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AA/etc Bet Fuel Stays High, What Happens If Not?  
User currently offlineenilria From Canada, joined Feb 2008, 6997 posts, RR: 13
Posted (2 years 11 months 3 weeks 5 days 4 hours ago) and read 2151 times:

I thought it was worth a thread to discuss this.

Airlines are taking on huge new order commitments to replace their fleets based upon $100 oil. The airlines all believe this is the new norm for fuel prices and are making decisions based upon it. Older airplanes will now plummet in value as the market is flooded with 737s, 717s, A319s, A320s, etc. being retired.

If we cross our fingers and fuel goes down, there is a huge opportunity for new ULCCs to wreak havoc on the legacies. Armed with cheap planes and lower operating costs (there is fuel price where operating cost excluding maintenance is actually less on older planes). For example, while winglets make a lot of sense in this oil environment, they are dead weight at the point that the cost of oil drops to a point where their weight exceeds the dollar savings they generate in fuel burn. As for maintenance costs, they are always higher on old planes, but that can be easily offset by a plane that can be acquired for $5 million instead of $45 million.

It is interesting to note that Allegiant seems to have little interest in getting on the new plane bandwagon. Smart? Short-sighted? Contrarian?

Discuss...

28 replies: All unread, showing first 25:
 
User currently offlineDCA-ROCguy From United States of America, joined Apr 2000, 4487 posts, RR: 33
Reply 1, posted (2 years 11 months 3 weeks 5 days 4 hours ago) and read 2110 times:

Like all bets, there's risk. I for one think $100 oil is unsustainable, and world economies will discipline it to the $70's. People can't spend their entire flipping paycheck on energy. It will drop. Suppliers and speculators need to get used to the idea.

AA seems to think otherwise, but they have time. It would take years for these a/c to be delivered, and there is probably some way for them to cancel orders if they decide they're unviable. If AA does take delivery of a bunch of new a/c and oil drops, the labor cost factor probably becomes more important.

Remember that Allegiant's cost structure is built to allow a/c to sit for days, so I suspect oil would have to go much higher than $100 to really put a dent in them.

Jim


User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 559 posts, RR: 1
Reply 2, posted (2 years 11 months 3 weeks 5 days 3 hours ago) and read 2054 times:

I am sure I will be required to look this up..... Recently I read that oil production only exceeds current demand by 3%. That's not a lot of slack. If there is true demand destruction in the form of an economic slowdown or some miracle fuel alternative that is actually cheaper, than you are right those making these bets will turn out poorly. However, they will have lowered their maintenance costs substantially no matter what happens to fuel prices and AA and others need new planes.

This is a nice summary of oil demand and usage:
http://omrpublic.iea.org/

Usage:
"Global oil demand in 2012 is expected to rise by 1.5 mb/d year-on-year to 91.0 mb/d. Growth is driven entirely by non-OECD countries, with OECD demand declining slightly. The global estimate for 2011 is raised by 0.2 mb/d to 89.5 mb/d (+1.2 mb/d year-on-year), with upward non-OECD baseline revisions outweighing downward adjustments in the OECD on persistent high prices and weaker economic activity."

Contrast that to supply:
"Global oil supply in June increased by 1.2 mb/d from May, to average 88.3 mb/d, with OPEC crude rising by 0.8 mb/d to 30 mb/d as Saudi Arabia boosted supply."

The projected usage in 2012 exceeds the current supply levels so new supply is going to have come online somewhere unless there is demand destruction. So while I didn't find the original piece I was looking for.. this should do.

In my mind regarding AA a more interesting is question is how are they going to pay for these planes? They don't earn a return on invested capital now and they just got the manufacturers and leasing companies to pony up $40 billion on top of the $17 billion of debt on AA's balance sheet. Good grief. I know operating leases are treated favorably in bankruptcy. But that kind of financing assumes that the demand for these planes will remain robust forever in the event something happens to AA.


