Cathay Pacific booked a fuel-hedging loss of HK$3.23 billion

[OddTrader]

afaik:

My view is every airline might have different way of hedging. And usually none of them would like external people know how they do hedging. Disclosure has been very limited. And they don't have to do hedging every year consistently using the same hedging approach, which can vary sometimes. The basis of costing is also another critical issue. Whether using cash-flow or else for accounting the hedging cost, or loss/gain. Very complicate.

My impression would be whatever an airline says about the loss or gain is just what they want to say for a reason they want outsider to know. Seldom accurate enough, at all!

No hedge reporting standards for reporting hedging details yet, it seems to me. If yes, we might be able to analyse an airline's annual hedging result according to previous disclosure of hedging data plus crude oil price movement data already known at year-end. But usually we can't. We would have to wait for announcement until several months later. Then share price reacts to the announcement whether resulting a huge hedging loss or else.

Hedge accounting procedures do exist, yes.

Just 2 cents!

 

[OddTrader]

I don't know. afaik, airline finance can be very complicate.

I don't have time to analyse the financials. But I would guess a better way could be to analyse just the costs data. Without comparing the sales data.

" Aug. 16, 2017

http://www.barrons.com/articles/cat...-loss-as-airline-crushed-by-rivals-1502874334

Cathay has struggled with fuel hedging losses, but losses were reduced to HKD3.23 billion from HKD4.49 billion. Fuel costs after accounting for fuel hedge losses rose to HKD14.93 billion from HKD13.25 billion."

Here my guesses.

this year for a hedge loss: about -22% (=-3.23/14.93); bad hedge; however still better than last year due to less loss %.
last year for a hedge loss: about -34% (=-4.49/13.25)

(hypothetical) during a year for a hedge gain: say +17% (=2/17); good hedge.

As mentioned by another poster, all sales were pre-booked, perhaps. The price level of tickets could be competitive, against other airline. Also they can have surcharge due to oil price increase.

(also another factor is seasonal adjustments. the original figures were only for 1H. How the company internally allots hedging cost based on cost/fund/cash data against the seasonal sales could be anther issue.)

afaik, airlines expect to spend/control (through hedging) fuel cost in the range of about 30%/35% on sales. That means sales for this year should be ideally $50 to $43. Any sales result generated below that figures $50 to $43 should be considered poor performance, imo.

last year, ideally $44 to $38.

during the (hypothetical) hedge gain year above, ideally $57 to $48. This range looks like a bit close to the $50 to $43 for the losing year. Implying costs was under control, due to (correct) hedging.

my 2 cents.

Looks like:

On page 17, the " Fuel, including hedging losses 13,259 " is already a total fuel cost, inclusive of the mentioned hedge loss -4.49 (which is part of the HK$13.25).

In other words, -8.76 -4.49 = -13.25.

Fuel cost alone before hedging was 8,76. After hedging (loss) was 13.25.


https://www.cathaypacific.com/conte...ngs/en/2016_analyst_briefing_17Aug2016_en.pdf

Operating Costs
-
Group
1H2016
1H2015
%
Var
Staff
9,867
9,373
+5.3%
Inflight service and passenger expenses
2,372
2,284
+3.9%
Landing, parking and route expenses
7,376
7,266
+1.5%
Fuel, including hedging losses
13,259
16,619
-
20.2%
Aircraft maintenance
4,170
3,653
+14.2%
Depreciation, amortization and operating leases
5,065
5,568
-
9.0%
Net finance charges
1,213
1,133
+7.1%
Others (including commissions)
2,304
2,689
-
14.3%
Total operating costs
45,626
48,585
-
6.1%

 

[OddTrader]

An article I read today says according to the CEO of Cathay, 54% of the fuels this year were hedged at $89 level, and 46% of next year's fuels are being hedged at $80 level.

Someone now estimates these negative hedging effects will last probably until year 2020 when the current hedging will end.

 

[newwurldmn]

Hedging commodity risk is actually very tricky for a company that consumes a resource. In the end it often becomes a speculative bet: in rising oil prices, airlines can pass the cost on as unhedged airlines need to and its becomes a defensible argument for hedged airlines.

In declining prices unhedged can drop their prices (less than the oil price drop would warrant) and get margin improvement while taking market share from the hedged guy.


Where it makes sense to hedge is for a producer where the certainty of a certain price level can make a project a go vs no go.

