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Sokes
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Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 11:25 am

If a resource is limited not all demands can be met. It's the price that decides whose demands get satisfied and whose demands can't.
Beside costing money, fuel hedges contradict the distribution function inherent in the oil price. Therefore I believe airlines shouldn't be allowed to hedge their fuel.
Please proof me wrong.
Why can't the world be a little bit more autistic?
 
SueD
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 11:44 am

Why not its just a futures trade and contains the requisite risk - Nothing out of the ordinary

Such trades are essential in commodity markets to predict levels of demand and in event of something untold of such as COVID19 coming up your investment can go badly wrong .

Epitome of the capitalist economic system at its best - Primarily the financial system is based on risk and a gamble or two
 
JayinKitsap
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 11:46 am

People shouldn't be allowed to buy Fire Insurance as it costs money and might never be used is a similar argument.

Airlines are selling tickets for September 2020, why can't they basically buy the fuel used for that flight now. It greatly reduces the risk for the airline to pre-purchase, which is what basically options and hedges are. Yes there is a stake price posted and the buyer can just let the option expire. Options pricing oil at $40/barrel would be quite cheap right now as no one expects to reach that point. But options for $20/barrel would be very expensive for if oil price rises to $25 the seller would be required to sell oil at $20 that is costing him $25. Airlines right now are letting tons of options expire, because they would be buying oil at say $30 with the option, but the refinery nearby would sell for $21 say.

Nearly all options are for crude, but not Jet fuel. However, structuring a series of trades one can 'hedge' Jet Fuel.

Power Companies in most states do 'hedges' by signing long term contracts for over half of the demand, at half of demand with the other half at the spot market that means any fluctuation is halved. Not much different in having 'cash' for a portion (say 20%) of one's portfolio it reduces the risk of the stocks one ownes.

In truly free markets options reduce market volatility and generally is the least cost in the macro economy sense.
 
davidjohnson6
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 11:47 am

An airline is unsure about the price of oil in 6 months time when it will fly people to the beach. The tickets have to go on sale now, so people can buy tickets to the beach. Some of the ticket price goes to paying fir the fuel

If fuel prices are high, the airline will charge a higher fare - which means some people decide the cost is too high and decide not to fly. Equally low oil prices means more people decide to fly

The airline in hedging fuel, is trying to have certainty as to what the price will be. If the airline can buy fuel cheaply for delivery in 6 months time, they will put on more flights, expecting more tickets will be sold - if the price is high, higher fares will be charged, fewer flights put on sale and some aircraft grounded
 
MIflyer12
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 11:49 am

Sokes wrote:
Please proof me wrong.


That's easy enough.

You're working from a fundamental misconception: a hedge doesn't decrease cost, it just shifts risk. If Southwest hedges oil (and it's more commonly oil, not Jet A) at $60/barrel, it needs a counter-party -- somebody who is paid by Southwest and may be called upon to buy oil at a higher price and sell it to Southwest at $60. The price signal to buyers to use less is still there.

If you think hedging is a low-cost activity you are wrong. In concept it's buying insurance. You're paying somebody (the counter-party) to take your risk. You're paying broker fees to have the deal assembled. Southwest paid about $0.05 per gallon in hedging premiums for 1Q20. Southwest used 2.1 Billion gallons of fuel in 2019.
 
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enilria
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 11:57 am

Sokes wrote:
If a resource is limited not all demands can be met. It's the price that decides whose demands get satisfied and whose demands can't.
Beside costing money, fuel hedges contradict the distribution function inherent in the oil price. Therefore I believe airlines shouldn't be allowed to hedge their fuel.
Please proof me wrong.

Why should options traders be able to buy fuel options? They don’t even use fuel. Airlines buy these options to reduce risk of price fluctuations on their huge fuel purchases. For traders it is simply an investment tied to nothing in their own real world.
 
Sokes
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 12:10 pm

SueD wrote:
Such trades are essential in commodity markets to predict levels of demand

First post and you immediately got me. Nice.
If traders who collect data of rainfall, old stock and what not from all over the world expect a shortage of wheat, future prices go up. It signals farmers for whom growing wheat without irrigation is just too risky to grow it, possibly with one expensive irrigation required.
Without future traders there may suddenly be no more wheat.
O.k., we can always eat cake instead.
Why can't the world be a little bit more autistic?
 
Exeiowa
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 12:11 pm

People who actually need the item are not causing a problem, it was when others who did not need the item realised they could profit from trading paper back and forth that rent extraction starts making products more expensive.
 
morrisond
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 12:35 pm

It is possible to buy futures on Jet Fuel. https://www.cmegroup.com/trading/energy ... -swap.html

These can be settled in cash.

Options and futures are different and shouldn't be used interchangeably in terminology

https://www.investopedia.com/ask/answer ... d-futures/
 
Boof02671
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 2:44 pm

Fuel hedging caused WN to be profitable for numerous years while all the other major US airlines were losing money.

https://www.nytimes.com/2007/11/28/busi ... 17580.html
 
mcg
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 4:02 pm

enilria wrote:
Sokes wrote:
If a resource is limited not all demands can be met. It's the price that decides whose demands get satisfied and whose demands can't.
Beside costing money, fuel hedges contradict the distribution function inherent in the oil price. Therefore I believe airlines shouldn't be allowed to hedge their fuel.
Please proof me wrong.

Why should options traders be able to buy fuel options? They don’t even use fuel. Airlines buy these options to reduce risk of price fluctuations on their huge fuel purchases. For traders it is simply an investment tied to nothing in their own real world.


Those option traders provide a market for the airlines (and others) to trade in. Without them there is no hedging.
 
mcg
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 4:04 pm

Boof02671 wrote:
Fuel hedging caused WN to be profitable for numerous years while all the other major US airlines were losing money.

https://www.nytimes.com/2007/11/28/busi ... 17580.html


Any airline (or anyone) with option contracts for the delivery of oil or jet fuel is going to lose money in a big way in the current environment.
 
32andBelow
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 4:06 pm

mcg wrote:
Boof02671 wrote:
Fuel hedging caused WN to be profitable for numerous years while all the other major US airlines were losing money.

https://www.nytimes.com/2007/11/28/busi ... 17580.html


Any airline (or anyone) with option contracts for the delivery of oil or jet fuel is going to lose money in a big way in the current environment.

