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Oil Approaching $60 - Trouble For Airlines?  
User currently offlineMattnrsa From United States of America, joined Dec 2002, 390 posts, RR: 1
Posted (5 years 2 months 2 weeks 2 days 16 hours ago) and read 5990 times:

It was only a few months ago that oil was down near $30, but yesterday it closed just below $59, after a steep increase in the last week. With the global economy still very weak, airlines could be facing the double whammy of high fuel prices and poor demand.

What price do you think oil would need to reach before the airlines have a serious (more serious) problem? I thought I read that the airlines managed to push a fare increase through in the last few weeks? Are airlines regaining some pricing power? Do you think we'll see some 2nd and 3rd quarter profits?

18 replies: All unread, jump to last
 
User currently offlineLAXintl From United States of America, joined May 2000, 24813 posts, RR: 46
Reply 1, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5932 times:



Quoting Mattnrsa (Thread starter):
It was only a few months ago that oil was down near $30,

Very briefly, in Dec08-Jan09. But dont forget there is also the crack spread which airline pay, and has ranged up to as high of $18, so their true net cost were higher.

Quoting Mattnrsa (Thread starter):
With the global economy still very weak, airlines could be facing the double whammy of high fuel prices and poor demand.

The forward market curve predicts near $70 fuel after New Years.

I actualy say the rise in oil is a good economic sign, that we have bottomed out and global demand is on the rise.

As several airline CEO have stated they rather deal with high oil prices then a weak revenue demand enviroment.



From the desert to the sea, to all of Southern California
User currently offlinePellegrine From United States of America, joined Mar 2007, 2349 posts, RR: 8
Reply 2, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5911 times:

I hope any smart management have some hedges in place by now if they have the money.

Quoting Mattnrsa (Thread starter):
What price do you think oil would need to reach before the airlines have a serious (more serious) problem? I thought I read that the airlines managed to push a fare increase through in the last few weeks? Are airlines regaining some pricing power? Do you think we'll see some 2nd and 3rd quarter profits?

Back above $100 will cause problems again.

What you might see is that airlines that have been able to hedge their fuel costs moreso than others will gain a notable cost advantage.



oh boy!!!
User currently offlineLAXintl From United States of America, joined May 2000, 24813 posts, RR: 46
Reply 3, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5874 times:



Quoting Pellegrine (Reply 2):
I hope any smart management have some hedges in place by now if they have the money.

Hedging activity is almost frozen at the moment as one does not hedge when the forward curve is inverted and pointing upwards as its currently doing.
Makes sense to hedge when the forward curve points downward indicating future delivery pricing is lower then market price, not the other way around.

Do you go out an buy a loaf of bread for $5 for January delivery when the stores price today is $3? You'd however more likely do it if the market price was $5 today and future delivery price was $3.



From the desert to the sea, to all of Southern California
User currently offlineJetdudetim From United States of America, joined May 2009, 94 posts, RR: 0
Reply 4, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5824 times:

Two basic things.

Every penny of fuel expense costs airlines millions-



LAXintl "actualy say the rise in oil is a good economic sign, that we have bottomed out and global demand is on the rise."

Actually the cost of oil is not going up because of demand, it is going up because OPEC has slowed production to create demand which allows them to raise the price, this is NOT such a good thing.


User currently offlineAlasdair1982 From UK - Scotland, joined Mar 2008, 468 posts, RR: 0
Reply 5, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5787 times:



Quoting Jetdudetim (Reply 4):
it is going up because OPEC has slowed production to create demand which allows them to raise the price

Not to forget the oil companies holding ships in the north sea waiting for demand to pick up


User currently offlineLAXintl From United States of America, joined May 2000, 24813 posts, RR: 46
Reply 6, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5760 times:



Quoting Jetdudetim (Reply 4):
LAXintl "actualy say the rise in oil is a good economic sign, that we have bottomed out and global demand is on the rise."

Actually the cost of oil is not going up because of demand, it is going up because OPEC has slowed production to create demand which allows them to raise the price, this is NOT such a good thing.

