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

[USA320Pilot]

Today USAPA CLT Domicile Rep. and USAPA president candidate Bill McKee wrote a campaign letter to US Airways' pilots. McKee informed the pilots he attended the recent Board of Directors Labor meeting where Doug Parker discussed M&A activity. MdKee said, "Doug Parker has always been an advocate of consolidation and the fact that AMR is now in bankruptcy, the possibilities of industry consolidation are almost certain. In the recent Board of Directors Labor meeting, Doug Parker told the group that we are interested in any and all opportunities and felt certain that the AMR bankruptcy process dictates a 9 month window of opportunity for consolidation. He felt certain Delta was serious in their efforts, as were we, in exploiting any and all opportunities. His statement to the group 'as you are all painfully aware, bankruptcy delivers unique opportunities that would normally be unavailable” left no doubt to anyone in the room that he intends to attempt to participate.'"

 

[Phoenix]

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.

The model that has a few executives work for two or three years and abscond with enough money for 30 people to live for 40 years is a far bigger issue than some FA having enough money at the end of a 30 year career to buy a double wide on the edge of town.

Perhaps you are in favor of euthanasia at 59.

 

[LD3]

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.

I am not sure you should be putting the blame on the pension/retirement plan. It seems to me that that is the easiest fund to neglect. If you don't pay your fuel bill you don't fly, if you don't pay your lease obilgations you don't fly. If you fail to pay into the pension fund you are still able to fly.. I am not sure if AA administers the pension plan or if they have an outside firm do it, but with my pension plan, I contribute 6% and my employer 4% and hope the hell that the State invests it wisely...

 

[BoeingBoy]

I am not sure you should be putting the blame on the pension/retirement plan. It seems to me that that is the easiest fund to neglect.

There are laws concerning pensions which must be followed, so "neglect" isn't the right word. For DB plans, those laws do allow companies some time to bring up funding levels back up when outside factors like big drops in the market, ultra-low interest rates on high rated bonds, etc, cause the plan to become underfunded. And those are not normally longer-term effects, but the DOW (as an example) is about the same today as it was in 1999 - 13 years ago.

What I think CG is saying is that DB plans that appeared to be rock solid 40-50 years ago are turning out to be unsupportable primarily because people are living longer in retirement. I don't know what percentage of working people in this country have DB pension plans, but it's probably a small percentage. Those left are going the way of the dinosaurs and being replaced with DC plans. In 2007, white males and females who retired at 65 were expected to live 4 years longer than white males and females who retired at 65 in 1970.

Jim

 

[CallawayGolf]

The model that has a few executives work for two or three years and abscond with enough money for 30 people to live for 40 years is a far bigger issue than some FA having enough money at the end of a 30 year career to buy a double wide on the edge of town.

Perhaps you are in favor of euthanasia at 59.

I'm in favor of people taking personal responsibility for their lives before and after retirement. Expecting the next generation to pay, by compulsion, for the previous generation's last 1-4 decades of life is wholly untenable. Defined benefit retirement systems are failing in corporate America, in the Social Security system, and likely everyplace else it has been tried (European models and the financial harm those nations are currently in). Life expectancies have increased by 10 years over the last 30 years or so and the trend continues to wreck havoc with the already tenuous mathematics of paying people not to work. When there are shortfalls created (and there always are) by actual financial need in comparison to what was projected to be needed in the distant past, then the variance needs to be made up by the current economic activity. That means current workers, taxpayers, or consumers are forced to pay for both the shortfall and also fund the system for their own supposed future benefit. As the shortfalls compound year after year, the systems face a predictable but inescapable collapse. Businesses are forced into bankruptcy and the Social Security system requires the Treasury to print and borrow more money just to keep the system afloat for one more cycle.

The bottom line is that people need to personally fund their own retirement outside of any Defined Benefit plan or they will need to find other alternatives. That may mean working in some capacity until the last possible day, or it could mean going the style of the Waltons where multiple generations all live under the same roof, or it may mean seeking assistance from churches or other private organizations that have benevolence programs to help those who can no longer help themselves. I personally view every dollar that is confiscated from my earnings for Social Security or Medicare or whatever to be a total loss as soon as is paid on my behalf. I absolutely do not expect a single dollar to be there when I would be eligible for it several decades from now. I'm certain that those dollars are not somehow waiting for me to reach a certain stage in life; on the contrary every dollar is being spent as soon as it reaches a bureaucratically-controlled bank account and will never be recovered. That's just the reality we face in America today. The further a person is from a "retirement age" the more likely they are to never see a benefit for their forfeited wages earned.