Well now they can be buying them for the future when it might go up.
 
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lightsaber
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 4:08 pm

MIflyer12 wrote:
Sokes wrote:
Please proof me wrong.


That's easy enough.

You're working from a fundamental misconception: a hedge doesn't decrease cost, it just shifts risk. If Southwest hedges oil (and it's more commonly oil, not Jet A) at $60/barrel, it needs a counter-party -- somebody who is paid by Southwest and may be called upon to buy oil at a higher price and sell it to Southwest at $60. The price signal to buyers to use less is still there.

If you think hedging is a low-cost activity you are wrong. In concept it's buying insurance. You're paying somebody (the counter-party) to take your risk. You're paying broker fees to have the deal assembled. Southwest paid about $0.05 per gallon in hedging premiums for 1Q20. Southwest used 2.1 Billion gallons of fuel in 2019.

It should be pointed out fuel is, typically, a high fraction of costs. Since fuel can be so variable, that hedging cost allows airlines to sell tickets out further, which is the basis of yield management which is what differentiates very profitable airlines from marginal profitable airlines.

Since airlines actually use the fuel, it is insurance. If buying insurance is wrong, are you going to regulate away an industry?

Some bests win, many lose. Overall, hedging increases costs.

But there is a market. The proving isn't if airlines, a consumer of a product, should be allowed to do as close to pre-buying their product. The proof required is should there be a reason to restrict a normal business practice.

When fuel spikes, everyone asks why airlines didn't hedge to control costs.

Lightsaber
Winter is coming.
 
DTVG
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 4:49 pm

I advise you to read a book on corporate risk.

The use of derivatives can have both positive and negative effects on shareholder value.

As already mentioned, for airlines fuel costs are a big part of the equation. Assuming fuel prices rise rapidly, an airlines can quickly move into so called „bad states of the world“, where the cost of financial distress or the cost of external financing (assuming they need more capital/cash) can seriously outweigh the cost of hedging.
 
leghorn
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 5:16 pm

hopefully with coming generations of planes the cost of fuel becomes a smaller percentage of operating costs and airlines will decide the cost of hedging isn't worthwhile and they'll self-insure by setting reserves aside.
 
ikramerica
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 5:20 pm

I guess OP wants airlines to either have shop at the spot market daily, or signed price fixed quantity fixed contracts for the future with obligations to pay that price and take that fuel no matter what.
Of all the things to worry about... the Wookie has no pants.
 
Sokes
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 5:54 pm

I never read airline financial statements. What I observed with Airbus:
In billion Euro:
2015 profit for the period: 2,7 / comprehensive income for the period: 0,05 / net change in fair value of cash flow hedges: -4,7
2016 profit for the period: 1,0 / comprehensive income for the period: -0,9 / net change in fair value of cash flow hedges:-0,2
2017 profit for the period: 2,4 / comprehensive income for the period: 10,1 / net change in fair value of cash flow hedges: 10,6 !!!!
2018 profit for the period: 3,0 / comprehensive income for the period: 0,0 / net change in fair value of cash flow hedges: -3,0
2019 profit for the period: -1,3 / comprehensive income for the period: -4,3 / net change in fair value of cash flow hedges: -1,4
https://www.airbus.com/investors/financ ... ports.html
(click on financial statements/ short notes. It's within the first three pages in concerned statement.)

Pension benefit plans and currency hedges decide the comprehensive income to a large degree. Operating income is important, but far less than the currency hedges.
Comprehensive income fluctuates extreme. It would fluctuate less without the currency insurance. But I believe manager bonuses depend strongly on profit. It may be more attractive for the management if profit of five years comes mostly in one year (2017) with extreme profits than if it is evenly distributed.
So I believe the function of currency hedges is not to insure against risk, but to increase risk and chance.

I would appreciate if anybody who reads airline financial statements can confirm or reject that hypothesis. What may be true for Airbus may not be true for airlines.

I shout myself hoarse here that companies need at least some equity. Funny that no equity seems acceptable, but currency or oil price risk needs hedging.
Risk is part of business. Somebody who dislikes risk shouldn't join business.
Why can't the world be a little bit more autistic?
 
Sokes
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 6:11 pm

ikramerica wrote:
I guess OP wants airlines to either have shop at the spot market daily, or signed price fixed quantity fixed contracts for the future with obligations to pay that price and take that fuel no matter what.

Do you have a car?

Is there no way to buy a hedge against raising fuel prices once and for all?
Why can't the world be a little bit more autistic?
 
Cubsrule
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 6:16 pm

Sokes wrote:
ikramerica wrote:
I guess OP wants airlines to either have shop at the spot market daily, or signed price fixed quantity fixed contracts for the future with obligations to pay that price and take that fuel no matter what.

Do you have a car?


I don’t think that argument works for a couple of reasons. Let’s take a worker who makes $50,000 a year with a 20-mile commute at 25 mpg and $3/gallon gas. Total commute distance is 8,000 miles (assuming 200 work days/year), total fuel consumption is 320 gallons, total spend is $960, or less than 2 percent of income. That’s much, much different than an airline.

Also, consumers can and do hedge fuel costs in different ways like buying stock in oil companies (like I do), investing in fuel-efficient vehicles, or substituting to work from home or transit.
I can't decide whether I miss the tulip or the bowling shoe more
 
Sokes
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 6:47 pm

Cubsrule wrote:
Also, consumers can and do hedge fuel costs in different ways like buying stock in oil companies (like I do)

Congratulations. You just found the solution how airlines can insure once and for all against oil price fluctuations.

Of course you are right that my "Do you have a car?" question was polemic.
Why can't the world be a little bit more autistic?
 
canyonblue17
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sat May 09, 2020 6:58 pm

How fuel hedging was always described to me was....its done to help keep the price of fuel predictable, not necessarily to make or lose money. If you know the price ahead of time, you can set the rest of your budget around it.
negative ghostrider the pattern is full
 
airzona11
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 3:47 am

Sokes wrote:
If a resource is limited not all demands can be met. It's the price that decides whose demands get satisfied and whose demands can't.
Beside costing money, fuel hedges contradict the distribution function inherent in the oil price. Therefore I believe airlines shouldn't be allowed to hedge their fuel.
Please proof me wrong.


