US Airways fuel hedges

[Andy]

If you are trying to make a point...make it. Oil futures price is not what you pay if you aren't hedged...this is what we are talking about.

Wow. Oil futures are the hedging instrument, much like insurance. Do you understand the purpose of a financial hedge?

 

[Andy]

Andy is a total barracks lawyer, still waiting for the financial meltdown and the end of the world as we know....that was about 3 yrs ago as well. He might have nice beachfront property in TN, but I would stay away from any of his financial.advice/claims/knowledge.

The meltdown occurred. The last 3 years have been a slow downward grind in the economy. I've been renting a house, watching prices drop monthly. While they continue to grind lower, I'm starting to look to buy some rental properties. I plan on buying at least two properties this year.
Since you're using me as a contrary indicator, you'll want to immediately sell your house and start renting.

 

[kf4amu]

Wow. Oil futures are the hedging instrument, much like insurance. Do you understand the purpose of a financial hedge?

Of course I do. You still haven't made a point.

 

[Andy]

Of course I do. You still haven't made a point.

OK, I'll break out the crayolas.
Airlines need to run active hedging programs in order to minimize the risk of oil shocks since fuel is the number one expense for airlines. That would have meant doing quite a bit of hedging Aug through Oct last year when oil prices were below $90/barrel.

 

[kf4amu]

OK, I'll break out the crayolas.
Airlines need to run active hedging programs in order to minimize the risk of oil shocks since fuel is the number one expense for airlines. That would have meant doing quite a bit of hedging Aug through Oct last year when oil prices were below $90/barrel.

The cost of those hedges negates much of the price rise protection they gained, and exposes them to losses if the economy had gotten worse (which, as I said...it will, but how soon is the question).

US determined it was actually more risky to hedge in this environment than not hedge.

 

[Flybywire44]

CNBC just had a newsclip stating that US Airways doesn't hedge fuel. OUCH! We're 2 bits short of $110/barrel on WTI.

Yes, but the city of CLT does have a hedge fuel program for US Airways.

I also thing AWE would rather dedicate 100% of its cash to AMR creditors over contracts, fuel hedges and aircraft orders etc.

 

[Andy]

The cost of those hedges negates much of the price rise protection they gained, and exposes them to losses if the economy had gotten worse (which, as I said...it will, but how soon is the question).

US determined it was actually more risky to hedge in this environment than not hedge.

I think you're confusing the structure of a futures contract with the structure of an options contract. From reading your post, it sounds like you think that there's a time value premium built into futures contracts. There's a time value premium in options but not futures contracts.

 

[kf4amu]

I think you're confusing the structure of a futures contract with the structure of an options contract. From reading your post, it sounds like you think that there's a time value premium built into futures contracts. There's a time value premium in options but not futures contracts.

I wasn't intending to get so technical and detailed to make my point...but Airways uses costless collars when it hedges...and as I understand it (not an options trader but I do dabble), they are options.

 

[Andy]

Yes, but the city of CLT does have a hedge fuel program for US Airways.

I also thing AWE would rather dedicate 100% of its cash to AMR creditors over contracts, fuel hedges and aircraft orders etc.

Really? Do you have any details on the CLT program? That sounds like quite a deal for LCC.

Fuel hedges require capital dedicated to cover futures contract margin requirements. This is probably a more logical reason why US Airways doesn't hedge - it would tie up some cash on hand. However, it's a very dangerous strategy because when fuel prices spike for an extended period of time, it puts the unhedged airline at a large cost disadvantage.

 

[weasel_lips]

A hedge is nothing more then an expensive gamble. There is also around a $10.00 per barrel fee on top of your hedged price. So placing a hedge can cost 100's of millions of dollars in just fees.

High oil prices are here to stay. It is better to get the whole passenger industry healthy enough to where hedging is not needed. FEDEX and UPS do not hedge for that very reason. They just raise prices to cover their expenses. That's where the passenger side needs to be.

 

[Hpilot]

A hedge is nothing more then an expensive gamble. There is also around a $10.00 per barrel fee on top of your hedged price. So placing a hedge can cost 100's of millions of dollars in just fees.

High oil prices are here to stay. It is better to get the whole passenger industry healthy enough to where hedging is not needed. FEDEX and UPS do not hedge for that very reason. They just raise prices to cover their expenses. That's where the passenger side needs to be.

Holy cr@p, I totally agree with you!

 

[Flybywire44]

Really? Do you have any details on the CLT program? That sounds like quite a deal for LCC.

Fuel hedges require capital dedicated to cover futures contract margin requirements. This is probably a more logical reason why US Airways doesn't hedge - it would tie up some cash on hand. However, it's a very dangerous strategy because when fuel prices spike for an extended period of time, it puts the unhedged airline at a large cost disadvantage.

Yes, CLT sells fuel to US Air at just above cost. The hedge is the ongoing minimal margin that kept US Airways in business during bankruptcy.

Also, the CLT landing fees are $2.12 per passenger vs ~$7 in FLL and ~$15 in MIA per passenger.

 

[jws717]

Hedge at a high level and the economy collapses again (which it will) oil prices will drop again. Usair calls it their natural economic hedge.

This might actually be one of the smarter ideas in the industry. The price of oil and the global economy walk hand in hand. Keep the cash in hand for a rainy day.

 

[Lampshade]

Parker says "Winning", crude at $84 currently.

 

[Andy]

Parker says "Winning", crude at $84 currently.

Looking like a great call ... unless helicopter ben bernanke launches QE3 - if he does that, I'd expect all commodities to skyrocket again.
On the other hand, the unhedged strategy looks like Mensa material compared to another airline that opted to buy a refinery. Seriously? A refinery? Refiners are losing money hand over fist right now.