American Airlines Struggles With High Oil, Weak Dollar

by: Grace Cheng

American Airlines (NASDAQ:AMR), the world’s largest airline, has said “our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.” Well yes, with oil prices reaching a new record almost every day, most US carriers are feeling the heat. American’s response is to cut US routes by 12%, retire 85 of its jets and charge passengers $15 to check-in their first piece of luggage. This comes at a time when US travelers are registering the worst satisfaction with their airlines in many years. Investors were also unhappy, but about earnings rather than passenger convenience, and American’s shares fell over 11%.

Oil reached a new high today, nearing $132/barrel. There are some investors that say the short-term surge is due to speculation rather than immediate supply concerns. However, the long-term supply concerns as markets like China and India continue to expand are the driving force to this speculative rise. Whatever the reasons, these high prices have prompted oil producers Exxon Mobil (NYSE:XOM), Royal Dutch Shell (NYSE:RDS.A), BP (NYSE:BP), Chevron (NYSE:CVX), Total (NYSE:TOT) and ConocoPhillips (NYSE:COP) to fork out a record $98.7 billion this year in exploration and production. Will this be enough to stem the rise in oil prices? UBS (NYSE:UBS) doesn’t think so, earlier this month it said oil would trade above $200/barrel by 2015. Not surprisingly, futures contracts for these dates have risen substantially since that statement.

These high commodity prices may have indirectly benefited Hewlett Packard (NYSE:HPQ) as it announced earnings which exceeded analysts’ expectations coming it at 87 cents a share in the second quarter, on sales of $28.26 billion. 70% of these earnings came from international markets, and revenue from Brazil, Russia, India and China grew 26% from last year. Revenue from Europe, the Middle East and Asia grew 16% to $11.1 billion. High commodity prices have benefited the economies of Brazil, Russia, and of course the Middle East, and the high Euro has benefited revenue of US companies in Europe.

Apart from long-term speculation, another major factor of rising oil prices is the falling dollar. The results of Germany’s IFO survey today give a strong signal that much of Europe is doing far better economically than the US, and that the high Euro is acting as a buffer against rising commodity prices. And since the dollar has dropped simultaneously against many of the world’s currencies, the high Euro may not be hampering exports to the rest of the world as their currencies are also high.