"Jet Fuel Hedging Positions for U.S., Canadian Airlines" http://www.bloomberg.com/news/2011-...sitions-for-u-s-canadian-airlines-table-.html LCC sticks out like a sore thumb with no hedge at all.
Some good trades...being short airlines from the 1st qt of 2011... I'm not convinced by your fuel hedging argument...The markets seem to treat all airlines the same... Maybe LCC did the smart thing, after all?!... Here is the CEO, granted he's going to talk his/their book... http://www.thestreet.com/_yahoo/sto...birds.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA
The market is treating some but not all airlines the same as LCC. For example, AMR JBLU UAL DAL LUV have all done poorly. Possible reasons: 1. Old fuel inefficient planes 2. Although AMR JBLU UAL DAL LUV are hedged, these are only partial hedges of approx. 50% of 2012 estimated fuel usage. There are other airlines which have clearly been stronger than the aforementioned carriers: CPA LFL ALGT to name just three. Also ALK has done very well up until a few weeks ago. So although airlines often trade as a group, there is a big difference between LCC / AMR and CPA. I haven't read the link you provided, but going by previous comments LCC have made, I am guessing that the CEO is making the "weak economy provides natural hedge because oil goes down" argument. This is valid to some extent. However, given recent outperformance by Brent Oil (and therefore jet fuel) over the S&P 500, and the possibility of peak oil, this is a dangerous mantra to maintain, especially given that competitors are hedging (roughly) 50% of their fuel usage.
I except airline stocks to soar when the oil price decreases, but it also decreases due to slackening demand, which does translate into less potential passengers, too... overall, a mixed bag, I don't suspect there's too much correlation here.
Thanks, and here are most of the comments the CEO (and CFO)of LCC made: BTW, you are right re. "weak economy/natural hedge" comment... US Airways is the only major airline that does not hedge fuel, a wise policy when fuel prices are falling. "We've thought for a long time that hedges are ineffective," said CEO Doug Parker, in an interview with TheStreet. "Hedges are very expensive and it's hard to purchase enough to be truly hedged." The economy provides a natural fuel hedge, because in a weak economy, fuel prices decline, Parker said. CFO Derek Kerr said he was pleased Monday night to receive "a text with the number seven in it" from a member of the airline's finance team, signifying that oil prices had fallen below $80 a barrel. "We have fuel down while demand has stayed strong," Kerr said Tuesday. "It's a good day for us." Both Parker and Kerr said that still, oil prices remain at relatively high levels; since Monday, prices have drifted back above $80. US Airways ceased hedging in August 2008, concerned about cash collateral requirements required from declines. Even so, as the carrier unwound its hedge positions, it reported a $234 million hedging loss in the fourth quarter of 2008. Travel demand remains strong as far as US Airways can see, despite the precipitous swings in the stock market, Parker said. "We are trying to [determine] exactly what all this means," Parker said. "The stock market is concerned about another recession, but we have no indication that is the case." He reminded that over the past year, airlines have seen booking patterns change, with passengers far more likely to book closer to their travel dates than they had previously. As a result, airlines have less visibility into the future of travelers' behavior. Airline shares have performed particularly poorly this year. In mid-morning trading Thursday, with the S&P 500 Index down about 9%, the Amex Airline Index(XAL) was down about 34% and US Airways was down about 47%. The brightest spot in the industry was Alaska(ALK_), currently Wall Street's favorite airline, down just 7 %. In a recent report, Soleil Securities analyst James Higgins raised US Airways to a buy with a $9 target price. He said that the recent fuel price drop could increase pre-tax profit by 70 cents a share. "Yet, while jet fuel prices have fallen by nearly 10% since the beginning of August, LCC shares are down 7% as economic concerns swamped the lower costs," Higgins wrote. Another unrecognized plus for US Airways is changes in Southwest's(LUV_) schedule, including a pullout from the Philadelphia-Pittsburgh flights, a route now served solely by US Airways. Beginning in the first quarter of 2012, Southwest will reduce its capacity in Philadelphia by about 13%, Higgins said, noting "that dynamic alone should substantially improve LCC's competitive landscape." Every dollar-a-barrel variation in the price of oil has an impact of $34 million on US Airways.
Some questions regarding your comment: "When oil price decreases" Which oil price? There is a big difference between NYMEX $WTIC and Brent Oil. Oil to decrease by how much? And "airline stocks to soar" by how much? Airline stocks "soared" by a lot during several multi-week rallies that have taken place in the last 8 months. The April to May period is a great example of this. However during those rallies I held onto my short position as I saw those moves as a counter-trend rally within a larger secular decline.
Earlier in the year, AMR's market cap was larger than that of JBLU and LCC. Even before its shares declined on Friday 30th and Monday 3rd, it had been underperforming those two airlines. Its market cap is now significantly lower than JBLU and slightly lower than LCC. Its market cap has even declined below that of ALGT and SAVE. Of the "big 6" USA airlines, (UAL DAL LUV JBLU AMR LCC), AMR is clearly the most likely to go bankrupt in the coming months and years. AMR has a massive debt burden and a huge underfunded pension liability. Despite lower oil prices translating into lower jet fuel prices, in a weakening economy the positive of lower fuel prices is offset by the decline in demand for air travel.
Although oil did not had a big one day spike on Friday, it is been cited by some media as the reason for Monday being a risk-off day today. example from AP: http://finance.yahoo.com/news/surging-oil-prices-weighing-markets-104806592.html This is ironic given that $BRENT and $HOIL are both down by about 1% from Friday. In any case, it was notable when airlines: * last Tuesday 21 February fell sharply * fell from their intraday peak on the previous trading day, Friday 17 February * peaked on Friday 3 February but did not make another new high after that date, despite the S&P 500 marching to fresh calendar year highs after that date. There isn't one magic number where oil / jet fuel is "expensive". However for what it's worth, on Tuesday 21 February, heating oil (good proxy for jet fuel) broke above $3.20, a level not seen since May 2011. The approximate corresponding level for $BRENT was $120 per barrel. According to Stockcharts, the 50 DMA and 200 DMA for the $BRENT to $HOIL ratio are 36.85 and 37.15 respectively. Using a ratio of 37, 37 * 3.20 = 118.40 however in recent days the ratio has climbed to about 38. Looking at the Bloomberg chart for jet fuel http://www.bloomberg.com/quote/JETINYPR:IND/chart it looks like the corresponding resistance level was $3.25.
DAL is such a reject... they thought all they'd have to do is keep their #1 status that they gave themselves after racking up cash and buying NWA! Now they're mad that United is aiming to not be the glorious 20th century company with the black and white commercials and AMEX deals, but the cheap low dunk airline with cheap cards and pay-for in flight meals. ...remember boys, its not the 500 tons of ratty metal we bought off of dead airlines & repainted, its the people.