American Is Rated Top 2015 Airline Pick by JPMorgan as Oil Prices Fall

[WorldTraveler]

btw, FWAAA, since you found the 2009 annual reports and got the RASM info out of them, this quote is worth noting from DL's SEC filing for 2009.

"Volatile fuel prices continue to represent a significant risk to our business and the airline industry as a whole. While our fuel cost per gallon declined 35% in 2009 compared to 2008 on a combined basis, contributing to $5.4 billion in lower fuel expense excluding the mark-to-market adjustments related to fuel hedges settling in future periods, crude oil prices have risen 78% from December 31, 2008 to December 31, 2009."

IOW it is possible that there could be a long-term collapse of oil prices in 2015 and beyond but the chances are very high that there will be a dramatic correction.

all of the carriers that hedge now will likely retain some of those hedges precisely because they know that when fuel prices go back up, it will be very rapidly....carriers that won't hedge will participate in 100% of the increases. Carriers that do hedge will have some protection just as they have had over the past few years as oil prices have moved around higher levels.

even if the discussion is solely about fuel costs, the chances that the benefit to AA or the losses to other carriers over time will be reflected by what happens in the next couple of quarters.

 

[Overspeed]

The analyst who rated American seems to have great credentials

JAMIE BAKER joined J.P. Morgan in March 2002 as the firm's US Airline Equity Analyst. Prior to joining J.P. Morgan, Mr. Baker was with UBS Warburg, part of the team covering the US airlines, with direct coverage of US regional and low-fare airlines. Prior to its merger with UBS Warburg, Mr. Baker assisted in covering the major airlines at PaineWebber Incorporated. Before that, Mr. Baker worked at Continental Micronesia and Northwest Airlines in their marketing departments. Mr. Baker holds a BA in economics from Earlham College. - See more at: http://www.twst.com/bio/JAMIE%20BAKER#.dpuf
What are WTs credentials?

 

[robbedagain]

There you go again Overspeed   youre really upsetting WT big time   See  WT is the know it all expert   and DL main cheerleader  

 

[FWAAA]

The analyst who rated American seems to have great credentials

JAMIE BAKER joined J.P. Morgan in March 2002 as the firm's US Airline Equity Analyst. Prior to joining J.P. Morgan, Mr. Baker was with UBS Warburg, part of the team covering the US airlines, with direct coverage of US regional and low-fare airlines. Prior to its merger with UBS Warburg, Mr. Baker assisted in covering the major airlines at PaineWebber Incorporated. Before that, Mr. Baker worked at Continental Micronesia and Northwest Airlines in their marketing departments. Mr. Baker holds a BA in economics from Earlham College. - See more at: http://www.twst.com/bio/JAMIE%20BAKER#.dpuf
What are WTs credentials?

Jamie Baker is the genius who told his clients that he saw bankruptcy at AA as "highly unlikely" just weeks before AA filed for Ch 11 protection. Here's what he had to say on Nov 29, 2011:
 

Jamie Baker, J.P. Morgan: J.P. Morgan’s analysts begin their note with three words: ”We were wrong.” Previously, J.P. Morgan had deemed a voluntary bankruptcy filing as highly unlikely. “‘The company has approximately $4.1 billion in unrestricted cash and short-term investments… [and] is anticipated to be more than sufficient to assure that its vendors, suppliers and other business partners will be paid timely and in full….’ So, this WASN’T about liquidity (liquidity is about 18% of LTM revenue).” On the filing’s implication for the industry, J.P. Morgan adds: “LCC filed. DAL filed. UAL filed. Today, those airlines are producing returns nobody ever dreamed possible, against a backdrop of 9% unemployment and ~$100 oil. There’s no evidence that those three are ‘going after one another.’ A more viable AMR doesn’t pose a threat, it contributes to an even more viable industry, in our view.

http://blogs.wsj.com/deals/2011/11/29/analysts-react-americans-bankruptcy-filing-this-wasnt-about-liquidity/

 

[Overspeed]

FWAAA,
Actually Jamie Baker was right. BK was not an imperative at the time of the filing. AMR wasn't improving or getting worse financially, it was stagnant. AMR's board made a "strategic" move in filing BK. They filed with over $4B in cash which allowed the company to not use DIP financing and have more control than most navigating Ch 13. No one expected a BK filing because they had plenty of cash. AMR's board surprised everyone though and the BK caught many with their guard down.
 
I believe all of agree, the AMR BK was not necessary, it was a manipulation of the law to squeeze the unions and creditors.

 

[jcw]

In addition creditors faired pretty well in BK compared to US UA or DL creditors

Let's hope the majority of cash generated with the low oil prices deleverages the balance sheet more aggressively

 

[WorldTraveler]

glad to see you contributing to the details of the conversation, jcw.

again, the difference between what DL has said it will lose in hedge losses minus what AA will lose in currency impairments in Venezuela amounts to about $800 million which is about 2% of the annual revenue that the big 3 generate.

