Category Archives: Oil/Energy

Wall Street Sends Politicians a Message: We Run This Hood

In case you’ve been occupied with feeding the cat, doing Sudoku, or eating a late lunch, the world financial markets are one big mess today.

So much for the power of politicians in Washington to snap their fingers and hope that the rest of the world simply agrees to sit back and let Treasury Secretary Hank Paulson do his “magic.” A couple of problems with that $700 billion gift from the U.S. taxpayers that Congress okayed last week. One, it’s going to take weeks before any of that buy-back of crappy debt even begins. Two, credit markets are frozen NOW. Third, now world markets are starting to unravel.

Which brings us to the big news if you are an airline investor, or someone who simply owns shares of your own airline that you work for.

Not only are world financial markets one big mess today — but airlines stocks are getting hit very hard.

You’d think that with the price of oil now down below $90 today that investors would be snapping up airline shares right and left.

After all — think of the potentially lethal profit cocktail we have going on — sharply lower fuel costs on their way, coupled with sharply reduced capacity. It would seem like the perfect recipe for higher airline stock prices.

Unfortunately that is not how the market is thinking today. Then again, the market is not thinking very clearly about much of anything. This is definitely one of those days when fear rules.

As for the airline sector, the biggest decliners as of this posting include: United, which is down 18% at 6.68, Continental Airlines, down 20% to 12.15, Republic Holdings down 16% to 7.86, AMR, parent of American Airlines, down 18% to 7.65, and US Airways, down 14% to 5.58.

Update on the Potential Benefit of $2 Cokes on US Airways

Back at the WHQ today. More from me later today. But first — as they say in TV land — an update on something I wrote earlier this week in regard to US Airways. In my post the other day about how quiet the flights were — sans the usual drink service — I alluded to the fact that perhaps the airline was also saving some money in terms of not having to provision as many soft drinks, etc. on board.

The airline continues to stock just as much, in terms of provisions, as it did before. I heard this first from one of the flight attendants on my flight yesterday and a quick check with the folks in Tempe today confirmed that yes, this was the case.

So the airline is not really saving any money, in terms of any weight issues onboard. And no — there is no danger of passengers being without ample refreshment should a long delay occur.

Where the airline is saving money is in the fact that fewer people are drinking soft drinks, which, obviously, means that in the big scheme of things the bill from Coca-Cola or whomever is lower than it would be normally.

Then there is the actual revenue the airline is making from charging for drinks.

Another point — several readers wrote me the last two days and asked more or less the same question. “Does this mean I think all airlines should do this? Have I lost my mind?” Or words to that effect.

No.

As I said in my speech at TheBeat Live Conference on Tuesday, we are in the middle of an extremely creative time for the airlines right now. The question is — given an airline’s brand and the level of service it wants to provide — against its current revenue and cost structure — what is an airline going to do in terms of ancillary revenues?

In the case of US Airways — the airline has continued to push to be more of a low cost carrier since America West merged with US Airways. In effect the airline really has no definable “brand” right now. So for them, I don’t think it is that big of a problem.

But — would I recommend that Continental Airlines do it? No. Never. It would be a total 180 degree turn to the airline’s continued attempt to stress a particular level of passenger service.

And I doubt Continental Airlines will do it. They may do some other things. But they are not going to charge for Cokes.

Just how to tweak an existing airline brand right now is a huge question — given the revenue and cost scenarios. But I don’t see this as a negative. I see it as a very opportunistic time for the industry. Or at least for those who are willing to break the old mold of “well if airline A is doing it, we must all have to do it.”

I just don’t think that holds anymore. Some things are going to work well for some airlines. But they are not going to work for all airlines in the same manner. Yes — those “marketing” people at airlines may just have to start earning their stripes. Instead of simply thinking about what routes to add next week.

The ATA Should Find Out The Facts Before Screaming Foul

Getting ready to make my way back to the WHQ today so just a quick note.

I see that late on Monday the Air Transport Association issued a press release in which President James May exclaimed, “The market’s extreme volatility suggests that speculators, who withdrew tens of billions of dollars from the commodities markets when Congress threatened to tighten oversight of excessive and harmful speculation, breathed a sigh of relief last week when action in the Senate seemed unlikely and returned to the energy markets in full force. Well, speculators are back and prices are up.”

Not hardly Jim.

Oil futures contracts for October expired on Monday. The price climbed on Monday because those who had taken short positions had to cover their rears. This was made clear yesterday when the price went back down — ending at $107 and change.

Putting out press releases in which it is clear you don’t know what you are talking about doesn’t help build confidence in your credibility. I’d suggest the ATA consult with a professional next time before spouting out nonsense.

