9 replies

TheRealBabushka

Member since 21 Apr 2012

Total posts 2,059

Jet fuel hedge. I'm unsure how this works in practice but could airlines hedge their jet fuel purchases at current prices for the next 50 years? Is there a market out there for such long term hedge positions? With prices at historical lows and expectation from the IEA that future prices will go up due to current collapse in investment in upstream oil, it seems sensible to lock in prices for the medium to long term.

aldrigsomandre

Qantas - Qantas Frequent Flyer

Member since 31 Aug 2015

Total posts 86

50 years is long term compared to the common practices. The hedging is based on future predictions, so an airline can hedge either all or part of their fuel requirements. Usually, low cost airlines tend to hedge a lot more. Predicting 50 years into the future is way too risky, taking into account the finite amount of fuel and the developments of technology, of course. Oil companies won't risk losing profits by taking hedging options for 50 years.

There's a pdf explaining these things: http://www.mercatusenergy.com/Portals/80554/docs/rockproducts.pdf

Hayden

Qantas - Qantas Frequent Flyer

Member since 28 Jan 2015

Total posts 94

The way hedging works is the longer the period of time you want to hedge for the higher the hedge price, to minimise risk to the seller.

If you could hedge airline fuel for 50 years, you would peobably find it would be close, if not more than the average price for the last 10 years. 

Hedge as much as you can for the next 2-5-10 years, definitely though!

TheRealBabushka

Member since 21 Apr 2012

Total posts 2,059

It got me thinking, rather then buying up foreign currency, could central banks expand their asset portfolio and buy up the glut of oil. Surely the price will go up in the future.

Or is holding on to oil reserve just a proxy for the greenback?

TheRealBabushka

Member since 21 Apr 2012

Total posts 2,059

On that note perhaps "pensioners" (is the term senior citizens PC?)  should divest their superannuation from property and invest in oil while it's cheap. Cut the young some slack so they can get on the property ladder.

It's a really opportunity if fund managers are able to faciliate the purchase of oil reserves for mom & pop investors.

Hayden

Qantas - Qantas Frequent Flyer

Member since 28 Jan 2015

Total posts 94

Oil takes up a lot of room to hold though, and can actually go off too.

But if everyone does go out and buy oil you could end up in a situation like what happened i think 7 years ago, when the price of oil went up $20/barrel in a single day due to people buying a crapload of oil rights

spinoza

Member since 01 Feb 2012

Total posts 218

No, there would be no market for it, no one would take the other side of that hedge unless the price was very high. There is also massive counter party risk. If they take a hedge out with a financial institution, whos to say they would still exist in 2030? You would need bank guarantees etc and cost would be astronomical. 

TheRealBabushka

Member since 21 Apr 2012

Total posts 2,059

Good point spinoza.

kimshep

Qantas - Qantas Frequent Flyer

Member since 11 Oct 2014

Total posts 336

TRB - if you're looking for a reasonably concise explanation of fuel hedging, check Wikipedia for a good overview of what it is, how it works, and the relevant parties and how the market is structured. It's readable without being heavily technical.

Back to your questions though. Hedging strategies work for some airlines and not for others - by choice. Some relevant examples here: AA (even through their recent bankruptcy) chose NOT to hedge over the past 4 years, whilst QF generally hedges on an annual basis. DL on the other hand bought their own oil refinery instead. Different views suit different countries / airlines.

Also, the promise of 'cheap' aviation fuel doesn't always add up to instant success and profits. If it did, Saudia (Saudi Arabia), Conviasa (Venezuela), Iran Air (Iran) would all be massive carriers of scale, due to cheap oil. Unfortunately, they're not.

As is said upthread, a 50 year hedge would need a flawless crystal ball. Way too many variables. Had a theoretical airline signed one of these 5 years ago, it would be fueling it's aircraft with red ink under the current price. DL last year paid US$1.4b to just terminate losing hedges .. and UA wasn't far behind.

Of course, it CAN also work in an airline's favour. The story of WN - Southwest's brilliant hedging strategy during the early 90's through to 2002 is legendary. It was this item that kept WN profitable after 9/11 when everyone else in the USA was going Chapter 11.

QF seems to have a comparitively superior hedging startegy team. But think about QF as an example. This year's planned expenditure on fuel? AUD$3.7 billion. Now, multiply that by 50. That would be a 'monster' bet for a company with a total market capital value of AUD$8.4b.

mrmaxwell

Member since 17 Jun 2011

Total posts 12

All I want to know is when will fuel surcharges be removed - when oil hits zero?

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