mrman said:
Do you know how far out they're (or others for that matter) are hedged for? Point being that at some point the reality of "current" pricing (especially if the price of oil jumps to the $75 - $85 range) will hit them head-on.
jm
Pivotal Airline Faceoff Today
- Thread starter BoeingBoy
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Do you know how far out they're (or others for that matter) are hedged for? Point being that at some point the reality of "current" pricing (especially if the price of oil jumps to the $75 - $85 range) will hit them head-on.
jm
jimntx
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Precisely. The dirty little secret is...
At some crude price point, the oil companies will tell WN or anyone else that they are not going to honor the hedge contracts. In fact, they will say something to the effect of "So sue me. We made $2billion last quarter. We can afford more expensive lawyers than you, and we have a couple of things you don't have--Jet A and time."
At some crude price point, the oil companies will tell WN or anyone else that they are not going to honor the hedge contracts. In fact, they will say something to the effect of "So sue me. We made $2billion last quarter. We can afford more expensive lawyers than you, and we have a couple of things you don't have--Jet A and time."
Three comments...
1. Value Pricing is not the end all - be all. Load factors for July 2004 were 82%+... So lowering fares to fill more seats will not work. Value pricing will only work if it is done like America West did, and Southwest has always done. The high-end gouger "biz" fares have to be lowered and the low-end fares must be raised, thus creating a higher average fare, and higher RASM. This can be done just by changing the revenue management model and top end fares.
However, if US Airways only lowers fares, and does not increase the average fare, then less revenue will be taken in, worsening the company's woes. Since load factors are already high, lower fares may stimulate demand, but UAIR would have very few seats available to accomodate the increased demand.
2. Southwest's fuel hedges will (and have) increase over time. No body today is going to sign a fuel hedge contract for $24/bbl (less than 1/2 price). These contracts have a beginning and end date. As these contracts come to an end, Southwest will probably continue to hedge to a favorable position, but the price at which they can hedge will increase. Southwest's "legendary" business model does not entitle it to 1/2 price fuel for ever.
3. If the cost of oil continues to climb, demand will deteriorate. UAIR, and other airlines, will go out of business if the price of oil continues to decline. These factors should help the price of oil to moderate (less airplanes to fuel, less demand, eventually prices will stabilize or fall). As long as Southwest has the most cash in the bank, they will be around when this oil situation stabilizes. The same cannot be said for UAIR.
1. Value Pricing is not the end all - be all. Load factors for July 2004 were 82%+... So lowering fares to fill more seats will not work. Value pricing will only work if it is done like America West did, and Southwest has always done. The high-end gouger "biz" fares have to be lowered and the low-end fares must be raised, thus creating a higher average fare, and higher RASM. This can be done just by changing the revenue management model and top end fares.
However, if US Airways only lowers fares, and does not increase the average fare, then less revenue will be taken in, worsening the company's woes. Since load factors are already high, lower fares may stimulate demand, but UAIR would have very few seats available to accomodate the increased demand.
2. Southwest's fuel hedges will (and have) increase over time. No body today is going to sign a fuel hedge contract for $24/bbl (less than 1/2 price). These contracts have a beginning and end date. As these contracts come to an end, Southwest will probably continue to hedge to a favorable position, but the price at which they can hedge will increase. Southwest's "legendary" business model does not entitle it to 1/2 price fuel for ever.
3. If the cost of oil continues to climb, demand will deteriorate. UAIR, and other airlines, will go out of business if the price of oil continues to decline. These factors should help the price of oil to moderate (less airplanes to fuel, less demand, eventually prices will stabilize or fall). As long as Southwest has the most cash in the bank, they will be around when this oil situation stabilizes. The same cannot be said for UAIR.
Art at ISP
Veteran
Funguy,
You have basically said what I have been saying all along. We do NOT need the artificially low fares--we need FAIR fares. I don't mind paying a reasonable rate, but I will not be gouged..$950 r/t to CLT from LGA is just too much.
We as much as told management this on a couple of different occasions, the most recent being RoachFest in August. We also told them how much we appreciate the EXPERIENCED employees who take care of us every time we travel--it is the PEOPLE who keep us coming back.
