Friday AM May 23rd, 2008

British Airways finds itself in a strong operating position, despite rising fuel costs and the economic slowdown. BA CEO Willie Walsh visited Houston to talk about the challenges facing the airline industry.

"We announced operating profits at a record of $1.7 billion. We hit our long-term target that we'd set for the business of a ten percent operating margin. Very strong balance sheet, very strong cash position—we've got about just under $4 billion in cash. And to honest, I'm really pleased that we've reported these results because we're now going into a very challenging time in the industry." Ed: "With the fuels costs. How have you managed to resolve that?" "Yeah, it's been tough. I think this is unchartered waters. We've succeeded in recent years in offsetting some of the significant increases in the oil price through taking costs out of non-fuel related areas. You know, that's becoming much more difficult now. We've also had a strong hedge position. For our current year, we've got about 72 percent of our fuel hedged in the first half of the year at about $85 a barrel, and for the second half it's about 58 percent. So you know, that's a strong position to be in, but we're still facing—even with that hedge position—we're still facing about an extra $2 billion in costs through our fuel costs."

Walsh says BA has also managed to cut about $4 billion out of its non-fuel cost base since 9-11, while still maintaining good customer service. British Airways has had to deal with the start-up troubles of Terminal 5 at their Heathrow hub in London.

"Yeah, it's going really well now. We had a very disappointing opening and personally I'm bitterly disappointed about that, but it's actually performing really well. Since the terminal opened on the 27th of March, we've had about 2.5 million customers go through. The vast majority of those have had a great experience and I'm getting very positive feedback, so I'm pleased that it's now working very well." Ed: "You're doing sort of whirlwind tour here—New York City, Boston and now Houston. What do you hope to accomplish here in Houston?" "Well, Houston's a very important market for us. I'm here because we've now been able to fly from Heathrow to Houston since the first stage of the Open Skies agreement. We used to fly into Gatwick but it's much better for us now and much better for our customers that they can fly into our global hub airport at London's Heathrow and connect into our network. I'm delighted to be in Houston where we're upgrading our facilities at Houston airport. We're upgrading our aircraft looking to fly 747s into Houston from the end of this summer season, so it's a great market for us and really, delighted to be here."

Walsh expects the airline industry will see further consolidations and service cutbacks. He says all airlines will have to increase fares because of increasing fuel costs, which for BA were nine percent of its budget in 2000, but more like 35 to 40 percent now.

Airline passengers say they don't like the idea of having to pay extra to check bags, but they sort of understand it. American Airlines says, starting June 15th, it's going to charge passengers $15 to check a single piece of luggage. On the one hand, Irv Scherman, visiting New York from Naperville, Illinois, says he's very unhappy at the notion. On the other, he says it won't stop him from coming to visit his son. Passenger Bill Thompson of New York City says he'd prefer to see the airline get its $15 another way. American says rising oil prices are adding nearly $3 billion a year to its fuel bill. Besides charging more for bags and other services, the airline says it's going to slash capacity and retire at least 75 older, gas-guzzling planes. Thousands of workers are likely to get layoff notices.

Congress says that getting stuck in airports and on runways cost the nation $41 billion last year in lost productivity and extra operating expenses. The Congressional Joint Economic Committee says in a report that the airlines suffered $19 billion in added operating costs, while delays cost passengers $12 billion. There was another $10 billion in indirect costs hitting food and lodging industries that rely on air traffic. The report concludes that delayed flights added $1.6 billion to airline fuel bills.

A top global energy monitor says there are new worries that the soaring demand for oil will outstrip supply and it is now preparing a landmark revision of its supply forecast. Chief Economist Fatih Birol at the International Energy Agency says experts are studying depletion rates at about 400 oil fields in its first-ever study of world oil supply. The study was prompted by soaring oil prices and concerns about new investment. The economist says growing demand in China and India is leading to a "new world energy order." Market analysts call the Paris-based IEA the world's most reliable independent source of oil information.

