Northwest Airlines CEO Steenland Testifies Before Congress; Outlines Remedies to Record Oil Prices
Steenland details the impact of surging oil prices on airline industry; calls for greater regulation of oil speculators
Northwest Airlines (NYSE: NWA) CEO Doug Steenland told members of Congress that surging oil prices are severely challenging the airline industry – and unregulated oil speculation is a major cause of the industry’s pain -- as he testified before the House Committee on Energy and Commerce, Subcommittee on Oversight and Investigations.
Steenland, who also serves as Chairman of the Board of Directors for the Air Transport Association, said fuel is quickly approaching 40 percent of the airline industry’s operating costs - and growing. In 2008, U.S. airlines are expected to spend $61.2 billion on jet fuel, $20 billion more than in 2007, and are projected to incur losses totaling close to $10 billion.
“If the current pricing dynamic does not change, our industry will be severely challenged and will continue shrinking – to the detriment of customers, employees and the communities we serve. It is as simple and stark as that,” said Steenland.
Steenland noted, “Unfortunately, the U.S. airline industry has become the poster child for why reform is needed” as it relates to speculative commodities trading of oil futures. “The price of jet fuel, which as you know is tied to the price of oil, is out of control.”
Steenland Cites Supply-Demand Disconnect
Steenland explained that worldwide daily demand for oil has increased about two percent over the past 12 months, while prices have increased over 100 percent in that same time period. “Supply and demand fundamentals alone do not explain the price increases and volatility experienced in the energy markets,” said Steenland.
A major cause of this disconnect, Steenland says, is an increase in speculative investments in the futures markets by financial institutions such as pension funds, investment banks and hedge funds. In March of 2008, world oil consumption was about 87 million barrels a day. However, about 1.2 billion barrels of oil were traded on an average day on the NYMEX and the London Intercontinental Exchange. The volume of paper transactions, or trades, was 13 times greater than the actual amount of oil used daily worldwide.
Steenland said this volume of speculative activity is excessive, and that additional regulation is necessary because it “has placed upward pressure on oil prices irrespective of market fundamentals.”
Steenland to Congress: Close Commodities Trading Loopholes
Steenland said Congress needs to close commodities trading loopholes and increase regulation of commodities trading here and abroad. To address this situation, the ATA has developed a list of common-sense measures that will level the playing the field between regulated and unregulated exchanges, which should squeeze from the market a speculator premium, including:
* Enact legislation to prohibit pension funds from investing in energy commodities
* Close the “Enron, London and Swaps” loopholes that permit unregulated trading by institutional investors
* Require the CFTC to reclassify certain categories of traders to distinguish between physical hedgers and speculators
* Increase margin requirements for institutional investors
* Give the Commodities Futures Trading Commission (CFTC) greater authority to enforce rules and regulations
* Require CFTC to work with the United Kingdom and other countries to ensure the same limits and reporting requirements apply in all countries where commodities exchanges exist
* Increase funding to the CFTC for investigations
Labor, Business and Trade Support for Steenland/ATA proposals
Adding further support to Steenland’s testimony and the proposals from ATA, a coalition of labor, business and trade organizations signed onto letter to the subcommittee’s chairman, Congressman Bart Stupak. The coalition, including the Air Lines Pilots Association (ALPA) and International Association of Machinists and Aerospace Workers (IAM) District 143, wrote, “Experts agree that today’s surging oil prices are beyond those warranted by supply-demand fundamentals and are due, in large part, to rampant speculation.”
The 15-member coalition added, “In early June, speculators traded more than 1.9 billion barrels of crude oil – 22 times the size of the physical oil market, including $150 billion traded on the New York Mercantile Exchange alone. Sophisticated “paper” speculators who never intend to use oil are driving up costs for consumers and making huge profits with little to no risk.”
The coalition is also calling for immediate Congressional action against oil speculators and applauded Congressman Stupak for his proposed “Prevent Unfair Manipulation of Prices Act of 2008” – or PUMP Act – with its focus on “opening up the market to greater transparency and fairness to level the playing field for all traders.”
In addition to ATA, ALPA, and IAM District 143, the coalition includes: The Air Carriers Association of America, Airports Council International, the American Association of Airport Executives, the American Society of Travel Agents, the Association of Professional Flight Attendants, Industrial Energy Consumers of America, International Brotherhood of Teamsters, National Air Traffic Controllers Association, National Business Travel Association, National Farmers Union, and the Regional Airline Association.
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