First power of OPEC should rather be described as their "lack of power". They were powerless for all those years in the 1990s when oil was as low as $18. OPEC today controls about 40% of global production and is far from a united group itself.

Price of oil rising is definately an economic sign, the same way future semi conductor orders are (and have begun to show signs of a stabilization), future US business inventory orders and the transportations service index(rose in April)



From the desert to the sea, to all of Southern California
User currently offlineEghansen From , joined Dec 1969, posts, RR:
Reply 7, posted (5 years 2 months 2 weeks 2 days 15 hours ago) and read 5719 times:

Personally I don't think fuel prices matter in the slightest. If fuel goes up for United on a certain route, it also goes up for every other airline on the same route. Hedging can delay the impact for a few months, but can also whip back and bite you if you bet wrong.

Airlines (particularly American carriers) have been losing money for decades. The lost money in the 80s and 90s when fuel was cheap. Witness Eastern, TWA, Pan Am, Frontier, People Express, Freddy Laker, Continental, Air Florida, Western, AirCal, PSA, etc. all of which flied for bankruptcy or were forced to merge in the 80s and 90s when fuel was very cheap.

The airlines seem to have an endless list of excuses (unions, fuel costs, terrorist actions, SARS, H1N1, recession, regulatory changes) for why they are losing money. It is time they learn to adapt to circumstances and earn money in the world as it is.


User currently offlineJetdudetim From United States of America, joined May 2009, 94 posts, RR: 0
Reply 8, posted (5 years 2 months 2 weeks 2 days 14 hours ago) and read 5712 times:

Well, maybe we can agree that both are indications, since the drop in OPEC production-can only cause the price to go up.

General demand would (hopefully) drive OPEC to produce more oil not less. Also, the US has a particualarly high demand for middle east oil vs the rest of the world thanks to polictial allinances we have (not saying they are good!)

But we can all hope we have hit the bottom of the recession!


User currently offlineBongodog1964 From United Kingdom, joined Oct 2006, 3535 posts, RR: 3
Reply 9, posted (5 years 2 months 2 weeks 2 days 14 hours ago) and read 5679 times:



Quoting LAXintl (Reply 3):
Hedging activity is almost frozen at the moment as one does not hedge when the forward curve is inverted and pointing upwards as its currently doing.
Makes sense to hedge when the forward curve points downward indicating future delivery pricing is lower then market price, not the other way around.

Do you go out an buy a loaf of bread for $5 for January delivery when the stores price today is $3? You'd however more likely do it if the market price was $5 today and future delivery price was $3.

If you are hedging fuel prices, it matters not whether they are rising or falling. The object is to outguess the other party and strike a deal that gives you fuel at a future date at less than spot price.
If say fuel is at $60 today, and you think it will be $80 in January, you would try to hedge at less than $80, likewise if you think its going to fall to $50, you would try to hedge with a pessimist who thinks it will fall further, and will agree a cost of say $45.


User currently offlineLAXintl From United States of America, joined May 2000, 24813 posts, RR: 46
Reply 10, posted (5 years 2 months 2 weeks 2 days 14 hours ago) and read 5619 times:



Quoting Bongodog1964 (Reply 9):
If say fuel is at $60 today, and you think it will be $80 in January, you would try to hedge at less than $80, likewise if you think its going to fall to $50, you would try to hedge with a pessimist who thinks it will fall further, and will agree a cost of say $45.

The forward curve is what drives the future pricing contract.

So today with fuel at $50, you cannot buy fuel for delivering in May 2010 for for less then what the forward curve price is (~$70) regardless if you think the future price will be $40, $60, or $100.

Hedging is frozen at the moment as the forward curve rises above the spot price, and no one is willing to lock in a future contract at a rate large percentages above today pricing as there are huge capital outlay requirements to cover the difference.
Hedging works for airlines when the future contract rate is lower then the spot price, not the other way, unless the business enjoys covering the difference with spare cash.

