Do You Forsee More Wage Concessions To Offset Fuel

[AAquila]

Soaring fuel costs burn airlines' cash
Industry rebound could be two years away
By Matt Andrejczak, CBS.MarketWatch.com
Last Update: 4:00 AM ET Aug. 28, 2004


SAN FRANCISCO (CBS.MW) -- U.S. airlines, hammered by soaring oil prices, will spend a staggering $5 billion more on fuel this year than they did in 2003 or even a greater sum, draining already thin cash reserves.



With no relief in sight, oil looks likely to keep the industry mired in financial distress for another two years, spoiling what many airlines had hoped would be the year they finally overcame the financial trauma dealt by the terror attacks of Sept. 11, 2001.

Airlines are among the industries hardest hit by high oil prices, which have jumped 38 percent in just 12 months.

What's more, with too many carriers competing for too few passengers, the razor-thin margins have left airlines no room to pass fuel costs down to customers, despite a steep rise in passenger traffic in the first half of the year.

Should oil remain above $40 a barrel, an industry rebound could be two years away.

"We doubt that any of the U.S. major network airlines will be profitable this year or next, though low-cost airlines AirTran (AAI: news, chart, profile), JetBlue (JBLU: news, chart, profile) and Southwest (LUV: news, chart, profile) should remain in the black," Morgan Stanley analyst William Greene said in a recent research note.

Nearing the breaking point

Added Bear Stearns analyst David Strine: "Something has to break. ... We believe we will see another massive round of cost cuts or capacity cutbacks."

AMR (AMR: news, chart, profile), parent of American Airlines, offered a grim outlook late Thursday. The world's largest carrier said it expects to spend $1 billion more on fuel this year, a 40 percent increase over last year. That's higher than previous projections.

What is more troubling is that airlines are projected to burn through their precious cash reserves faster than they had anticipated at the start of the year, due to the surge in oil prices.

Running an airline is capital intensive. Fuel accounts for 10 percent to 20 percent of an airline's total operating costs. It is the second-highest expense after labor.

Making matters worse is that with the exception of low-cost carriers like JetBlue and Southwest, most airlines have nowhere to turn to raise new funds, according to analysts.

Airlines tapped Wall Street and the federal government for capital following the Sept. 11 terrorist attacks and have little left to pledge as collateral. Adding to their woes, credit rating agencies have launched a new round of downgrades, citing runaway fuel costs and liquidity concerns.

This leaves some airlines in a tighter bind than others. "For most airlines, unrestricted cash is the last line of defense," Bear Stearns' Strine said in an Aug. 26 research note.

Adding up the damage

Delta Air Lines (DAL: news, chart, profile), the nation's third largest airline, and US Airways Group (UAIR: news, chart, profile), the nation's sixth largest, face the worst cash crunches.

According to Bear Stearns' analysis, Northwest Airlines (NWAC: news, chart, profile), Continental Airlines (CAL: news, chart, profile), AWA Holdings (AWA: news, chart, profile) and Frontier Airlines (FRNT: news, chart, profile) would be the most impacted if oil hovers at $40 a barrel for the remainder of this year and next.

American, Southwest, AirTran and Alaska Airlines (ALK: news, chart, profile) would be in safer positions.

Delta estimates it will burn through $1.4 billion in cash this year, putting it on the precipice of bankruptcy if it cannot reach a cost savings deal with its pilots union.

The carrier ended the second quarter with $2 billion in unrestricted cash. Compounding its predicament, Delta's pension plans are underfunded by $5 billion.

US Airways has $975 million in unrestricted cash and is racing the clock to reach deals with its five labor groups to preserve cash. If cash falls below $725 million by Sept. 30, the airline would violate federal loan and bank covenants.

By year-end 2005, Northwest would burn through $1.34 billion in cash, leaving it with $1 billion in unrestricted cash. Continental would eat up $277 million in cash, putting its unrestricted cash at $1.27 billion.

AWA, the nation's 10th largest airline, which is restructuring its finances, would have $257 million in cash if oil stays at $40 a barrel.

