Cathay Pacific booked a fuel-hedging loss of HK$3.23 billion
- Thread starter OddTrader
- Start date
These are huge deals for airlines. It's what pushed Southwest into the top 5...their growth was entirely underwritten by fuel hedging.
It took down AAL, and it nearly took down DAL.
It's probably less important for state owned airlines because of the wide moat (quite literally in the case of Kai Tak), but these are make-or-break in competitive markets...seriously, almost took down Delta...they basically own the airport that (apparently) also has a city.
It took down AAL, and it nearly took down DAL.
It's probably less important for state owned airlines because of the wide moat (quite literally in the case of Kai Tak), but these are make-or-break in competitive markets...seriously, almost took down Delta...they basically own the airport that (apparently) also has a city.
I don't know exactly what happened at DAL and AAL... but when companies whine about 'losses' in their hedging it's usually because they misunderstand the purpose of a hedge. Maybe they hedged too big, it's always better to under-hedge when hedging a commodity which has a large impact on your own business activity.
If the underlying market would have gone the other way, they would pat themselves on the shoulder and say "wow, how smart was I to hedge!?".
It comes down to, do you want to ride the waves... or have less volatility and be better in the calm waters with no up- or downside....
If the underlying market would have gone the other way, they would pat themselves on the shoulder and say "wow, how smart was I to hedge!?".
It comes down to, do you want to ride the waves... or have less volatility and be better in the calm waters with no up- or downside....
I'd hope they have the money to pay someone who understands intimately how hedging works when even I understand conceptually.
No airline should be hedging more than a fraction of their expected fuel usage...
AAL and LUV both played essentially speculatively, LUV won, AAL lost. LUV lost their own game recently, and that's why as a "low cost" carrier, they're one of the most expensive around.
But it should be pretty clear to hedge against sold fares, and base current fares on current prices...or conversely use then to level prices over time. Both are very straight forward. Losses like that suggest they're speculative.
Exactly, my thoughts as well.
I actually think that banks nowadays are wrongly put in the position that they are at fault when there are losses on client's hedging. It's almost like the client gets a free put option.... if the hedge works out and makes money... they take the money. And if the hedge costs money, they want it to be voided and returned the losses... while they would still make money on the underlying business.
???
Whatup?
From article: "We expect passenger yield to remain under pressure...The benefits from lower fuel prices will continue to be partially offset by losses on our fuel hedging contracts,"
Just because they lost more due to increased competition and lower ticket prices... doesn't mean the hedge wasn't the right thing to do. Hindsight is a beaut...
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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.
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Actually, the Fuel costs are incl the hedge losses... so those numbers should be:
-3.23/18.16 = 18%
-4.49/17.75 = 25%
Looking at it this way, their pre-hedge fuel costs are more or less the same as the year previous. The hedge came out little bit less expensive, probably also due to not so much of a drop in fuel price as it was the year before.
Good analysis though
