BioInvestor

An Open Letter to All Airlines - Quit Whining and Hedge Your Fuel Costs

Good point: no one can! Speculators have become the new boogie man. If futures were settled in oil, that would be one thing, but they're settled in cash. Sure, they may be marked to the spot price, but so what. There are commodities with inflation that don't have a derivatives market; there are commodities with derivatives that don't have inflation. I don't know what people mean by speculators--it's seldom defined--but I too don't see evidence that it has anything to do with futures, forward contracts or options on futures.



On July 15, esw wrote:

Can anyone point to a reputable economist (other than the Air Transport Association's) who will credit speculation for a substantial share of the current per bbl price of oil?

Airline Stocks: Where Value Investing Takes Flight

I think trading airline stocks is the only way to generate any kind of return. It would surprise me if AMR went into C11, but I think in the short term--say the next year or two--it's not a bad trading vehicle for those that are looking for short term returns.


On July 8, Mark S. wrote:

AMR will be a good short-term buy - today it went up 11+%. You trade these things. You don't invest in them. I think some of these airline stocks will be good bets against oil stocks as oil prices drop. I just wouldn't put all of my eggs in one basket and I wouldn't keep my money in them for long-term. Still, if you're looking at a safer play against oil, DUG looks like a good ETF

Airline Stocks: Where Value Investing Takes Flight

Sad but true: none of the legacy carriers has. Southwest isn't part of this conversation.


On July 8, ProfessionalHFAnalyst wrote:

If memory serves, no US airline has ever returned its cost of capital. Even in the good times. Until there is a cartel/monopoly established where tickets can be sold at multiples of current prices, I would avoid this sector at all costs.

Airline Stocks: Where Value Investing Takes Flight

I want to make a couple of points on AMR to clarify the statements made in the article. I think that the analysis of the financial statements doesn't paint the entire picture. (I do think at some point it's probably in AMR's best interest to reorganize.)

While AMR has under $1 billion in cash, it has almost $4.9 in cash equivalents. The company has reduced its accounts payable by $5 billion: I am waiting to see exactly why this step occurred. The company is burning cash, but is solvent. Contrast this picture with the one five years ago, where shareholder equity was negative.

The statement that AMR is drowning in debt isn't wholly accurate, since the legacy carriers are all highly leveraged. An analysis of all the legacy carriers shows that AMR is in a better position than many of its peers.

In contrast, UAUA has weaker cash (and cash equivalent) position than AMR. Looking at income, the company performed worse than AMR in the latest quarter. Just like AMR, UAUA is bleeding cash.

Overall, AMR is in a better position than is UAUA.

LCC is an interesting case as it definitely benefited from its reorganization. The company still has challenges with the US Airways/American West merger. I haven't looked at the June numbers for LCC, but its income is trending in the wrong direction. Long term, LCC has a poor hub structure. LAS and PHX are areas of growth, but PHL isn't a good international gateway; PIT is a problem for the airline. CLT has advantages in terms of traffic, but it too isn't a good international gateway. Long term LCC, in my opinion, isn't going to be a winner.

Just like AMR, CAL has pretty stable revenues despite current market conditions. The company has, arguably, the strongest balance sheet of any of the legacy carriers. Its EWR hub is an excellent international gateway; IAH is a strong hub for Central and South America. CLE doesn't appear to add much in the way of value for the company. CAL lacks exposure on the west coast--it needs a hub. Of course, since the company will be one of the first to take delivery of the B787s, whenever they're ready, the airline will expand into Asia from its IAH and EWR hubs. CAL leases most of its fleet--it owns some regional jets. It's more difficult for CAL to park aircraft. It also can't raise funds against equipment as easily as, say, UAUA could. CAL is unlikely to enter C11, but leasing poses some downsides. CAL also owns many of the aircraft used by Express Jet (XJT), a company spun off from CAL a few years ago. Like CAL, XJT looks to have a strong balance sheet and relatively stable income; however, the company has very serious cash flow problems. Its stock price has collapsed (bigcharts.marketwatch....); the company should be delisted from the NYSE later this month or early in August. If XJT fails, CAL will be stuck with a number of non-performing assets: Embraer regional jets, which won't be helpful to its cause. CAL is, IMHO, still the strongest of the major, legacy carriers.

ALK has a weakening cash position; it does have relatively stable income and a relatively healthy balance sheet. Its cash position is actually weaker than many of the legacies. ALK is in a relatively good market where it has been able to compete quite successfully with LUV. It has done well and will likely continue to do well in the future.

