Category Archives: Oil/Energy

PlaneBusiness Banter Now Posted!

Hello everyone! This week’s issue of PlaneBusiness Banter is now posted!

It’s another heavy earnings week issue this week as we take an in-depth look at the recent 4Q14 earnings reported by American Airlines, JetBlue, Allegiant, and Hawaiian. We also have the PlaneBusiness Earnings Summary for WestJet, which reported earnings Tuesday.

So which airline surprised us with their report — and not in a good way? That would be Hawaiian Airlines. If you’re wondering why shares of the stock fell of a cliff after the airline reported earnings, we’ll tell you why.

As for American, while some investors decided that lower-than-anticipated RASM guidance for 1Q15 was something to get worried about, (and one analyst actually downgraded the stock as a result of concerns over short-term sluggishness) I am not worried.

For that matter, Delta Air Lines announced lower than expected PRASM estimates for December on Tuesday.

Things are sluggish out there right now.

Now American has both its pilots and its flight attendants set with new JCBAs, the airline can devote more time and attention to other integration issues.

Best integration news we heard in the call? The airline has almost completed all the steps necessary to obtain single carrier status.

We were happy with JetBlue’s call as well. I like the attitude of the new management team. I think whatever drama has been sitting over the management team at JetBlue has finally left the building. That is a good thing.

Allegiant? What can I say? I hate the business model. But the airline continues to make money. With fuel dropping, it is only going to make more money.

We also talk about the situation developing with alliances — particularly with the Middle Eastern carriers, European carriers and U.S. partners. In case you missed it, Qatar announced a 10% stake in IAG Holdings last week, and today Korean Airlines announced a codeshare deal with American on Seoul/DFW routes. Why is this a big deal? Because Korean is a founding member of the SkyTeam alliance. Not sure what the folks in Atlanta think about this development.

All of this, and more, including the latest update on oil prices, in this week’s issue of PlaneBusiness Banter.

PlaneBusiness Banter Now Posted!

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Hello earthlings. This week in PlaneBusiness Banter we are, of course, talking fuel prices. Jet fuel prices to be exact. New York Harbor Jet closed today at $3.22/gallon. Have you filled up your Boeing 737-800 lately? Yes, well, if you have — you can understand why the airline industry is having its own equivalent of an anxiety attack.

Today American Airlines became the second major US carrier to announce a reduction in its capacity forecast for the year. (JP Morgan analyst Jamie Baker has to be sooo happy with this news — after the hard time he gave the airline about their capacity plans in the airline’s fourth quarter earnings call.) Delta already reduced its numbers in February.

Who will be next?

We also have our in-depth earnings call review this week for both SkyWest and Republic Holdings — our last two US airline industry earnings calls for the fourth quarter.

Calls for both airlines were quite interesting, but I have to say, I did not realize that ….well, I’ll keep what I was surprised about in the SkyWest call a surprise. You’ll just have to read.

We also talk about the fourth quarter numbers that a number of Asian carriers posted last week including Air Asia, Malaysia, and Tiger Airways.

We also take a look at US industry revenues for the fourth quarter this week. If you want a graphical look at how revenues in this industry are consolidating — your search has ended with this week’s issue.

Also — do you know the difference between a “weighted average” and normal average? If you frequently look at summaries about various industry metrics, it might be a good idea if you knew what the difference was. There — that’s our small effort at financial education for the week.

Airline stocks? Can we change the subject please? With crude oil prices up more than 13% on the week and jet fuel up 8% — it was a horrible week for the sector. Shares of Air Canada posted the biggest loss of the double-digit loser group.

As always, all this and more — in this week’s issue of PlaneBusiness Banter.

Subscribers can access this week’s issue here.

Jet Fuel Closes Up 13 Cents on the Day: $3.22/gallon

New York Harbor Jet picked up another 13 cents in trading today. Closed at $3.22/gallon.

Last week Southwest Airlines CEO Gary Kelly said the airline would not reassess its capacity plans unless fuel hit $3.30 a gallon. Looks like that day could come sooner than he had anticipated.

