Boyd: "Okay, Panic Is Now Acceptable Behavior..."

[MachPi]

Ok, that's the most retarded thing I've yet heard on this board and that's saying something.

Okay, I guess I'm as retarded as Tref because I studied things other than economics during school. I logically assume that when one entity is, for example, procuring a product at $X, while all its competitors are having to buy it at $1.7X, somebody, somewhere is losing money. I guess I'm an idiot for thinking that.

I don't expect much from the dismal science, as long as it tries. And it tries so hard, like the pitiful neighbor's kid at the special olympics.

 

[arthompson]

Danger my apologies, I must have confused his bio with someone else. I have been reading alot of big wig bios lately and am posting from work. My apologies to you and everyone else for posting bad information.

 

[StaySeated]

Wow is this a boyd love thread or what. I fail to be impressed with this gent. no hard feelings, I just lost interest when he repeatedly divided a big number with a small number and discovered that 50 seat casm is higher than 100 seat casm. He must have someone new on staff because he failed to mention his biggest client (emb) for the first time in over two years of over the top, unoriginal press releases.

 

[Nindiri]

Boyd has a keen eye for the obvious. He is usually right because he is usually saying things that everyone else has known for months or even years.

 

[Phil O'Sopher]

I have never been very impressed with anything that Mr. Boyd had to say or with his "sermon from the mount" manner. His full bio from his website is very unimpressive and he strikes me as just another self proclaimed expert who couldn't make it in the business and joined a large group of snake oil salesmen who try to convince everyone that they have a legitimate service to sell. He is to aviation consulting what Kit Darby is to aviation employment.

 

[Tref]

Ok, that's the most retarded thing I've yet heard on this board and that's saying something. I don't know much about SWA or the specifics of their hedges, but I know all about futures contracts.

A futures contract is simply today's spot price (let's say oil at $66) plus the cost of borrowing money for the length of the contract (let's say 1 year) plus a bid/ask premium.

If you buy a contract, you are just paying for the cost of the commodity today plus the cost to borrow the money for the length of the contract. That's it. There is no "company that does it's fuel hedging through", it's the open futures market.

Boyd, although often full of a bit of hot air really pooched this one, nobody took the other side of a bet with SWA, instead a financial firm simply bought the rights to oil at $25, sold those barrels to SWA at the cost to borrow the money and a bid/ask spread. There is ZERO RISK on the side of the market maker that sells a future.

My explanation leaves out a little bit of detail, but not much. Any basic undergrad finance course has this as a homework assignment---open the WSJ, pick a commodity, and by the spot price and today's interest rate, you can use a simple calculation to figure out the price of the futures--then you go check (in the same section) the price of the futures and voila, they're the same!

The way I understand it is that you can't buy jet fuel on the futures market and there is some kind of a swap with heating oil futures. Obviously I don't know the details, that's why I was asking.

Having said that, I was told by someone who should know. I don't know enough about it to argue with you, but I don't know you and I do know the person who told me this. I'm betting he's right.

Maybe you should check into the details of the SWA hedge and then tell me with more confidence how retarded I am.

 

[Gillegan]

Ok, that's the most retarded thing I've yet heard on this board and that's saying something. I don't know much about SWA or the specifics of their hedges, but I know all about futures contracts.

A futures contract is simply today's spot price (let's say oil at $66) plus the cost of borrowing money for the length of the contract (let's say 1 year) plus a bid/ask premium.

If you buy a contract, you are just paying for the cost of the commodity today plus the cost to borrow the money for the length of the contract. That's it. There is no "company that does it's fuel hedging through", it's the open futures market.

Boyd, although often full of a bit of hot air really pooched this one, nobody took the other side of a bet with SWA, instead a financial firm simply bought the rights to oil at $25, sold those barrels to SWA at the cost to borrow the money and a bid/ask spread. There is ZERO RISK on the side of the market maker that sells a future.

My explanation leaves out a little bit of detail, but not much. Any basic undergrad finance course has this as a homework assignment---open the WSJ, pick a commodity, and by the spot price and today's interest rate, you can use a simple calculation to figure out the price of the futures--then you go check (in the same section) the price of the futures and voila, they're the same!

