High Oil Prices = Certain Doom For Legacy Carriers

[usair_begins_with_u]

The price of U.S. benchmark crude-oil futures for September reached another high yesterday on the New York Mercantile Exchange, rising 52 cents to settle at $47.27 a barrel. Many analysts believe the price won't ease much from the high levels of recent weeks anytime soon.

Taken from By DANIEL MICHAELS and MELANIE TROTTMAN
Staff Reporters of THE WALL STREET JOURNAL
August 19, 2004; Page A1

I can not even begin to imagine how much cash USAir will burn in Q3. I dont think UAir will cover its fuel bill alone, ignoring wages all together.

This is not a joke.

Southwest is 80% hedged through 2005 @ $25 barrel.

Adding fuel hedges now isn't a likely solution either. With oil prices so high, it's too late to lock in below-market rates at attractive prices. Trying to do so would be like buying insurance after a car crash.

Anyone have figures on UAirs oil hedging position?

 

[autofixer]

I have said this before, the price of oil will never go back down to the low levels we all enjoyed in the past. The Chinese and Indians are abandoning their Water Buffalo for cars. We are restricting exploration, whilest world wide demand for crude is exploding!

 

[BoeingBoy]

u begins with u,

per the 2Q04 report:

"As of June 30, 2004, the Company had open fuel hedge positions in place to hedge approximately 35% of its third quarter 2004 anticipated jet fuel requirements, 30% of its fourth quarter 2004 anticipated jet fuel requirements, and 5% of its 2005 anticipated fuel requirements. "

Jim

 

[oldiebutgoody]

While petroleum prices are high, fuel prices seem to be stabilizing. At least that's what I'm seeing. Also, production is up according to the analysts. I don't know that I'd immediately jump to the conclusion that prices will stay at these levels forever. It would be pretty short sighted not to plan for the worst, however.

 

[savyinvestor]

I think I saw it was closer than ever to $50. Savy

 

[Flying Titan]

While petroleum prices are high, fuel prices seem to be stabilizing. At least that's what I'm seeing.


Stabilizing??? The price of oil seems to be setting new records every day and who among us would bet against oil hitting $50/barrel before things get better. Autofixer is right - demand is increasing around the world and production levels are not growing quickly enough to keep up.

I hate to think of how high the price of a barrel of crude will go if we have an unusually cold winter this year...and we should all pray that there isn't another major terrorist attack anytime soon. This is reality for the industry for the forseeable future.

With current fares essentially capped by LCC competition, where will the revenue come from to pay for this - or will it have to come from the cost side? Any fresh ideas? Also, please don't jump on the hedging issue. That's water (or oil) under the bridge by now and most carriers are in a worse hedge position than UAIR.

 

[Prince of PAWOBs]

Less than ten years ago, Bob and Steve Sheetz bought an interest in a Hess oil refinery down in Tennessee, according to what I'm told. It explained quite a bit to me on how a brand new Sheetz gas station can run promotions when they first come into town to sell gas at 99 cents a gallon for the first few days, then move the price up close to the competition, but yet still lower than the other gas stations in town.

Too bad US is not in the best financial position right now to even consider buying a refinery, because if you own the means of fuel production, not only are your fuel costs lower, but you can always sell fuel to other airlines and pocket THEIR cash instead of another fuel provider doing so.

Food (or fuel) for thought......

 

[Flying Titan]

Less than ten years ago, Bob and Steve Sheetz bought an interest in a Hess oil refinery down in Tennessee, according to what I'm told. It explained quite a bit to me on how a brand new Sheetz gas station can run promotions when they first come into town to sell gas at 99 cents a gallon for the first few days, then move the price up close to the competition, but yet still lower than the other gas stations in town.

Too bad US is not in the best financial position right now to even consider buying a refinery, because if you own the means of fuel production, not only are your fuel costs lower, but you can always sell fuel to other airlines and pocket THEIR cash instead of another fuel provider doing so.

Food (or fuel) for thought......

[post="170800"][/post]​

Interesting idea. Ultimately, it's that type of thinking that will lead to a long term solution. Perhaps a *A fuel solution is somewhere in the pipeline. At least there's more cash, collectively. Alliance purchasing has been discussed as a way to save money on aircraft orders; what about fuel? Would this be legal? Any other thoughts out there?

 

[jimntx]

Interesting idea. Ultimately, it's that type of thinking that will lead to a long term solution. Perhaps a *A fuel solution is somewhere in the pipeline. At least there's more cash, collectively. Alliance purchasing has been discussed as a way to save money on aircraft orders; what about fuel? Would this be legal? Any other thoughts out there?

[post="170844"][/post]​

Take it from someone who spent 20+ years in the oil business in Texas...
There is no solution other than reducing demand. The supply is finite and exhaustible. The oil companies know it, the Saudis know it, every other oil-producing country knows it. The only people who don't seem to know it are the American people.

We insist on our "right" to drive alone in a vehicle capable of carrying the contents of a 3-bedroom house. And, when we get to that 3-bedroom house, we insist on our "right" to cool every room-in use or not--down to 65 degrees in the summer and up to 85 degrees in the winter (well how else can you wear a sweater in the summer and run around in your underwear in the winter?).

Furthermore it is our "right" as free-born Americans to pay less than half what the rest of the world pays for a gallon of gas. How popular do you think Lincoln Navigators, Cadillac Escalades, and Hummers would be if we paid the $4+/gal that Europeans pay? Remember the first oil embargo in the 70's? People were running around saying, "If gas reaches 50 cents a gallon, I'm parking that car and riding the bus." Didn't happen.

