Airline Economics - Casino-like fuel hedges to hurt airlines in oil plunge

[OddTrader]

Casino-like fuel hedges to hurt airlines in oil plunge

Q http://www.smh.com.au/business/avia...t-airlines-in-oil-plunge-20141205-1213mt.html

Investors from Sydney to Mumbai cheered the plunge in crude-oil prices, sending Asian airline shares to their highest level in three years.

But the bad news is several carriers could end up losing money from the sudden drop - with Qantas one of the few likely winners.

Some carriers, like Singapore Airlines, have hedged fuel at an average $US116 a barrel of jet fuel, when spot market rates are about $US85. That can result in losses on paper as carriers will have to account for their wrong-way fuel hedges or pay charges to unwind contracts prematurely.

Oil's dramatic decline in the past month is a replay of events in 2008 and 2009 when Hong Kong-based Cathay Pacific, Chinese carriers and Singapore Air all reported millions in losses because of wrong-way bets on fuel.

An inability to take advantage of a drop in their biggest expense also means airlines may be reluctant to cut fuel surcharges and lower ticket prices for consumers.

"It's like going to the casino," said Mark Clarkson, a Singapore-based business development director at flight data firm OAG Aviation, about the airlines' hedging.
UQ

 

[OddTrader]

Q July 15, 2015

http://www.benzinga.com/analyst-rat...partner_feed&utm_content=analyst_ratings_page

Morgan Stanley's Rajeev Lalwani analyzed airline stocks under the context of lower oil prices.

In the firm's Question of the Week, Lalwani asked: "What do you prefer
(A) low oil, limited capacity discipline, and higher profits or
(B) high oil, increased capacity discipline, and lower profits?"

The investors that Morgan Stanley polled "overwhelmingly" supported scenario B, to the tune of 76 percent of respondents.

...

Oil's decline created an environment where the airlines will "achieve record profitability and return significant capital to shareholders," which Morgan Stanley "finds supportive" of long-term share prices.

Amongst the airlines, JetBlue Airways Corporation (NASDAQ: JBLU) has been the standout, gaining more than 41 percent year-to-date. That performance is even more distinguishing when comparing against its peers – all down around 20 percent on the year. Southwest Airlines Co (NYSE: LUV) dipped 20 percent since the start of the year; American Airlines Group Inc (NASDAQ: AAL) lost 22 percent; and Spirit Airlines Incorporated (NASDAQ: SAVE) shed 22 percent.
UQ

 

[zdreg]

That can result in losses on paper as carriers will have to account for their wrong-way fuel hedges or pay charges to unwind contracts prematurely.

it doesn't sound like losses on paper but real losses.

in any case i have always believed that losses on paper are real while profits on paper are not real and illusionary until realized

 

[stevegee58]

I remember when Southwest was the only one doing this and were considered geniuses and visionaries. I can't believe they're any better at guessing future fuel prices than anyone else.

 

[OddTrader]

Q http://www.elitetrader.com/et/index...etter-to-customers-on-oil-speculation.131312/

Twenty years ago, 21 percent of oil contracts were
purchased by speculators who trade oil on paper with
no intention of ever taking delivery. Today, oil
speculators purchase 66 percent of all oil futures
contracts, and that reflects just the transactions that
are known. Speculators buy up large amounts of oil and
then sell it to each other again and again. A barrel of
oil may trade 20-plus times before it is delivered and
used; the price goes up with each trade and consumers
pick up the final tab. Some market experts estimate
that current prices reflect as much as $30 to $60 per
barrel in unnecessary speculative costs.
UQ

 

[Tsing Tao]

Q http://www.elitetrader.com/et/index...etter-to-customers-on-oil-speculation.131312/

Twenty years ago, 21 percent of oil contracts were
purchased by speculators who trade oil on paper with
no intention of ever taking delivery. Today, oil
speculators purchase 66 percent of all oil futures
contracts, and that reflects just the transactions that
are known. Speculators buy up large amounts of oil and
then sell it to each other again and again. A barrel of
oil may trade 20-plus times before it is delivered and
used; the price goes up with each trade and consumers
pick up the final tab. Some market experts estimate
that current prices reflect as much as $30 to $60 per
barrel in unnecessary speculative costs.
UQ

Of course. How else would you be able to pressure the ME and Russia whenever you wanted?

 

[zdreg]

I like the fact that you dug up this article. however, it contains the same relentless nonsense used by industry insiders when they are unhappy with the price of their particular futures contract, due to their own incompetence which leads to losses in their hedged positions. basically they ignore or deny the value of price discovery and price transparency offered by future contracts. on occasion they succeed in getting a futures contract eliminated. i.e. potatoes
of course lefties don't believe in free markets but government diktats of prices and production and support the elimination of futures markets.