We Are Also All Witnesses To The Biggest One-Day Jump Ever Recorded in Crude Oil Prices

One last datapoint before yours truly hits the sack.

For you history buffs out there, you need to mark down this date in history. Because today the price of oil gained more than $16 a barrel. This was the biggest one-day gain in dollar terms since 1984 — when crude futures began trading on the New York Mercantile Exchange.

Crude for October delivery rose $16.37, or 15.7%, to close at $120.92 a barrel on the New York Mercantile Exchange.

MarketWatch reports that the gain surpassed the previous price-gain record of $10.75, registered on June 6 of this year. The highest percentage rise in a single day was seen on Jan.3, 1994, at 20.9%, according to FactSet.

So how did jet fuel fare today? NY Harbor Jet was up 17 cents to 3.34/gallon while Gulf Coast was up 7 cents to 3.35 gallon.

Lehman Brothers Lives…Or at Least Parts of It and AIG Gets A Lifeline

Monday morning I thought we had lost another airline analyst as Lehman Brothers filed for bankruptcy. And not just any airline analyst — Gary Chase. Gary, who is a former Institutional Investor “Star” analyst and Dave Fintzen, his trusty associate, had packed up their belongings and were waiting their turn to run the gauntlet of news hounds outside the doors of their employer the last time we heard from them.

But as Scarlett said, “Tomorrow is another day.”

Today, a deal in which Barclay’s bank will take over the more profitable chunks of the bankrupt investment bank was revealed, and voila! It looks like there was no need for Gary and Dave to pack up their belongings in banker’s boxes after all.

According to a note from Gary this morning,

“The last few days have been a roller coaster ride (not the fun kind). We knew things were fluid, but we didn’t think they’d be this fluid. As late as yesterday in the afternoon, we really thought that twelve years and, more importantly, that the collective efforts of a group of people we had tremendous pride in had come to an abrupt end. Today, we’re very excited to be back in business with Barclays behind us.

We very much appreciate all the support and concern many of you expressed. It made a very difficult situation easier to take and we can’t thank you enough.”

Meanwhile, today Wall Street had a lot to digest. The biggest piece of news was, of course, the fact that the Federal Government — yes, that means you and me — has loaned mega-insurance behemoth AIG $85 billion in an attempt to give the company some time to get its affairs in order.

As I wrote this weekend in PBB, one of the things the company will probably try to do is divest itself of a number of its subsidiaries, and one of those companies is airline leasing giant ILFC.

The problem with this is that it’s going to have to be one heck of a huge company.

One of the reasons that ILFC thrived as a part of AIG is that the company could lean on AIG’s massive financial clout in getting much better than market rates on financing deals.

This is the same business model that GECAS uses — as it depends on Daddy General Electric to serve basically the same purpose.

But those days are now gone. Today, the financial arm of GE is the part of the company that is dragging the rest of the company down, and in the case of AIG, the company is now being forced to look at its assets from a “what ones can we extract the most premium from” perspective.

And clearly ILFC is one of those potential jewels in the sell-off bag.

Gustav’s impact on oil production

Active energy platforms in the Gulf of Mexico
While we wait for Gustav to make landfall, and hope that Holly’s family remains safe and sound, we also need to consider the impact of the hurricane on the oil and energy industry. This graphic from NOAA reminds us of the sheer number of energy-drilling platforms, most now evacuated, situated in the northern Gulf of Mexico — almost 4,000 active platforms. What we don’t see here is the shore-based infrastructure. Pipelines, terminals, and refineries along the coast are going to be hit as well.
We don’t know how bad it’s going to be yet, but there’s likely to be a hit at the gas pump for drivers and airlines alike nationwide in the coming days.
Another note as the hurricane approaches, Louis Armstrong International Airport in New Orleans discontinued flight operations at 6:00 PM Central time. Following some of the discussion over at Airliners.net, many airlines ran extra flights and used larger planes to assist in evacuations. AirTran, American, Continental, Delta, Northwest, Sun Country, US Airways, and other airlines all contributed to the flight exodus efforts.

My What A Difference 30 Days Makes: JP Morgan Upgrades Airlines

In the wee hours of this morning, analysts Jamie Baker and Mark Streeter of JP Morgan issued a huge upgrade of the airline sector. Not only were airline stocks upgraded, but the investment bank also upped its recommendation on airline credit.

From their research note this morning:

“We do not believe equities (or credit for that matter) have sufficiently responded to sharply lower fuel prices and resulting likelihood of profit resumption in 2009. Given the combination of improved non-fuel fundamentals, bolstered liquidity for many, and equity values meaningfully below March levels, we are significantly revising our estimates and equity/credit ratings for North American airlines.”

