qantas787
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Oil Price Hedging

Fri Oct 20, 2006 2:22 pm

After the recent drop in oil prices of about 20%, is it now at these prices, prudent for the airlines to start hedging, or is it still too expensive. If for example oil dropped to $50 a barrel, and airlines enmasse started to hedge, is there a limit to the amount of fuel that would be available to hedge. Any input would be appreciated. BTW I did do a search and didn't find any recent threads on this subject. Thanks. Smile
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PanHAM
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RE: Oil Price Hedging

Fri Oct 20, 2006 2:30 pm

OPEC just announced a 1 Million barrel a day production cut to stabilize prices. That announcement allone will affect the market and any, so any contract mnot made yetsreday should wait a couple of days to test market reaction.
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baroque
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RE: Oil Price Hedging

Fri Oct 20, 2006 2:41 pm

As I understand it, QF have hedged again, but at something close to USD70 a barrel which means they are losing at present prices.

http://www.smh.com.au/news/business/...umbo/2006/09/27/1159337221124.html

"QANTAS is not placing much store by the recent dive in oil prices, having just boosted its fuel hedging level to 90 per cent of its needs for 2006-07 compared with 60 per cent when it announced its annual profit five weeks ago.

Qantas is at present enjoying the benefits of lower fuel prices but is playing a conservative game, having used the lull to boost hedging.

Recent deals have been slightly more favourable as the new average hedge price is $US70.50 a barrel for oil, down from $US71 when the full-year result was announced."

Hedging looks clever when you get a clear run up in prices and you hedged as Qantas did at about 32$ a barrel. Hedging at 70 could look great or ugly, depends on King Frost, and King Bush.

Will there be a cold northern winter, will Bush try and fight Iran, or even being nasty again to Chavez could bring Qantas hedging in as a smart move. If oil declines during a mild winter and calmer politics to below $60, it will not look so smart.

No idea what the other airlines are doing. The other thing to look at is what the oil companies are doing. Oil Search some years ago hedged their production at something horrid like 18$ while prices went north of 30. They will not do that again. Woodside had a nasty bout of hedging too, not sure what they are doing at present.
 
AF022
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RE: Oil Price Hedging

Sat Oct 21, 2006 1:07 am

Quoting PanHAM (Reply 1):
OPEC just announced a 1 Million barrel a day production cut to stabilize prices. That announcement allone will affect the market and any, so any contract mnot made yetsreday should wait a couple of days to test market reaction.

Despite this, prices don't seem to have moved much. I don't think OPEC is the most cohesive of organizations.

Check out this site with recent price activity.
http://www.seat9k.com/crudeblog.html
 
baroque
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RE: Oil Price Hedging

Sat Oct 21, 2006 1:15 am

Quoting AF022 (Reply 3):
Despite this, prices don't seem to have moved much. I don't think OPEC is the most cohesive of organizations.

No, well the prices will not move much until we find out how much the overproduction will be. If it is 1 million a day, they may even fall, but if some of that million really IS taken off the market, prices will rise, probably slowly, but expect jumpy prices while the politics remain uncertain.

OPEC is rarely cohesive. The most dutiful now do not control the excess capacity, that is with the Gulf states and Saudi. In most circumstance the Gulf states overproduce. We shall see if it is different this time.
 
supa7E7
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RE: Oil Price Hedging

Sat Oct 21, 2006 1:19 am

You don't hedge expecting to make money. You hedge to remove volatility from your spending.

In principle, and over any highly repetitive cycle, hedging oil is a money loser to transaction losses. Just like buying insurance is generally a money loser. But buying insurance can be smart business to reduce your volatility.

The whole notion of "timing the market" is way beyond the expertise of any airline including WN. Oil companies have far more, higher paid, smarter people working on that than any airline could dream of. You can get lucky, but just like any commodity market... it's a hedge, not a decent investment!! Expected growth is below 0% on any hedge.

Many airlines hedge today for political reasons (to appease investors and worker groups who saw WN's windfall). They barely know what they are doing IMO.
"Who's to say spaceships aren't fine art?" - Phil Lesh
 
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N328KF
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RE: Oil Price Hedging

Sat Oct 21, 2006 1:21 am

The problem with hedging is that when you buy a hedge, you do it at the market rate. If you have hedges from when oil was lower, that's great. But you can only hedge at the lmarket price, since nobody will be stupid enough to sell you a contract for less than the going rate. They'd lose money.