User currently offlineAAExecPlat From United States of America, joined Sep 2009, 634 posts, RR: 4
Reply 3, posted (2 years 11 months 3 weeks 5 days 3 hours ago) and read 1985 times:

Hard to know in the short-term where oil prices are headed...but surely we can all agree on the fact that oil is a finite resource that will be in steadily higher demand as emerging economies in Asia, South America, and Africa develop a greater appetite for oil...long term, there's no way BUT up for oil prices. The only question is when a "replacement" is found and at what price the replacement is economical. Until then, oil is headed north.

User currently offlineytz From Canada, joined Jun 2009, 1947 posts, RR: 24
Reply 4, posted (2 years 11 months 3 weeks 5 days 3 hours ago) and read 1926 times:

You think $100/bbl is high?

Really? I think that's the lowest number airlines should be planning. I remember when AC ordered the 787s. They said they had modelled for $100/bbl and that's what drove them to order the 787s. Today, I would think airlines should be modelling for $150/bbl.

Quoting DCA-ROCguy (Reply 1):
I for one think $100 oil is unsustainable, and world economies will discipline it to the $70's. People can't spend their entire flipping paycheck on energy.

The intensity of oil and energy consumption has dropped. We get more unit of GDP per barrel of oil today, than we did in the 70s. That's why we can withstand $100/bbl. I think this is the new normal. The question now is, can we normalize at $150/bbl. That's what OPEC wants to know.

Quoting enilria (Thread starter):
Airlines are taking on huge new order commitments to replace their fleets based upon $100 oil. The airlines all believe this is the new norm for fuel prices and are making decisions based upon it.
Quoting enilria (Thread starter):
For example, while winglets make a lot of sense in this oil environment, they are dead weight at the point that the cost of oil drops to a point where their weight exceeds the dollar savings they generate in fuel burn. As for maintenance costs, they are always higher on old planes, but that can be easily offset by a plane that can be acquired for $5 million instead of $45 million.

It's not just oil. Think carbon taxes too.


User currently offlineflyAUA From Austria, joined May 2005, 4604 posts, RR: 56
Reply 5, posted (2 years 11 months 3 weeks 5 days 3 hours ago) and read 1914 times:

I don't see fuel prices ever plumetting, again... ever!


Not drinking, also isn't a solution!
User currently offlineenilria From Canada, joined Feb 2008, 6997 posts, RR: 13
Reply 6, posted (2 years 11 months 3 weeks 5 days 2 hours ago) and read 1836 times:

Quoting flyAUA (Reply 5):

I don't see fuel prices ever plumetting, again... ever!
Quoting DCA-ROCguy (Reply 1):
I for one think $100 oil is unsustainable

History says we are overdue for a sharp downward correction, but I don't doubt it will go back up again.

Quoting DCA-ROCguy (Reply 1):
and there is probably some way for them to cancel orders if they decide they're unviable.

It's called Ch11.  
Interestingly, with Boeing and Airbus doing the financing for AA's huge order they are opening themselves up to a lot more financial risk down the line. Once these planes are delivered AA could file for Ch11 and refused to pay the lease cost leaving Airbus/Boeing with a lot of planes to remarket that compete with their new airplanes.

Quoting DCA-ROCguy (Reply 1):
Remember that Allegiant's cost structure is built to allow a/c to sit for days, so I suspect oil would have to go much higher than $100 to really put a dent in them.

Yes and no. They can't afford to have new planes sit, agreed. The problem is that these planes burn a lot of fuel, so there is a point where that is a problem. We have already seen their traditional profit margin fall.

Quoting PlaneAdmirer (Reply 2):
I am sure I will be required to look this up..... Recently I read that oil production only exceeds current demand by 3%. That's not a lot of slack.

I always have thought that is a meaningless statistic. The question is not how much is being pumped, but how much is available to be pumped? Why would you ever pump more oil than is needed? You are just building inventory. Where is that supposed to go? There is only so much room to store oil that is not immediately needed.

Where is that 3% going? Into the ocean? I don't really even understand the statistic. There should be periods where they over-produce slightly and periods where they reduce production and allow inventory to decrease. It is the same with toy rifles, automobiles, or anything else that doesn't readily spoil.

Quoting ytz (Reply 4):
It's not just oil. Think carbon taxes too.

