US Airways Confirms It Has Hired M&A Advisors For Possible AMR Takeover

[WorldTraveler]

I don't think there is any disagreement that US would be in a world of hurt if fuel prices took a sudden spike.... however, there was a spike not that long ago in which US was unhedged and their results weren't much worse than any other carrier.
AA went to considerable effort to protect its ability to hedge in BK.... US remains one of the only large carriers that chooses not to edge. While they have avoided losses in recent fuel runups, it shows how risky their financial strategies are compared to the standard for the industry... and isn't disconnected from the much higher level of risk they would have to take in order to make an AA acquisition work.
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As for the pipeline, the point is that the US and Canada have long been strong partners regarding energy. Forcing them to send the pipeline elsewhere, potentially losing revenue and the opportunity to gain something from that pipeline doesn't make a whole lot of sense, esp. when Canada sits between the lower 48 and energy-rich Alaska.
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Yes. OPEC's influence is diminishing but they still are a cartel... the more energy that is produced outside of OPEC, the more market forces (including production decisions) will prevail.

 

[CallawayGolf]

Actually not. Why would IAG invest in AA now? There is only one reason to invest while AA is in bankruptcy - to provide DIP financing which would turn into an investment when AA exits bankruptcy but AA doesn't need DIP financing. Otherwise, an equity investment if needed upon bankruptcy exit is still a possibility that IAG didn't rule out.

Jim

AA might not need DIP financing today, but their current solvency and liquidity status explains why they are operating under bankruptcy protection:

Equity deficit of $7.5 billion against $23.8 billion in assets

Current Ratio = .782 (can only pay 78% of current liabilities with current assets)
Quick Ratio = .568 (can only pay 56% of current liabilities with liquid assets)
Cash Ratio = .463 (can only pay 46% of current liabilities with cash/short-term investments)

AA needs to both reduce the operating cash burn and also be granted substantial relief from creditors to regain solvency and emerge from protection as a stand-alone carrier. It can be done, but they have a long hard road to recovery left to climb. Dumping the $9 billion in pension liabilities is likely the key to fixing their long-term solvency issue, but even that would do little to fix all of the liquidity/current ratios that are out of whack.

 

[LD3]

AA needs to both reduce the operating cash burn and also be granted substantial relief from creditors to regain solvency and emerge from protection as a stand-alone carrier. It can be done, but they have a long hard road to recovery left to climb. Dumping the $9 billion in pension liabilities is likely the key to fixing their long-term solvency issue, but even that would do little to fix all of the liquidity/current ratios that are out of whack.

What a way of doing business, cut 13,000 employees, dump the pension obigations, screw the creditors. I know AA isn't the only company to do this, but my god when does it end?

 

[CallawayGolf]

What a way of doing business, cut 13,000 employees, dump the pension obigations, screw the creditors. I know AA isn't the only company to do this, but my god when does it end?

Probably not until people and companies realize that you can't work for 40 years and then have someone else pick up your living expenses tab for the next 30 years without running out of money somewhere in the process. All of these retirement/pension plan models were built on the assumption that there will always be enough people in the current workforce to pay for those who have entered retirement. Those assumptions have proven to be faulty, but few are willing to admit that companies and governments just can't pay for such large percentages of the population to be paid all the way through retirement, long after their economic contributions through productive work has ceased.

 

[Move2CLT]

Actually not. Why would IAG invest in AA now? There is only one reason to invest while AA is in bankruptcy - to provide DIP financing which would turn into an investment when AA exits bankruptcy but AA doesn't need DIP financing. Otherwise, an equity investment if needed upon bankruptcy exit is still a possibility that IAG didn't rule out.

Jim

Spot on.

 

[BoeingBoy]

I don't think there is any disagreement that US would be in a world of hurt if fuel prices took a sudden spike.... however, there was a spike not that long ago in which US was unhedged and their results weren't much worse than any other carrier.

"A world of hurt" and "weren't much worse" ... having your cake and eating it too? Care to tell us when the last 50% spike in crude was, since that was the basis for my comment?

Jim

 

[WorldTraveler]

"A world of hurt" and "weren't much worse" ... having your cake and eating it too? Care to tell us when the last 50% spike in crude was, since that was the basis for my comment?