With that said, this might not be a bad time for airlines to hedge fuel oil (they cannot hedge Jet-A, but fuel oil is pretty much the same price) for future occurrances.
When they call the roll in the Senate, the Senators do not know whether to answer 'Present' or 'Not guilty.' -Theodore Roosevelt
 
baroque
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RE: Oil Price Hedging

Sat Oct 21, 2006 2:26 am

QFs hedging seems poorly timed. Mind if W had invaded Iran, it would have been brilliant. But just at present, not so good.
 
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TVNWZ
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RE: Oil Price Hedging

Sat Oct 21, 2006 8:09 am

Most of the major airlines have been hedging all along

Many as the cost of oil shot up considerably. And now, many of those airlines have been stuck with hedges that are upside down: the value of the hedge is higher than the current spot market cost.
 
Cory6188
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RE: Oil Price Hedging

Sat Oct 21, 2006 8:29 am

Quoting TVNWZ (Reply 8):
And now, many of those airlines have been stuck with hedges that are upside down: the value of the hedge is higher than the current spot market cost.

I was wondering about this....is it feasible for carriers in this situation to buy fuel at the current market price and then only draw from their hedge when the market price rises above their hedge price? Or are they stuck into purchasing fuel at the hedge price regardless of what happens to the market price?
 
baroque
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RE: Oil Price Hedging

Sun Oct 22, 2006 12:45 am

Quoting TVNWZ (Reply 8):
And now, many of those airlines have been stuck with hedges that are upside down: the value of the hedge is higher than the current spot market cost.

I assume that is how financial hedges got their name, full of bloody prickles, you usually get stabbed as you go in, and stabbed again as you get out.
 
PolymerPlane
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RE: Oil Price Hedging

Sun Oct 22, 2006 1:45 am

Quoting TVNWZ (Reply 8):
Many as the cost of oil shot up considerably. And now, many of those airlines have been stuck with hedges that are upside down: the value of the hedge is higher than the current spot market cost.



Quoting Baroque (Reply 2):
As I understand it, QF have hedged again, but at something close to USD70 a barrel which means they are losing at present prices.



Quoting Cory6188 (Reply 9):
I was wondering about this....is it feasible for carriers in this situation to buy fuel at the current market price and then only draw from their hedge when the market price rises above their hedge price? Or are they stuck into purchasing fuel at the hedge price regardless of what happens to the market price?

I don't think when you hedge your fuel price you actually buy the fuel at that price. What you actually buy is a future, which means, whoever sells it agrees to sell you fuel at say $70/barrel.

It does not mean you HAVE TO buy it from them for that price. You can choose not to exercise that future contract, which means you can buy fuel at market price. That is why it's more like an insurance policy rather than contract to buy.

However, there's a fee associated with the hedging, and you will lose it no matter what happens.

Also, the fuel price from future contract does not depend on the current oil price. Say, current oil price is at $50/barrel, You probably cannot buy a future at this price. It's all on the expected future value of oil price. If the market see this price drop is only temporary, nobody will ever sell a future contract at this price.

Cheers,
PP
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baroque
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RE: Oil Price Hedging

Sun Oct 22, 2006 1:55 am

Quoting PolymerPlane (Reply 11):
However, there's a fee associated with the hedging, and you will lose it no matter what happens.

That is indeed correct in terms of a hedge for purchase. However, sellers do indeed have to deliver at the hedge price. So QANTAS faced with the option of losing a few dollars of hedge costs and buying oil at USD70 will clearly chose to forfeit that money. However an oil company that had hedged to sell at USD70, will indeed claim that money. I don't know of any that oil producers who did hedge that way, but I am willing to bet that there are some. But equally, if you had hedged to sell at 70 and the price was 78, you had to deliver at 70.

Just as Placer for about 3 or so years had hedged sales of gold at anywhere up to (from memory, but I could find the actual numbers) USD80 an ounce above the then market prices.

Some of the largest players have a policy of going with the tide - Rio Tinto is one I believe. This is much the same as EXXON which some years ago did not let you take out insurance when you hired a car to do work for them, because they self insure - it pays to do so when you are as large as EXXON. Don't know how they went with the EXXON Valdez however!
 
supa7E7
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:09 am

Quoting Baroque (Reply 12):
This is much the same as EXXON which some years ago did not let you take out insurance when you hired a car to do work for them, because they self insure - it pays to do so when you are as large as EXXON

Right. Ideally you don't buy any insurance or hedges, because overall they are money losers. You only insure what you cannot afford to lose.