 

[OddTrader]

Q http://www.elitetrader.com/et/index...etter-to-customers-on-oil-speculation.131312/

Twenty years ago, 21 percent of oil contracts were
purchased by speculators who trade oil on paper with
no intention of ever taking delivery. Today, oil
speculators purchase 66 percent of all oil futures
contracts, and that reflects just the transactions that
are known. Speculators buy up large amounts of oil and
then sell it to each other again and again. A barrel of
oil may trade 20-plus times before it is delivered and
used; the price goes up with each trade and consumers
pick up the final tab. Some market experts estimate
that current prices reflect as much as $30 to $60 per
barrel in unnecessary speculative costs.
UQ

What % for total airlines based on worldwide consumption? Anybody knows?

 

[OddTrader]

Airlines could incur big losses on cost of fuels, either with hedging or without hedging!

Actually a matter of bad timing - just like most speculative traders!

Airlines drop fuel hedging after big losses

Susan Carey
The Wall Street Journal
March 22, 2016

http://www.theaustralian.com.au/bus...s/news-story/aa5c3013354d1006a348f672957932d7

Asian and European airlines have tended to rely more heavily on hedging because they must spend US dollars to buy fuel but collect most of their revenue in other, and recently weaker, currencies. In Europe, after “huge” hedge losses last year, some of the largest carriers are hedging less, said Andrew Lobbenberg from HSBC Bank.

 

[OddTrader]

What % of fuels cost should be hedged?

Airline Fuel Hedging: Southwest's Enviable Position
Aug. 4, 2009

http://seekingalpha.com/article/153600-airline-fuel-hedging-southwests-enviable-position

Isaac Newton taught us that what goes up must come down. When that “what” is an airplane we can only hope that the up and down go smoothly. For the most part it appears the airlines have figured out how to manage the ascent and descent of their planes. Where they seem to be having a bit more trouble is in managing their fuel costs.

With oil cruising comfortably in triple digits last year appearing set to climb to $200/bbl, the airlines put on fuel hedges that are acting like overweight baggage on their bottom lines.

Delta Air Lines (NYSE: DAL) booked a loss on their fuel hedges in 2Q09 of $390MM pushing the full company earnings in the red by $257MM. AMR, American Airlines’ parent company, saw its overall fuel bill fall by $1.8BN in the first half of this year which was a combination of a 35% reduction in the price per gallon as well as 8.3% lower usage. The only turbulence was caused by a $465MM loss on 1H09 fuel hedges.

If the motto for the airline industry as a whole is “safety first”, it would appear the finance departments of the various airlines have fastened their seat belts and hedged much less aggressively this year. UAL (UAUA), parent of United Airlines has hedged only 8% of its 2010 expected fuel needs, while Delta put price protection on 9% and JetBlue 10%.

Going way out on the wing, Continental (NYSE:CAL) has put no hedges on for next year’s fuel needs as 1H09 hedges cost the company roughly $0.42/gallon, totaling $350MM.

Southwest (NYSE:LUV) is flying in the completely opposite direction and has already hedged about 47% of its planned 2010 fuel purchases. Additionally it has pledged $425MM in cash as collateral on hedges it has stretching as far into the future as 2013.

LUV is in a bit of an enviable position as it is one of the few airlines that has the cash to park in hedges and one of the few airlines to post a profit in 2Q09 adding $0.07/share or $54MM to its bottom line.

UAL was the other profitable airline in the 2nd quarter but the $0.19/share or $28MM number was based on one-time gains.

In order of appearance: DAL’s equity hit its low in early March ($3.93) and its high ($8.11) just about a month later. The stock has traded in the middle of that range since. The CDS market had been rising for most of the year hitting its peak of 3597bps in late June and staying at the level for a good part of July. A recent move down to the 2851bps level has been matched by a rising stock price.

AMR’s CDS/equity relationship has been fairly active with the two price streams crossing each other every six weeks or so as CDS levels move up and then down and the negatively correlated stock does the opposite. The latest peak in AMR’s CDS levels seen during July (4350bps) have come down somewhat, 4073bps as of last nights close while the stock started gaining altitude faster than the CDS was falling with a $3.95 close on June 24th and a $5.31 close last night.

CAL’s CDS/equity relationship mirrors AMR’s closely with the stock rising off of late June lows while the CDS stalled at levels near their highs for the year before falling more recently.

LUV has been the best performer so far this year closing at its highs for the year last night ($8.36) while the CDS is again approaching the low tick (155bps; 6/2/2009) closing at 184bps last night.

Enjoy the week.