Tag Archives: oil prices

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.

Airline Stocks Hit Turbulence: Sluggish Traffic and Higher Oil to Blame

As ardent followers of the airline stock sector are aware, every month Continental Airlines leads the other airlines in reporting their traffic numbers for the previous month. But the other information the airline issues, along with its traffic numbers, is usually of more interest to us hard core airline fans.

That information, of course, is the RASM estimate the airline issues along with the traffic numbers.

For those of you who are new to this piece of the world, RASM stands for revenue per available seat mile and it is the most widely used “rule of thumb” measure of an airline’s revenue performance.

Last night Continental Airlines reported that it now expects mainline domestic revenue per available seat mile for November 2008 to grow only 4 percent to 6 percent, down significantly from previous expectations for growth in the “low-to-mid teens.”

Not surprisingly, the airline said that this was a result of lower yields. Translation: Lower ticket prices.

This news comes after most airlines over the last month insisted during their earnings call presentations that they were not seeing significant drops in demand.

We have a bit of what we might call an “inconjunct” here.

Jamie Baker, analyst with JP Morgan wrote this morning that while the news was not a complete surprise — it was still enough to push him to sharply reduce his fourth quarter forecast for the airline.

Baker now expects the company to report a loss of $0.56 per share, compared with prior expectations for profit of $0.40.

As Baker said in his note, it wasn’t a question of if — just a question of when the economic meltdown would catch up with airline demand. He expected the industry might have at least a month or so before the full effect hit.

The other problem today? Oil prices.

And here it gets a bit more complicated.

Is the price of oil rising because of a supply and demand issue?

No.

The reason the price of oil is up today is because the dollar is falling.

Remember that oil is priced in dollars. As a result, investors see commodities such as oil as a hedge against inflation and a weak dollar and pour money into the crude futures market when the greenback falls.

A weak dollar also makes oil less expensive to buyers dealing in other currencies.

There you go. There’s your commodity pricing/falling dollar lesson for the day. Unfortunately the end result — higher oil prices — then affects this sector negatively.

As of this posting oil has soared more than $7 today, and is now trading around $71.50.

The ATA Should Find Out The Facts Before Screaming Foul

Getting ready to make my way back to the WHQ today so just a quick note.

I see that late on Monday the Air Transport Association issued a press release in which President James May exclaimed, “The market’s extreme volatility suggests that speculators, who withdrew tens of billions of dollars from the commodities markets when Congress threatened to tighten oversight of excessive and harmful speculation, breathed a sigh of relief last week when action in the Senate seemed unlikely and returned to the energy markets in full force. Well, speculators are back and prices are up.”

Not hardly Jim.

Oil futures contracts for October expired on Monday. The price climbed on Monday because those who had taken short positions had to cover their rears. This was made clear yesterday when the price went back down — ending at $107 and change.

Putting out press releases in which it is clear you don’t know what you are talking about doesn’t help build confidence in your credibility. I’d suggest the ATA consult with a professional next time before spouting out nonsense.

We Are Also All Witnesses To The Biggest One-Day Jump Ever Recorded in Crude Oil Prices

One last datapoint before yours truly hits the sack.

For you history buffs out there, you need to mark down this date in history. Because today the price of oil gained more than $16 a barrel. This was the biggest one-day gain in dollar terms since 1984 — when crude futures began trading on the New York Mercantile Exchange.

Crude for October delivery rose $16.37, or 15.7%, to close at $120.92 a barrel on the New York Mercantile Exchange.

MarketWatch reports that the gain surpassed the previous price-gain record of $10.75, registered on June 6 of this year. The highest percentage rise in a single day was seen on Jan.3, 1994, at 20.9%, according to FactSet.

So how did jet fuel fare today? NY Harbor Jet was up 17 cents to 3.34/gallon while Gulf Coast was up 7 cents to 3.35 gallon.