DODD-FRANK RULES SHOULD MAKE FUEL HEDGING MORE ATTRACTIVE FOR AIRLINES

Dino D'Amore
By Dino D'Amore July 25, 2011 15:26

DODD-FRANK RULES SHOULD MAKE FUEL HEDGING MORE ATTRACTIVE FOR AIRLINES

Today’s oil prices show a slight dip (Brent Crude Oil: $117.99 a barrel) but they remain high and are a significant concern for all airlines. Ryanair’s Michael O’Leary reports failing profits today on the back of high fuel costs and predicted that they would have to cut routes over the winter schedule as a consequence. He also suggested that there would be more airline failures this year as some carriers bow to the pressure of such weighty fuel costs.

Even though Ryanair is partially protected from fuel spikes being 80% hedged, and hedge savvy carriers such as Southwest Airlines continue to post profits in the face of such expensive fuel costs, hedging remains a risky and costly business. Southwest disclosed in its 2010 annual report that it trades more than 600 financial derivatives contracts to hedge fuel prices between 2011 and 2014 with third-parties in the over- the-counter derivatives market. Maintaining such a portfolio is expensive and putting a hedge in place can cost as much as 10% of the market price. This coupled with the sheer volatility in oil price makes hedging a risky prospect for the less experienced airline. Even the experienced airlines, including Southwest, have been burned in the past and made considerable losses. But as oil is a finite commodity, the price is only going to increase in the future. And with the new transparency rules being drafted by the US Commodity Futures Trading Commission and the Securities and Exchange Commission to more closely regulate all types of oil-derivatives contracts to eliminate speculating; those increases in oil price should stabilize to make hedging a more attractive prospect for airlines.

Dino D'Amore
By Dino D'Amore July 25, 2011 15:26
Write a comment

No Comments

No Comments Yet!

Let me tell You a sad story ! There are no comments yet, but You can be first one to comment this article.

Write a comment

Only <a href="http://www.aviationnews-online.com/wp-login.php?redirect_to=http%3A%2F%2Fwww.aviationnews-online.com%2Feditorial-comment%2Fdodd-frank-rules-should-make-fuel-hedging-more-attractive-for-airlines%2F"> registered </a> users can comment.