Norwegian Air stability through summer?
May 31, 2019, 12:24 am
#226
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I think many people miss the point when they talk about fuel hedging; it really isn't a bet where you try to make money, but you just want a level of predictability in relation to your operating costs.
1Q 2019 presentation gives the following figures:
- 53% of H1 2019 at USD681
- 38% of FY 2019 at USD680
Doesn't sound aggressive to me.
1Q 2019 presentation gives the following figures:
- 53% of H1 2019 at USD681
- 38% of FY 2019 at USD680
Doesn't sound aggressive to me.
May 31, 2019, 5:18 am
#227
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I think many people miss the point when they talk about fuel hedging; it really isn't a bet where you try to make money, but you just want a level of predictability in relation to your operating costs.
1Q 2019 presentation gives the following figures:
- 53% of H1 2019 at USD681
- 38% of FY 2019 at USD680
Doesn't sound aggressive to me.
1Q 2019 presentation gives the following figures:
- 53% of H1 2019 at USD681
- 38% of FY 2019 at USD680
Doesn't sound aggressive to me.
In Norwegian's case, it isn't about the percentage of fuel usage that they've hedged; it's about the amount of capital required to maintain those positions and the range of gains/losses that are possible with one's position size.
Here's why I stated that Norwegian is overhedged. It is because Norwegian doesn't have any spare capital to hedge even one pound of jet fuel.
At the end of the first quarter, Norwegian had 3.1B NOK of equity (note that this was after a 3B NOK capital raise in mid-March). At 1.5B NOK of equity, bondholders can immediately demand full payment on their bonds which would trigger immediate liquidation of the entire company.
If you review 2019's monthly traffic reports, you'll see that Norwegian had anywhere from 183M NOK to 1.047B NOK of unrealized gains from hedging. That's some very volatile swings in just four months. The April report had 183M NOK of unrealized gains. I would anticipate an unrealized loss on hedge positions at the end of May - I don't know where the number will fall, but if it's in excess of 1B NOK, that would likely cause the company's capitalization to fall below the 1.5B NOK bond covenant requirement.
Those hedging gains and losses go directly against a company's equity.
What Norwegian is doing is akin to someone who has very little money to their name and $10 in their pocket walking into a casino and playing blackjack at the $5 table.
In both cases, the positive and negative swings in capital will be excessively large. And just like the gambler with $10 in his pocket, Norwegian will eventually get wiped out when they hit a losing streak and have to supply additional capital to cover futures margin calls.
Norwegian is in no financial position to be able to hedge; they should not have any fuel hedges with the small amount of capital they have at their disposal.
Edit: what I should have originally stated is that Norwegian Air is overhedged relative to their available equity capital.
Position sizing is extremely important in futures trading, and it appears that no one in Norwegian management envisioned the downside risk of a decline in oil futures. Here's an article on position sizing in futures: https://www.thebalance.com/how-to-ca...-trade-1031082
Last edited by iflyjetz; May 31, 2019 at 5:44 am
May 31, 2019, 6:41 am
#228
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At the same time, they do have an airline to run. They have to buy fuel no matter what.
If fuel prices start moving to the wrong direction and you're 100% exposed to those price movements in the immediate term, isn't that putting your capital at risk as well?
If fuel prices start moving to the wrong direction and you're 100% exposed to those price movements in the immediate term, isn't that putting your capital at risk as well?
May 31, 2019, 7:41 am
#229
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Most airlines no longer hedge. It's been shown to cost more over the longer term to hedge rather than just accept spot pricing and adjust ticket prices up or down when fuel prices move considerably.
May 31, 2019, 7:49 am
#230
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Code:
Breaking City News
April 29, 2019 / 3:53 PM / a month ago
TABLE-Jet fuel hedging positions of European airlines
6 Min Read
LONDON, April 29 (Reuters) - The following table shows the percentage of
planned jet fuel consumption hedged by European airlines to protect themselves
against price fluctuations, and the baseline price.
