airlines and oil – fuel for thought - spec 2000 and oil – fuel for thought. ... jetblue airways...
TRANSCRIPT
John Heimlich, Chief Economist2004 ATA e-Business Forum
Atlanta, GeorgiaOctober 28, 2004
Airlines and Oil – Fuel for Thought
The Air Transport Association of America, Inc.October 2004
Combination Services
Alaska AirlinesAloha Airlines
America West AirlinesAmerican Airlines
ATA AirlinesContinental Airlines
Delta Air LinesHawaiian AirlinesJetBlue AirwaysMidwest Airlines
Northwest AirlinesSouthwest Airlines
United AirlinesUS Airways
All-Cargo Services
ABX AirASTAR Air Cargo
Atlas AirEvergreen Int’l Airlines
FedEx CorporationMenlo Worldwide Forwarding
Polar Air CargoUPS Airlines
Associate Members
AeromexicoAir CanadaAir JamaicaMexicana
The Big Picture (Stinks)
§ Massive losses, debt = poor credit ratings and job cuts
§ Soaring, sustained price of oil accelerating Chapter 11/7/18/22/29 filings
§ Widening crack spreads hurting jet fuel users (10-20% of op. cost)
§ Passenger airlines lack pricing power; some on international routes
§ Cargo operators partially recovering spikes through indices/surcharges
§ Airline finances, energy market preclude most new “hedging”
§ Roots of “hedging” in charter industry, where revenue known
§ With a 12-month strip > $50/barrel, locking in could cost millions
§ So…unprecedented conservation efforts underway in an industry already known for steady gains in fuel efficiency over time
§ But we can only do much to offset foreseeable price levels…
$5.4$2.8
($13.1)
$23.0
($23.2)
($8.0)
($30.0)
($20.0)
($10.0)
$0.0
$10.0
$20.0
$30.0
1947-78 1979-89 1990-94 1995-00 2001-03 2004F
Net
Pro
fit/L
oss
($B
illio
ns)
U.S. Airline “Earnings” = Cumulative Net Loss2004 Net Loss Will Compound 2001-03 Losses, Which Exceeded 1995-2000 Gains
Notes: 2001 and 2002 include federal compensation remitted to air carriers under P.L. 107-42 (roughly $5B pre-tax distributed over two calendar years); 2003 includes federal reimbursements (roughly $2.3B pre-tax) for security costs imposed and estimates for concessions, offset by SARS and the War in Iraq.
Source: ATA research
Includes $1.9B DAL special charge
AA
A
BB
B
B+
B
BB
+
A
BB
B
BB
B-
BB
B+
BB
B-
B+
BB
+
B
AA
A
BB
B
CC
C
DD
A
B
BB
-
B-
CC
B
CC
C-
B-
B-
BB
-
B-
AirTran
Alaska
America W
est
American ATA
Continental Delta
Indepen
dence*
JetBlue
Northwest
SouthwestUnited
US Airways
Evergree
n**
FedEx**UPS**
9/10/2001 10/22/2004
Airline Balance Sheets in Disrepair With Heavy LossesStandard & Poor’s (S&P) Corporate Credit Ratings
AAA: Extremely strong capacity to meet financial commitments. Highest rating.AA: Very strong capacity to meet financial commitments.A: Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.BBB: Adequate capacity to meet financial commitments, but more subject to adverse economic conditions. (BBB- is the lowest investment grade rating.)BB: Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.B: More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.CCC: Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.CC: Currently highly vulnerable.C: A bankruptcy petition has been filed or similar action taken but payments or financial commitments are continued.D: Payment default on financial commitments.
