American Airlines doing all it can to cut costs as fuel prices rise

[FWAAA]

FWAAA,
Can you please explain to us how fuel hedging works for airlines during these tough times?
Also, airlines are raising fairs and adding fee's to offset fuel costs, and with the mergers, less competition makes this easier to do. The way I look at it, aa is making a killing right now.

I don't have much skill explaining fuel hedging but I'll give a rough estimate. You're more optimistic about AA's first quarter than I am.

My WAG estimate is that AA will lose about $450 million in Q1 or about $5 million/day. AA will spend about $0.50/gal more for fuel than the first quarter of last year, when AA paid $2.22/gal. That means that fuel will cost AA about $300 million more than in Q1 of 2010. So it looks like a possible loss of $800 million.

Offsetting some of that fuel price increase are the slightly higher fares this quarter and the bag fees and preferred seat fees (which elites like me who fly AA a lot don't have to pay - we're exempt). Plus some ticket change fees (from which we are not exempt). I'm guessing that the extra revenue (less the winter storm-related losses and the Japan disruption losses) will total about $350 mllion for Q1, leaving a net loss of about $450 million (800 - 350 = 450).

Making a killing? Airlines rarely make killings in the first quarter. Profits are usually more likely and larger in the second and third quarters.

Fuel hedging? My guess is that hedging will save AA about $50 million in the first quarter. In Q1 2010, hedging actually cost AA about $50 million extra above and beyond the market price for fuel. For the past three months, fuel prices have spiked a lot, so perhaps AA could potentially save even more from its hedging, maybe even $100 million. AA's hedges aren't like the WN hedges of several years ago where WN was effectively paying $35/bbl even when the market price was double that. AA's hedges might save a few dollars per barrel as oil prices were already high and climbing when AA entered into the hedges. Hedging pays off huge if you accuartely predict steep oil price increases years in advance, like WN famously did in the last decade.

Overall, I predict a first quarter net loss of $450 million unless the revenue is up a lot more than I expect. Fuel hedging might also be much more successful, potentially saving AA a lot in fuel prices. Still, even if both of those happened, I still predict a net loss (just not quite as large).

 

[FWAAA]

My WAG estimate is that AA will lose about $450 million in Q1 or about $5 million/day. AA will spend about $0.50/gal more for fuel than the first quarter of last year, when AA paid $2.22/gal. That means that fuel will cost AA about $300 million more than in Q1 of 2010. So it looks like a possible loss of $800 million.

Offsetting some of that fuel price increase are the slightly higher fares this quarter and the bag fees and preferred seat fees (which elites like me who fly AA a lot don't have to pay - we're exempt). Plus some ticket change fees (from which we are not exempt). I'm guessing that the extra revenue (less the winter storm-related losses and the Japan disruption losses) will total about $350 mllion for Q1, leaving a net loss of about $450 million (800 - 350 = 450).

Making a killing? Airlines rarely make killings in the first quarter. Profits are usually more likely and larger in the second and third quarters.

Fuel hedging? My guess is that hedging will save AA about $50 million in the first quarter. In Q1 2010, hedging actually cost AA about $50 million extra above and beyond the market price for fuel. For the past three months, fuel prices have spiked a lot, so perhaps AA could potentially save even more from its hedging, maybe even $100 million. AA's hedges aren't like the WN hedges of several years ago where WN was effectively paying $35/bbl even when the market price was double that. AA's hedges might save a few dollars per barrel as oil prices were already high and climbing when AA entered into the hedges. Hedging pays off huge if you accuartely predict steep oil price increases years in advance, like WN famously did in the last decade.

Overall, I predict a first quarter net loss of $450 million unless the revenue is up a lot more than I expect. Fuel hedging might also be much more successful, potentially saving AA a lot in fuel prices. Still, even if both of those happened, I still predict a net loss (just not quite as large).

After I posted this, AA released its estimates for first quarter fuel cost, which was exactly as I predicted: $2.72/gal in Q1:

http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDI3NTY1L3htbA%3d%3d

Also, after I posted this, Helane Becker released her estimate of AMR's first quarter loss; she estimates that AA will lose $450 million, exactly the same as my estimate above:

http://aviationblog.dallasnews.com/archives/2011/03/analyst-expects-amr-to-lose-ov.html

Wonder if Ms Becker reads this forum or whether she independently estimated the loss?

In about three weeks, we'll see how close I was on the first quarter loss.

