Merged: Virgin Blue Share Price - how low can it go and for how long?
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ongaurd, that would be true if all they did was buy the call, but to offset some of the cost of the call they sold a slightly lower striked put (collar), and are now marked to market ($200mil odd) on the put as it moved in the money.
the currency hedge cannot offset this as it is already offsetting the fact that the exchange rate is @ 60odd cents and they have alot of future spending to do in USD.
CAPISH!
the currency hedge cannot offset this as it is already offsetting the fact that the exchange rate is @ 60odd cents and they have alot of future spending to do in USD.
CAPISH!
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BG did say every $1 in the barrel costs 1 mil , so effectively 100mil has been gained
so if 100mil would have been gained had they not had sold the put and 200mil has been lost because they did does this mean their synthetic exposure is twice there requirements, what does this mean for their actual cost of fuel if fuel prices stay where they are or continue to head south??
tsalta your good with options care to enlighten?
so if 100mil would have been gained had they not had sold the put and 200mil has been lost because they did does this mean their synthetic exposure is twice there requirements, what does this mean for their actual cost of fuel if fuel prices stay where they are or continue to head south??
tsalta your good with options care to enlighten?
Last edited by im sparticus; 26th Dec 2008 at 07:41.
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Hey Sparticus,
I understand that VB actually used two different strategies for their fuel hedge policy. The first was options and the second was swaps.
Usually for hedging with options they would just purchase a call option, which as stated, gives the purchaser the right but not the obligation to purchase the oil at a set price on a set date.
A put gives the options holder the right but not the obligation to sell a product (oil) at a set price at a future date. It also obligates the put seller to purchase the product (oil) at a set price on a future date. As a seller, if they did in fact sell a put then their exposure continues to increase as the oil price falls below the option strike price.
That seems like a bit of an odd strategy. The option premium for each call would only have been in the vicinity of USD 6-10 per barrel for a strike just out of the money and 6-12 months out.
The other hedging method is swaps. Swaps have no premium fee but are obligations for both parties. VB's swaps are set at around USD 110 per barrel and the Singapore jet fuel last week was USD 58 ish. I understand VB are about 40% swaps and 60% option hedged. I'm not sure about the strike price for their options though.
They are not Robinson Crusoe though. I don't think there would be an airline on the planet who hedged in the correct direction last year.
Regarding the currency hedge. There are currency options but they more common method is currency forwards. They are more similar to swaps in that they are obligations for both parties.
cheers
tsalta
I understand that VB actually used two different strategies for their fuel hedge policy. The first was options and the second was swaps.
Usually for hedging with options they would just purchase a call option, which as stated, gives the purchaser the right but not the obligation to purchase the oil at a set price on a set date.
A put gives the options holder the right but not the obligation to sell a product (oil) at a set price at a future date. It also obligates the put seller to purchase the product (oil) at a set price on a future date. As a seller, if they did in fact sell a put then their exposure continues to increase as the oil price falls below the option strike price.
That seems like a bit of an odd strategy. The option premium for each call would only have been in the vicinity of USD 6-10 per barrel for a strike just out of the money and 6-12 months out.
The other hedging method is swaps. Swaps have no premium fee but are obligations for both parties. VB's swaps are set at around USD 110 per barrel and the Singapore jet fuel last week was USD 58 ish. I understand VB are about 40% swaps and 60% option hedged. I'm not sure about the strike price for their options though.
They are not Robinson Crusoe though. I don't think there would be an airline on the planet who hedged in the correct direction last year.
Regarding the currency hedge. There are currency options but they more common method is currency forwards. They are more similar to swaps in that they are obligations for both parties.
cheers
tsalta
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www.asx.com.au/asxpdf/20081128/pdf/31dxh1yhw6bkx9.pdf
17/33
17/33
80% fuel hedged using mainly collars, not that uncommon/odd.
Last edited by im sparticus; 27th Dec 2008 at 23:50. Reason: wrong link
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Hi Sparticus,
Thanks for the link. Unless VB are calling something a collar which is not usually considered a collar, then I am confused.
A collar is an option strategy which is used by someone who already owns the underlying asset, in this case oil. If VB already owned the oil then there is no need to hedge the cost.