You just made the argument as to why they hedge and why futures exist. The total demand is met if there is another side that purchases the contract, or that gets paid to take the risk. Demand is finite prices up and down.
 
airzona11
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 3:49 am

Sokes wrote:
I never read airline financial statements. What I observed with Airbus:
In billion Euro:
2015 profit for the period: 2,7 / comprehensive income for the period: 0,05 / net change in fair value of cash flow hedges: -4,7
2016 profit for the period: 1,0 / comprehensive income for the period: -0,9 / net change in fair value of cash flow hedges:-0,2
2017 profit for the period: 2,4 / comprehensive income for the period: 10,1 / net change in fair value of cash flow hedges: 10,6 !!!!
2018 profit for the period: 3,0 / comprehensive income for the period: 0,0 / net change in fair value of cash flow hedges: -3,0
2019 profit for the period: -1,3 / comprehensive income for the period: -4,3 / net change in fair value of cash flow hedges: -1,4
https://www.airbus.com/investors/financ ... ports.html
(click on financial statements/ short notes. It's within the first three pages in concerned statement.)

Pension benefit plans and currency hedges decide the comprehensive income to a large degree. Operating income is important, but far less than the currency hedges.
Comprehensive income fluctuates extreme. It would fluctuate less without the currency insurance. But I believe manager bonuses depend strongly on profit. It may be more attractive for the management if profit of five years comes mostly in one year (2017) with extreme profits than if it is evenly distributed.
So I believe the function of currency hedges is not to insure against risk, but to increase risk and chance.

I would appreciate if anybody who reads airline financial statements can confirm or reject that hypothesis. What may be true for Airbus may not be true for airlines.

I shout myself hoarse here that companies need at least some equity. Funny that no equity seems acceptable, but currency or oil price risk needs hedging.
Risk is part of business. Somebody who dislikes risk shouldn't join business.


The entire point of hedging is to reduce risk. Risk is part of business that is why your hedge. You are quite literally hedging the risk.
 
reltney
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 4:18 am

Absolutely! Delta has been hedging since the 60s and it made them the only profitable airline during the Arab oil embargo in the early 70s...
The US is filling their oil reserves up. Go for it. Remember 150$ a barrel ...... greedy Arabs were buying sport cars as a hobby.... oh well..

Cheers
Knives don't kill people. People with knives kill people.
OUTLAW KNIVES.

I am a pilot, therefore I envy no one...
 
QF7
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 4:18 am

Sokes wrote:
Cubsrule wrote:
Also, consumers can and do hedge fuel costs in different ways like buying stock in oil companies (like I do)

Congratulations. You just found the solution how airlines can insure once and for all against oil price fluctuations.

That's not really right. If you own all or part of an oil company you're making yourself the counterparty which is not hedging, you're just shifting the risk of fluctuating oil prices from the airline part of your business to the oil part of your business.

The price of oil is not set by the oil companies (no matter how hard OPEC and Russia and others might try).
QF7
 
Sokes
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 5:10 am

airzona11 wrote:
Sokes wrote:
...
Pension benefit plans and currency hedges decide the comprehensive income to a large degree. Operating income is important, but far less than the currency hedges.
Comprehensive income fluctuates extreme. It would fluctuate less without the currency insurance. But I believe manager bonuses depend strongly on profit. It may be more attractive for the management if profit of five years comes mostly in one year (2017) with extreme profits than if it is evenly distributed.
So I believe the function of currency hedges is not to insure against risk, but to increase risk and chance.

The entire point of hedging is to reduce risk. Risk is part of business that is why your hedge. You are quite literally hedging the risk.

Did you read what I wrote? I know the common knowledge: hedging is an insurance. But I have show that it isn't so in the case of Airbus.
Need more examples?
Also in 2017 Rolls Royce lost big way by betting on currency movements.

"Rolls-Royce agreed to pay £671m to settle corruption cases with UK and US authorities and it has written off £4.4bn from currency related contracts. Like many international businesses, Rolls-Royce usually "hedges" its bets to protect itself from fluctuating currency markets.
Most international aerospace contracts are priced in dollars, but, as a UK company, much of Rolls-Royce's costs are in pounds.
It takes out long-term currency trades. These were designed to protect the firm against what seemed the most likely risk- the fall in the dollar - and many of them were put in place before the EU referendum was even announced.
Since the Brexit vote, the pound has fallen sharply against the US dollar, which has led to the accounting loss."

Image
https://www.bbc.com/news/business-38966165

If management gambles and looses: It's not their money. If they gamble and win: They get a good share of the profit in the form of bonuses.
Please enlighten me as to how hedging reduces risk? Twenty-five years ago there was much less risk hedging (gambling?) within companies. You have any company in mind whose profits 25 years back fluctuated as extreme as Rolls Royce or Airbus in recent years?

That apart currency prizes just like wheat prizes also have a signalling function.
Suppose:
Currency A is overvalued. Usually that means a balance of trade deficit and that holidays in that country are very expensive for the standard offered.
Currency B is undervalued Usually that means balance of trade surplus and that it's cheap to make holiday in the country.
It's not always true. E.g. Germany and Greece share a currency. German products are too cheap, holidays in Greece are too expensive. The usual prize signal function of the currency doesn't work. However mostly it's true.

If the market adjusts the value of currency A decreases and value of currency B increases. Businesses in A which were already profitable with the overvalued currency A get a signal to expand. Businesses which already struggled in B with the cheap currency get a signal to stop investing or even to shrink or to shift business abroad.
That is called risk in our discussion. Is it risk or is it necessary adjustment? Can there be an insurance against it long term?
Only a feudal world is static. What was Poland 30 years back, what is it now? China is another example. Depending on politics some countries go up, others go down. There is no business without risk and chances.
And even if a country has stable good politics there are always changes in industry. If aviation increases strongly and a country manufactures planes it may have to accept that TV manufacturing is done cheaper in some other country. One industry shrinks, another expands.
We enjoy a level of wealth unknown in world history. Insecurity is the price we have to pay for it. As Taoism says: "Embrace the change!"

