AMR Stock dips more than 20%

[FWAAA]

I seem to recall Arpey telling us he sold off a lot of their hedges at one time. I think we were told they sold them to SWA.

AA unwound some hedges, as explained in the second quote below. AA did not "sell" its hedges to WN. It terminated some of the agreements with the counterparties to raise money in the spring of 2003.

From the 2002 10-K, filed April 15, 2003:

The impact of fuel price changes on the Company and its competitors is dependent upon various factors, including hedging strategies. The Company has a fuel hedging program in which it enters into jet fuel, heating oil and crude swap and option contracts to protect against increases in jet fuel prices, which has had the effect of reducing the Company's average cost per gallon. During 2002, 2001 and 2000, the Company's fuel hedging program reduced the Company's fuel expense by approximately $4 million, $29 million and $545 million, respectively. To reduce the impact of potential fuel price increases in 2003, as of December 31, 2002, the Company had hedged approximately 32 percent of its estimated 2003 fuel requirements. Based on projected fuel usage, the Company estimates that a 10 percent increase in the price per gallon of fuel as of December 31, 2002 would result in an increase to aircraft fuel expense of approximately $205 million in 2003, net of fuel hedge instruments outstanding at December 31, 2002. The decline in the Company's credit rating, as discussed in Liquidity and Capital Resources of Item 7, has limited its ability to enter into certain types of fuel hedge contracts. A further deterioration of its credit rating or liquidity position may negatively affect the Company's ability to hedge fuel in the future. Due to the competitive nature of the airline industry, in the event of continuing increases in the price of jet fuel, there can be no assurance that the Company will be able to pass on increased fuel prices to its customers by increasing its fares. Likewise, any potential benefit of lower fuel prices may be offset by increased fare competition and lower revenues for all air carriers.

From

From the 2003 10-Q for the second quarter (dated July 18, 2003):

American enters into jet fuel, heating oil and crude swap and option contracts to protect against increases in jet fuel prices. Beginning in March 2003, the Company revised its hedging strategy and, in June 2003, terminated substantially all of its contracts with maturities beyond March 2004. During the second quarter of 2003, the termination of these contracts resulted in the collection of approximately $41 million in settlement of the contracts. The gain on these contracts will continue to be deferred in Accumulated other comprehensive loss until the time the original underlying jet fuel hedged is used.

At June 30, 2003, American had fuel hedging agreements with broker-dealers on approximately 725 million gallons of fuel products, which represented approximately 29 percent of its expected fuel needs for the remainder of 2003, approximately 21 percent of its expected first quarter 2004 fuel needs and an insignificant percentage of its expected fuel needs beyond the first quarter of 2004. The fair value of the Company's fuel hedging agreements at June 30, 2003, representing the amount the Company would receive to terminate the agreements, totaled $115 million, compared to $212 million at December 31, 2002, and is included in Other current assets.

So if oil is hedged and he tells us that every dollar that oil goes up costs AMR X more dollars a day isnt he misleading us if much of their oil is hedged?

I think BoeingBoy covered this better than I could.

 

[Boomer]

Who feeds you inaccurate nonsense like the above? The TWU? Or do you just make it up all on your own?

From the 2004 AMR 10-K:



From the 2005 AMR 10-K:



From the 2006 AMR 10-K:



Similar paragraphs are included in each year's 10-K. Additionally, information about fuel hedging positions and gains (or losses) have been included in each quarterly 10-Q plus in each quarterly earnings press release.

Do you possess any evidence at all for your outlandish (and false) claims that Arpey refused to fund hedges or that he has some opposition to hedging? Differences of opinion are one thing - but your post above is clearly, and demonstrably, false.

Arpey came to our station shortly after Carty was shown the door, he stood in our line room and personally defended the failure to hedge fuel.

He stated that he had gone around and around with Crandall over the issue. He said it, we heard it...from there onward, and only until this year, AMR has been at a disadvantage while LUV profited from a strategy he claimed did not work.

Put that in your pipe and give it a toke, bubba.

 

[BoeingBoy]

I'm not surprised that Arpey defended not hedging in 2003. To hedge, a company must have either a good credit rating or cash up front. The counterparties to the hedge want to be sure that they'll be paid if the hedge settles in their favor.

Needless to say, WN had both a good credit rating (near investment grade) and cash if necessary (all those years of profits provided that). The legacies didn't back in 2003.