To paraphrase my friend Piney, you cannot have true customer satisfaction without employee satisfaction--to the credit of all the employees I see regularly, you are still putting your best face forward, and WE appreciate that very much.
I don't know how this is all going to turn out but my colleagues and I are staying for the long haul....
My best to you all.....
You have basically said what I have been saying all along. We do NOT need the artificially low fares--we need FAIR fares. I don't mind paying a reasonable rate, but I will not be gouged..$950 r/t to CLT from LGA is just too much.
We as much as told management this on a couple of different occasions, the most recent being RoachFest in August. We also told them how much we appreciate the EXPERIENCED employees who take care of us every time we travel--it is the PEOPLE who keep us coming back.
To paraphrase my friend Piney, you cannot have true customer satisfaction without employee satisfaction--to the credit of all the employees I see regularly, you are still putting your best face forward, and WE appreciate that very much.
I don't know how this is all going to turn out but my colleagues and I are staying for the long haul....
My best to you all.....
balloonguy
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funguy2 said:
As part of the "Star Alliance", why can't US Airways, etc. get a better deal on fuel? I thought that one of the advantages was that you were now part of a "buyers group"?
BoeingBoy
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Somehow, I doubt that any airline fortunate enough to have hedges in place would share the savings with another airline - alliance partner or not. Did we offer UAL some of our hedged fuel savings?
Where the alliance can offer savings is thru "bulk buying" power, and that would mostly affect places with lots of alliance traffic - like the major international hubs. Even then, how many airports have multiple fuel suppliers? With single-source fuel supplies, there is little or no need for the supplier to offer a lower price.
Jim
Where the alliance can offer savings is thru "bulk buying" power, and that would mostly affect places with lots of alliance traffic - like the major international hubs. Even then, how many airports have multiple fuel suppliers? With single-source fuel supplies, there is little or no need for the supplier to offer a lower price.
Jim
How hedged is WN?
From the June 30 earnings release:
http://ir.thomsonfn.com/InvestorRelations/...&storyId=117271
It is safe to assume that by now, WN has probably covered more of their 2006 needs and probably some of their 2007 needs.
Oil will probably fall before WN is completely exposed to market prices, but by then, one or more of their legacy airline competitors will probably have bled out.
And to answer jimntx: The same factors that prevent bankrupt (and nearly bankrupt) companies from engaging in hedging transactions guarantees that WN will not be a victim of someone simply reneging on their hedging contracts. Much (if not all) of the losers' money (the opposite parties to WN's contracts) is already on deposit with a broker somewhere.
Most hedging strategies both parties to be creditworthy or to put up cash collateral equal to their potential losses pursuant to those contracts. USAir pointed out in its Ch 11 redux filings that could not hedge fuel because it lacked the cash to play.
Fuel futures are played by the monied speculators and by large users of fuel, not by oil companies. And some of those speculators are currently losing their ass in deals with WN and other transportation companies that hedged at low prices. Imagine having promised to deliver millions of gallons of oil at $24/bbl now that it cost you $52 (or more) per. 😱
You don't get to play poker in Vegas for big bucks without putting up cash or very good credit. Similarly, you don't get to bet on fuel prices with the big boys without the same qualifications.
From the June 30 earnings release:
http://ir.thomsonfn.com/InvestorRelations/...&storyId=117271
It is safe to assume that by now, WN has probably covered more of their 2006 needs and probably some of their 2007 needs.
Oil will probably fall before WN is completely exposed to market prices, but by then, one or more of their legacy airline competitors will probably have bled out.
And to answer jimntx: The same factors that prevent bankrupt (and nearly bankrupt) companies from engaging in hedging transactions guarantees that WN will not be a victim of someone simply reneging on their hedging contracts. Much (if not all) of the losers' money (the opposite parties to WN's contracts) is already on deposit with a broker somewhere.
Most hedging strategies both parties to be creditworthy or to put up cash collateral equal to their potential losses pursuant to those contracts. USAir pointed out in its Ch 11 redux filings that could not hedge fuel because it lacked the cash to play.
Fuel futures are played by the monied speculators and by large users of fuel, not by oil companies. And some of those speculators are currently losing their ass in deals with WN and other transportation companies that hedged at low prices. Imagine having promised to deliver millions of gallons of oil at $24/bbl now that it cost you $52 (or more) per. 😱
You don't get to play poker in Vegas for big bucks without putting up cash or very good credit. Similarly, you don't get to bet on fuel prices with the big boys without the same qualifications.
