Fuel Hedging Losses
01-22-2015 | 06:13 PM
#21
Gets Weekends Off
Joined: Mar 2006
Posts: 5,213
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From: guppy CA
You can "hedge" either way. Going up or going down. The problem with what the airlines do is they don't do a pure "hedge". They do a "collar". They buy calls to "hedge" against rising fuel prices, but they don't like the paying the cost. To offset the cost, the sell a put. That negates the cost of the collar. It is called a "no-cost" collar. It is true, unless you were wrong about the direction of the price of oil, which is happening now, and happened back in 2010 or so.
When the price goes down, the put you sold goes up in value, and you have to pay up.
UAL being hedged against the Euro didn't mention which way they bet. They could have bought calls, or puts. And sold the opposite.
When the price goes down, the put you sold goes up in value, and you have to pay up.
UAL being hedged against the Euro didn't mention which way they bet. They could have bought calls, or puts. And sold the opposite.
Most airlines use a 3 option collar. Buy call, sell put, buy lower strike put. The lower strike put limits losses when prices move significantly lower.
I guess the only positive note is that DAL doesn't seem to be any better run financially than we are. Operationally they are kicking arse.
Their biggest FOPA is their refinery. Needed lots of CAPEX every year, 100 mil or so. They didn't do their due diligence when they bought the place. It is an environmental disaster that they are on the hook to cleanup. They also don't blend ethanol with the gasoline they produce, so they are spending "millions" buying ethanol credits. It didn't mention how many millions, just "millions". They decided to use fracked oil, because it was cheap. But they had to pay 15 dollars a barrel to transport it by rail. Then they ran out of railcars because a bunch got de-qualed after the fire in Quebec. So they didn't have enough oil. So they bought an old tanker to ship it by sea from IAH to EWR. The tanker had problems so they just ordered a new-build tanker.
Shipping by sea is much cheaper, right? Well, not so much. Because of an old law, I think it is called the Jones Act but I cannot recall. Any ship operating between US ports has to be built in a US shipyard, and staffed by US crews. I have heard shipping like this is 3-4 times the cost of a Panama flagged, Korean built, Philippino staffed super tanker.
Turns out DAL may not be that well managed after all. At least financially.
Their biggest FOPA is their refinery. Needed lots of CAPEX every year, 100 mil or so. They didn't do their due diligence when they bought the place. It is an environmental disaster that they are on the hook to cleanup. They also don't blend ethanol with the gasoline they produce, so they are spending "millions" buying ethanol credits. It didn't mention how many millions, just "millions". They decided to use fracked oil, because it was cheap. But they had to pay 15 dollars a barrel to transport it by rail. Then they ran out of railcars because a bunch got de-qualed after the fire in Quebec. So they didn't have enough oil. So they bought an old tanker to ship it by sea from IAH to EWR. The tanker had problems so they just ordered a new-build tanker.
Shipping by sea is much cheaper, right? Well, not so much. Because of an old law, I think it is called the Jones Act but I cannot recall. Any ship operating between US ports has to be built in a US shipyard, and staffed by US crews. I have heard shipping like this is 3-4 times the cost of a Panama flagged, Korean built, Philippino staffed super tanker.
Turns out DAL may not be that well managed after all. At least financially.
They chose to use fracked oil because it's easy for the Trainer refinery to process. The alternative would be Nigerian light sweet. Transportation costs are about $6-8/bbl higher for Bakken crude but the prices more than offset the transportation costs.
The Trainer refinery serves two purposes for Delta:
1) it lowers jet fuel prices in a region where Delta has the most presence (east coast) due to their tuning the refinery to produce a higher percentage of jet fuel vs other refined products.
2) It's a crack spread hedge; something that is not possible to hedge well with financial products. Due to the price difference between Brent and WTI, the crack spread is decreasing, but I don't think many saw that coming. I sure didn't.
The environmental issues don't mean anything as long as the refinery is operating. Even after it gets shut down, I doubt it will mean much.
The purchase of ethanol credits is a red herring. Other refiners are buying ethanol credits because it's cheaper to do that than blend gas and ethanol. RFS Roundup: As Gasoline Prices Plummet, Refiners Nix Ethanol Blending | Article | EESI
01-22-2015 | 07:09 PM
#22
Gets Weekends Off
Joined: Nov 2013
Posts: 1,168
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From: Gets weekends off
Interesting because just 2 days ago this article from Forbes appeared in my Twitter Feed. It slams Delta and claims Delta made a mistake buying the refinery and that they costs of owning it far exceed the savings they've made in gas prices.
How Cheap Oil Has Delta Air Lines Jet Fooled - Forbes
How Cheap Oil Has Delta Air Lines Jet Fooled - Forbes
01-22-2015 | 07:32 PM
#23
Thread Starter
Don't say Guppy
Joined: Dec 2010
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From: Guppy driver
Andy, everything you just posted about the refinery is straight out of DAL managements statements for the last 4 years. I have read it all, multiple times.
It just hasn't worked out for them.
The land the refinery is on is a EPA disaster.
They couldn't get enough fracked oil.
They bought a ship to ship fracked oil by sea, after it is shipped by rail to Texas. $$$$$
They ordered a new-build ship.
They are buying ethanol credits by the "millions".
The refinery cost them over 100 million every year but one, and there is a gigantic billing coming due someday to clean the land up.
And, over time, I don't believe fuel hedging has worked out for us.
There is still not enough info to tell if we lost money on the Euro hedge, or made money.
It just hasn't worked out for them.
The land the refinery is on is a EPA disaster.
They couldn't get enough fracked oil.
They bought a ship to ship fracked oil by sea, after it is shipped by rail to Texas. $$$$$
They ordered a new-build ship.
They are buying ethanol credits by the "millions".
The refinery cost them over 100 million every year but one, and there is a gigantic billing coming due someday to clean the land up.
And, over time, I don't believe fuel hedging has worked out for us.
There is still not enough info to tell if we lost money on the Euro hedge, or made money.
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