Fuel Hedging using CL Call Options
- Thread starter OddTrader
- Start date
There are several major factors that have caused me to cease this fuel hedging experiment.
I now would be more interested in using my time and effort focusing on the equity hedging system. http://www.elitetrader.com/vb/showthread.php?s=&threadid=233773
I now would be more interested in using my time and effort focusing on the equity hedging system. http://www.elitetrader.com/vb/showthread.php?s=&threadid=233773
The difficulty with fuel hedging
Dec 28th 2008, 16:17 by The Economist | WASHINGTON DC
http://www.economist.com/blogs/gulliver/2008/12/the_difficulty_with_fuel_hedging
"As The Economist hinted in October, Southwest's third quarter earnings weren't pretty: the company reported its first loss in 17 years. The culprit? You guessed it: fuel hedging. The airline had to take a one-time charge of $247 million, reflecting the decline in value of its hedges as gas prices plummeted. That made for a $120 million loss in the third quarter. The New York Times explained in detail:
At the end of the second quarter, Southwestâs contracts, which stretch through 2010, were worth $6 billion. But at the end of the third quarter, the value of the contracts had dropped to about $2.5 billion, and have since fallen to $1.1 billion, Southwest executives said Thursday.
So Southwest posted a big loss last quarter on the declining value of its hedges. Fine: no one should expect the airline to always win its bets. Does Southwest's overall hedging strategy still make sense? Probably, but let's wait for those fourth quarter results. "
Perhaps an update during 2010 after it was initially published in year 2008.
Dec 28th 2008, 16:17 by The Economist | WASHINGTON DC
http://www.economist.com/blogs/gulliver/2008/12/the_difficulty_with_fuel_hedging
"As The Economist hinted in October, Southwest's third quarter earnings weren't pretty: the company reported its first loss in 17 years. The culprit? You guessed it: fuel hedging. The airline had to take a one-time charge of $247 million, reflecting the decline in value of its hedges as gas prices plummeted. That made for a $120 million loss in the third quarter. The New York Times explained in detail:
At the end of the second quarter, Southwestâs contracts, which stretch through 2010, were worth $6 billion. But at the end of the third quarter, the value of the contracts had dropped to about $2.5 billion, and have since fallen to $1.1 billion, Southwest executives said Thursday.
So Southwest posted a big loss last quarter on the declining value of its hedges. Fine: no one should expect the airline to always win its bets. Does Southwest's overall hedging strategy still make sense? Probably, but let's wait for those fourth quarter results. "
Perhaps an update during 2010 after it was initially published in year 2008.
Fuel hedging no guarantee for airlines
March 21, 2011|By Brett Snyder, Special to CNN
http://articles.cnn.com/2011-03-21/...increases-airlines-lower-price/2?_s=PM:TRAVEL
"
Southwest got lucky when it locked in its oil at a low price, and it had a massive cost advantage against the other airlines for some time. The problem is that those low oil prices didn't prevent Southwest from having to adjust to the new realities of higher oil. It simply delayed it until the hedges ran out.
And Southwest kept buying hedges at higher and higher prices. But when oil prices came crashing back down, Southwest owed a lot of money to the financial institutions with which it made its bets and ran into a cash crunch as a result.
The point of all this is that oil hedging itself doesn't come without risk, and it also doesn't necessarily guarantee a set oil price for the airlines. On top of that, it can be expensive.
The most conservative hedging options have a high fixed cost to buy the options. The more risky techniques might not have high fixed costs, but they come with risky downsides, as Southwest and others learned in 2008 after oil prices fell. That's why you don't see any airlines hedge all of their fuel needs.
As of January 21, United had 63% of its first quarter 2011 fuel needs hedged. At last check, American and Delta had roughly half of their fuel needs hedged for the first quarter. Even the king of hedging, Southwest, has no more than 64% of its needs hedged through 2011, and it may be less than that.
Some airlines have decided that the high price of hedging isn't worth the money.
US Airways and Allegiant Air are two examples of airlines that don't hedge.
Last year, they were right. US Airways saw oil prices rise from $70 to $92 a barrel, but that increase in costs was still lower than what it would have had to pay to hedge in the first place. That's why the airline actually ended up with lower fuel costs last year than any of its competitors that hedged.
So even the most aggressive hedging airline still is fully exposed for a third of its fuel needs and doesn't necessarily have a fixed price for the rest. That means that when fuel prices increase, airline costs increase as well. So fare increases are bound to follow.
"
March 21, 2011|By Brett Snyder, Special to CNN
http://articles.cnn.com/2011-03-21/...increases-airlines-lower-price/2?_s=PM:TRAVEL
"
Southwest got lucky when it locked in its oil at a low price, and it had a massive cost advantage against the other airlines for some time. The problem is that those low oil prices didn't prevent Southwest from having to adjust to the new realities of higher oil. It simply delayed it until the hedges ran out.
And Southwest kept buying hedges at higher and higher prices. But when oil prices came crashing back down, Southwest owed a lot of money to the financial institutions with which it made its bets and ran into a cash crunch as a result.