 

[Deleted member 14439]

After I posted this, AA released its estimates for first quarter fuel cost, which was exactly as I predicted: $2.72/gal in Q1:

http://phx.corporate-ir.net/phoenix.zhtml?c=117098&p=irol-SECText&TEXT=aHR0cDovL2lyLmludC53ZXN0bGF3YnVzaW5lc3MuY29tL2RvY3VtZW50L3YxLzAwMDA5NTAxMjMtMTEtMDI3NTY1L3htbA%3d%3d

Also, after I posted this, Helane Becker released her estimate of AMR's first quarter loss; she estimates that AA will lose $450 million, exactly the same as my estimate above:

http://aviationblog.dallasnews.com/archives/2011/03/analyst-expects-amr-to-lose-ov.html

Wonder if Ms Becker reads this forum or whether she independently estimated the loss?

In about three weeks, we'll see how close I was on the first quarter loss.
[/quote

Gee, hope you did not break your arm patting yourself on the back.

 

[FWAAA]

Gee, hope you did not break your arm patting yourself on the back.

I'm sorry that the humor went over your head. I posted it as a light-hearted jab at WT - you know, the self-described know-everything truth-teller.

 

[FrequentFlierCA]

Fuel is a game-changer, not just for AA but all airlines. The carrier are caught in a pincer movement between rising fuel and the inability to raise fares to market prices (prices that reflect the true cost of inputs, from fuel to labor to materials).

I know some of you think AA is hiding money and doing wonky things with the balance sheet, but the reality is that your "restore and more" has gone to Saudi Arabia.

 

[WorldTraveler]

I'm sorry that the humor went over your head. I posted it as a light-hearted jab at WT - you know, the self-described know-everything truth-teller.

why would I have any ill-will against you for understanding and correctly forecasting what happens in the business?

Glad you and Helene agree.... she also had some not so flattering things to say about the challenges facing AA - so hopefully between the two of you, someone can come up with a viable turnAAround plan.

Accept my heartiest congratulations and good natured banter at your ability to understand the truth of the current situAAtion.

A $450M loss to start out the year when demand has really not slowed down even with price increases doesn't bode well for later in the year when demand surely will slow down as the economic problems due to Japan and fuel-driven demand reductions do take effect.

IT should also be noted that US does not have any fuel hedges in place and thus will feel the complete brunt of fuel price increases. Believe it or not, but AA might not be in the worst situation with respect to cost increases.

 

[bravozulu@afw]

Has ANYONE noticed how many CAPITAL improvements are being funded/spent? NEW/ REMAN golf carts for CSMs/MGRs at our Line statns, New $2.5K FLAT Screen Status Quo Advisors, the Quantum Computer Project with 586 Pentium Processors, Painting ANYTHING that does NOT MOVE, and TOO MANY OTHER PROJECTS TO NAME. These MONEY PITS were created to SPEND MEGA BUCKS, all in order to show a PAPER LOSS!!!!

At AFW, Bill Collins, and his minions, showed up to give us a good 'DOG 'N PONY' show, without displays or refreshments. We learned of EPQA's new projects to improve QUALITY. Nuttin new here. WE asked for a revisit of the 4/10 schedule, due to the workers' high fuel cost. WE asked for 'Just in Time' parts program to supply needed parts/ assys that are REPLACED each MBV. It seems that non-union personnel can't look at their AOG lists and determine what parts are used on every OUTBOUND PLANE!! I was told that parts that are used on multiple fleets are kept in hangar SIX, TULE. Any requests for them are processed EXCLUSIVELY, job protection?, by SIX personnel so to keep the quantities at a PREDETERMINED level, thus keeping the vendors busy!!!! WE HOUNDED BILL on the 'TOOTHLESS' Red Line Program at AFW. WHY does it take SIX MONTHS after a 'RED LINEd' document is modified to become a 'NEW AND IMPROVED' Document??? The Crew Chiefs have learned of the ORIGINAL Modified Document, made COPIES, for themselves, and OPERATE with a XEROXed document, C/C Communication is LIGHT YEARS ahead of Corporate Communication!!!

The show HAD to stop, they had to get to DFW for a 1745 departure!!

