legacy-to-LCC said:
does anybody know (or how to find) a list or summary of what airlines are hedged and which airlines are not?
the competitive landscape may indeed be changing?!?!?!
[post="295851"][/post]
Ran across this article that gives additional information on hedging. Curious to note that AWA's stragey on hedging isn't trying to predict the future price of oil...AWA takes a more conservative level headed approach...read on:
For airlines, 'hedging' on commodity pricing can be a risky strategy
Friday, September 02, 2005
By Dan Fitzpatrick, Pittsburgh Post-Gazette
America West Airlines rolled the dice last year when it agreed to pay a then-high $48 to $58 per barrel for half of its 2005 oil supply.
But with the price of crude now above $70 and the aftershocks of Hurricane Katrina applying more pressure on supplies, America West's gamble is looking more and more like a brilliant gambit, as the Tempe, Ariz.-based carrier and US Airways merger partner continues to make money while saving millions on fuel.
Same goes for Southwest Airlines, which purchased 85 percent of its oil this year at $26 per barrel -- more than $40 below the current spot price. The oil-buying strategy, devised before the 9/11 attacks, allowed the Dallas low-fare carrier to save $196 million in 2005's second quarter -- its 57th profitable quarter in a row.
"They took a gamble and it paid off," said Patrick Furey, senior commodity manager at Ariba Inc., a California-based business software and services firm with offices Downtown.
These days, the difference between making and losing money in the airline industry comes down to "hedging," the risky strategy that involves the purchase of a commodity -- typically fuel and oil -- in advance, under a contract guaranteeing a certain price no matter what the market does. Some contracts are purchased years in advance.
But not everyone has the stomach for the oil futures market. It requires a lot of cash up front and a guess as to the future direction of prices.
There also is the risk of an expensive failure.
"Southwest looks great now, but two to three years from now, that may flip on them" if they lock in prices and guess wrong, said Furey, who oversees a staff of 40 monitoring commodity markets around the world.
Many cash-strapped airlines, including the twice-bankrupt US Airways, have no hedges on fuel contracts this year because they can not afford the upfront expense, often in the tens of millions for an expense that costs them hundreds of millions. Delta Air Lines, trying to stave off bankruptcy, sold its contracts last year to raise much-needed cash.
Former US Airways chief executive officer Stephen Wolf once summed up the dilemma of fuel hedging by telling analysts in the 1990s that the right guess on prices can turn a CEO into a "hero" -- Southwest CEO Gary Kelly was responsible for the carrier's long-term hedging strategy -- or, if he or she guesses wrong, a "goat.''
For that reason, hedging on any sort of commodity is more the exception than the rule, Ariba's Furey said.
Many companies that depend on the oil and natural gas supplies disrupted by Katrina are not well protected from the price swings, Furey said. Even the plants that use oil- and natural gas-type chemicals -- such as the plastic resin polyethylene used in the making of plastic garbage bags -- have not been willing to make the expensive bets.
"You would really be surprised," Furey said. "There is not a whole lot of hedging that goes on in those markets."
For the few companies brave enough to try the oil-futures market, the risk rises with the price of crude as it gets more and more difficult for big hedgers to lock in low prices ahead of time. Southwest, for example, is now able to buy only a quarter of its fuel for $35 in the year 2009.
But America West, the US Airways merger partner that was able to lock up 57 percent of its fuel this year at prices ranging from $48 to $58, claims that its hedging is part of a long-term strategy, in place since 1996, to buy "insurance" against huge price swings.
In other words, the airline does not view the strategy as a risk, but a cost of doing business.
"We don't try to out-think the market," said America West spokesman Carlo Bertolini. "When you do that, you become a speculator and that's not what we are trying to do."
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(Dan Fitzpatrick can be reached at
[email protected] or 412-263-1752.)