The lesson learned from XJT, which is a great lesson for the airline industry, is to take a look at cash flow. The balance sheet is the past; the statement of cash flows is the future. I don't think that any of the legacy carriers represents a good investment opportunity right now. None of them is safe. At current oil prices--and the trend in oil prices--each carrier is in peril. My suggestion is to wait for the first legacy carrier to enter C11 (it would well be LCC), which would be good for the rest. Of the three listed in the article, only ALK and CAL are worth consideration from a committed investor. I wouldn't buy either right now; I would wait for major calamity in the industry, then purchase.

10 Signs of a Recession

In fairness to George Bush, the word nuclear actually has three syllables not two.

On July 6, DanD1 wrote:

remember "New Clear"? Was George Bush uttering code words for the future? The press presented him as a bumbling idiot because he couldn't pronounce nuclear; maybe he pronounced it the way he wanted it said? Report abuse

The ATM at the Airlines

sf94127, I disagree that the baggage charge is something that should be removed. There are passengers that simply don't need to check baggage. I believe it fair to disaggregate pricing and assess a fee for those that want to check their bags.

I think that the idea of a fuel charge is interesting. Airlines have tried this option quite successfully. For the case of the airline, the advantage of a charge of food or baggage is that this charge could remain after fuel prices moderate.



On July 5, sf94127 wrote:

I believe consumers would understand (but not like) a surcharge for rising fuel costs. Let this cost float with the price of jet fuel at the time they make the reservation. It may be a $400 flight has a $75 fuel surcharge; so be it. Get the cost out front, transparent, and get rid of the silly nickel and dime stuff which are just surrogates for real issue of high fuel cost.

Are Airlines Stocks a Contrarian Opportunity?

sf94127, I don't see AMR going into liquidation. The weakest carrier is probably LCC, though it is close. They may enter reorganization, but the complete liquidation of one of the legacy carriers will be good for the rest.

Are Airlines Stocks a Contrarian Opportunity?

fatcat, did you mean puts? How does buying calls help if Valero drops?

The ATM at the Airlines

On June 28 at 12:39 AM Stock Miser wrote:

BlueDog, thats part of my point. If I go and do my research on finding an airline to get me from point A to point B, and only later discover I could have flown for less net dollars on another airline not charging such fees or charging less fees because I couldn't read the 2 point font that says I was going to be charged such a fee, I would have surely flown a different airline. . .

I already read this post when you wrote it on June 27. I don't think there's any reason to repost my reply!

How Bad Is the Oil Shock of 2008?

I'm off to see if there are any unused clichés left! ;)


On Jun 09 02:03 PM Independent E.G. wrote:

> 1. Leadership. Leadership at all levels and in all walks of lives
> and communities.
> 2. Good conscience. Imagine if every citizen or resident proactively
> contribute his/her share, what's no to overcome?
> 3. Collective power. Why not utilize all these talents collectively?
> We have the largest pool of smart and practical brain power in the
> World, don't we? We need to pull these people together.
> When the world changed after 911, when we are under attack in so
> many angles, the status changed. Don't surrender to this mess! Ask
> not what others can do for you, ask what you and your corporation
> can do for your own country!
> Do we have that spirit? We used to.
> When Asian financial crisis hit Asia a few years ago, Korean Airlines'
> flight attendants jointed other citizens at their airport in Seoul
> to ask people not to leave their own country so their money will
> be spent inside their own country.
> Right now in Taiwan, the Mayor of Kaohsiung is offering free ride
> on all their public buses. The government in Taipei is offering 20%
> raise for their employee in helping them overcoming oil crisis.
>
> And their citizens responding actively in efforts to reduce energy
> consumption.
> Just to list a few. What are we going to do?

What's Really Wrong With The Airline Industry - And Can It Be Fixed?

ford96exploder--the hub-and-spoke model certainly can cause issues in lean times, but when times are good, this model is exceptionally powerful and leads to much more successful results than other approaches, such as the point-to-point approach followed by Southwest. Of course, the structure that Southwest adopts appears to lead to a better overall performance. Hub-and-spoke can work.

There certainly is a diversity of equipment among legacy carriers. Part of the reason is that these companies serve many different markets. It's a small point, but Southwest really flies two different pieces of equipment: the -700 and -300 series aircraft aren’t identical. There's no question that the minimization of diversity practiced by Southwest is one of the factors that leads it to consistent profitability.

