Fuel Hedging

[WorldTraveler]

yes, it has.

The refinery is profitable on a standalone basis - as required by accounting rules, is net positive since it was acquired by DL, and that doesn't begin to count the reduced jet fuel costs that the refinery has provided thru increased capacity of jet fuel.

yes, the refinery is profitable on a standalone basis.

once again, the primary principle behind DL's decision to invest in the refinery was because the US is consuming less and less gasoline which is the primary output for US refineries. As such, there are fewer refineries needed. Jet fuel is a byproduct for most US refineries. Jet fuel demand is not falling as fast as gasoline demand thus the price of jet fuel relative to other petroleum products was elevated - via the crack spread.

DL bought the refinery with the intention of converting it to a high jet fuel output facility and it is producing jet fuel at or close to the maximum chemical limit. The jet fuel produced by DL's Trainer refinery is shipped via dedicated pipelines to DL's operations in NYC and then beyond to other locations in the NE. The rest of the products which Trainer produces are exchanged with oil companies for jet fuel in other locations where DL needs jet fuel.

the whole purpose of the refinery was to increase the supply of jet fuel and for DL to be able to obtain one of its largest costs from an in-house producer, itself.

There were many people who argued that DL couldn't make the refinery work but it has done that.

As DL's bad fuel hedges fall away, it will be much more apparent how much DL saves on fuel relative to its peers because of the refinery. Before the price of oil dropped and DL lost on hedges, it was saving up to 10 cents/gallon on jet fuel because of Trainer. It is likely that will happen again.

and no one factored in the savings DL gained from Trainer when they talk about how much DL lost on hedges.

again, AA made the decision not to hedge. Most other airlines hedge.

DL not only hedges but also uses the refinery to manage its jet fuel costs.

As hedges expire, the refinery will play a bigger role in differentiating fuel costs between airlines.

Revenue will play a larger role in differentiating profitability.

 

[bob@las-AA]

Found this art. its a good read, It also questions DL thinking when buying this facility.
 
http://www.forbes.com/sites/christopherhelman/2015/01/21/how-cheap-oil-has-delta-air-lines-jet-fooled/

 

[WorldTraveler]

the article has been posted before on here, Bob.

It also misses that DL has posted profits with the refinery for the last two quarters including within days of when the article was released; the refinery was also profitable before the article came out. DL's profits have been running about $60M per quarter recently. DL also had just started to convert the refinery from African to US domestic crude which reduced input costs. I'm not sure of the exact percentage of domestic crude Trainer is using but it has been part of the reason Trainer has turned profitable.

Obviously with that information, the author might want to reconsider their assessment of whether the investment made sense or not.

and again, this is only accounting for the refinery on a standalone basis. DL never bought the refinery to operate it on a standalone basis but to reduce the cost of fuel for DL.

DL can't say that it was responsible for lowering the price of jet fuel but the price of jet fuel esp. in the NE dropped considerably relative to diesel fuel within months after Trainer went online. Jet fuel was selling at a significant premium to diesel but that completely reversed after Trainer began production.

Even if other airlines benefitted from the lower costs also, DL reduced its costs. And DL still managed to report a number of quarters where its fuel costs were 5-10 cents/gallon less than other carriers.

When you include those facts, it becomes a whole lot harder to make a statement that the refinery didn't make sense.

but again, the question here is about hedging. DL like nearly every other airline except AA post merger has hedged. DL lost big on those hedges but they are nearly gone.

Thus, talking about whether the refinery made sense for DL seems like little more than a distraction from the fact that AA HAD an advantage with fuel costs due to its no hedging policy. Other carriers have largely written off their hedge losses by now or they aren't large enough to affect their quarterly results - so far as we know.

Given that the refinery is profitable and there is no reason to think it will quit being profitable, it seems strange to question the wisdom of the refinery when it is profitable and when it did contribute ot lower overall fuel costs for DL before fuel prices dropped and hedge losses became the drag on earnings. DL noted that refinery profits have offset some of the fuel hedge losses.

as fuel hedge losses are neutralized, it becomes even more significant to think about the financial situation in the next few quarters at least.... on that basis, it is very possible that the refinery could make a positive and competitive difference in DL's fuel costs just as it did before.

