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

 

[KigAir]

Sounds like the fuel bill at SWA will be going up.

How does increase compare with what other airlines are paying?

 

[wmuflyguy]

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.

It won't happen...If someone figured it out, they would probably have him killled off before it got out into the public media. The oil companies contribute so much money to political campaigns that the governement wouldn't let it happen either.

I'm with you, It is rediculous that they are turning billions in proits, while there is a ton of people struggling to survive with gas this high

 

[enigma]

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

Looking for a silver lining, I conclude that there are some smart, rich people out there who are betting that oil (heating oil) will come DOWN in each of the next four years. Remember, for SWA to buy, someone has to be willing to sell. At least I think that's the way this works.

If everybody KNEW that oil would stay up, no one would be willing to sell low priced future oil.

At least I can hope so

enigma

 

[AnimalTale]

SWA is AWESOME!!!!

Cya

 

[AQ PILOT]

Midnight Flier...I'm in the same boat you are, believe me, thanks to fuel prices my airline is right on the brink. Add a dash of inept management (which we have in abundance) and we are very close to shutting the doors.

My question is why is everyone so down on the oil companies? I mean really, they have a product that they sell to consumers. I know it isn't as simple as boycotting their product and all, but in reality, if it was that hard on us we would find other means.

I'm not picking at you in any way. I am just tired of everyone blaming this on the oil industry and big business. If I were in their shoes I'd be charging you absolutely everything I could get out of you. If the times turn around and something happens that adversely affects me, say a big drilling project goes bust or whatever, I'm almost positive noone is going to come to the rescue of big oil. No, I'm positive no one is coming to the rescue!

We could all choose to bike to work, carpool, or even give up our SUVs if we wanted to. But honestly, how many of us have never pushed the throttles up just a little bit to make sure we got in in time to catch the early deadhead home? Problem is for me, I leave them throttles up all the way across the Pacific.....

 

[wheelsup]

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.

Because when people like you and I go to the pump, we say %$(G $2.60/gal? That's %$(% rediculous, and then swipe our Visa and pump it into our suburban, hummer, or even hybrid.

The prices are high because we have no choice but to buy gas. Atleast right now. Purely electric cars won't come about until some infrastructure gets in place like plugs at the workplace to charge them for the drive home, etc. Until you can make a choice as to what you use, you have to use gas. And they can charge whatever people are willing to pay.

At what point will people simply say I'm not going to pay $xx/gal for gas, I'd rather walk to work or buy a golf cart? Who knows. We'll find out soon, I think.

~wheelsup

 

[SWA/FO]

thanks dude.... its sinking in

 

[Flopgut]

?

How did SWA manage to enhance the fuel hedges? They swapped some short term for some longer term/duration hedges at a slightly higher amount? Is that right? Are there any hedges available for outright purchase below $50? If there is any sort of hedges available, airline management needs to zero in on them! My airline wants to instead make expensive investments in the regional carrier and the foriegn carrier and save some money for the day they can outright purchase some South American airline! They need to be "inspired" to fixate on fuel just like SWA!

On a side note: How is what is going on with fuel not translateable to the airline business? I mean, NWA had a bad day in DTW that was wx induced and almost immediately we had a passenger bill of rights! Why is Congress not pressing for a energy users bill of rights? Big oil would have you believe the wx is a determining factor in much of today's environment. Of course, I do know that the prevailing mentality in Washington is to keep these energy prices high, but why are we (this industry) not being more vocal on this issue?

 

[canyonblue]

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.

If Oil were to move in the opposite direction we would then just cash out the hedges and even make a profit at that.

 

[apdsm]

For those of you interested, here is a document that describes fuel hedging strategies. Boring stuff to most, but some might be interested.

http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf