A softening economy will actually improve the bottom line since fuel prices will drop and that's what has been killing the airlines. However, as the profits increase in this environment, capacity also must be reduced due to lack of demand.

The 50 seaters are being reduced because they are complete garbage for an airplane. The 70 seater can take the place of any 50 seater in any market that Delta serves and be redeployed anywhere at anytime; Something the 50 seater is not capable of. Hence, why they are going away.

One way could be to increase the RAW value for SC's. Right now its 5, which is the equivalent of just over 2 hours of flying and deadhead credit combined. SC should RAW credit the equivalent of what the average day of flying/deadheading would credit. It would be a zero cost item since it wouldn't effect pay credit and would equalize the flying versus sitting SC disparity while still preserving the current bucket system.

They are now reportedly going to be 787-900's. That's 10 in addition to the 787-800's that they've already leased, a few I think.

When the Aeromexico code share was 'sold' to us by DALPA, they made statements indicating that the feed provided to us from Mexico would enable our widebody international fleet to connect those passengers to domestic and international destinations. This aircraft order portends the reverse.

It is very concerning to me that an airline with which we have such close ties and coordinate scheduling so closely with is ordering new state of the art widebodies while we continue to pare our destinations and reduce capacity and system block hours, as passengers are more and more sent through the big Skyteam hubs without ever touching Delta metal. That's less jobs for you and me. Call it whatever you want. Venting, spewing, postulating, or theorizing, I don't get a good feeling when I hear such developments.

ANALYSIS: Should airlines hedge their bets on fuel?

Volatile oil prices bring into focus airline strategies for protecting themselves from spiralling fuel costs and whether they can avoid taking too much of a gamble

When Delta Air Lines announced its intention to acquire an oil refinery earlier this year, the unusual move drew a mixed response from analysts. Some praised its innovation, arguing that its daily consumption of 210,000 barrels of jet fuel justified cutting out the middle man. Others questioned whether airlines should be in the business of refining crude oil.

But one thing no one disputed was the urgent need to offset fuel price volatility. According to IATA's latest forecast, Brent crude, the main European benchmark, is likely to average $110 a barrel this year - but in just six months spot prices have ricocheted wildly between $128 and $88.

For airlines that rely on stable ticket pricing to deliver profitability, such swings have brought fuel hedging firmly back into vogue during the post-2008 recovery. In its simplest form, hedging allows fuel prices to be fixed or capped for future expenditure, smoothing out unforeseen spikes in the oil price and bringing some certainty to margins.

But as Delta has experienced, this can be a double-edged sword. The airline wrote down fuel hedging losses of $155 million in the second quarter of 2012, alongside mark-to-market paper losses of $800 million for future hedges. It took the hit after West Texas Intermediate (WTI) crude, the main US benchmark, slumped from $110 a barrel in February to $78 in June, making spot prices much cheaper than the futures contracts Delta was locked into.

The spread between WTI and Brent reflects differing stockpiles on either side of the Atlantic, as well as variations in demand and transportation costs. Both benchmarks feed into secondary jet fuel prices - which, as of 6 July, have fallen by 10.9% year on year to an average of $117.40 a barrel, according to Platts.

Delta will not be the only carrier to record hedging losses in Q2 2012, but its results are the first worrying sign that the industry has repeated the mistakes of 2008, when airlines locked in sky-high hedges only to see Brent crash from $147 a barrel in July to $36 in December.

"There was a fear that oil prices were going to go to $200 or $300 a barrel," says Mike Corley, president of hedging consultancy Mercatus Energy Advisors. "The fear of being exposed to $200 a barrel was so great that a lot of people convinced themselves prices could not decline. Prices were rising so fast that many airlines started hedging without even really thinking about it."

Heavy toll

When oil then collapsed along with most other asset classes, the opportunity cost of hedging above $100 a barrel took a heavy toll. In the 2008/09 fiscal year, Cathay Pacific recorded mark-to-market hedging losses of HK$7.6 billion ($974 million); Air China booked 6.8 billion yuan ($994 million) in losses; and Emirates lost 1.57 billion dirham ($428 million). Even Southwest, once the pin-up for fuel hedging, lost $117 million on its Q4 positions.