I agree there can be short term fluctuations. That's why companies should have some equity.
Why can't the world be a little bit more autistic?
 
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DocLightning
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 5:37 am

Every time you fill your gas tank you are hedging against price fluctuation for 10-15 gallons, however long that lasts you.

Airlines can purchase fuel in bulk, so in essence, they are filling a very large tank, so if they can lock in a price today and then the price goes up, they win. And if it goes down, they lose.
-Doc Lightning-

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Sokes
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 5:49 am

reltney wrote:
Absolutely! Delta has been hedging since the 60s and it made them the only profitable airline during the Arab oil embargo in the early 70s...
The US is filling their oil reserves up. Go for it. Remember 150$ a barrel ...... greedy Arabs were buying sport cars as a hobby.... oh well..

Cheers

Interesting point you make. Unfortunately I don't know enough about airlines and I'm not willing spending many hours to go through their financial reports. I was hoping somebody brings some hard data to the discussion. So you made a start.

For some reason Arabs reduce the oil supply or demand increases unexpectedly. The oil price increases. Demand is a little flexible. I can reduce my room heating for one degree. I skip a weekend trip with the car.
If shortage becomes more serious I skip a holiday that requires a long range flight.
If there is still not enough oil, major adjustments are necessary. Room heating could be changed to heat pumps, old planes could be replaced with new planes, alternative sources will be found, e.g. power production with gas from fracking.

"Delta Air Lines operates 878 commercial aircraft, making it the second largest airline fleet in the world. In the past, Delta purchased or leased older generation aircraft and it flies aircraft for 20–30 years, much longer than most other major airlines. This makes Delta's one of the oldest fleets of any United States airline, with an average fleet age of 14.9 years.[1][2] In 2011, Delta began a massive fleet-renewal effort with narrow- and wide-body aircraft on order."
https://en.wikipedia.org/wiki/Delta_Air_Lines_fleet

Suppose Delta has hedged the oil price. Thanks to it they can continue flying old, inefficient planes.
It was pointed out that my comment "Do you have a car?" was nonsense as fuel expenses are a major expense of airlines.
If oil is in short supply, some industries have to take a hit. Should all businesses reduce their activity equal, let's say 5% ? If not, which industry is supposed to reduce business?
Isn't Delta with it's old planes exactly the business which is supposed to be hit hardest? In exchange they also profit the most from falling oil prices.
Why can't the world be a little bit more autistic?
 
Someone83
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 8:10 am

Sokes wrote:
Suppose Delta has hedged the oil price. Thanks to it they can continue flying old, inefficient planes.


That is only for a short period of time, and until the hedge expires

You seems to not understand the concept of hedging and pricing of tickets. Airlines sell their tickets anything from 0 days to one year in advance, and their flight program is scheduled well in advance. In order to reduce volatility and uncertainty, then then chose to hedge their biggest variable cost: fuel. However, this doesn't really reduce cost. It both cost to hedge, and the longer the hedge, the more expensive it is, thus they seldom hedge for more than one year in advance, and also their hedging position is usually from loaded: i.e. more fuel is hedged in the coming quarter vs the fourth quarter.

Hedging doesn't make fuel cheaper, it only makes it less volatile. Long term development in fuel prices will still hit airlines costs.

Neither is hedging risk free and when the oil price decreases, airlines have to pay the difference, as we clearly sees this days

And by the way: oil producer hedge as well, they just sit at the other side of the table
 
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Antaras
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 10:41 am

Fuel-hedging can't be a very serious problem in some country, and with the state-owned carriers.
Have a look at JetstarPacific's fuel-hedge scandal in 2010. One Vietnamese boss was arrested, and 2 other Australian manager were banned leaving Vietnam for the investigation.

Everything could be sensitive.
If you disagree with my statement, assume that it was just a joke :duck:
 
Boof02671
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 11:09 am

reltney wrote:
Absolutely! Delta has been hedging since the 60s and it made them the only profitable airline during the Arab oil embargo in the early 70s...
The US is filling their oil reserves up. Go for it. Remember 150$ a barrel ...... greedy Arabs were buying sport cars as a hobby.... oh well..

Cheers

Did you know it also bit DL in the rear?

https://www.forbes.com/sites/uhenergy/2 ... costs/amp/

And there was this incident

https://www.ajc.com/business/delta-fora ... M/amp.html
 
whatThe
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 6:33 pm

Another way to think about it is airlines (and other companies) hedge to increase their certainty in the future value of the item they're hedging. This increased certainty (reduced uncertainty) gives them more confidence in making business decisions.

As an example, an oil producer will hedge the price of oil that they sell over the coming few quarters. This allows them to operate their business with increased certainty about what their revenues will be in the future via hedging. On the flip side, an airline with hedge the price of oil to increase its certainty in one of its main cost drivers over the coming quarters. As many have pointed out, this allows the airline to make decisions on pricing airfares as it knows with increased certainty what its cost structure will look like over the coming quarters.

The above is the practicalities of how hedging works. How it is accounted for in financial statements is very different and often a complicated topic. Let's say an airline hedges the price of oil three quarters from now. It has no need for the oil until then. However, for accounting reasons, it has to reflect the market value of that hedge as oil prices fluctuate in its financial statements in the current quarter and next quarter, even if it has limited practical impact on how they run their business. In certain situations, that mark-to-market impact is recorded through the Other Comprehensive Income statement - which is distinct from the income statement. Management and investors recognize this has limited practical impact and ignore it, knowing that what really matters is that the airline has locked in some part of the fuel costs in the future. This is why you can get headlines about huge hedging losses, but with little practical impact on how companies operate their business as the time hasn't yet come for them to realize the value of that hedge as they intended.

This is a complicated accounting topic - but that's the two minute summary.
 
WayexTDI
Posts: 1869
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 6:52 pm

Sokes wrote:
ikramerica wrote:
I guess OP wants airlines to either have shop at the spot market daily, or signed price fixed quantity fixed contracts for the future with obligations to pay that price and take that fuel no matter what.

Do you have a car?

