even price of all the major projects in the US. There are some analysts that would tell you that chart isn't that accurate. The thought initially was, oil had to be at least $80 per barrel to keep drilling.

A funny thing happened while the Yanks were drilling ,fracking, sideways drilling, heating sands, or whatever to extract the product from the ground :
They found out how to do it better, faster, more efficiently, and most importantly, CHEAPER, and here's the thing, every day they keep drilling, they figure how out how to get better at it still. All of this is bad news for the harbingers of "cheap oil is short term".

The most expensive part is finding it, a large part of that is done, they know where it is. The cost of extracting is now not much more than what the Saudi's pay to extract and that's not lost on the Saudi's either, hence, their decision to keep drilling. The Saudi's know they will lose even more market share so they can no longer make the calls on prices, they can only keep drilling or lose market share.

It's not just the US drilling that's in play, the Russians are producing more than anyone, and they won't slow down , because they can't. It's the only thing they have to export, legally.
The matrix is much different now than even just 10 years ago, and again, the Saudi's realize this or they would have just reduced back in November like they always have in the past.

 

[eolesen]

I suspect there's a huge underestimation of how badly people in North America are looking for energy independence...

Had the Saudi's taken these steps on pricing in 2009, the efforts to drill in the Bakken or drive down the cost of processing tar sands wouldn't have taken hold, and now I'm not sure that genie will ever go back in the bottle as much as OPEC may want it to.