Well carbon taxes are a whole different thing. I don't think that concept will go across the pond until there is a viable alternate source of energy for airplanes. Absent that, I see no point to it other than to discourage air travel which seems to be of little interest. Additionally, rail isn't viable in North America so the only other outlet are cars which produce far more greenhouse gas per passenger.


User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 559 posts, RR: 1
Reply 7, posted (2 years 11 months 3 weeks 5 days 2 hours ago) and read 1800 times:

Quoting enilria (Reply 6):
I always have thought that is a meaningless statistic. The question is not how much is being pumped, but how much is available to be pumped? Why would you ever pump more oil than is needed? You are just building inventory. Where is that supposed to go? There is only so much room to store oil that is not immediately needed.

It means that any shock to the system will cause prices to spike - like a war, the closing of the Straits of Hormuz, revolutions in oil producing countries, the hijacking of a super tanker, a spill in the Gulf shutting down production. Good thing those events never happen.... On a positive side if economic growth should have a spurt, supplies will tighten substantially and prices will go up.

[Edited 2011-07-21 09:22:30]

User currently offlineRamblinMan From United States of America, joined Oct 2010, 1138 posts, RR: 1
Reply 8, posted (2 years 11 months 3 weeks 5 days 2 hours ago) and read 1795 times:

Quoting enilria (Reply 6):
I always have thought that is a meaningless statistic.

It is, but the alarmists will never stop quoting it, so it's pointless to argue.

Quoting enilria (Reply 6):
They can't afford to have new planes sit, agreed. The problem is that these planes burn a lot of fuel, so there is a point where that is a problem.

I wonder how close they are to the tipping point. One problem I see with their strategy is that if fuel goes high enough, they can't offset losses by increasing utilization, as that will cause them to lose more money.

You're absolutely right in bringing this topic up. Basically, unless the price of fuel stabilizes somewhere around today's price, interesting things will happen. AA has either made the best bet or the worst bet in airline history. I guess we'll know in another ten years when they're either back on top or they're gone.


User currently offlinemoman From United States of America, joined Aug 2004, 1054 posts, RR: 4
Reply 9, posted (2 years 11 months 3 weeks 5 days 1 hour ago) and read 1747 times:

Quoting RamblinMan (Reply 8):
You're absolutely right in bringing this topic up. Basically, unless the price of fuel stabilizes somewhere around today's price, interesting things will happen. AA has either made the best bet or the worst bet in airline history. I guess we'll know in another ten years when they're either back on top or they're gone.

What worries me about this strategy is that it seems remakably like the prior TWA strategy - huge paper losses, low productivity, senior, expensive workforce, and then ordering a ton of aircraft and making it seem like the nirvana strategy to drive the company forward. I understand the theory behing it - hedging fuel costs and expecting the lower fuel burn combined with lower maintenance costs to offset the increased capital expenditures, but in reality, it might not pan out. Let's be honest here - in a super spike of oil to $150-200 a barrel, every major US carrier would be bankrupt in short order. Air service would be significantly reduced, fleets downsized, etc. I could see us going back to to the days when there were 2-3 flights on larger planes between city pairs vs. the 10-12 flights on smaller planes.



AA Platinum Member - American Airlines Forever
User currently offlineenilria From Canada, joined Feb 2008, 6997 posts, RR: 13
Reply 10, posted (2 years 11 months 3 weeks 5 days 1 hour ago) and read 1727 times:

Quoting PlaneAdmirer (Reply 7):
It means that any shock to the system will cause prices to spike

It doesn't have any bearing on that really. Inventory is the relevant number. If you are pumping 1,000 barrels per day and demand is 997 barrels per day, but you have 70,000 barrels in inventory then you have an enormous buffer against a shock. Once that inventory has been built up there is little reason to keep overproducing. Holding inventory is very expensive. I don't know what the inventory level is for oil worldwide, but demand and supply should optimally be equal in the long term and economically it really should not affect prices much until supply is less than demand. Would you propose they crush unsold new cars into junk because it would be unhealthy to not overproduce in case of a shock?

