Another Example Of Poor Management

Doc

Veteran
Jul 15, 2003
783
4
www.usaviation.com
Luv is 80 % hedged and U is 20 what does that tell you.......






CHICAGO, March 10 (Reuters) - As jet fuel prices continue to soar, the chances that the U.S. airline industry will return to profitability this year are slipping, analysts said.
To make matters worse, not many airlines have sufficiently hedged their exposure to rising jet fuel prices, leaving them open to the risk of even higher prices.


Jet fuel -- at its highest level in a year -- makes up 12 to 14 percent of airlines' operating costs and is their second-biggest operating expense after labor. High fuel prices are the latest challenge for the industry, which has been struggling with weak revenue and soft demand for more than two years.

"It's a major concern," said Blaylock & Partners analyst Ray Neidl. "If fuel prices stay at current levels and airlines cannot pass these fuel costs on to consumers ... then the industry will not return to profitability this year."

Airlines have tried several times this year to raise prices to offset fuel costs. But with relatively weak demand, fuel surcharges have failed to stick.

Morgan Stanley airline analyst William Greene on Tuesday cut earnings estimates across the board, with the most significant changes at carriers with little hedging -- or strategies to offset exposure to volatile prices -- in place.

He said none of the major network carriers is likely to be profitable this year if crude averages $34 per barrel, although all of the low-cost carriers should remain in the black.

"As hedges roll off at various airlines, the full effect of the currently high fuel prices will be felt with increasing severity," Greene wrote in a note.

Crude prices -- at 20-year highs near $36 per barrel -- have jumped since OPEC (News - Websites) agreed to cut supply quotas from April and to eliminate production over current quotas.

Each dollar rise in crude oil equates to a 3-cent gain per gallon in jet fuel, said David Swierenga, airline industry consultant at AeroEcon. With industry consumption of 18 billion gallons a year, each penny increase in jet fuel adds $180 million to industry operating costs.

Jet fuel prices, closely tied to crude and heating oil, could start to decline this summer as crude prices are projected to fall and as heating oil tends to weaken in warmer weather. But tight supplies, low inventories and international tensions could also keep prices propped up, analysts said.

PRECIOUS COMMODITY

If crude moves below $30 a barrel, airlines could be tempted to lock in hedges again, said Paul Flemming, senior analyst at Energy Security Analysis Inc.

"At these high levels, I understand why airlines would not be stepping up right now," Flemming said.

Airlines use many complex strategies to hedge exposure to volatile fuel prices. Many use a combination of the NYMEX heating oil futures contract, over-the-counter jet fuel swaps, and call options in a rising price environment.

Southwest Airlines (NYSE:LUV - News), which has been consistently profitable while its larger peers falter, is more than 80 percent hedged this year and has spent less than $25 million on 2004 fuel hedges.

Based on current futures prices, the low-cost carrier's savings from hedges would be about $240 million this year, Chief Financial Officer Gary Kelly told Reuters in an interview.

"You probably wouldn't go without health care insurance, you wouldn't go without liability and collision insurance for your automobile," Kelly said. "We view this the same way."

Delta Air Lines (NYSE:DAL - News) said recently it was 52 percent hedged for the first quarter, while American Airlines parent AMR Corp. (NYSE:AMR - News) and US Airways Group (NasdaqNM:UAIR - News) said they were about 20 percent hedged.

Continental is 20 percent hedged for the second half of this year and has said it is looking to add more hedges, while Northwest Airlines (NasdaqNM:NWAC - News) and United Airlines parent UAL Corp. (OTC BB:UALAQ.OB - News) have said they have no hedges in place.

Hedges are expensive, and airlines hesitate to lock themselves into high prices when they think prices will soon decline.

"If you're looking ahead and you think prices are going to fall, the less expensive solution is to just not hedge at all," Swierenga said. "What we've got here is a situation where just about everybody guessed wrong."
 
It tells you simply that WN is more aggressive than most all other carriers.

Perhaps you should be raising this more on the United/NW forums given the following statement: "Northwest Airlines (NasdaqNM:NWAC - News) and United Airlines parent UAL Corp. (OTC BB:UALAQ.OB - News) have said they have no hedges in place."

And the darling of all majors - Continental is hedged at 20% as well. The same amount as US Airways.

So, Gordon Bethune, Richard Anderson, and Glen Tilton must also be morons, right?
 
I think if we work for free we would still loose money.

For US Airways every penny increase in fuel cost us $800,000 a month

Each dollar rise in crude oil equates to a 3-cent gain per gallon in jet fuel, said David Swierenga, airline industry consultant at AeroEcon.
 

Attachments

  • jetmug.jpg
    jetmug.jpg
    26.7 KB · Views: 146
pitguy said:
If Bronner is truly in this for the long haul what would be the matter with prudently hedging fuel?
Because if you dont have the cash flow to do it what do you do? Im sure there are many bargains out there they we cant afford.
 
pitguy said:
If Bronner is truly in this for the long haul what would be the matter with prudently hedging fuel?
Same thing as not offering early outs. Spending money today to save money tomorrow. Just that we dont have money to spend today to save money tomorrow so we'll continue to lose money in the mean time. Guess he isnt interested in loaning US any more money to start making money.
If we had spent some money to hedge, how much could we have actually saved bottom line? Same as if we paid early outs this year it would cost bottom line, but when the newbies are hired to replace those leaving, how much would we save next year? :unsure:
 
pitguy said:
If Bronner is truly in this for the long haul what would be the matter with prudently hedging fuel?
Two points -

1. UAIR actually has to have the money to hedge. With the cash issues that are coming up in June and the red ink still flowing, it's hard to spend for the future - even when it may save you money in the long run.