Inve
stm
ent
Gra
de
(>=
BB
B-)
* Formerly Atlantic Coast Airlines** Airfreight company
Airline Headcount Down ~122,000 (16%) from 9/11Low Fares, High Fuel Prices, Productivity Gains Driving Cuts or Curbing Growth
433
75
165
74
314
81
150
80
0
100
200
300
400
500
"Big 6" PassengerAirlines*
Selected Low-CostCarriers**
Selected CargoAirlines***
Other U.S. Airlines
U.S
. Air
line
Em
plo
ymen
t (00
0s)
Aug-01 Aug-04
Sources: U.S. Department of Transportation P1a employment report; carrier reports for full-time and part-time workers
* American, Continental, Delta, Northwest, United, US Airways** AirTran, Alaska, America West, ATA (formerly American Trans Air), Frontier, JetBlue, Southwest, Spirit
*** Air Transport Int’l, ASTAR/DHL, Express.Net, Evergreen, FedEx, Gemini, Kalitta, Kitty Hawk, Polar, Ryan Int’l, Southern, Tradewinds, UPS, World
Aug-01 Aug-04747.6 625.9
TOTAL
Post-2001 Fuel Prices Soaring to Record HighsCrude Oil to Reach Record High in Nominal Terms in ’04; No Relief Seen in ’05
$19.73
$23.34
$27.14
$31.66
$41.60$41.60
$31.10
$41.65
$26.10
15
20
25
30
35
40
45
50
55
60
1992-2001 2002 2003 2004F 2005F
Ave
rag
e P
rice
of C
rud
e O
il ($
per
Bar
rel)
*
Nominal Real ($2004)
*West Texas Intermediate at Cushing, TexasSource: PIRA Energy Group and Air Transport Association
“Daniel Yergin, chairman of Cambridge Energy Research Associates, agrees that it would be a mistake to underestimate the effect high oil prices have already had on the world economy. He points out that the…losses suffered by the airlines mirror the increase in their fuel bills. ‘We are not that far behind the high prices of the early 1980s even in real terms…’”
(James Boxell, Financial Times, September 16, 2004)
Jet Fuel Crack Spread Widening in 2004
Source: Goldman Sachs
Gulf Coast $1.52/galNY Harbor $1.59/galLos Angeles $1.62/gal
Post-2001 Fuel Surging to Record HighsCrude Oil > $50/Barrel; Modest Hedging Bringing Jet Price Paid Below Spot
10
15
20
25
30
35
40
45
50
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Ave
rag
e P
rice
of C
rud
e O
il ($
/Bar
rel)
*
55
65
75
85
95
105
115
125
135
Jet Fu
el Price excl. T
axes (¢/Gallo
n)
Crude Oil (WTI)* Jet Fuel Paid (DOT) Jet Fuel Spot (EIA)
*West Texas Intermediate (WTI) at Cushing, TexasSource: DOT Monthly Fuel Cost and Consumption Report and PIRA Energy Group
Crude Oil $/bbl*
2001 $262002 $26
2003 $312004F $42
2005F $42
$425
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$1 $2 $3 $4 $5 $6 $7 $8 $9 $10 $11 $12 $13 $14 $15
Hypothetical Increase in Price of a Barrel of Oil**
Incr
emen
tal O
pera
ting
Exp
ense
s ($
Mils
)
0.0
15.0
30.0
45.0
60.0
75.0
90.0
105.0
Airlin
e FT
Es (000s)*
Expenses
Jobs
Fuel Spikes Exacerbate Losses and Threaten JobsEvery $1 Increase in Fuel is Cost of Employing 5,520 Airline Workers*
Source: ATA Airline Cost Index ($77K per worker in 1Q04)* Job equivalent not intended to establish causation** Assumes annual industry-wide consumption of 425M barrels
Weak Demand and High Fuel Prices Don’t MixAn Assessment by Standard & Poor’s
"Fuel prices are an external factor that airlines cannot control. What can they do to react and minimize the damage? A comparison with other modes of transportation is revealing. Fuel represents a roughly comparable proportion of expenses for railroads and many trucking companies (in the mid-teens percent range), but they have not been hurt by higher fuel prices to nearly the same degree.