Jim

Jim,
no US carriers have hedges that could provide any meaningful protection against a 50% increase in fuel prices.... and given that the chances of it actually happening are very small, discussion of the effect it would have is at best academic.
The highest spike was when fuel flirted with $140/bbl which did significant damage to the global economy.... OPEC is smart enough to know that there is no value in running up prices and then sending the economy into a downturn - all the while with countries incentivized because of the spike in prices to develop alternatives to prevent the damage the spike produced. Given that more and more production is coming online and OPEC's share is shrinking, that is exactly what the $140/bbl spike produced - and it long term will weaken OPEC. When you factor in the instability in Iran, the market is seeking reliable sources of energy NOW.
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A fair treatment of facts is that US DID manage to avoid significant differences in its fuel costs compared to the average of the industry which did hedge during the most recent relatively small "spike" in fuel prices. Thus, it is not two-faced to acknowledge that US' decision to not hedge was not harmful during the most recent event but it doesn't mean it will be that way in the future esp. if a large sustained spike really does occur - even if it doesn't last long. Other carriers do have hedges which they can count on for some degree of controllability of costs; US does not.
Unlike true insurance, hedges cost very little to implement other than tying up some cash and credit lines - but it does provide a level of stability which analysts look for. The real question is why US does not have the resources or chooses not to properly devote a certain amount of resources comparable to the industry to seeking a level of financial stability which is the norm in the industry. Just as in the choice not to have car insurance (legality not being a consideration), if you are in an accident, it will have significant repercussions.... regardless of whether you have managed to stay out of accidents for many years without having insurance.

 

[usa1]

Who got the "professional fees", Horton's nephew ... or Baines Capital? Let the looting begin! I smell a thief

Yepper ... the looting has begun over at AA, we saw the same thing at US Airways a few years ago, didn't we? The play book hasn't changed much. There goes their pension money into someone else's bank account, most likely located in an offshore bank.

Saving money is not cheap, as one consulting contract for American Airlines and AMR is proving.

Boston Consulting Group has been helping new AMR/American Airlines chairman and chief executive officer Tom Horton reorganize the management structure at the air carrier.

On Thursday, AMR filed a motion seeking approval of the arrangement, with a "not-to-exceed" price tag of $11,732,000 for Boston Consulting's fees.

The payments are described as "a flat fee of $254,500 per week (with a team of approximately 8.8 full time employees ('FTEs') for the first six weeks and a flat fee of $392,500 per week for the final twenty-six weeks (with a team of approximately 13.5 FTEs)."

 

[wings396]

Amazing what they can afford when they want to..

 

[FWAAA]

A fair treatment of facts is that US DID manage to avoid significant differences in its fuel costs compared to the average of the industry which did hedge during the most recent relatively small "spike" in fuel prices. Thus, it is not two-faced to acknowledge that US' decision to not hedge was not harmful during the most recent event but it doesn't mean it will be that way in the future esp. if a large sustained spike really does occur - even if it isn't large. Other carriers do have hedges which they can count on for some degree of controllability of costs; US does not.
Unlike true insurance, hedges cost very little to implement other than tying up some cash and credit lines - but it does provide a level of stability which analysts look for. The real question is why US does not have the resources or chooses not to properly devote a certain amount of resources comparable to the industry to seeking a level of financial stability which is the norm in the industry. Just as in the choice not to have car insurance (legality not being a consideration), if you are in an accident, it will have significant repercussions.... regardless of whether you have managed to stay out of accidents for many years without having insurance.

I have not computed the industry average fuel prices for 2011, but I have compared the price US paid last year, $3.11/gal, with AMR, which paid $3.013/gal, for a difference of 9.7 cents per gallon. US paid for (mainline and express) a total of 1.433 billion gallons of fuel. US thus paid $139 million more for fuel than it would have paid if it had paid the price enjoyed by AMR with its hedging strategy. While a dime a gallon doesn't sound like a huge difference, it starts to add up when you spend 1.433 billion dimes more than your competition spent. US posted a paltry $71 million net profit for 2011; that profit was roughly just one-third as large as it would have been if it had paid AMR's fuel prices. Of course, even if it had posted a profit of $210 million (if it had paid AMR's fuel prices), that would have lagged the industry compared to UA and DL.

 

[psa8979]

I have not computed the industry average fuel prices for 2011, but I have compared the price US paid last year, $3.11/gal, with AMR, which paid $3.013/gal, for a difference of 9.7 cents per gallon. US paid for (mainline and express) a total of 1.433 billion gallons of fuel. US thus paid $139 million more for fuel than it would have paid if it had paid the price enjoyed by AMR with its hedging strategy. While a dime a gallon doesn't sound like a huge difference, it starts to add up when you spend 1.433 billion dimes more than your competition spent. US posted a paltry $71 million net profit for 2011; that profit was roughly just one-third as large as it would have been if it had paid AMR's fuel prices. Of course, even if it had posted a profit of $210 million (if it had paid AMR's fuel prices), that would have lagged the industry compared to UA and DL.

 

[BoeingBoy]

Jim,
no US carriers have hedges that could provide any meaningful protection against a 50% increase in fuel prices....

Au contraire - remember all those mark-to-market adjustments we've discussed. Effectively buying fuel for 20% less would be meaningful in my book.

and given that the chances of it actually happening are very small, discussion of the effect it would have is at best academic.