Meanwhile, American Airlines became the second major US carrier (behind Delta who did so in February) to announce a cutback in 2011 capacity as a result of higher fuel prices.

Oil Leaps Above $80/Barrel — Airline Stocks Sink

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Want to know why most all airline stocks sunk like they had rocks tied to their little feet today?

That’s right. Give the man in the back row with the red shirt on a gold star.

It’s oil. Or rather, the exploding price of oil.

Crude oil futures closed at 81.37 today — up a hefty $2.25.

Why? One major factor– the continued drop in the value of the dollar. The euro climbed about $1.50 today, the highest level since August 2008.

And as all bright PlaneBuzz readers know — oil is priced in dollars. So as the dollar falls in value, international investors start bidding up the price of oil futures as a play against the weakening U.S. currency.

That’s the way the markets work.

May Airline Traffic and RASM Out-Takes

American Airlines Cancellations

This week the U.S. domestic carriers have been in the throes of the usual first-week-of-the-month traffic and RASM reporting ritual.

And what have we found out from the various press releases full of mind-numbing numbers?

I think Gary Chase, analyst with Barclays started the week off on the right tone as he wrote, “We think the market was largely ready for numbers as bad as CAL posted last night, even if we had hoped for better.”

Continental reported at the beginning of the week that it estimates the H1N1 scare cost the airline at least $30 million in revenue. This was more than many analysts had expected, and was clearly a big factor in the airline reporting that consolidated PRASM for May was down between 19.5% and 20.5%. Mainline only was down between 19% and 20%.

Friday morning Bill Greene, analyst with Morgan Stanley issued a note in which he said, “Recent, May traffic reports highlight the severity of the supply/demand differential plaguing the industry with RASM falling ~20% YoY at both CAL and LCC. Surprisingly, managements continue to bet on a 4Q recovery, as evidenced by the sequential acceleration in capacity growth between 3Q and 4Q09.However, even if a rebound does materialize, we worry that higher oil prices obstruct profit-improvement at many airline.”

Looking towards June, as I wrote in this week’s PBB, I am not hearing much of anything positive from the airline folks I am talking to — in terms of demand uptick.

Kevin Crissey, analyst withUBS wrote this week, “Airline financials are troubling, particularly with fuel prices rising.” He continued, “We are concerned about the revenue outlook after May,” said Crissey, who forecasts that June traffic “will be 2 to 3 percent worse” than May and “July could look like May. The forward curve for fuel is higher.”

Of course, as has been the case over the last year, there is one domestic airline that just keeps bucking the drop in demand trend. That airline is Allegiant Air, the airline portion of Allegiant Travel.

The airline reported Thursday that its total RPMs rose 20.1% while capacity was up 19%. While this resulted in only a 0.8 point increase in load factor for the month, you can pretty much be assured that this is going to be the most positive combo of demand and capacity that will be reported for the month.

Scheduled service at the airline increased 23.9% while capacity jumped 22.9%. Load factor increased 0.7 percentage points to 90.6% from 89.9%.

Both AirTran and Southwest Airlines announced drops in load factor this week.

Remember that these declines also came as both airlines were engaged in pretty stiff fare competition, so we can pretty much figure both airlines posted some healthy declines in yield and RASM as a result.

US Airways, which also reports RASM estimates, as does Continental, reported on Wednesday that its mainline traffic declined 5.2% on a 5.8% cut in capacity. As a result, the airline actually posted a .5 point increase in load factor.

However, as Bill Greene mentioned in his note on Friday, the airline also said that its consolidated PRASM fell between 18% and 20% during the month.

Also note that American Airlines saw traffic fall much more than the airline’s capacity cuts — as the airline reported that mainline traffic declined 11.7% in May, on a capacity decline of only 8.8% This resulted in a 2.6 point drop in load factor for the month. Ouch.

