Many airlines have or are putting agressive fuel hedging programs in place, when fuel is 130+ dollars a barrel. Now we are starting to see fuel go down. The airlines must be think “Watch does it take to make money.” The risk in this investment went the other way on them. Some guy on airliners.net has said that United has lost 500 million of fuel hedges. Yikes!!
Funny, I was talking with our other pilot about this the other day. We wondered how Southwest, who was brilliant on the way up, is doing now. I hadn’t heard the $500 million figure, I wonder how many more options will expire worthless over the next couple of quarters. On the other hand maybe Southwest saw the downturn coming.
John
Futures contracts don’t work the same way that stock options do.
If they hedge at $130 and oil goes down, to say $90, they have to pay the difference on the contract. With the high margin ratios on futures contracts, this can get very expensive, very quickly. The oil market has dropped so quickly, that there are many bagholders that are getting crushed right now. Could very well be the next shoe to drop.
You’re right, I was busy watching a business channel report on options while I was typing. That’ll teach me to multi-task.
The airlines didn’t necessarily have to buy futures contracts - there is such a thing as commodity options.
Also, the $500M figure is over the life of the contracts, some of which are as long as 10 years. According to the filing, the realized losses are only in the $20-$30M range.
A mere pittance to the oil companies and I’d hardly call this a “Stab in the Back”, e.g. an unexpected and treacherous attack, it’s more like a bite in the ass!
I meant more the fuel hedging itself stabbing the airlines in the back. Still, my title might not be the most fitting.
Didn’t mean anything personal J, just a matter of semantics.
Got ya!