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What Price To Airlines Pay For Jet Fuel?  
User currently offlineMOBflyer From United States of America, joined Sep 2007, 1209 posts, RR: 3
Posted (6 years 8 months 2 weeks 1 day 8 hours ago) and read 12309 times:

I know that hedging changes everything, but I cannot imagine even unhedged airlines paying upwards of $5.00 per gallon for jet fuel. Do airlines even get bulk discounts for the mere volume and heavy consistency in their purchases? Surely they don't pay the general aviation price.....

Thanks for your input.
Josh

15 replies: All unread, jump to last
 
User currently offlineMiller22 From United States of America, joined Nov 2000, 721 posts, RR: 4
Reply 1, posted (6 years 8 months 2 weeks 1 day 8 hours ago) and read 12259 times:

The average price over the past few weeks has been about $3.50 per gallon. Take into account that volume discounts and tankering between airports, and it's probably closer to $3.20.

User currently offlineBurnsie28 From United States of America, joined Aug 2004, 7564 posts, RR: 8
Reply 2, posted (6 years 8 months 2 weeks 1 day 8 hours ago) and read 12257 times:



Quoting Miller22 (Reply 1):
The average price over the past few weeks has been about $3.50 per gallon. Take into account that volume discounts and tankering between airports, and it's probably closer to $3.20.

Which is unfortunate because it was only a few years ago that airlines were paying around $0.70 a gallon.



"Some People Just Know How To Fly"- Best slogan ever, RIP NW 1926-2009
User currently offlineMOBflyer From United States of America, joined Sep 2007, 1209 posts, RR: 3
Reply 3, posted (6 years 8 months 2 weeks 1 day 8 hours ago) and read 12246 times:



Quoting Miller22 (Reply 1):

Does that price reflect any hedges? If not, what is the average non-hedged price?


User currently offlineTristarSteve From Sweden, joined Nov 2005, 4064 posts, RR: 33
Reply 4, posted (6 years 8 months 2 weeks 1 day 6 hours ago) and read 12151 times:

Air transport World publishes a graph of fuel price every month. See
http://www.atwonline.com/channels/dataAirlineEconomics/trends_0208.pdf
for the last chart.

Go down a page.

[Edited 2008-04-07 08:31:48]

User currently offlineBx737 From Ireland, joined Sep 2001, 687 posts, RR: 3
Reply 5, posted (6 years 8 months 2 weeks 1 day ago) and read 11925 times:

Airlines pay for fuel by the tonne and I believe that the current price is between $750 and $800 per tonne. How this relates to the cost of a barrel of oil I don't know.

I hope this helps somewhat

[Edited 2008-04-07 14:04:04]

User currently offlineDoug_Or From United States of America, joined Mar 2000, 3441 posts, RR: 3
Reply 6, posted (6 years 8 months 2 weeks 1 day ago) and read 11899 times:



Quoting MOBflyer (Reply 3):
Does that price reflect any hedges? If not, what is the average non-hedged price?

Someone correct me if I'm wrong, but I don't think hedging affects the price airlines pay for gas. It is a financial instrument (not unlike a short sell on stocks, except in the commodity market, and you bet the price goes up instead of down... but other than that) that allows you to bet that prices will go up, so that if they do your increased fuel costs will be offset by gains in the financial markets. I don't think SIG or however else is selling the gas and driving the trucks knows or cares how much the airlines it sells to are hedged.



When in doubt, one B pump off
User currently offlineDHR From United Kingdom, joined Jun 2007, 117 posts, RR: 0
Reply 7, posted (6 years 8 months 2 weeks 1 day ago) and read 11838 times:



Quoting Doug_Or (Reply 6):
Someone correct me if I'm wrong, but I don't think hedging affects the price airlines pay for gas. It is a financial instrument (not unlike a short sell on stocks, except in the commodity market, and you bet the price goes up instead of down... but other than that) that allows you to bet that prices will go up, so that if they do your increased fuel costs will be offset by gains in the financial markets. I don't think SIG or however else is selling the gas and driving the trucks knows or cares how much the airlines it sells to are hedged.

 checkmark 

Hedging has no bearing on the final price an airline pays to fill its tanks, its purely an investment instrument.


User currently offlineStarlionblue From Greenland, joined Feb 2004, 17166 posts, RR: 66
Reply 8, posted (6 years 8 months 2 weeks 21 hours ago) and read 11791 times:

Buying a future on jet fuel is saying: "I will pay at price x on date y."
Selling a future on jet fuel is saying: "I will sell at price x on date y."

That's the simple explanation. However the company selling the future is hedging as well to spread risk. It gets very very complex.

Quoting DHR (Reply 7):

Hedging has no bearing on the final price an airline pays to fill its tanks, its purely an investment instrument.

Of course it has bearing on the price. Otherwise there would be no point in hedging. Whether you get the money as a payment from an investment bank or as a discount at the pump doesn't matter to the bottom line.



"There are no stupid questions, but there are a lot of inquisitive idiots."
User currently offlineTdscanuck From Canada, joined Jan 2006, 12709 posts, RR: 80
Reply 9, posted (6 years 8 months 2 weeks 20 hours ago) and read 11764 times:



Quoting Starlionblue (Reply 8):
Quoting DHR (Reply 7):

Hedging has no bearing on the final price an airline pays to fill its tanks, its purely an investment instrument.

