Hedging fuel

[spinup]

FWIW

SWA 75% of this and next years fuel hedged at 23$/bbl


Quarterly hedges:
NWA 100% hedged 23$ - 31$ /bbl
CAL 95% hedged 33$/bbl
DAL 66% hedged 26$/bbl
AWA 63% hedged 24$ to 31$/bbl
AMR 40% hedged 23$/bbl

As of Mar. 23, market close

Brent crude 24.35$/bbl

 

[General Lee]

Fuel hedging is buying fuel ahead of time at a certain price. It can be risky----the price of fuel could go down and you would be stuck paying the higher price. Normally you have to have good credit to hedge---and that is why UAL cannot hedge.

By the way Spinup, our CFO at Delta said we are now hedged at 78% at 77 cents a gallon through the second quarter. If we ever do win this war in the near future, oil or fuel prices might sink well below $23 a barrel, and then Southwest could be at a disadvantage---especially if they hedged 100% for the year and into the next. Since the Southern Iraqi oil fields are now in our possesion, we might be swimming in it within the next six months. I think that is why Delta didn't hedge at 100%. Only time will tell.

Bye Bye---General Lee

 

[Jeff G]

Fuel hedging is buying fuel ahead of time at a certain price.

Not exactly. You're thinking of contract fuel rates, which is not hedging. Hedging is trading in commodity derivatives. Since there are no commodity options for jet-A, what happens is that the company buys options for heating oil, which closely matches the price of jet-A. The options don't cost all that much, so there's not that much downside risk. If the price of oil drops below the option price, the premium for the contract is wasted. But if the price of oil is higher than the option price, then the commodity option can be sold at a nice profit, which offsets the higher price of jet-A. It's just a way of limiting a large loss due to fuel price spikes. It doesn't lock in a fuel price, per se.

 

[atldc9]

Actually, you are both right. The TWO main types of fuel hedging are 1. buying forward purchase contracts, which is like buying your home heating oil in the summer for delivery in the winter at a pre-arranged price, and 2. using the derivatives markets to offset the risk of fuel spikes.

Most airlines will try to do a combination of the two types, some more successfully then others. As Jeff G pointed out, the NY mercantile exchange doesn't trade Jet A futures, so many airlines use the futures for Heating Oil, because the prices for both heating oil and Jet A correlate very closely. The Japanese commodity exchange does trade Jet A futures, but it is not widely used by US airlines I believe.

 

[General Lee]

JeffG,

Thanks, I really didn't know about the "other half" of fuel hedging. It really is an interesting topic, and from what I hear a risky one. I read somewhere that Continental hedged some portion (maybe 50%??) of their fuel at $31 a barrel----which is a lot more than the current going rate. Also I want to thank ATLDC9 for his/her comments.

Bye Bye---General Lee

 

[mdf]

Possibly some more clarity. What we are talking about are futrues contracts, or Options on futures contracts. The futures contract is a contract to purchase a commodity at certain price by a certain date. In this case as mentioned before Heating Oil is used. You could go into the futures market and buy or sell(short) the HO contract to hedge you fuel position. Or if you prefer something less risky you use options on the that same futures contract. The risk on purchasing an option is limited to the premium you pay for it, which is usually a fraction of the futures price. It works like insurance and just like insurance usually the guy who sells the premium ends up making the money. I can't remember the HO contract specifics, but I will give a cheesy example. If you pay .10 cents for a HO June $10 Call option and the contract size is 100 whatever than you pay 10 bucks for for that option. If HO falls to 5 than you do nothing and let the option expire worthless at the end of June. If HO jumps to 20 prior to June you exercise you option and make a 10 profit minus the premium you paid.

 

[Jeff G]

Thanks, I really didn't know about the "other half" of fuel hedging.

That's OK, I didn't know that fuel contracts were called "hedging". As atldc9 said, it looks like we were both right.

mdf, thanks for the clarification. I probably screwed up the details by confusing futures contracts with options on futures contracts. I don't mess with derivatives or commodities, personally. Sorry if I caused any confusion.