 

[Deleted member 14439]

1. FWAAA, No not over my head. I just find NO humor in what is going on.
2. Yep, another classic dog and pony show at AFW today. Several questions,and the as expected non anwser anwser to each one. I cited but 2 examples of productivity inefficiencies. To his credit Mr.Collins admitted to their failure on the wireless infrastructure. Yes we have 30 some panasonic toughbooks collecting dust in the toolroom.
2a. I asked about the man hours assigned to our pattern cards. Many cards, as I have posted before, have grossly inaccurate man hours assigned to them. One example, 3-10 link inspection left wing card calls out 2AMTs 16 hours. Right wing 3-10 inspection calls 2 AMTs 40 hours!!! I ask those of you smarter than I. How with this one small example can we believe our "labor costs" are SO out of line? Yes I realize more goes into the equation but there are MANY examples of this thru out our maintenance program. The reality of this particular example is this job can be done in one 8 hour shift with 4 COMPETENT, SKILLED AMTs.
3. I did not bring up the FACT that our little maintenance base is falling apart. Our brothers and sisters in facilities are doing what they can but they are simply understaffed and mismanaged. Docks broken, gear pits patched together, gse in very poor condition.
4. EWIS. This is going to be a big one. The majority of non routines I have seen are for "dust and debris" on wire bundles. It has been decided that AMTs will handle the cleaning of the wire bundles. Why are the cleaners not given this task? This means having a 32 dollars an hour AMT doing what a 10 dollar an hour cleaner could do. Which of course translates to time lost on a repair, eco or AD that an AMT could have been doing. Am I making sense here?

 

[eolesen]

Dvldog says AFW is falling apart, and BZ says they're painting anything that doesn't move, installing flat panels and buying new golf carts instead of Ford Rangers...... which one is it?

 

[Bob Owens]

Dvldog says AFW is falling apart, and BZ says they're painting anything that doesn't move, installing flat panels and buying new golf carts instead of Ford Rangers...... which one is it?

Why are they mually exclusive? Do new golf carts and flat panels make the Docks and gear pits redundant?

 

[eolesen]

They may not be, but you have one guy saying they're spending money to spruce up the place, and another guy saying it's falling apart from neglect... seemed a bit contradictory at first read.

At least the golf carts and flat panels can be loaded up on a truck and moved somewhere else when AFW gets spun off or sold to FedEx or UPS?...

 

[Deleted member 14439]

Dvldog says AFW is falling apart, and BZ says they're painting anything that doesn't move, installing flat panels and buying new golf carts instead of Ford Rangers...... which one is it?

Ok, so don`t lsten to a guy that has been at AFW sine 1994. Denial of problems and issues does not make it go away as we are constantly reminded. Flat panel televisions? Yep, the company bought a bunch of them and mounted them thru out the hangar. No it was not so we could keep up with news and sports scores. They are there to display charts and graphs from DWMS on each airplanes status. There are not many AMTs that care about these charts and fewrer that even understand them.
I point out these issues here in my little corner to balance the "productivity" issue. When a landing gear pit, that was a known problem, breaks down in the middle of a gear change that impacts my productivity. When some knuckehead decides to send ALL safety harness out for recertification at the same time, that impacts my productivity. Leaving work last night we just shook our heads when we got to the turnstiles. Why? It was because 50% of the turnstiles were taped off, broken, unusable out of service.
So feel free to dismiss my examples as one disgruntled mechanic. I see these examples as an indicator of a much larger problem.,,,

 

[eolesen]

Not dismissing at all. Just asking for clarification.

 

[Bob Owens]

They may not be, but you have one guy saying they're spending money to spruce up the place, and another guy saying it's falling apart from neglect... seemed a bit contradictory at first read.

At least the golf carts and flat panels can be loaded up on a truck and moved somewhere else when AFW gets spun off or sold to FedEx or UPS?...

Well if the gear pits and docks are all busted up AA wouln't get much would they? I think what we have here would be akin to getting your car washed every week but never changing or checking the oil.

 

[chris perry]

Well if the gear pits and docks are all busted up AA wouln't get much would they? I think what we have here would be akin to getting your car washed every week but never changing or checking the oil.

Someones brother in law must be selling flat panel TV's to the company.Dam things are multiplying at DFW...
and have been for sometime. Meanwhile the operation is in a state of Panic....and getting worse. I just hope this new guy
can get a grip on things,he certainly has his work cut out. We havent had any leadership here since Bob V left. Its been on a steady
downhill slide. Example the last two didnt even introduce themselves . No meetings,how do you do,nothing.....