Does fuel hedging increase fuel prices?

[Beetle007]

Most airlines only use hedges as a form of revenue generation, and actually pay market price for fuel. This is how SWA does it.

Yep.

Exchange-traded derivatives are not available for Jet Fuel in the U.S.A.

Airlines are forced to hedge either crude oil or heating oil. Neither one works too well in a jet engine =)

Southwest chooses heating oil because it has a higher correlation to the price of jet fuel.

 

[Beetle007]

Most airlines only use hedges as a form of revenue generation, and actually pay market price for fuel. This is how SWA does it.

Yep.

Exchange-traded derivatives are not available for Jet Fuel in the U.S.A.

Airlines are forced to hedge crude oil or heating oil. Neither one works too well in a jet engine =)

Southwest chooses heating oil.

 

[bugchaser]

Most airlines only use hedges as a form of revenue generation

Wrong again. As I and others have said, it's called risk management. Hedges are in place as a form of insurance against rising prices. Managing risk is the name of the game and hedges are great tools for that.

 

[Muskycat]

Wrong again. As I and others have said, it's called risk management. Hedges are in place as a form of insurance against rising prices. Managing risk is the name of the game and hedges are great tools for that.

Hedges are a great tool but they are not fail safe.
Just curious what your experience is in trading commodities and using hedges?

 

[Beetle007]

It is a hedge against the falling dollar. In effect, since the dollar's value is unstable, oil has become a form of currency.

Good point. It seems like buying oil has become similar to buying gold or silver.

I also thought it was interesting on CNBC when an oil invester recommended buying airlines as a hedge for falling oil prices.

I noticed today that China raised the price of gas under pressure from the U.S.A. Chinese drivers now pays a maximum of 3.12 HK dollars (0.4 U.S. dollar) per liter. For those of you without a calculator, the Chinese are now paying $1.51 per gallon of gas. After 18 months of no changes in their gas prices, they just raised the price 8 cents per gallon.

The Chinese price controls haven't caused hoarding or shortages in China. It has just pissed off U.S.A. You might also find it interesting that China is starting to slant drill for oil off the coast of Florida under an agreement with Cuba.

 

[bugchaser]

Muskycat, I don't claim to know everything but I did spend several years working for a big grain company. I spent a lot of time developing hedging strategies for large farms. Some differences but the mechanics are much the same. I have to say that much of agribusiness and even some small farmers are much better at risk management than most airline managers.

 

[Beetle007]

Wrong again. As I and others have said, it's called risk management. Hedges are in place as a form of insurance against rising prices. Managing risk is the name of the game and hedges are great tools for that.

His point was that oil hedges don't change the price an airline pays for fuel. Oil hedges generate revenue when oil prices increase.

The revenue that is generated can be used to increase the profitability of a company (i.e., SWA) or to mitigate a loss.

 

[SkiFishFly]

You might also find it interesting that China is starting to slant drill for oil off the coast of Florida under an agreement with Cuba.

I wonder about this - Are they taking oil that should belong to the USA?