Quoting RamblinMan (Reply 8):
It is, but the alarmists will never stop quoting it, so it's pointless to argue.

I'm going to try anyway!  
Quoting RamblinMan (Reply 8):
I wonder how close they are to the tipping point. One problem I see with their strategy is that if fuel goes high enough, they can't offset losses by increasing utilization, as that will cause them to lose more money.

I suspect they will buy up surplus A319s and such once the NEOs come from Toulouse.

Quoting RamblinMan (Reply 8):
You're absolutely right in bringing this topic up. Basically, unless the price of fuel stabilizes somewhere around today's price, interesting things will happen. AA has either made the best bet or the worst bet in airline history. I guess we'll know in another ten years when they're either back on top or they're gone.

While I don't want to see any airlines die, I do very much want the industry to refocus on leisure passengers as a valuable revenue generator. A dive in oil prices would really change the dynamics and allow for a new cycle of ULCCs which is what this country desperately needs.


User currently offlineaajfksjubklyn From United States of America, joined Jul 2007, 901 posts, RR: 1
Reply 11, posted (2 years 11 months 3 weeks 5 days 1 hour ago) and read 1727 times:

Quoting moman (Reply 9):
What worries me about this strategy is that it seems remakably like the prior TWA strategy - huge paper losses, low productivity, senior, expensive workforce, and then ordering a ton of aircraft and making it seem like the nirvana strategy to drive the company forward. I understand the theory behing it - hedging fuel costs and expecting the lower fuel burn combined with lower maintenance costs to offset the increased capital expenditures, but in reality, it might not pan out. Let's be honest here - in a super spike of oil to $150-200 a barrel, every major US carrier would be bankrupt in short order. Air service would be significantly reduced, fleets downsized, etc. I could see us going back to to the days when there were 2-3 flights on larger planes between city pairs vs. the 10-12 flights on smaller planes.

AA's "aquiring" of new planes isn't really affecting their balance sheet. There is a great article on how this all went down via cnn money, explaining the process.

If oil plummets, it only benefits them even more....cheaper fuel, more profit on flights etc.


User currently offlineAADC10 From United States of America, joined Nov 2004, 2061 posts, RR: 0
Reply 12, posted (2 years 11 months 3 weeks 5 days 1 hour ago) and read 1701 times:

Even if oil falls well below $100 it still makes sense to retire the MD-80s. They are old and need to be replaced anyway and they have a 30% higher fuel burn CASM than 73Gs or A320s. It is difficult to be competitive, except on very short flights, even when oil is at $60 per barrel.

Airlines are drooling over the 15-20% they hope to get with a 787 (over a 762). At 30% oil would have to be really cheap for the MD-80 to make sense. The A320NEO is expected to give them at least 42% over the MD-80, which makes sense at any oil price over the last decade.

The real speculation is around fuel hedges. Paying too much for oil futures cost WN when oil prices fell a couple of years ago, although they also benefited from purchasing lower priced fuel and lower priced future hedges.


User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 559 posts, RR: 1
Reply 13, posted (2 years 11 months 3 weeks 5 days 1 hour ago) and read 1667 times:

Regarding a shock...
Chart of commercial inventory levels of oil:

http://www.eia.gov/steo/gifs/Fig12.png

As long as a disruption is solved in two months it will be fine (yes, I know usage would go down but it's a tight margin).

US SPR holds 727 million barrels http://www.fossil.energy.gov/programs/reserves/. The US uses 18.8 million barrels per day. While a shock would reduce that amount, it's equal to 38.67 days at normal use rates.

Economic growth requires more energy production and finds like the Brazilian offshore or Canadian tar sands don't just turn on with a switch.

Feel free to think what you like.

Quoting enilria (Reply 10):
Holding inventory is very expensive.

Not having adequate and diverse supplies is even more expensive.


