DeltaPaySoon

An Open Letter to All Airlines

By Bill Mann, Tim Hanson, Nate Weisshaar, and Joe Magyer July 10, 2008 Comments (2)
2 Recommendations

Dear CEOs of AirTran (NYSE: AAI), Alaska Airlines, AMR (NYSE: AMR), Continental Airlines (NYSE: CAL), Delta Airlines, Hawaiian Airlines, JetBlue (Nasdaq: JBLU), Midwest Airlines, Northwest Airlines, Southwest Airlines (NYSE: LUV), UAL (Nasdaq: UAUA), and US Airways (NYSE: LCC),
Thank you for your July 10 letter detailing the threat of rising oil prices to your businesses and our economy and for encouraging us to help you "Stop Oil Speculation Now." We have a few follow-up comments, questions, and suggestions.

First, we feel your pain. You have, historically, been a group of such well-run businesses that it's difficult to watch some of you pile up losses and flirt with bankruptcy. This is unprecedented in our economic history and the situation clearly requires urgent action. Or not.

Didn't Eastern Airlines collapse when oil was $12 per barrel? Come to think of it, U.S.-based airlines have eviscerated shareholder capital for decades. The Oracle of Omaha invested in U.S. Air one time, and has described the fact that he managed to make money as being indistinguishable from blind stinking luck (we're paraphrasing here). We even have a colleague who wrote recently that he wouldn't recommend airline stocks to his worst enemy.

So perhaps you shouldn't be blaming oil traders for your difficulties, but rather should focus on developing a robust, highly efficient industry based on the ideal of competition which ensures timely and enjoyable coast-to-coast (and even international) travel. That means, first and foremost, good service -- even for economy class passengers. After all, people will always need to travel. You might find out that airline passengers are more willing to pay up to fly (see the growth of a company like NetJets) when they know it won't be a dreadful experience.

But please let us know if your strategy works. We're pretty fed up with how the stock market has been declining recently. Perhaps we can convince Congress that the downturn threatens American savings and has been driven by "speculators" who are selling stocks without regard to their fundamental prospects and that we need regulations that will "Stop Stock Selling Now."

Yeah, that sounds like a foolproof solution.

Sincerely,
Us




Just more funny reading.

willflyforcash

Sorry "Us", your statement is incorrect. Airline passengers are actually NOT willing to pay up to fly nice. In a recent study, they found that about 70% of passengers fly only once a year. Just about all of these passengers based their purchase on price and travel time. Sadly to say, frills dont make money. (See the "growth" of a company like Eos or perhaps Max Jet.. R.I.P.)

At the end of the day, you shop like people shop for shipping a package; price and time to travel, yet at a cheaper price than shipping a package, so please dont expect much more service than a package would get.

Billy32

Even if you raised the prices and gave everyone first class service on the plane, they still have to get to the airport early, deal with the crowds, and get screened by the TSA. I think that is one of the big reasons for the success of fractionals.

afterburn81

As Hank Hill would say......."What in the He@#!! So these are the people we are up against. Not going to be easy when they just think it is one big joke!

milky

Why is it that most of the people on this site have no idea how market economics work but are not afraid to spew out why this industry is failing? Speculators do not control the price of gas. The market determines the price. The speculators actually keep the market stable. Without people trading futures, there would be HUGE volatility in the market and most purchasers of oil would be unable to survive because of the lack of ability to predict the cost.
This letter is almost spot on. Gas prices are not the primary reason for the poor performance of airlines. It just happens to be a contributing factor at a bad time. Airlines have run themselves into the ground at every price of gas, and they don't seem to be doing much to change things.
For the record, futures markets are a very important part of our economy that have helped businesses grown for decades. Futures don't just trade for higher amounts. They also trade for lower than current prices. The only speculators that succeed are the ones that predict the prices accurately. If I were a speculator and I could change the price of oil, then I would just buy it for $400/barrel and make a huge profit, right? That would be a huge ROI for me. Oh wait, somebody has to believe the price of gas will be $400 for that to be successful.
All I ask is that you people try to do a little research and learning about the spew that you put forth here. It's just embarrassing.
Oh, and Wal-mart is not the anti-christ. Anybody that complains about Wal-mart coming to a town and closing down mainstreet should not say anything unless he drives a 1950 Ford and uses a typewriter to post on APC. Otherwise, you're an ignorant hypocrite.
Sorry, just finally reached my limit with the ignorance that prevails here.

fosters

I agree milky, their letter is great. "Don't hate the player, hate the game".

willflyforcash

This letter is not spot on. It is written in a partly serious and partly satirical style. I pointed out earlier in this thread why the author is wrong about the airlines being more service oriented. Airlines are not in trouble because the have given passengers poor service. Additionally, Eastern didnt go under just because oil was $12 a barrel. There are many factors why Eastern closed doors, one of the main being that they were TOO service oriented! (r.e. competition like People Ex.)

Oil price is driven by one of 2 things:
1 - The ratio between the supply and demand.
2 - Speculators buying futures - which is based on faith and fear.

The price of oil has risen about %100 in the past year. This price drive has been pushed by both above factors. Granted, oil supply has decreased and the global demand has risen (therefore creating an increase in value), but the ratio has not changed enough to create a %100 increase in value.

Speculation has been the major driving factor over the past few month. A simple version of what is going on: More speculators buy futures at higher prices, more fear is created and more speculators buy higher futures, and more fear is created etc... add some vicious media into the scene and you have the perfect storm. And that, ladies and gentlemen, is what we must weather today.

waflyboy

Can you explain how the trading of contracts to purchase barrels at a set price in the future influences the spot price today?

I thought futures were a hedge against future price changes. If purchasing the hedge itself can influence the spot price, doesn't that defy the purpose of hedging?

How does speculation cause a rise in commodity prices today?

DeltaPaySoon

Milky, that's only partially true. While the speculators are only playing the game by "rules" allowed to them, they do have a HUGE say in the price of traded oil and, therefore, gas. I agree with the airlines on this one. There are certain commodities in our country such as food, oil and energy that speculators need their hands tied as far as how many trades can happen before an end user gets the product. There is no GOOD reason it needs to be traded 50 times with each trade jacking the price up before it gets to the end user.

***Rhetorical statement coming***
Why can a guy/gal trade an asset that they:
1) Don't physically own
2) Can't take possession of because they don't own a warehouse
3) Never see it, feel it, taste it, etc.

..when the ONLY reason is to make money off of the, not nearly regulated enough, trade?

I grew up on the farm watching speculators screw farmers for decades with the Chicago Board and Trade employing tactics outside of the farmers control. There is no such thing as the grower selling to the buyer.

Bottom line, for me at least, is there are some commodities that needs immediate attention or the speculation trading will get even further out of control.

DeltaPaySoon

A hedge is only an option if someone is willing to sell you futures for a fixed price. Since oil, therefore, gas is so volitile right now, I can't see anyone on the buying or selling side interested in making fixed costs for the next 2-5 years (typical hedge on fuel).

The airlines don't trust the sellers that the price will stay this high and the sellers, probably, think they can get it higher.

As for your last question, it's because speculators are unregulated as to how many times the commodity can be traded before hitting the end user. A barrel of oil can be traded a 100 times if there are 100 buyers, with each trade jacking the price up. The end user has to wait until the speculator sells "his" future commodity at the price bought, or higher.