CallawayGolf
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Along with the rest of the airline CEOs/Presidents most or all of whom don't have 100% hedges in place. Does anyone know the current fuel hedging percentages and hedged prices for DL, UA, AA, and WN?
USAirways not hedging fuel
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CallawayGolf
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In my first sentence I'm going on historical information that no airline is 100% hedged. That was a published fact back in 2007, 2008, and 2009. So based on that information I am assuming that no ariline has hedged all of their 2011 fuel purchase requirements.
The second sentence (as noted by the use of the "?" at the end of the sentence) is a question and a request for information. I would like to know if anyone has current data on the major US airlines and how much hedging they have in place as a percent of their projected requirements and also what price or prices they have locked in the heding/collars for. If you know please share. If DL, UA, and AA all hedged less than 30% of their fuel requirements, then fares/surcharges will rise in the industry to cover the additional cost of fuel at market prices. If they are all hedged at 80% at a much lower price than the spot price, then US has a much higher exposure. I'm just trying to figure out what the reality of the situation is.
Biofuels might not be the end all, a big Ethenol push for example could be a enviromental disaster, lead to world wide hunger and the ensuing riots. In fact any Biofuel that replaces food crops for a more profitable Biofuel crop is probably a bad idea in the long run. More promising is alge that can be grown in the dessert.
It was a simplistic statement, but the way he explained it the idea makes perfect sense--has to do with removing wealth and leveling the playing field in oil rich countries.
That said, we still need to find viable alternatives to oil--the clock is ticking.
With regard to US and their non-hedged position, who knows but if oil keeps climbing they will soon be at a disadvantage.
WorldTraveler
Corn Field
- Dec 5, 2003
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thanks, Pi brat. I'd like to say that I have some great insight but it really only takes looking back at history so see that problems in the Middle East arise w/ a fair degree of frequency and have a signficant impact on the airline industry as well as the global economy when it happens.
Yes, alot of analysts are not getting near as excited about these high oil prices as they once did... granted we faced a lot higher but it doesn't take too much to realize that the damage starts to occur long before oil prices hit the stratosphere.
I personally think the US will back governments that need to keep peace and the oil flowing but there is alot of oil in the control of countries like Libya and Iran which the US has no ability to help. Further, if certain groups gain control of some of these governments, they are not the least bit concerned with making money for their country or in keeping the global economies afloat by not allowing oil prices to go too high. Previous oil shocks were usually relatively short lived because those governments quickly saw the damage that happened to the global economy. As less rational parties take control of some countries, it is very possible that the world's very delicate balance regarding alot of things, including food could be thrown out of balance as economics favor using limited resources for energy.
As for hedging by US carriers, UA's hedging details are not as detailed as AA or DL's but it appears that UA is fairly well hedged in the first quarter. CO didn't have as much hedged but that is somewhat to be expected since CO hasn't existed as a separate entity for several months.
UA reported its hedging position as of Dec 31 while AA and DL reported it as of Jan, just before they reported their earnings.
AA and DL have similar hedges; they are both just under 50% hedged for the 1st quarter at levels between $80-90/bbl. Both generally have similar values of hedges (between $75-95) for most of the year although the percentages start to drop off each quarter.
At the current $100/bbl for Nymex crude, those hedges are paying off for AA and DL - and correspondingly creating financial results that will hit the bottom line compared to other carriers.
Yes, alot of analysts are not getting near as excited about these high oil prices as they once did... granted we faced a lot higher but it doesn't take too much to realize that the damage starts to occur long before oil prices hit the stratosphere.
I personally think the US will back governments that need to keep peace and the oil flowing but there is alot of oil in the control of countries like Libya and Iran which the US has no ability to help. Further, if certain groups gain control of some of these governments, they are not the least bit concerned with making money for their country or in keeping the global economies afloat by not allowing oil prices to go too high. Previous oil shocks were usually relatively short lived because those governments quickly saw the damage that happened to the global economy. As less rational parties take control of some countries, it is very possible that the world's very delicate balance regarding alot of things, including food could be thrown out of balance as economics favor using limited resources for energy.
As for hedging by US carriers, UA's hedging details are not as detailed as AA or DL's but it appears that UA is fairly well hedged in the first quarter. CO didn't have as much hedged but that is somewhat to be expected since CO hasn't existed as a separate entity for several months.
UA reported its hedging position as of Dec 31 while AA and DL reported it as of Jan, just before they reported their earnings.
AA and DL have similar hedges; they are both just under 50% hedged for the 1st quarter at levels between $80-90/bbl. Both generally have similar values of hedges (between $75-95) for most of the year although the percentages start to drop off each quarter.
At the current $100/bbl for Nymex crude, those hedges are paying off for AA and DL - and correspondingly creating financial results that will hit the bottom line compared to other carriers.
A back years ago when SW was hedged at so low prices it really hurt US because being the outlier, they couldn't raise prices enough to offset costs-SW didn't need too, and didn't. It seems that if you take near the same strategy as your competitors, at least you are all in the same boat. We'll see.
Exactly. As the one airline that hasn't hedged at all, US will be hurt the most by rising fuel prices. The others will be hurt as well, but having hedged some of their requirements, the impact will be less. You don't have to outrun everyone - you just need to outrun some of them. The decision by US management to not hedge at all appears to be an attempt to outrun everyone, including the bear.
