Katrina to Kill Continental This Year?
 

It looks like CO has been doing a great job of keeping the company financially fit in these times of rising fuel and labor costs. At least thats what I've been led to believe from reading this board and their press releases.

However, CNBC today discussed the rising price of jet fuel and how Southwest's fuel hedges are fantastic and will keep their carrier soaring...while other carriers like Delta will fold.

http://moneycentral.msn.com/content/P127889.asp

While I understand the precarious position Delta is in (I think if someone sneezes in ATL, the airline will fold), I didn't think CO was in that bad of a position ...and also didn't think Southwest was in that good of one (I thought they weren't able to bargain fuel as good as they have done in the past.) The line that says "The same is true if Continental fails" in the article raises the most concern/suspicion.

High fuel prices are bad for everyone, but does it really put Southwest in that much of a better position than CO?

SW can't lose in this situation. If fuel costs rise for other airlines their's don't They can compete agresively on fares and hurt their competitiors. I suspect they would be selective her and I don't know how much they compete directly with CO. Others--US especially and PIT-would be hard hit by that.

Also, if other carriers raise fares and SW goes along they increase revevue faster then expenses rise and ipso changeo they have more profit.

I do wonder if CO fuel supply at IAH will be impacted (although ther must be refineries around there) and CO does a good business out of MSY so the general economic downturn might hurt. OTOH, IAH looks a big staging area for the recovery so maybe in short term build business.

Southwest's fuel hedges have enabled them to keep their costs drastically lower than any of the other US airlines. Given what I am seeing on the market news today, avgas prices are going to skyrocket even more unless the US Government dumps a lot of barrels from the SPR. Remember, even slight increases in fuel costs can make a million $ a day difference on the bottom line. Frankly, considering the impending fuel crisis caused by the lack of refineries as well as the upcoming change in bankruptcy law, I foresee NW and DL filing for protection in the next couple of weeks.

And, IMHO, it is highly possible that we will have a transportation crisis as the remaining carriers will have no choice but to park planes in the desert as they are unable to afford or find avgas to fill them. Or, nobody will be able to afford the resulting fares.

I still think there should be a cap put on profits for the oil companies. That and we need to make it easier for companies to build more refineries. There is so much red tape it is damn near impossible and or costly to build a new refinery.

I thought the bankruptcy law change was only for indivudual bankruptcies; but the corporate law is staying the same.

- HF

Hedges won't help anyone if they can't get their hands on fuel at all. The DL board was reporting earlier that enroute fuel stops were added for some flights at CVG because there is an expected shortage of fuel at ATL.

The price changes we are seeing now are profiteering...given the depth of the crisis and its potential to launch us into a recession or cause civil disruption, there needs to be better efforts to stabilize prices and work on restoring supply.

This forum isn't the place for politics, but I have to say the way things are going, it appears someone is fiddling (or strumming a new guitar) while rome burns.

That is incorrect. True WN might have difficulty flying the planes. However, the fuel must be delivered at the contracted price or the contract must be repurchased at market negotiated price. So southwest could effectively "sell" each contracted barrel of oil at say $70 a barrel back to the writer of the option. Thus they would have a profit of about $44 a barrel they control. that profit would make the shareholders happy. There is a differnce between being a customer and a shareholder.

Maybe a "Windfall Profits Tax"?

See Energy Taxes and Subsidies: A Report to the Energy Policy Project of the Ford Foundation written in 1974, at http://www.fordfound.org/elibrary/do...s/0153/toc.cfm

"In economics "windfall" means being paid generously for what you were going to do anyway. The function of rising prices is to bring about new production, as demonstrated by crude oil price increases in late 1973 that brought about a flurry of activity to increase output. Increased output, in turn, increases wealth in a society as long as a buyer is willing to pay more than the cost of producing a product. An excise tax that ignores cost will irrationally limit output in cases where there are no windfalls. The tax benefits, on the other hand, will continue to make a large part of the true windfalls tax-free." (Chapter 5, at page 84)

Why don't we talk about effective ways to incentivize efficient use of fuels first? (Disclosure: My wife's car is a Prius.) Buses & Trains need to be protected and valued; government buildings should have a mandatory design component of solar collectors, especially in places like LA, Phoenix, etc.; gasoline taxes need to be increased (or vehicles assessed on their EPA ratings, with lower MPG translating to higher car taxes).