User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 559 posts, RR: 1
Reply 14, posted (2 years 11 months 3 weeks 5 days ago) and read 1613 times:

By the by.. just because there is extra capacity doesn't mean it has to pumped out of the ground or the ocean floor. The Saudis for years have been the swing producer cutting production when prices were low and increasing when supplies were tight and prices were high.

http://en.wikipedia.org/wiki/Swing_producer

[Edited 2011-07-21 10:37:19]

User currently offlineytz From Canada, joined Jun 2009, 1947 posts, RR: 24
Reply 15, posted (2 years 11 months 3 weeks 4 days 23 hours ago) and read 1493 times:

Quoting enilria (Reply 6):
History says we are overdue for a sharp downward correction,

You'e misreading history.  

When supply vastly exceeds demand you might see a crash. So far there seems to be no great oversupply. The BRIC countries and the rest of the developing world are using up every spare bit of oil left. So the chances of a crash are pretty slim. As Western consumption declines, their consumption rises.

Quoting enilria (Reply 6):
Well carbon taxes are a whole different thing. I don't think that concept will go across the pond until there is a viable alternate source of energy for airplanes. Absent that, I see no point to it other than to discourage air travel which seems to be of little interest. Additionally, rail isn't viable in North America so the only other outlet are cars which produce far more greenhouse gas per passenger.

Carbon taxes may not take off everywhere. But they do effectively raise the price of fuel, incentivizing the purchase of more efficient airplanes. An airline in a jurisdiction with carbon taxes may well need NEOs to be profitable in the future, while their lesser taxed competitor might get by with a modern OEO airframe.

Quoting enilria (Reply 6):
I always have thought that is a meaningless statistic. The question is not how much is being pumped, but how much is available to be pumped?

How is this meaningless? Supply and demand is what determines the equilibrium price. 6 month oil futures aren't being traded on the value of reserves. If a major refinery went boom tomorrow, surely oil prices would spike because demand would exceed supply. It's not like oil prices would not be impacted because the amount of oil in the ground stays the same.

I think far too many of us in the West are forgetting about the rise of India, China, Brazil, etc. These countries use a fraction of the oil we do in the West. But they want our (energy intensive) living standards. There's no way they'll settle for less. And as they demand more, they'll consume more.

And all that does not even include talk about the cost of production. Getting oil out of the tar sands is far more expensive than dropping a straw in the Saudi desert.

The only way oil prices are going back down, is if there's a major global economic crash. And even then, it'll only be down to $70, which will be followed by $120/bbl.


User currently offlineenilria From Canada, joined Feb 2008, 6997 posts, RR: 13
Reply 16, posted (2 years 11 months 3 weeks 4 days 23 hours ago) and read 1469 times:

Quoting AADC10 (Reply 12):

Even if oil falls well below $100 it still makes sense to retire the MD-80s.
Quoting aajfksjubklyn (Reply 11):
If oil plummets, it only benefits them even more....cheaper fuel, more profit on flights etc.

I think you miss the point of the thread. It would be good for AA in the absence of new competition, but new airlines could buy the surplused airplanes very cheaply and be able to vastly undercut AA's cost on their very expensive new planes. It is a variant of the Allegiant strategy, although the viable scale of such a strategy varies relative to the price of fuel.

Quoting PlaneAdmirer (Reply 13):
Not having adequate and diverse supplies is even more expensive.

I'm not sure what that means exactly, but if you mean limited competition among resource providers drives the price up, I would agree.

Quoting PlaneAdmirer (Reply 14):
By the by.. just because there is extra capacity doesn't mean it has to pumped out of the ground or the ocean floor. The Saudis for years have been the swing producer cutting production when prices were low and increasing when supplies were tight and prices were high.
Quoting ytz (Reply 15):
How is this meaningless? Supply and demand is what determines the equilibrium price.

Well, to some extent economics are moot with regard to oil because there is no free market. There could not be a more obvious cartel situation when obviates conventional economics. Regardless, there is no reason for more oil to be pumped than is purchased and thus my original point.

Quoting ytz (Reply 15):
When supply vastly exceeds demand you might see a crash. So far there seems to be no great oversupply.

Well, that will never happen because if inventories started to build up they would simply cut production. That's true in most industries in a modern era where inventory can be tracked. It is even moreso the case in a cartel situation where supply is tightly controlled.

Quoting ytz (Reply 15):
But they do effectively raise the price of fuel, incentivizing the purchase of more efficient airplanes.

