Fuel Hedge Improves
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Fuel Hedge Improves
As oil is now on it's way back to $80usd/barrel, the paper loss on the fuel hedge is dramatically improving. In other words, the sky is NOT falling, and CX will be able to report a dramatically improved profit figure than originally forecast. Of course, they seem to be keeping that quiet (surprise). The AOA should do an analysis and also have the company update the Association on the actual situation. There is no need for concessions at this point (especially as they have effectively just taken 8% of my annual pay with no 13th month).
(I think it needs about another 8% of healing).
It is far from $80, but high enough for USA to increase production and probably too big a carrot for Russia and Saudi to kept at their reduced production levels.
No long it will be back to around $50-$55 a barrel.
No long it will be back to around $50-$55 a barrel.
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It's not that simple
If we were unhedged and oil fell $2 per barrel(Jet), we would save $2 per barrel. Because we hedged 50%(or so) we only save $1 for every $2 fall in oil price.
Conversely, for every $2 rise in oil, we save $1 by having a smaller hedge loss. So overall we only lose $1 per $2 oil price increase.
Overall, we are better off with the biggest fuel hedge loss possible as that means we save a greater amount on the spot rate. So the recent increase in oil prices is actually BAD for us, not good. It actually REDUCES our profitability.
Conversely, for every $2 rise in oil, we save $1 by having a smaller hedge loss. So overall we only lose $1 per $2 oil price increase.
Overall, we are better off with the biggest fuel hedge loss possible as that means we save a greater amount on the spot rate. So the recent increase in oil prices is actually BAD for us, not good. It actually REDUCES our profitability.
Massive own goal played down and vaguely explained away by incompetent Managers. No individual held accountable and all quiet on the Shareholder front. How do they arrange this? What would it take to incurs Swire's (or anybody's) wrath? You can only speculate what the implications would be if pilots caused anything like these hedging numbers. Those responsible have caused financial damage equivalent to carrying 10 tons of fuel over and above that required on every Cathay flight for several years. Not even a murmur.
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Numero. I understand your logic, however, does not the recent increase in oil prices actually 'reduce' the paper losses on the hedge (ie: if fuel was 20 and we were hedged at 80, the paper loss would be 60, ergo, if the fuel is 80 and the hedge is 80 there is no paper loss whatsoever).
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Lions-yes. But let me give an example to make it clearer.
We need 100 barrels of oil - we have hedged 50 at $80. So no matter what we are paying $4,000 for half our oil. (50 x $80)
Now if oil is $20 - we pay $1,000 for the other 50 barrels - total oil bill is $4,000 + $1,000 = $5,000. Now in actual fact, what would happen in this case is that we buy 100 barrels at $20 = $2,000 and lose $3,000 on the hedge ((80-20) x 50 = $60 x 50 = $3,000) Total bill is $2,000 for the oil plus $3,000 for fuel hedge loss = $5,000.
If oil is $80 a barrel, no hedge loss, but we pay 100 x $80 = $8,000 fuel bill
So lower oil price, bigger hedge loss, is better overall for us (given we are stuck with an ill thought out hedging legacy)
We need 100 barrels of oil - we have hedged 50 at $80. So no matter what we are paying $4,000 for half our oil. (50 x $80)
Now if oil is $20 - we pay $1,000 for the other 50 barrels - total oil bill is $4,000 + $1,000 = $5,000. Now in actual fact, what would happen in this case is that we buy 100 barrels at $20 = $2,000 and lose $3,000 on the hedge ((80-20) x 50 = $60 x 50 = $3,000) Total bill is $2,000 for the oil plus $3,000 for fuel hedge loss = $5,000.
If oil is $80 a barrel, no hedge loss, but we pay 100 x $80 = $8,000 fuel bill
So lower oil price, bigger hedge loss, is better overall for us (given we are stuck with an ill thought out hedging legacy)
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Whether it’s a highly leveraged hostile takeover, a fuel hedging scam, or some CDO/derivatives bundling scheme it’s imho not very useful to get down in the weeds as to the whys and hows. Unless you are LE investigating the specifics and legalities to build a case.
Plainly speaking, a scam is a scam is a scam.
FWIW, ‘The Big Short’ was a fun movie to watch. But there are endless variations on the tune. The big learning point is that people often somehow get away with it and all one can do is not accept the premise and not let them get YOUR money.
Plainly speaking, a scam is a scam is a scam.
FWIW, ‘The Big Short’ was a fun movie to watch. But there are endless variations on the tune. The big learning point is that people often somehow get away with it and all one can do is not accept the premise and not let them get YOUR money.
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The problem, Numero, is that the competition, who did not hedge as much as we did, benefit more from the low fuel price than we do.
Hence, while a high fuel price is bad for us, it's even worse for the competition (especially the low cost carriers as their 'low operating cost' is further diluted in their total cost (including fuel price).
So in the end, high fuel cost could also be a good thing for us.
