Crude Oil is now trading above $110 a barrel. Do you think there will be significant schedule reductions, grounded planes and and the look to international routes? And of course, these prices have to be giving airlines the urge to merge.
March 12 (Bloomberg) – U.S. airline shares tumbled after JP Morgan Securities Inc. analyst Jamie Baker lowered ratings on the biggest carriers because of soaring jet-fuel prices and a slowing economy.
The 14-member Bloomberg U.S. Airlines Index plunged 10 percent, the biggest decline since Sept. 17, 2001, when trading resumed after the Sept. 11 terrorist attacks. Northwest Airlines Corp. and Delta Air Lines Inc. both dropped 16 percent today, the steepest slide since the companies exited bankruptcy in last year’s second quarter.
Airlines are struggling as jet-fuel prices are at record highs and the U.S. economy teeters near recession. Jet fuel for immediate delivery in New York harbor reached a new peak of $3.24 a gallon today and has surged 80 percent in the past year. Fuel has displaced labor as the largest expense at some carriers.
If demand trends mirror prior recessions, a $9 billion loss can't be ruled out'' for the industry this year, the New York-based analyst wrote today in a note to clients. Even a best-ever recessionary demand scenario results in a $4 billion industry loss.‘’
Previous recessions cut airlines’ revenue by 10 percent to 15 percent, Baker wrote. He estimated a drop of 6 percent to 7 percent this time, in part because all U.S. airlines, including discounters such as JetBlue Airways Corp., are being squeezed by fuel costs and consumer cutbacks. The carriers haven’t been able to raise fares enough to offset higher fuel expenses.
Baker cut Northwest to underweight'' from overweight,‘’ and made the same change for American Airlines parent AMR Corp. and for United Airlines parent UAL Corp. He lowered Delta and Continental Airlines Inc. to neutral'' from overweight.‘’
JetBlue Downgrade
Standard & Poor’s equity analyst Jim Corridore today lowered JetBlue shares to hold'' from buy,‘’ saying higher oil prices will make it ``difficult’’ for the New York-based carrier to be profitable this year.
Northwest fell $1.98 to $10.25 at 4:02 p.m. in New York Stock Exchange composite trading. AMR tumbled $1.36, or 13 percent, to $9.31, while UAL slid $2.54, or 9.5 percent, to $24.29. Delta declined $1.98 to $10.13 and Continental dropped $2.16, or 9.5 percent, to $20.46.
JetBlue fell 24 cents, or 4.8 percent, to $4.76.
All depends what currency you use to buy oil ( petroleum products ). Oil sold on the world markets in U.S. dollars. U.S. dollar is weakening against other currencies. So Crude is much more expensive in the U.S. but price is offset elsewhere by the increase in value foreign currencies like the EURO or Canadian dollar for example.
Most major airlines use very sophisticated foreign currency hedging strategies, so hard to say who is paying what currency to buy oil/jet A.
this time, it will hurt the LCC’s more than the Legacy carriers. You can’t pay these fuel costs on their yields.
The cuts you will see will probably be a continuation of dropping RJ frequencies and acceleration of retirement of DC9’s in NW’s case, “Classic” 737’s in UA and US’s case, and MD80’s in AA’s case. DL might ground a few 757’s and 767-200’s to. 757’s are great aircraft in a good economy, but they’re a bit hard to fill in a tough economy and that’s why a lot of airlines parked them from 2001-2004.
However, it remains to be seen if these prices will stick. With their current decent cash positions, the airlines aren’t going to react quickly and rashly to these cost increases. If $100+ prices are here throughout the summer, then you might see some cuts in the winter schedule compared to this year, but I don’t see a carrier pulling down its summer schedule at this point because they’re scared of fuel costs.