FWAAA said:
I disagree. WN would be dumb to hedge fuel when prices are this high. Hedging, as I understand it, means you buy fuel at today's prices with deliveries scheduled in the future. Only way WN would hedge is if they realistically expected fuel to continue to increase substantially. Hedging is always a risk, as if the price is lower on the delivery date than on the date in which you paid for the fuel, you lose. Otherwise, you win.
As someone else pointed out, speculators are losing their shirts with the hedging agreements already in place. Expect it to be harder in the future to hedge ... at least until world political situation stabilizes some (Iraq and elsewhere).
BoeingBoy
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USFlyer,
Remember that the numbers that FWAAA cited are as of the end of June, so prices have not been this high since then.
Also remember that WN continued hedging in 2003 when "everybody assumed that oil prices would go down", at least according to our management.
We'll soon know whether WN hedged in the 3rd quarter or not - they should release their financials before long.
Jim
Remember that the numbers that FWAAA cited are as of the end of June, so prices have not been this high since then.
Also remember that WN continued hedging in 2003 when "everybody assumed that oil prices would go down", at least according to our management.
We'll soon know whether WN hedged in the 3rd quarter or not - they should release their financials before long.
Jim
USFlyer said:
One correction: Entering into a hedge today for oil to be delivered in 2006 or 2007 or beyond does NOT mean you pay today's spot price. It means you agree to pay whatever someone else thinks oil will cost in 2006 or 2007 or beyond. And right now, most people probably think it will come down.
I'm too lazy to look at what oil futures for 2007 delivery are worth today, but I highly doubt they are at $52. No doubt, they are higher than $24 or $26 or $28, but I'm certain they aren't at today's spot price.
I'm also too lazy to look at all the past WN earnings releases, but WN has continued to hedge all along - the coverage reported in the June 30 release compared to the Mar 30 release would show that WN added to its hedging positions during 2Q2004. Likewise, it is safe to assume that progam has continued even during 3Q2004, despite rapidly increasing prices.
WorldTraveler
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The pricing arguments are valid. However, US really has the ability to set pricing only in its key hub markets and only if there isn’t an LCC or a larger legacy carrier competing in the same markets. US is the dominant carrier in few markets from its hubs to other carriers’ hubs. Even DL’s announcement today of its new service from CLT to NYC complete with introductory fares shows how little pricing power US actually has. When DL can walk into a major US market and lower the fares, even under the guise of an intro fare, and believe that it will gain more benefit than US, then US’ prospects for setting the prices it needs are not good at all. And as the smallest legacy airline, US is essentially subject to the decisions of the other five legacy carriers when it comes to pricing in connecting markets. Yes, fares probably will come down throughout the USA, but the legacy carriers are not controlling the process; the low cost carriers are controlling the legacies, and the bigger legacies are controlling the smaller legacies.
USFlyer,
People thought CO was not acting intelligently when they said they would start hedging earlier this year at $40 a barrel. Turns out they are enjoying benefits that DL, UA, and US (among others) are not getting at all. As oil prices continue to move higher, there will be proportionately more damage to the overall economy which will prod politicians to act; right now high oil prices are hurting legacy airlines the most. When the pain is felt by all of America, things might change.
USFlyer,
People thought CO was not acting intelligently when they said they would start hedging earlier this year at $40 a barrel. Turns out they are enjoying benefits that DL, UA, and US (among others) are not getting at all. As oil prices continue to move higher, there will be proportionately more damage to the overall economy which will prod politicians to act; right now high oil prices are hurting legacy airlines the most. When the pain is felt by all of America, things might change.
ITRADE said:
OK, I'll bite.
First, the first handful of Econ classes do not address the management effect - management comes under the rubric of 'everything else being equal.'
And that is perfectly understandable - the profs are trying to get theory across to the budding Keynes, Smiths, and Freidmans.
I am reliably told that Ha'vad BS does case studies of business decisions 😉 .
Trade, would you agree that it is possible that U may wind up a case study one day, and that just perhaps, something other than evil unions will be determined to have had a casual effect on its' plight?
One can hope. 😀