OK, I don't pretend to be a financial expert in any way, shape or form but your statement about zero risk to the seller of the future has me confused. My understanding is that the original seller of the future is the producer of the commodity itself. What they are trading is possible increased profits (or losses) due to spikes and troughs in pricing for price stability. The way I understand it, there is value to the farmer to know that he can get X dollars per bushel of stuff next year. If his cost of production next year exceeds the value of the futures contract, he has lost the bet. This is why commodity futures and their value on the open market are so dependent on the actual supply of said commodity. The value of the futures contract is based on the difference between the contract value per bushel and the price of that bushel on the open market but at this point, the original seller of the contract has gotten his money, for better or worse.

Now I don't know how far into the future you can purchase a fuel contract for but it seems to me that the longer demand for oil exceeds supply the less incentive there is for the original seller (producer) to sell a futures contract at the differential prices that we are seeing right now. You could say that the original seller (producer) of those contracts has lost additional money by agreeing to sell those barrels at $30 rather than the $65+ that we are seeing now. I guess the bet going forward would be based on demand, supply, refining capacity and stability in the oil producing nations of the world. One thing that I do know is that it is an essentially zero sum game and if someone is winning by possessing a future for oil at $30 a barrel, then someone is losing by not getting the $65 that is being demanded on the open market.

 

[FlyBoeingJets]

Smartest article I've read from Boyd. I find the writing style and hyperbole slightly irritating, but he is right more than wrong in this article.

Legacies will have new found low costs and good international revenue. Revenue the LCC's won't have as they beat each other up on the domestic routes. But they have big debt that will weigh down profits. If international revenue overcomes debt payments, they are golden.

Rising fuel costs are to be feared. To keep loads up ticket prices can't go up much. So other costs have to come down. If not, some passengers will fly less, much less. On the other hand ticket prices might continue to spiral up. I hope that is the case.

Southwest has a decent revenue stream but costs are rising as hedges trend to a lower percentage of fuel needs. Labor costs are going up with yearly union pay raises. Southwest is entering uncharted waters with their industry leading pay rates. Every other carrier with the highest pay has eventually paid dearly for it.

But my conclusion on Southwest is different than Boyd's. I think Southwest will continue to succeed. But they will have stronger competition as Boyd described. Growth will not come easily.

Regionals. This is a tough one. If they get bigger RJ's that can be defined as narrowbodies, their cost structure suddenly becomes competitive.

 

[FlyBoeingJets]

I heard a rumor that the company that Southwest does it's fuel hedging through is in serious financial trouble. That's not hard to believe seeing as how they're losing their shirts. Can anyone confirm this? If that company goes CH 11, does SWA lose it's hedges?

Not sure about this one, but I think Southwest has bought "hedges" as financial instruments through a firm that makes money buying and selling on the market. Like a brokerage that makes commission. After you take a position you sell when you want through whatever firm you choose. That is how Southwest shows investment income on fuel contracts.

If the firm doing the trading goes under it is because the market for these instruments is drying up or they are mismanaged. Southwest will just buy and sell somewhere else.

I'm hoping SWA doesn't hold a "promise" from some small, weak oil company to provide fuel at a low price. That is a business risk instead of a "lock-in" price risk. Haven't heard this one before. I suspect it is vicious rumor.

 

[SDF2BUF2MCO]

Regionals. This is a tough one. If they get bigger RJ's that can be defined as narrowbodies, their cost structure suddenly becomes competitive.

Stating the obvious, but with a stroke of the pen, scope clauses could be rewritten and the real worth (or non-worth depending on your view) of the RJ would be unmasked.

 

[Peanut gallery]

Poor Mikeeee

I have never been very impressed with anything that Mr. Boyd had to say or with his "sermon from the mount" manner. His full bio from his website is very unimpressive and he strikes me as just another self proclaimed expert who couldn't make it in the business and joined a large group of snake oil salesmen who try to convince everyone that they have a legitimate service to sell. He is to aviation consulting what Kit Darby is to aviation employment.

Ran the marketing department into the ground for a couple of carriers, no body would hire him then he starts his own firm. He has not been right about anything at a major level since 1995. The only things he gets right are the obvious issues that everybody already knows.
The media goes to him because he thinks it boost his image and marketability of his firm. It is almost as pathetic as Maria Schavo getting the call every time an accident occurs. She and Mikee would not know actual cause and effect if it bit them in the face.

What a joke, please quote anytime in Mikee's history that he has been right about the progression of reality.