Airlines would be better off if they all signed a pact saying "I will not hedge fuel, no matter what." Then, airlines would not be paranoid about keeping up with other airlines' hedges. If fuel went to $100, all would face it simultaneously, and nobody would be at a competitive disadvantage. It is competitive fears that spur fuel hedges IMO, not just expensive fuel itself but the prospect your rival will destroy you if they hedged well.
"Who's to say spaceships aren't fine art?" - Phil Lesh
 
baroque
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:48 am

Quoting Supa7E7 (Reply 13):
Airlines would be better off if they all signed a pact saying "I will not hedge fuel, no matter what."

What can I say, you are right!!  checkmark 

The only other comment is that there is a country not so far from Aus where it is possible to do really stupid things while driving and have other drivers avoid you instead of, as in Aus crashing straight into you, and asking why you did something so stupid. Is this because the population of country X is strangely tolerant? Well they are pretty tolerant, but no, it is because very, very few have car insurance, so they are just as keen not to hit you as you are not to be hit. There is probably a lesson in that!!
 
PolymerPlane
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:53 am

Quoting Supa7E7 (Reply 13):
Right. Ideally you don't buy any insurance or hedges, because overall they are money losers. You only insure what you cannot afford to lose.

No, you buy insurance to reduce the risk of doing business, and spread the risk among the industry. It is a money loser, but it's better than having to take the risk. Remember, you'll never get the expected value of the risk. If you insure your car, you can never get 1/2 crash or 0.02 crash. The result will be either u crash or u don't. You take insurance so when u crash, you don't go broke.

Cheers,
PP
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F9Animal
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:57 am

While OPEC did state a 1 million barrel production cut, prices dropped almost $2.00. Airlines would be smart if it drops to $45-$50 range to hedge. While we face next summer and hurricane season, I am sure the prices will rise again. Seems like any reason for a season is a reason these days.
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ANother
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:58 am

Don't forget that despite the large drop in per barrel cost of oil, the cost of refined Jet A kerosene has seen smaller reductions. This weeks price of Jet A is still north of $75 and the average price for '06 is still north of $85.

If QF is hedging at $70 for kerosene - Great!
 
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TVNWZ
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RE: Oil Price Hedging

Sun Oct 22, 2006 3:31 am

Hedging is a way to smooth out the cost of fuel. It is not about winning and losing per se, even though WN won with their hedging strategy. Airlines want and need predictability in their cost structure. Because of the volitility of oil, hedging can do that if done properly. It is/can be a very good business. They should stay with it.
 
dz09
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RE: Oil Price Hedging

Sun Oct 22, 2006 9:55 am

If prices drop, then I think it is smart to hedge as long as W is in office. Once the democrats take over in '08, oil prices will free fall.
 
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N328KF
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RE: Oil Price Hedging

Sun Oct 22, 2006 1:35 pm

Quoting DZ09 (Reply 19):
If prices drop, then I think it is smart to hedge as long as W is in office. Once the democrats take over in '08, oil prices will free fall.

That's rather presumptuous. It's a good thing you don't work for commodities brokers.
When they call the roll in the Senate, the Senators do not know whether to answer 'Present' or 'Not guilty.' -Theodore Roosevelt
 
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TVNWZ
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RE: Oil Price Hedging

Sun Oct 22, 2006 1:51 pm

OPEC is Democrat?
.
.
 
supa7E7
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:52 pm

Quoting PolymerPlane (Reply 15):
Remember, you'll never get the expected value of the risk.

If you repeat something 10,000 times, you will get precisely the expected value of the risk. Probably this is why large companies can self-insure small matters.

Of course, if a typical person loses their car, it's disastrous. So they should insure that risk.

Whether fuel hedging is a risk mitigator is confused by the fact that the industry has pricing power. Airlines can slap fuel surcharges, so it's really the consumers who face oil risk, not the airlines. FedEx is a pure example of that. Their customers paid for the oil hike, not FedEx.

Here's an excerpt from a fairly decent though too-optimistic hedging paper online, fair use excerpt:

http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf

"Making the case against hedging, Rod Eddington, the CEO of British Airways, commented: "a lot is said about hedging strategy, most of it is well wide of the mark. I don't think any sensible airline believes that by hedging it saves on its fuel bills. You just flatten out the bumps and remove
the spikes." He went on to say that there is a case for not doing any hedging at all. "When you hedge all you do is bet against the experts of the oil market and pay the middle man, so you can't save yourself any money long term. You can run from high fuel prices briefly through hedging but
you can't run for very long."

