Few actors understand the pluses and minuses of hedging better than traders . . . and airlines. In an ironic twist, some airlines could be financially hurt by falling oil prices. That's right: hurt by falling oil prices.
United Airlines (NYSE: UAUA) is one such airline. United said it could lose up to $294 million in Q3 if oil prices average $95 per barrel, marketwatch.com reported Wednesday.Oil rose $2.44 to $109.05 in mid-day Wednesday trading. United purchased fuel caps averaging around $111 per barrel this year and $118 for 2009. In other words, the caps mean United would be compelled to pay more for oil than the market price, due to the established contracts.
Stock Analyst C. Leonard Bauer told BloggingStocks Wednesday most airlines "merely seek to break even with their fuel hedges and caps, not profit from them."
Northwest Airlines Corp. (NYSE: NWA) is feeling the heat of high oil prices like most of us, and announced 2,500 job cuts (8.3% of its workforce) yesterday evening. In addition to the job cuts, the regional air carrier will now charge $15 for a single piece of carry-on luggage. Want to redeem some frequent-flier rewards? It'll cost you another $100.
Northwest isn't the first (and won't be the last) to charge for almost any luggage brought on board by customers. With all the other (undisclosed) fees it will be adding to its services, the carrier said that it expected to add $250 million to $300 million a year in revenue. Sounds like what the telecom companies have been doing for years sliding in fees to prop up profits.
Northwest CEO Doug Steenland said, "These reductions are the direct result of our extraordinary fuel costs and the necessary actions we must take to right-size our airline and eliminate unprofitable flying." Regarding the frequent-flier redemptions, Steenland indicated that Northwest would charge $25 for domestic tickets, $50 for trans-Atlantic tickets and $100 for trans-Pacific tickets -- but did call the new frequent-flier service fees "temporary."
Fuel prices seem to be the number one concern on just about everyone's mind lately, and it seems like things are not going to be getting better any time soon. As prices have risen to record levels, many of us have decided to cut back on our driving, especially on long trips in order to save a little on our fuel prices. Well, the airlines are no different, and there's an interesting report today in The Wall Street Journal showing how airlines are cutting back on long flights in order to save a little on fuel consumption.
It is a pretty nasty cycle we are seeing with the airlines. The higher fuel costs have led to higher tickets prices and extra fees. These higher prices have led to less air traffic, and that has led to an even greater need to find more ways to cover rising costs. Definitely a tough situation.
The new way they are starting to combat the high costs of flying is by cutting back, or postponing long international flights, in particular flights that are in excess of 12 hours.
While those names could sound tempting for investors who may think they are cheap, BusinessWeek's Karyn McCormack reminds us that not everything that is cheap is a good bargain, and there are some risks that need to be taken into account.
One common problem for most of these stocks is that they trade under $10 for a reason. That reason is usually hardly any earnings growth, if any at all. And with a weak economy, these companies would have an even harder time to stimulate growth. Add to the mix the fact that institutional investors don't like to touch stocks under $10 and the potential for recovery is not good.
Another day. Another merger of two struggling airlines.
This time it''s UAL Corp.'s (NYSE: UAUA) United Airlines and US Airways Inc. (NYSE: LCC), which together lost more than $773 million in the first quarter are reportedly in are "advanced" merger talks, two sources familiar with the situation told The Associated Press. These "sources" may be public relations people who are leaking details of the deal at the direction of the investment bankers and the companies themselves.
Wall Street is reacting positively to the news sending shares of US Airways in mid-afternoon trading. I am not so sure a celebration is in order. For one thing, as Reuters and the Associated Press both have noted this is a marriage of necessity.
"The discussions intensified over the weekend after Continental Airlines Inc, which had been in negotiations with United, pulled out to explore a potential marketing alliance with AMR Corp's American Airlines and British Airways Plc," according to Reuters.
Eos was an improbably candidate for success in the airline industry. It flew one route, from New York's JFK to London. It was an all-business-class carrier.
