To hedge or not to hedge, that is the question

wheelsup

Well-Known Member
Jet-A is currently being hedged at $140-$150/bbl in the heating oil market.

If you were the CEO, would you do it? Knowing that you will lose billions if you do hedge at that cost?
 

SoCalAprch

Well-Known Member
It depends if you could figure out a way to be profitable with those hedges in place. If so I may put in a small hedge to last a little bit.

Its a catch 22. Your gonna feel like an idiot if you don't hedge and cost keeps going up but your also gonna feel the same way if you buy a ton of the expensive oil and the price drops 30 bucks next week.
 

wheelsup

Well-Known Member
It depends if you could figure out a way to be profitable with those hedges in place. If so I may put in a small hedge to last a little bit.
What if you couldn't be profitable? Would it make sense to liquidate the company and return what cash you have to the shareholders? Is it being fiscally responsible to burn thru $2 billion in cash only to end up in bankruptcy within a year?
 

kellwolf

Piece of Trash
I'd say no. I don't know of many business plans in aviation that can be profitable at $140-150 bbl. So, you're damned if you do, damned if you don't. Hedge, and you could go TU. If you don't hedge and the price keeps going up, you're gonna go TU.

Honestly, I think we've seen oil peak barring a hurricane or political issue affecting prices. We're seeing slight fluctations that would be happening if it were $75-90 a barrel anyway. I haven't seen gas prices move up (or down) in this area in the past two weeks.
 

Baradium

Well-Known Member
They're finally taking steps to shut down the speculators, hopefully it'll work and drop the prices back to where they should be.
 

TUCKnTRUCK

That guy
I've seen some talk of a floating hedge. Right now, you would end up looking the fool, or reaping a fortune.

Tradionaly, demand is NOT meeting these absurd prices. Demand has been down 5% or more, while fuel prices have continued to rise. I do not think it will be long before Gov't steps in... no matter what the special interest groups pay. Fuel is a sensitive enough area, that it could become a local senate campain issue.

Is it absurd when a used prius sells for more than a new one, and the wait list for a new one is 4+months???

All being said, aviation prices never seem to decline. A small hedge if you can afford it now is not a bad idea. If prices were to drop like some predict, between the hedge, and current prices on fuel you would be ok... and if prices go up, you would have a safety net.


All in all, Southwest, the mother of hedgers, doesn't seem to be buying any right now. You prob. would not be stupid to follow their moves
 

doog

Well-Known Member
Jet-A is currently being hedged at $140-$150/bbl in the heating oil market.

If you were the CEO, would you do it? Knowing that you will lose billions if you do hedge at that cost?
Hell no. Why would you hedge at higher than the market rate, when the market rate is already at an all time high? You hedge when you're comfortable that the current price locks in expected profits... hedging to lock in a loss is ridiculous and shareholders should be outraged.
 

doug_or

Well-Known Member
Hell no. Why would you hedge at higher than the market rate, when the market rate is already at an all time high? You hedge when you're comfortable that the current price locks in expected profits... hedging to lock in a loss is ridiculous and shareholders should be outraged.

Higher than market rate? That is the market rate. You have to hedge at a price above the current price because the market believes that prices will continue to rise. It doesn't make a difference what your airlines break even oil price is. If I was a shareholder I would be outraged if the CEO told us they lost $500 million because they didn't hedge since it would have still resulted in a $100 million loss and a loss is a loss, right?
 

surreal1221

Well-Known Member
All of our economies are at the mercy of the markets. . .which obviously is a 180 degree spin on how it should be.

Markets are to be at the mercy of our economies, not the other way around.
 

SoCalAprch

Well-Known Member
There was another thread stating that Delta may show a second quarter profit and the article link said that they had their fuel hedged. At what rate did Delta hedge their fuel?
 

jtrain609

I'm a carnal, organic anagram.
Yeah my thoughts exactly...basically airlines are unable to hedge now, and they are at the mercy of the markets now.
You don't just hedge to get cheap prices, you hedge to plan costs. As I understand things, that's the primary reason Southwest hedged for so long, even when oil was cheaper, and why they will continue to hedge, when it's expensive.
 

doug_or

Well-Known Member
You don't just hedge to get cheap prices, you hedge to plan costs. As I understand things, that's the primary reason Southwest hedged for so long, even when oil was cheaper, and why they will continue to hedge, when it's expensive.
EXACTLY. Hedging is risk management. Its not (supposed to be) speculation. The point is not to bet on the markets, but to remove uncertainty.
 

granlistillo

Well-Known Member
I am guessing that the premium you would have to pay to hedge in a raging bull market would be pretty darn expensive. Nobody wants to underwrite cheap oil, the downside risk is toooo high. Hedging when market are relatively stable is what needs to be done. But then, why would management want to harm their qtly results when there is no crisis?
Didnt Delta management sell off their hedges for cash a few years back and then got clobbered with the relatively speaking small spike in oil a couple of years ago?
 

kellwolf

Piece of Trash
You don't just hedge to get cheap prices, you hedge to plan costs. As I understand things, that's the primary reason Southwest hedged for so long, even when oil was cheaper, and why they will continue to hedge, when it's expensive.
That works when there's minor fluctuation in the prices or when oil is on the way up. However, I don't see oil continuing its meteoric rise, so it doesn't make sense to pay the extra fees to hedge. If you plan your costs at $140, don't hedge, and the price of oil falls, you wind up with a bigger profit margin anyway. If oil continues to go past $150, the odds of breaking even (much less making $$$) are pretty slim anyway. So, if you hedge at $150, you're either limping along, or you're gonna have to cut costs somewhere else (ie labor).
 

wheelsup

Well-Known Member
You don't just hedge to get cheap prices, you hedge to plan costs. As I understand things, that's the primary reason Southwest hedged for so long, even when oil was cheaper, and why they will continue to hedge, when it's expensive.
So if you were running the company you would hedge, and lock in a price you KNOW cannot generate a profit? Or would you not hedge? That was the question ;).

Quite a predicament.
 

jtrain609

I'm a carnal, organic anagram.
Couldn't tell you, I don't run businesses. I'm not really very interested in doing so to be real honest with you.
 
Top