Is It Time To Say Goodbye To American Airlines?

Based on today’s news from Reuters, it appears that American Airlines (AA) has its back against the wall and is trying to survive in this ever-increasing-fuel-cost environment. American Airlines, taking the old adage of “desperate times require desperate measures” to heart, is now charging $15 for the first bag, planning on slashing service domestically by about 11% to 12% by 4Q 2008, and removing 75 aircrafts, including old MD-80s, from service. It would appear that AA is desperately trying to stay alive by jettisoning highest cost routes and planes while trying to squeeze as much revenue from its passengers.

Now, back in April, I noted in Issues With The Delta-Northwest Merger - Part 1 that the MD-80s typically burn about 22% to 26% more fuel per seat miles flown than a more efficient airplane, on an apples-to-apples comparison. Additionally, 94% of American Airlines’ fleet is MD-80s (source: Wikipedia and respective airline’s website):

So, on a daily basis, America Airlines is using approximately 20.7% to 24.5% more fuel than other airlines that do not fly MD-80s. With jet fuel prices now averaging $2.58 per gallon, it is only a matter of time before the higher fuel cost completely erode American Airlines’ income and make it economically difficult to remain in business. Stay tuned for further analysis.

Regards,
Ed Kim
Practical Risk Manager

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Risks Of Congressional Bill To Sue OPEC

And the scene gets stranger still in Washington as the House Of Representatives pass a bill to sue OPEC. Here is the lead in from Reuters:

“The House of Representatives overwhelmingly approved legislation on Tuesday allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices, but the White House threatened to veto the measure.”

The House passed the Bill H.R.6074 by a vote of 324-84. The Senate is looking at a similar bill, S. 2976 – The OPEC Accountability Act. For the House Bill to go to the President, the Senate will have to reconcile the two bills and have the entire Congress approve it. If the President follows through on his threat of a veto, it would be one of the few and rare cognizant moments from him.

The problem with bills like these is that we are trying to lay blame for our own avarice. Americans have over-consumed and wasted limited resources and still continue to do so in face of rising prices and further decrease in global supply. Instead of using Congressional powers to enact bills that would lead to better CONSERVATION and reduction in consumption, Congress is engrossed in blatant finger pointing to other parties as being the ones responsible for the current condition.

This act is similar to the fat people who sued McDonald’s for their weight problem. What is happening to their common sense? Does serving in Washington atrophy their brains? I don’t know but if this bill is any indication of their mental capacity, then there is something definitely wrong.

Here are the risks of the bill

• U.S. becomes the fodder for more late night jokes; you just can’t make these things up
  
• World community will join the late night hosts in mocking the U.S.
  
• If the bill becomes law, then expect to see OPEC and other resource-rich nations to retaliate against the U.S., which will drive up prices of limited resources even further upwards
  
• If the bill becomes law, then expect to see OPEC members counter suing the U.S., especially Venezuela
  
• If the bill becomes law, then expect to see other nations suing the U.S. for squandering limited resources

Here is the roll call summary of the votes for this inane bill (click here for the full list):


Regards,
Ed Kim
Practical Risk Manager

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Risks Of Steps Taken By China And Japan To Hedge Against Raw Material Price Shocks

Nippon Steel Corp. is seeking to invest in Cia. Vale do Rio Doce's $1.4 billion planned coalmine, according to Bloomberg. This is a natural progression for companies being hit with continually increasing price of its basic raw and intermediate materials. Taking a script from the major oil refiners, Nippon Steel, the world's second-biggest steel maker is looking for ways to lessen the risks of price shock from rapid costs increases.

Nippon Steel’s move closely follows the China model, which is trying to secure sufficient raw materials for steel manufacturing by buying into BHP Billiton. The rationale is simply to ensure steady supply of material at a reasonable rate, something that China has not been able to with Rio Tinto. As BHP Billiton pursues merger with Rio Tinto, the need for Asian industrial companies to buy into suppliers of raw material becomes more pressing.

However, as China and Japan continue to buy stakes in leading mining companies, there is a growing risk that other nations may experience raw material shortage or be forced to pay a higher price on the spot market. Since Vale, Rio, and BHP control more than 50% of world’s iron ores, the investments by Japan and China bear watching.

Of the two, China will be more aggressive as they are still in the development stage of the country’s lifecycle. As such, their economy will require more and more raw materials in the years to come. This will put China in direct collision course with its SE Asian neighbors, especially India. This will fuel increase in national protectionism and may lead to increased international friction between developed and developing nations. The friction will come from developing nations crying foul as more raw materials are diverted to developed nations while developing nations are forced to may ever increasing prices in the spot market.

Regards,
Ed Kim
Practical Risk Manager

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