Parker and Kirby gambled that prices would stay steady or fall, and that might turn out to be a very expensive gamble - far more costly than the $300 million they were proud to say they were saving by not hedging at all. I don't celebrate the fallout on rank and file employees of US if oil hits $150/bbl or $200/bbl, but I will celebrate Parker's and Kirby's incompetence if oil bankrupts US once and for all.
Are you still under the opinion that the decision to hedge fuel is up to the BOD and not Parker and Kirby when they present the budget?
WorldTraveler
Corn Field
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You are correct that no large US airline is 100% hedged and it wouldn't make sense to do so. Hedges cost money and involve risk. Hedging even the majority of your expected consumption says that you are pretty certain that you know which way oil prices are going to go and you are willing to spend the money to ensure you are right. But it is highly unlikely that you are right and no one else is either; there have to be parties to counter every hedge. Further, airline BODs are not likely to allow an airline to take the financial risk fo rhedges that are above what an airline could reasonably be expected to use... airlines are not chartered to engage in financial derivatives trading outside of what is needed for their own business. WN did so well on hedges in the past decade because they bought cheap hedges when no other airlines could but there are very few if any cheap hedges around today... hedges do require money to be set aside to cover the risk; UA and US both lost alot of money in 2008 on bad hedges and part of US' mgmt's strategy is undoubtedly not to repeat that.
Finally, there is no market in jet fuel hedges. Heating oil is usually what is hedged as a similar enough product that relates to jet fuel prices. There are alot more people interested in the heating oil market than there are jet fuel which means that the notion of an airline winning on hedges that no one else thought about is not likely.
it is also highly unlikely based on history that fare increases or surcharges will rise fast enough to allow fuel cost increases to be passed along fully. It is true that there is less demand in the industry and there are fewer players now than there have been in decades (which makes it easier for a few like minded people to do the same thing w/o talking to each other) BUT it would take a very strong economy, in a very high demand period for fare increases to be high enough to cover the cost of fuel increases. It is possible that summer fuel usage could be covered by suircharges because demand is high enough that fare increases could stick - assuming the current levels of oil do not increase much more. But there are a whole lot of months before and after summer where airlines do not have the demand or can create it only by reducing prices - eliminating the benefit gained from fuel surcharges.
Further, remember that everyone except US has a lower bar to jump over in order to cover their costs - because they will recover at least half of the oil price increases that are roughly above $85/bbl thru hedges. US will be paying for 100% of that increase.
It is not realistic to think that US will not have any negative impact relative to its peers as a result of US' decision not to hedge while at least some of its peers are fairly well hedged through at least the first 3 quarters of the year.
Can anyone on this forum explain to me the "Crack spread" And how this plays into the effectiveness of fuel hedges? I know that it has something to do with the cost of a gallon of heating oil compared to the cost of a gallon of JET A. Exactly what does it mean for airlines that hedge vs US who does not.
I don't know everything about the crack spread, but it refers to the difference between the price of a barrel of crude and a barrel of jetA. It's obvious that you can't turn 42 gallons of crude into 42 gallons of jetA and it's obvious that it costs money to refine crude into those 42 gallons of jetA, so naturally there should be some spread between the two. To use easy numbers, assume that crude is selling for $84/bbl (or $2/gal). If, on the same day, the spot price of jetA is $3/gal, that would be a crack spread of $42/bbl, which would be very high compared to the historical spread.
There is no established futures market for jetA, but there are futures markets for crude, gasoline and home heating oil (kerosene that's close to jetA). So in hedging, airlines typically use a mix of the three, hoping that any movement in the prices of those three mimic the movement in the price of jetA.
When the crack spread is small between the price of crude and the spot price of jetA, the mix of hedges (of the three above) act as a fairly reliable proxy. When the crack spread widens, that reduces the effectiveness of the typical mix of hedges.
I recall hearing the AA execs periodically complain in the 2005-08 timeframe about how large the crack spread had become and how that reduced the effectiveness of the hedges. The retail price of jetA was rising faster than the wholesale prices of crude, gasoline and heating oil.
Hope that helps.
There is no established futures market for jetA, but there are futures markets for crude, gasoline and home heating oil (kerosene that's close to jetA). So in hedging, airlines typically use a mix of the three, hoping that any movement in the prices of those three mimic the movement in the price of jetA.
When the crack spread is small between the price of crude and the spot price of jetA, the mix of hedges (of the three above) act as a fairly reliable proxy. When the crack spread widens, that reduces the effectiveness of the typical mix of hedges.
I recall hearing the AA execs periodically complain in the 2005-08 timeframe about how large the crack spread had become and how that reduced the effectiveness of the hedges. The retail price of jetA was rising faster than the wholesale prices of crude, gasoline and heating oil.
Hope that helps.
I spent over 20 years in the oil bidness, and this explanation--click on the link below--of the crack spread is one of the best (possible to understand) explanations I've ever run across. I know it's Wikipedia, but a good explanation is a good explanation. Cracking is the refinery process of breaking down crude oil into market products--gasoline, home heating oil, Jet-A, etc. Different crude oils, and different blends of crude, produce different percentages of end products. For instance, one I know of is that high sulfur crude oils end up producing a smaller amount of gasoline because the sulfur must be removed due to air quality laws and regulations. The process of removing the sulfur "damages" the crude such that less end product is produced. Also regional differences enter in...in the summer, a refinery in the northern part of the country will be producing more home heating oil in preparation for the winter season than a refinery on the Gulf Coast. (Seasonal products, such as home heating oil, are always produced "out of season" to the extent possible and stockpiled; so they are available if cold weather comes earlier than expected.
crack spread definition
crack spread definition