Part of the difference is due to more active hedging programs by these freight transportation companies, but most is due to the fact that many of their contracts with corporate customers allow them to pass through higher fuel costs in the form of surcharges. Airlines have tried repeatedly to raise fares in response to high fuel costs, but with little success. [T]he problem comes back to a lack of pricing power in a very competitive market.”
Philip Baggaley – Managing Director, Standard & Poor’s (June 3, 2004)
Testimony before the U.S. House of Representatives Committee on Transportation and Infrastructure
Since 2000, Breakeven Load Factor Well Above ActualPrices, Less Cargo, Higher Costs = More Seats Must be Filled
67.2%
69.4%70.5% 70.8% 71.1%
72.4%
70.0%
71.8%
73.4%
71.5%
77.7%
79.6%
66.0%64.9% 64.9%
80.9%
84.1%
69.3%
66.5%
64.3%
60%
65%
70%
75%
80%
85%
1995 1996 1997 1998 1999 2000 2001 2002 2003 1Q04
Pas
sen
ger
Lo
ad F
acto
r (%
) — M
ajo
rs a
nd
Nat
ion
als
Actual Breakeven
Source: ATA research
0
100
200
300
400
500
600
700
800
900
1,000
46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03
Pri
ce In
dex
(194
6=10
0)
CPI Yield-Domestic Yield-International
Airfares Have Not Kept Pace With U.S. InflationEven Adjusting for Increasing Trip Length, Yields Have Fallen Flat
Sources: U.S. Department of Transportation Form 41 reports; U.S. Bureau of Labor Statistics
Nominal Yield (Fare Paid per Mile) Below 1988 Levels
Pricing Power Remains ElusiveDomestic Fares (Excl. Taxes) Down Sharply From 2000; International Recovering
Source: ATA research
“Internet pricing, low-cost carrier growth and higher taxation of airline revenue remain as obstacles to an airline recovery. [I]t may be years before we experience a return to the late 1990's absolute level of revenue….” (William Greene, Morgan Stanley — September 24, 2004)
(30%)
(25%)
(20%)
(15%)
(10%)
(5%)
0%
5%
10%
Jan-01
Apr Jul Oct Jan-02
Apr Jul Oct Jan-03
Apr Jul Oct Jan-04
Apr Jul Oct Jan-05
% C
han
ge
in M
ain
line
Psg
r. Y
ield
(¢/R
PM
) vs.
200
0
Domestic International
Passenger Unit Revenue Weak at Home; Strong AbroadDomestically, Record Load Factors Insufficient to Offset Sharply Lower Fares
6.00
6.50
7.00
7.50
8.00
8.50
9.00
9.50
10.00
10.50
11.00
Dec-00 Mar Jun Sep Dec-01 Mar Jun Sep Dec-02 Mar Jun Sep Dec-03 Mar Jun Sep Dec-04
12-M
on
th R
olli
ng
Psg
r. R
even
ue
per
AS
M (¢
)*
Domestic Atlantic Latin Pacific
* ATA research of Alaska, American, America West, Continental, Delta, Northwest, United, US Airways
“[T]he industry continues to face a demand curve characterized by very accentuated price elasticity and thus the needed objective to achieve simultaneously capacity and traffic growth as well as improved price realization continues to be a very elusive task.” (Citigroup — October 24, 2004)
VolatilityHighest for Crude!
-
30
60
90
120
150
180
Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03
Gold
Euro
Deutsche
3-Month Treasury Bill
Crude Oil
To Hedge or Not to Hedge?It Depends, Sherlock
§ Doing nothing could be considered speculation
§ Reduce cash flow volatility
§ Respond to competitive pressures
§ Improve financial planning capability
Market Terms
Fuel “hedging” is participating in a forward contract for a fuel commodity. It is not truly hedging in the conventional sense, more of a gamble than arbitrage.