 

[silverbird007]

Found this art. its a good read, It also questions DL thinking when buying this facility.
 
http://www.forbes.com/sites/christopherhelman/2015/01/21/how-cheap-oil-has-delta-air-lines-jet-fooled/

very interesting! Parker should at least send Anderson a bottle of champagne! (Dom Perignon of course!!)

 

[WorldTraveler]

you can only come to that conclusion if you think the world and AA will live and die based on fuel prices that existed for 6 months.

in fact, it won't.

 

[CMH_GSE]

http://mobile.reuters.com/article/idUSKCN0QP01M20150820

 

[CMH_GSE]

http://money.cnn.com/2015/08/18/investing/oil-prices-15-kotok/

 

[WorldTraveler]

and the real challenge for the airline industry is how airlines can justify their prices after years of consolidation has left the industry in the hands of a few players as a result of poor economics esp. regarding fuel.

If fuel remains low for years to come, which is likely, there will be no shortage of demand that can be filled by adding aircraft to airline fleets.

all of which should be good for airline employees

 

[NewHampshire Black Bears]

As Jet-A, is a major chunk of any airlines dollars, it looks like the timing of AA/US couldn't have been done at a more opportune time.

 

[jimntx]

For those of you who think we need to be hedging fuel for a sharp rise in Jet-A...
 
http://finance.yahoo.com/news/feels-1986-oil-track-longest-035541446.html
 
Oil closed at $40.45/bbl down 2.1% for the week.  Lowest close since the 2009 financial crisis.  Oversupply in the U.S. and looming recession in China has reduced demand considerably.  Oil actually traded as low as $39.86/bbl at one point today.  "Front-month U.S. crude has fallen 33 percent over eight consecutive weeks of losses, the longest such losing streak since 1986."
 
Traders would love to sell you a hedge at $60/bbl.  There would still be a chance their kids could go to college.  
 
Lower prices for crude oil means lower prices for the products made from crude oil.

 

[WorldTraveler]

No one expects crude oil to rise significantly anytime soon.

but most other airlines still have some hedge protection knowing that they will participate in the majority of the downside or price declines.

and given that stock markets worldwide tanked this week and especially today, lower fuel might finally be aligned with what it traditionally has been - weak economic performance.
the reason why low fuel prices have been an anomaly for so long is that the economy has been relatively strong at least in the US.

If global economies start faltering, then the lower fuel prices will be accompanied by much weaker business demand and much lower revenues for airlines.

Given that US airlines already have recognized that they need to pull back some capacity in order to balance out the strong dollar, the clues have been there. regardless of whether demand is weak because of a strong dollar or weaker global economies, the impact on US airlines will be there.

Thus, it is a little premature to celebrate long-term fuel savings without considering the impact on the revenue environment.

 

[jimntx]

Another article that says oil and oil product prices are going to remain low for the time being...
 
http://finance.yahoo.com/news/what-cheap-oil-means--and-where-do-prices-go-from-here-193021668.html#

 

[WorldTraveler]

low fuel prices have existed for airlines in the past.... they have often been accompanied by very sluggish economic conditions.

The difference that existed for US airlines was that oil prices were low while domestic demand and pricing was fairly strong - at least stronger than the losses from bad fuel hedges.

and there have also been times in the history of the industry when one carrier or another had a significant cost advantage for jet fuel relative to other carriers; for WN it was when most of the rest of the industry was in BK or teetering on the edge of it while for AA it was in the last year when other carriers had bad hedges.

IN the next year, there will be no significant difference in what each carrier pays for jet fuel - at least relative to their ability to generate revenue.
In contrast, there is now and will be significant differences in the revenue that each carrier is able to generate. Global economic conditions are not affecting each carrier similarly because each carrier has not responded to them similarly.

This could be one of the most defining winters in the industry in quite some time.

 

[AANOTOK]

So let me repeat what you just said in ten words or less:
 
Delta responding well.
AA not so good.

 

[WorldTraveler]

No advantage to any carrier on fuel.

Revenue appears to be tracking similar to what it has been for various carriers for several quarters, perhaps years.

if you believe that means that DL has a revenue advantage to AA, then I will let you make that statement on your own.