What Would This Mean for the Future of Mileage Running (and Flying in General)

Discussion in 'General Discussion | Miles/Points' started by superscot, Apr 20, 2011.  |  Print Topic

  1. superscot
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    superscot Gold Member

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    From today's Aviation News Online:

    Although I can't see anything like this happening soon, this would have incredible implications on airlines' revenue management, availability of FF awards, possibility of mistake fares, etc, etc. What do you think?
     
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  2. TRAVELSIG
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    Jamie Baker seems to have missed the point that airlines finance the majority of their operations based on advanced cash flow from customers. Rating here:
    http://biz.yahoo.com/a/9/93850.html
     
  3. superscot
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    superscot Gold Member

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    Interesting point. Any idea what the distribution of ticket sales are relative to date of flight?
     
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  4. TRAVELSIG
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    I think it would be necessary to carve out the financial statements and dig into the cashflow to figure this out- however I do recall that it is very significant to an airlines operation.
     
  5. chemist562
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    chemist562 In Memorian

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    I hope the airlines don't become like the cruiselines. Cruiselines have the provision where they can add fuel surcharges up to the time of sailing.

    At least when the price of fuel went down below $65, one could get a refund of the surcharge. (back when fuel dropped from the high in 2008).
     
  6. rrgg
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    rrgg Silver Member

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    If they need predictable fuel costs, then using hedging.
     
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  7. anabolism
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    It seems to me that there must be a lot of businesses whose costs fluctuate. For example, currency fluctuations affect many businesses.
     
  8. sdcarver
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    Thanks for postng OP, I hope that it never happens... :(

    sdcarver
     
  9. TRAVELSIG
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    Hedging can pretty much eliminate any affects of currency fluctuation (with the exception of the cost of hedging which is actually very reasonable). As rrgg has noted, this is also the answer for airlines. My very limited understanding is that Southwest has been the model of hedging- enough that other airlines have studied their system (I am not sure if it is still working).
     
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  10. MSPeconomist
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    DL did some hedging on fuel costs recently too.

    However, the problem with hedging is that if fuel costs fail to rise, the airline has needlessly spent more money than necessary. Hedging protects the carrier from price increases, but at the cost of not allowing them to profit from price decreases or even failures of prices to rise as quickly as anticipated.
     
  11. TRAVELSIG
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    I look at hedging like insurance for most companies- you hope you never need to use it, but it was a good investment anyway for many investors- airlines don`t need to use their public liability insurance very often either (thank goodness)- but they still buy it.
     
  12. MSPeconomist
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    Exactly, although in the case of fuel hedging, the cost of hedging when it's not ultimately needed can be huge too.
     
  13. TRAVELSIG
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    I can imagine! Fortunately not in the airline business.
     
  14. Wandering Aramean
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    Hedging is NOT insurance. It is gambling. BIG difference.
     
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  15. From a 2008 article regarding Southwest's fuel hedging:

    The dark side of fuel hedges cropped up for Southwest Airlines (LUV) this summer, leading to the company’s first quarterly loss since early 1991. Southwest took a $247 million charge to record the actual value of some fuel contracts that went the “wrong way” for it as fuel prices dipped from their July high. The GAAP rules for such “mark-to-market” assessments meant a $120 million net loss on the quarter, even though the company collected $448 million in cash settlements from its extensive fuel hedging activities.
     
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  16. MSPeconomist
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    Hi and welcome (belatedly) to MP. It looks like you'll soon be an Original.
     
  17. jw3711
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  18. Scottrick
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    Hedging ought to work because then the carrier can use the fuel portion of the ticket you buy in May to protect for the price of fuel in May, even if you will actually fly in November. If the price of fuel goes up, great! The hedge will pay for it. If the price of fuel goes down, then you've lost money on the hedge, but the fuel is cheaper. I think the problem with hedging is when the airlines try to make money off of it, separating the amount of protection part from the number of passengers. Lesson: Only buy hedges as you sell the tickets.

    I also disagree with the airlines financing current operations with current income for future goods and services. That seems like a bad way to run a business. I know a lot of businesses do it, and I'm not a business major, but it seems like a recipe for trouble. What happens if your business winds down? You won't be selling any future products, so you'll have no income to pay for current products you already promised customers. This is also the same way Social Security works, taking my taxes to pay for retired people's benefits. When the number of boomers retiring increases and fewer young people enter the workforce, there won't be enough taxpayers to cover everyone. Not that I'm trying to criticize SS itself, but it's another example of how such a funding scheme isn't a good idea.
     
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  19. Lufthansa Flyer
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    Call and put contracts on oil / fuel futures will solve the problem. Airlines just need to get more proactive with hedging and FX transactions. wouldnt surprise if we dont see avgas futures pop up along the way. Calls will ensure airlines pay less for fuel if prices go up going forward and puts will even let them profit when fuel prices go down. Its done with equities and commodities everyday.
     
  20. Lufthansa Flyer
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    idiots didnt hedge the hedge. You never hedge one way.
     
  21. Misplaced Texan
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    It shouldn't be, but it is.

    If airlines hedged just to offset the risk from early ticket sales, then all they would be doing would be taking the exact uncertainty that this article discusses out of the equation.

    Simplified example: Airline X sells 5% of its seat-miles tomorrow at April '11 prices and fuel charges. If they lock in 5% of their fuel at April '11 prices then they've appropriately insured against fuel price spikes. If prices go down, there's a paper overpayment, but not a real one since they've passed current fuel prices on to the customer in the YQ.

    The problem occurs because there's a bright boy sitting somewhere at every airline saying "let's buy 10% or 20% of our fuel at the April '11 price because it's sure to go up." At the moment they contract at current prices for more than they're selling, they've stopped "insuring" and started speculating. That's when it becomes gambling.
     
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  22. Lufthansa Flyer
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    They get greedy thinking that they're smarter than the marketplace. That strategy NEVER works out....
     
  23. TRAVELSIG
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    Hedging is actually a "covered short position" which means it is insurance- you are locking in an exact price you will pay for something- or a range of prices you will pay- and you pay for this option through the purchase of the relevant contracts/positions. Hedging is used by many companies around the world to protect themselves from changing in prices of commodoties, currencies, and other external risks. Gambling is an uncovered short- which is where the trouble really starts.
     
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  24. Lufthansa Flyer
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    Exactly. When a position is properly hedged you know exactly what your maximum profit and losses will be and are prepared for every variable in between.
     
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  25. TRAVELSIG
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    Agreed- Hence why the saying "Hedge your bets" is popular :)
     
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