cobra27
Posts: 939
Joined: Wed May 23, 2001 6:57 pm

Southwest Fuel Hedging?

Mon Oct 15, 2007 5:42 am

From which companies do the hedge fuel from? How come other airlines don't do the same?
 
itsnotfinals
Posts: 1573
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Southwest Fuel Hedging?

Mon Oct 15, 2007 5:44 am

1. WN' hedges are expiring

2. Hedges are on futures, not actually fuel, they are sold in the financial markets and are not actually tied to "real " gallons of jet fuel.

3. Futures cost money and are risky, most airlines were in no position to buy futures becuase they had no cash to do so.


here are some good links that discusses more about hedging:

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

http://www.platts.com/Oil/Resources/Risk%20Management/hedgetypes.html

[Edited 2007-10-14 22:46:54]
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OPNLguy
Posts: 11191
Joined: Tue Jun 15, 1999 11:29 am

Southwest Fuel Hedging?

Mon Oct 15, 2007 6:28 am

Quoting Itsnotfinals (Reply 1):
1. WN' hedges are expiring

Not exactly.

The old hedges are, but there are new hedges for the future...

According an annual report, here is the company's fuel hedge for forward years ("approximate" per barrel basis, as of mid-January): 2007 is 95% hedged at $50/barrel; 2008 is 65% hedged at $49/barrel; 2009 is over 50% hedged at $51/barrel; 2010 is over 25% hedged at $63/barrel; 2011 is over is 15% hedged at $64/barrel; 2012 is 15% hedged at $63/barrel.
ALL views, opinions expressed are mine ONLY and are NOT representative of those shared by Southwest Airlines Co.
 
itsnotfinals
Posts: 1573
Joined: Sun Mar 04, 2007 8:51 am

Southwest Fuel Hedging?

Mon Oct 15, 2007 6:47 am

Quoting OPNLguy (Reply 2):
The old hedges are, but there are new hedges for the future...

thats what meant, the percentage hedged is going down for WN compared to prior periods, although WN is still in better shape than any other domestic US carrier.

95% at 50 then 65% ar 49 then 50% at 51 then 25% 63 ( less percent at higher barrel costs) is more exposure to actual pricing.
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cobra27
Posts: 939
Joined: Wed May 23, 2001 6:57 pm

Southwest Fuel Hedging?

Mon Oct 15, 2007 8:24 am

thank you very much Itsnotfinals for info
 
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par13del
Posts: 6720
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Southwest Fuel Hedging?

Mon Oct 15, 2007 9:38 am

Now you still need an answer to your other question as to why other airlines do not do it.

Quoting Itsnotfinals (Reply 1):
3. Futures cost money and are risky, most airlines were in no position to buy futures becuase they had no cash to do so.

This is really too easy an answer, especially when you consider the number of carriers who have been restructured via the Chpt. 11 process, I admit to not having read all the documentation to see if hedging was used or even considered as a strategy for recovery. One thing we do know from the rhetoric on this site, is that hedging is the only reason why WN is not loosing money like the others, and that is not regarded as a good business move on WN's part, still have not figured that one out yet, but I'm no expert.

Cheers
 
JRadier
Posts: 3944
Joined: Mon Sep 27, 2004 11:36 pm

Southwest Fuel Hedging?

Mon Oct 15, 2007 10:43 am

Quoting Cobra27 (Thread starter):
How come other airlines don't do the same?

Other airlines do, KLM is one example of that (source: internal newsletter).
For once you have tasted flight you will walk the earth with your eyes turned skywards, for there you have been and ther
 
737tanker
Posts: 263
Joined: Fri Dec 30, 2005 2:47 am

Southwest Fuel Hedging?

Mon Oct 15, 2007 10:45 am

Quoting Itsnotfinals (Reply 3):
thats what meant, the percentage hedged is going down for WN compared to prior periods, although WN is still in better shape than any other domestic US carrier.

95% at 50 then 65% ar 49 then 50% at 51 then 25% 63 ( less percent at higher barrel costs) is more exposure to actual pricing.

While you are correct that the hedges are decreasing now it will only be so if you believe that everything remains the same at WN. WN has a department totally devoted to fuel hedges. They are constantly adding to the hedges for future years. Remember it wasn't to long ago when everyone was saying that WN's hedges were going to expire in 2009, now it is at the 50% level.
 
jfidler
Posts: 368
Joined: Wed Aug 23, 2000 3:32 pm

Southwest Fuel Hedging?