Sort of true, but taxes often result in intended consequences in terms of what they incentivize.


User currently offlineytz From Canada, joined Jun 2009, 1947 posts, RR: 24
Reply 17, posted (2 years 11 months 3 weeks 4 days 23 hours ago) and read 1445 times:

Quoting enilria (Reply 16):
I think you miss the point of the thread. It would be good for AA in the absence of new competition, but new airlines could buy the surplused airplanes very cheaply and be able to vastly undercut AA's cost on their very expensive new planes. It is a variant of the Allegiant strategy, although the viable scale of such a strategy varies relative to the price of fuel.

The NPV drop in value of the old airplanes would be on the order of magnitude of (or at least proportional to) the expected savings from reduced fuel burn on the new airplanes. Why do you foresee a massive drop in airplane prices? Particularly if as you suggest oil prices aren't going to stay at $100.

Quoting enilria (Reply 16):
Regardless, there is no reason for more oil to be pumped than is purchased and thus my original point.
Quoting enilria (Reply 16):
Regardless, there is no reason for more oil to be pumped than is purchased and thus my original point.

These are reasons the price of oil will stay up. Yet, you're arguing the price of oil will decline.

Restricted production means a higher price of oil, not lower.

Quoting enilria (Reply 16):
Sort of true, but taxes often result in intended consequences in terms of what they incentivize.

I'm not going to get into the whole debate on free market economics, taxation, etc. I think on the micro level we can agree that carbon taxes have the effect of making fuel more expensive. In such a scenario, the value of increased fuel efficiency rises, make it more logical and profitable to fly more fuel efficient aircraft than your competitors.

If the US were to slap on a carbon tax (far-fetched I know) by 2017, AA would be laughing and their competitors would be crying.


User currently offlinePlaneAdmirer From United States of America, joined Jul 2009, 559 posts, RR: 1
Reply 18, posted (2 years 11 months 3 weeks 4 days 22 hours ago) and read 1338 times:

Quoting enilria (Reply 16):
Quoting PlaneAdmirer (Reply 13):
Not having adequate and diverse supplies is even more expensive.

I'm not sure what that means exactly, but if you mean limited competition among resource providers drives the price up, I would agree.

It means that a substantial amount of the world's supply, in excess of the 3%, swing amount comes from some very unstable places in the world (I assume it's against the site's protocol to name them). More swing supply will create greater stability.

Quoting enilria (Reply 16):
Well, to some extent economics are moot with regard to oil because there is no free market. There could not be a more obvious cartel situation when obviates conventional economics

Russia, Canada, and the US among others are not members of OPEC. The prices, even to OPEC members, are set everyday in the markets.

IMO, AA made a reasonable bet on the direction of oil prices and extracted remarkable concessions in the process. Their lenders and lessors made a less reasonable bet.


User currently offlineaaway From United States of America, joined Oct 2003, 1521 posts, RR: 14
Reply 19, posted (2 years 11 months 3 weeks 4 days 22 hours ago) and read 1297 times:

Quoting enilria (Thread starter):
As for maintenance costs, they are always higher on old planes, but that can be easily offset by a plane that can be acquired for $5 million instead of $45 million.

It is interesting to note that Allegiant seems to have little interest in getting on the new plane bandwagon. Smart? Short-sighted? Contrarian?

I think the potential positive impact to AA's CASM is being sorely underestimated if you consider the scale and scope of the replacement program being initiated with the aircraft orders. And this isn't only about Jet A since AA is essentially replacing three fleet types with two fleet types.

As for Allegant comparison, considering their business model, I'm not sure its really apples-oranges, fair or germane in discussing AA's decision to renew its fleet.



With a choice between changing one's mind & proving there's no need to do so, most everyone gets busy on the proof.
User currently offlineytz From Canada, joined Jun 2009, 1947 posts, RR: 24
Reply 20, posted (2 years 11 months 3 weeks 4 days 22 hours ago) and read 1297 times:

I remember when AC announced the 787 buy. Oil prices were in the range of $60-$70/bbl. People thought that was high and here Milton was talking about modelling prices as high as $100/bbl. I'm sure some people thought he was out there. Now he seems like a genius.