 

[radarlove]

The way I understand it is that you can't buy jet fuel on the futures market and there is some kind of a swap with heating oil futures. Obviously I don't know the details, that's why I was asking.

Having said that, I was told by someone who should know. I don't know enough about it to argue with you, but I don't know you and I do know the person who told me this. I'm betting he's right.

Maybe you should check into the details of the SWA hedge and then tell me with more confidence how retarded I am.

Ok, I checked into it and you're still retarded.

Insults aside, I did a Google on SWA fuel hedging (as you could have done as well) I found a good academic paper here, with the following quote:

Jet fuel futures contracts do not exist in the United States, so futures on crude or heating oil must be used instead to hedge jet fuel purchases. Because these futures contracts are based on an underlying commodity other than jet fuel, they introduce basis risk because they are not perfectly correlated. Basis is generally defined as: Basis = spot price of hedged item – futures price of selected contract

So, back to what I was saying, the cost of the futures contract is based on today's spot price. From reading the paper, SWA uses over-the-counter contracts (traded by investment banks) on fuel oil, which has a 93% correlation with jet fuel, since jet fuel contracts don't exist to purchase.

Here's the interesting part: SWA uses a "mean reversion" strategy, where they bet on the cyclic part of oil prices, "what goes up, must come down".

Here's another interesting quote:

Secondly, hedging allows airlines to take advantage of investment opportunities in times of high commodity prices. Carter et. al. demonstrate that airline investment opportunities are positively correlated with periods of high jet fuel prices. This is explained by the significant distress costs in the industry. It is more likely that airlines will go bankrupt when fuel prices are very high, and in such cases they are often forced to sell planes and other assets at substantially below-market prices.

Another quote: As of December 2003, Southwest had a mixture of purchased call options, and fixed price swap agreements in place to hedge portions of its expected 2004-2007 jetfuel consumption.

So back to my argument that your rumor is retarded, saying "I hear the company that does SWA'S futures is headed for bankruptcy", is about the same as saying "I understand the entire financial system of the US is headed for bankruptcy".

 

[Dangerkitty]

Danger my apologies, I must have confused his bio with someone else. I have been reading alot of big wig bios lately and am posting from work. My apologies to you and everyone else for posting bad information.

Art,

No need to apologize to me. I just knew that he is not a pilot from reading his website. I must admit I am one of his fans.

DK

 

[Dangerkitty]

What a joke, please quote anytime in Mikee's history that he has been right about the progression of reality.

Ok then, why dont you post something where Boyd has been wrong?

 

[atafan]

Boyd is right on much of what he said, I've been hearing the same news for some time now, nothing inspired or fresh here.

Obviously, SWA labor cost is approaching industry leading only because they have been so profitable and most every other airline is in a race to the bottom, including my little ATA. Gary Kelly is trying to offset high hourly costs with increased productivity, so far SWA has been doing a good job. SWA will raise fares with increased fuel charges, they can afford to do this since they are the market makers in most routes they fly.

The difference, as I see from the outside, between the SWA culture and every other legacy carrier in existence is TRUST. If SWA management does everything possible to maintain profitability and still must approach the pilots for some form of concession, I believe that the pilots will work together with management to reach similiar goals. I have never seen this kind of management/employee relationship from any airline I have worked at, including a former dinosaur airline that closed it's doors in 91'.

I observe SWA and I shake my head because everything they do is so simple, so easily copied and just about everyone is trying to. They say it's not what they do but who is doing it, maybe they are right.

My money is still on SWA to be the airline to watch.

 

[Tref]

Ok, I checked into it and you're still retarded.

Insults aside, I did a Google on SWA fuel hedging (as you could have done as well) I found a good academic paper here, with the following quote:

Jet fuel futures contracts do not exist in the United States, so futures on crude or heating oil must be used instead to hedge jet fuel purchases. Because these futures contracts are based on an underlying commodity other than jet fuel, they introduce basis risk because they are not perfectly correlated. Basis is generally defined as: Basis = spot price of hedged item – futures price of selected contract

So, back to what I was saying, the cost of the futures contract is based on today's spot price. From reading the paper, SWA uses over-the-counter contracts (traded by investment banks) on fuel oil, which has a 93% correlation with jet fuel, since jet fuel contracts don't exist to purchase.

Here's the interesting part: SWA uses a "mean reversion" strategy, where they bet on the cyclic part of oil prices, "what goes up, must come down".