Frontier, the second largest carrier at Denver International Airport, would be left with $96 million.

Projected cash reserves if oil remains at $40/barrel
Airline Current unrestricted cash Estimated cash year-end 2005
Delta $1.966 billion $0 ($0.163 billion debt)
Continental $1.689 billion $1.277 billion
Northwest $2.857 billion $1.061 billion
AWA $0.478 billion $0.257 billion
Frontier $0.194 billion $0.096 billion

Some airlines -- to varying degrees -- have cushioned themselves against rising oil prices. Southwest, for instance, has hedged 80 percent of its fuel costs for 2005 at $25 a barrel.

JetBlue and AirTran have hedged about 20 percent of their 2005 fuel costs at less than $30 a barrel. On the flip side, Northwest and Continental have no fuel hedges in place for next year.

So how did some airlines get themselves in this mess?

Airlines, presuming that oil prices would drop when the war in Iraq ended, were blindsided by the spike, according to Standard & Poor's analyst Philip Baggaley.

"Most airlines, which were under liquidity pressures, did not hedge aggressively when prices were lower," he said, adding that many hedging contracts require the counterparty to take on an airline's credit risk, a risk few are now willing to take.


Matt Andrejczak is a reporter for CBS.MarketWatch.com in San Francisco.

 

[WingNaPrayer]

Saudis took out the towers in the visible terrorist threat, now they have a strangle-hold on the planet's oil supply in a less visible terrorist threat.

Shrub decided after 9/11 to bomb a few caves in Afghanistan and over throw the country of Iraq, leaving the Saudis untouched.

Hmmmmmmmmmmmmmm.......

Wage cuts? No, I think AMR already has their eye on something else, namely your pensions.

 

[Fly]

Heck, now that United has decided to pillage the pensions, watch the government freak out and start lowering the price of fuel. Remember, there is NO shortage, just Dubya's way of trying to win the election.

(gee, I wonder if he'll be able to win the popular vote this time)

 

[LiveInAHotel]

AMR can kiss our a$$es regarding more concessions!

 

[Wretched Wrench]

AA has been planning to loot our retirement since Carty set up the bankruptcy-proof retirement slush fund for the top 47 officers. All that drivel about "Leading by Example" and "Shared Sacrifice" is an insult.

 

[Strake]

AMR can kiss our a$$es regarding more concessions!

[post="173908"][/post]​

Could not have said it better!!!!!

 

[Bob Owens]

Could not have said it better!!!!!

[post="174474"][/post]​

Not only couldnt you have said it better but you wouldnt have said it all just like last time!

 

[Oneflyer]

AA has been planning to loot our retirement

If United does it they won't have any choice. There is absolutely no question that if United is allowed to disolve their pensions AA will be gone shortly as well. Whether it is through bankruptcy or other means.

All that drivel about "Leading by Example" and "Shared Sacrifice" is an insult.

I don't really agree, I think Arpey and crew really mean it, but if they cut my salary I'll be out the door faster than any of you.

 

[LiveInAHotel]

I don't really agree, I think Arpey and crew really mean it, but if they cut my salary I'll be out the door faster than any of you.

[post="174661"][/post]​

If you vote Yes on concessions you will be out the door faster than all of us. Unless you're non-union and don't have a voice?

 

[Oneflyer]

Like other salaried management employees I vote with my feet. There are plenty of well paying jobs in the Dallas/Fort Worth area and unlike union employees I don't have a pension that ties me to AA, my 401k is portable.

I think AA is very unlikely to ask for consessions for two reasons.

1. Customer service is already mediocre at best, lowering salaries is only going to make it worse, at some point there is a diminishing margin of returns. Saving 100 million in F/A salary and then losing 100 million in revenue do to bad CS does really get you anywhere.

2. Contrary to what you may believe HDQ is pretty bare bones in a lot of areas and having masive attrition. You can't keep top talent with below average salaries. More pay cuts will continue to thin the ranks of quality lower level management employees.

 

[LiveInAHotel]

Like other salaried management employees I vote with my feet.

