Oil Over $51

[usairways_vote_NO]

Prices hedging jet fuel..why heating oil correlation

 

[BoeingBoy]

Thanks, UVN.

I think that's the one I remembered to correlations from - or should I say not remembered since I was so far off.....

Jim

 

[Fatherknowsbest]

BoeingBoy, you know what I find interesting? PSA used to own an oil refinery. One of the first things that US Air dropped after the takeover. And the Company has NEVER learned from that mistake. They still screw up on hedging every single year!

Back in January when crude hit $41, I was wondering (on this board) what excuse the Company would use for not hedging. They didn't ask the Judge for permission until it was back to $46.

Hope the Air Wis news will be the positive that everyone is praying for (but your earlier post about U promising another profit to them means Barnum and Bailey rides again).

I believe that your paycut once again, is only paying the higher price of fuel.
It is not allowing for the fares to be lowered accross the board to compete in the market place. Lowering fares now is just suicide.

 

[BoeingBoy]

BoeingBoy, you know what I find interesting? PSA used to own an oil refinery. One of the first things that US Air dropped after the takeover. And the Company has NEVER learned from that mistake. They still screw up on hedging every single year!

[post="250037"][/post]​

Heck, Father, who knows. The way this place has been run for the last decade they'd probably just hired a contractor to run the refinary, guaranteed them a profit, and we'd still have lost money on the deal.....

Jim

 

[BoeingBoy]

Michael,

Here's the paper I mentioned. I'll put the link here instead of sending it to you in case anyone else is interested.

Jet Fuel Hedging Strategies:

Jim

 

[javaboy]

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

[post="250027"][/post]​

companies that are in bankrupcty are not allowed to enter into derviative contracts. now besides UAIR look at AMR (sold their derivatives early last year to avoid bk, delta too) UAL none, Hawaiian none, ATA none.


here's a thought, if fuel/oil is prohibitedly high for entering into collars and swaps then do it with something else. generate income rather than protecting costs, what else could this possibly mean? what else do airlines produce in large quantities?
cash flow (hold your jokes please) the time you have the cash from the time you deliver the product you can do short term derivatives and generate short term income pops.

 

[eolesen]

Here's a thought... If oil stays at $50+, should US be in such a rush to exit bankruptcy protection, or should they stay in Ch11 and just extend Round 3?....

 

[speedbird86]

Here's a thought... If oil stays at $50+, should US be in such a rush to exit bankruptcy protection, or should they stay in Ch11 and just extend Round 3?....

[post="250069"][/post]​

Here's another thought. According to some reports, crude could possibly see prices very close to $60 p/bbl. Perrish the thought. But if it should get near this price there is no way labor can carry that expence. At what time will this cost have to be passed on to the consumers in the way of fare increases, fuel surcharges (again), whatever? And to all the PineyBobs, don't say you'll drive cause you're going to be looking at a pump price of about $2.50 p/gal. plus the cost of driving and a lot of your time if you want to take that into account.
So you may very well be right by not wanting to jump out of bankruptcy or, jumping on the chance to hedge fuel at $50 p/bbl. IMO $50 p/bbl is here to stay and the airlines and the USA and world economies better get prepared for it.

 

[Winglet]

Look for another recession. Bush is full of **** saying that the economy is strong . . . although I suppose if you're a beltway bandit, it is.

 

[goingboeing]

Oil companies will continue to raise the price until they find the price people are no longer willing to pay.
One of the quickest ways to reduce fuel prices is for the airlines,trucking companies,and Railroads CEASE ALL OPERATIONS for about 72 hours.

Until the transportation companies make a goal line stand against oil companies will CONTINUE to increase prices at their every whim.

The airlines need to clean up their own back yard and stop blaming all losses on fuel prices and excessive compensation of the employees.

 

[sentrido]

I heard something on the radio that when short term interest rates are higher than long term rates it meant in the past a recession was comming, 100%. and that this is the case today. Lets hope it doesnt happen this time.

 

[mweiss]

PSA used to own an oil refinery. One of the first things that US Air dropped after the takeover. And the Company has NEVER learned from that mistake. They still screw up on hedging every single year!

Not to put too fine a point on it, but refineries don't conjure up crude from thin air.

 

[mweiss]

Here's the paper I mentioned.

[post="250042"][/post]​

Jim,

The paper brings up some interesting points. In particular, it suggests early on that WN took advantage of the cyclical nature of fuel prices. Perhaps that was their goal, but if it was it's a strategy that won't last for very long. In essence, they're suggesting that WN was recognizing an arbitrage opportunity (not exactly, but conceptually). Whenever such opportunities arise, once they're discovered they disappear. It's sort of like those lovely vacation spots (Waikiki, anyone?) that get discovered and then ruined in the process.

In this case, once the airline industry returns to a period of stability, hedging will become an integral part of fuel purchasing...which will effectively render the arbitrage component sterile.

Having said that, I still can see some significant benefits to the predictability of future fuel prices.

In addition, they performed a regression analysis with the goal of teasing out the value of the competitive advantage rendered by hedging. It's a useless calculation in this case, because it only covers the situation where an airline bought the hedges when the market was lower, and had the advantage when fuel prices rose. It's quite likely that this coefficient would be significantly reduced (though perhaps still greater than zero) over the long haul. Imagine, for instance, what hedges bought in 1984 would have done to an airline in 1986.

I really got a kick out of the hedge vs. valuation graph (Exhibit 3). The implication they're going for is a causal relationship. I don't think it really is, though; rather, it's a correlative relationship. You can't buy hedges when you need the money to make payroll. Reading more into it is ignoring the forest for the trees. Furthermore, the closest one could come to a causal relationship, even ignoring the forest, is to conclude that, when fuel prices rise sharply, those with the most fuel hedged do the best. It tells us nothing about what happens when fuel prices fall sharply.

Now, in answer to your questions about some of the other instruments:

A collar can be thought of as a limited put or call. Traditional puts and calls have no limits to the upsides or downsides. This means greater risk to the parties involved, which affects the price of the instrument. By applying a collar (which is really nothing more than adding puts and/or calls into the mix), the risk to the parties is limited, which reduces the price to the buyer.

A cap can be thought of as a one-sided collar, strictly limiting the upside.

 

[mweiss]

I heard something on the radio that when short term interest rates are higher than long term rates it meant in the past a recession was comming, 100%.

[post="250122"][/post]​

As economic indicators go, an inverted yield curve (that's when short-term rates are higher than long-term) is a very good one. When you see one, it's a solid indication of impending recession.

FWIW, the last time we saw an inverted yield curve was Q1, 2000.

 

[Rico]

Round 4 is the KO round 😛h34r:

[post="249987"][/post]​

Wow, do you really think the higher Oil prices will cause your Airline to liquidate...? I hope not, here's wishing UAL the best of luck.