We are the most selfish, self-centered people who ever appeared on the face of the earth. Incapable of denying ourselves anything. Anything I want to have or do is automatically my CONSTITUTIONAL RIGHT to have or do.

Neither our politicians nor we will be willing to look at alternatives until it is too late. Then most of the effort will be expended in finding someone else to blame.


But, don't get me started.

 

[oldiebutgoody]

While petroleum prices are high, fuel prices seem to be stabilizing. At least that's what I'm seeing.
Stabilizing??? The price of oil seems to be setting new records every day and who among us would bet against oil hitting $50/barrel before things get better. Autofixer is right - demand is increasing around the world and production levels are not growing quickly enough to keep up.

I hate to think of how high the price of a barrel of crude will go if we have an unusually cold winter this year...and we should all pray that there isn't another major terrorist attack anytime soon. This is reality for the industry for the forseeable future.

With current fares essentially capped by LCC competition, where will the revenue come from to pay for this - or will it have to come from the cost side? Any fresh ideas? Also, please don't jump on the hedging issue. That's water (or oil) under the bridge by now and most carriers are in a worse hedge position than UAIR.

[post="170785"][/post]​

You TOTALLY missed what I said. While petroleum is up close to (if not over by now) $50/barrel, fuel prices (gasoline in particular. I know it's not jet fuel, but it is still an indicator) are actually MUCH lower than they were when petroleum was in the high $30s/barrel. Plus, I would expect this price to cause even MORE production by the countries that can, if for no other reason than the profit margin.

 

[funguy2]

You TOTALLY missed what I said. While petroleum is up close to (if not over by now) $50/barrel, fuel prices (gasoline in particular. I know it's not jet fuel, but it is still an indicator) are actually MUCH lower than they were when petroleum was in the high $30s/barrel. Plus, I would expect this price to cause even MORE production by the countries that can, if for no other reason than the profit margin.

[post="170875"][/post]​

However, in order for the oil companies to make money, this cannot continue to be true... Gasoline (and other energy products) prices will increase. The oil companies will take their profit margin. I am not usually a conspiracy theorist, but its conceivable the US oil companies are keeping prices down to help out their buddy, George W. I would expect some "snap-back" after the election, on gasoline in particular.

 

[jimntx]

However, in order for the oil companies to make money, this cannot continue to be true... Gasoline (and other energy products) prices will increase. The oil companies will take their profit margin. I am not usually a conspiracy theorist, but its conceivable the US oil companies are keeping prices down to help out their buddy, George W. I would expect some "snap-back" after the election, on gasoline in particular.

[post="170893"][/post]​

If past practice is any indicator, you will see an upward spike right before Labor Day--a big "drive to the destination" holiday. Then, as you said, to help out Shrub, you will see prices go back down until after the election. Then there will be another "crisis" that will allow them to jack up prices again in time for home heating oil season.

However, Please be aware of the following facts that I learned from 20+ years in the oil bidniz...

1. The cost of crude oil has almost nothing to do with the cost of gasoline at the pump. The pump price of gasoline is based almost entirely on what the oil companies think that you and I are willing to pay. Thus, today in Dallas in the heart of oil country, we are paying in the neighborhood of $1.80/gal for regular unleaded. A friend of mine who lives in St. Louis told me that she just paid less than $1.70/gal there.
2. As far as this winter's home heating oil price increase due to a Nov. or Dec. "crisis"...The home heating oil that those of you in the Northeast will be using this winter is being refined and shipped via pipeline to storage facilities in your area even as we "speak." Home heating oil is refined in the summer and summer formulations of gasoline are refined in the winter. The "crisis" will be nothing more than an excuse to jack up the prices.

 

[usair_begins_with_u]

1. The cost of crude oil has almost nothing to do with the cost of gasoline at the pump.

WRONG!!!!!

I plugged these numbers into a quick simple regresson, and got a correlation coefficient of .8921

You are either a liar or incrediblly ignorant, though probably both.

 

[jimntx]

WRONG!!!!!

I plugged these numbers into a quick simple regresson, and got a correlation coefficient of .8921

You are either a liar or incrediblly ignorant, though probably both.

[post="170909"][/post]​

Oh wow! A chart. I'm impressed. Of course, as Mark Twain said, There are lies. There are damn lies. And, then there are statistics.

I'm just telling you what I learned from the Senior Vice-President of Marketing of the (then) 3rd largest oil company in the United States. You can "prove" whatever you like with a chart. Doesn't change the truth. And, I think you will find that correlation holds together a lot better when crude oil and gasoline prices are rising. Rising cost of crude oil was always our best excuse for raising the wholesale and pump price of gasoline. Didn't you ever notice that those higher crude oil prices are for delivery 1, 3, or 6 months in the future, but the price of gasoline goes up at the pump today?

 

[funguy2]

Well... the charts show one thing... That in the May/June time frame, gasoline prices grew at a faster rate than crude oil rpices... gasoline was up 27% (roughly, per the chart) when crude was up 13%. Thus today's "stability" is a result of being overcharged at the beginning of the summer, assuming you believe that crude oil prices have an effect on gasoline prices... which I do.

(No disrespect jimntx... but come on, the cost of the #1 ingrediant of gasoline has a little something to do with the price. While, I am sure there is merit to your argument, charge what the market will bear, I also believe there is merit to the argument: if costs go up X%, then revenue must increase X% in order to maintain profit margin Y%. If one were to follow your assertion to a logical conclusion, that would indicate that the cost of beef is irrelevant to the cost of hamburgers... and that simply isn't true.)

There is also a time lag effect between crude and gasoline. I have a feeling this effect will get "extended" until November, as I noted before.