Mon Oct 15, 2007 11:16 am

Quoting Cobra27 (Thread starter):
How come other airlines don't do the same?

An argument can be made that airlines should not do any hedging at all. Investors are well aware that the profits of airlines are closely tied to fuel prices. If an investor is concerned about this risk, they can also buy shares in firms whose profits move exactly the opposite direction when fuel prices change. This allows the investor to hedge, but also gives them the option not to do so. When the airlines do this on their own, that means the investor no longer has the option not to hedge their risk, even though some may want to do so. This is the concept of "specific risk" in the capital assets pricing model. Note that while I have studied finance, it's not my expertise, so I would be interested to hear what others have to say about this so I can learn more.
 
tdscanuck
Posts: 8572
Joined: Wed Jan 11, 2006 7:25 am

Southwest Fuel Hedging?

Tue Oct 16, 2007 1:02 am

Quoting Jfidler (Reply 8):
An argument can be made that airlines should not do any hedging at all. Investors are well aware that the profits of airlines are closely tied to fuel prices. If an investor is concerned about this risk, they can also buy shares in firms whose profits move exactly the opposite direction when fuel prices change. This allows the investor to hedge, but also gives them the option not to do so. When the airlines do this on their own, that means the investor no longer has the option not to hedge their risk, even though some may want to do so. This is the concept of "specific risk" in the capital assets pricing model. Note that while I have studied finance, it's not my expertise, so I would be interested to hear what others have to say about this so I can learn more.

I understand what you're getting at, but I don't buy the initial argument.

The primary duty of the Board of a public company is to guide the company in a direction to maximize shareholder value. Generally, that means maximizing long-term profitability. Fuel hedging increases profitability (in a market with rising fuel prices) therefore is a sensible action for the airline. The company is under no obligation to provide investors with a particular type of risk mitigation...if investors don't like how a company is hedging their risk the appropriate response for the investor is to not invest in that company, not suggest that the company somehow owes them the option to hedge their risk elsewhere.

Tom.
 
rwessel
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Joined: Tue Jan 16, 2007 3:47 pm

RE: Southwest Fuel Hedging?

Tue Oct 16, 2007 4:30 am

Quoting Jfidler (Reply 8):
An argument can be made that airlines should not do any hedging at all.

An additional argument is that hedges of that nature are a net increase in expenses. Sure they help when fuel prices go up faster than the futures markets expect, but when prices are steady or decreasing, they're just a cost. And the cost of the hedges to the airline have to be greater (over time) than the money they'd save (unless the airline guesses the future of fuel prices better than the sellers of the option do).
 
siromega
Posts: 564
Joined: Mon Sep 12, 2005 11:57 am

RE: Southwest Fuel Hedging?

Tue Oct 16, 2007 4:51 am

How did WN get such good prices on hedges? Even $63/bbl seems cheap - especially given the expectations that oil will hit $100 this winter. I don't figure that things are going to get better from a resource or geopolitical standpoint anytime soon (regardless of who gets elected in Nov 2008). My target price is $100/bbl on average over the next 3 years.
 
sccutler
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RE: Southwest Fuel Hedging?

Tue Oct 16, 2007 9:01 am

Whatever history has taught us, it has certainly shown that markets cannot be reliably predicted, and this includes teh price of oil. By hedging, the airline buys a measure of certainty and predictability to use as a foundation for planning and growth. There is value in this.
...three miles from BRONS, clear for the ILS one five approach...
 
AADC10
Posts: 1509
Joined: Sat Nov 13, 2004 7:40 am

RE: Southwest Fuel Hedging?

Tue Oct 16, 2007 6:35 pm

Quoting Itsnotfinals (Reply 1):
2. Hedges are on futures, not actually fuel, they are sold in the financial markets and are not actually tied to "real " gallons of jet fuel.
There are no U.S. dollar jet fuel futures, so crude futures and derivatives are purchased, which closely tracks fuel costs. Some airlines trade other energy commodities. If you look in the company financial reports, they often outline their hedging strategy. While they are not trading actual fuel, the main point is that crude tracks closely enough to be the hedge.
3. Futures cost money and are risky, most airlines were in no position to buy futures becuase they had no cash to do so.

