Fuel Hedging

[autofixer]

I know Doug was burned on fuel hedging and since sworn it off, but has anyone in management considered pitching to him hedging here at $60, since AAL is flush with cash?   It appears the Fed is determined to devalue the dollar and that will result in rising oil prices.  Oil is skyrocketing in price, even though the world is awash in supply.  U.S. monetary policy is driving the price rise and how can it reverse with our massive debt?  

 

[WorldTraveler]

It is doubtful that any company can buy significant long term hedges at current levels

AA execs addressed that on the most recent earnings call

 

[FWAAA]

The OP is correct - oil is going to increase in price. Thing is, everybody knows that, the only unknowns are "when" the increases happen and "how high" will prices go. Since everybody knows that oil is going to go up in price, there aren't very many people willing to take the other side of the gamble at a cheap price. Today's market prices are cheap, but futures pricing has not declined substantially, so hedging contracts for the future are not at today's low prices.

In the early 2000s, when Southwest embarked on its famous fuel-hedging victories, there were lots of sophisticated financial types who did not foresee oil climbing as high or as fast as it did. Recall that the huge price spike began around Labor Day, 2005, when Hurricane Katrina hit, and by then, WN had already saved billions by successfully hedging for several years before that. From Labor Day 2005 to July 2008, oil prices spiked from about $50/bbl to about $140/bbl, and WN made a killing.

Now, as a result of the steep and unexpected price collapse in the second half of 2014, everybody expects oil to go back up. It will have to stay cheap for a long time to eliminate that expectation. The successful hedgers will be the ones who time the market correctly and capitalize on those vulnerable financial types once they have been lulled into a false sense of security, thinking that the low prices will stick around. Right now, nobody expects the low prices to stay where they are long-term. That's why the OP would like to lock in today's prices for the long-haul. It's unfortunate that the hedging counterparties are as sophisticated and cautious as they are. That sophistication and caution is telling them not to gamble that prices stay low for a long time.

If AA had sufficient storage capacity, say 12-16 billion gallons worth, then AA could fill up the storage tanks at today's cheap prices and then use that fuel for the next 3 to 4 years. That way, AA could lock in today's prices at the cost of the storage facility and the interest cost on the purchase price (interest would eat up about 5% annually). Its not realistic to try to store more than 10 billion gallons of jet fuel, so that ain't happening.

 

[autofixer]

I don't think you actually take delivery on your futures contracts if you hedge.  You just pocket the spread between your purchase price and selling price. The accountants work magic and make the numbers work with the actual fuel cost.   An easy way for every-man to hedge is USO ETF.  USO is an easy way you can hedge your personal fuel costs if you, like I, believe fuel costs are going up.  

 

[WorldTraveler]

The care of stored jet fuel is a tricky process; I doubt if any US airline would take the risk

 

[CMH_GSE]

Oil trending down with a bullet.

http://www.marketwatch.com/story/oil-prices-edge-lower-as-china-devalues-yuan-2015-08-11

 

[CMH_GSE]

And the hits just keep on coming...

http://money.cnn.com/2015/08/11/news/economy/oil-prices-collapse-opec/

 

[WorldTraveler]

Airlines gain far more than they lose in oil related business travel.

Part of the problem of low oil prices is also the strong dollar which has a bigger impact on the global 3 US airlines but based on what we have seen over the past year in profitability, lower oil is worth more to the US3 than the shift in business.

Note that US airlines stand to gain the most.

The only real question is, given that fuel prices will stay for years to come, how long US airlines can get by with record profits before the government pushes them to reduce fares.

For airline employees that get profit sharing, the next few years will be very lucrative.

The current situation also argues for aggressive capacity growth since the risk of adding routes is much lower with low oil prices.

The problem for upstarts is that the pilot shortage means there are few pilots in the pipeline so there will increasingly be a bidding war for pilot labor.... and with it all airline labor.

