United gives a good biffing to the critics

[Ukridge]

Straight off, congratulations to all of the workers at United. Yes the workers took a stropping and management will enrich themselves handsomely but this is to be expected as it has been happening ever since the days when a mine owner would bemoan the loss of a valuable pit-pony but not a collier. I can well though imagine the pleasure of having given the legions of gall-filled gloomsayers a good biffing. I can envision how tiring this constant physics lesson must have become – the lesson of an equal (well, actually quite disproportionate when one stops to think) and opposite reaction. By this I mean, that for any and all news items concerning your airline, there was an overwhelming, immediate, and sustained, chorus of gloom that presented a spin that of course only portended the most negative of all possible scenarios. We know all too well the unfortunates who sang in this choir and a sharp boxing of their nose, so to speak, must be fine recompense for that part of human nature that would just as soon not turn the other cheek but mete out some deserved come-uppance.
That having been said, I believe it was Cosmo who succinctly stated that the game is now on and that cash generation from operations is going to be the test. I would go further is opining that all heretofore has been mere preparation - albeit necessary, wrenching, difficult etc.. Frankly I think it will work.
A real problem though, and one over which I would ask the opinion of those who seem to watch the oil markets (Boeing Boy, Jimintx, Busdriver, etc.) is that irrespective of opinion on Iraq, that the situation in Iran holds the potential for a SERIOUS disruption in the price of oil. From the various scenarios that I have read regarding the world’s response to Iran (of which one is the maintenance of the status quo ante) NONE is favourable for reduction in oil prices. I do not have a good feeling about this one and I am wondering if others could see over 100 USD for oil if things do not play out well. Ideas?
If such a serious spike in oil prices were to occur, how, if at all, would the airline industry respond? It seems many models are built of 50 to 60 USD for oil so how long and severe a price spike could be weathered?

Cheers

 

[767jetz]

IMO, with the lowest common denominators (ie: JetBlue & SWA) feeling the oil price pressure, any further increases in jet fuel will be passed along to the consumer. Yes, SWA has fuel hedges, but they are gradually expiring. Jet Blue will show a loss for 2005. And 2006 only looking worse for them with maintenance cost up over 70%.

If oil gets out of control for any significant amount of time (such as a war in Iran), prices will finally be passed on to the consumer. There is no other choice.

 

[ualdriver]

I definitely agree. When JetBlue can't even make a profit with the huge benefit of discount labor and SWA's fuel holiday coming to an end, you know that any increase in fuel price is going to largely be eaten by Joe Traveler.

Just using some very rough numbers as I don't have my desk in front of me, even if crude oil prices doubled from what we paid in 2005, that would "only" equate to about a 22%-ish increase in total costs. Will Joe Lunchbox pay 20% more for his tickets to cover this increased cost?

In my opinion, if Iran does something stupid and cuts off its supply to China (indirectly to the world), crude oil prices will go through the roof, demand will decline for passenger air travel as the airlines increase fares to cover these higher costs, and either DAL and/or NWA will fail to exit bankruptcy, which may remove enogh capacity to cover declining demand. Hopefully we will be out of bankruptcy by the time this all happens (if it does) or I imagine we might be in a bit of trouble with our exit.

 

[WorldTraveler]

And remember that WN only serves about 60 cities - and not some of the busiest airports. I hope oil doesn't spike but, if it does, the outcome will be very different. The legacies are now in a position to fight back and that they will do.

 

[The Gopher]

We as a company are in a position to respond to whatever the market throws at us. Only since 2002 we have seen SARS, Iraq, Katrina, FlyI, and $70/bbl. All of those obsticles we faced as a weaker company as we are today.

Now I have no data, but I am willing to bet that ours is one of the most fuel-efficient networks out there. That is, we move more pax per gallon (or fewest gallons per pax) than about anyone, including JBU and SWA. While P2P is great for single-market flying, only hub and spoke can combine millions of possible itineraries to provide connections to about anywhere using the fewest fuel/aircraft resources.