These losses prompted a seismic shift in attitudes to hedging. Stalwart practitioners such as Air France-KLM, British Airways and EasyJet all scaled back their programmes, while China's risk-averse government took the extraordinary step of banning airlines from buying oil futures.

Memories of 2008 will be keenest in Asia because of the widely held perception that western banks had mis-sold hedging instruments. Little wonder, then, that Japan Airlines, All Nippon Airways, Cathay Pacific and Singapore Airlines have all moved to reduce fuel surcharges in recent weeks - no doubt relishing their higher exposure to spot prices.

Helane Becke, analyst at Dahlman Rose and Company, says: "We expect airlines that do not hedge jet fuel to say they are managing their businesses better, because they will not report hedge losses in this declining jet fuel environment."

However, although sceptics are now singing the praises of risk aversion, out-performance in a bear market is just one side of the coin. Macroeconomic fundamentals continue to exert upward pressure on oil, which makes heavy exposure to spot prices just as risky as light exposure. "If you are not hedging, you are speculating," says Mercatus's Corley.

Fuel-consuming companies that choose not to hedge generally believe one or both of the following: that they have the ability to pass on fuel-driven inflation to customers, and/or they are confident that oil prices will fall.

For airlines, both viewpoints are dubious. Even carriers tightly managing capacity have limited control on price elasticity, which is dictated more by the competition and demand, while predicting price movements is essentially a gamble. As Ryanair deputy chief executive Michael Cawley once observed: "You can't anticipate fuel prices. If we could, we wouldn't be running an airline."

Instead of trying to out-manoeuvre the market, prudent hedges aim to smooth volatility. By acquiring positions that partly negate real-world exposure, airlines can use financial derivatives to mitigate price shocks.

Shifting risk

"It's really about quantifying your fuel costs and then taking action to limit your exposure to volatility," Corley says.

"Hedging reduces exposure to price risk by shifting that risk to companies that have opposite risk profiles, or to investors who are willing to accept the risk in exchange for a potential profit opportunity," he adds.

To do this, carriers can choose from an array of financial tools. The simplest are fixed price swaps, which lock in future prices and tend to be favoured in periods of low volatility. Many of the airlines that got burnt in 2008 had taken out $120-plus swaps, turning a blind eye to the huge downside risk.

Call options are typically better suited to periods of high volatility because they give the opportunity, but not the obligation, to buy fuel at an agreed future price. By exposing a company to downside cost savings while capping upside risk, call options offer the greatest flexibility - but that comes with a hefty price-tag.

Corley admits premiums for call options have risen in recent years, with greater volatility raising the level of risk shouldered by counterparties. "But put yourself in an airline's shoes," he says. "Would you rather pay a little more for something that allows you to benefit from a $30 price decline, or would you rather have not paid that premium and now be locked into $125 Brent?"

As a compromise, collars provide limited upside and downside protection by putting ceilings and floors on prices. Although typically favouring collars in periods of moderate volatility, airlines are increasingly combining them with the more conservative call options.

Air New Zealand, for example, has hedged 48% of its estimated fuel expenditure for the first quarter of the 2012/13 fiscal year, making provision for 910,000 barrels. Most of this is achieved through call options on 740,000 barrels at a WTI strike price of $116.80. But a further 170,000 barrels are locked into a ceiling price of $106.40 and a floor price of $82.26. So the carrier's hedges are positioned defensively against higher prices while retaining some exposure to lower prices.

Although Air New Zealand's collar will be loss-making if WTI slips below $82.26 a barrel, this will be vastly outweighed by savings elsewhere. Not only will its call options expire unused, but the airline's 52% unhedged position will see it enjoy lower spot prices on most of its fuel burn.

"The key to a successful hedging programme is developing and implementing strategies that perform as intended in both high- and low-price environments as well as in between," says Corley. "You can start combining all these tools, and there really are some great hedging strategies."

Critics of hedging argue that counterparties have a financial incentive to sell under-performing hedges, with the airline's loss becoming the bank's gain, but Corley says the responsibility lies with management.

"One of the problems is that airlines generally don't construct their own hedging strategies," he says. "They rely on the derivative marketers at the bank to make suggestions, and often those suggestions are not necessarily in the airlines' best interest.