I don't think that knowing a business and focusing on financial issues are mutually exclusive by any means: Southwest does both.

Southwest has consistent, stellar results, but the carrier wasn't always burdened by high labor costs. In the 80s, LUV had a much more favorable labor cost than its competitors and certainly than it does today. Southwest is no longer a growth stock in that it participates in the business cycle: high labor costs are one reason for the comparatively lackluster performance of the company.

Unfortunately, when you start to talk about on-time performance, a credibility gap starts to open! The statement about Southwest getting to the destination on time, every time is just nonsense. Southwest has its share of delays. Consistent delays were the reason that Southwest pulled out of Denver well over ten years ago, and why it left San Francisco a few years back. It’s now back in both markets. Southwest does well in on-time performance, but others have done better. The Department of Transportation statistics released for March showed that Southwest ranked number 5 in the US. You can check out www.dot.gov or here's a link to a newspaper article on the topic: www.bizjournals.com/bi... Southwest did much better in April, beating all th legacies (check here www.bizjournals.com/wi...). Actually, here's a link to the Bureau of Transportation Statistics of the DOT: www.bts.gov/press_rele....

The comment about former first class passengers flying Southwest because of on-time performance is just nonsense. Certainly, the industry pioneered by companies such as NetJets competes to some extent with the premium services offered by legacy carriers. Southwest does not.

The ATM at the Airlines

BlueDog--bingo! :)

The ATM at the Airlines

Thanks Stock Miser, you made my point. Individual opinions aren't that useful, but if there's a theme shared by many people, we’re no longer talking about a single opinion.

Complaining and leaving are two separate and distinct responses: businesses will listen to complaints but respond to the loss of customers. People who complain don't necessarily take their business elsewhere.

You might want to ignore that wise business person you cited, because there's no evidence that I have found to support the notion that a disappointed person will influence a thousand potential customers. Twenty people might hear a story, but certainly not everyone in that group is going to react.

The ATM at the Airlines

dandbear, weclome to SeekingAlpha! Of course, I have been on many flights and never had a carry on that was deemed too heavy and had to be checked. Big deal. It makes as much sense for an airline to base its policies around me as it does around you. There is, however, a great site where people discuss, among other things, their experiences while traveling: www.flyertalk.com Individual experiences while traveling are interesting, but not really useful when analyzing companies.

Having the government involved in handling fees isn't going to happen. The trend globally is to have less government involvement in the business side of running airlines.

The ATM at the Airlines

Stock Miser, I think you're ignoring some of the factors which govern the airline industry.


I don't see the argument against fees as being valid. Airlines that impose--or that plan to impose--such a tariff have targeted the occasional, non-frequent flyer passenger. Most of that group is motivated by price. Only time will tell if such passengers rebel against the concept of paying a separate charge for baggage. In some respects, if an airline is to lose customers, the price-sensitive, infrequent flyer is probably the group that should be targeted first. Passengers with elite status within a program aren't yet affected by the baggage fees discussed by some of the legacy carriers.

The suggestion to raise fares across the board by $25 each way is something that most airlines would love to do; they can't. Even a casual observer of the industry observes that airlines are price takers. They're currently slowly raising fares, but an increase of $25 across the board just won't work: prices are highly elastic. Fees on the other hand are tried and tested: fees work for meals; fuel surcharges have been effective. AA and others will try these baggage fees; if they work, they'll stick. If they don't, they'll disappear.

I don't see that the ATM analogy bolsters your argument. The first important point is that the cost of a good isn't necessarily the determinant when it comes to price. The market determines the price. It would be frankly dumb for a bank to determine a price for the use of an ATM based on its cost of service when it can attract a higher price from the consumer. ATM fees have actually worked very well for banks. Just like the various and sundry fees attached to credit cards, ATM fees are a good source of income. The success of ATM fees (assuming the analogy with airlines is valid) should be a source of solace for legacy carriers, not concern.

I think it's clear that passengers are paying for the transportation of luggage; it is an inherent component of the ticket price; it’s even discussed in the contract of carriage which governs the travel. I read your objection to a separate fee as meaning that you don't like the various costs, or a portion thereof, to be separated out. That's a personal preference. The airlines are doing an experiment right now to see if the preference that you appear to have stated is shared by the flying public. As I said, if it works, expect such fees to stay; if it doesn’t work, they’ll disappear.