Originally Posted by
brunos
If you hedge with forward/futures/swaps the win/loss structure is exactly symmetric.
Say the spot and futures price of oil is $100. CX is afraid that oil prices will go up to 150in in a year time, so they buy futures at 100. That guarantees this price for future purchase.
On the other hand some producers are happy to sell at 100 to insure a good price for their future delivery.
Either side could "win" or "lose" in their desire to insure a known price for the future and that depends on what the spot price will be in a year time (it could be 50 or 150).
Hedging is a normal practice for all companies that have amounts to purchase/sell in the future.
Some believed that what CX did many years ago seemed to have been, in part, akin to speculating on fuel prices.
In 2018 CX still had 45% of its fuel purchases hedged. CX started to dramatically reduce its hedges by 2019 (down to 5% Q2 2020).
ALL airlines were hit by a double whammy due to covid (and for CX the 2019 protests). Traffic got dramatically reduced meaning much much less fuel was needed; and prices of fuel dropped.
It did induce a huge extraordinary loss for CX.
Referring endlessly to that episode seems a bit sterile to me.
Sterile: Hmmm, I think, you get lost in the technicalities and lose the overall out of sight.
When hedging with a professional party you will always be in a position with less information and as such, be at the losing end of the game (losing being apart from the transaction costs, which can be considered an insurance cost), when you are on the speculative road. The professional party will not go into deals when they (based on their significantly better information) expect to lose on the deal. Or so to say, when doing speculative hedging, you will always lose (on average) from the professional party. Not to say, the professional party does have the benefit of "the large numbers" and probably some worse-case back-insurance too and you don't.
Or, so to say, your assumption about "symmetric" when doing speculative hedging is just plain wrong. We see so many companies go haywire with speculative hedging (be it on fuel pricing, commodities, or even interest assumptions) and afterward, there is the confusion of "how could this happen ?". Easy, because you are on the lesser knowledge side.
When hedging on the fuel price based on the number of tickets sold on a day (granted, it needs averaging), you can come out with little risk, since for each and every ticket sold, you get money for the fuel and you hedge to purchase the fuel at the date of the flight(s) against the price you did let the customer pay. So, when hedging conservatively, it can work out very fine, IE reducing your risk in direct operational costs.
Obviously, in the past, CX did go the speculative way, making their own assumptions on the future fuel price, which worked out (completely) differently.
And, you also refer to the futures. Yep, all airlines did have issues there, I'd say unavoidable when governments step in with rules, deviating from general expectations. With non-speculative hedging, the fuel price does not matter.
Again, these kinds of decisions are not something that "management" does on their own, it needs approval (and quite likely initiation) from the controlling board(s), effectively, the shareholders, pushing for more profit (at a risk).