Now, Eos is bankrupt. Having only one route, added to the rising price of jet fuel, cut the carrier down.
The news raises the question, once again, whether small and large airlines alike can make it though the current increase in fuel prices and a recession without having to file for Chapter 11. It was only four years ago that most U.S. carriers had to seek protection in the courts. AMR (NYSE: AMR) was one exception. That hurts it now because it did not use bankruptcy to cut its debt and the costs of its workforce. That may make it the most likely candidate of any American carrier to hit the air pocket of insolvency.
The oil price crisis my be so bad that, coupled with falling passenger revenue in a sharp and prolonged downturn, even mergers like the one planned by Delta (NYSE: DAL) and Northwest (NYSE: NWA) will not save them.
That will leave the banks, who hold most of the debt on airline balance sheets, holding the bag.
Douglas A. McIntyre is an editor at 247wallst.com.
With Delta Air Lines and Northwest Airlines said-to-be-close to announcing a merger, according to Reuters, analysts and business executives will closely-evaluate the proposed deal's details, parsing it to see if it is capable of creating something the land of the free hasn't experienced in quite some time: a profitable major airline.
Turning aside (for the moment) points that argue that with the added cost of public subsidies of aviation and aerospace research, it's hard to envision a U.S. airline as ever being truly 'profitable,' independent stock analyst C. Leonard Bauer told BloggingStocks Monday the merged Delta / Northwest could create an assertive airline capable of racking-up revenue, even as it spurs aviation innovation and change.
According to people familiar with the matter, the Wall Street Journal reported that home-furnishings retailer Linens 'n Things, acquired by Apollo Management in 2006 and caught by a shrinking housing market and increasing debt load, is expected to file for Chapter 11 bankruptcy-court protection by Tuesday.
The United Auto Workers union notified General Motors Corporation (NYSE: GM) of its deadline to strike three factories in Michigan if the two are unable to agree on local labor pacts, the Detroit News reported.
The Business Standard reported that Toyota Motor Corporation (NYSE: TM) is planning to invest Rs 1,400 crore in Toyota Kirloskar Motor, its India subsidiary to set up its second plant in the country.
The stalled Delta Air Lines (NYSE: DAL) / Northwest Airlines (NYSE: NWA) deal talks should regain momentum next week, provided Delta's management makes progress in talks with its pilots, The Wall Street Journal reported Wednesday (Subscription required).
Further, independent stock analyst C. Leonard Bauer, said that while the Delta / Northwest talks have been stalled at a traditional, formidable hurdle -- pilot seniority and pilot flight schedules -- "the stars now appear to be lining up to get this deal done."
Bauer said that since the talks began, recent data released indicates that the U.S. economy has continued to slow, and is most likely already in a recession -- never a good backdrop for airlines -- which depend on consumer disposable income for a portion of their revenue. Further, oil has resumed its 'regularly scheduled' movement: up, which has increased aviation costs by at least another 10-15%. Or as Bauer put it, "From a fuel cost standpoint, this is no time to fly commercial jets around less than half full." Oil rose $3.71 to $112.21 per barrel -- an all-time high -- Wednesday afternoon after an unexpected decline in U.S. weekly oil inventories.
The on again, off again merger talks between Delta (NYSE: DAL) and Northwest (NYSE: NWA) have started again according to the Financial Times. They are being driven by an up-turn in fuel costs and a potential down-turn in traffic. The pilot's union, which had blocked earlier attempts at a merger, may be left on the sidelines for now. The boards of the two companies believe that they are bargaining for the survival of their respective companies.
While the last set of talks broke down in February, according to the FT, "Executives at Minnesota-based Northwest have since put pressure on their counterparts at Delta to proceed without the pilots' support."
A merger will not help with fuel costs and unions are not likely to give in to job cuts, raising the issue of strikes. Yet the big airlines feel that they must act even if it only saves them a dime. Most of the large airlines have big debt loads and falling cash-flow. Mergers often cause problems with customer service while the parties try to mesh their reservations systems and IT.