Airlines: Don’t Look Now, But Oil Prices Are on the March

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In the midst of all the giddy sentiment that is starting to take hold in the industry concerning the “stabilization” in demand decline — a fact that April RASM estimates issued by some airlines have fueled this week — a new ugly problem is starting to make itself known. That ugly problem? Higher fuel prices.

As they say, if it’s not one thing, it’s another in this industry.

The big question concerning the recent relatively calm period of lower oil prices was this one — how fast would they start to ratchet up when the economy began to shows signs of recovery?

We, unfortunately, are starting to see that apparently the answer to that question is — pretty fast.

If you have not looked at the oil futures market lately, here is the bad news. As I post this (at about 1:30 PM CDT), the price of a barrel of crude is now sitting at 58.55, up almost $2 bucks for the day. Just two weeks ago, the price of crude closed at 50.80. Last Friday, it closed at 53.20.

Today’s price is the highest price that crude has posted since November.

What is fueling the push?

A combination of some encouraging signs on the economic front, U.S. equity markets that seem to believe the worst is over (whether it is or not) and a weaker U.S. dollar.

As most of you know, a declining US dollar makes dollar-priced oil cheaper for foreign buyers and tends to encourage demand, leading to higher prices.

Yes, it is indeed a vicious circle.

And one damn frustrating one if you are an airline. Do you hedge or not? At what price levels? With what hedging instruments?

Remember that many airlines were still paying the price (and dearly) in the first quarter for making the wrong move on oil futures last year.

What makes this rapid rise in the price of oil potentially more troubling for the industry than the record-breaking rise last summer is that it is rearing its ugly head at a time when the level of demand, i.e., revenue, has fallen through the floor.

Great Speech on Oil And What We Need To Do About It: Anne Korin

My thanks to a PlaneBusiness Banter subscriber who sent along a link to a series of videos on YouTube this morning. The videos are of a recent speech that was given by Anne Korin and covered on C-Span. Korin is the co-director of the Institute of Global Security. There are seven videos that cover the speech and questions and answers after the presentation.

Her speech takes a very logical and rational look at the situation we now find ourselves in — in terms of that strategic and fungible commodity — oil.

Excellent presentation, and I would recommend it to all who make a living in the transportation business.

Continental Airlines, Southwest Airlines Report Earnings

It’s Friday and Wall Street is up to its volatile tricks again today. Should be interesting to see where the numbers end at the close of the day.

Meanwhile, Continental Airlines and Southwest Airlines reported their third quarter earnings Thursday.

The Cliff Notes version of the results?

The numbers for both airlines — on their face — were very weird. Just as we saw yesterday with American and Delta. Weird in that with capacity being pulled out and oil prices through the roof for much of the third quarter, we again saw cost per ASM figures solidly in the double-digit category for both airlines.

But revenues were also up — especially at Southwest.

Continental reported a loss of $236 million or $2.14 a share. Excluding $91 million of previously announced special items, Continental recorded a net loss of $145 million or $1.32 a share.

Southwest’s numbers are a bit more complicated to break down — as a result of the airline’s fuel hedges.

Southwest reported net income excluding special items and SFAS 133 unrealized gains and losses of $69 million. Or $0.09 a share. This was two cents better than analyst consensus.

However, because of the drop in the value of crude oil, the airline had to write down the value of its fuel hedging transactions. (That is the bulk of that “SFAS 133 unrealized gains and losses” accounting mumbo jumbo up there.)

When you factor in those write-downs, the airline lost $120 million for the quarter, or $0.16.

That’s right. All those great fuel hedges the airline has stocked up on aren’t so great when the price of oil begins to plummet.

As for honest-to-gosh cash in the bank? The airline ended the quarter with $1.5 billion. With an incremental $200 million of a revolving credit line still available.

Four fully detailed reports on the earnings results from American, Continental, Southwest, and Delta Air Lines will be included in this week’s PlaneBusiness Banter.

Wall Street Makes History, Airline Stocks React Erratically, Oil Drops Significantly

It’s official.

The Dow Jones Industrial Average posted its worst week in history this week.

The average had its worst week on record in both point and percentage terms, as did the Standard & Poor’s 500 index.