The figures are based on company quarterly and annual results or company
statements.
Company Disclosure Period Hedging Price
date percentage
Air France KLM 20/02/2019 2018 60 $651/tonne
(price after 2019 59 $693/tonne
hedge, based on
forward curve at
15 February
2019)
2020 33 $717/tonne
Q4 2018 59 $683/tonne
Q1 2019 61 $658/tonne
Q2 2019 61 $686/tonne
Q3 2019 61 $708/tonne
Q4 2019 55 $717/tonne
EasyJet 20/11/2018 6 months to 31 March 2019 69 $567/tonne
Full year to 30 Sept 2019 65 $571/tonne
Full year to 30 Sept 2020 45 $654/tonne
Flybe 14/11/2018 H2 2018/19 96.9 $606/tonne
H1 2019/20 85 $718/tonne
IAG* 28/02/2019 Q1 2019 98 n/a
Q2 2019 86 n/a
Q3 2019 79 n/a
Q4 2019 69 n/a
Q1 2020 56 n/a
Q2 2020 47 n/a
Lufthansa 14/03/2019 Full year 2018 79 (10.8 $666/tonne
mln t)
Full Year 2019 76 (11 mln $698/tonne
t)
Q1 2019 82 (2.4 $661/tonne
mln t)
Q2 2019 81 (3 mln $695/tonne
t)
Q3 2019 77 (3.0 $709/tonne
mln t)
Q4 2019 65 (2.6 $722/tonne
mln t)
Norwegian Air 08/01/2019 H1 2019 52 $681/tonne
H2 2019 22 $680/tonne
Ryanair 04/02/2019 Fiscal year 2019 90 $583/tonne
Q1 fiscal year 2019 n/a $547/tonne
Q2 fiscal year 2019 n/a $547/tonne
Q3 fiscal year 2019 n/a $624/tonne
Q4 fiscal year 2019 90 $625/tonne
Fiscal year 2020 90 $709/tonne
Q1 fiscal year 2020 90 $717/tonne
Q2 fiscal year 2020 90 $718/tonne
Q3 fiscal year 2020 90 $723/tonne
Q4 fiscal year 2020 90 $667/tonne
Q1 fiscal year 2021 13 $628/tonne
Fiscal year 2021 3 $628/tonne
SAS 29/01/2019 Feb-Apr 2019 96 $650-$700/
tonne
May-July 2019 99 $701-$750/
tonne
Aug-Oct 2019 68 $650-$700/
tonne
Nov 2019 - Jan 2020 24 $601-$649/
tonne
Feb-Apr 2020 37 $650-$700/
tonne
Finnair 24/04/2019 H1 2019 76 n/a
H2 2019 69 n/a
Wizz 30/01/2019 Fiscal year 2019 (3 82 $618-$672/
months) tonne
Financial year 2020 (12 53 $639-$700/
months) tonne
May 31, 2019, 8:40 am
#231
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Iflyjetz is referring to US airlines which are the most profitable in the world. Several years ago, now AA CEO Doug Parker proved that hedging oil is generally disasterous for an airline. That's because the hedges are so costly. You lose a lot of money when oil prices go down, you lose some money when oil prices are stable, and you often lose money even when oil prices go up! The only time you make money is when prices skyrocket. It's kind of like playing the slot machines in a casino: the odds are always heavily in the house's favor. Even if you manage to make big money on a hedge -- like Southwest famously did earlier this century -- it almost always comes back to bite you.
https://www.fool.com/investing/2016/...dges-agai.aspx
When oil prices started to fall, WN's biggest problem was coming up with cash to pay the additional collateral on their hedge. Fortunately, with their good credit rating, they were able to borrow the money. Norwegian would not be so lucky
I have no idea why European airlines would still continue to engage in this foolish hedging behavior.