Is there no way to buy a hedge against raising fuel prices once and for all?

Fuel hedging is limited in time; so, it cannot be "once and for all".
You can buy a year's worth of fuel if you want to, and store it in your garage; you've hedged yourself against any future increases, but also decreases.
There was a company that did some fuel hedging for car drivers years ago, when oil was on its way to $140; I don't know how it ended or if it still exists, but I will venture to say they lost their shirt, pants and the whole wardrobe.
 
Vicenza
Posts: 172
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 7:38 pm

reltney wrote:
The US is filling their oil reserves up. Go for it. Remember 150$ a barrel ...... greedy Arabs were buying sport cars as a hobby.... oh well..

Cheers


And the West buying their (Arabs) oil for mere pennies, but knowing it's 'value', wasn't greed in your opinion then, no?
 
smartplane
Posts: 1574
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 8:49 pm

lightsaber wrote:
MIflyer12 wrote:
Sokes wrote:
Please proof me wrong.


That's easy enough.

You're working from a fundamental misconception: a hedge doesn't decrease cost, it just shifts risk. If Southwest hedges oil (and it's more commonly oil, not Jet A) at $60/barrel, it needs a counter-party -- somebody who is paid by Southwest and may be called upon to buy oil at a higher price and sell it to Southwest at $60. The price signal to buyers to use less is still there.

If you think hedging is a low-cost activity you are wrong. In concept it's buying insurance. You're paying somebody (the counter-party) to take your risk. You're paying broker fees to have the deal assembled. Southwest paid about $0.05 per gallon in hedging premiums for 1Q20. Southwest used 2.1 Billion gallons of fuel in 2019.

It should be pointed out fuel is, typically, a high fraction of costs. Since fuel can be so variable, that hedging cost allows airlines to sell tickets out further, which is the basis of yield management which is what differentiates very profitable airlines from marginal profitable airlines.

Since airlines actually use the fuel, it is insurance. If buying insurance is wrong, are you going to regulate away an industry?

Some bests win, many lose. Overall, hedging increases costs.

But there is a market. The proving isn't if airlines, a consumer of a product, should be allowed to do as close to pre-buying their product. The proof required is should there be a reason to restrict a normal business practice.

When fuel spikes, everyone asks why airlines didn't hedge to control costs.

Lightsaber

Problems can occur when airlines start to treat futures and options as speculative profit centres, have weak management and systems controls, and / or employ a maverick dealer or two.
 
Sokes
Topic Author
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 9:16 pm

whatThe wrote:
Let's say an airline hedges the price of oil three quarters from now. It has no need for the oil until then. However, for accounting reasons, it has to reflect the market value of that hedge as oil prices fluctuate in its financial statements in the current quarter and next quarter, even if it has limited practical impact on how they run their business. In certain situations, that mark-to-market impact is recorded through the Other Comprehensive Income statement - which is distinct from the income statement. Management and investors recognize this has limited practical impact and ignore it, knowing that what really matters is that the airline has locked in some part of the fuel costs in the future. This is why you can get headlines about huge hedging losses, but with little practical impact on how companies operate their business as the time hasn't yet come for them to realize the value of that hedge as they intended.

This is a complicated accounting topic - but that's the two minute summary.

I don't know about prices for hedges. I just argue about the principle. Possibly my numbers are unrealistic.
Suppose oil price is 60 $/ barrel today and an airline spends 200 million $ to insure that they can get a certain quantity for 55 $/ barrel after nine months. The airline profits if the oil price crosses 70 $/ barrel.
It so happens that the oil price after three months is only 40 $/ barrel. The insurance which is for delivery in six months is now worth maybe 50 million $. The airline in "other comprehensive income" has to record a loss of 150 million $.
If after another six months oil price is indeed 70 $/ barrel, there are gains in the comprehensive income to compensate the former losses. The fuel price fluctuations indeed did not matter. But how likely is that?

Did you read what I wrote above about yearly comprehensive income of Airbus? These gains and losses are very real. I wouldn't be surprised if Rolls Royce employees can sing a song about it.

What do you think about "deferred production costs"? Are they real?
Why can't the world be a little bit more autistic?
 
prebennorholm
Posts: 7101
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 10:05 pm

In the long run you will always pay the full price of the fuel. If you hedge, then you will pay the profit of the hedging companies on top of that.

Hedging isn't always a disadvantage. It can be an advantage. In case your airline is on the brinks of collapse, then a lucky hedging may save your butt and carry you through a fuel price spike which otherwise might have killed you.
Always keep your number of landings equal to your number of take-offs
 
Dmoney
Posts: 134
Joined: Tue Mar 17, 2020 9:53 am

Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 11:14 pm

It's hard to argue with Soakes who knows so little about finance he doesn't get it. But I'm kinda on his side a tiny bi, you pay for hedging in the long run unless you can beat the market and these are airlines not hedge funds so that's not their role. Since you pay for it you are paying for a consistent 10% return over a lumpy 12% which is the problem with public markets as Buffet and Munger always hammer. The incentive for C-suite is always to do a neutron Jack and hit your numbers through everything up to an including fraud if necessary. You are rewarded for earning consistency that analysts can get, not volatile shit.

There is a certain sense since airlines run such "efficient" balance sheets that lease partners will likely require you hedge a chunk for decent rates. But honestly I'd rather see a airline run a more conservative balance sheet and sometime get done on oil prices and some times come off better but on the whole save on hedge costs. But that would require a concentrated long term ownership base that no longer exists.

Plus high oil prices generally come when the economy is doing well. Not as much when the economy is in the shitter.
 
airzona11
Posts: 1785
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Sun May 10, 2020 11:28 pm

Sokes wrote:
airzona11 wrote:
Sokes wrote:
...
Pension benefit plans and currency hedges decide the comprehensive income to a large degree. Operating income is important, but far less than the currency hedges.
Comprehensive income fluctuates extreme. It would fluctuate less without the currency insurance. But I believe manager bonuses depend strongly on profit. It may be more attractive for the management if profit of five years comes mostly in one year (2017) with extreme profits than if it is evenly distributed.
So I believe the function of currency hedges is not to insure against risk, but to increase risk and chance.

