Dropping Oil Prices Hurting Airlines. Huh?

[Dover]

Airlines can't catch a break these days no matter how hard they try. Case in point -- United Airlines has announced it could lose as much as $544 million because of falling oil prices. Say what?

United has fallen victim to its own efforts to manage what's been a devastating rise in fuel costs. The airline, like just about everyone else in the business, has been buying jet fuel using a tactic called hedging. Ben Brockwell of the Oil Price Information Service calls it "an insurance policy against prices rising."

So long as prices are rising, it works. But if prices start falling, it can quickly become a fiscal disaster, as many airlines are discovering.

Here's a very simplified explanation of how fuel hedging works, using a hypothetical scenario: Let's say oil is selling for $130 and the price is expected to rise. An airline signs a deal with a supplier to buy, say, three months worth of fuel at $110 a barrel. That's called a fuel hedge. The price of oil rises to $140 a barrel, but since the airline is locked in at $110, it can sit back and laugh as its competitors pay more for fuel. Smart move.

But let's turn that scenario on its head and say the airline hedges at $110 but the price drops to $92. Oops. Now the airline is paying more for fuel than it costs on the open market, placing it at a competitive disadvantage. The balance sheet craters...>

http://blog.wired.com/cars/2008/09/airlines-hurt-b.html

[glowing]

1. I don't care much for the airlines.. However, I do care about municipalities

and school busses which do the same thing to keep costs down... NOW, taxpayers are taken for a ride, too... Well, if you are big, big school... I'm sure miss Alaska gets free gas for her short bus.

[Uben]

2. CFOs are gambling with corporate money

When they lose, their investors lose. Most everything in life is a gamble, so those who lose have to take the fall, unless you are in tight with the Bush administration, then, the people will lose for you!

[The Croquist]

3. This is not gambling. It's more of an insurance policy.

It is a standard business tactic. Farmers often do it to guarantee a set price for their crops.

[Uben]

5. CAll it what you want....

...it's still a gamble. If prices go down, they cannot compete with those who did not lock in prices.

[The Croquist]

7. Is buying medical or auto insurance a gamble?

If you don't need it during a given year, was it a bad idea to buy it?

[NickB79]

4. The predicted market volatility of Peak Oil is starting to bite

One thing about Peak Oil: the price doesn't just keep going up year after year in a steady progression. THAT at least would be something one could plan for, prepare for. But the reality is that the prices will spike, demand destruction and recession sets in, and then prices fall. The economy recovers briefly, the price of oil shoots back up, and the cycle begins again. It becomes impossible to lock in prices with any reasonable certainty that you will save money. The investment capital required for fuel efficiency improvements and alternative energy production vanishes as the stock market seesaws.

[Doctor Cynic]

6. Can't they circumvent this?

Can't they just, say, reduce their fuel purchasing from their supplier by 90% and then turn to the open market for the rest?

Of are they completely locked in with the supplier?

[The Croquist]

8. They signed a contract

The only ways they can get out of it is to declare bankruptcy (It's been a few weeks since their last one right?) or ask the Feds to bail them out again. As a member of the "Feds" (Taxpayer XXX-XX-XXXX) I vote against a bailout.