sipples

We're now seeing oil topping $70/bbl (with gold also hitting records), thanks primarly to Bush Administration sabre rattling with respect to Iran. So I'm wondering what effects $70 (or higher) oil has on AA. Several questions:

1. Did AA have this oil price level in its forecasts? Higher?

2. I know Southwest is hedged at $36/bbl. (I hope they got big bonuses over there!) Does AA have any hedging to preserve their fuel price disadvantage at least at the same level?

3. Does the ever-increasing price of oil change AA's strategy? Will the MD-80s fall by the wayside quicker? How about a return to turboprops on certain routes? Any chance for 787 orders?

4. When does AA begin its O'Hare-Tehran nonstops?

OK, please ignore the last question.

kenfry

This is for Cargo right?

party_boy

You mean humanatarian relief.

tropicalmalady

just something to bring the corpses home.

gemac

If you believe that oil prices are the result of "Bush Administration sabre rattling with respect to Iran", then MD-80s will not fall to the wayside quicker, nor should they, since this would be a transitory effect. If higher oil prices are a result of global economic recovery combined with rapidly increasing industrialization of the world's two largest population countries, India and China, then the higher oil prices are likely to be enduring and might result in changes to aircraft replacement strategies.

Sometimes you have to take what you don't want to get what you want.

MJonTravel

I believe I read recently that AA is partially hedged at around 60 per barrel which provides some protection.

Southwest's 36 dollar hedges are rapidly expiring which is why they've recently raised fares, although they are still better protected than most anyone else.

AA will not order another airplane until they are posting profits in my opinion. Although I do believe it is more probable than not that they will take the deliveries they have slotted for 738's in 200X? They could either be expansion airplanes, or they could just replace MD80's one for one.

I do believe that AA will eventually order the 787, but again, not before they are a good bit more profitable. They've got a lot of work to do with their 20 billion debt load.

Most of the above is speculation on my part. We'll see how things unfold.

kenfry

But populations of those countries are also aware of price of oil, and moving towards alt fuels, which think country lacks.

Gardyloo

AA is on top of the situation. As cited in yesterday's Wall Street Journal...

Connected1

Find out the answers to all of these questions and more on tomorrow's Arpey/Horton conference call webcast.

PresRDC

Surcharges just have to continue to go up to match the rise in fuel costs.

I don't see how anyone could reasonably object to that.

gemac

Nontheless, oil consumption there is up dramatically. If oil remains this high, all countries will move towards alternate fuels, as those fuels make more economic sense at $70/barrel than they do at $20. This takes time, though, and during that time the worldwide demand for energy continues to expand. For example, we still use oil to generate electricity in this country (primarily because we have not begun any new nuclear power generation facilities in decades). A reasonable response to higher oil prices would be for us to build enough nuclear power plants to stop using oil to generate electricity or heat buildings, but it would take at least 10 years to bring those plants on stream.

Newly developing countries can switch some oil use to alternative fuels more quickly, but we are still talking multiple years for any significant savings, and rising demand will still keep prices high during that period unless significant added supplies become available.

My point to the OP was that if oil prices were high for the reason he cited, it would be back down next week or next month, and would not cause any significant change in airplane replacement policies. I don't think that is the reason, I think that it is the major increase in worldwide demand, and I think that we as a nation and AA as a company should be planning for the future with the assumption that oil will average $150/barrel for the decade of 2010-2020. In that price range, it would make a lot of sense to buy newer, more fuel-efficient planes. But that's just my guess.

hazzey

What if the higher fuel prices help AA by hurting the competitors more?

We know that AA is on the verge of profitability. That can't be said for a lot of the other airlines. This means that AA is in the best possition to handle the fuel price increases (besides Southwest).

All it would take is for one of the other major airlines to go under (like the earlier talk from Delta) or some of the LCCs to give up, and then even with the higher fuel prices, loads and fares should increase, bringing back profits.

sipples

Iraq was supposed to be "transitory," but the Pentagon sure is pouring a lot of concrete for bases.

I agree that China, India, and other developing countries are helping to bid up energy prices as they grow rapidly. There are lots of factors conspiring to push up oil prices.

So what does AA do? Is waiting for profits (as mentioned upthread) before ordering airplanes going to work? Don't they have to plan now for the future if they hope to have one?

Could they run a mix of turboprops and RJs on low density short hauls, for example? That would allow passengers who prefer jets to book them, but it would also help maintain frequencies at lower fuel costs.

gemac

Iraq was more than just "sabre rattling", IMO.

AA doesn't have to wait for profits before ordering new airplanes. It either saves money or it doesn't, regardless of profits. For example, assume the following: AA pays $5 million per year to lease a MD-80. It costs $15 to escape the lease. It costs $10 million to lease a new, more fuel efficient plane.

At $50/barrel, the MD-80 burns $50 million of fuel per year, and the new plane burns 10% less fuel. At $50/barrel, the fuel savings is $5 million per year, the lease is $5 more, so AA never recovers the cost of voiding the MD-80 lease. At $70 per barrel, fuel savings is $7 million, of which $5 million goes to the higher lease, leaving $2 million per year to apply to the $15 million to void the lease, a 7.5 year payout, making it a marginal decision.

At $100 per barrel, fuel savings is $10 million ($5 million after paying for the higher lease), giving a 3 year payout and making the decision a slam dunk.

The above is vastly simplified, but the principle applies. Notice also that the whole thing depends a great deal on the ability to forecast oil prices with reasonable accuracy. If you can do that, please notify Wall Street.

But if it makes sense to do, it makes sense to do. Profits or losses don't really affect the decision unless they alter the lease amounts that AA would have to pay for new aircraft.

greatam

China absolutely does not care what the price is. Kind of like Russia in the 70's. They will pay whatever it takes to get the supply of oil they think they need. And they will continue to burn coal, without scrubbers, and pollute the world. China has jacked the price of cement so badly that the US is now IMPORTING a lot of cement from Mexico.

I own a global logisitics managment company and deal with equipment and fuel prices every day. Do I trade my trucks for more efficient ones or do I just add on more fuel surcharge to my customers? Or do I do both? Exactly the same scenario AA (and every transportation company in the US) is going through. Tough decisions and tough times ahead.

I have found that customers, including airline passengers, are much more willing to pay a "fuel surcharge" than an increase in rates. They can "relate" to a fuel surcharge. They see it in their own gas tanks.

I think AA should tack on an increasing fuel surcharge, as the trucking industry has done. Example: $60 per barrel-12% increase, $64 per barrel-15% increase, etc. Our fuel charge today went to 19%. Sure, we may loose a few customers to a company with a cheaper rate. But they will be back, as the other companies cannot sustain the business absorbing the fuel increases.