The paper goes on to attempt to say Eddington is wrong. In doing so, the paper neglects to disprove Eddington's central point, that airline hedges are doomed to fail to outperform the market over time. If they could, why wouldn't we all do it and make ourselves billions?

The paper does not examine the transaction losses, which are key. If you pay a 5% fee to make an even-odds gamble with somebody, you're going to lose 5% of let's say $1 billion. So, hope you budget $50 million for hedge fees each year. Good business? Maybe.

Without quantifying that spending, it's hard to say the cost stability is worth it. There is a happy medium between low costs and low volatility, but the paper does not explore that subtlety, instead saying low volatility is always better.

So they simplify an issue with too many moving parts for them to understand. They advise airlines to hedge at the bottom of each oil "cycle." Great plan, Kellogg, wish I thought of that.

A junk paper, but the Eddington quote has the ring of serious mathematics to it. I just get the feeling today's execs are upping the ante, trying to get dealt a royal flush like WN got in 2002. It's expensive, this poker.
"Who's to say spaceships aren't fine art?" - Phil Lesh
 
PanHAM
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RE: Oil Price Hedging

Sun Oct 22, 2006 2:59 pm

Quoting ANother (Reply 17):
Don't forget that despite the large drop in per barrel cost of oil, the cost of refined Jet A kerosene has seen smaller reductions. This weeks price of Jet A is still north of $75 and the average price for '06 is still north of $85.

you can only hedge the commodity, not the refinery costs.
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PolymerPlane
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RE: Oil Price Hedging

Sun Oct 22, 2006 3:24 pm

Quoting Supa7E7 (Reply 22):
If you repeat something 10,000 times, you will get precisely the expected value of the risk. Probably this is why large companies can self-insure small matters.

Yes, but how can u explain that big airlines still buy airplane insurance? because it's less risky for them to do so. I know that if you are big, those risk will even out by itself, but it's still a riskier than taking insurance policy.

Quoting Supa7E7 (Reply 22):
Whether fuel hedging is a risk mitigator is confused by the fact that the industry has pricing power. Airlines can slap fuel surcharges, so it's really the consumers who face oil risk, not the airlines. FedEx is a pure example of that. Their customers paid for the oil hike, not FedEx.

You are way off. Parcel carrier and pax airlines are two different industry. In parcel carrier, there's only two market leader, and some small player. Thus, they have stronger pricing power. Airline industry on the other hand, cannot simply pass its costs, especially in the US.

That's why you see those legacy carrier made big loss in the last several years. If your theory is correct, we would not see DL, NW, UA and others entered chapter 11, because they can simply pass the costs, including labor and fuel, to the consumer right?

Quoting Supa7E7 (Reply 22):
I don't think any sensible airline believes that by hedging it saves on its fuel bills. You just flatten out the bumps and remove

Flattening the bumps and remove the spikes are the important point here. I never said that you can make money off fuel hedging. I even admit that if you can get the expected value you actually lose money. But by doing this fuel hedging, you remove the uncertainty, thus you can work on your business plan more accurately.

It's about diversifying your risk. Just like people build portfolio around many different stocks. Airlines hedge some percentage of their fuel, just to spread the risks.

Quoting Supa7E7 (Reply 22):
"When you hedge all you do is bet against the experts of the oil market and pay the middle man

So what? experts loses money in the market all the time. No one stock broker has constantly make money in the market.

Anyway, I do not have time to read this paper, but It looks like a class exercise rather than serious research paper, and I don't think it has been peer reviewed. I would not dig into it too deep.

Cheers,
PP
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supa7E7
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RE: Oil Price Hedging

Sun Oct 22, 2006 4:10 pm

Quoting PolymerPlane (Reply 24):
That's why you see those legacy carrier made big loss in the last several years. If your theory is correct, we would not see DL, NW, UA and others entered chapter 11, because they can simply pass the costs, including labor and fuel, to the consumer right?

Hang on, we're talking about fuel. Not labor. NW, UA and DL were quite different from B6, FL, F9, TZ being legacy compared to LCC. But in one respect they were all the same. They paid the same price for fuel. They all passed the fuel cost to the customer. Every time a price hike failed, it was because of aggression by strong players hoping to destroy the weak, and this is normal.

Bankruptcies happened because of the LCC revolution, not fuel. Fuel prices were built into LCC pricing. Frontier and AirTran were OK.
"Who's to say spaceships aren't fine art?" - Phil Lesh
 
scalebuilder
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RE: Oil Price Hedging

Sun Oct 22, 2006 11:35 pm

Quoting PolymerPlane (Reply 11):
don't think when you hedge your fuel price you actually buy the fuel at that price. What you actually buy is a future, which means, whoever sells it agrees to sell you fuel at say $70/barrel.