This, and not to mention Tilton's oil-industry past helping us out by securing pipeline rights at dozens of US and world airports. We are first in line for jet fuel at many, many airports. If there is a shortage or embargo, we have dibs while other carriers are dry. A hedge is meaningless if there's no dead dinosaur juice in the pipe.

 

[NewHampshire Black Bears]

Excellent responses to a good topic !!

If I were (AA's) Arpey, I'd make QUICK friends (with our best(NEW) friend) Hugo Chavez !!

" *UCK Bush " !!!!!!!!!

Since we're KING in central/south America, stops in CCS(while enroute to destinations) might become the order of the day !!

"Fill er' up please, and check to oil" !!! :unsure:

NH/BB's

 

[Busdrvr]

A few things to consider concerning Iranian oil
- Iran produced approx 4 million B's a day in 2004 (5% of global output)
- Iran used 1.5 million B's a day, leaving 2.5 MBD's for export (3% of world consumption)
- I think China has a "sweetheart" deal with Iran. Cheap oil for a Security Council veto.

What does it mean? I think the potential is for China to be hurt the most in the case of a meltdown in the situation in Iran. Iran can't feed itself. They ignorantly think that the world needs them more than they need the world. I think I can cut my oil use by 3% much longer than they can go without food. Additionally this is a situation of "I don't have to outrun the bear; I just have to outrun you." Energy consumption in the west is much LOWER per unit of GDP, as well as significantly lower as a percent of household disposable income than in the countries most responsible for the huge increase in energy demand. In short, if oil doubled, I'd complain while I filled my tank, while someone in china would be dusting of the old bicycle.

How is the market valuing the added risk?
I'd suggest looking at the derivatives market for answers. First, I'd consider the changes in the Futures market. Then, and just as important, I'd look at the changes in the options market. By comparing the Call option price for vs the equiv underlying futures cost, you can determine the implied "volatility" of oil for that time period. This will give out an accurate picture of the expected range of oil prices and probabilities that the market assumes.

In general, oil is considered by most folks "in the know" as a mean reverting consumption commodity. In the past this was partly due to the fact that daily supply was in excess of daily demand at a given price due to excess capacity held off the market by OPEC. That excess capacity appears to be gone. Unfortunately, we have citizens who would rather we drill in the Caribbean for some of the dirtiest, most polluting oil, vs. disturb a few caribou. We have citizens who would rather we pay big dollars to a foreign Marxist dictator, forcing us to subjugate OUR nations best interest to HIS, instead of offer the incentives necessary to have OUR oil companies find oil HERE, for fear an oil company might make a profit, never realizing profit for an oil company means their retirement mutual funds go up. We develop the "pristine" Martha's Vineyard, yet refuse to develop the "pristine" ANWR. I wonder which one supported more wildlife. Liberalism at it's best.
Another "fun" little fact is that the Colorado, Utah, and Wyoming contain more oil than all of the Middle East combined. The oil is locked up in "shale". Shell Oil Company has a new process whereby they drill a bunch of holes in the ground and then drop in heaters. The heaters heat the ground to approx 800 degrees F. This causes the "hydro cracking" of the very large petro molecules "in situ". The process leaves behind very large carbon dominated molecules, and the oil that is pumped out is of incredibly high quality, requiring minimal refining. One acre of land yields up to 1.3 MILLION barrels. The problem? Despite an energy ration of 3:1 (3 units out for one unit in), it requires a HUGE amount of electricity. To produce 3 MBD, the project would require 2 times the current amount of electricity produced in the entire state of Colorado. They face environmental hurdles for the project itself, despite being a process that would result in LOWER global pollution when the alternatives are considered, plus hurdles for each and every additional power plant that has to be built to support the project. Again, we have PLENTY of oil, we'd just rather give our money to dictators, terrorist, and tyrants than disturb a moose in one of the most remote areas on the planet.