Commodity is any useful thing that is bought/sold as an article of commerce.
Futures or forward contract is a contract for purchasing or selling a commodity in the future at set pricing.
a cap or call option is paying a premium to lock in a price ceiling for a future time period
a swap* is locking in a price for a future time period
a collar* is locking in a price range for a future time period
Each day, billions of dollars worth of energy products, metals, and other commodities are bought and sold on the trading floor of the New York Mercantile Exchange. Shortly after the trading floor closes, overnight electronic trading picks up, because night and day, minute by minute, the value of these strategic commodities changes.
*A swap or collar may involve paying a premium depending on the price set for the time period.
Industry “Hedge” Program ComparisonExcept Southwest, Minimal “Hedges” in Place -- @ Legacy or LCCs
Source: Goldman Sachs
44.2
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
50.0
1975 1980 1985 1990 1995 2000 1Q2004
Rev
enu
e P
asse
ng
er M
iles
per
Gal
lon
Aviation Fuel Efficiency Has Risen SteadilyPassenger Throughput — RPMs per Gallon
Source: U.S. Department of Transportation
Policy Considerations/Options
§ Slow down Strategic Petroleum Reserve.
§ Eliminate Federal Jet Fuel Tax.
§ Modify state jet fuel taxes – especially those tied to price!
§ Ease construction/enhancement of refineries.
§ Improve air traffic control system and runways to ease congestion.
§ Liquidate.
Customer Service Metrics Show StrengthLow Fares and Steady On-Time Performance Lead to Fewer Complaints
Source: U.S. Department of Transportation Air Travel Consumer Report
0.750.711.222.102.982.47Customer Complaints(per 100,000 passengers)
4.584.194.914.965.295.08Mishandled Bags(per 1,000 passengers)
79.4%76.0%78.3%80.2%62.8%78.0%On-Time Arrivals(within 00:15 of schedule)
0.970.860.720.821.040.88Denied Boardings(per 10,000 passengers)
1.5%2.1%1.7%1.0%5.9%n/aFlight Cancellations(per 100,000 passengers)
YTD0420032002200120001999
Ope
ratio
nal P
erfo
rman
ce
500
600
700
800
900
1,000
1,100
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Fiscal Year
Rev
enu
e P
asse
ng
er E
np
lan
emen
ts (M
illio
ns)
* FAA Forecast FY01
FAA Forecast FY02
FAA Forecast FY03
FAA Forecast FY04
As of Mar-04, FAA Still Projecting Long-Term GrowthFAA Expects Demand to Exceed a Billion Passengers in Fiscal Year 2014
*Scheduled Revenue Passenger Enplanements (Millions), Certificated U.S. Carriers; Source: FAA Aerospace Forecasts, based on DOT Forms 41 and 298-C
Consumer/CEO OutlookCEO Confidence Hit 20-Year High in 1Q04, but Deteriorating Rapidly
25
30
35
40
45
50
55
60
65
70
75D
ec-9
8
Mar
Jun
Sep
Dec
-99
Mar
Jun
Sep
Dec
-00
Mar
Jun
Sep
Dec
-01
Mar
Jun
Sep
Dec
-02
Mar
Jun
Sep
Dec
-03
Mar
Jun
Sep
Dec
-04
CE
O B
usi
nes
s C
on
fid
ence
Ind
ex (Q
uar
terl
y)
75
80
85
90
95
100
105
110
115
120
125
Co
nsu
mer S
entim
ent In
dex (M
on
thly)
CEO Consumer
Sources: Conference Board and University of Michigan
May it Please the Court…Bankruptcy Protection (or Equivalent) Sought by Many in 2001-03
Atlas/Polar
Arrow
ATA
Great Plains
Hawaiian
Midway
National
Sun Country
TWA
Vanguard
United
US Airways
Air Canada
ACES
Aeris
AOM-Air Liberté
Avianca
Sabena
Swissair
www.airlines.org