The two then went on to explain:

“This Isn’t Just An Oil Call – Jet kero prices have plummeted over $1/gallon from recent highs, representing $13 billion of reduced annualized expense. This represents both the most rapid and most significant expense savings ever realized for the airlines, standing well in excess of any historic precedent for demand weakness.

The Industry Has Also Changed – This isn’t the same industry that gave us pause last March. Annualized system capacity cuts have reached 8%, liquidity defenses have been bolstered for many, other revenue trends (bag fees, etc) are surging, one merger appears set to close . . . and the sell side largely has settled into a period of uncharacteristic bearishness.

Best Yet, Equities Are Down – Sure, equities haven’t ignored oil’s descent. But many Legacy equities are still well below their March levels despite the aforementioned fundamental changes. Continental is 22% lower, Delta 23% lower, United 54% lower, to name a few.”

On the balance sheet side of the equation, Baker and Streeter also re-ranked the capital structure ranking. Yee haw.

So if you are about to run out and purchase airline stocks, which stocks do the JP Morgan Dynamic Duo suggest you take a strong look at?

No surprises here.

Baker and Streeter said in their note that the legacy carriers they cover are all now “overweight,” they are “neutral” on the “discounters,” and “underweight” on the regionals.

With a few exceptions.

“LUV downgraded from N to UW, having outperformed as fuel made its ascent. PNCL maintained as an OW and RJET as N. AMR, CAL, and LCC upgraded from UW to OW; DAL and ALK from N to OW; NWA from UW to N. AAI and UAUA maintained at OW, JBLU at N.”

Traders are standing by now to take those buy orders.

Good News for Airline Stocks: Oil Continues Fall as Dollar Rises

The week ended on a great note for airline stocks.

The price of oil took another drop today, closing at 115.20, down almost $5 today alone.

So why is the price of oil continuing to drop?

Fears that the U.S. economic slowdown is now beginning to spread around the world is one reason. That is what has more or less caused the dollar to rise and the euro to fall this week. So much so that the dollar posted what appears to be its biggest one-day gain in the last four years today.

Couple this with continuing sentiment that the recent higher prices really have dented demand to a certain extent, especially in a number of Asian markets, and well — there you go.

For airline stocks, the screen was all green this afternoon, with only two exceptions. Shares of Air Canada were down on that airline’s earnings revelations today — and ADRs of China Eastern Airlines got smacked around a bit as the stock market in China took a big hit today on what some were calling a “Post-Olympic” wake-up call.

The biggest gainers for the airline sector today were:

US Airways. The stock here ended the day up 18%, closing at 7.96. The stock picked up a whopping 54% for the week as it posted the biggest gain for the week of any airline stock we track here at PlaneBusiness.

Shares of United Airlines rose 16% Friday, closing at 11.13. Shares here were up 36% for the week.

Shares of Continental wrapped up the top three spots for the day, as shares here picked up 12%, ending the week up 26% at 16.48.

Nice. Very nice.

Not so nice?

Shares of ExpressJet ended the week down 22%, closing today at 25 cents. The stock takes PlaneBusiness Basement honors for the week.

Good News On Jet Fuel Front

Relatively speaking.

The price of New York Harbor jet fuel closed today below $4/gallon. At $3.92 to be exact, down 10 cents.

Meanwhile, the price of oil was down to $129.29 at the close of trading today, down $5.31 on the day.

Another day, another day of demand questions, as more traders look at the potential of the one-two punch of a slowing economy both here and abroad, in addition to rising inflation.

One of those “good news, bad news” situations that Wall Street loves so much. The good news? Energy prices are falling. The bad news? They’re falling because more and more estimates of demand worldwide are being tempered because of more problems on the economic front.

But hey, we’ll take it.

Daily Bad News Rundown: Oil and Jet Fuel Hit Record Highs Again

Sorry to be a bit late tonight with today’s oil news, but yours truly had a little trip to the dentist’s office today. I won’t go into the less than pleasant details. Which reminds me. I don’t think I’ve ever gone when there were pleasant details.

But anyway, this put me back at the WWH late, and well, to be honest, I then had to slurp some soup and take some pain killers before the throbbing in my gums would stop.

Okay, can I have some pity here or what?

Speaking of pity, I pity the airline CFOs out there. It’s not going to be a happy Fourth of July for them, as the price of both oil and jet fuel hit new record highs again today.

After a bit of bouncing around, oil closed today at $145.29, up $1.72 from yesterday.

On the jet fuel front, New York Harbor Jet A closed at $4.36/gallon. Yes, another record high.

I do have one bit of very good news that relates to Wall Street however.

The markets are closed tomorrow in honor of July 4th.

Woo hoo. Get the sparklers out and start the parade.

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