The point of all this is that oil hedging itself doesn't come without risk, and it also doesn't necessarily guarantee a set oil price for the airlines. On top of that, it can be expensive.
The most conservative hedging options have a high fixed cost to buy the options. The more risky techniques might not have high fixed costs, but they come with risky downsides, as Southwest and others learned in 2008 after oil prices fell. That's why you don't see any airlines hedge all of their fuel needs.
As of January 21, United had 63% of its first quarter 2011 fuel needs hedged. At last check, American and Delta had roughly half of their fuel needs hedged for the first quarter. Even the king of hedging, Southwest, has no more than 64% of its needs hedged through 2011, and it may be less than that.
Some airlines have decided that the high price of hedging isn't worth the money.
US Airways and Allegiant Air are two examples of airlines that don't hedge.
Last year, they were right. US Airways saw oil prices rise from $70 to $92 a barrel, but that increase in costs was still lower than what it would have had to pay to hedge in the first place. That's why the airline actually ended up with lower fuel costs last year than any of its competitors that hedged.
So even the most aggressive hedging airline still is fully exposed for a third of its fuel needs and doesn't necessarily have a fixed price for the rest. That means that when fuel prices increase, airline costs increase as well. So fare increases are bound to follow.
"
Q&A
When hedging backfires
http://www.bunkerworld.com/forum/Hedging/thread_51/When-hedging-backfires
Q
"
Over the past few years, many shipowners have enjoyed the benefits of hedging their bunker requirements as oil prices seemed to go only up and up, but since mid-July this year, oil and bunker prices have headed south.
While this would be welcomed by shipping companies, some of them have reported backfiring hedging policies, with their bunker hedging contracts losing value as the market dropped.
While hedging is all about managing fuel price risk, does it work best when prices are only moving up (or down)? Have many companies been burnt by hedging polices that did not anticipate that the oil market would stop rising and actually fall? And what approach to hedging looks sensible as we look forward to 2007?
"
A
"
Sorry for the delayed reply. Technology must have failed us, as I was unaware until this morning that this had been posted.
You've asked an interesting question. Certainly sometimes fixing prices of anything, via hedging, wasn't the best thing to have done when looking at a situation retrospectively. Hedging is designed to fix prices OR, if the hedger is using a product with optionality, to fix the ability to fix prices if needed. It would be great if we always knew which way the market was going to move, but sadly we can't. All we can do is make educated guesses.
I'm sure that companies have been burnt by going into a hedging program which didn't use the best product for the upcoming market conditions -- or because the company simply made the wrong market assumptions.
What to do for 2007? I wish I could tell you which way bunker prices were going to go. But I can't. I think all you can do is fixed-price hedge when the price you're locking in is critical to your business and then use other hedging tools with more flexibility (OR, of course, make a decision to perhaps not hedge at all) when you think it could be appropriate.
"
When hedging backfires
http://www.bunkerworld.com/forum/Hedging/thread_51/When-hedging-backfires
Q
"
Over the past few years, many shipowners have enjoyed the benefits of hedging their bunker requirements as oil prices seemed to go only up and up, but since mid-July this year, oil and bunker prices have headed south.
While this would be welcomed by shipping companies, some of them have reported backfiring hedging policies, with their bunker hedging contracts losing value as the market dropped.
While hedging is all about managing fuel price risk, does it work best when prices are only moving up (or down)? Have many companies been burnt by hedging polices that did not anticipate that the oil market would stop rising and actually fall? And what approach to hedging looks sensible as we look forward to 2007?
"
A
"
Sorry for the delayed reply. Technology must have failed us, as I was unaware until this morning that this had been posted.
You've asked an interesting question. Certainly sometimes fixing prices of anything, via hedging, wasn't the best thing to have done when looking at a situation retrospectively. Hedging is designed to fix prices OR, if the hedger is using a product with optionality, to fix the ability to fix prices if needed. It would be great if we always knew which way the market was going to move, but sadly we can't. All we can do is make educated guesses.
I'm sure that companies have been burnt by going into a hedging program which didn't use the best product for the upcoming market conditions -- or because the company simply made the wrong market assumptions.
What to do for 2007? I wish I could tell you which way bunker prices were going to go. But I can't. I think all you can do is fixed-price hedge when the price you're locking in is critical to your business and then use other hedging tools with more flexibility (OR, of course, make a decision to perhaps not hedge at all) when you think it could be appropriate.
"
Thanks Bone. I think the above statement is easy to say but very difficult to resolve the issue regarding how to do proper hedging for fuel, as whether it is technically feasible to find a viable solution, I just wonder.
Intriguing indeed!
http://ww.airliners.net/aviation-forums/general_aviation/read.main/2783765/
Quote
Although the airline is owned by the government of Qatar, a major oil and gas exporter, Baker said it received no fuel subsidies and was feeling the pinch of rising energy costs.
"Unfortunately we are not hedging at the moment. When we realised that we had to hedge, it was already too late," he said.
"Once the oil prices go down, then of course we will hedge."
From Reuters (UK)
Unquote
LOL!