It does not mean you HAVE TO buy it from them for that price.

This is very true. Should the option or the future contract expire "out-of-the" money, you're only out the cost of the contract itself. You can still buy fuel at going prices outside the hedging agreement should prices have gone down.

Most airlines buy these contracts in bulk based on total anticipated or future fuel consumption. These are amortized, using a fixed schedule, over their lives. Usually 12 months.

What brings volatility to results reported in an airline's financial statements is the market valuation of these contracts during the holding period driven by the swings in oil prices. This mark to market adjustment, while volatile, does not result in any economic gain or loss to the airline in the interim. In the worst case and at the end of the day, the airline can only be out the cost of that option. Should the option expire in the money, the airline will post a hedging gain. While the airline will buy fuel at the going market price (assuming prices did go up), this hedging gain will be there to offset that particular fuel price increase.

Hedging is really a game outside the "normal course of business" buying and consuming fuel. A hedging program does not normally require any airline to buy fuel at some "future contractual price". It is simply there to defrill increasing fuel costs by recording a hedging gain.



Quoting Supa7E7 (Reply 13):
Right. Ideally you don't buy any insurance or hedges, because overall they are money losers. You only insure what you cannot afford to lose.

Airlines would be better off if they all signed a pact saying "I will not hedge fuel, no matter what." Then, airlines would not be paranoid about keeping up with other airlines' hedges. If fuel went to $100, all would face it simultaneously, and nobody would be at a competitive disadvantage. It is competitive fears that spur fuel hedges IMO, not just expensive fuel itself but the prospect your rival will destroy you if they hedged well.

Hedges may not be money losers. While I see your point stressing that "everybody would be facing the same scenario" should prices go to $100 per barrel, we also need to recognize that some airlines can do this better than others. I think we should let them. Additionally, I don't think we should look at fuel hedging as an attempt to mitigate just a particular risk, but look at this as an effort to manage total pricing risk for any airline.
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PolymerPlane
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RE: Oil Price Hedging

Mon Oct 23, 2006 12:49 am

Quoting Supa7E7 (Reply 25):
Every time a price hike failed, it was because of aggression by strong players hoping to destroy the weak, and this is normal.

Now you said it yourself. Price hike failed because "strong players hoping to destroy the weak", which is a fancy way to describe competition, and yes this is normal.

That's the essence of competition. The airlines does not have the pricing power over the ticket price. One airline cannot increase its price, because other airline will lower its price, thus one airline cannot control the price. If all airlines agree to increase its price together that's anti-competitive, which is illegal.

Everytime you hear this rhetoric from business executive that they will pass tax or cost hikes to the consumer, but that's a big lie. Both side of the equation, consumer and producer will suffer from increase in costs. Depending on the demand and supply elasticity, one suffers more than the other.

Quoting Supa7E7 (Reply 25):
Bankruptcies happened because of the LCC revolution, not fuel. Fuel prices were built into LCC pricing. Frontier and AirTran were OK.

I thought frontier and AirTran were also having problem with the rising fuel costs? They did not go into bankruptcy, but it still hurts their bottom line. BTW, if you study a little bit of economics, costs are in the very bottom priority in price determination. It's all about demand and supply, especially in competitive market.

Cheers,
PP
One day there will be 100% polymer plane
 
dz09
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RE: Oil Price Hedging

Mon Oct 23, 2006 2:22 am

Quoting N328KF (Reply 20):
That's rather presumptuous. It's a good thing you don't work for commodities brokers.

Wait and see. I am too smart to be working for commodities brokers and they're parasites anyway.
 
supa7E7
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RE: Oil Price Hedging

Mon Oct 23, 2006 6:46 am

Quoting PolymerPlane (Reply 27):
I thought frontier and AirTran were also having problem with the rising fuel costs? They did not go into bankruptcy, but it still hurts their bottom line. BTW, if you study a little bit of economics, costs are in the very bottom priority in price determination. It's all about demand and supply, especially in competitive market.

I am not here to defend pricing policies. Suicidal pricing is quite common. It always goes to the strong party's limit. AirTran was in control of many prices and they were trying to kill Delta, so it was probably a rough time for all.

With cheaper oil, AirTran and Frontier would have faced stronger enemies in UA and DL. The financial pressures would have been the same.