[post="174668"][/post]​

That answers all of our questions. Typical management; running and hiding when the going gets tough. You must be a Carty fan! You must be pals with Jane Allen! You must have had John WAArd kissing your a$$! Did you offer John WAArd a management job with AA?

 

[planemech669]

I don't see where any more cuts in wages are going to make a difference.
Southwest just negotiated new wages with their workforce which increased their wage costs. They will be even with us when their hedge fuel runs out at the end of this year. It may even be more of a strain on that airline because AA, DL and others have had the advantage of slowly integrating increased fuel costs into their bugets. Southwest and other hedgers are going to have to absorb the last 4 years of increases in one fell swoop.

It's quite possible that in the end fuel will be the great equalizer and we'll see an increase in fares once everyone is evened out.

Then we'll see traffic fall off as the consumer realizes that in the 6 hours that it took him to fly to his destination, he could have driven it at 1/4 the cost.

Too many ifs and maybes. Time will tell.

 

[wwtraveler99]

You must have missed the part where LUV is 80% hedge for 2005. Even though it was not posted in the article LUV also has hedges in place for 2006. Take a look at their 10-k for some of the numbers for hedging. I think at the time it was printed 2006 was 20% hedged

 

[local 12 proud]

we will see more concessions with the next threat of bankruptcy and you can TAKE THAT TO THE BANK! :mf_boff:

 

[FWAAA]

I don't see where any more cuts in wages are going to make a difference.
Southwest just negotiated new wages with their workforce which increased their wage costs. They will be even with us when their hedge fuel runs out at the end of this year. It may even be more of a strain on that airline because AA, DL and others have had the advantage of slowly integrating increased fuel costs into their bugets. Southwest and other hedgers are going to have to absorb the last 4 years of increases in one fell swoop.

It's quite possible that in the end fuel will be the great equalizer and we'll see an increase in fares once everyone is evened out.

[post="174745"][/post]​

Your statements about WN's fuel hedging couldn't be more wrong.

I don't know who has been feeding you this misinformation (AMFA?? or did you just make it up on your own??) but WN is over 80% hedged for 2004, 80% hedfged for 2005 and 45% hedged for 2006 at very favorable prices. And you can be certain that the 2006 figure will increase if WN's management thinks that increasing their hedging makes financial sense.

Since I've read various posts on USAviation.com with the same misunderstandings from several different posters (all of whom appear to be mechanics due to their screen names), my guess is that AMFA or the TWU has been spreading this slop to you guys. I hope that it isn't AMR that is screwing with you.

Take a look at the WN press releases and 10-Q to see for yourself the favorable fuel position that WN finds itself in:

"We continue to mitigate high energy costs with our successful hedging program and fuel efficiency efforts. We are over 80 percent hedged for the remainder of 2004 with prices capped below $24 per barrel. We are also 80 percent hedged for 2005 with prices capped at approximately $25 per barrel and approximately 45 percent hedged for 2006 with prices capped at around $28 per barrel.

http://biz.yahoo.com/prnews/040715/dath005_1.html

The Company utilizes financial derivative instruments for both short-term and long-term time frames when it appears the Company can take advantage of
market conditions. The Company currently has a mixture of purchased call
options, collar structures, and fixed price swap agreements in place to hedge
over 80 percent of its remaining 2004 total anticipated jet fuel requirements
that effectively cap crude oil-equivalent prices under $24 per barrel. The
Company is also 80 percent hedged for 2005 with prices capped at approximately
$25 per barrel, and approximately 45 percent hedged for 2006 with prices capped
at approximately $28 per barrel. As of June 30, 2004, the majority of the
Company's remaining 2004 hedges are effectively heating oil-based. Beyond 2004, the majority of the hedge positions are crude oil-based.

http://www.sec.gov/Archives/edgar/data/923.../q2_200410q.txt

If you (or anyone else) thinks that fuel is suddenly going to "catch up" with WN, you are sadly mistaken.

Next time, be more skeptical when someone feeds you BS like that. Look it up for yourself instead of repeating such obvious falsehoods. Be less trusting of people who feed you BS.