 

[john john]

trust fund baby

 

[CallawayGolf]

trust fund baby

Not even a little bit close John John. I come from a family of two working parents who did a nice job of providing a middle-class lifestyle for our family (which was better than either of their own family backgrounds), for a while anyway. I was a latchkey kid from the time I was in first grade and leaned to be self-reliant and responsible for myself because I had to be. Life was not so good, however, in my teenage years as my dad committed suicide in 1982 out of financial despair. That despair was the result of Jimmy Carter and the Democrats all but destroying the American economy. If only he had given Reaganomics another few months, he would have been around to witness the longest and greatest peacetime expansion of the American economy that resulted from lowering marginal tax rates and reducing the regulatory burdens that had been punishing the middle class under the disastrous ploy of taxing the rich.

No, I inherited no trust fund. I'm the only person in my family that went to college and earned two degrees. I paid for my college degrees by working full-time at $7-10/hr jobs while simultaneously attending college full-time. I paid my student loans off to the very last penny, and I have never asked or expected anyone to pay for my way through life. If I work hard and earn money, then I get to live the lifestyle of my choosing. If I fail to work hard or fail to provide a value in return for my services, then my lifestyle will be limited by my own failures. That's the way I want it and IMO that's the way it should be for everyone living in a country that was founded on liberty and the rights of the people to live without government interference and oppressive/punitive taxation policies designed to transfer money from those who work and produce value to those who don't.

 

[WorldTraveler]

Callaway,
at times there is the opportunity to truly get to know people on this forum... and it is always a great privilege when it happens.
.
thanks for sharing your story - your views make alot of sense in light of your story.

 

[CallawayGolf]

Callaway,
at times there is the opportunity to truly get to know people on this forum... and it is always a great privilege when it happens.
.
thanks for sharing your story - your views make alot of sense in light of your story.

Thanks WT. I welcome your feedback in the spirit in which it was given. Not sure what about my views may not have made sense until now, but I'm glad it helped to bring some clarity.

 

[Jester]

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.

As I understand hedging, while it cost very little to implement (assuming the airline has the credit) it has the very real potential of expensive losses if the bet goes wrong. Hedging locks in the price for the airline to buy, but it also locks in the price for the supplier to sell. If passengers bought several months, in advance, with a locked-in price for their fare, then locking in the price of fuel would be wise, but most tickets are not bought that far out. The hedge might provide some stability to the cost structure, but that's not a good thing when that cost structure is much higher than that of the competition.

More of a true "insurance" which would limit the exposure to rapid increases in oil prices in the short term would be in the use of a proxy asset lilke West Texas Intermediate crude options which has an R-square of around .98 relative to the price of aviation fuel historically speaking. An airline could buy calls with the right to buy WTI crude (but not the requirement to buy) at some future date, as not to take delivery, but to sell the option if the price of WTI exceeds the strike price. That money from the sale would be used to purchase the more expensive aviation fuel, and offset the increased costs.

Options are relatively cheap in the short-term with strike prices well above of the market, but obviously a high degree of risk insofar, that even cheap options run the risk of being worthless with 100% of the "investment" lost. (Much like most car insurance paid annually provides no returns to the "investment" as no claim was made by the policy holder.) With as many options which would be required given the large amounts of fuel burned daily, I think the costs would be excessive. In an industry which seems to live on pennies of CASM, the costs of bushels in relatively cheap options would probably be too expensive, otherwise most airlines would be in the options market for WTI crude.

However, I think a more prudent approach would be to consider call options on WTI crude for some "Black Swan" event where the price of oil soars to $300 a barrel over some exogenous shock to oil supplies, and an option a year out with a strike price of $200 should be relatively cheap.

So Recommends Jester.

 

[WorldTraveler]

Thanks WT. I welcome your feedback in the spirit in which it was given. Not sure what about my views may not have made sense until now, but I'm glad it helped to bring some clarity.