Of course it has bearing on the price. Otherwise there would be no point in hedging.

I think what DHR was asking is whether hedging actually changes the price at the pump. It does not. Every airline pays the fuel provider whatever the going rate that day is, regardless of their hedging. The hedging income offsets the fuel price increase, but that correction happens within the bowels of the airlines' accounting systems, not at the pump.

Tom.


User currently offlineStarlionblue From Greenland, joined Feb 2004, 17166 posts, RR: 66
Reply 10, posted (6 years 8 months 2 weeks 16 hours ago) and read 11733 times:

Indeed. Thanks for clarifying Tdscanuck.


"There are no stupid questions, but there are a lot of inquisitive idiots."
User currently offlineFlyDeltaJets From United States of America, joined Feb 2006, 1936 posts, RR: 2
Reply 11, posted (6 years 8 months 1 week 5 days 22 hours ago) and read 11564 times:
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THe price of fuel varies from city to city. Even airport to airport here in JFK the fuel according to the fueling comapny Allied Aviation is one of the cheapest in the nation due to the fact that Allied has a 100% control over the entires system from tanks to pipes to trucks and they "pass the savings on" to the airlines. THe last time I check around the end of winter fuel was $2.90/gallon in JFK.


The only valid opinions are those based in facts
User currently offlineViscount724 From Switzerland, joined Oct 2006, 25978 posts, RR: 22
Reply 12, posted (6 years 8 months 1 week 5 days 20 hours ago) and read 11554 times:

IATA issues a weekly updated summary of the average worldwide jet fuel price.
http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm


User currently onlineMir From United States of America, joined Jan 2004, 21851 posts, RR: 55
Reply 13, posted (6 years 8 months 1 week 5 days 17 hours ago) and read 11521 times:

Airline jet fuel is also not subject to many of the taxes that general aviation jet fuel and avgas are.

-Mir



7 billion, one nation, imagination...it's a beautiful day
User currently offlineIRelayer From United States of America, joined Jul 2005, 1073 posts, RR: 2
Reply 14, posted (6 years 8 months 1 week 4 days 23 hours ago) and read 11428 times:

Much is made of Southwest having "hedges" on fuel. Let me just clarify that "hedging" in this context is basically trading futures. If you think the price of oil is going to go up in the future, you buy futures contracts on oil (for a fee...called a "premium"), and when those future contracts expire, you are obligated to buy the underlying commodity at the contract (negotiated) price. So you are taking a risk...essentially you are agreeing to buy X barrels of oil for 40 dollars at the expiration date of the contract. Now if the MARKET price of X barrels of oil at the expiration date is HIGHER than the 40 dollars (+ the fee (premium) you paid for each contract) you have essentially MADE money on the deal. As an example, lets say that the market price of a barrel of oil on this theoretical expiration date was 55 dollars. You get to buy a barrel of oil for 40 dollars because you agreed to buy a futures contract (sometime in the past) that obligated you to buy it, and you paid a 1 dollar premium for that future contract. So 55-41 = 14. You have "made" 14 dollars of profit on each barrel because if you were to turn around and sell that barrel at market price, you would make that 14 dollar difference between the price you agreed to when you bought the contract and what it costs now. Since historically back then, oil had not gone up that much that quickly (we are talking the late 90s early 00s), the fees for the contracts were cheaper, and WN was able to make a lot more money, now everyone has basically got the picture...oil is expensive and its not going to get much cheaper...so it has become harder to hedge in this manner.

This is an ongoing process, the point of which is to manage (or "hedge") your risk (your risk being the chance of oil going up in price) and to shield yourself from fluctuations in these prices (in both short and long run terms). I would venture to guess that all the airlines do it to some degree. If I owned an airline, I certainly would want the price that I pay for fuel to be relatively stable, instead of going up and down and ruining my business plan. Southwest is known for it probably because they made a huge gamble back when few thought oil would go this high this quickly, and it paid off for them. It could have easily gone the other way, in which case Southwest would have lost money.

If you want to think of it in somewhat simpler terms, think about going to the gas station to fill up your car. If the price of gas has been fluctuating up and down very frequently, and you think that the price will go down next week, you might fill up only half of your gas tank and wait to fill up the rest next week, when the price may or may not be lower. This way you will be able to fill up next week for a cheaper price than if you filled up all the way right then, and take advantage of the fluctuation. It is still a gamble, because if the price goes the other way, you lose money.

There is no set date that Southwest will start having to pay "what it costs" for fuel. Its not like on January 1st, 2010, Southwest will be like, "woah, our supply of cheap gasoline ran out, now we have to pay market price". It doesn't work like that.

Just wanted to add some clarification to the whole issue as it seems there are some misconceptions.

-IR

[Edited 2008-04-10 15:00:20]

User currently offlineStarlionblue From Greenland, joined Feb 2004, 17166 posts, RR: 66
Reply 15, posted (6 years 8 months 1 week 4 days 22 hours ago) and read 11410 times:

Nice post IRelayer. And let's not forget that most financial plans have hedges on the hedge. And hedges on the hedge of the hedge. Just to remove uncertainty. These guys aim for a certain level of risk and build a complex web of hedges to reach it.


"There are no stupid questions, but there are a lot of inquisitive idiots."
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