 

[OddTrader]

Hedging commodity risk is actually very tricky for a company that consumes a resource. In the end it often becomes a speculative bet: in rising oil prices, airlines can pass the cost on as unhedged airlines need to and its becomes a defensible argument for hedged airlines.

In declining prices unhedged can drop their prices (less than the oil price drop would warrant) and get margin improvement while taking market share from the hedged guy.


Where it makes sense to hedge is for a producer where the certainty of a certain price level can make a project a go vs no go.

Too many books about hedging already, especially energy hedging. Airline finance included, that alone can be a degree course by many institutions. Google "airline finance degree" to see.

Perhaps you should write another book to teach them something.

 

[newwurldmn]

Too many books about hedging already, especially energy hedging. Airline finance included, that alone can be a degree course by many institutions. Google "airline finance degree" to see.

Perhaps you should write another book to teach them something.

Lots of books and phds who have wasted their lives.

I think the concept of hedging for all these industries was built by banks to sell services and create price insensitive orderflow.

 

[OddTrader]

Lots of books and phds who have wasted their lives.

I think the concept of hedging for all these industries was built by banks to sell services and create price insensitive orderflow.

Of course, there will be a sequel for the above!

Fuel hedging sinks Kenya Airways deeper into loss
Thursday, July 21, 2016

http://www.businessdailyafrica.com/corporate/539550-3305512-avstu1z/index.html

KQ, which is majority owned by the Kenyan government and Dutch carrier KLM, took a heavy beating from the global dip in fuel prices, booking Sh5.1 billion in fuel hedge losses that significantly impacted its bottom line.

Airlines ordinarily enter into forward fuel supply agreements with financiers to lock in prices and limit their exposure to an unexpected rise in the cost of jet fuel.

KQ has long maintained the policy of hedging up to 80 per cent of its oil rations for 12 months and 50 per cent of it for two years.

Recent months of oil price decline have, however, turned hedging into a potent monster that gobbles up large amounts of money and making it difficult for KQ to climb out of the loss-making pit it fell into three years ago.

 

[OddTrader]

Lots of books and phds who have wasted their lives.

I think the concept of hedging for all these industries was built by banks to sell services and create price insensitive orderflow.

I once owned the book exclusively covering the court case in length and photo copies of original documents about below article, which seems surprisingly a better source than reading the original book.


Truly a classic!

"Ceylon Petroleum Corporation (CPC) Oil Hedging 2007 – Casestudy"
Apr 19, 2014
by Farhan in Case Study
https://financetrainingcourse.com/e...m-corporation-cpc-oil-hedging-2007-casestudy/

Ceylon Petroleum Corporation (CPC) made oil price hedging deals with several banks in 2007 without employing the proper expertise for such a complex option. When the oil market crashed, the hedging deals’ negative payoff for CPC reached several hundred millions. CPC defaulted on the hedging payments which resulted in the banks taking CPC to International Courts in 2009.

Related posts:

China Aviation Oil (Singapore) Corporation Limited’s Jet Fuel Scandal (2005) – Casestudy
London Whale – Casestudy and Timeline
Financial Risk Management MBA Workshop – Fuel Hedging Case – The Case for and against Jet Fuel Hedging
Liquidity Risk Management Case Study: Bear Stearns – June 2007 to 16th March 2008
Financial Risk Management Training – Margin Shortfall, Oil Refineries & Crude Oil Hedging – Dubai Transcript

 

[newwurldmn]

I once owned the book exclusively covering the court case in length and photo copies of original documents about below article, which seems surprisingly a better source than reading the original book.


Truly a classic!

Are you a lawyer that you would read up on something so esoteric?

I remember when I rented my first apartment in NYC - the landlady wanted to know what I did for a living. I told her I traded derivatives at a bank. Her only response was "a lot of people lost a lot of money trading derivatives."

 

[OddTrader]

Are you a lawyer that you would read up on something so esoteric?

I remember when I rented my first apartment in NYC - the landlady wanted to know what I did for a living. I told her I traded derivatives at a bank. Her only response was "a lot of people lost a lot of money trading derivatives."

I regretted immediately after receiving the book from Amazon.com . Most the contents were unreadable to me, being a layman in nothing.

She just missed two words: "a lot of people "outside banks" lost a lot of money trading derivatives."