Effect on airlines? If oil were to spike due to trouble in the Middle East, we'd have issues caused by politics also. The most exposed airlines would be the ones who fly internationally. One key delineation however is that in the past Britain and the US have been forced to largely "go it alone". This time, we'd all be involved. I'd think LH, and AF would suffer more than UAL because they actually fly to the region. Same for BA. Additionally, the difference this time around is that NO airline has the cash to thwart a recovery. You have to figure that even if air travel was had relatively elastic demand, there are a large number of people who WILL fly at prices that are 20-30% higher. Because of the past few years of cutthroat competition, even the LCC's have very limited coffers to fight a fare war. An oil price shock would result in a few very quick BK's and possible liquidations followed by a equally swift rationalization of prices. My corner gas station didn't start losing money when oil went up, they passed on the price. With capacity rationalization, the airlines will also.

 

[TechBoy]

Another "fun" little fact is that the Colorado, Utah, and Wyoming contain more oil than all of the Middle East combined. The oil is locked up in "shale". Shell Oil Company has a new process whereby they drill a bunch of holes in the ground and then drop in heaters. The heaters heat the ground to approx 800 degrees F. This causes the "hydro cracking" of the very large petro molecules "in situ". The process leaves behind very large carbon dominated molecules, and the oil that is pumped out is of incredibly high quality, requiring minimal refining. One acre of land yields up to 1.3 MILLION barrels. The problem? Despite an energy ration of 3:1 (3 units out for one unit in), it requires a HUGE amount of electricity. To produce 3 MBD, the project would require 2 times the current amount of electricity produced in the entire state of Colorado. They face environmental hurdles for the project itself, despite being a process that would result in LOWER global pollution when the alternatives are considered, plus hurdles for each and every additional power plant that has to be built to support the project.

Sounds like this would be a great place to bring on line some of the new generation of nuclear plants. 4 or 5 800MW plants ought to do the trick. What is the cost of production of oil using the new technique?

Oil sands production is booming in Alberta because of higher prices and better extraction technology. It will be interesting to see if shale can work.

 

[Busdrvr]

Sounds like this would be a great place to bring on line some of the new generation of nuclear plants. 4 or 5 800MW plants ought to do the trick. What is the cost of production of oil using the new technique?

Oil sands production is booming in Alberta because of higher prices and better extraction technology. It will be interesting to see if shale can work.

I'm in total agreement WRT Nukes. I attended a meeting with the CEO of Shell's alternate energy resources division and the chief chemist for the project. While they would not give out any proprietary info, the cost was roughly $24 a BOE (it also produces NG), with approx half the cost being in the form of electricity. They will either go BIG or go home. Interestingly, one of the advantages of this technology is that it can use "off peak" power. Because soil is such an outstanding insulator and most of the resources are approx 1000 ft underground, they can use wind energy as well as cheap off peak conventional power. Additionally, if they build their own powerplants, they would have the ability to sell power at high peak demand times, thereby making making advanced coal and Nuke plants that much more efficient. I just wish the government would offer extremely good incentives that phase out rather quickly to force them to "sh1t or get off the pot"

 

[Ukridge]