2. The current uptick in pricing was not predicted in all quarters. Many thought that after Saddam was removed from power in Iraq and that country became more stable, that Iraq would be exporting large quantities of crude oil, thus driving prices down. Many (read NWA, UAL and CO) estimated that prices in the mid- to high-$20s per barrel were too high to pruchase as a hedge. Of course, it hasn't turned out that way - Iraq's oil production facilities are in deplorable condition and it's now expected to be two or three years before Iraq can pump huge amounts of oil - but this was tough to predict (especially with our great intel!).

While I don't envy any air carrier with fuel prices going up the way they are, I have a hard time slamming execs who chose not to dive head first into the oil hedging pool last year.
 
If one is serious about competing with Southwest then one must hedge fuel and not expect employees to pay for all of management shortcomings.

(That was not a pun regarding Dave the New Lorenzo's height.)


--Long term problems are not dealt with using short term solutions.
 
Per company reports SW is hedged 100% and U for 2004 is hedged 30% at 87 cents and hedged for 5% for 2005. Why, cause we can't buy as we go along. We have to buy in advance.

Company slide presentation.
 
PITbull said:
Per company reports SW is hedged 100% and U for 2004 is hedged 30% at 87 cents and hedged for 5% for 2005. Why, cause we can't buy as we go along. We have to buy in advance.

Company slide presentation.
General question to all -- If you were in charge of fuel purchases, would you be hedging at today's prices?

I know I wouldn't because I can't imagine that fuel is going up much further before it starts to slide down (perhaps late summer or early fall). I'm no expert at this, but it seems like we're at or near the high point in the cycle and it's probably best to ride this out for a while before trying to put hedges in place for 2005 and 2006. Of course, that's probably what people thought last year with our invasion of Iraq taking place at the time.
 
Flying Titan said:
PITbull said:
Per company reports SW is hedged 100% and U for 2004 is hedged 30% at 87 cents and hedged for 5% for 2005. Why, cause we can't buy as we go along. We have to buy in advance.

Company slide presentation.
General question to all -- If you were in charge of fuel purchases, would you be hedging at today's prices?

I know I wouldn't because I can't imagine that fuel is going up much further before it starts to slide down (perhaps late summer or early fall). I'm no expert at this, but it seems like we're at or near the high point in the cycle and it's probably best to ride this out for a while before trying to put hedges in place for 2005 and 2006. Of course, that's probably what people thought last year with our invasion of Iraq taking place at the time.
Absolutely I wouldn’t hedge fuel at today’s prices.
But the post was referring to the point that we did not hedge and I understand that we are short on cash but if you can’t see the mismanagement in this.
You have to pay for fuel anyway it is still a cost…. why would you not hedge like LUV did only hedging 20% was a risk and another mistake by this management now we are asked to pay again for their mistakes…………
 
Doc said:
Absolutely I wouldn’t hedge fuel at today’s prices.
But the post was referring to the point that we did not hedge and I understand that we are short on cash but if you can’t see the mismanagement in this.
You have to pay for fuel anyway it is still a cost…. why would you not hedge like LUV did only hedging 20% was a risk and another mistake by this management now we are asked to pay again for their mistakes…………
It reads like you are making an honest attempt in reinforcing problems with mis-management. On this topic you are failing. You need to put up cash up front to hedge fuel. We can not use our cash on hand to hedge fuel and risk not being able to rasie the money back up to stay within the covenants of the gov't loan.

Don't worry, you'll get other chances. I for one don't need constant reinforcing of the same topic. That is what makes this board boring sometimes.
 
PITMTC said:
Doc said:
Absolutely I wouldn’t hedge fuel at today’s prices.
But the post was referring to the point that we did not hedge and I understand that we are short on cash but if you can’t see the mismanagement in this.
You have to pay for fuel anyway it is still a cost…. why would you not hedge like LUV did only hedging 20% was a risk and another mistake by this management now we are asked to pay again for their mistakes…………
It reads like you are making an honest attempt in reinforcing problems with mis-management. On this topic you are failing. You need to put up cash up front to hedge fuel. We can not use our cash on hand to hedge fuel and risk not being able to rasie the money back up to stay within the covenants of the gov't loan.

Don't worry, you'll get other chances. I for one don't need constant reinforcing of the same topic. That is what makes this board boring sometimes.
PITMTC,

I have to agree with you this one time...U doesn't have the cash on hand to hedge fuel up front. SW gets to pay as they go along and they hedged at 68 cents.. we don't. We have to keep some of the $1B in cash to meet the convenants. That's just how it is...and we hedged 30% not 20%.If I were Bronner, I would pay off the ATSB now and get the monkey off our backs.


Spent $50 Million just on hedging. Hopefully, we will let some luck and fuel will start to move down. Then we can be at a better position for 2005.
 
Your correct PITbull.
Putting it in perspective, If I could pay off my car loans and mortgage right now I might also. I know I will have to no matter what in the future. But, I prefer to leave my money in the bank just in case I am not drawing in as much in the future.
Maybe thats part of it.