A collar uses a protective long put to limit any loss if the price of the underlying falls, and a short call to offset the cost of the long put. If this strategy is employed without owning the underlying then they are merely speculating on the price movement of oil. In addition, they left themselves open to theoretically unlimited losses if the price had kept rising. That does not make sense and is definitely not common in hedging price movements of a commodities.
40% swaps and 60% options is "mainly options".
If anyone has any further info, I'd love to hear it.
Regards
tsalta
Thanks for the link. Unless VB are calling something a collar which is not usually considered a collar, then I am confused.
A collar is an option strategy which is used by someone who already owns the underlying asset, in this case oil. If VB already owned the oil then there is no need to hedge the cost.
A collar uses a protective long put to limit any loss if the price of the underlying falls, and a short call to offset the cost of the long put. If this strategy is employed without owning the underlying then they are merely speculating on the price movement of oil. In addition, they left themselves open to theoretically unlimited losses if the price had kept rising. That does not make sense and is definitely not common in hedging price movements of a commodities.
40% swaps and 60% options is "mainly options".
If anyone has any further info, I'd love to hear it.
Regards
tsalta
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they are trying to hedge the price rises of fuel they are theoretically short not the downside risk of a stock they already own so its like you say but in reverse, you can construct a collar to protect whichever direction you choose. CAPISH!
www.econoutlook.net/2008/07/airline-industry-part-6-hedging-calls.html
www.econoutlook.net/2008/07/airline-industry-part-6-hedging-calls.html
Last edited by im sparticus; 28th Dec 2008 at 22:17.
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Hey Sparticus,
Sure, got that. Thanks. Great link.
The problem for VB then becomes that if they are short a put to reduce the cost of the long call they have set themsleves a floor price for fuel which would have to be way above the current price. I guess this is where the 200 mill loss of fuel hedging is coming from. They have given away a major cost advantage to other operators.
Whoops! Would just have been better to go the long call and wear the cost. Hindsight is a pain!
Cheers
tsalta
Sure, got that. Thanks. Great link.
The problem for VB then becomes that if they are short a put to reduce the cost of the long call they have set themsleves a floor price for fuel which would have to be way above the current price. I guess this is where the 200 mill loss of fuel hedging is coming from. They have given away a major cost advantage to other operators.
Whoops! Would just have been better to go the long call and wear the cost. Hindsight is a pain!
Cheers
tsalta
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glad we are now on the same wavelength
which brings me back to this statement from "on guard":
BG did say every $1 in the barrel costs 1 mil , so effectively 100mil has been gained.
if this statement is correct and they were perfectly hedged they would have only lost $100mil so why have there hedges lost them $200mil, did they write twice as many puts as they baught calls (or long twice as much whatever swaps/futures etc as required or a combination thereof 60/40), would this gearing of downside risk theoretically double there locked in price of fuel at current prices ??
I have no idea just trying to make some sense of the figures and facts that are being thrown around.
any ideas??
which brings me back to this statement from "on guard":
BG did say every $1 in the barrel costs 1 mil , so effectively 100mil has been gained.
if this statement is correct and they were perfectly hedged they would have only lost $100mil so why have there hedges lost them $200mil, did they write twice as many puts as they baught calls (or long twice as much whatever swaps/futures etc as required or a combination thereof 60/40), would this gearing of downside risk theoretically double there locked in price of fuel at current prices ??
I have no idea just trying to make some sense of the figures and facts that are being thrown around.
any ideas??
Last edited by im sparticus; 29th Dec 2008 at 00:36.
Todays Financial Review,
Virgin Blues pax numbers for November increased by 9.6% over last the previuos year to 1.53 million. Virgin Blue traffic measured by RPK rose 12% for the month while revenue load factor was down 3.4 percentage points to 79%
Virgin Blues pax numbers for November increased by 9.6% over last the previuos year to 1.53 million. Virgin Blue traffic measured by RPK rose 12% for the month while revenue load factor was down 3.4 percentage points to 79%
Traditionally no airline makes money over new year, January period. Once we're well into Feb, we should see the trend for the coming 09'
Those that have built their businesses on solid ground will probably survive. Those built on the short sighted altar of debt, well...?
