Southwest increases it's hedges

[XR650R]

This is an excerpt from Planebusiness.com:


On the hedging front, the airline said that it has increased its hedging positions. For 2006, the airline is now 70% hedged at $36/barrel; in 2007, the airline has 55% of its fuel needs hedged at $37 a barrel; for 2008, the airline now has 35% of its needs hedged at $37/barrel, and for 2009, the airline now has 30% of its needs hedged at $39 a barrel

 

[Skyrunner]

"You just keep thinkin' Butch, cuz that's what you're good at."

-- Sundance Kid

 

[FDJ2]

Sounds like the fuel bill at SWA will be going up. For comparison purposes, what is SWA hedged at for 2005?

 

[G4G5]

I got this from an article in the Newyorker:

In the current environment, Southwest has continued to outmaneuver everyone in the business. When crude-oil prices plowed past $60 a barrel, crushing every airline in its path, Southwest was paying $26 a barrel for 85 percent of its fuel, because of its prescient hedging strategy. And as long as oil prices remain high, this competitive advantage will extend into the next few years. Sixty-five percent of Southwest’s oil in 2006 will come at a cost of $32 a barrel. By 2008, it’ll still be getting 30 percent of its fuel at $33 a barrel.

 

[Tejas-Jet]

This is an excerpt from Planebusiness.com:
On the hedging front, the airline said that it has increased its hedging positions.

This really shouldn't be a big surprise. It's pretty much common knowledge that fuel hedges are constantly being negotiated and re-negotiated.

Tejas

 

[bugchaser]

They have oil hedged, not fuel. The big bump in fuel prices seen in the last few months is more from the refinery problem and/or the interuption in production due to the hurricanes. While these oil hedges will help offset some of the increased fuel costs, they will still be paying much more next year for fuel if something does not change. If oil were to fall back to around $40/bbl, there would be little gain for them after factoring in the transaction costs, etc. Heating oil would seemingly be a better hedge vehicle for protection against jet fuel price increases, since it follows closely with JetA prices.

It's pretty much common knowledge that fuel hedges are constantly being negotiated and re-negotiated

.

I think that there is very little understanding of what a hedge is. It is not negotiated like a contract. The traders may get in and out of many positions in order to improve the net cost in a given time frame. In the current situation there are not many opportunities to improve beyond a certain point. You can lock in a price, but there is a risk to that. Right now they are possibly selling some options to generate some revenue in order to lower the net cost. If the market were to move in the right or wrong way, it is possible that SW could pay more for its fuel than an airline that has not hedged any of its fuel costs.

 

[chase]

Bugchaser,

In fact SWA holds hedges in heating oil, the refined product vs straight barrels of oil. They actual hold 3 different types of "hedge products" but I believe they are at the "refined level" which allows them to absorb even more of the increased costs. A year ago the difference between the price of a barrel of oil & a barrel of home heating oil (nearly equivalent to Jet A...there aren't hedges for those, therefore home heating oil works as you probably know) was measured in the $.10 range. Within the past 4 weeks that variable has shifted as much $30-50...that has caused airlines with no hedges to paying actually (no longer, it has come down) an equivalent of $110 a barrel for their fuel....the home heating oil differences (between Jet A fuel) use to be measured in pennies but has shifted to slightly more but somewhere around $1 I believe...this is the "crack spread" folks refer to...the 'cracking of oil" to get it refined is bid up or down as the demand rises & falls.

Again SWA was very fortunate to have the home heating oil futures vs. merely barrels of oil. I suspect you knew most of the above but some readers may not....I'm certainly no oil analyst & some of my numbers may be off...I have the data but am too lazy to go look for it right now quite frankly but that is the gist of what I remember on the number side. Cheers & have a great weekend,

 

[Jetjockey]

With all this fuel/oil hedging talk, it got me to wondering (dangerous). How long until oil company buys an airline or two. Most airlines complain the biggest cost increase lately has been fuel costs. Oil companies have recently posted record profits. One company posted 9.9 billion quartely profit! I know companies don't leave huge piles cash lying around to let the government tax it. They invest, or re-invest in other businesses. That oil company could probaby purchase a major airline or two, and run them on thier own "hedged" fuel costs. Any business experts out there?

 

[Midnight Flyer]

With all this fuel/oil hedging talk, it got me to wondering (dangerous). How long until oil company buys an airline or two. Most airlines complain the biggest cost increase lately has been fuel costs. Oil companies have recently posted record profits. One company posted 9.9 billion quartely profit! I know companies don't leave huge piles cash lying around to let the government tax it. They invest, or re-invest in other businesses. That oil company could probaby purchase a major airline or two, and run them on thier own "hedged" fuel costs. Any business experts out there?

I agree. They could have bought ASA and still have several billion left from their quarterly earnings.

I'm not an accountant nor do I understand much about economics, but why are these huge oil companies able to get away with the price of their oil set so outrageously high. It is rediculous that one greedy oil company can make nearly 40 BILLION dollars in profits in one year because of their over priced oil products. I realize it's all about business, yadda-yadda-yadda, but you would think the government would be able to step in and make 'em stop screwing the public like they are. There's tons of airline employees adversly affected by this unnessary rising cost of fuel; people are loosing jobs and families are affected.

I'd love to see some average Joe discover some alternative fuel that can be used in all jet engines, diesels, and regular cars. It would be even funnier if it was something simple, that's right under our noses, like garbage. Then when the whole world switches to that alternative fuel, that will put the big oil companies out of business...those dirty fukcers.

 

[bugchaser]

Hey Chase, thanks for the info. Glad to hear that yall have your positions in refined products. I did not realize that. Should have known it though as your management does not let much get by them. Good explanations on the other stuff. My experience in commodities is more with soybeans and corn than with oil, but the same principles apply. Thinking about all this is making me thirsty. Time for another beer.

Later