By 2004, AA was hedging to a limited extent. From the 1Q04 10-Q:

As of March 31, 2004, the Company had hedged, with option contracts, approximately 16 percent of its estimated second quarter 2004 fuel requirements, nine percent of its estimated third quarter 2004 fuel requirements, four percent of its estimated fourth quarter 2004 fuel requirements and an insignificant percentage of its estimated 2005 and 2006 fuel requirements.

Fast forward to the latest 19-Q and this was the amount hedged:

As of September 30, 2008, the Company had effective hedges, including option contracts and collars, covering approximately 38 percent of its estimated remaining 2008 fuel requirements.

One thing that WN has done for years, and they're able to because of the good credit rating negating the need for cash up front, is hedge not just 4-5 quarters ahead but 4-5 years ahead. They don't hedge a lot of their anticipated need that far out, but the amount hedged grows over the intervening years. For example, as of the end of 3Q08 WN had some hedges in place that'll settle in 2013 - 5 years from now.

The legacies, 5 years ago, weren't in a position to hedge that far out. Again, they didn't have the credit rating or the spare cash. So WN was doing some hedging for 2008 when jet fuel prices were a lot lower than now, even after the recent steep decline.

Jim

 

[Hopeful]

The legacies, 5 years ago, weren't in a position to hedge that far out. Again, they didn't have the credit rating or the spare cash.

Jim

Funny, they always found the cash for executive PUPs,, regardless of the company's financial position.

I know, I know,,, the have a contract and their PUP payouts wouldn't buy much fuel hedges...

 

[Bob Owens]

Not necessarily, for a several reasons:

Stop right there. "Not necissarily' is like saying "Yes but,,,,".

"Misleading" is the word I used instead of lying for a reason. If he says that "for every dollar oil goes up it costs us X million $ a day more" by simply multiplying the dollars per gallon used per day without factoring in the hedges he is most definately misleading us.

 

[BoeingBoy]

Funny, they always found the cash for executive PUPs,, regardless of the company's financial position.

And you'll notice that I've not defended that practice. Even if it's only for show (since the money involved doesn't approach the total involved with employee concessions) it'd at least be something to indicate that "we're all in this together" is more than empty words.

"Misleading" is the word I used instead of lying for a reason. If he says that "for every dollar oil goes up it costs us X million $ a day more" by simply multiplying the dollars per gallon used per day without factoring in the hedges he is most definately misleading us.

He (Arprey I assume) was correct, at least in general since I don't know if the number of gallons/day and math were correct. But I can see how anyone that doesn't understand how hedging works would feel misled.

Hedging doesn't change the price paid for jet fuel. If airline ABC buys 1 million gallons a day (on average, I presume, since schedules change) and fuel goes up $1/gal, then the fuel bill goes up $1 million per day. Hedging doesn't change that.

What hedging does is (hopefully) produce a profit that offsets some of the cost of fuel. Really no different than using the profit from the sale of Beacon this past quarter and claiming that that offset the price of fuel, although almost nobody would have considered Beacon a fuel hedge.

It's a common misunderstanding that fuel hedges result in buying fuel at the hedged price - presumably because they're called fuel hedges. In reality, however, they just don't work that way.

To put this in a more personal perspective, let's say you decide to hedge gas, so you call your broker and buy puts or calls on Coca-Cola stock. You anticipate the price of Coke stock correctly and make money on the put or call. When you go to the station to fill your gas tank, do you pay less per gallon than the pump price? Of course not - you just have more money in your pocket, from the profit you made on Coke stock.

Jim

 

[FWAAA]

Funny, they always found the cash for executive PUPs,, regardless of the company's financial position.

No PUPs were paid in 2001-2005. The first PUP was paid in 2006, almost entirely in stock. In 2007 and 2008, PSPs were paid out, again, almost entirely in stock.

I know, I know,,, the have a contract and their PUP payouts wouldn't buy much fuel hedges...

By 2006, AA was as hedged as it wanted to be. Had they desired more hedges, AA could have afforded them by 2006.

 

[FWAAA]

Stop right there. "Not necissarily' is like saying "Yes but,,,,".

"Misleading" is the word I used instead of lying for a reason. If he says that "for every dollar oil goes up it costs us X million $ a day more" by simply multiplying the dollars per gallon used per day without factoring in the hedges he is most definately misleading us.

Do you have any evidence at all that the amounts quoted ignored hedging gains? Or are you just making stuff up, like Boomer?

 

[FWAAA]

Arpey came to our station shortly after Carty was shown the door, he stood in our line room and personally defended the failure to hedge fuel.

He stated that he had gone around and around with Crandall over the issue. He said it, we heard it...from there onward, and only until this year, AMR has been at a disadvantage while LUV profited from a strategy he claimed did not work.

Put that in your pipe and give it a toke, bubba.

Given that your recollection is at odds with the historical record (the filings with the SEC), I find your story the less believable. AA has been hedged from 2003 until the present. AA didn't profit as much as WN from hedging, but then again, neither did any other airline.

No doubt someone asked Arpey about hedging in mid-2003, and no doubt he responded, but it's unlikely his response lines up with your summary.

 

[The Goose]

No PUPs were paid in 2001-2005. The first PUP was paid in 2006, almost entirely in stock. In 2007 and 2008, PSPs were paid out, again, almost entirely in stock.



By 2006, AA was as hedged as it wanted to be. Had they desired more hedges, AA could have afforded them by 2006.

As I recall (perhaps somewhat flawed due to my old age), holy hell was "raised" by the TWU with regard to the PUP payouts in cash. If memory serves me correctly, the union(s) didn't want the payout to be in cash, but in stock and the execs "conceded", as the stock payouts were really more to their benefit. Please - someone correct me if I'm wrong.

It stands to reason, though, as the payouts would have severely taxed the AMR treasury at that time, and manufacturing stock for the SOBs to sell for cash was considerably cheaper for the corporation. In order to insure a situation of non-competition for stocks sales/prices, the TWU was turned down re: its request for more shares to offset the dilution/piddly value of the stock given in 2003 as a "Carty Bad" award.

The TWU International was paid off by the company to lead its membership down the primrose path, performing the function of a Judas Goat quite admirably.

Do I remember correctly?

 

[TWU informer]

TWU "raising holey hell"?

You surely are aged and losing it...

 

[FWAAA]

As I recall (perhaps somewhat flawed due to my old age), holy hell was "raised" by the TWU with regard to the PUP payouts in cash. If memory serves me correctly, the union(s) didn't want the payout to be in cash, but in stock and the execs "conceded", as the stock payouts were really more to their benefit. Please - someone correct me if I'm wrong.

That's basically the way I remember it, although I thought the APA and APFA also filed grievances to help push the execs toward the stock instead of cash. Not that it made any real difference.

It stands to reason, though, as the payouts would have severely taxed the AMR treasury at that time, and manufacturing stock for the SOBs to sell for cash was considerably cheaper for the corporation. In order to insure a situation of non-competition for stocks sales/prices, the TWU was turned down re: its request for more shares to offset the dilution/piddly value of the stock given in 2003 as a "Carty Bad" award.

The cash ($165 million or so, if I recall correctly for the 2006 awards) would not have "severely taxed" the AMR treasury at the time. On March 30, 2006, AMR held $4.3 billion of unrestricted cash and short term investments. Little asked for more stock for the TWU because the three unions had been given 19% of the equity of AMR in April, 2003 and various public offerings after the concessions had diluted the three unions' positions to something like 12%. AA told him to pound sand. If he wanted proportional ownership, he should have negotiated for it. You guys really have a claim against the worthless union for their incompetent handling of your negotiations. A textbook example of malpractice - or whatever you call it when your union is incompetent at representing you.

Paying the execs in stock instead of cash wasn't "cheaper" for AMR. Less than 9 months later, in January, 2007, AMR sold 13 million new shares to the public for almost $500 million.

 

[The Goose]

TWU "raising holey hell"?

You surely are aged and losing it...

Hey - they put on a show, didn't they?

Notice the quote marks. That implies cynicism.

 

[Boomer]

Given that your recollection is at odds with the historical record (the filings with the SEC), I find your story the less believable. AA has been hedged from 2003 until the present. AA didn't profit as much as WN from hedging, but then again, neither did any other airline.

No doubt someone asked Arpey about hedging in mid-2003, and no doubt he responded, but it's unlikely his response lines up with your summary.

Your prediliction to dissembling is more like Clinton when he said, "I did not have sex with that woman,...," at no time did Clinton say he did not have physical contact with, "that woman." He refused to state what he interpreted as sex and whether or not the physical contact he did have constituted what is normally considered sex.

I never meant to fully quantify the extent to which Arpey stated he was against fuel hedging, only that when asked why we did not possess the hedges of LUV, Arpey stated that he was philosophically against hedging in general as it was his opinion that hedging was a zero-sum game.

As for my story being the less-believable: you are not arguing with me, the guys that work here know what happened and the collective credibility they possess is far more than yours as a neo-capitalist or mine as an ex-TWU official.

And, NO, in answer to the unasked question: I am not in posession of any equivalent blue dress.