The entire point of hedging is to reduce risk. Risk is part of business that is why your hedge. You are quite literally hedging the risk.

Did you read what I wrote? I know the common knowledge: hedging is an insurance. But I have show that it isn't so in the case of Airbus.
Need more examples?
Also in 2017 Rolls Royce lost big way by betting on currency movements.

"Rolls-Royce agreed to pay £671m to settle corruption cases with UK and US authorities and it has written off £4.4bn from currency related contracts. Like many international businesses, Rolls-Royce usually "hedges" its bets to protect itself from fluctuating currency markets.
Most international aerospace contracts are priced in dollars, but, as a UK company, much of Rolls-Royce's costs are in pounds.
It takes out long-term currency trades. These were designed to protect the firm against what seemed the most likely risk- the fall in the dollar - and many of them were put in place before the EU referendum was even announced.
Since the Brexit vote, the pound has fallen sharply against the US dollar, which has led to the accounting loss."

Image
https://www.bbc.com/news/business-38966165

If management gambles and looses: It's not their money. If they gamble and win: They get a good share of the profit in the form of bonuses.
Please enlighten me as to how hedging reduces risk? Twenty-five years ago there was much less risk hedging (gambling?) within companies. You have any company in mind whose profits 25 years back fluctuated as extreme as Rolls Royce or Airbus in recent years?

That apart currency prizes just like wheat prizes also have a signalling function.
Suppose:
Currency A is overvalued. Usually that means a balance of trade deficit and that holidays in that country are very expensive for the standard offered.
Currency B is undervalued Usually that means balance of trade surplus and that it's cheap to make holiday in the country.
It's not always true. E.g. Germany and Greece share a currency. German products are too cheap, holidays in Greece are too expensive. The usual prize signal function of the currency doesn't work. However mostly it's true.

If the market adjusts the value of currency A decreases and value of currency B increases. Businesses in A which were already profitable with the overvalued currency A get a signal to expand. Businesses which already struggled in B with the cheap currency get a signal to stop investing or even to shrink or to shift business abroad.
That is called risk in our discussion. Is it risk or is it necessary adjustment? Can there be an insurance against it long term?
Only a feudal world is static. What was Poland 30 years back, what is it now? China is another example. Depending on politics some countries go up, others go down. There is no business without risk and chances.
And even if a country has stable good politics there are always changes in industry. If aviation increases strongly and a country manufactures planes it may have to accept that TV manufacturing is done cheaper in some other country. One industry shrinks, another expands.
We enjoy a level of wealth unknown in world history. Insecurity is the price we have to pay for it. As Taoism says: "Embrace the change!"

I agree there can be short term fluctuations. That's why companies should have some equity.


Neither airbus nor RR are airlines. Currency hedging is not commodity hedging. Similar but playing the forex market isn’t like playing the demand for oil.

I was focusing on your original hypothesis of hedging with airlines, your subsequent points on currency and others industries seem separate.
 
dstblj52
Posts: 530
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 1:11 am

airzona11 wrote:
Sokes wrote:
airzona11 wrote:
The entire point of hedging is to reduce risk. Risk is part of business that is why your hedge. You are quite literally hedging the risk.

Did you read what I wrote? I know the common knowledge: hedging is an insurance. But I have show that it isn't so in the case of Airbus.
Need more examples?
Also in 2017 Rolls Royce lost big way by betting on currency movements.

"Rolls-Royce agreed to pay £671m to settle corruption cases with UK and US authorities and it has written off £4.4bn from currency related contracts. Like many international businesses, Rolls-Royce usually "hedges" its bets to protect itself from fluctuating currency markets.
Most international aerospace contracts are priced in dollars, but, as a UK company, much of Rolls-Royce's costs are in pounds.
It takes out long-term currency trades. These were designed to protect the firm against what seemed the most likely risk- the fall in the dollar - and many of them were put in place before the EU referendum was even announced.
Since the Brexit vote, the pound has fallen sharply against the US dollar, which has led to the accounting loss."

Image
https://www.bbc.com/news/business-38966165

If management gambles and looses: It's not their money. If they gamble and win: They get a good share of the profit in the form of bonuses.
Please enlighten me as to how hedging reduces risk? Twenty-five years ago there was much less risk hedging (gambling?) within companies. You have any company in mind whose profits 25 years back fluctuated as extreme as Rolls Royce or Airbus in recent years?

That apart currency prizes just like wheat prizes also have a signalling function.
Suppose:
Currency A is overvalued. Usually that means a balance of trade deficit and that holidays in that country are very expensive for the standard offered.
Currency B is undervalued Usually that means balance of trade surplus and that it's cheap to make holiday in the country.
It's not always true. E.g. Germany and Greece share a currency. German products are too cheap, holidays in Greece are too expensive. The usual prize signal function of the currency doesn't work. However mostly it's true.

If the market adjusts the value of currency A decreases and value of currency B increases. Businesses in A which were already profitable with the overvalued currency A get a signal to expand. Businesses which already struggled in B with the cheap currency get a signal to stop investing or even to shrink or to shift business abroad.
That is called risk in our discussion. Is it risk or is it necessary adjustment? Can there be an insurance against it long term?
Only a feudal world is static. What was Poland 30 years back, what is it now? China is another example. Depending on politics some countries go up, others go down. There is no business without risk and chances.
And even if a country has stable good politics there are always changes in industry. If aviation increases strongly and a country manufactures planes it may have to accept that TV manufacturing is done cheaper in some other country. One industry shrinks, another expands.
We enjoy a level of wealth unknown in world history. Insecurity is the price we have to pay for it. As Taoism says: "Embrace the change!"

I agree there can be short term fluctuations. That's why companies should have some equity.


Neither airbus nor RR are airlines. Currency hedging is not commodity hedging. Similar but playing the forex market isn’t like playing the demand for oil.

I was focusing on your original hypothesis of hedging with airlines, your subsequent points on currency and others industries seem separate.