Here's another interesting quote:

Secondly, hedging allows airlines to take advantage of investment opportunities in times of high commodity prices. Carter et. al. demonstrate that airline investment opportunities are positively correlated with periods of high jet fuel prices. This is explained by the significant distress costs in the industry. It is more likely that airlines will go bankrupt when fuel prices are very high, and in such cases they are often forced to sell planes and other assets at substantially below-market prices.

Another quote: As of December 2003, Southwest had a mixture of purchased call options, and fixed price swap agreements in place to hedge portions of its expected 2004-2007 jetfuel consumption.

So back to my argument that your rumor is retarded, saying "I hear the company that does SWA'S futures is headed for bankruptcy", is about the same as saying "I understand the entire financial system of the US is headed for bankruptcy".

Actually, I found the same article after I read your post. From the Kellog School? It has to be the same one. Does that mean that we are both equally retarded? It'd be nice if you could just get an answer without being attacked.

BTW, did you read the part of that paper that said that there is risk involved with hedging and that airlines usually use several different financial institutions to spread the risk?

I found things in the paper that both supported and refuted the rumor. Be nice to hear from someone who actually knows instead of someone who is just guessing. That's what I was looking for with my original "retarded" post.

I'm starting to think this whole conversation is becoming a bit retarded. You never flew airbuses by any chance? "Retard, retard."

 

[radarlove]

Actually, I found the same article after I read your post. From the Kellog School? It has to be the same one. Does that mean that we are both equally retarded? It'd be nice if you could just get an answer without being attacked.

BTW, did you read the part of that paper that said that there is risk involved with hedging and that airlines usually use several different financial institutions to spread the risk?

I found things in the paper that both supported and refuted the rumor. Be nice to hear from someone who actually knows instead of someone who is just guessing. That's what I was looking for with my original "retarded" post.

I'm starting to think this whole conversation is becoming a bit retarded. You never flew airbuses by any chance? "Retard, retard."

The second insult was a bit toungue-in-cheek, spreading a rumor that could quick become an urban legend ("Jet Blue doesn't pay for their airplanes") was a bit of an irritant to me.

Yes, the swaps (not futures!) carry some risk of default, but only if the investment bank actually goes under, which they don't. It's kind of like worrrying about your $200,000 certificate of deposit because it's over the FDIC insurance maximum. Yeah, one could argue that the bank could dissapear and you'd lose a good portion of your deposit, but the chances are miniscule. Again, we're just talking the swap part of the hedging, not futures contracts or put/call options which make up the vast majority of the financial position.

Back to your original statement, that "the company that handles futures for SWA is about to go bankrupt", I hope by now you realize that that is a complete fabrication. It's like saying, "I heard the stock market is going to go bankrupt." It doesn't even make sense.

Futures/swaps/options are built by investment banks in a nearly risk-free fashion. They don't make their money by "betting", they make it by charging a premium for coming up with the perfect product for your needs and they formulate the product to have zero risk on their side.

To take this further, there isn't some "loser" on the other side of the SWA hedges, the fuel was actually purchased for the contracts at the time they were entered and that fuel is simply worth a lot more now than it was then, but the transaction happened back then. The bank made their profit at the time of the transaction.

 

[I.P. Freley]

It'd be nice if you could just get an answer without being attacked.

Yep. I had to scratch my head in bewilderment at the original comment about your post being the most retarted thing ever (or whatever it said). Seemed like a perfectly reasonable question/comment you had, and a completely over-the-top response.

 

[Peanut gallery]

Let's see furloughed AA prob TWA

Ok then, why dont you post something where Boyd has been wrong?

So tell us about mr. Boyd's predictions about the Ichan agreement to back away and how that would guarantee the survivability of TW. Tell us about mr. Boyd's predictions on the merger of TW and AA and how that would go. Since you are probably most familiar with that story let's see if you can remember the Boyd group predictions. This would be a great place to start looking at predictions vs. reality.

 

[race#53]

Ok then, why dont you post something where Boyd has been wrong?

How about this one?

But Michael Boyd, an aviation consultant and principal of the Boyd Group, said Monday that United could well be strong enough to avoid bankruptcy, and criticized Creighton for implying otherwise.

"I think he did it as a ploy to scare the unions," Boyd said. "The downside for United is it scares the vendors. It scares the public.