Fuel Hedging
- Thread starter B767
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Baronman
Well-Known Member
Well, obviously it's yet to be seen if fuel prices will go back up above $70....That's part of the bet.
The article posted doesn't explain much about fuel hedging, just that SWA has fuel at $30-something a barrel. Which by the way I'm looking forward for their fuel costs to go up, I think in general it will help other companies when they pay more. It's not that I dislike SWA per say, it's just so hard for others to compete.
ANyways...the reason why many airlines don't hedge is that they cannot. Would you want essentially bet (hedge) millions of dollars worth fuel with a company that might not be able to eventually pay you? SWA has cash so people are willing to bet with them. That's my take on it at least...
The article posted doesn't explain much about fuel hedging, just that SWA has fuel at $30-something a barrel. Which by the way I'm looking forward for their fuel costs to go up, I think in general it will help other companies when they pay more. It's not that I dislike SWA per say, it's just so hard for others to compete.
ANyways...the reason why many airlines don't hedge is that they cannot. Would you want essentially bet (hedge) millions of dollars worth fuel with a company that might not be able to eventually pay you? SWA has cash so people are willing to bet with them. That's my take on it at least...
DMBinHBurg
New Member
B767
The airlines aren't hedging because who is to say fuel will go up from here? Just last week it was almost at $52 a barrell. Oil could go down to $40 a barrel just as fast as up to $70.
The airlines aren't hedging because who is to say fuel will go up from here? Just last week it was almost at $52 a barrell. Oil could go down to $40 a barrel just as fast as up to $70.
Hedging is a risk either way you do it. Say if oil is $50 a barrell, but you're able to purchase hedges at $35/bbl, fantastic. But if the price drops to $30, not only did you spend a premium to purchase the right to buy gas at $35/bbl, you're also now locked into paying $5 extra/bbl.
Hypothetically speaking of course.
Hypothetically speaking of course.
lostplanetairman
Well-Known Member
Actually, all it does is give you the right to purchase the fuel at $35/bbl; you can go out on the free market and purchase fuel at any price you can get. So it's insurance against the rising costs.
Bigey
Well-Known Member
Ehh good on Southwest! They took the chance, and won. I like to think of business as a calculated risk! Haha
amorris311
Well-Known Member
it is!
SpiraMirabilis
Possible Subversive
Don't get angry at SWA because other airline management isn't as intelligent or decisive as they are. That is kind of a dangerous attitude.
B767
Well-Known Member
I believe 2009
Baronman
Well-Known Member
I think you mistook what I said. In no way do I think that their fuel hedge is unfair, they took that risk and it paid off. But when fuel costs are one of your biggest expenditures and your competitor pays a fraction of what you pay, it doesn't help your bottom line. And my company's bottom line affects my bottom line, whether it be profit sharing or when it comes time to negociate a new contract.
I think even the American CEO (I forget his name) mentions he's waiting for the day when SW pays what they pay for fuel. This was from that Documentary about a day in the life of AA. Maybe they just tried to paint him in the best light but he seems like a pretty stand up guy (considering he's airline management).
lostplanetairman
Well-Known Member
Fuel hedging is part of their business model. So, don't look for them to end soon.
From Gary Kelly:
"Our fourth quarter 2006 unit costs (economic) increased 3.0 percent due to higher jet fuel prices. Even with a superb fuel hedging position and $118 million in fourth quarter 2006 cash hedging gains, our jet fuel costs per gallon (economic) increased 28 percent from a year ago to $1.56, as expected. We are benefiting from the recent decline in energy prices and are now 100 percent hedged (economic) for first quarter 2007, capped at an average crude-equivalent price of approximately $50 per barrel (compared to over 75 percent hedged at approximately $36 per barrel for first quarter 2006)."
"Based on this hedge position and today's market prices, we are forecasting our first quarter 2007 jet fuel costs per gallon (economic) to be in the $1.65 to $1.70 range. We are nearly 95 percent hedged (economic) for the remainder of 2007 at approximately $50 per barrel; 65 percent in 2008 at approximately $49 per barrel; over 50 percent in 2009 at approximately $51 per barrel; over 25 percent in 2010 at $63 per barrel; approximately 15 percent in 2011 at $64 per barrel, and 15 percent in 2012 at $63 per barrel."
tonyw
Well-Known Member
Actually, Doug, a hedge just gives you the RIGHT to purchase a certain commodity at a certain price. If you buy hedges for oil at $40 a barrel for June deliveries and the price of oil declines to $35 a barrel, you are not obligated to actually purchase the oil at $40 a barrel.
flyover
New Member
Right. Hedging is not a "risky" gamble that SWA got lucky on. Hedging takes the risk out of being 100% exposed to the market in oil. It's just good business. Ask AA how much they are making off of foreign currency speculation, something SWA probably doesn't get involved in at all.
But hedging costs money - and more to the point it costs cash, since taking out a loan to hedge fuel isn't normally considered a good business practice. So SWA had cash to hedge fuel at a time when nobody else did - hence their advantage.
As to playing the currency game - you have to earn foreign currency in order to play that game and SWA, as we all know, is a domestic airline.
As to playing the currency game - you have to earn foreign currency in order to play that game and SWA, as we all know, is a domestic airline.
flyover
New Member
Actually SWA could take their cash and speculate in currency if they wanted to. In that case they would be engaging in risky speculation.
On the other hand, since they are a consumer of aviation fuel and will spend hundreds of millions if not billions on that commodity, investing in future contracts on fuel reduces their risk. People often confuse what speculators do with commodity contracts with what companies like SWA are doing. The futures markets in commodities was set up as a risk reducing venture and it operated like that until speculators discovered it. It can still serve that function for savvy and well run companies. Others just have to pray that a huge oil spike doesn't wipe them out.
But it is true that since SWA has run their business so well over the years that they have top quality credit and plenty of cash reserves they do have an unfair advantage. And I'm guessing that being good at the airline game is an unfair advantage they'll have for a long time.
mtsu_av8er
Well-Known Member
It's not their fault that they made a smart business decision . . . you can't blame them for other companies' mistakes.
Timbuff10
Well-Known Member
I'm not saying that the brown trout forced other airlines to make mistakes, just that in order to compete with southwest's lucky break, some other airlines way of competing was to do things that ended up not working out so great.
To me that says alot about southwest's business plan... it was very good. Question is, when they are on equal ground again, will they still be the darlings of the wal-mart crowd?
Wonder what kind of other goodies management can come up with? Maybe it is time to go after the pilot's pay since they are actually compensated fairly well compared to other airlines?