Dino D'Amore
By Dino D'Amore January 6, 2011 20:40


As Airbus celebrates a great A380 order (see APAC section) US airlines show that, even though bad weather may take the shine off of the recovery for most, passenger demand remains stronger than expected.

AirTran’s traffic climbed 2.7% in December, which rounded off a record year for the airline for both capacity and load figures. For AirTran capacity increased 1.1% in December while load figures rose to 78.9% from 77.7% during the same period in 2009. The increase in passenger demand for both economy and business travel has helped the airline make healthy gains in 2010. Passenger traffic for the full year climbed 5.3% on a 3.3% increase in capacity, with load factor up to 81.4% from 79.8%.

Also benefiting from the general rise in air travel demand, Alaska Airlines has reported a 13.3% percent increase in traffic on a 10.7 percent increase in capacity for December 2010. With a load factor of 85.6% and 80.9% on time record, December was a great month for the airline.

However, Horizon Air, a subsidiary of Alaska Airlines parent Alaska Air Group, reported a 2.4% decline in traffic on a 5.8% decline in capacity compared to December 2009. Its load factor was up to 78.6% but only 67.6% of its flights arrived on time in December last year.

Yesterday the NYSE Arca Airline Index rose slightly to 48.33 points, just below its 52-week high of 50.66, set in November. Six of the 13 airlines in the index traded up.

US Airways total December traffic rose 5.7% to more than 4.74 billion revenue passenger miles. Its total unit revenue for the month rose by 5%, which was at the high end of analyst expectations. Subsequently shares of US Airways rose 2% in recent trading but analysts warned the airline would take a hit in revenue due to the disruption to services caused by the December snow storms.

AMR Corp, the parent of American Airlines yesterday saw record call-option trading. Almost 95,000 calls to buy AMR shares changed hands yesterday, almost eight times the four-week average and six times the number of puts to sell. The carrier climbed 5.8% to $8.57 in trading. January $9 calls jumped 150% to 20 cents for the biggest gain among AMR contracts and were among the carrier’s most-active contracts. Call volume for both Delta and united was up by more than a percentage point.


Although fuel prices have edged back over the past few days our annual round of the market suggest that most dealers expect a range for 2011 that goes as high as $115 a barrel with lows of $86 a barrel. A wide margin or error indeed but most analysts expect the average for 2011 to fall in at around $110.

This information was not lost on traders as they spoke up about the fact that Delta Air Lines, whose shares increased by 2%, has the most advantageous fuel hedge position, with 39% of 2011 hedged at $85 a barrel. Other airlines, including Southwest, have limited hedging positions for 2011 that will impact on margins. Garry Kelly, CEO of Southwest Airlines knows this and has warned of the same. In the APAC region Cathay Pacific is hedging 35% to 40% for the 2010-11 financial year compared with 50% a year earlier, while Malaysia Airlines is covering 33% in 2011 compared with 60% last year.

Many airlines are staying away from further hedging, betting that a recent surge in oil prices to two-year highs will slow but as with all insurance matters lack of cover risks a squeeze on profits. Airlines on the main now think that air fares can give an adequate buffer to any rises to around the $100 level and many have not forgotten that JAL was destroyed by its bets on oil prices.

While there are no available figures on the volume of options being traded, transactions in OTC swaps contracts that are sometimes used by airlines as a betting tool have been falling. The visible volume of Asian regrade and jet fuel swaps purchased by banks in the last quarter of 2010, when oil prices crossed $90, fell compared with the same period last year. Some 2.84 million barrels worth of the two contract types changed hands between October and December 2010. Hedging remains on the decline and a further economic crisis is by no means an impossibility. A short term option around the $80-85 mark does at this time seem a good bet for security and forward planning through 2011 if nothing else.

Dino D'Amore
By Dino D'Amore January 6, 2011 20:40
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