Tag Archives: jet fuel

PlaneBusiness Banter Now Posted!

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It’s Tuesday. The Libyans are shooting at each other. Do you know where your favorite airline stock closed today? You don’t want to know. Do you know how much the price of oil increased today? Jet fuel? Ditto.

Today was an airline industry CFO’s worst nightmare.

In this week’s issue of PlaneBusiness Banter I talk about the current goings-on in the Middle East and just how much of an impact these events could have on airline financial results in the short term.

Before the people in Libya began shooting at each other, though, there were a lot of other things that happened last week that we will be talking about as well.

First, we talk in-depth about the fourth quarter earnings results and the fourth quarter earnings call for Pinnacle Airlines Corp. The airline is in the middle of a major transformation of itself. First it is taking three separate airlines and ending up with only two airlines. In addition, the airline’s contract with Delta Air Lines will not compensate the airline for its higher pilot contract costs (the TA was just ratified by all three pilot groups last week) until much later in the year. As a result, the numbers going forward into 2011 are going to be kind of ugly. Until all of this is sorted out.

But the business plan remains the same, the airline continues to build its Q400 fleet, and well, we’ll give you the lowdown.

In other news, the FAA held its forecasting forum last week in DC. Not a whole lot of news from the forum, but the FAA does forecast very slow growth continuing in the US domestic market for years to come.

On the international side, meanwhile, the IATA said last week that it expects international airline profits to decline 40% in 2011, down from 2010’s $15 billion plus figure.

We take a look at comparisons of operating margins and break-even load factors for the fourth quarter this week. Three airlines took the top three positions in each metric. Know which ones they were?

Air fare hikes? Oh yes, we talk about those too. Ones that failed, and ones that appear to have “taken.” You know the rest of the industry denizens are happy when Southwest Airlines rolls out a fare increase. And that is exactly what happened on Friday.

Airline stocks were fairly quiet last week — the calm before the storm I suppose you could say.

Anyway, as usual, all this and more — in this week’s issue of PlaneBusiness Banter.

Subscribers can access this week’s issue by clicking here.

Airlines: Don’t Look Now, But Oil Prices Are on the March

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In the midst of all the giddy sentiment that is starting to take hold in the industry concerning the “stabilization” in demand decline — a fact that April RASM estimates issued by some airlines have fueled this week — a new ugly problem is starting to make itself known. That ugly problem? Higher fuel prices.

As they say, if it’s not one thing, it’s another in this industry.

The big question concerning the recent relatively calm period of lower oil prices was this one — how fast would they start to ratchet up when the economy began to shows signs of recovery?

We, unfortunately, are starting to see that apparently the answer to that question is — pretty fast.

If you have not looked at the oil futures market lately, here is the bad news. As I post this (at about 1:30 PM CDT), the price of a barrel of crude is now sitting at 58.55, up almost $2 bucks for the day. Just two weeks ago, the price of crude closed at 50.80. Last Friday, it closed at 53.20.

Today’s price is the highest price that crude has posted since November.

What is fueling the push?

A combination of some encouraging signs on the economic front, U.S. equity markets that seem to believe the worst is over (whether it is or not) and a weaker U.S. dollar.

As most of you know, a declining US dollar makes dollar-priced oil cheaper for foreign buyers and tends to encourage demand, leading to higher prices.

Yes, it is indeed a vicious circle.

And one damn frustrating one if you are an airline. Do you hedge or not? At what price levels? With what hedging instruments?

Remember that many airlines were still paying the price (and dearly) in the first quarter for making the wrong move on oil futures last year.

What makes this rapid rise in the price of oil potentially more troubling for the industry than the record-breaking rise last summer is that it is rearing its ugly head at a time when the level of demand, i.e., revenue, has fallen through the floor.

Airlines, Jet Fuel and The Market Meltdown: What The Heck Is The Problem?

It’s Friday and it’s already been another rough day in the financial markets.

You guys are smart folks. You knew this was going to be the case.

The Dow Jones Industrials are now down another 275 points or so, after a sharp drop of almost 700 points at the open.

Okay, enough of the bad news.

Yesterday analysts Jamie Baker and Mark Streeter with JP Morgan issued a research note in which they wrote, “We’ve never witnessed such a disconnect between fundamentals & equities. True, AMR & CAL treaded water for a month after DAL & NWA filed, despite Ch11 plans to cut capacity by an amount sufficient to restore industry profitability. But nothing we’ve experienced comes close to explaining a recent $5 share price for United, considering we expect it to earn something similar (untaxed) in 2009.”

As I talked about in PBB this week, with the price of oil dropping like a rock, there is no logical reason for the corresponding battering of airline stocks.

And yes today, the price of oil continues to drop like a rock. As of this posting, the price of crude is trading at around $80 bucks and change. Yes, $80.

And no, this is no mystery. If the world is heading into a recession, the price of oil has to come down. It’s simple economics. No voodoo speculative manipulation involved in this drop whatsoever.

In Jamie and Mark’s note, they also said, “Sure, oil could ruin the forecast – We readily admit that unprecedented demand declines coupled with $140 oil would support multiple bankruptcies. But it is difficult for us to reconcile the implied global economic backdrop of this scenario with sharply higher oil. Always a risk, but a poor base-case assumption, in our view.”

They continued, “Simply put, we are having a tough time modeling losses – Fundamentals appear to be going one way, equities the polar opposite. Perhaps seasonality comes to the rescue, perhaps the flight to quality eases and redemptions moderate, or perhaps investors simply need more time to accept the profit implications of an industry rolled back to its 1998 size while enjoying fuel prices below those of last year. In any event, our conviction in 2009 profitability and bullishness for legacy equities has yet to waver and exceeds that of any prior point in our career.”

I agree.

Then again, with what is going on with Wall Street right now, maybe the thought of airline stocks being a potentially screaming “buy” opportunity is the least of what is top of mind of most investors right now.