Hedging Fuel

[Justme]

Business Week, October 2, 2006

UPFRONT, Bad Bets by Michael Arndt

CHEAPER OIL, BUT NOT FOR MOST AIRLINES

Bottom line of the story is that in recent months when oil was above $70 and headed for $100 or more, the majors did "what seemed prudent". You know where this is going, don't you...

Here's the current reality:

Oil around $60.

Continental: 33% of its third quarter requirements @ $73.18 and 27% of its fourth quarter requirements @ $75.20.

US Airways Group: 44% of its third quarter requirements @ $71.39.

OK, so that's no big deal. It's not that bad. But wait, the story doesn't end there. This story wouldn't be complete without the following reminder...

:huh: xxxxxxxxxxxxxxx F L A S H xxxxxxxxxxxxxxxxxx :huh:

Southwest, in a deal it signed long before prices shot up is still at $36 for 73% of its second half (2006) fuel.

Bummer....

 

[nycbusdriver]

Fuel hedging is high stakes gambling, pure and simple.

It's no better or worse than betting on a horse race.

SWA won their bet.

USAirways and Continental lost.

Fuel hedging is only 100% effective when you can predict the future with 100% accuracy.

 

[a320av8r]

It' a gamble. Except for the election there wasn't any reason for oil to drop. We'll see after the first Tuesday of November. May still be a good move.

 

[Elevation]

It' a gamble. Except for the election there wasn't any reason for oil to drop. We'll see after the first Tuesday of November. May still be a good move.

I'm guessing you didn't go to college.

 

[mga707]

Except for the election there wasn't any reason for oil to drop.

Sure there was. The price was artificially high based on fears of a cut in supply that didn't happen. No Gulf of Mexico hurricanes, some reduction of tension in the Nigeria oil delta, etc.

 

[a320av8r]

I'm guessing you didn't go to college.

Election Day occurs on the Tuesday following the first Monday of November every year, which is always the Tuesday between November 2 and November 8, inclusively.

What???
FYVM

 

[diogenes]

Just a little hard for me to believe that for the the past few years, every time some sheik got a belly-ache, oil was speculated upwards, and now, with Iraq not going so well, Iran going nuclear, ands still not a new refinery in sight, oil is coming down so fast, so quick. Weren't we taught oil prices went up like a rocket, and down like a feather, and that's how the market works?

I don't think Bush picked up the phone to get this done. He didn't need to. His oil buddies are looking out for themselves, and Bushco is along for the ride.

FWIW, check out Exxon's annual report for yourself. Their 2005 markup was significantly higher than in 2000. Probably weren't sweating any oversight.

 

[PITbull]

Sure there was. The price was artificially high based on fears of a cut in supply that didn't happen. No Gulf of Mexico hurricanes, some reduction of tension in the Nigeria oil delta, etc.

Typical "Right" response.

Prediction: Crystal ball reveals oil will be creeping up starting end of Nov./Dec until they hit the $3,00 mark again. Why? Because the oil companies can do what they want and demand top $$ from the consumer for their oil.

They are currently arrtifically depressed by the oil companies for the upcoming election. Veneuzella and Iran are in control of our energy supply, and the oil companies are willing to bring the prices down, less profit for the month in order for the voting public to vote with their pocket book giving the illusion they have more disposable income for the minute.

 

[EricLv2Fish]

Fuel hedging is high stakes gambling, pure and simple.

It's no better or worse than betting on a horse race.

SWA won their bet.

USAirways and Continental lost.

Fuel hedging is only 100% effective when you can predict the future with 100% accuracy.

AWA, now the US Airways strategy...is to always have a certain percentage of fuel hedged no matter what the current price is. It levels the overall cost without huge spikes either way. Our history of recent hedging has been right around 50% of our total consumption of fuel, not 100%! Doing this brings a certain amount of predictability in expenses and allows better forecasting of resources and other tangible/intangible benefits. It's a moderate financial strategy that attempts to bring predictability into financial forecasting. Not a win or lose situation, it's a win situation by bringing stability into the forecasting system.