Hence, while a high fuel price is bad for us, it's even worse for the competition (especially the low cost carriers as their 'low operating cost' is further diluted in their total cost (including fuel price).
So in the end, high fuel cost could also be a good thing for us.
NC I read the first post without checking who wrote it. Knew it would be you. Hope ya keeping well mate.
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Numero Crunchero
You forgot about the other side the equation.
For every $2 drop in oil price, that's $2 dollar that our competitor can lower their ticket price (while still maintaining their profitability). While, if we match our competitor in pricing, that will eats into our profit margin. Hence what has been happen in the past 2 years.
When oil price goes up, our competitor will be force to increase price (to maintain the same profit level), so for a $2 increase in fuel price, their will need to increase $2 to cover the extra cost. While we only need to do that by $1. Hence, if we match our competitor pricing, we will double our profit (or we can squeeze our competitor out of the market by pricing below them [which is a very un-swire thing to do]).
Also, higher oil price usually means stronger market / economy, hence company can better afford to pay higher fares. But then again, I am looking at this in a very simplistic manner as well. A lot more goes into this then what we are talking about here if you want to dig into it.
You forgot about the other side the equation.
For every $2 drop in oil price, that's $2 dollar that our competitor can lower their ticket price (while still maintaining their profitability). While, if we match our competitor in pricing, that will eats into our profit margin. Hence what has been happen in the past 2 years.
When oil price goes up, our competitor will be force to increase price (to maintain the same profit level), so for a $2 increase in fuel price, their will need to increase $2 to cover the extra cost. While we only need to do that by $1. Hence, if we match our competitor pricing, we will double our profit (or we can squeeze our competitor out of the market by pricing below them [which is a very un-swire thing to do]).
Also, higher oil price usually means stronger market / economy, hence company can better afford to pay higher fares. But then again, I am looking at this in a very simplistic manner as well. A lot more goes into this then what we are talking about here if you want to dig into it.
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NC,
Respect your posts but it’s ludicrous to assume fuel hedging occurs in a vacuum.
Another like minded poster compared fuel hedging losses to unused fire insurance. Let’s look at that using CX figures.
Current fuel hedging losses over 4 years aprox 23B.
CX total market capitalization aprox 40B.
So aprox 14% of the total value of the company was spent annually on “insurance”.
That would be the equivalent of purchasing a $10M investment unit, purchasing fire insurance for $120,000/month, then wondering why your unit isn’t giving an attractive return on capital employed.
If every unit owner was paying the equivalent, then that’s reflected in the market rate for rents. If you’re an outlier, then you’d better be praying the street burns down and you’re the only landlord rebuilding after the carnage.
Respect your posts but it’s ludicrous to assume fuel hedging occurs in a vacuum.
Another like minded poster compared fuel hedging losses to unused fire insurance. Let’s look at that using CX figures.
Current fuel hedging losses over 4 years aprox 23B.
CX total market capitalization aprox 40B.
So aprox 14% of the total value of the company was spent annually on “insurance”.
That would be the equivalent of purchasing a $10M investment unit, purchasing fire insurance for $120,000/month, then wondering why your unit isn’t giving an attractive return on capital employed.
If every unit owner was paying the equivalent, then that’s reflected in the market rate for rents. If you’re an outlier, then you’d better be praying the street burns down and you’re the only landlord rebuilding after the carnage.
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I still wanna know who is on the other end of those hedging contracts. Could it be, in any way, related to any other Swire-controlled entity? Would that constitute money laundering?
I have long thought that a conspiracy was behind the fuel "bet" fiascos.
Plural because the first disaster was around 2009 when HKD7.6bn was written off the balance sheet. At that time the CFO RA took the wrap and was the only one who walked the plank.
To double down a mere 5 years later is extraordinary and led me to believe the conspiracy theory. After much digging around, Occam's Razor has led me to believe it was plain stupidity and gullibility. The board was simply led to the slaughter by a bunch of smarmy sweet talking professionals who saw a fatted calf sitting on their doorstep.
Who is walking the plank this time? Noone. This tells me it was a collective act of extreme stupidity by the whole board.
Plural because the first disaster was around 2009 when HKD7.6bn was written off the balance sheet. At that time the CFO RA took the wrap and was the only one who walked the plank.
To double down a mere 5 years later is extraordinary and led me to believe the conspiracy theory. After much digging around, Occam's Razor has led me to believe it was plain stupidity and gullibility. The board was simply led to the slaughter by a bunch of smarmy sweet talking professionals who saw a fatted calf sitting on their doorstep.
Who is walking the plank this time? Noone. This tells me it was a collective act of extreme stupidity by the whole board.
With the fracking boom in the US, I doubt oil is going to stay much above $60/barrel (USD) for any length of time - at least not for the next 5 years or so. The US is already producing oil at an all time high, and there is spare capability that can be brought on line very quickly if/when the price goes high enough (and $60 seems to be the magic number for making it worthwhile).