Look I have a proposal to you why don't you take a job with a hundred percent commission-based pay packet, over a 40-year horizon it pays 10% better than your current job, but instead you take a salary which is basically a hedge on the value of the labor you produce each month, some months you have a week of vacation and take a few days sick leave and others you have really incredibly productive months, but in each case you're going to be paid essentially the same amount. Aviation is a risky business and trying to derisk it is often a good move, besides the market signal of pricing works just fine regardless of hedges because someone is still eating that lose or making the profit when an airline hedges its not all that different from insurance essentially.
 
Sokes
Topic Author
Posts: 2188
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 6:26 am

dstblj52 wrote:
Aviation is a risky business and trying to derisk it is often a good move, besides the market signal of pricing works just fine regardless of hedges because someone is still eating that lose or making the profit when an airline hedges its not all that different from insurance essentially.

The function of the price market signal is not that somebody takes losses. The function of a high oil price is that somebody has to stop consuming oil until oil production ramps up.
I asked before why not Delta with it's old, inefficient fleet? I don't say that Delta should cease operations. I say they should cut capacity by maybe 30 % or so. These will be the most inefficient planes. Ticket prices will go up. Nearly all seats will be sold. Even though Delta will have to accept a loss in such years. They also get higher profits when oil is cheap. Or, if the economy is really bad, have less losses than competitors with high capital costs.
I would appreciate if those who disagree can tell who should reduce oil consumption instead.
Why can't the world be a little bit more autistic?
 
Sokes
Topic Author
Posts: 2188
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 6:44 am

airzona11 wrote:
Neither airbus nor RR are airlines. Currency hedging is not commodity hedging. Similar but playing the forex market isn’t like playing the demand for oil.

I was focusing on your original hypothesis of hedging with airlines, your subsequent points on currency and others industries seem separate.

True.
I took Airbus and RR as I don't know about airlines. Airbus/ RR hedge for currency fluctuations, airlines for oil price fluctuations.
Boof02671's answer in post 32 suggests that it's not so different.

Maybe the problem is a lack of working capital. Airlines sell tickets how long in advance? They need the money of the tickets as they pay today's bills with flights several months away. Is this a stable system? Nobody can know what the oil price will be in six months. How can the prize signal work for airlines if seats are already sold?
There is need for a global agreement that airline tickets can only be sold two months in advance.
Is this an interference in free markets? I forgot. Government intervention is only desired when the risks companies take finally come true.

Are ticket sales long in advance and the resultant inability to react to oil price signals the reason the airline industry is so high risk and in the news every few years?
Why can't the world be a little bit more autistic?
 
dstblj52
Posts: 530
Joined: Tue Nov 19, 2019 8:38 pm

Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 8:50 am

Sokes wrote:
dstblj52 wrote:
Aviation is a risky business and trying to derisk it is often a good move, besides the market signal of pricing works just fine regardless of hedges because someone is still eating that lose or making the profit when an airline hedges its not all that different from insurance essentially.

The function of the price market signal is not that somebody takes losses. The function of a high oil price is that somebody has to stop consuming oil until oil production ramps up.
I asked before why not Delta with it's old, inefficient fleet? I don't say that Delta should cease operations. I say they should cut capacity by maybe 30 % or so. These will be the most inefficient planes. Ticket prices will go up. Nearly all seats will be sold. Even though Delta will have to accept a loss in such years. They also get higher profits when oil is cheap. Or, if the economy is really bad, have less losses than competitors with high capital costs.
I would appreciate if those who disagree can tell who should reduce oil consumption instead.

The person who choose not to hedge and now cannot run a viable business at the current oil prices, a hedge is no different from you buying house insurance, all the hedge does is set what you have to pay for oil regardless of it's price, it's no different from how when you purchase house insurance your essentially setting the maximum and minimum cost that damage to your house can cause. It's just about adjusting who has to bear the risk of changes in supply and demand.
 
nws2002
Posts: 921
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 5:17 pm

Sokes wrote:
dstblj52 wrote:
Aviation is a risky business and trying to derisk it is often a good move, besides the market signal of pricing works just fine regardless of hedges because someone is still eating that lose or making the profit when an airline hedges its not all that different from insurance essentially.

The function of the price market signal is not that somebody takes losses. The function of a high oil price is that somebody has to stop consuming oil until oil production ramps up.
I asked before why not Delta with it's old, inefficient fleet? I don't say that Delta should cease operations. I say they should cut capacity by maybe 30 % or so. These will be the most inefficient planes. Ticket prices will go up. Nearly all seats will be sold. Even though Delta will have to accept a loss in such years. They also get higher profits when oil is cheap. Or, if the economy is really bad, have less losses than competitors with high capital costs.
I would appreciate if those who disagree can tell who should reduce oil consumption instead.


In capitalism, markets adjust themselves. If the price rises high enough, someone will stop consuming oil. That is exactly how supply and demand works, they always find a balance.

Remember, hedges are just buying today for the future. So, maybe Delta bought enough to last for 3 months. They have to make a decision on if they feel oil will continue to be high once their futures are done, and consider raising ticket prices and reducing flying. Airlines have very high fixed costs though, as we've seen with COVID-19. Even parking aircraft and greatly reducing flying means they still have to pay employees, maintenance expenses on aircraft, and finance/lease payments on at least some aircraft.
 
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vhtje
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 6:22 pm

Sokes wrote:
If a resource is limited not all demands can be met. It's the price that decides whose demands get satisfied and whose demands can't.
Beside costing money, fuel hedges contradict the distribution function inherent in the oil price. Therefore I believe airlines shouldn't be allowed to hedge their fuel.
Please proof me wrong.


No offence meant, but that's a silly argument. You have not thought this through.

Airlines sell tickets to their customers months before the make the supply, ie the customer takes the flight. The airline industry is like few others with its high exposure to upward movement in fuel costs. By hedging fuel costs, airlines are able to put some certainty in their future cost structure. If hedging was outlawed, then airlines couldn't price future tickets with any certainty. If you bought your ticket now, in May, for your December trip home for Christmas, would you be upset if the airline billed you in late November for an additional fuel levy, because world fuel prices rose sharply since you bought your ticket? Of course you would - you'd scream blue murder, and threaten to sue, citing breach of contract. Airlines would be forced to stop selling advance fares, which in turn would drive ticket prices up.

