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!

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?

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

www.asx.com.au/asxpdf/20081128/pdf/31dxh1yhw6bkx9.pdf

17/33

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

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

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

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??

... heard there's a chain txt msg going around the Q halls saying "DJ gone bust" send to all your DJ friends at this date and time... bit of a low joke?

Full loads over xmas maybe one or two seats spare.

New bases, new lounges.

Hardly sounds like a company going "bust".

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%

Price is trending up over the last week.
Market must be pricing in some positive news on a good load factor over the Christmas period.

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...? :(

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!)

Mr Approach,

All i can think of to respond to your "rumour" is to say with much emphasis.........."BULLSH*T"

I think no further clarification required!

Ratter :ok:

Mr Approach......................Check Wheels?........................Go Round!

If it looks like B'sht,smells like B'sht.....it's probably B'sht.

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."

Ex AAP- 16 Feb 09:

777 delivery
 

Leaving Auckland yesterday I noted a big shiny new 777 in VAustralia colours. Looks great and notably longer than the ANZ ones:ok:. 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.

It wasn't a delivery flight. I believe it was a proving flight simulating a diversion to AKL as part of the AOC process.

what recession?
 

I guess BG whining about 'tough conditions' could be perceived as contradicting the bearded, grinning idiot. ie Recession, what recession? :D But wait, what about keeping the air fair?

Even with all the support @ 25c, VBA has made a new all time low currently 24c hate to see what it will go to when the support gives up and just lets the market have its way!

Proving flight
 

Maybe proving they can fly around with no passengers. Cruel irony.:hmm:

400 jobs could go

http://www.asx.com.au/asxpdf/2009021...6bd7235l5g.pdf

Parking of 5 aircraft and reduciton in domestic flying of 8%

Currently at 23 to 23.5 cents.

article ex the Courier Mail/AAP:

The net loss reported is almost $4M per week over the half year to 31 Dec 2008. Back on 25 Oct 2008 I reported DJ lost $5+ for the whole of Sep 2008 and were on track to loosing more for Oct 2008. A few contributors such as 7378FE. porch monkey, OZangel and ANstar made a few comments at the time canning me. I guess there is no substitute for inside information and B... S... walks.

Not good.
 

The real issue for VB at the moment is CASH.

Of the current 526 mil in cash, approximately 300 mil is not available to be spent as it is locked as cash reserves required by the groups financiers.

That leaves around 120 mil liquid cash reserves.

The total cash position decreased from 772 million to 526 million over the previous 12 months. This is a decrease of 246 million or 4.7 million per week.

If that rate of cash burn is maintained, there is only 26 weeks of operational cash remaining.

In addition to the current rate of cash burn, the debt position has worsened in the last 2 months and is set to deteriorate even further over the next 6-12 months. An additional 1.4 billion in debt will be added during this period.

The dry leasing cost for 1 x 777 is in the vicinity of $45000 per day. Each additional aircraft will be placing an increasing burden on an already depleted and decaying cash position.

Unless there is a dramatic about turn in passenger numbers and yield in the next 26 weeks, VB will either need to raise capital or take some other action to survive.

tsalta -

Can you run through your maths again in arriving at 120 m cash reserves ? :confused:

tsalta - where does $772m figure come from ??? I thought the last reported cash reserves were just over $600m. and your maths does seem to be bit out!

$526m - $300m = $126m...hmmmm

Dry lease of a B777 at $45000 per day??? That equates to 13.5 million a month!!!!!:rolleyes: I think you are out by an order of magnitude at least!!

Slice -

The cash assets from the published reports FY 2007 was indeed 772 m.

The latest published cash position in the 6 months to 06/2008 was $ 603 m and the next 6 months to 12/2008 was $ 526 m. This is a decrease of $ 246 m over 78 weeks or approx. $ 3.5 m per week. Some of this is attributable to the 777 start up costs.

