Is Fuel Hedging Cheating?

[FlyBoeingJets]

The "Hedges" are more than one type of "contract" or "future"

But I believe most of the contracts work basically this way--

They are expensed out the quarter they are bought.

If fuel were to go up, they are sold for a profit near their expiration. If fuel goes down, the contract is not exercised.

Fuel is always bought by SWA on the open market regardless of the price of fuel.


I believe some of these contracts are sold by refiners. Somewhere down the line after it changes hands in the futures market someone is owed some oil/gas/heating oil that the contract promises. If oil were to go down, the price paid for the contract at the beginning would be added to the refiners bottom line to offset lower profits from market price decline. And it would not be exercised as oil is cheaper elsewhere.

If oil goes up, the refiner is rolling in the dough and they have to sell a set amount of oil below market prices. No big deal to them.

Kinda like farmers selling corn futures.

Speculators can also sell contracts but they have to buy the commodity on the open market to honor the contract if they guess wrong.

 

[atafan]

The "Hedges" are more than one type of "contract" or "future"

But I believe most of the contracts work basically this way--

They are expensed out the quarter they are bought.

If fuel were to go up, they are sold for a profit near their expiration. If fuel goes down, the contract is not exercised.

Fuel is always bought by SWA on the open market regardless of the price of fuel.

Fuel hedging is a broad term. You don't have to be an airline to practice "Fuel Hedging", you don't even have to burn gas. All you need is an internet connection or phone and cash, the cash can even be someone else's cash.

ATA is even "Fuel Hedging" some these days, SWA just has some smart guys and even more cash to play.

 

[radarlove]

Hedging is nothing more than buying fuel at today's prices, for delivery at a point in the future.

Oil prices are cyclic with an upward trend, so there isn't a lot of rocket science to devising a good hedging strategy, but if you're in financial trouble, you're not going to hedge, because you don't want to buy fuel now for future deliver, you need the cash now.

Flyboeingjets is right, hedges don't actually deliver fuel, they are purely financial instruments that change in value over time. SWA has been hedging for at least fifteen years and I think ten of those years the hedges expired with little or no value.

But that's like paying insurance; just because you didn't make a claim doesn't make the insurance valueless.

 

[accinelli]

I dont think many of us consider SWA a 'cheater' because of fuel hedging. We all wish our airlines would have done the same thing they have. SWA mgmt scored a big hit that allowed them to have an advantage that other airlines dont have. We are all waiting for the fuel hedging to end so that SWA has to raise fares, which will put SWA ticket prices a lot closer to the rest of the industry prices. When this happens we all will have the same basic costs (labor/fuel) and will be forced to provide a 'better product' in order to gain customers.

Oh I see. The airlines are waiting for SWA to raise fares once their hedges run out -- which is when they (other airlines) will be "forced to provide a better product." Great thinking. Maybe you could have your FAs make an announcement inflight stating the same -- so that the customers understand the crappy product that is being put out daily (mostly by the legacy carriers).

 

[Mach 80]

Technically SWA is not hedging fuel, but some other product that closely matches jet fuel.

Some of you guys talk like fuel hedging is a guaranteed good thing. It is a gamble and if fuel prices took a dive the hedging program could have cost SWA a lot of money and then people would say what a dumb gamble it was and been laughing at SWA. Managing a company always involves risk and educated guessing and making decisions -- just as when an airline flies into a new market...but then pulls out 8 months later because it didn't do well.

If SWA didn't have the hedging it has, it would have simply raised fares even more than it has. By not needing to raise fares a whole lot, it correctly (from a business perspective) makes things tougher on competitiors.

 

[Whine Lover]

"..if fuel prices took a dive the hedging program could have cost SWA a lot of money."

WRONG.

That's why you are a Pilot (labor) and NOT Management.


YKW

P.S.- I HATE Management...But stupid Pilots suck even worse.

 

[SWA/FO]

We cheat all the time.

 

[Widow's Son]

Just like Vegas, SWA hedges its hedges so that the worst is can do is break even. The Rich get richer. God bless America.

 

[ferlo]

The notion that they're "cheating" is stupid. It's accounted for using GAAP which is generally accepted accounting procedures. SWA would be losing money if they couldn't count the hedges in the income column. That is where people think something underhanded is going on but it's not. The stock price and it's stagnation for 4 years speaks volumes about Wall Streets enthusiasm for showing profitablility by accounting rule and not real $$$$$.

 

[TexaSWA]

SWA would be losing money if they couldn't count the hedges in the income column. .

Wrong. Over 100mil this quarter with no hedges.