 

[whlinder]

US Airways Group: 44% of its third quarter requirements @ $71.39.

What calendar is US on? Was the quarter that just ended their Q3?

 

[PHL]

Typical "Right" response.

Prediction: Crystal ball reveals oil will be creeping up starting end of Nov./Dec until they hit the $3,00 mark again. Why? Because the oil companies can do what they want and demand top $$ from the consumer for their oil.

They are currently arrtifically depressed by the oil companies for the upcoming election. Veneuzella and Iran are in control of our energy supply, and the oil companies are willing to bring the prices down, less profit for the month in order for the voting public to vote with their pocket book giving the illusion they have more disposable income for the minute.

And you have the typical "left" response that has absolutely no basis in economic fact/analysis whatsoever. The only thing you said that is true is that oil companies want to get top dollar from the consumer. I always thought that was the goal of any profit driven business. But maybe I missed that day of school that they taught otherwise.

 

[FWAAA]

And you have the typical "left" response that has absolutely no basis in economic fact/analysis whatsoever. The only thing you said that is true is that oil companies want to get top dollar from the consumer. I always thought that was the goal of any profit driven business. But maybe I missed that day of school that they taught otherwise.

She worked too many years for a nonprofit USAir to understand how profit-seeking corporations really work.

 

[BoeingBoy]

It levels the overall cost without huge spikes either way. <Snip> Doing this brings a certain amount of predictability in expenses and allows better forecasting of resources and other tangible/intangible benefits.

Give Eric a ceegar....

The primary benefit of hedging is exactly what he said - bring predictability to an otherwise uncontrollable major cost item. Hedging shouldn't be used to "gamble" on the future price of fuel but to move a major expense from an "unknown" to a "known" cost.

Everybody see's WN's hedging profits over the last few years and thinks "They won the gamble". But WN has been hedging for 1-1/2 decades, sometimes "winning" and sometimes "losing", but always having a good idea what their future fuel cost will be. That knowledge by itself makes running a profitable business easier.

Jim

 

[TechBoy]

Give Eric a ceegar....

The primary benefit of hedging is exactly what he said - bring predictability to an otherwise uncontrollable major cost item. Hedging shouldn't be used to "gamble" on the future price of fuel but to move a major expense from an "unknown" to a "known" cost.

Everybody see's WN's hedging profits over the last few years and thinks "They won the gamble". But WN has been hedging for 1-1/2 decades, sometimes "winning" and sometimes "losing", but always having a good idea what their future fuel cost will be. That knowledge by itself makes running a profitable business easier.

Jim

Yes, but . . .

WN also hedged significantly when prices had fallen far below the long term mean (in real dollars) and they hedged many years out, so it's much more than just creating a "known" cost for the future. That is doubly smart.

What I don't understand is why US would hedge so heavily in the short term when oil was trading far above its long term mean, unless they thought that production had reached its peak and demand would continue to grow. That is a gamble.

 

[BoeingBoy]

WN also hedged significantly when prices had fallen far below the long term mean (in real dollars) and they hedged many years out, so it's much more than just creating a "known" cost for the future. That is doubly smart.

Yes, it turned out that way but there were no guarantees when they put any specific hedges in place. For a number of the years they hedged, they listed the end of year value of the hedges they had as "not material" - neither markedly in the money or out of the money. But you're generally right - WN hedges more when they anticipate that fuel will be more expensive in the future and hedges less when they anticipate that fuel will be less expensive in the future. And while I haven't tallied up the gains and losses booked over the years, I wouldn't be surprixed that WN has come out ahead overall - not even counting the last few years.

I suspect the key is to have a long-term program in place. Just saying "Oh my gosh - look at the price of fuel. We better do something quick!!" isn't a strategy. It really is gambling....

Jim