The number of newly laid off workers filing for unemployment benefits fell last week to the lowest level in a month. The Labor Department reported that applications for jobless benefits totaled 365,000, down by 9,000 from last week. Economists had been looking for claims to rise slightly. Even with the decline, claims remain at a level that indicates the labor market is under stress from the sluggish economy. The four-week average for claims rose to 372,250, up significantly from a year ago when the four-week average was around the 300,000 mark.

Wall Street investment companies are reducing their borrowing from the Federal Reserve's emergency lending program. The Federal Reserve said that those companies averaged $14.2 billion in daily borrowing over the past week. That compares with $16.6 billion in the previous week. The program, which began March 17th, is one of several steps the Fed has taken to help financial companies and the economy overcome the housing, credit and financial troubles.

A Texas House panel is backing off an inquiry into the legislature's long-standing practice of hiring full-time employees at part-time hours. The chairman of the State House General Investigations Committee cites a potential conflict with a criminal investigation by Travis County prosecutors. But the chairman, State Representative Larry Phillips, says "it is crucial the public have confidence that House employees are working the hours that justify their pay and benefits." Phillips is a Sherman Republican. No comment yet from the Travis County District Attorney's office. The Austin American-Statesman has reported that at least 12 house employees are paid less than $300 a month and work other jobs, but enjoy the insurance and other benefits of full-time employment.

Alaska's governor is recommending state lawmakers approve a proposal from Transcanada to build a natural gas pipeline from Alaska's North Slope to a hub in Alberta, Canada. Governor Sarah Palin, along with the state's natural resources and revenue commissioners, said the Calgary-based company's plan merits issuance of a license under Palin's Alaska GasolineInducement Act, as well as a $500 million cash inducement from the state. They said the multibillion dollar project stood far above a proposal from oil giants BP and Houston-based ConocoPhillips because it was binding and enforceable. Lawmakers have 60 days to review the license proposal. A special session begins June 3rd in Juneau.

Ukraine is canceling a contract with a Texas company to explore for oil and gas on a shelf off the Crimean Peninsula in the Black Sea. The government says the 2006 production-sharing agreement with a subsidiary of Houston-based Vanco Energy amounts to "plundering Ukraine's mineral reserves." Last month, Ukraine revoked Vanco's license and the country's Prime Minister Yulia Tymoshenko called for an investigation into how the license was awarded. U.S. Ambassador William Taylor is calling on Ukraine to reverse the cancellation, saying the project was important for its energy industry. The offshore shelf region--known as Prykerchenska--covers around 3.2 million acres, located southeast of the Crimea Peninsula. The company says development of the entire project would require more than $20 billion in investments.

Microsoft is offering cash rebates when people make purchases after using its search engine. At issue is how the software makerplans to do battle with Google after the failure of its bid forYahoo! Analysts and investors have been eagerly awaiting details about "Plan C" after Microsoft acknowledged that its plan a of going solo was troubled but also withdrew its Plan B, acquiring Yahoo!, because Yahoo! executives sought more money. Under the cash program, web shoppers who sign up for an account and buy items found using Microsoft's Live Search Cashback site will receive a percentage of the purchase price deposited into their account. When the total reaches $5, the shoppers can redeem it by using eBay's Paypal.

McDonald's says its french fries are now trans-fat-free in all its restaurants in the United States and Canada. The big fast-food chain is catching up with its rivals in that area. The company made the word official at its annual shareholders meeting at its corporate headquarters in Oak Brook, Illinois. McDonald's has lagged other restaurant operators in switching over to a zero-trans-fat cooking oil out of worries it would compromise the taste of its trademark fries. It has been under increasing pressure from consumer advocates and some public officials to make the change. The new oil is canola-based and includes corn and soy oils.

The Democratic National Convention is going to be fueled by beer. And we're not talking about the parties at this summer's event. Brewer Molson Coors is donating fuel made mostly out of beer waste for use at the convention. The Denver 2008 host committee says the beer-based ethanol-gasoline blend will power the official cars. But ethanol isn't the only thing coming from the Denver-based brewer. Molson Coors will also provide beer--for drinking--at convention-related events.


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