Crude oil futures are like any other commodity traded at the CBOT. The value of the trade is diluted by the cost of the funds used to purchase them. Since WN is in the best financial shape of the major airlines, it was able to purchase extensive crude options when the price was low. They are not risky for airlines since they are making a bet on a commodity that they depend on. If the price of oil goes up, fuel costs go up, but they get some of it back by selling the futures at a profit. If the price remains stable or falls, the options expire worthless, but the airline benefits with lower fuel costs.

Under normal conditions, fuel hedging is supposed to be revenue neutral. It is not supposed to add to the bottom line, it is supposed to even out revenue between quarters or years. However, it gave WN an advantage over its competitors when fuel prices shot up.
 
itsnotfinals
Posts: 1573
Joined: Sun Mar 04, 2007 8:51 am

RE: Southwest Fuel Hedging?

Sat Oct 27, 2007 8:25 pm

Quoting Par13del (Reply 5):
This is really too easy an answer, especially when you consider the number of carriers who have been restructured via the Chpt. 11 process, I admit to not having read all the documentation to see if hedging was used or even considered as a strategy for recovery.

Hedging is a risk based activity, it is not to be used without adequate assets and cannot be done without liquidity to purchase and hold positions.

Quoting AADC10 (Reply 13):
They are not risky for airlines since they are making a bet on a commodity that they depend on.

any financial instrument has risks, fuel hedges are no exception.
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7e72004
Posts: 3440
Joined: Thu Apr 01, 2004 12:15 am

RE: Southwest Fuel Hedging?

Sat Oct 27, 2007 11:04 pm

A lot of the "analysts" in the financial markets are thinking that this high price of oil lately, i.e. the $92 barrel, etc. will make a pretty good drop in the coming weeks/months. It will most likely hit all time highs up to $100 per barrel then drop back to around $60-$70 per barrel. THe $100 per barrel is close to the all time inflation adjusted high and the concensus is that the "oil traders" will take the barrel price to the psychologically big milestone to $100 then it will retreat.

Wasn't it just a few years ago that we were at or around $20/barrel?!?!?  boggled 
The next generation of aircraft is just around the corner!
 
7e72004
Posts: 3440
Joined: Thu Apr 01, 2004 12:15 am

RE: Southwest Fuel Hedging?

Sat Oct 27, 2007 11:05 pm

I forgot to make my Southwest connection *lol* Obviously, Southwest made a good bet when it had its fuel hedging but it will be interesting to see what happens.  Smile
The next generation of aircraft is just around the corner!
 
EMBQA
Posts: 7798
Joined: Sat Oct 25, 2003 3:52 am

RE: Southwest Fuel Hedging?

Sun Oct 28, 2007 1:02 am

Quoting SirOmega (Reply 11):
How did WN get such good prices on hedges?

Because they had cash in the bank to do it............
"It's not the size of the dog in the fight, but the size of the fight in the dog"
 
KarlB737
Posts: 2636
Joined: Sat Mar 20, 2004 9:51 pm

RE: Southwest Fuel Hedging?

Sun Oct 28, 2007 1:11 am

Here is a story provided by Reuters that better explains the fuel hedging situation as it applies to Southwest.

Southwest Airlines Gets Boost From Record Oil - 2 Page Article

http://www.reuters.com/article/ousiv/idUSN2635922120071026
 
AAR90
Posts: 3140
Joined: Fri Jan 21, 2000 11:51 am

RE: Southwest Fuel Hedging?

Sun Oct 28, 2007 5:36 am

Folks, please understand that airlines (even WN) do NOT hedge fuel in order to make money (or a profit). Airlines hedge fuel PRIMARILY to STABILIZE their expenses. Most USA airlines have a team or department dedicated to studying fuel futures and fuel hedging. WN did a GREAT job by hedging a higher percentage of their needs and at lower prices than most other USA airlines in the recent past. They did so because they have excellent cash/credit reserves available that can/could be dedicated to covering such hedging. Most other USA airlines are not in such financial positions. For example, AA is 40% hedged for the 4th quarter. But with so much MORE fuel required than WN, AA can not afford to hedge much more than that... just too many billions of dollars on what could be a risky gamble --recall AA had to write DOWN (expense as a loss) quite a few fuel hedges last year.
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