AIRLINES LOOK TO SNOW HEDGING TO PROTECT THEM FROM FURTHER FREEZING LOSSES

Dino D'Amore
By Dino D'Amore February 11, 2011 17:41

AIRLINES LOOK TO SNOW HEDGING TO PROTECT THEM FROM FURTHER FREEZING LOSSES

With Chicago once more under a blanket of snow and freezing conditions closing many airports across the Eastern US, airlines could be forgiven for considering buying snow hedges – yes hedges not sledges. Snow derivatives are in demand, according to the Weather Brokerage and CME Group. Since they launched the products two years ago, business has been booming.

Most of the major European and US airlines have all posted lower fourth quarter results, volcanoes aside, this has mainly been caused by flights being cancelled and airports being forced to close due to an inability to cope with the amount of snow and ice. British Airways reported it lost £50 million during the snow disruption to UK airports in December; easyJet lost £18 million; Air France-KLM lost €70 million. In the US in December, three major airports were closed and more than 6,000 flights were cancelled, placing estimates on the cost as up to $150 million. The latest disruption to hit Chicago in the past few weeks resulted in more than 13,000 flights being cancelled and as such is expected to cost airlines even more than last year in lost revenue. With such big sums, airlines should consider looking into buying snow hedges, but it’s unlikely as they got fuel hedging policies so wrong in the past few years, that betting on the weather, an even more volatile commodity that oil, will probably prove too great a risk for most. But not according to The Weather Brokerage, who counts airlines among its clients as well as road salt manufacturers and snow-removal contractors.

The year The Weather Brokerage launched in 2009, the US brokerage booked three contracts – a successful launch for weather derivatives – and last year it is reported to have booked many more. The most recent storms will also serve to boost business in 2011. The firm sells snow derivatives based on the snowfall at six US locations: Boston, New York (Central Park), New York (La Guardia), Chicago, Detroit and Minneapolis. The contracts pay out for every inch over or under the agreed amount on the contracts. The CME Group tracks average snowfall in those locations. But even though with the record snow fall finding companies to buy the derivatives has become much easier, finding investors to buy them is much harder…. Probably akin to selling ice to Eskimos you would think…

Dino D'Amore
By Dino D'Amore February 11, 2011 17:41
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