Oil Over $51

[boeing787]

That hurts everyone

 

[justaumechanic]

That hurts everyone

[post="249933"][/post]​

No.. The company will say they have targeted a fuel price in the 50 to 55 range based on round 4 of upcoming contract talks with ALPA and AFA..

Lakefield will say that the cost of fuel was not added to Round 3 and due to that fact we must endeavor to save the company by opening up negotiations with our union partners. The fact that I have not taken a paycut is not relevent because I am only one person.

USA320 will ask "When do I get to vote yes"..

 

[BoeingBoy]

That hurts everyone

[post="249933"][/post]​

Honestly, I'm not trying to be picky or anything, but I'd amend that just a little bit....

That hurts everyone who isn't significantly hedged. For those that are, it just increases the competitive advantage they enjoy.

Now on to something that may contribute to the discussion....

The most up to date source I've found yet for spot jet fuel prices is the DOE, which runs about 1-1/2 weeks behind - if anyone has a more current source (that doesn't require paying) I'd love to have the link.

They show jet fuel rising from a low on 2/7 (from the peak in October 04) to close between $1.3025 and $1.4158 per gallon on 2/11 depending on whether it's New York harbor, Gulf Coast, or LA delivery.

That's $54.70 to $59.46 per barrell. On 2/11.

For reference, on the same day (2/11) crude spot prices were $47.15 per barrel for West Texas Intermediate and $44.41 for Brent (North Sea, I think).

Jim

 

[speedbird86]

That hurts everyone

[post="249933"][/post]​

You got that right. Was wondering how long it would be before someone brought this up. Fuel prices are suppose to spike upwards in the spring. Is the industry prepared? We'll find out here in about 3 months.

 

[usairways_vote_NO]

That hurts everyone

[post="249933"][/post]​

And makes round 4 ripen quickly

 

[boeing787]

Round 4 is the KO round 😛h34r:

 

[mweiss]

That hurts everyone who isn't significantly hedged. For those that are, it just increases the competitive advantage they enjoy.

Exactly. This helps WN, simply because of the increasing advantage they have.

Now on to something that may contribute to the discussion....

Great contribution. So we have about a 22% markup between a unit of crude and an equal unit of JetA. At $51/bbl crude, that should tranlate to roughly $62.22/bbl JetA, or $1.48/gal. In other words, WN is paying half as much per gallon as those buying on the spot market.

 

[Tim Nelson]

Round 4 is the KO round 😛h34r:

[post="249987"][/post]​

There is no doubt in my mind that it makes 'good sense' for your company to come back to the well. I'm not saying it is good business but if history is our teacher then you can bank on them coming back to the well. Is it empty yet? I doubt it since no union on the property has the jewels to recommend against such things. Oh, sure plenty of rhetoric blasting the company but in the end it's hand in hand baby.
At any rate, oil at $51 a barrel should speed some things up.

regards,

 

[local 12 proud]

Let me guess? "THE CONCESSION STAND IS CLOSED"

 

[FWAAA]

I'm not sure refineries can get exactly 42 gal of JetA (or 42 gal of any particular distilled product) from a 42 gallon bbl of oil, but I may be mistaken. That might throw off the calculations somewhat.

Any oil refinery experts or petroleum engineers here?

 

[BoeingBoy]

I'm not sure refineries can get exactly 42 gal of JetA (or 42 gal of any particular distilled product) from a 42 gallon bbl of oil, but I may be mistaken. That might throw off the calculations somewhat.

Any oil refinery experts or petroleum engineers here?

[post="250004"][/post]​

I'm neither but I did stay at a Holiday Inn Express once....

As I understand it, you are absolutely correct that a 42 gal barrel of oil will not distill down to 42 gal of jet-A (or any other distillate, for that matter).

However, it's also my understanding that spot prices for distilled products are based on buying in 1,000 barrel lots, or 42,000 gallons.

So a barrel of jet-A (or gasoline or heating oil) didn't start as a barrel of crude, but it's priced the same way - by the barrel (or by the 1,000 barrels to be more precise).

Jim

 

[BoeingBoy]

So we have about a 22% markup between a unit of crude and an equal unit of JetA.

[post="249994"][/post]​

Don't know about that, Michael. I've noticed that both the variation between crude and jet fuel prices and between delivery points for jet fuel prices varies from day to day. So I'm not sure looking at one specific day gives very good guidance.

Seems like my reading on fuel hedging methods turned up the nugget that oil and jet fuel prices have an 85 or 90% correlation while heating oil and jet fuel have a 95% correlation. Supposedly the better correlation is why heating oil is used to hedge jet fuel much more than crude is. I'll let you explain the meaning of that to me.

Jim

 

[FWAAA]

So a barrel of jet-A (or gasoline or heating oil) didn't start as a barrel of crude, but it's priced the same way - by the barrel (or by the 1,000 barrels to be more precise).

[post="250007"][/post]​

Fair 'nuff. B)

 

[mweiss]

I've noticed that both the variation between crude and jet fuel prices and between delivery points for jet fuel prices varies from day to day. So I'm not sure looking at one specific day gives very good guidance.

Agreed. It's probably accurate to two significant digits, though.

Supposedly the better correlation is why heating oil is used to hedge jet fuel much more than crude is. I'll let you explain the meaning of that to me.

The simplest way of describing that is to say that if heating oil rises by 10%, then there's a 95% chance of JetA rising by 10% +/- a small margin.

The reasons for having any correlation divergence (i.e., a correlation < 100%) are:

• Product mix options. This impacts the supply, because the producers can choose to slightly vary the output from a unit of crude to bias toward particular products.
• Secondary refining capacity. This impacts the supply, in a similar fashion to the product mix options. With a given refining capacity, the secondary refining equipment can be used for different products, depending on projected demand.
• Seasonal demand fluctuations. Heating oil isn't particularly popular in the mid-summer months, but it's used a lot in January.
• Unexpected supply and demand fluctuations. Maybe a JetA pipeline breaks, which would increase the price of JetA due to supply reduction. The same wouldn't have happened to heating oil.

So you use puts and calls on heating oil to counter the effects of changing JetA prices. Basically, you set up contracts such that if heating oil prices rise, you make money. The money you make is used to offset the increased cost in buying JetA.

The downside, of course, is that if heating oil prices fall, you have to pay the other party in the heating oil contract. You'd do this with money that you had otherwise expected to spend on JetA.

The real benefit, and thus the primary motive for entering into these contracts in the first place, is predictability. If you budget very carefully, then elements of unpredictability make it harder for you to maximize your mid-term investments. You have to keep some in liquid form just in case the unexpected happens. Since fuel is such a huge portion of an airline's expenses, having predictability in future fuel costs gives you a much better opportunity to solidify a big chunk of cash for the duration of the hedges. This typically gives you a higher rate of return, since (in general) longer duration investments pay higher interest rates.

This approach works best when interest rates are relatively stable, since you don't want to be caught with a mid-term locked rate and suddenly rising spot rates. Of course, interest rates have been remarkably stable for many years, and don't show indications of a sharp rise in the mid-term. In the long term...well, that's for another day.

 

[BoeingBoy]

Michael,

To drift further off topic, but for my education, I noticed that there were several different "plays" that could be used in hedging. The two you mentioned - puts and calls I sorta semi-understand. I think two of the others were "straddles" and "caps", with maybe a "collar" or something like that thrown in.

My limited understanding of some of these is their ability to hedge against price increases while still enjoying the benefit of capturing price drops.

Sometime I'll have to look up the paper that mentioned all that and send you the link.

Jim