Fuel hedging is good for passengers, and good for airlines' bottom lines, even if they sometimes get it wrong, because at least it gives some certainty to their biggest cost. I think I remember Qantas getting a fuel hedge terribly wrong a few years back.
I only turn left when boarding aircraft. Well, mostly. All right, sometimes. OH OKAY - rarely.
 
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enilria
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 8:58 pm

mcg wrote:
enilria wrote:
Sokes wrote:
If a resource is limited not all demands can be met. It's the price that decides whose demands get satisfied and whose demands can't.
Beside costing money, fuel hedges contradict the distribution function inherent in the oil price. Therefore I believe airlines shouldn't be allowed to hedge their fuel.
Please proof me wrong.

Why should options traders be able to buy fuel options? They don’t even use fuel. Airlines buy these options to reduce risk of price fluctuations on their huge fuel purchases. For traders it is simply an investment tied to nothing in their own real world.


Those option traders provide a market for the airlines (and others) to trade in. Without them there is no hedging.

My point was that it makes more sense for airlines to hedge than anybody. Airlines are attempting to smooth earnings volatility at a fuel dependent business. Options traders are basically gambling. They should be allowed to gamble, of course.
 
tphuang
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 9:21 pm

what's the point of having derivatives in these products if not to help business (like airlines) hedge their exposure and providing buffer against underlying shock movements?

All these derivatives got created because businesses needed to hedge.

Airlines should not just hedge against fuel, but also FX and whatever else might be risks.
 
ScottB
Posts: 7131
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Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 10:48 pm

Sokes wrote:
I never read airline financial statements. What I observed with Airbus:
In billion Euro:
2015 profit for the period: 2,7 / comprehensive income for the period: 0,05 / net change in fair value of cash flow hedges: -4,7
2016 profit for the period: 1,0 / comprehensive income for the period: -0,9 / net change in fair value of cash flow hedges:-0,2
2017 profit for the period: 2,4 / comprehensive income for the period: 10,1 / net change in fair value of cash flow hedges: 10,6 !!!!
2018 profit for the period: 3,0 / comprehensive income for the period: 0,0 / net change in fair value of cash flow hedges: -3,0
2019 profit for the period: -1,3 / comprehensive income for the period: -4,3 / net change in fair value of cash flow hedges: -1,4
https://www.airbus.com/investors/financ ... ports.html
(click on financial statements/ short notes. It's within the first three pages in concerned statement.)

Pension benefit plans and currency hedges decide the comprehensive income to a large degree. Operating income is important, but far less than the currency hedges.
Comprehensive income fluctuates extreme. It would fluctuate less without the currency insurance. But I believe manager bonuses depend strongly on profit. It may be more attractive for the management if profit of five years comes mostly in one year (2017) with extreme profits than if it is evenly distributed.
So I believe the function of currency hedges is not to insure against risk, but to increase risk and chance.


Airbus isn't hedging currency to create extreme profits in one year. Airbus hedges currency because they sell products in a currency which is different from the one(s) which represent(s) a large portion of their costs. The same is true for Rolls-Royce. All those employees in Toulouse/Hamburg/Broughton/Derby/etc. expect to be paid in euros or pounds but the airplanes/engines/parts get sold in dollars. When Airbus sells an A321NEOXLRWTFOMGLOLPDQDTFBRBGTGPOSLGBTQIA+ in dollars for delivery in 2025, they want some assurance that those dollars will bring in at least as many euros as they need in the budget. Ditto for RR and sterling:

Sokes wrote:
Also in 2017 Rolls Royce lost big way by betting on currency movements.

"Rolls-Royce agreed to pay £671m to settle corruption cases with UK and US authorities and it has written off £4.4bn from currency related contracts. Like many international businesses, Rolls-Royce usually "hedges" its bets to protect itself from fluctuating currency markets.
Most international aerospace contracts are priced in dollars, but, as a UK company, much of Rolls-Royce's costs are in pounds.
It takes out long-term currency trades. These were designed to protect the firm against what seemed the most likely risk- the fall in the dollar - and many of them were put in place before the EU referendum was even announced.
Since the Brexit vote, the pound has fallen sharply against the US dollar, which has led to the accounting loss."


RR needed to hedge against the risk of a fall in the dollar because they sell in dollars. Yes, they take a loss on the value of those hedges, but they benefit from the upward market movement of the dollar. Those engines sold in dollars brought in a lot more GBP than they would have had the dollar fallen. Their costs in pounds remained the same. They just don't get the full benefit of the upswing in the dollar because they had a loss on the hedges. If the dollar had gone down they would have been protected against that.

It isn't entirely unreasonable for airlines to engage in some currency hedging as well -- again because the value received in foreign currencies may vary against the value of the home currency when the ticket is flown (which allows the airline to book the ticket value as revenue). And, in fact, IAG, AF-KLM, and LH Group all hedge currencies to mitigate this risk.
 
Dmoney
Posts: 134
Joined: Tue Mar 17, 2020 9:53 am

Re: Should airlines be allowed to hedge against fuel price flactuations ?

Mon May 11, 2020 11:25 pm

Sokes wrote:
airzona11 wrote:
Neither airbus nor RR are airlines. Currency hedging is not commodity hedging. Similar but playing the forex market isn’t like playing the demand for oil.

I was focusing on your original hypothesis of hedging with airlines, your subsequent points on currency and others industries seem separate.

True.
I took Airbus and RR as I don't know about airlines. Airbus/ RR hedge for currency fluctuations, airlines for oil price fluctuations.
Boof02671's answer in post 32 suggests that it's not so different.

Maybe the problem is a lack of working capital. Airlines sell tickets how long in advance? They need the money of the tickets as they pay today's bills with flights several months away. Is this a stable system? Nobody can know what the oil price will be in six months. How can the prize signal work for airlines if seats are already sold?
There is need for a global agreement that airline tickets can only be sold two months in advance.
Is this an interference in free markets? I forgot. Government intervention is only desired when the risks companies take finally come true.

Are ticket sales long in advance and the resultant inability to react to oil price signals the reason the airline industry is so high risk and in the news every few years?



It's hard to comprehend something so confused. RR and Airbus have costs in pounds and Euros and lots of sales pricer in dollars. They hedge their dollar risk, end of.

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