"I would say 90% of the industry's hedging-related problems are a result of executives not having an in-depth understanding of hedging. The chief financial officer arguably should have the best understanding, but he has to wear 17 other hats. And often the board has an even lower level of understanding, yet it is the board that has to give approval."

Speculation trap

Without in-house expertise, finance directors often fall into the trap of speculation. Recalling the media frenzy about oil reaching $200 a barrel in 2008, Corley says many airlines started to treat hedging as "an emotional rather than an analytical decision".

He contrasts that with the "highly quantitative and mathematical" strategy adopted by the Lufthansa Group, which in its 2011 annual report calculated that a 10% rise in fuel prices this year would increase costs by €372 million ($456 million) without protective hedges. The group reduces this risk every month by hedging about 5% of its predicted fuel burn over the next two years. This rolling strategy has been in force since 1990 and persists in all market conditions.

Ultimately, such emotional detachment from price action underpins the most reliable strategies. "You need to have a rigid hedging plan," says Corley. "Current prices dictate what instruments you should use, not whether you should hedge."

"Prices dictate what instruments you should use, not whether you should hedge"

Right on WRT what you said about Europe. I've said many times their little socialist collapse (remedies by increased doses of socialism LOLZ!) could be a very, very good thing for US airlines. The key for us is how the JV manifests when their end sees far greater demand drop than our end. It very well could be a fulcrum for the JV, yet while neither can afford to be without a JV, they could afford it a lot less than we could.

Anyway WRT the quote, I think MEM and CVG have already been "dehubbed" for the most part. I see MEM losing some more redundant RJ hub raider capacity, but they are both actually very good fortune 500 markets well worthy of at least strong "focus city" status. While we zoom in on pilot and airplane bases, what really matters is the flying the market demands. I think CVG and MEM demand a lot more than just hourly service to ATL, DTW and NYC. Both will have substantial direct O&D service for DL relative to what similar sized cities have.

Look at PIT. It never justified a semi-global mega hub like USAir tried to force there by corporate edict. So they over reacted with a severe pulldown far in excess of what the market justified. So SWA moved in became the biggest carrier there, JB moved in, pre-merger AT ramped up a bit and even DL recently has started to fill out the market with net capacity increases.

And I agree with others that something needs to happen in DFW for DL to truly become a lasting powerhouse. I could care less if its a "base" but we do need to better serve that market. A very large part of becoming a "base" has to do with dedicated airframe flying out of a given market. With a million fleet types, that makes it really hard on an airline like DL. The total flying may more than be there, but if that flying is divided among a almost everything in the fleet (marketing has a blank check well over and above any QOL issues for flight ops) then you end up with significant markets with no base, especially for pilots. Just look at MCO. Yet how we define a "base" is irrelevant.

The notion that we can "de-hub" every city except "the four corners" is extremely flawed and deeply myopic for an airline our size, neverending capacity dicipline in order to fund the ULCC's and foreign EGO airline fantasy order books notwithstanding.

So who's been to ACC lately? Any tips on how not to die of Malaria?

You're safe from Malaria as long as you fly the ER.

It's ATL M88 B reserve that is the best place to catch Malaria. And die.

You are probably right about the capacity discipline, but one thing is for sure - its a lot easier to get enthusiastic about capacity discipline while in the left seat. :rolleyes:

Scoop

When were you "sold" the code share agreement with DALPA?

DAL has been code sharing with Aeromexico for years.

I share your concern with international code sharing and joint ventures. That's one of the reasons I voted in favor of this latest TA. It tightened international code sharing and established first of a kind global joint venture protections.

Since code sharing with Aeromexico is not a joint venture, and we don't have anti trust immunity, I'm not sure if your claim that we are coordinating scheduling is correct.

Also, isn't Aeromexico a prorate code share agreement. How is it that Delta is deriving revenue from a passenger on Aeromexico who never touches Delta metal or flies through one of our hubs?

You got the assignment today? Start taking your malarone. Grab some mosquito repellent with 50% deet. Get on Deltanet, scroll down to the bottom and on the left you'll see a link called Travel Health. There's a ton of useful info on there. :)

Also, there may be repellent with deet available in the CPO.