If fuel costs keep marching up and a deep recession keeps people off planes, Northwest and Delta can go into Chapter 11 as a combined company instead of separately.
Douglas A. McIntyre is an editor at 247wallst.com.
Troubled savings and loan giant Washington Mutual Incorporated (NYSE: WM) will receive a $5B investment from private equity firm TPG and other investors, the Wall Street Journal reported. For now, this eliminates the possibility that it will be acquired by another financial institution such as J.P. Morgan Chase & Co (NYSE: JPM).
People close to the situation said that Delta Air Lines Inc (NYSE: DAL) and Northwest Airlines Corporation (NYSE: NWA) have revived merger talks. It is speculated, the Financial Times reported, that weak demand and high fuel costs are urging the airliners back to the table to work out a merger arrangement.
OTHER PAPERS:
Evergreen Solar Inc (NASDAQ: ESLR) is expected to announce today that it will double the size of its manufacturing facility in Massachusetts and add about 350 new jobs as part of its ongoing expansion, according to the Boston Globe.
WEB SITES:
Bloomberg reported that The Goldman Sachs Group Inc (NYSE: GS) has been the only major investment bank that has refused to reduce its leverage. In fact, Goldman's adjusted leverage ratio of assets rose to 18.6 at the end of February, from 17.5 at the end of November.
Don't look for airlines to stop raising prices anytime soon, nor bend over backwards to provide creature comforts to travelers, according to one analyst.
Further, Northwest Airline's (NYSE:NWA)most recent decision to increase "fuel surcharges" - - i.e. raise ticket prices - - will remain a sector theme for at least the next few quarters, so says independent stock analyst C. Leonard Bauer.
"Airlines are facing rising fuel costs at a time when passenger demand is still solid. That means they have power to raise prices and pass their higher costs on to the consumer," Bauer told BloggingStocks Friday.
Fuel surcharge
Northwest announced Friday that on March 18 it raised fuel surcharges generally by $10 or $20 each way for flights from North America to Europe, India, Japan and most other destinations in Asia, The Associated Press reported Friday. That brings the surcharges to between $115 and $155. The surcharge on flights from Japan to North America will rise by $20 to $160 beginning May 1. Northwest also said it plans to freeze hiring pilots and flight attendants and cut domestic schedules by 5% beginning in September 2008, The AP reported.
Northwest's shares fell 5 cents to $9.16 on the news on Friday at mid-day.
Following the collapse of The Bear Stearns Companies Inc (NYSE: BSC), the industry is rampant with rumors wondering about the financial well being of scores of other institutions, according to a Wall Street Journal report called "The Credit Crisis Hits Wall Street". True or not, its giving fits to the companies, regulators, and investors.
Skyrocketing fuel prices and a weakened economy are taking their toll on the airline industry, reported the Wall Street Journal. Additionally, the proposed Delta Air Lines Inc (NYSE: DAL) merger with Northwest Airlines Corporation (NYSE: NWA) has lost its momentum as airline pilots cannot agree on a structured seniority system.
OTHER PAPERS:
According to people close to the situation, the New York Times reported that before the end of the month, Citigroup Incorporated (NYSE: C) is planning to lay off another 2,000 investment bankers and traders.
The Detroit News reported that Ford Motor Company (NYSE: F) appears to have fallen short of its goals in the latest, and possibly last, round of company-wide buyouts for hourly workers.
Few actors understand the pluses and minuses of hedging better than traders . . . and airlines. In an ironic twist, some airlines could be financially hurt by falling oil prices. That's right: hurt by falling oil prices.
Fuel prices seem to be the number one concern on just about everyone's mind lately, and it seems like things are not going to be getting better any time soon. As prices have risen to record levels, many of us have decided to cut back on our driving, especially on long trips in order to save a little on our fuel prices. Well, the airlines are no different, and there's an interesting report today in The Wall Street Journal showing how 
The weak market conditions have caused many stock prices to fall under $10. Not only smaller -- and perhaps lesser known -- stocks trade under $10 these days, but also some big and famous names such as 
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