 

[CMH_GSE]

Airlines gain far more than they lose in oil related business travel.Part of the problem of low oil prices is also the strong dollar which has a bigger impact on the global 3 US airlines but based on what we have seen over the past year in profitability, lower oil is worth more to the US3 than the shift in business.Note that US airlines stand to gain the most.The only real question is, given that fuel prices will stay for years to come, how long US airlines can get by with record profits before the government pushes them to reduce fares.For airline employees that get profit sharing, the next few years will be very lucrative.The current situation also argues for aggressive capacity growth since the risk of adding routes is much lower with low oil prices.The problem for upstarts is that the pilot shortage means there are few pilots in the pipeline so there will increasingly be a bidding war for pilot labor.... and with it all airline labor.

Interesting.
Previously, when I posted about oil prices going and staying low, you posted about how oil was going back up and DL would win the day because they hedged and AA didn't.
Narrative now is, you only win if you have profit sharing.
That's unless of course, the company can arbitrarily reduce the amount of PS it decides to share, like DL is now doing with all of its work groups...

 

[WorldTraveler]

if you were certain that oil prices were going to stay low, then I hope you put some money on it in the market. What I or anyone else says doesn't matter if you're the one that is raking in the dough.

You did take some of it home, didn't you?

as for the rest, you clearly selectively read. go back and digest all of what I said with regard to airline employees.

For those who have profit sharing, the next few years will be very lucrative. DL employees could easily top 20% of their salary in profit sharing this year, up from last year's 16.5%.

And, in the aftermath of DALPA's defeat of the TA, there are no plans for any profit sharing to be reduced by any airline. There never were any announced plans to reduce anything for any other workgroup.

 

[AANOTOK]

Airlines gain far more than they lose in oil related business travel.

Part of the problem of low oil prices is also the strong dollar which has a bigger impact on the global 3 US airlines but based on what we have seen over the past year in profitability, lower oil is worth more to the US3 than the shift in business.

Note that US airlines stand to gain the most.

The only real question is, given that fuel prices will stay for years to come, how long US airlines can get by with record profits before the government pushes them to reduce fares.

For airline employees that get profit sharing, the next few years will be very lucrative. DL employees could easily top 20% of their salary in profit sharing this year, up from last year's 16.5%.

The current situation also argues for aggressive capacity growth since the risk of adding routes is much lower with low oil prices.

The problem for upstarts is that the pilot shortage means there are few pilots in the pipeline so there will increasingly be a bidding war for pilot labor.... and with it all airline labor.

That's all you need out of that comment. WT had to remind you again. The haves and have nots!

 

[WorldTraveler]

if that is what you want to focus on, so be it.

let's be honest, though.

No airline employee, including mgmt., have had anything to do with the price of oil or the value of the dollar.

both are far larger than just one company. If Exxon profits are getting hammered because of the drop in fuel prices, and petroleum is their business, it is hard to argue that any airline employee has any reason to take credit for the drop in the price of oil.

or you simply accept that profits are profits and those companies that have them are free to do with those profits as they choose.

 

[autofixer]

I wonder what the break even oil price is for that old, decrepit Delta refinery?

 

[WorldTraveler]

first of all the refinery meets EPA guidelines now... DL spent a couple hundred million dollars to bring it up to standards.

Second, the refinery does its magic in reducing DL's JET FUEL costs regardless of the price of crude oil. you and others have never understood the concept of DL's use of the refinery to reduce the jet fuel crack spread... which is why the refinery is profitable to DL.

third, the refinery successfully reduced DL's fuel hedge losses. AA took the decision to not be protected in any way from fuel prices. The refinery works with DL's fuel hedges. Even with the drop in crude oil prices, other carriers still are continuing their hedges. DL simply has hedges AND the refinery, a combination no other airline has.

and finally, most of the US industry's bad fuel hedges have expired. AA had its day in the sun for not hedging and the much lower final cost of jet fuel because of it. Now, fuel prices among all of the carriers will be fairly comparable.

Parker made a good call... he is personally benefitting handsomely for it.

the future will not be the same as what has taken place over the past year - which Wall Street recognizes and which is why the gap between AA and the highest market cap airline in the US industry has widened over the past couple months.

 

[1AA]

I wonder how that investment for Delta is paying off owning their own oil refinery? Did it ever develop into anything financially positive for them?