CO Locks in More of Its Fuel Costs
 

http://www.chron.com/disp/story.mpl/...z/5837162.html

I haven't seen it mentioned on here. They are cutting flights to (from IAH) MIA, ORD, LGA, MCO, among others. In my case, I am happy they are leaving flights to PHL, FLL, and DEN alone.

Hedging ~40% at $120-140/bbl. That is a pretty big bet on oil prices continuing to rise for the next 9-12 months.

At least if they hedge fuel, they know what they are dealing with and can plan their routes and schedules accordingly. If there was some kind of disaster/terrorist attack, fuel would shoot out of sight.

Well it looks like my every other week trip to Miami is going to have to be FLL now, miami was already having such a tight connection from my CoCo flight that it was hard to make if any problems ( 41 min)

Just to clarify - the article says that they are reducing capacity to these cities. I originally misinterpreted what you wrote (thought you were saying they were cutting these cities from IAH), so I thought I would clarify for people who have not read the article.

While I agree that CO has done a less than stellar job of fuel hedging, they have hedged fuel in another way by the fleet that they have developed. I would assume that their economist have long seen the savings from having "the youngest jet fleet." While they may not be paying $35 a barrel for oil they do have a reduced risk and it would be interesting to know what that reduce gas risk was because of the fleet in terms of dollars.

My bad. Yeah, they are cutting seats (probably frequency of flights - since larger 737s will replace the 733s and 735s), not cutting them completely. Oops. I am glad they aren't touching the cities I fly to/from the most... at least for now.

I never have really understood the whole hedging thing. Aren't they basically betting that the price will go up? Who would take that bet?

Larry has talked about the permanent fuel hedge thanks to the efficient fleet. I haven't heard him describe the significance of those savings. It's a good question; I am now curious to dig around and find the answer.

An example would be Southwest, which has taken that bet to great effect. Power companies hedge too. It makes planning a lot easier. Though I must say, in the current environment, I wonder if hedging makes sense.

Basically... you're buying fuel now for use later so that when later comes around, you know how much its going to be and you can plan accordingly. Sure, you can look at it as a bet that the price will go up but companies never hedge 100% of their requirements.

If they hedge 50% and fuel goes up $10 barrel, then its the same as if they hedge nothing and fuel only went up $5. But if fuel goes down $10, then their fuel bill only goes down $5.

It's a risk management strategy.

Hurricane
 

Even if it has no impact on any oil operations, a single hurricane this season will probably cause oil to spike.... so it's a wise move for CO to pursue.

Wirelessly posted (BlackBerry8830/4.2.2 Profile/MIDP-2.0 Configuration/CLDC-1.1 VendorID/105)

I agree that it allows them to do a much better job of predicting their costs for the next 3-4 quarters; WN used the same rationale many years ago and they won the gamble. But it is still a gamble. A hurricane in the gulf or many other events could cause prices to go up. Saudi Arabia's decision to pump 500,000 more bbls daily might make prices drop.

We'll find out in a few months if CO makes money on the bet or not.

I don't even see them doing it as a way to make money. It's simply a way to make sure it can survive.

They look at fuel prices today and what's going on in the industry, and decide that the ~$135 crude level is about where it can still survive by cutting capacity and raising fare. If they don't hedge now at this price and the crude continues to rise, then its survival will be in doubt.

If crude goes down, they'll lose money, but the company will still survive.

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Thinking of betting, I just have a thought. Companies like USAirways should simply put itself on BLACK (or RED) on a roulette table at a casino. That way, they have at least close to 50% of making around 260m and get a chance to ride it out. Better than dying slowly the way it is now with 0% chance of survival.

Anyone seen a note on how much this exercise actually is going to cost CO? United recently wrote down $500MM in hedge losses. I'm hopeful that CO's exposure isn't that high, but certainly there is a pretty significant loss looming on these hedges.