How To Prevent Destruction of Airline Industry: Non-Profit VerticalOil Company

John Kulp wrote:

On Wed, 23 Apr 2008 01:39:15 -0700, "Mr. Travel" wrote:


wrote:


On 22 Apr, 03:48, James Robinson wrote:


Robert Cohen wrote:


Hey, it's only a napkin dooodle idea, though something does need to be
done in the public interest, as more bankruptcies will seemingly hurt
the very competitive industry more.

Why do they need to do this?

In the first place, all airlines have to buy fuel as part of their
operating cost. All they need to do is pass the cost on to their
customers. The fact that the airlines aren't making money is simply that
they all are charging too little for their services, not that fuel cost is
high.

Second, airlines already have the financial mechanism to control the price
of fuel so it is predictable. It's called hedging. Southwest uses it to
great advantage over its competitors. The others just haven't learned.


Or they just 'gambled' the wrong way.


That is an excellent way of putting it.


Which is exactly what hedging is. You look smart if you win and an
idiot if you lose. Good management shouldn't be confused with good or
bad luck.

Yes, but like buying put and call stock options, it requires money to
start. Airlines with financial issues don't have the financial ability
to hedge.

James Robinson wrote:

(John Kulp) wrote:


"Mr. Travel" wrote:


wrote:


James Robinson wrote:


Second, airlines already have the financial mechanism to control the
price of fuel so it is predictable. It's called hedging. Southwest
uses it to great advantage over its competitors. The others just
haven't learned.

Or they just 'gambled' the wrong way.

That is an excellent way of putting it.

Which is exactly what hedging is. You look smart if you win and an
idiot if you lose. Good management shouldn't be confused with good or
bad luck.


Hedging, if done properly, is not about luck, or winning or losing. It is
about fixing stable prices for fuel, so company finances are more
predictable.

That's not what WN did. They bet the price was going up.
They didn't buy options speculating the price was going down.

James Robinson wrote:


No, properly done, they don't hedge at a single price. They get puts
and takes, so they are protected in a narrow range.

Do you have evidence that WN did anything but bet the price would go up?

Mr. Travel wrote:

Yes, but what happens if the price drops? Wouldn't WN have lost money on
the deal?

If they commit to buying 200 barrels of oil at $55 in 3 months, then in
3 months, they need to dish out $11,000 to buy those 200 barrels at $55
no matter what the price of oil is at that time.

If the price of oil drops, then yeah, WN ends up paying more for its oil
than airlines who have no edges. Not sure if that is considered "losing"
money.

The big advantage of hedging for airlines is that the price of tickets
at the time of ticket purchase reflects the oil price that will be in
effect at the time of the flight.

If, today, you buy a ticket for summer travel, its prices assumes a
barrel of oil at say $100. But when your day of travel arrives, should
the price of oil have risen to $130, the airline will end up losing
money because your ticket price doesn't reflect today's oil price.

This is one big reason why airlines line Delta and Northwest declared
billion dollar losses for a single quarter and Southwest is laughing all
the way to the bank. Southwest can sell tickets in advance and know that
its fuel costs will roughly be the same on the day you will travel.

For Southwest, it also has an advantage that it doesn't really have
"advance sales" like the legacy carriers. (people don't buy WN tickets 4
months in advance, whereas on legacy carriers, this is often the case,
especially for overseas flights).

On Wed, 23 Apr 2008 21:17:45 -0700, "Mr. Travel" wrote:



Which is exactly what hedging is. You look smart if you win and an
idiot if you lose. Good management shouldn't be confused with good or
bad luck.

Yes, but like buying put and call stock options, it requires money to
start. Airlines with financial issues don't have the financial ability
to hedge.


Yes, it does which is why not everyone has hedged to the extent SW
did.

In article ,
(John Kulp) wrote:

On Wed, 23 Apr 2008 21:17:45 -0700, "Mr. Travel" wrote:



Which is exactly what hedging is. You look smart if you win and an
idiot if you lose. Good management shouldn't be confused with good or
bad luck.

Yes, but like buying put and call stock options, it requires money to
start. Airlines with financial issues don't have the financial ability
to hedge.


Yes, it does which is why not everyone has hedged to the extent SW
did.

Familiar with the term "penny wise and pound foolish?"

Kurt Ullman wrote:

Yes, it does which is why not everyone has hedged to the extent SW

The problem is that once your financial condition deteriorates, you no
longer have the option to buy hedges and rising price of oil makes your
financial condition even worse.


And airlines that are in bankrupcy protection can't really enter into
hedging contracts because all credit is frozen. Since emerging from
bankrupcy, United has purchased some hedges, but they are only for a
fairly small proportion of its fuel needs because that is all it can afford.

In a "survival of the fittest" scenario, you let Southwest win and the
others falter because WN was smart and had sufficient cash to play the
fuel hedging game VERY well.

In a scenario where a country wants competition, the government might
have to intervene and provide cash garantees that would enable all
alrilnes to play the hedging game so that they could continue to compete
against Southwest and the few others who have good hedging.

In article ,
John Doe wrote:

Kurt Ullman wrote:

Yes, it does which is why not everyone has hedged to the extent SW

The problem is that once your financial condition deteriorates, you no
longer have the option to buy hedges and rising price of oil makes your
financial condition even worse.

I did not write the above.
How does it? You write the option and you pay the vig or commission or
whatever you want to call it. Management needs to look at expenses and
everything, so why ignore your second or (in many cases any more) your
highest single cost.
Investopia (and a little, albeit very little, personal experience)
would tend to argue against that.
"In real life, the ****actual delivery rate*** of the underlying
goods specified in futures contracts is very low. This is a result of
the fact that the hedging or speculating*benefits of the contracts can
be*had largely without actually holding the contract until expiry and
delivering the good(s). For example, if you were long in a futures
contract, you could go short the same type of contract to offset your
position. This serves to exit your position, much like selling a stock
in the equity markets would close a trade."
Also you go the options route, you have the right to buy, but no
obligation.



And airlines that are in bankrupcy protection can't really enter into
hedging contracts because all credit is frozen. Since emerging from
bankrupcy, United has purchased some hedges, but they are only for a
fairly small proportion of its fuel needs because that is all it can afford.

Actually all old credit is frozen. New financing
(debtor-in-possession) is instituted. YOu have to have the okay from the
Courts to buy them, probably a rather hard row to hoe given that it
isn't a "traditional" expense. Maybe it should be and the airline could
use WN's experience as evidence.

It is all they have decided to afford. Again, I would argue penny wise
and pound foolish if you don't use any


In a scenario where a country wants competition, the government might
have to intervene and provide cash garantees that would enable all
alrilnes to play the hedging game so that they could continue to compete
against Southwest and the few others who have good hedging.

Yeha, lets continue our long-standing tradition to bail out bad
managers and punish the good ones.

John Doe wrote:
Mr. Travel wrote:


Yes, but what happens if the price drops? Wouldn't WN have lost money on
the deal?


If they commit to buying 200 barrels of oil at $55 in 3 months, then in
3 months, they need to dish out $11,000 to buy those 200 barrels at $55
no matter what the price of oil is at that time.

If the price of oil drops, then yeah, WN ends up paying more for its oil
than airlines who have no edges. Not sure if that is considered "losing"
money.

Well, they are spending more money.