Cash security deposits for fleet financing are technically "untouchable" and effectively do have to come off the company's "spare" cash available. Any move to use these funds would be a breach of the leasing contracts. Would the lessor act ? - who knows.

IF the $ 45000 per day for 773 dry lease is correct, this amounts to $ 1.35 m per 30 day month. 3 aircraft is $ 4.05 m per 30 day month or approx $ 1.0 m per week

Anyway you look at it, Virgin Blue Holdings with 3 x 773 aircraft in it's fleet will suffer considerable losses that will have to be met using cash. It's debt position after 12 months will be significantly worse.

That is just not a position that lends itself to VBA surviving in its' current form. There will have to be some sort of cash injection.

Not good.
 

Con Catenator,

Pretty much correct mate however:

The reported cash position at 31 Dec 07 was 771 million.
The reported cash position at 31 Dec 08 was 526 million.

The reserved cash as required by the leasing agreements is 300 million.

The reserved cash is locked by the leasing covenant and is not able to be spent.

526 million less 300 million = 126 million.

The cash burn is over the 52 week calendar year 08 and is 4.7 million per week.

Slice,

Take your shoes off and do the math again.

Given the poor credit rating of VB, it is likely the leasing cost is higher. I obtained the figure from a research paper of an MBA grad.

Can someone explain how $526 mil - 300 mil = 126 Ml. Wheres the other 100 Mil gone?

tsalta

Slow down take a deep breath and recheck your maths you are beginning to embarrass yourself.

Where do you get the information that the Lease facilities have a cash coverage componenet

Along with a whole boat load of other really interesting information, you will find the restricted cash detailed in the notes to the annual financial accounts.

The notes are where you will find all the good stuff they are trying to bury.

As of Jun 30 2008 the restricted cash was 201.5 million. With the addition of debt since, the restricted cash is now set at approximately 300 million and will climb further in the next 6 months.

Me embarrassed? Yes, I can't seem to drive the calculator.

Make that 526 - 300 = 226 or 48 weeks at the current cash burn. My bad.
Still not a flash position for VB.

tsalta

It may not be a good position, but only assuming they do nothing. As Godfrey said, they're taking steps to hoard cash over the next 2 years which is what they've built as their expected time until the market heads north again. I take that to mean that they'll take the measures necessary, such as cutting capacity (as already foreshadowed) and managing the workforce to cut the expenditure as needed.

But, hey I guess time will tell

Hi EBT,


Sure, if they manage to change enough to escape then great. However, what concerns me is where they are taking action to exacerbate the situation, i.e. VA.

Anyone giving the results more than a cursory glance will see how they have tried to use the results delivery and presentation prose to make the results seem better than they are.

No one could foresee what is happening now financially. What was initially a great move is now going to cost dearly.

My main fear is from about mid year, the real financial pain will begin and what little profit is generated domestically will evaporate.
If that happens, then VA will be the Kryptonite necklace around VB's neck.

I look forward to being proven wrong (and that is often the case) but I believe that VB in their current form are VSF.

tsalta

Positive what!!
 

Look.Settle down geezers. It's not all that bad.I do believe VB is ripe for a takeover...stay tuned

va is not vb. vb will have a cash burn max. when or if it is reached va, a separate company with separate debts/assets it would be cut loose, i.e. wound up or sold (singapore !!!). vb will still exist buts its image somewhat tarnished

deluded
 

Dude,

if you think that is the case..................good luck to you.

VB is VA.

VA is VB.

end of story.

There is no separation, they are cross colatoralised.

VA's assets are secured by VB's.

Think about it. If you were a lender, and going to extend a startup organisation 300m for a plane, wouldn't you want some more security other than the plane which is now only worth 250m because it is second hand?

The basic sniff test always works in the end.

tsalta

V Oz has to remain majority Australian owned to keep the rights to fly the planned routes and as there are not many rich Aussies willing to risk big money on an airline at this stage, I don't think that there is any chance of VB successfully selling off V Oz.