User currently offlineLAXtoATL From United States of America, joined Oct 2009, 1590 posts, RR: 2
Reply 21, posted (2 years 11 months 3 weeks 4 days 21 hours ago) and read 1248 times:

Quoting aajfksjubklyn (Reply 11):
AA's "aquiring" of new planes isn't really affecting their balance sheet.

This is not a unique financing arrangement. These are operating leases which AA as well as other airlines have plenty of, operating leases do not hit the balance sheet as debt because the lessor carriers the debt on their balance sheet. However whether or not you finance the plane and carrier reports the debt on the balance sheet or you lease the aircraft and don't have to carry the debt the monthly payments for the aircraft must still be paid. While it helps their long-term debt picture, their operating expenses will sky rocket - does it really matter where the payments are recorded on a financial statement? The payments will have to be made either way. It is important to remember that $13bln of financing was arranged for AA take possession of these aircraft, that $13bln was not a gift - it must still be repaid with interest just like any other loan.


User currently offlineLipeGIG From Brazil, joined May 2005, 11406 posts, RR: 59
Reply 22, posted (2 years 11 months 3 weeks 4 days 21 hours ago) and read 1216 times:
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FORUM MODERATOR

The point is, no matter the oil price is, the fact is some planes are just more expensive. Of course at higher fuel prices, the savings looks bigger, but just as a reminder, not all routes and even airlines are able to increase fares the same level as fuel expense increases.


New York + Rio de Janeiro = One of the best combinations !
User currently offlineokie From United States of America, joined Jul 2003, 2966 posts, RR: 3
Reply 23, posted (2 years 11 months 3 weeks 4 days 21 hours ago) and read 1180 times:

Quoting DCA-ROCguy (Reply 1):

Like all bets, there's risk. I for one think $100 oil is unsustainable, and world economies will discipline it to the $70's. People can't spend their entire flipping paycheck on energy. It will drop. Suppliers and speculators need to get used to the idea.


There is just a little more to this than speculation, supply and demand. First of all in the last about 2.5 years the dollar has fallen (devalued) almost 20% to other currencies and oil is priced in dollars.
So actually, (just rough figures) $100 per barrel oil is more or less $80 oil due to the US fiscal policy. Someone predicting $100 oil 2.5 years ago would roughly equate to $120 today.
The rest of the world is seeing $80 oil the US is seeing $100 due to exchange rates.

Okie


User currently offlineSonomaFlyer From United States of America, joined Apr 2010, 1665 posts, RR: 0
Reply 24, posted (2 years 11 months 3 weeks 4 days 20 hours ago) and read 1156 times:
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One way or the other, oil will not go down enough to make AA's purchase a money losing proposition. Here are some reasons why:

1. Supply/demand. No slack as mentioned above plus political problems in the middle east where so much oil is currently produced;
2. With the current idiocy going on in Washington right now, the U.S. is risking a default. A default will hammer the markets and oil producers could decide to switch to a different currency to price their oil. The U.S. Dollar is currently a "reserve" currency. If that goes away, our oil price will jump by at least 20% just due to switching the currency for oil quotes*
3. The MD-80's are getting really old and maintaining them will get much more expensive.
4. The fuel burn difference is so high that even if oil goes down by 10-15%, its still a good buy.

*with respect to #2, a debt default by the U.S. could have major negative implications for most of the world's economies, especially the U.S. Another recession has been widely predicted which of course will impact flying.


25 mogandoCI : If AA wants to really quickly fix their fleet, shouldn't they do short-term leases of 737NG/A32x planes from GECAS or ILFC while waiting for Boeing or
26 goblin211 : Oil is both unpredictable and not the same everywhere you go. Gas is a lot cheaper in Florida than in California for example and prices go down here a
27 SonomaFlyer : Given the financing support Airbus included in the deal, training is likely either included or highly discounted for AA. They'll also get lots of nic
28 Post contains images flipdewaf : Or maybe its the lifestyle that one chooses to lead that is unsustainable Fred
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