Interesting responses. I am pleased to have finally have started a thread that has garnered some interest and response
A few points from Busdriver that he made well but I am not sure I fully understand. First, I have to say that I have always been a full supporter of the French attitude toward power generation. As you know the country is sprinkled with nuclear reactors and they have a flawless safety record due to sophisticated oversite. I bemoan Britian's lack of continued reliance on this as the U.K. is now actually an importer of oil. Rather redfaced to admit this with the stunning progress of North Sea oil production in the 70s and 80s. We do not have shale or sands serving as a potential helpmeet and I wish we would have followed the Gaulist model and let the atom do the work.
What confused me was that I thought with roughly 4.2 million barrels a day, that Iran was a bit north of the 5% figure quoted for a percentage of world production. I thought it was more in line of 8%. Either way, my concern is that open or imminent strife in Iran would have a political context that very well may serve as an accelerant to any percieved risk or volatility that is being priced into oil. I agree with your suggestion of watching the derivitives on this and a 3-5% drop in supply may well be covered by the "over-supply" at any one time but.....
Where my greatest concern lies is what would happen after a bombing campaign. For if the Straight of Hormuz were closed due to hostilities, there would be significant upward pressure on oil prices. I do not know if the U.S. recieves any oil at all from this area, but Europe and India/China certainly do and it is of concern to us. A pure drop of the 3-5% could probably be absorbed, but it is that unknown of the Straight that makes me wonder. In other words would it be only the Iranian oil that was not making it to market. Even if the good and gentle-hearted Sauds were to increase production to buffer the shortage, would this oil be able to be brought to market? Learned commentators are estimating that nearly 300 to 400 hardened sites would have to be bombed in any effort to eradicate an Iranian nuclear program. This would not be a jolly one-two and nip off for a drink type of operation. There would be disruption - perhaps a lot of it and perhaps not limited to Iranian oil alone.
As an aside (I realize this is an airline forum and not an affairs dicussion but...) I think this is a true test of China and India. Are they now members of the modern industrial trading group of nations and will they percieve Iran for the puerilish actor that it is becoming in upsetting the stability of the world order, or will they only look on their oil (and to a further extent natural gas) dependancy and act accordingly? I think the West is the effete in this matter and it is up to our Asian and sub-continent friends to step onto the stage. Barring pressure from this quarter there will be problems of the gravest consequence.
The second question that I had (again, not disagreement, rather wondering) is that the U.S. carriers have had a beggar of a time setting price increases in the past. From what I read this no longer seems to be true, but would a spike of 100+ USD oil be able to be seamlessly passed onto the consumer or is it rather (IMHO) the case that air travel really does have a cost and the last 5 years have been the extremest sort of aberation in having cheap fares all around?
Cheers

 

[jimntx]

Some really serious thought going on here. My thoughts about the subject...

I wouldn't worry about Iran doing anything to disrupt the oil supply. As I posted on another thread, they may be crazy but they are not stupid. Iran's leaders are well aware that there is no political support in the world, Arab or otherwise, for an attack on the U.S. or Israel. And, their oil sales are just about their only source of hard currency today.

As to the comment about the Iran/China relationship involving a quid pro quo in the Security Council...How does this differ from the U.S. preventing the U.N. from sanctioning the former Shah of Iran for years when it was well known that the Savak were torturing and killing the Shah's opponents? Or, the CIA engineering the coup that restored the Shah to the throne in the early 50's after a democratic government had been established in Iran? Or, the U.S continuing to support the ruling families in Saudi Arabia and Bahrain (which like Iraq has a Sunni ruling class, but a Shi'ite population)? When it comes to world politics, no ones hands are clean, now or in the past.

I don't see oil going to $100/bbl even briefly. A 2/3 increase in crude oil price would result in a pump price north of $4/gal for gasoline.The oil producers and the oil companies know that there is--even in the oil gluttonous U.S. of A--a price point at which people will actually cut back on their consumption. There is still excess capacity--not much, but some--that could be brought on line to temper price pressures over the short haul. However, if there is a disruption in the normal supply channels (and I foresee sabotage of Saudi pipelines before I see Iran doing something dumb), prices might well go above $80/bbl for some time.

At some point the developed world is going to have to think seriously about conservation and then follow that thinking with some action. Yes, one can say that the world is awash in oil. It's just not conveniently placed or stored at the moment--see also, oil sands, etc. And, we can all say that the tree huggers are preventing these sources from being exploited. All that sounds real good on Fox News and in the right-wing publications. And, the oil companies all trumpet that they would go after these sources immediately if only they could be exempted from the onerous environmental laws, yada, yada, yada. But oil is still a finite resource. Are we to condemn future generations to a dark and cold existence just so we can drive our Escalades and Navigators today?

The truth of the matter is that Shell, et al are all hot to trot to exploit the oil sands with all their new gee whiz technology as soon as every possible drop of conventionally recovered oil has been extracted from the ground. Trust me as someone who worked for Texaco for years. Changing the way they do business is not the strong suit of most oil companies. As long as ExxonMobil can rake in a gross in excess of $4billion/year doing things the good old tried and true way, why should they change? (For that matter, the airlines resisted changing anything about the way they did business, until they had to. ) The oil companies want what they have always wanted (and used to have)...the right to drill wherever and whenever they want, even if it means putting up a drilling rig in the middle of your child's sandbox. If there was a profit to be made from oil sand recovery, etc., the oil companies would be doing it. Passing up an opportunity to make money is not their short suit.