I wasn't saying that your views didn't make sense... but having pulled yourself up by your bootstraps, so to speak, your desire to see market forces really work make more sense.... your politics reflects your own personal experiences.
.
thanks for your insights, Jester.
Fuel hedging as with currencies is highly complex for airlines and it is risky... the cost comes in getting it wrong either way.
US' aversion to hedging directly comes from its bad experience with hedging a couple years ago. As FWAAA notes, I'm not sure why US has had less success and been more preoccupied with a process that alot of airlines refine but they still know they have to do - and occassionally like WN earlier in the 2000s, you strike the motherlode.
But there is alot about any hedging that involves credit qualtiy and on that basis, US will likely be at a disadvantage because their smaller size in a pond with larger fish makes it harder and harder for them to compete on the same basis.. it's not just revenue for which they fight an uphill battle.
.
Carriers do have to make commitments to the amount of capacity they fly several months out, even if many of the passengers haven't bought tickets yet... every airline uses a host of advance booking and revenue models to determine if they are where they need to be based on the time from departure... and some of the airlines that have turned their finances around the best have been very aggressive in changing their schedules up until the latest period allowed by their own planning processes... factor in the change in fuel prices which airlines can use to model profitbility and there is alot more predictability to planning for profitability than has ever been possible in the past. Thus if fuel prices soar and it is known that fare increases are necessary to cover those costs - and with those two comes reduced demand - there is little reason why carriers should be operating flights at losses after the "table has been set" two to three months in advance. Even if you can't get labor and other costs out quickly, it makes little sense to operate flights that can't make money given that fuel is now 1/3 or more of the cost of operating a flight.

 

[BoeingBoy]

As I understand hedging...

Hedging is, or can be pretty complex. Most carriers that do it use not just call options but a combination of options, swaps, straddles, collars, and one or two others. You can protect against both increases and decreases in price beyond a certain range resulting in losses but it's more expensive to do so. The hedged product fluctuates also. Few use pure crude or WTI because there are fluctuations in the so-called "crack spread" or difference between the price of the crude and the price of the final product. For example, the "crack spread" has been generally increasing the last couple of years so even if WTI remained constant the price of diesel, heating oil, or other hedging commodities would increase.

US' problems with hedging in 2008 stem from not just one factor. First, they dealt almost exclusively with call options so there was no protection when prices dropped so much. Second, they hedged short term while aiming to be 50% hedged entering a quarter. So to be 50% hedged in the 3rd quarter of 2008, they were only about 10% hedged for the 3rd quarter at the start of 2008 and maybe 30% hedged at the start of the 2nd quarter. They added a lot of call options at prices up to $140/bbl then the price collapsed, creating high loses. Contrast that with WN - at the end of 2011, they were 10% hedged for 2015 and 25% hedged for 2014. They look for hedging opportunities and don't have that "OMG, we've got to hedge a lot before the start of next quarter" impulse and hedge at any cost. Plus, with the losses after the price of crude plummeted in 2008, US didn't have the spare cash to hedge - they had to get relief from the credit card processor hold back requirement to keep from defaulting.

Jim

 

[Jester]

Few use pure crude or WTI because there are fluctuations in the so-called "crack spread" or difference between the price of the crude and the price of the final product. For example, the "crack spread" has been generally increasing the last couple of years so even if WTI remained constant the price of diesel, heating oil, or other hedging commodities would increase.

Jim,

And that's exactly what has happened in the past few years, after I stopped following the relationship between WTI and various other oil related products. For example, on the following graph: http://www.bloomberg.com/quote/JETINYPR:IND/chart/
Shows the price of jet fuel in the spot market (and I do not know if the WTI comparison was inserted into the graph, but its symbol is "OIL"), and the relationship holds up very well more than 3 years ago, but the last few years the relationship completely fell apart. Curious as to know why it happened, but I am not an oil trader.

Thanks again for your insights on the matter.

Jester.

 

[BoeingBoy]

Part of it is that WTI Cushing spot price is the price at the Cushing, OK, pipeline terminal while distilled product spot prices are generally at the port or pipeline terminus (like NYC port), so transportation - crude from Cushing to refinery and product from refinery to port - plays a significant role in the spot price of the product - transportation cost goes up, the spot price of the refined product goes up. Then refineries, like planes, have periodic shut-downs for scheduled maintenance which reduces refining capacity and drives up the cost of the finished produce while crude may actually decline due to reduced refining capacity. Of course, there the unexpected shut-down too - remember Katrina and the damaged refineries?

Refining is itself an interesting process. It's not like a refinery can turn crude into gasoline one week and diesel the next - each barrel of crude produces so much of each of a range of products. So if a refinery wants to increase production of gasoline, like normally happens in the spring, it has to refine more crude and get more of each of the range of products. Some products are almost interchangeable at the refinery level though, like diesel/heating oil/fuel oil/jet fuel. So producing more heating oil in the winter means producing more gasoline, which may not be desirable at that time of year, OR cutting production of the other interchangeable products and the latter can drive up the cost of those other products that have relatively constant demand - like jet fuel.

Jim

 

[USA320Pilot]

AMR says it needs labor deals in "matter of weeks"

Click here to read the story.