The airline industry is, net net, a very efficient user of fuels. But look at the parking lots and highways leading to the airport for the real culprit...our national car obsession.

I know this doesn't belong here (so moderator you can delete this if you see fit) but the above statement just reminded me to "Boycott Citgo".

Venezuelan government owned. Well intentioned low prices but big problems down the road.

Forget N.Korea, we'll have a hand in Venezuela next.


I hate to get political...sorry.

No you're not or you wouldn't say it.

LOL!!!

I think Continental will definitely be out of the picture before the year is out. Everyone should spend their miles (even if EasyPass) before it's too late.

n.b. this topic reminds me of something you'd see on FoxNews. :td:

I doubt it... they won't go before NW, Delta, etc. The fuel prices affect everyone except for Southwest. Southwest doesn't have enough capacity to meet overall travel demand, and if they did I doubt they have enough fuel futures to account for increased capacity. Look for reductions in service on airlines/aircraft with the highest fuel costs (Like NW DC9s). Fewer available seats will lead to higher fares. CO should be OK in that scenario. Not sure about NW or DL.

CO will survive.

DL should be in BK court shortly. I hope for them it's ch11 and not 7. They will be hit the hardest - extreme overcapacity, razor thin margins and bleeding so much red I cant see how they can even stabilize their losses.

There is so little fuel available to them in ATL, DL is adding enroute fuel stops for many of their longer distance flights - which further increases costs.

CO is going to be pinched, like everyone else, but they are in the best financial position of the majors - not to mention the oil industry represents some of their best and most loyal customers. Oil execs want their upgrades too - so I am sure they will be keeping the spigots open to fuel CO aircraft.

I guess my question is ... CO has already been through BK and thats how they streamlined their operation. With BK, before Oct that is, both DL and NW will be able to shed their pensions and probably obtain more cuts from the unions. Gas prices will always be variable, but they will have lowered a major part of their fixed costs. It will be interesting to see how this all plays out... I predict DL BK the week after Labor day... and NW BK by the end of Sept.

I guess my sarcasm wasn't obvious enough. :)

I don't think that they are competing aggressively at all. I was looking at flights from MAF-HOU, and WN was at least $20 more than CO, and IAH is a lot more convenient for me, not to mention safer.

I have my elite for next year, and I would like to fly WN a bit more to get the RR certificate, but I just can't bring myself to get on one of their planes.

I am not sire where the saftey information comes from but if SW is getting $20 per ticket and paying less for fuel then they are in fact doing better then CO>

:eek: guess not... I usually detect sarcasm.

Only there it would be "Fuel costs are like shark attacks: everyone's susceptible, even musclemen like Continental Airlines. But, first, this message..."

WN Fuel Hedges
 

If I remember correctly, most of Southwest's fuel hedges expire relatively soon. Anyone know for sure?

And once that happens, at least ONE component of cost is more level.

Not exactly. WN will enjoy a very large cost advantage next year and smaller, but still substantial, advantages through 2009.

http://phx.corporate-ir.net/phoenix....041&highlight=

Interesting. These two positions seem to be the offspring of radically different ideologies. On one hand, the anti-oil company notion of capping their profits. On the other, the environmentally unfriendly desire for the proliferation of oil refineries.

With regard to your suggestion of a profit cap, may I (hypothetically) inquire as to what industry and, perhaps even more specifically, what business you work in? Because I'm sure you'd agree that those profits should be capped as well. ;)

I hate expensive gas. But sometimes we need very loud alarm bells and red flags to warn us that it is a very finite resource. I suppose that's the silver lining with regard to our petroleum predicament.

On topic . . . CO will most certainly survive the year. And, in all likelihood, many years to come.

I agree with the first statment, but after the year end my crystal ball gets a little cloudy. Once apon a time (and it wasn't that long ago) Delta was considered to be the big gorrilla in the airline industry due to it's large cash reserves.