For example with the drop in fuel this winter, one airline (US Airways), as having to collateralize a growing balloon of $20-30mil added cash on a daily basis to cover the upside down hedges they held as the spot price kept declining.



From the desert to the sea, to all of Southern California
User currently offlineBrilondon From Canada, joined Aug 2005, 4116 posts, RR: 1
Reply 11, posted (5 years 2 months 2 weeks 2 days 12 hours ago) and read 5481 times:

I caused problems in the past as was discussed to death on here every time oil would hit a new bench mark price, ie. $80, $90, $100 etc What happened then was airliners got leaner, reduced services, started charging for luggage was an example of this. The good airlines will get over the new level of oil and the bad airlines will fail as we saw in the past.


Rush for ever; Yankees all the way!!
User currently offlineXJETFlyer From United States of America, joined Apr 2007, 326 posts, RR: 0
Reply 12, posted (5 years 2 months 2 weeks 2 days 9 hours ago) and read 4584 times:

Oil is being pushed up because of greed right now. They can't stand seeing their product not being needed. Will it hurt the airlines? Sure it will. What number will really hurt? That depends on how the economy is doing at the time. If business starts flowing again and making big money, then the airlines will have their void filled. I say we will be around $65 in August and it will slide back and forth from there.

User currently offlineCIC777 From United States of America, joined Oct 2007, 87 posts, RR: 0
Reply 13, posted (5 years 2 months 2 weeks 2 days 8 hours ago) and read 4324 times:

Don't forget, too, that many airlines hedged fuel when it was around $60, $70, $80 a barrel, and many of those hedge contracts are still in effect. Airlines such as United lost almost $80 million in the first quarter alone on fuel hedges because the prices of fuel was so low, and their hedge price was so high. So in the short term the price of oil may serve to help them a bit as they won't lose so much (if any) on their hedge contracts. In the long term, who knows?

User currently offlinePellegrine From United States of America, joined Mar 2007, 2349 posts, RR: 8
Reply 14, posted (5 years 2 months 2 weeks 2 days 7 hours ago) and read 4216 times:



Quoting LAXintl (Reply 3):
Hedging activity is almost frozen at the moment as one does not hedge when the forward curve is inverted and pointing upwards as its currently doing.
Makes sense to hedge when the forward curve points downward indicating future delivery pricing is lower then market price, not the other way around.

Do you go out an buy a loaf of bread for $5 for January delivery when the stores price today is $3? You'd however more likely do it if the market price was $5 today and future delivery price was $3.

Sorry I should have explained more I wasn't talking about crude futures. It depends what kind of derivatives you are talking about. If you want to chat about forwards versus futures versus CFDs versus spreadbetting versus trading in the cash-settled spot markets, etc. we'd be here all day. But I do like to talk trading.  Smile There's a reason why hedge funds leased oil tankers and parked millions of barrels months ago. But I did forget for a sec that airlines don't really have all the tools/expertise to do the type of transactions financial speculators do. As a speculator you can "buy" $10M of oil in the spot market (without ever taking delivery), hold it as long as you wish, and "sell" it later. This is conducted virtually and you need money to act as margin up-front. Many of these transactions are not available in the United States because of regulations.



oh boy!!!
User currently offlineJetbluefan1 From United States of America, joined Dec 2003, 2971 posts, RR: 14
Reply 15, posted (5 years 2 months 2 weeks 2 days 6 hours ago) and read 4022 times:



Quoting Jetdudetim (Reply 4):
Actually the cost of oil is not going up because of demand, it is going up because OPEC has slowed production to create demand which allows them to raise the price, this is NOT such a good thing.

This is only true to an extent. The recent rally in oil from ~$40 to ~$60 has more to do with the fact that the economy is (seemingly) rebounding. A rebounding economy means greater need for oil. As demand goes up and supply goes down, prices are pushed up obviously.

Quoting LAXintl (Reply 6):
Price of oil rising is definately an economic sign, the same way future semi conductor orders are (and have begun to show signs of a stabilization), future US business inventory orders and the transportations service index(rose in April)

Correct.