So you've got an inside line on what Iran or Israel might do? Refresh my memory - what percentage of world crude supply passes through the Strait of Hormuz?

The highest spike was when fuel flirted with $140/bbl which did significant damage to the global economy....

Thanks for admitting that that was the last time that there was a significant spike in crude prices. Note that fuel went even higher - "the whole truth" after all.

OPEC is smart enough to know that there is no value in running up prices and then sending the economy into a downturn - all the while with countries incentivized because of the spike in prices to develop alternatives to prevent the damage the spike produced.

Who said anything about an organized OPEC campaign?

A fair treatment of facts is that US DID manage to avoid significant differences in its fuel costs compared to the average of the industry which did hedge during the most recent relatively small "spike" in fuel prices.

Only because the "spike", as you call it, was small. I wouldn't say we've had a spike since 2008 since the latest was a drop in crude prices followed by prices returning to the previous level - the inverse of a spike. As I said, the discussion started with a premise that, or question if, crude could go to $150/bbl. Given that premise, US would be in a world of hurt and would not "avoid significant differences" in it's fuel price compared to carriers that are hedged.

Jim

 

[gaucho99]

I have not computed the industry average fuel prices for 2011, but I have compared the price US paid last year, $3.11/gal, with AMR, which paid $3.013/gal, for a difference of 9.7 cents per gallon. US paid for (mainline and express) a total of 1.433 billion gallons of fuel. US thus paid $139 million more for fuel than it would have paid if it had paid the price enjoyed by AMR with its hedging strategy. While a dime a gallon doesn't sound like a huge difference, it starts to add up when you spend 1.433 billion dimes more than your competition spent. US posted a paltry $71 million net profit for 2011; that profit was roughly just one-third as large as it would have been if it had paid AMR's fuel prices. Of course, even if it had posted a profit of $210 million (if it had paid AMR's fuel prices), that would have lagged the industry compared to UA and DL.

I'll admit I'm not an expert on fuel hedging, but I think you have left out the cost of securing these hedges, which from what I understand is fairly steep. That is one of the reason's why US opted not to hedge because the costs to do so would have wiped out any real savings.... unless fuel really spiked substantially more than it did.

 

[BoeingBoy]

If crude (or whatever commodity is used to hedge) spikes, the cost of the hedges is the least of the problems, especially hedging short term like US did. Over the longer term, assuming that the hedged commodity changes slowly the cost of entering the hedges does become a big factor since not much is saved even with an effective hedging strategy. US was, and is right - as long as the cost of fuel follows the economy in general there's not much sense in hedging short-term like US did.

One thing Parker/Kirby never mentioned is that it does tie up cash to hedge, unless you've got good credit. US, at the end of 2008, didn't have the spare cash or credit to hedge. So hoping for gradual changes in the price, reflecting changes in the economy, was a good excuse for not hedging. Fortunately for US, the 2009 recession was just what Parker/Kirby needed to "prove" that they were right.

Of course, all that omits one of the reasons for hedging - to know in advance what a significant portion of the fuel needed will cost. Not many companies of any size blindly leave 1/3 of their cost of production up to chance.

Jim

 

[FWAAA]

I'll admit I'm not an expert on fuel hedging, but I think you have left out the cost of securing these hedges, which from what I understand is fairly steep. That is one of the reason's why US opted not to hedge because the costs to do so would have wiped out any real savings.... unless fuel really spiked substantially more than it did.

I didn't leave anything out; the price of $3.013/gal for AMR was the net fuel price including hedging gains or losses. For 2011, AA's hedging gains were $335 million - and those gains were reflected in the price above.

Yes, after being burned severely by the steep drop in fuel prices late in 2008 and the relatively low prices of 2009, Parker opted not to hedge. He told analysts in a conference call that hedging was a very difficult activity and that US would go naked from that point forward. US nearly ran out of cash because of the huge hedging losses. If you're unable to do it competently, probably better off not doing it.

For every year since the US-HP merger except for one (2010), AMR's fuel price per gallon (net of hedging gains and losses) has been less than US' price. Parker and Kirby have their strengths, but fuel price management is not one of them. For 2006-2011, US has paid several hundred million dollars more for fuel than it would have at the AMR price.

Fuel expenses at US increased about 38.2% for the full year 2011 compared to full year 2010. IMO, that was a big spike and management weakness at US cost the company $139 million, or twice the net profit for the year. At AMR, because of its hedging, fuel expense was up 30% year over year. Don't get me wrong - AMR's results for 2011 were dismal - but the $335 million AMR saved by hedging paid for several new fuel efficient 738s (perhaps 8-10 depending on AMR's discounts with Boeing).