Is Fuel Hedging Cheating?

[atafan]

Congrats to SWA and CAL for your profitable quarters!

Why do so many on this board think that fuel hedging is cheating regarding profits that SWA churns out? Fuel Hedging is a strategy used just like any other strategy that their business plan calls for. Good Management not cheating.

I also hear on this board that SWA will be in trouble once the fuel hedging isn't as effective. SWA raises fares, a no brainer. SWA is where they are because their management thinks at least four steps ahead of most every other airline, CAL is pretty amazing as well.

I'm no SWA cheerleader, I'm sure they would sink ATA if it benefits them, without even a second thought. I do admire their style of management and enjoy studying good management.

 

[G100driver]

Cheating no this is America ... However, I would be interested to hear what guys who are really in the know think about how hedging effects the market in general. Does it raise prices for the rest of us?

 

[Flyby1206]

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.

 

[shagadelic]

For the last time, fuel hedging does NOT END. It is a continuous process. We have already hedged some fuel in 2012 at 61 bucks a barrel. As long as oil continues to climb, it will be a good deal. If oil is 50 bucks a barrel in 2012, then it's not a good deal. They will continue to hedge whenever they think the price is good. I hope they continue to be right.

Hedging takes money now, that's why so many don't do it. We have money, so we continue to hedge. It's that simple.

 

[bvt1151]

Fuel hedging only works when oil prices stay the same or go up. Otherwise they'll be paying more for gas than the competition.

 

[Flyby1206]

Ahhhhh thanks for the explanation shag, I was definitely clueless.

 

[B6Driver]

No, just very smart business.

 

[JerkyHerky]

Cheating ?????

Hedging is a business expense just like insurance. Is it cheating to pay insurance premiums then when your house floods the insurance companies pay you money to rebuild your house? Fuel hedging costs money up front to enter into the aggreement, that's why the "distressed" carriers can't do it. It's not just fuel that can be hedged, just about every commodity can be hedged. As long as the amount that can be saved through long term contracts is greater than the amount of money the company has to pay up front for the hedge, hedging is good.

 

[canyonblue]

Fuel hedging only works when oil prices stay the same or go up. Otherwise they'll be paying more for gas than the competition.

No, you just sell the Hedges. No wonder we are the leading airline in hedging fuel, we are the only pilot group that understands how it works. Fu#k!!!!!! uke:

 

[woog315]

No, you just sell the Hedges. No wonder we are the leading airline in hedging fuel, we are the only pilot group that understands how it works. Fu#k!!!!!! uke:

You obviously won't be selling the hedges for the same price you bought them- who would buy short term hedges for a higher than market price? So you end up eating the loss on the hedge plus paying market price for fuel. I.E.- you pay more. Fuel hedging isnt a no-lose street like you seem to think it is- economics 101

 

[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.

 

[Tejas-Jet]

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)

Really???? Well, I know of one legacy pilot group that is in negotiations with their management for a new (combined) contract and they have already said that they are....

#1. Tired of giving
#2. Saved the airline while in BK
#3. Want their fair share since management has been given and has cashed
in stock options that were not made available to the pilots.

You really think costs will stay the same with the legacy carriers? Especially after they are out from under the clutches of BK? And once the profits start showing up?

I can see some "Summers of Love" already on the horizon.

TEjas

 

[cactuspilot]

If your not cheating, your not trying...

 

[SWA GUY]

Rubbin' is racin'

 

[ferlo]

Wrong. Over 100mil this quarter with no hedges.

You're probably right. I haven't heard about last Q

 

[Gorilla]

There are a few scattered programs that let average Joe motorist "hedge" gasoline in a crude way. It's very simple. Let's say gas is selling from CITGO for $2.80. You say "I want 1,000 gallons." You may get a slight per-gallon cut due to the bulk buy, so let's say you pay CITGO $2,650 for the 1,000 gallons. You are handed a coded ATM-like card, and that card is used to "pay" for the gasoline until the 1,000 gallons are used up.

If gasoline prices dip, you are a bit screwed, but the value of the card will pretty much always be gallons remaining X current gas price.