FWAAA said:
Thanks for posting this. I didn't write the article for Seeking Alpha, but I could have, as it matches exactly what I've been posting here ever since AA announced the huge new plane orders in the summer of 2011.
You can hedge fuel, but that's risky and you have to keep doing it constantly. And you might lose spectacularly, like DL and WN and UA have over the past 12 months.
I have always liked how Parker lets it ride (for the most part) on hedges. Delta does well on hedges when fuel is high but then end up taking huge losses when fuel dips. I feel like at the end of the day it evens out but I still don't want something I am investing in taking MTM losses of billions and thinking its okay.
Playing the game is fine, but don't be at 50-50 win/losses.
FWAAA said:
As the author pointed out, a long-term hedging method is to buy new fuel efficient aircraft that tend to burn less fuel per seat mile, like A321s instead of old 757s and 787s instead of old 767s. Since aircraft have to be replaced eventually at every airline, might as well bite the bullet and get it over with, and save fuel in the process. Add in the maintenance holiday new aircraft bring and you save labor costs.
I agree on the mirco of just fuel costs. Some what on maintenance costs.
In MX, checks start (hangar checks) start 18 months in. They are pretty short visits (on narrow bodies) but they still happen. I think the idea of this maintenance holiday is a little bit of a joke. If you are a carrier like DL and AA who do a lot of work in-house the money you save from not doing the heavy heavy work ends up being blown on tooling, facilities, staffing and training.
However on the macro of the airline, ownership, acquisition, leasing are also a huge part of this. I also believe in getting a ROI or do like some of the other airlines do and turn the assets when they are young (6-12 years) so that the selling price is still high and they get the ROI that way.
In this fuel environment I would MUCH rather see AA slow down on the fleet turn over and take that capex and put it toward the balance sheet. The main reason I wont touch AAL and UAL is that balance sheet. They are not working nearly as hard as DAL to get it cleaned up. Also, IIRC, AA has ALOT of its fleet leased (from burning the furniture to heat the house pre-BK) and I believe a large amount of the big fleet order is also planning to be leased.
I'm not a fan of airlines not owning a lot of its assets.
FWAAA said:
Not often mentioned is the environmental benefit, as the new planes reduce fuel consumption rather than successful hedges, which encourage airlines to fly less-efficient planes which do more harm to the environment.
meh its a feel good thing but really does nothing for you. I highly question if the crowd that might pay a little more for this is large enough to make it worth while.
FWAAA said:
If fuel drops further and stays low for a long time, then AA's refleeting strategy won't pay off quite as well as if fuel stayed very expensive, but even with very low fuel prices, AA still benefits some from the fuel efficiency plus the maintenance holiday plus the environmental impact. On top of that, this article points out the very low interest rates that AA is paying on new long-term debt, and that's nothing to sneeze at.
I don't think fuel has to get much lower. Didn't AA change there plan a little for the long haul fleet already (deferring 787s)? I know UA has changed its fleet plan a little, buying used 73Gs/319s and keep 767s around.
however, one thing a lot of people are forgetting, The nitrogen kits for the fuel tanks are going to start being a real issue in a few years. That is a big investment and it will be make or break for some of these older (but not done) aircraft.
FWAAA said:
Yes, used 717s and MD-90s are almost as fuel efficient as new jets, but another airline has basically cornered the market on those and bought up all the available copies, and so AA doesn't have the option of buying several dozen 717s and MD-90s, as that ship has long sailed. AA's only choices are to buy new fuel efficient planes or fly old planes and hope that fuel hedging gains make flying them affordable.
The 717 and MD90 are both rare cases, and I honestly am not sure they would have been a good fit for AA. (at least the direction Parker wants to go)
The MD90 has a LOT of issues with it maintenance wise. IMO the only reason Delta finally started buying them used was because we finally started getting all the bugs worked out. DL had a good lead time on AA to get those bugs worked out and IMO it would have been a big gamble for AA to take them on.
The 717 also has some issues. Well that me say that differently, the BR715 is a turd on a high cycle aircraft. It is a engine originally designed for low cycle flying. DL has been working with Rollers to get PIPs done but when DL took them on from FL/WN the TBOs were ~18months. (CFM56 is about 4-5 years from comparison). This is a big reason why the engine will be coming in-house vs going to RR for work (the original plan was for them to be PBH engines). Again, if Doug is wanting to get out of the maintenance business I'm not sure they would have been a wise choice.
On top of all of that, Delta will be keeping its JT8D powered Maddogs around for a while and AA seems hell bent on dumping them ASAP, which is going to jack part prices up compared to DL.
As we talked about in another thread, I think the E90 is the best bet for AA. Its low risk, already have them in the fleet and can probably get a good/great deal from EMB to add more than 20 to fleet.
Also, I agree with Anderson, I think we are going to have a big narrow body bubble in the next few years as NEOs and MAXs start coming in big numbers, AA might also be a mover in this market. (buying not selling)
jimntx said:
Excuse me, DL did not lose spectacularly on fuel hedges over the last 12 months. What appears to be a loss to you commoners is actually the fruition of a strategic investment designed to reduce taxes, or moonthumbs per available seat gallon, or something else. But, it was not a loss--spectacular or otherwise.

Jim wins.