satpak77

Reuters news is reporting close to $1 Billion

United Airlines closes out fuel hedges, sees hedge losses near $1 bln | Reuters

Andy

From the article: United also said that its only currency hedge going forward into 2015 is on the euro. It has hedged about 60 percent of its exposure at a rate of $1.22, Rainey said.


At least they hedged the EUR; it's been in freefall. Currently at 1.1367.

Probe

Yes, but it didn't say which way they hedged. They could be winning, or losing, on that bet as well.

Andy

International companies hedge currency against the risk of USD appreciation, so hedging in this case would be selling the EUR. This is because any profits in foreign currencies are decreased when you convert those profits back to USD when the USD appreciates. So in this case it's a profitable hedge.

pilot64golfer

Yep. Exactly. The hedge is a financial instrument separate from the actual purchase of the good. If the Euro gets stronger, we get more USD for each purchase. If the dollar gets strong (what its doing now) we get less USD from those Europeans when they buy tickets.

The idea of hedging is just to have a stable price of goods and not bet on windfall profits or losses from fuel prices or currency fluctuations.

baseball

practically speaking, a hedge allows a company to determine its break-even price point when a portion or a large portion of their product is determined with non fixed priced goods or services. Our labor at UAL is a fixed price, but fuel is not. We know the labor price over the next 4 years for example. Hard to be strategic about business plans when 50 percent of your costs fluctuate so greatly.

Also, you could also consider hedging as a way of dollar-cost-averaging your expenses over a period of time, if you had your hedges set either monthly or quarterly.

CAL did really well on hedges and then did really bad, so I guess it evened out, but then they went into a liquidity shortfall and then we ended up with POS 02.

Probe

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.

pilot64golfer

Ya you're right about the procedure. I'm not sure which way united does it. I didn't know we had currency hedges until today. Currency hedges are mostly used by companies they trade strictly with one nation or have a factory in one nation with different currency than ours.



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Probe

This is the first time I have heard of any airline hedging currency as well. Not saying they haven't, I just never heard it and I read the finance stuff most days.

Probe

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.