Nuclear power--done right--is the affordable answer for the time being. Though it pains me to say this, we might have to bring in the French to run the projects for us. They've done nuclear well and affordably for a long time. We have such examples as the South Texas Nuclear Project started by Houston Lighting and Power and others in 1971. Initial cost was to be $974 million and take 10 years to complete IIRC. By 1981, the project was at least 4 years behind schedule and the general contractor had raised the cost estimate to $4.4-4.8 billion. The general contractor by the way was Brown & Root, now part of KBR which is raking in billions in Iraq as a subsidiary of a small little known company called Halliburton. B&R thought the customers (HL&P, et al) should pay to repair the huge air bubbles in the containment building concrete which B&R had caused. The customers of HL&P are still paying a surcharge on their monthly bills to pay for the STNP and will be for some years to come.

As far as any of us being able raise ticket prices to cover costs, tain't so, McGee. I hate to be the Cassandra here, but the truth is that a great deal of our "revenue" passengers today are flying only because the tickets are so cheap. I often wonder if there is a one of us, SWA included, who is breaking even on Vegas flights. The flights are always full, but that is because the tickets are dirt cheap. Yet, the Conventional Wisdom today is that ticket prices are still too high. (I had a woman say that to me just the other day. She had to pay almost $300 for a r-t between PDX and ORD. ) The airlines are obviously gouging the poor consumer.

A little history as a comparison--and also a lesson in how cheap things are in this country and always have been compared to the rest of the world...Back in the early 80's I was at the Texaco office in Hamburg for 3 weeks. My ticket from IAH through AMS to HAM and return was about $1400 r-t, Business Class. While I was there, I had to fly down to Rome for a couple of days to cover for someone on the project who became ill at a critical test time. My last minute purchase fare on LH from HAM to FCO and return was over $1000, coach. Yet, my passenger was outraged at having to pay less than $300 to travel over halfway across the North American continent and back in 2006.

If we raised ticket prices even to a point where we don't lose money on the sale, a lot of passengers would disappear. Super Bowl tickets are going for $7500 a piece, but an airline ticket should be as cheap as a bus ticket.

 

[Dea Certe]

I am so happy to see United make it through the BK and come out on the other end. Good job, guys! Never forget it was the employees who are in a large part the reason customers keep coming back!

That said, I believe the airline industry is responsible for the public perception that air fares should be as cheap as bus tickets.

Airlines have continued to "give away" its product. The public knows if they wait long enough, they will be able to pick up a cheap seat. In the quest for domination, airlines will engage in suicidal fare wars.

It's my opinion that ultimately the public loses out in the long run. Small cities lose service, FF's lose amenities and the airlines fail to make profits.

I feel sorry for the business travelers who are caught up in this game. The very bread and butter of the airline business are really suffering. They lose the convenience of frequency, better on-board amenities and generally have to pay the most for their tickets. And they get the "pleasure" of being stuck in seats so small they can barely use their laptops! It's just awful!

I'm glad to see that United is focused on retaining their business flyers by offering a great business class product.

Great job, guys! Keep it up!

Dea

 

[x15]

----------------------
I am so happy to see United make it through the BK and come out on the other end. Good job, guys!
-----------------------

"Good job guys"??

What, good job in negotiating and letting the courts force you to give back half your pay, retirement, benefits, schedule quality, stiffing investors and creditors? Oh yes, great job!

 

[Fly]

You have a problem with United's schedule?!? 🙄 HELLO!!!! United still has the best route structure in the industry much to the chagrin of all the nay-sayers. The fact that we kept that intact throughout the bk process is quite impressive actually.

 

[Bulscu]

It was conditional... 🙂