The Dow Jones Industrial Average, after starting the day down more than 700 points, finished down only 128 points, but it was one wild road in between.

Over the last eight days, the Dow has lost just under 2400 points.

As for airline stocks, it was also a volatile mix today as several airlines stocks posted record-breaking one-day gains. But we had some losers in the bunch as well.

On the huge plus side for the day, shares of Republic Holdings picked up a whopping 29% today. Yes, you read that correctly. Shares here closed at 8.94.

But wait — we had one airline stock do even better. Shares of Alaska Air Group shot up 31% on the day, closing at 18.80.

Shares of US Airways also had a great day, as shares here were up 27%, closing at 4.60.

AMR, parent of American Airlines saw their shares pick up 20%, closing at 8 bucks even.

AirTran also had a good day, as shares here picked up a nice 18%, closing at 1.96.

Shares of SkyWest didn’t have a bad day either, as shares here shot up 17%, closing at 13.75.

On the loser side, we really just had a small handful of notable drops for the day.

Shares of Pinnacle were down 10%, closing at 2.37, while shares of Mesa dropped back 15%, closing at 25 cents.

Embraer and Bombardier didn’t have good days either — not surprising considering the action in the market as a whole. Embraer shares closed down 8%, ending the week at 17.20, while shares of Bombardier closed down 16%, ending the week at 3.50.

And, last, but by no means least — where did crude and jet fuel end up today?

Crude futures closed at 77.70, down 8.89 on the day, while the average spot price for jet fuel closed at 2.33, down 21 cents on the day.

Taken by itself, this would be great news for the things with wings.

Unfortunately, there is that elephant that is blocking the view to the nice new HD flatscreen — the rest of the financial/economic mess on a worldwide basis and the recognition, finally, that no, this is not just a little “subprime” mortgage problem centered in California, Arizona and Florida.

Airlines, Jet Fuel and The Market Meltdown: What The Heck Is The Problem?

It’s Friday and it’s already been another rough day in the financial markets.

You guys are smart folks. You knew this was going to be the case.

The Dow Jones Industrials are now down another 275 points or so, after a sharp drop of almost 700 points at the open.

Okay, enough of the bad news.

Yesterday analysts Jamie Baker and Mark Streeter with JP Morgan issued a research note in which they wrote, “We’ve never witnessed such a disconnect between fundamentals & equities. True, AMR & CAL treaded water for a month after DAL & NWA filed, despite Ch11 plans to cut capacity by an amount sufficient to restore industry profitability. But nothing we’ve experienced comes close to explaining a recent $5 share price for United, considering we expect it to earn something similar (untaxed) in 2009.”

As I talked about in PBB this week, with the price of oil dropping like a rock, there is no logical reason for the corresponding battering of airline stocks.

And yes today, the price of oil continues to drop like a rock. As of this posting, the price of crude is trading at around $80 bucks and change. Yes, $80.

And no, this is no mystery. If the world is heading into a recession, the price of oil has to come down. It’s simple economics. No voodoo speculative manipulation involved in this drop whatsoever.

In Jamie and Mark’s note, they also said, “Sure, oil could ruin the forecast – We readily admit that unprecedented demand declines coupled with $140 oil would support multiple bankruptcies. But it is difficult for us to reconcile the implied global economic backdrop of this scenario with sharply higher oil. Always a risk, but a poor base-case assumption, in our view.”

They continued, “Simply put, we are having a tough time modeling losses – Fundamentals appear to be going one way, equities the polar opposite. Perhaps seasonality comes to the rescue, perhaps the flight to quality eases and redemptions moderate, or perhaps investors simply need more time to accept the profit implications of an industry rolled back to its 1998 size while enjoying fuel prices below those of last year. In any event, our conviction in 2009 profitability and bullishness for legacy equities has yet to waver and exceeds that of any prior point in our career.”

I agree.

Then again, with what is going on with Wall Street right now, maybe the thought of airline stocks being a potentially screaming “buy” opportunity is the least of what is top of mind of most investors right now.