One thing that I would like to note is that over the last few years, airlines' stock prices have had an indirect correlation with oil prices (as oil went up, stock prices went down). Recently (since the beginning of this recession), this phenomenon has actually made a 180 degree turn, and there is now a direct correlation (as oil goes up, so do stock prices). This correlation suggests that economic recovery is much more important for airlines than low oil prices. A stronger economy means that airlines will have more pricing power, and airlines could use higher fares to pay for the higher fuel prices, and even have some money left over for a profit.

Disclaimer: This trend has exceptions, but on a day-to-day basis it seems to be the case.

The next few months are going to be very, very interesting to say the least.

JetBluefan1



Most people on a.net hate JetBlue. Get used to it.
User currently offlineBongodog1964 From United Kingdom, joined Oct 2006, 3535 posts, RR: 3
Reply 16, posted (5 years 2 months 2 weeks 22 hours ago) and read 2092 times:



Quoting LAXintl (Reply 10):
Quoting Bongodog1964 (Reply 9):
If say fuel is at $60 today, and you think it will be $80 in January, you would try to hedge at less than $80, likewise if you think its going to fall to $50, you would try to hedge with a pessimist who thinks it will fall further, and will agree a cost of say $45.

The forward curve is what drives the future pricing contract.

So today with fuel at $50, you cannot buy fuel for delivering in May 2010 for for less then what the forward curve price is (~$70) regardless if you think the future price will be $40, $60, or $100.

Hedging is frozen at the moment as the forward curve rises above the spot price, and no one is willing to lock in a future contract at a rate large percentages above today pricing as there are huge capital outlay requirements to cover the difference.
Hedging works for airlines when the future contract rate is lower then the spot price, not the other way, unless the business enjoys covering the difference with spare cash.

I can't quite work out why you appear to be disagreeing with my post, as your reply seems to back up what I posted.
As you say the "experts" think that oil will be $70 for May 2010. If an airline thinks it will less they won't hedge; if they think it will be more, they will. All this talk about the forward curve is just jargon to confuse the layman.
As to the reason that no one is hedging at present, has nothing to do with the "forward curve rising above the spot price" etc. It is because the airlines got their fingers severely burnt last time by speculators creating a false market, and ended up paying way over the odds. The result of which was a flotilla of tankers anchored up full of oil no one has an immediate use for. This time they aren't so inclined to believe the futures prices being quoted to them.


User currently offlineAirNZ From , joined Dec 1969, posts, RR:
Reply 17, posted (5 years 2 months 2 weeks 21 hours ago) and read 2067 times:



Quoting XJETFlyer (Reply 12):
Oil is being pushed up because of greed right now. They can't stand seeing their product not being needed. Will it hurt the airlines?

The "greed" of who are you referring to though. However, those comments reflect [i]any[i/] product sold anywhere and it's the simple law of capitalism with supply and demand. Nothing at all wrong with that and I see no evidence of "greed" being involved. Of course the rising price of fuel will have an effect on airlines.....exactly the same way it does equally on every other form of transport. Airlines certainly aren't special in that regard.


User currently offlineBaroque From Australia, joined Apr 2006, 15380 posts, RR: 59
Reply 18, posted (5 years 2 months 2 weeks 18 hours ago) and read 1897 times:



Quoting AirNZ (Reply 17):
The "greed" of who are you referring to though.

A worthy question. Gobbling down oil at giveaway prices seldom seems to be accorded the description of greed, and yet it seems to fit quite well.  Big grin

Quoting AirNZ (Reply 17):
However, those comments reflect [i]any[i/] product sold anywhere and it's the simple law of capitalism with supply and demand.

Indeed they do. Remind us all, how do the margins within the various stages of the oil business compare with for example retail stores, lawyers and not least banks?

Oh yes, the billions that are made are dependent upon huge volumes. I wonder if the huge volumes consumed are a result of greedy customers, or greedy companies pushing the stuff down the poor old customers unwilling throats?


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