One can only guess what's gonna happen to fuel prices, and according to the National Hurricane Center:

"NOAA Raises the 2005 Atlantic Hurricane Season Outlook,
Bulk of This Season's Storms Still to Come"

This is extra bad news since they've already used up the bulk of storm names for 2005, there's only 8 names left! :(

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Don't get me wrong...I feel like some sort of profit cap is only needed as a temporary measure. Alot of gas companies are profiteering and that is just wrong. Case in point...the day after the hurricane there was no shortage of gas, the true shortages won't show up for another week or so, and gas jumped up by 60 cents easily here in KC. That is simply playing on peoples fears to get more money.

I'm not asking for oil refineries to be built everywhere either, but alot of people don't understand that we barely had enough refineries before the hurricane, and many more don't know that the last refinery was built something like 25 years ago. We don't have an oil shortage, we have a lack of means to turn oil into useful products. If we can eliminate some of the red tape and make it a bit easier and more worthwhile to build a refinery or two it would greatly benefit us.

To get back on the topic of CO...while the initial shock of Katrina well hurt the airlines, CO may actually see a long term gain. With all the ports along the gulf destroyed business is going to shift to Houston and other Texas ports which of course comes with business travelers.

All I can say is that I hope things in NO get under control soon.

Matt

Is it really profiteering? I think it's just basic ECON 101 and supply & demand. There's a decrease in supply (partly a real decrease, partly perceived) and gas stations can price a gallon at $3.50 and still sell all of their gas. Why shouldn't you be allowed to sell gas at whatever price you want if people are still buying it?

If you're so angry that they make so much money off of you, stop buying their gas.

Yeep.
 

You sell a product based on what people will pay for it, not what it costs you.

Case and point: ~150 transcon fares.

I'm not really angry because I work from home and don't have to do alot of driving....and btw I have yet to fill my tank since the hurricane...lol.

Trust me I understand supply and demand very well...although the Republican in me thinks you should sell at the highest price people will pay, there is a part of me that feels it is just very wrong to capitalize on a tragedy like this.

You sell a product at the price(s) which will enable you to sell the amount you want for the highest profit (or loss in the case of airlines). $150 are used to fill potentially empty seats, however probably overused.

It's actually a shame more people can't hold two views that aren't exclusively either left or right.

In case anyone was wondering, if we have a storm after Wilma, the names go like this:

Alpha
Beta
Gamma
Delta

and so on. :eek:

If Katrina takes down CO, which is very unlikely IMHO, she sure won't be the only one going. :(

Very good point. Can I build it in your back yard?

That's always the sticking point isn't it? But aren't there communities out there that would welcome the good paying jobs that came with it? I mean that's a heck of a stimulus package for an area wouldn't you think? Maybe I'm wrong.

Actually you can't...cause I live in downtown KCMO and there just isn't room.

Now we could always bulldoze the abandoned tank farms surrounding EWR and rebuild what has essentially already been there.

How 'bout Crawford?
 

How 'bout Crawford? :D

Nope... in the rare event that they run out of names before the season's out, then they go to the top of next year's list.

More about naming hurricanes: http://www.nhc.noaa.gov/aboutnames.shtml

Greek Letters
 

No, when it comes to Atlantic Basin tropical systems, they do revert to Greek letters when the full list is exhausted. This has yet to happen although it's becoming obvious it will need to happen this year. Only in some regions of the Pacific do they cycle names from one list to the next where there's an abundance of systems each year.

In any event, returning to topic, any word on how Katrina's impact on fuel is impacting CO directly ...and how CO is dealing with fuel costs differently from the other carriers?

Even though LUV is 85% hedged, they're paying more than they expected...they're hedged in crude oil, but they use jet kerosene A...and just like gasoline, with the refinery shut-downs, jet fuel spiked over 20% while crude rose <10%. Still alot better than no hedge, but I know its pissing them off...BTW not a one of the legacy carriers can make it long term with the combo of today's fuel and today's fares; sometihng has to give. I would guess, if you think fuel is going to stay up here, book ASAP to beat the coming fare hikes.