How the most skilled airlines have saved themselves from the increase in the price of fuels
Hedging commodity prices is a trading strategy widely used by oil and gas producers and large consumers of energy commodities such as airlines to protect themselves from market fluctuations. In times of falling crude oil prices, oil producers typically use "Short" coverage, i.e. short-term sales, to avoid over-constraining, while heavy consumers such as airlines do the exact opposite: they cover themselves for a long time. term from rising oil prices which could quickly dent their profits. Almost all of an airline's costs are predictable in some way, except for one: short-term fuel costs. Fuel is typically the most important entry in an airline's expense ledger and can account for nearly a third of total operating costs.
Two years ago, many large carriers ditched oil covers after suffering massive losses due to persistently low oil prices, but with oil prices steadily at multi-year highs, they have been forced to turn around and are hedging in a way. aggressive, with brokers reporting the most intense consumer coverage period in recent years.
And there is growing evidence that fuel forward hedges are working as they should this time around. This term hedge is paying off
Southwest Airlines and Alaska Airlines are the only large US carriers that have consistently covered the cost of fuel for a long time . Southwest is the only major US airline that is also a low-cost carrier and fuel accounts for a third of its operating costs. The airline began covering fuel costs in the early 1990s, following the surge in crude oil prices during the first Gulf War, and continued to cover them religiously during tough times.
Southwest's goal is to cover at least 50% of fuel costs annually and to use options and spread calls exclusively. To do this they used some of the best Wall Street traders, and they managed to contain costs successfully. Between 2015 and 2017 Southwest lost money with its hedges, but this year the oil hedges are giving excellent results to the Texan carrier.
According to the Financial Times, a team of four Southwest Airlines fuel traders managed to save the company a whopping $ 1.2 billion this year thanks to smart hedging.
While oil prices have soared 40% from year to year, middle distillates have seen an even bigger surge: jet fuel recently hit $ 320 a barrel in New York ($ 7.61 / gallon) , a whopping premium of over $ 200 over raw material prices. The aviation fuel premium is ~ 10 times larger than any other premium seen in the past 30 years. Southwest's hedging must have shielded the company from some severe price shocks.
Southwest is just one of many companies trying to protect themselves from high oil prices. In recent months, there has been a renewed appetite from many airlines and an influx of new operators, including Walt Disney (NYSE: DIS), as well as trucking and manufacturing companies.
“We are also very lucky as we are well covered on fuel for the next 12 months. I would attribute it more to luck than to extremely intelligent management. However, we bought 80% of the fuel up to March 2023 for less than $ 70 a barrel, ”Ryanair Holdings Plc CEO Michael O'Leary revealed at the company's latest press conference.
Sure, hedging in the current market can be expensive, thanks to the strong demand for hedging products. The higher hedging costs have been accentuated by the lack of liquidity in recent months, which has made it more difficult to find counterparties and agree on prices. However, since oil prices are unlikely to fall anytime soon, large oil consumers have no choice but to hedge themselves forward or risk paying billions of euros more in fuel costs.
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The article How the most skilled airlines have saved themselves from the increase in fuel prices comes from ScenariEconomici.it .
This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/come-le-compagnie-aree-piu-abili-si-sono-salvate-dallaumento-di-prezzo-dei-carburanti/ on Sun, 03 Jul 2022 11:36:51 +0000.