Jane Allen Explains the Sale of American's Fuel Hedge
AMR Sells Fuel Hedge to Southwest for $41 Million
Tells Employees American Can’t Compete
Funds Trust Fund with the Money
Former American Airlines VP of Flight Service Jane Allen explains why AMR sold American's fuel hedge for $41 million in the 2Q of 2003. Pilots tell us that it was sold to Southwest.
Why this is of interest is because this is the exact figure accessed the the Supplemental Executive Retirement Plan (SERP) that AMR funded in 2003 in an effort to protect executives during the company's Restructuring.
It's also import because court depositions show that the $1.8 billion in annual concessions demanded from employees was nothing more than a cut-and-paste figure from a low-cost labor comparison AMR did in 2002 in an effort to align American with Southwest.
Simply put, AMR sold American's fuel hedge to the competitor and then lied to employees in an effort to gain a labor advantage against the very said competitor that AMR said we could compete against. They sold American's fuel hedge thus putting American at a cost disadvantage solely to to fund an executive trust.
What is being done to alleviate the impact of fuel prices on our projected revenue?
Q. I was reading an article about the impact of fuel prices on the balance sheet of legacy carriers. An airline analyst predicts that only three or four of these carriers will survive the next decade. American is on the endangered list, what are we doing to alleviate the impact of fuel prices on our projected revenue?
A. AMR has traditionally used a systematic fuel hedging program to help dampen the volatility in our earnings by "averaging-in" fuel prices. Traditionally, we have executed our hedges either by purchasing call options on fuel or by entering into swap transactions.
However, events of the past year and a half, related both to AMR's financial situation and to the persistently high price of fuel have limited our ability to hedge effectively. Early in 2003, in an effort to conserve cash, we temporarily discontinued fuel hedging. Hedging would have required the payment of cash premiums, which was not attractive given our already weak cash balance. The deterioration of our credit rating into the low speculative, or junk, category has effectively eliminated our ability to enter into swaps on an unsecured basis.
Following our near-bankruptcy experience last year, we were left with a dangerously low cash balance. So, in the second quarter of 2003, to raise cash as part of our effort to restore liquidity, we monetized most of the fuel hedges we had remaining from before we discontinued hedging. We received $41 million in cash settlements from terminating the hedges. Other carriers such as Northwest, Delta and US Airways also terminated much or all of their hedges to improve their cash position and to lock in gains.
Late in 2003, as our situation stabilized, we entered into some new hedges for 2004. As a result, we are 12% hedged for 2004. However, while we are now able to once again hedge some portion of our fuel needs, we are faced with the fact that fuel prices, both today, and what we could buy in the futures market, are significantly higher than they were a year ago.
Additionally, with the increase in volatility we have seen in fuel prices, the cost of buying options has also increased.
We are continuously evaluating our fuel hedging position and we expect to continue to hedge in the future. However, the sharp run-up in crude prices, both on the spot market and on the futures market, means that we can't cap our fuel costs at the kind of low prices we remember from a few years ago.
Like you, we expect American to be one of the surviving legacy carriers and will do everything possible to continue our tradition of greatness. 840C