FlyingSig
Double Breasted _ _ _
- Joined
- Dec 1, 2001
- Posts
- 560
May 27, 2005
As fuel prices continue to play havoc with Delta's transformation plan, the company is reinstituting a short-term "physical hedging" program, which locks in a price for designated volumes to protect 10 percent of the company's jet fuel needs for June.
While Delta has utilized physical hedges for years, most employees are only aware of the traditional, long-term, paper hedging, which is difficult to execute considering Delta's financial position.
Michael Randolfi, director-Forecasting and Reporting, said the company will strategically revisit long-term hedging in the future. But the company has returned to hedging short-term as part of its goal to move toward viability.
"When Delta gets to a position where it can execute a long-term hedging program, the Treasury department can look as much as two or three years out," said Scott Wilde, general manager-Fuel Supply Chain. "Our physical hedges are very short-term in nature. Since we can lock in the short term, the Treasury group is free to look at the longer term."
Since May 1 of last year, crude oil prices have increased on average 33 percent. Jet fuel prices are on a similar track, exposing Delta to significant cost increases. On Wednesday, crude oil was trading at $49.85 per barrel for a July contract. Heating oil, which is closest in price and trading to jet fuel, was $1.38 per gallon.
"Heating oil is very close to jet fuel, so the correlation of price between heating oil and jet fuel flows together," said Wilde. "As heating oil goes up, generally jet fuel goes up and vice versa. The price of jet fuel right now is very volatile. By locking in the price for a portion of our fuel needs, we mitigate some of that volatility."
The company was able to lock in the price for 10 percent of its June 2005 fuel needs by working with some of its large suppliers to deliver fuel at a set price. Wilde said jet fuel is not traded as a futures contract - which guarantees a certain price on a certain date - so industry traders follow heating oil prices.
"When hedging fuel for July, I will look at the August futures contract for heating oil and if it gets down to a price within our parameters, I will call up the supplier," Wilde said. "They are looking at the same information and through some negotiations we can lock in a price for jet fuel delivered in July."
Delta has negotiated physical hedges for a number of years, Wilde said. The most recent expired last June. Paper hedges expired before that.
"Hedging is not about hitting the homerun," said Wilde. "It's not necessarily about saving a huge amount of money. We do it to take out volatility, allow for business units to make better plans and protect prices that we know the airline can support."
"As it happens, the physical hedges that we have done in the past have been very successful from a monetary point of view, but that wasn't necessarily the goal," he said. "If the price of jet fuel goes up and the hedges provide some protection, then they have done their job and that's good. But it's not necessarily good for Delta. We would much rather see the price of jet fuel come down, take a little bit of a hit on the 10 percent that we hedged, and benefit much more on the 90 percent that we didn't hedge."
As fuel prices continue to play havoc with Delta's transformation plan, the company is reinstituting a short-term "physical hedging" program, which locks in a price for designated volumes to protect 10 percent of the company's jet fuel needs for June.
While Delta has utilized physical hedges for years, most employees are only aware of the traditional, long-term, paper hedging, which is difficult to execute considering Delta's financial position.
Michael Randolfi, director-Forecasting and Reporting, said the company will strategically revisit long-term hedging in the future. But the company has returned to hedging short-term as part of its goal to move toward viability.
"When Delta gets to a position where it can execute a long-term hedging program, the Treasury department can look as much as two or three years out," said Scott Wilde, general manager-Fuel Supply Chain. "Our physical hedges are very short-term in nature. Since we can lock in the short term, the Treasury group is free to look at the longer term."
Since May 1 of last year, crude oil prices have increased on average 33 percent. Jet fuel prices are on a similar track, exposing Delta to significant cost increases. On Wednesday, crude oil was trading at $49.85 per barrel for a July contract. Heating oil, which is closest in price and trading to jet fuel, was $1.38 per gallon.
"Heating oil is very close to jet fuel, so the correlation of price between heating oil and jet fuel flows together," said Wilde. "As heating oil goes up, generally jet fuel goes up and vice versa. The price of jet fuel right now is very volatile. By locking in the price for a portion of our fuel needs, we mitigate some of that volatility."
The company was able to lock in the price for 10 percent of its June 2005 fuel needs by working with some of its large suppliers to deliver fuel at a set price. Wilde said jet fuel is not traded as a futures contract - which guarantees a certain price on a certain date - so industry traders follow heating oil prices.
"When hedging fuel for July, I will look at the August futures contract for heating oil and if it gets down to a price within our parameters, I will call up the supplier," Wilde said. "They are looking at the same information and through some negotiations we can lock in a price for jet fuel delivered in July."
Delta has negotiated physical hedges for a number of years, Wilde said. The most recent expired last June. Paper hedges expired before that.
"Hedging is not about hitting the homerun," said Wilde. "It's not necessarily about saving a huge amount of money. We do it to take out volatility, allow for business units to make better plans and protect prices that we know the airline can support."
"As it happens, the physical hedges that we have done in the past have been very successful from a monetary point of view, but that wasn't necessarily the goal," he said. "If the price of jet fuel goes up and the hedges provide some protection, then they have done their job and that's good. But it's not necessarily good for Delta. We would much rather see the price of jet fuel come down, take a little bit of a hit on the 10 percent that we hedged, and benefit much more on the 90 percent that we didn't hedge."
