Cursory review of Airlines earning potential following last week disruptions

IATA estimates show the depth of the catastrophe as losses total upwards of $ 1.7 Billion for Airlines alone.

North American Airlines in the previous cycles had confronted inherent structural costs deficiencies by entering Chapter 11 of the Bankruptcy code. This least desirable alternative (out of 146 airlines seeking Ch11 bankruptcy restructuring sine 1978 deregulation only 16 had emerged) allowed airlines with depleted cash balances to renegotiate under court supervision most of its fixed obligations. High cost of labor that legacy North American airlines had inherited from various Collective Bargaining Agreement, various structured retirement pensions funds, long-term debt, capital, operating leases etc…were first in line.

Very sizable obligations were floating in the previous cycle; the underfunded employees retirement plans to the order of $10.4 Billion covering the period 2004 to 2008, and general obligations estimated roughly at $ 15 Billion for 2005 & 2006, $ 17 Billion for 2007, $ 13 Billion in 2008.

the net result for bankruptcy reorganization in reducing overall structural cost has been improving the share of operating cost attributed to labor for the periods 2001-2008 from 36.2% to 21.5% while in Europe the share fell from 27,2% to 24.8% fro the same period.

Fuel Issues.

Fuel costs issues for airlines has remained correlated to escalating crude oil prices during the previous cycles.So-called refinery margin which accounts for some of the premium on jet fuel cost compared to crude oil cost airlines $ 34.5 Billion in 2008.

And by far Jet fuel has comprised the single most costly part of airlines operational cost. In 2008 jet fuel represented 32.3% of airlines total operating cost (from a survey of 45 major airlines).This number was up from 27,4 % in 2007.In comparison this figure was 12-13% from 2001 to 2003.

In 2003 the average jet fuel price was $ 34.7 per barrel. By 2008 it had shot up to $ 126.7.

Current prospects have seen refinery capacity improvement that let analysts forecast a end of the year rate of $ 94 per barrel.Q1 average was $86 with a surge to $ 89 for March.

The extensive use of dynamic fuel hedging strategy as insurance against fuel price surges has also permitted airlines to had to their bottom on the use of more sophisticated trading instruments. Although this approach has clearly shown adding value to airlines balance sheet, the opposite has also held true.

Malaysia Airlines and Cathay pacific have revealed profit on hedging operations even in situations where core airlines operations were generating losses. One carriers conversely has reported as much as $ 390 million losses on hedging.


February traffic figures has indicated that load factor were excellent (breaking a record).This tendency has confirmed return of aircraft from storage and accelerated delivery of newer planes (100 new planes in US for January and February).The 2% increase in passenger aircraft and 4% in freighter is still relatively modest and indicate airlines being cautious in adding capacity as not to disrupt yield.

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