DL is growing RASM on an annual rate that is at least 2% better than AA.


It may break a whole lot of people's hearts but the chances are pretty high that the decreasing fuel prices and the lack of fuel price hedges may provide AA no advantage at all but instead will help subsidize losses in Latin America due to weak currency. Anyone that has reviewed currencies realize that there is a relationship between falling oil price rates and the strength of the US dollar - with an inverse relationship between currencies in other countries esp. in developing countries.

DL, UA, and WN have less exposure to developing world economies than AA does and it just may well be that AA's fuel cost advantage will be offset by revenue and currency weakness while DL, UA, and WN will fare better because of their ability to generate revenue to cover their fuel price hedges - even though UA and WN haven't disclosed the size of their fuel hedge losses.

at the end of 2015 or whenever fuel prices start going back up - whichever happens first, it may well happen that the drop in fuel prices might not amount to near as big of a difference as some people think - including Jamie Baker - because they simplistically focus on one number at the expense of the larger revenue and currency issues.

FWAAAs mention of the 2009 RASM declines across the industry highlights that the global financial crisis forced down revenue while also forcing down fuel prices.

The same thing will likely happen here with the difference that the drop in fuel prices is not affecting all of the world equally because it is not driven by a recession - at least yet - but by the Saudi's desire to regain pricing control of oil. Those efforts will have different effects on different parts of the global economy and on different parts of the US airline industry.

 

[jcw]

please - you say that then go on to trash AA

 

[traderjake]

Maybe now that we have cash American will hedge fuel at these lower prices.
 
If and when fuel prices rise that will make us more profitiable compared to other airlines that hedged and bought refineries at higher prices.

 

[WorldTraveler]

Maybe now that we have cash American will hedge fuel at these lower prices.
 
If and when fuel prices rise that will make us more profitiable compared to other airlines that hedged and bought refineries at higher prices.

perhaps but it is not likely that AA will decide to hold onto hedges until fuel reaches a high level and then dump them.... but it is possible they could come up with such a hedging structure.

in the meantime, whatever benefit that AA has by not hedging has to be weighed against the disadvantage it had in the past by not hedging, the currency losses that are also part of the equation, and above all revenue will always be far more important in determining success.

 

[eolesen]

Maybe it's just me, but throwing in the currency impairment from Venezuela into the mix is a bit of a red herring right now.

The funds are frozen, but unless AA choses to write off the value of the impairment, it's still an asset on the books.

If there's a regime or a rule change in Venezuela, AA gets to realize the book value of what's currently frozen.

That certainly ain't going to happen with the book value of fuel hedges.

 

[WorldTraveler]

no, currency and fuel hedges are the same type of financial instruments. Get out your accounting books if you don't understand why they are in the same class of financial instruments.

the reason you see it as a red herring is because AA is currently gaining at one but not the other while for DL and UA it is just the opposite.

let us know when there is a regime change in Venezuela.

and you can't sit on impaired revenue forever.

 

[jcw]

Actually they are similar however you can't hedge "trapped cash" so hedging currency would have had no impact on Venezuela
 
UA and DL are not gaining in Venezuela - and you are making it a red herring - since Venezuela is only one country - one country does not make it a big issue - let's face it all the trapped cash you are worried about has been offset by leaps and bounds by the gains AA has in lower fuel costs
 
If I were to guess the trapped cash you are so concerned about doesn't even get any airtime anymore at mgmt meetings since they have taken action and monitoring the situation
 
Let's all count how many times the venezuela cash issue comes up in different threads to see the red herring at play

 

[WorldTraveler]

and that is true.


there is no market for currencies which do not freely trade in global markets.

But that is a risk that AA takes in serving markets with currency risks.

It is also likely why AA, and no one else that I am aware of, has put in place restrictions on sales in Argentina so they don't repeat the same thing there.

If there is an analogy between currency hedges it is DL and UA in Japan - they both hedge the yen or have which has offset their losses as the yen has fallen. DL also hedges the Canadian Dollar and I believe the Pound.

No, AA has not taken action. They have provided a notice to investors that they might have to write it off - but it amounts to about half of DL's fuel hedge losses.

Further, AA's RASM underperformance relative to DL is currently running 2% or more which means that AA's currency losses plus its revenue underperformance is likely equal to DL's fuel hedge losses.

And we still have not heard from UA or WN or any other carrier regarding their fuel hedge losses. They will have them. some of them, like UA will not be posting RASM growth as high as Dl and WN so they do not have something to offset the hedge losses.

and most importantly, AA hasn't provided any guidance for 2015 margin which does hold weight with investors.

This whole article is based on one investment analyst picking out one statistic and trying to rank airlines in the absence of complete data.

When AA comes up with guidance that exceeds other carriers, let us know.

 

[FrugalFlyerv2.0]

You don't fact-check anything you post, do you?

 
Why let facts get in the way of a gooDL narrative?