MOBflyer
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What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 1:11 pm

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
 
miller22
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 1:47 pm

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.
 
burnsie28
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 1:48 pm



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.
 
MOBflyer
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 1:52 pm



Quoting Miller22 (Reply 1):

Does that price reflect any hedges? If not, what is the average non-hedged price?
 
Tristarsteve
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 3:30 pm

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]
 
bx737
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 9:02 pm

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]
 
doug_or
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 9:10 pm



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
 
dhr
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RE: What Price To Airlines Pay For Jet Fuel?

Mon Apr 07, 2008 9:35 pm



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.
 
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Starlionblue
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RE: What Price To Airlines Pay For Jet Fuel?

Tue Apr 08, 2008 12:17 am

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." - John Ringo
 
tdscanuck
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RE: What Price To Airlines Pay For Jet Fuel?

Tue Apr 08, 2008 1:57 am



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.
 
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Starlionblue
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RE: What Price To Airlines Pay For Jet Fuel?

Tue Apr 08, 2008 5:05 am

Indeed. Thanks for clarifying Tdscanuck.
"There are no stupid questions, but there are a lot of inquisitive idiots." - John Ringo
 
FlyDeltaJets
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RE: What Price To Airlines Pay For Jet Fuel?

Wed Apr 09, 2008 11:02 pm

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
 
Viscount724
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RE: What Price To Airlines Pay For Jet Fuel?

Thu Apr 10, 2008 1:15 am

IATA issues a weekly updated summary of the average worldwide jet fuel price.
http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm
 
Mir
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RE: What Price To Airlines Pay For Jet Fuel?

Thu Apr 10, 2008 4:12 am

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
 
irelayer
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RE: What Price To Airlines Pay For Jet Fuel?

Thu Apr 10, 2008 9:59 pm

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]
 
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Starlionblue
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RE: What Price To Airlines Pay For Jet Fuel?

Thu Apr 10, 2008 11:08 pm

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." - John Ringo

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