airoli

Note that these are (unfortunately) two separate items: One is the base fare (LX has announced a 3% increase for the winter timetable), the other is the "fuel surcharge" (which of course should be included in the base fare, but let's not go there ). For the latter, LX has stated that they will remove the last two increases if the oil price remains <$120 / barrel for 28 consecutive days. This should be the case soon.

SmilingBoy

http://www.iata.org/whatwedo/economi...evelopment.htm (check the chart "Taking a longer term perspective of price movements" and try again)

NA-Flyer

What is the % of kerosin prices drop ? I belive Kerosin is originally developed from OIL so it must be also dropping in prices !

moeve

Do a reality check - remember there was no way airlines could roll over all the losses for those higher fuel prices therefore they are going to keep those surchages for longer to recoup at least some of those losses.

SmilingBoy

I agree, as long as they can keep the fuel surcharges high, they will. I was just questioning your statement that Jet A1 had not come down in price at all, which is simply incorrect, since crude and Jet A1 are almost perfectly correlated (albeit with a slightly higher markup now than a few yeas ago due to slightly constrained refining capacity).

Tim2008

LH cuts its fuel surcharge for domestic and European flights by 3 € and 5€ for long-haul flights for new tickets issued after Oct 20.

Triple3

Compared to when? Compared to August approx 24% (FOB SIN).



You might remember that kerosene is refined from oil in a combined production system. So just because crude is dropping this doesn't imply a reduction of kerosene prices - typically when the winter season begins and people start to fill their home heating oil tanks kerosene gets more expensive - even if crude drops in price. Refineries cannot strongly shift production into a specfic direction, i.e. jeopardising gasoil production for increasing kerosene output doesn't work above a certain limit.

Btw: That's the reason why airline's kerosene hedging via crude is not a perfect hedge. They still have to deal with a not-insignificant amount of basis risk. Unfortunately TOCOM's kerosene futures have a ridiculously low trading vaolume.

SmilingBoy

Agree entirely with you, exceptHouseholds do not use kerosene for their heating, but heating oil. Heating oil is more or less the same as diesel, so this should not affect jet fuel prices more than prices of other oil products.

Whilst I agree that a hedge via crude is not perfect, look at the chart I linked above. The correlation between the the jet fuel price and the price for crude is probably in the range of 0.95-0.99, so I would not worry too much about the slightly different development.

Triple3

JET A-1 Spot (FOB SIN) vs NYMEX crude 90 day futures: 0.817

JET A-1 Spot (FOB ARA) vs NYMEX crude 90 day futures: 0.917

(based upon 14 year time series)

JET A-1 Spot (FOB SIN) vs NYMEX heating oil 90 day futures: 0.837

JET A-1 Spot (FOB ARA) vs NYMEX heating oil 90 day futures: 0.924

(based upon 8 year time series)

JET A-1 Spot (FOB SIN) vs IPE crude 180 day futures: 0.952

JET A-1 Spot (FOB ARA) vs IPE crude 180 day futures: 0.95

(based upon 8 year time series)

JET A-1 Spot (FOB SIN) vs WTI Spot: 0.872

JET A-1 Spot (FOB ARA) vs Brent Spot (FOB ARA): 0.946

(based upon 14 year time series)

So, if you call this "perfectly correlated" I might be interesting in your company's hedging processes and hedge effectiveness testing.

Triple3

Undoubted.



So think of where the kerosene refining fraction is compared to heating oil or diesel.

I agree though wrt JET B. That's much more correlated with naptha prices.

See the correlations I posted. Me would not dare to infer a 0.99 correlation from the charts you linked.... that's far less, mate.

Triple3

That argument would only hold valid if airlines solely used futures for hedging. Which is not the case for quite a few incl. LH.

SmilingBoy

Good to get into numbers. A few observations:

• No point comparing European jet fuel prices with NYMEX prices - the distance results in imperfect correlation.
  
• Why use spot prices for jet fuel and futures prices for crude? The original suggestion was that jet fuel prices did not come down whereas crude prices did.

I was surprised at your low correlations so made a little analysis myself. As I don't have access to Platts I used data from http://tonto.eia.doe.gov/dnav/pet/pet_pri_spt_s1_m.htm and correlated the series "Europe Brent Spot Price FOB (Dollars per Barrel)" with the series "Amsterdam-Rotterdam-Antwerp (ARA) Kerosene-Type Jet Fuel Spot Price FOB (Cents per Gallon)". These are monthly spot prices, probably both taken in the ARA region.

The picture that emerges is remarkably different to what you present. Whether you use 2, 3, 4, ..., 21 years of data does not make a difference: the correlation is always above 0.99 and seems to be around 0.996 in the long-run.

Now, whether there are liquid markets to hedge these prices is a different question, but I think that it is without doubt that a change in crude price will have a proportional effect on jet fuel prices.

SmilingBoy

This is flawed reasoning. The main reason it makes sense for companies hedge is to stop them from going bankrupt. The price at which they hedged the fuel should not have an impact on their marginal cost, as at any moment they can sell or buy fuel at the market price on the spot market. Therefore, the correct marginal cost which should be taken into account for pricing purposes is the current spot market price. Hedging is just speculation, and results in a windfall profit or windfall loss that is sunk, and should not affect prices. The only other thing it affects is the probability of bankruptcy which decreases if the hedging strategy is good.

Triple3

Not if you take the regional contracts.

See my post ... I realised that, too, and added spot correlations.

We should take this offline. I doubt the mods will tolerate a detailed discussion abt. corr. analysis here. You'll have PM.

Triple3

Now that's a flawed statement.

We had that (fruitful) discussion before... I still tend to believe that companies will pass on their hedging costs to their customers.... and a windfall loss due to (dumb) future hedging is nothing but cost of hedging.