If Norwegian fails this summer or fall, it will almost certainly be because of hedging losses or credit card holdbacks. You can't run an airline with no money.
https://www.fool.com/investing/2016/...dges-agai.aspx
When oil prices started to fall, WN's biggest problem was coming up with cash to pay the additional collateral on their hedge. Fortunately, with their good credit rating, they were able to borrow the money. Norwegian would not be so lucky
I have no idea why European airlines would still continue to engage in this foolish hedging behavior.
If Norwegian fails this summer or fall, it will almost certainly be because of hedging losses or credit card holdbacks. You can't run an airline with no money.
May 31, 2019, 8:56 am
#232
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May 31, 2019, 11:01 am
#233
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Further, after 9/11, the big 3 had to liquidate their fuel hedges due to the capital requirements to keep them in place. Hedges aren't cheap.
Jun 2, 2019, 11:11 pm
#234
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I didn't realize that European airlines still hedged; as IAHPHX pointed out, the US airlines learned a while back that it's a fool's errand. That's probably a large part of the reason why European airlines are struggling so much financially. And if the price trend continues to decline, there may be several European airline failures this year.
Further, after 9/11, the big 3 had to liquidate their fuel hedges due to the capital requirements to keep them in place. Hedges aren't cheap.
Further, after 9/11, the big 3 had to liquidate their fuel hedges due to the capital requirements to keep them in place. Hedges aren't cheap.
I would tend to think that most medium / large airlines globally hedge at least some of their fuel price exposure - even if (some of) the US majors don't.
I'm not entirely convinced by the claim that fuel hedging is "a fool's errand" or that it is a key issue for European airlines at the moment. You might have good reasons to hold such a view, but I don't understand this.
It's not different from trying to hedge your currency or interest rate exposure. You just want to have a certain degree of predictability over the cost of inputs (vs. trying to 'make money').
Jun 3, 2019, 3:20 am
#235
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I believe there are good reasons why airlines might choose to do fuel hedging. Agreed that smaller airlines might not have the resources to have a hedging strategy in place.
I would tend to think that most medium / large airlines globally hedge at least some of their fuel price exposure - even if (some of) the US majors don't.
I'm not entirely convinced by the claim that fuel hedging is "a fool's errand" or that it is a key issue for European airlines at the moment. You might have good reasons to hold such a view, but I don't understand this.
It's not different from trying to hedge your currency or interest rate exposure. You just want to have a certain degree of predictability over the cost of inputs (vs. trying to 'make money').
I would tend to think that most medium / large airlines globally hedge at least some of their fuel price exposure - even if (some of) the US majors don't.
I'm not entirely convinced by the claim that fuel hedging is "a fool's errand" or that it is a key issue for European airlines at the moment. You might have good reasons to hold such a view, but I don't understand this.
It's not different from trying to hedge your currency or interest rate exposure. You just want to have a certain degree of predictability over the cost of inputs (vs. trying to 'make money').
Fuel hedging is always a losing game in the long term because of the way that futures are priced (backwardation). Even the legendary oil trader Andrew Hall proved that a couple of years ago when he blew up his hedge fund on an incorrect directional bet on the price of oil.
Can airlines hedge fuel? Sure, but they'll lose money in the long term by doing so, and can draw down a large amount of capital in the short term if they are heavily hedged when prices drop. I already posted the large swing in the value of Norwegian's oil hedges this year. The fact that unrealized gains were almost the entire company's equity (book value) should tell one that this is a company that cannot afford to hedge oil prices. Going back to the example of a blackjack player, one can 'afford' to lose some money at the $5 blackjack table if they've got $1000 in their pocket. But one that has $10 in their pocket cannot afford to play $5 blackjack because it only takes a couple of hands that go against the player for that player to be wiped out.
Right now, oil prices are again falling. https://finance.yahoo.com/news/oil-p...010514590.html It probably won't take much more of a price decline to completely wipe out Norwegian's capital. I don't know the oil price level where Norwegian's completely insolvent, but the monthly traffic data for May will give us a better idea of how much money Norwegian lost on their fuel hedges in May. And make no mistake; they lost a decent chunk of money on their fuel hedges in May.