If universal costs go up 10%, fares will go up 10%, although that point cannot be proven or disproven in the real world, since the prices move strangely at all times. We cannot look back at 2005 and define how prices did or did not react to oil.

Was there a lag time for universal costs to filter up to pricing? I would say no. A giant fare sale took place, or in other words a failure to hike fares to cover oil costs. This was done by LCCs to kill legacies.

Prices failed to rise, even though the demand would have paid it. Indeed it looks like air travel demand was inelastic to the big price hikes 2005-2006. I do not think airlines were paying an oil premium then, nor are they now. Consumers are. What changed is, the massive LCC-Legacy war of 2002-2006 is over. This was a war of labor costs, business models etc and not especially oil related. YMMV.

[Edited 2006-10-23 00:05:21]
"Who's to say spaceships aren't fine art?" - Phil Lesh
 
PolymerPlane
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RE: Oil Price Hedging

Mon Oct 23, 2006 7:39 am

Quoting Supa7E7 (Reply 29):

I am not going to argue with you. You can believe whatever you want to believe. Just answer this question:

1. Was Oil spike hurt the bottom line of LCC? (according to your argument, airlines can always pass its fuel costs to the customer)
2. If the LCC were to hedge the fuel, can they plan better for oil spike?

There is no doubt in the long run, when the oil price steadily increases, price will go up. But if there's a spike in oil price like last two years, wouldn't the airlines be better off in planning and spreading the risk with hedge? I think so.

You have to remember, hedging your fuel does not mean you will receive cheap fuel for the entire life of the company. Hedging fuel is just to smoothen the unnecessary risk of price volatility.

Say, there's a war tomorrow in Iran, and price of oil triples. How do you think airlines react? Do they double the ticket prices? How about the tickets they already sold? Are they gonna charge more money? How soon can the market absorb the increasing costs of transportation? 1 month? 2 month? 1 year? 3 years? Can airlines survive on the market downturn in this period?

This is what I meant of you cannot get your expected value from the price volatility risk. You can't say.. well there's a 0.1 chance of all out war in middle east next year. If there's war, oil will be $150/barrel while if there's no war, it will be $50/barrel. So do you plan your company with oil price at $60/barrel (the expected value of oil price)?

You can only do it with hedging your oil. If you don't, you will pay either $150 or $50. If there's actually a war, and the market is sluggish, and your competition hedge their oil. You'll be bankrupt in a minute. Sure, You'll say yeah but over 20 years, if you see the oil price, it will follow a trend, thus even out the risk on it's own. But, If airlines cannot ride out this spike, they will not be around in 20 years.

Again. Yes, market will adjust eventually to supply shock. But market is sluggish. When there's an oil shock, historically, It takes about 1/2 a year to 1 year for the CPI to start rising. Remember life is still about short run. In the long run, we are all dead (John Keynes).

That's all I am going to say.

Cheers,
PP
One day there will be 100% polymer plane
 
scalebuilder
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RE: Oil Price Hedging

Wed Oct 25, 2006 9:51 am

Just an interesting observation related to this topic. I was watching MSNBC on Sunday night. They had a special labeled "A week with American Airlines" (or something close to that  Wink.

The one hour sequence included everything from watching AA employees in action on the ground floor to interviews with AA's CEO. Interesting guy.

I learned from watching that Southwest Airlines, through a successful hedging program, is effectively paying $40 per barrel for fuel these days. Southwest obviously making a homerun while somebody else out there is taking a real bath.

It proves that hedging can be highly effective when a good program is in place, though only in the short term.
Go the extra mile......and avoid the traffic!!!
 
vv701
Posts: 5773
Joined: Fri Aug 19, 2005 10:54 am

RE: Oil Price Hedging

Wed Oct 25, 2006 10:40 am

Quoting PanHAM (Reply 1):
OPEC just announced a 1 Million barrel a day production cut to stabilize prices.

At the time of this announcement an OPEC spokesperson was asked to justify a cut in production of this size while crude prices were still very high in historic terms. He replied that it was better to take action to steady the price and avoid rapid changes rather than do nothing, watch the price plunge to $10 a barrel and then try to push the price up.
 
baroque
Posts: 12302
Joined: Thu Apr 27, 2006 2:15 pm

RE: Oil Price Hedging

Wed Oct 25, 2006 5:45 pm

Quoting Scalebuilder (Reply 31):
I learned from watching that Southwest Airlines, through a successful hedging program, is effectively paying $40 per barrel for fuel these days.

Why did I own shares in the oil company from whom they must have hedged!!

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