Businessflyer
Topic Author
Posts: 280
Joined: Thu Aug 30, 2001 4:23 pm

Could Oil Be The Knock-out Blow For AA And UA...

Thu Mar 06, 2003 11:11 am

... and for many other airlines?

There is a story in today's Financial Times, that nearly all of United's cuts in wage costs have been eroded by increases in oil prices and that consequently, it is looking increasingly likely that it will not meet the financial milestones dictated by its debtor-in-possession funding.

It also highlights American Airlines as being very vunerable since it has previously hedged only 40% of its future fuel costs for the first quarter and only 32% for the full year. Clearly it is banking on oil prices falling during the year. In contrast, however, Southwest is apparently 100% covered for the first quarter at US$24 per barrel (I think the current oil price is close to US$40!) and is 84% covered for the entire year at US$23.

It is interesting to see how hedging against future fuel costs can sometimes pay dividends. BA, for example, hedged more than 50% of its total fuel costs in 2002, which meant that when fuel costs for other airlines were increasing, BA managed to reduce its total fuel costs in 2002 by more than 30%.

Anyway, it will be interesting to see what the impact of the higher oil prices will be on the industry. Apparently US and European airlines are lobbying their governments to try and reduce the involved costs... they may need to... otherwise there may be far fewer airlines flying if oil prices stay as high as they now are!

 
workbench
Posts: 163
Joined: Wed Aug 11, 1999 3:22 am

RE: Could Oil Be The Knock-out Blow For AA And UA...

Thu Mar 06, 2003 12:01 pm

The war with Iraq will be the final nail in the coffin for both UA/AA. UA will see CH 7 if the war lasts much over a month and same with AA. AA will not have the luxury of a CH11 filing as they are too heavily leveraged currently and are unable to arrange DIP financing. AA will go straight to CH7 within the same time period of a war.
 
Ilyushin96M
Posts: 2506
Joined: Sat Sep 04, 1999 3:15 am

RE: Could Oil Be The Knock-out Blow For AA And UA...

Thu Mar 06, 2003 12:33 pm

My friend at Midwest Airlines says they were paying $1.25 per gallon for jet fuel, down from $1.30. He said all the problems the airline is having of late are a direct result of oil prices. All the events leading up to Bush's war with Iraq are causing these problems, and if we go to war, his administration can be credited for ruining the US airline industry. This is the talk at YX right now; my friend is actually considering going to DC as part of an anti-war protest, because he wants to keep his job. However, his hours were reduced to part-time yesterday, so he and many other people at the airline are already facing hardship from the problems caused by the high oil prices.
 
OPNLguy
Posts: 11191
Joined: Tue Jun 15, 1999 11:29 am

RE: Could Oil Be The Knock-out Blow For AA And UA...

Thu Mar 06, 2003 12:52 pm

Based upon what I've read various places, it would appear that UA is in a much different (worse) situation than is AA. Already in Chapter 11, and with oil at $40 a barrel (likely to go even higher should an Iraq war start), UA is far more at-risk of a shutdown and Chapter 7 liquidation than is AA. To be sure, AA is also bleeding, but they are not anywhere near the condition that UA is in.

Ironically, and depending upon which "expert" you happen to listen to, a UA shutdown could be an immediate boon to AA, in that AA could quickly fill -some- of the void at ORD. AA still needs to get its overall costs down (like others), and they'll continue to attempt to do so, but a UA shutdown would take a lot of the immediate pressure off.

If UA keeps going, AA could very well be the next airline to file Chapter 11, but they'd reportedly do so with at least a billion in unencumbered cash to expedite the process. The chances of AA shuting down, as in Chapter 7, and pretty slim.

All of the above and .50 will get you a cup of coffee....  Big grin
ALL views, opinions expressed are mine ONLY and are NOT representative of those shared by Southwest Airlines Co.

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