Jun 3, 2019, 3:41 am
#236
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Same argument could be used against insurance. Most likely airlines are going to 'lose money' paying for insurance as well.
You could equally argue that a 50% of fuel price increase in the coming months could wipe out Norwegian's equity if they have no fuel hedges in place.
You could equally argue that a 50% of fuel price increase in the coming months could wipe out Norwegian's equity if they have no fuel hedges in place.
Jun 3, 2019, 5:52 am
#237
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Same argument could be used against insurance. Most likely airlines are going to 'lose money' paying for insurance as well.
You could equally argue that a 50% of fuel price increase in the coming months could wipe out Norwegian's equity if they have no fuel hedges in place.
You could equally argue that a 50% of fuel price increase in the coming months could wipe out Norwegian's equity if they have no fuel hedges in place.
Jun 3, 2019, 9:31 am
#238
Join Date: Apr 2014
Posts: 1,638
Likely planning to fly CDG-OAK in late Sept but I've just been waiting and watching, assuming cheap premium would remain available (with possible fire sale pricing at some point) but improbably, discount premium has disappeared for a bunch of dates and it's just Flex at this point. Seat map looks like 17/35 filled for the date I'm eyeing. I'm hoping the price drops back at some point to ~$800 but if it's staying at $1,179, we may consider another option (connecting through MAN on MT is $550 for what looks like a similar premium product).
Discount premium (~$800) still available for the first half of the month; late September appears busier than early for some reason ¯\_(ツ)_/¯
Jun 3, 2019, 9:52 am
#239
Join Date: Jun 2004
Posts: 3,773
What should one do to protect against loss if purchasing a Norwegian ticket in the coming months?
My husband and I will be buying a one-way transatlantic flight originating in CPH, probably in the next two months, and most likely only a couple of weeks in advance. I usually purchase the insurance offered by DY when buying the ticket but I believe this is primarily to cover a potential cancellation by pax for a non-refundable flight due to illness and I doubt it covers the airline's insolvency.
Is any particular credit card better than another to protect against loss (I have both a US AmEx Cent and an IDC AmEx Platinum, the latter of which I think may have better travel insurance).
In past years, one was always cautioned to purchase a flight with at least one night's hotel booked because [EU?] travel insurance will cover a loss due to an airline's bankruptcy only if the trip was booked as a "package" (which required at least one night hotel). But we don't need a hotel so would only be booking a one-way flight.
My husband and I will be buying a one-way transatlantic flight originating in CPH, probably in the next two months, and most likely only a couple of weeks in advance. I usually purchase the insurance offered by DY when buying the ticket but I believe this is primarily to cover a potential cancellation by pax for a non-refundable flight due to illness and I doubt it covers the airline's insolvency.
Is any particular credit card better than another to protect against loss (I have both a US AmEx Cent and an IDC AmEx Platinum, the latter of which I think may have better travel insurance).
In past years, one was always cautioned to purchase a flight with at least one night's hotel booked because [EU?] travel insurance will cover a loss due to an airline's bankruptcy only if the trip was booked as a "package" (which required at least one night hotel). But we don't need a hotel so would only be booking a one-way flight.
Jun 3, 2019, 11:53 am
#240
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Same argument could be used against insurance. Most likely airlines are going to 'lose money' paying for insurance as well.
You could equally argue that a 50% of fuel price increase in the coming months could wipe out Norwegian's equity if they have no fuel hedges in place.
You could equally argue that a 50% of fuel price increase in the coming months could wipe out Norwegian's equity if they have no fuel hedges in place.
And frankly, fuel costs are input costs for airlines; those costs should be passed on to customers. If fuel prices rise by 50%, airline ticket prices should rise to cover the increased fuel costs. The air travel industry isn't a charity operation and margins are razor thin - the appropriate business decision is to raise prices when input costs rise. Or the airline can sell their product at below cost and eventually go out of business.