Those that have built their businesses on solid ground will probably survive. Those built on the short sighted altar of debt, well...?
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Heard a rumour here in Melbourne that ASA had excluded VB from forward income estimates due lack of confidence in the airlines survival and purchase offer by ANZ. (and we know what happened to the last of those!)
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From McBank today...
Earnings revisions
QAN: financial year 2009 +21%; financial year 2010 -2%; financial year 2011 -9%.
VBA: financial year 2009 +68%; financial year 2010 +71%; financial year 2011 +14%, albeit off mainly negative earnings.
Price catalyst
We expect QAN's November operating traffic data to provide a further indication of yield and load factor trends, although further guidance from management may only be forthcoming at the interim results for QAN on 19 February and for VBA on 23 February.
Action and recommendation
We remain cautious on the airline sector, although the negative news flow for both carriers appears to be mainly priced in.
We believe VBA's earnings, while not inspiring in the short term, are the most positively leveraged to a recovery in consumer sentiment, with the stock still looking cheap at 0.4x price/book value. Outperform.
QAN by contrast has significant exposure to declining international premium traffic, and greater exposure to declines in cargo volumes and leisure travel. We believe a better entry point should exist for QAN in second half 2009 - first half 2010. Neutral."
Earnings revisions
QAN: financial year 2009 +21%; financial year 2010 -2%; financial year 2011 -9%.
VBA: financial year 2009 +68%; financial year 2010 +71%; financial year 2011 +14%, albeit off mainly negative earnings.
Price catalyst
We expect QAN's November operating traffic data to provide a further indication of yield and load factor trends, although further guidance from management may only be forthcoming at the interim results for QAN on 19 February and for VBA on 23 February.
Action and recommendation
We remain cautious on the airline sector, although the negative news flow for both carriers appears to be mainly priced in.
We believe VBA's earnings, while not inspiring in the short term, are the most positively leveraged to a recovery in consumer sentiment, with the stock still looking cheap at 0.4x price/book value. Outperform.
QAN by contrast has significant exposure to declining international premium traffic, and greater exposure to declines in cargo volumes and leisure travel. We believe a better entry point should exist for QAN in second half 2009 - first half 2010. Neutral."
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Ex AAP- 16 Feb 09:
Qld: Virgin Blue could ground discount fares
Virgin Blue boss BRETT GODFREY says discount fares could be grounded in a tough economy.
The Virgin chief executive says the company will be reducing capacity .. which will make discounted fares difficult to sustain.
The arrival of Virgin's first long-haul .. full-service airline is expected to spark a price war on the trans-Pacific route with established carriers Qantas .. United Airlines and Delta.
Virgin boss .. Sir RICHARD BRANSON .. will attend the launch party for the first V Australia flight from Sydney to LA on February 26.
The company will use the launch party to raise money for the Victorian Bushfire Appeal.
AAP RTV ahe/pjo/tm
Virgin Blue boss BRETT GODFREY says discount fares could be grounded in a tough economy.
The Virgin chief executive says the company will be reducing capacity .. which will make discounted fares difficult to sustain.
The arrival of Virgin's first long-haul .. full-service airline is expected to spark a price war on the trans-Pacific route with established carriers Qantas .. United Airlines and Delta.
Virgin boss .. Sir RICHARD BRANSON .. will attend the launch party for the first V Australia flight from Sydney to LA on February 26.
The company will use the launch party to raise money for the Victorian Bushfire Appeal.
AAP RTV ahe/pjo/tm
777 delivery
Leaving Auckland yesterday I noted a big shiny new 777 in VAustralia colours. Looks great and notably longer than the ANZ ones
. I assume she was on delivery being parked on a remote ramp. Looked like a refuel stop on delivery but not sure why it would need one.
. I assume she was on delivery being parked on a remote ramp. Looked like a refuel stop on delivery but not sure why it would need one.
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Leaving Auckland yesterday I noted a big shiny new 777 in VAustralia colours. Looks great and notably longer than the ANZ ones. I assume she was on delivery being parked on a remote ramp. Looked like a refuel stop on delivery but not sure why it would need one.