Southwest Pays Approx $51 USD A Barrel

On May 30, 3:24*pm, wrote:
On May 30, 11:23 am, Robert Cohen wrote:





On May 30, 2:04 pm, wrote:

On May 30, 1:17 am, bucky3 wrote:

On May 29, 7:32 am, Robert Cohen wrote:

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

Let's not confuse futures, forwards and options, shall we. *What SWA
has are a combination of swaps and call options, not futures or
forwards. *The airline is not in the oil speculation business but
rather has hedged its exposure to price fluctations. *Option calls are
like insurance policies - futures and forwards are investments with
risk. *Swaps are a derivation on the theme and again act like
insurance policies, not risky investments.

al

I understand call and put options.

The premiums are the prices of options.

There are no "premiums" for futures contracts.

Give me an idea or estimate of how much in premiums the airline spends
or risks.

They risk nothing - that is the value of an option over a future or
forward contract. *It's no different than any other insurance a
company may purchase. *I have no idea what SWA spends for these
options but I imagine if you wanted to calculate the value you could
by looking in their 10K or annuals and doing a little math.

Can the other companies do similarly (thru 3rd parties or however they
trade)?

I agree that an option is not *as risky as a futures contract, though
there are also several (complex to me) strategies or tactics in
hedging or "playing" *options.

There is no risk to an option unless you are playing in the
derivatives market and trading them. *There is a known cost to the
option and a firm date and strike price that does not change
regardless of what the market does.

As I said earlier - SWA is NOT in the business of playing in the
futures market - and most large commercial companies aren't either. *A
hedge with a call option is a risk reduction strategy, not an
investment strategy for companies (outside of financial firms, of
course).

al- Hide quoted text -

- Show quoted text -

I bought a London coffee call option in the early 1970s, and later
trained as a broker with the same broker and also another broker
before that.

I luckily made a few bucks on my call option, though fishing for
prospects didn't do well for me.

I am no salesman nor cogent trader.

A JOURNAL OF COMMECE subscription was how I followed my call option
back then--not a computer.

It was a premium of approx $700 for one call option.

I was lucky that Brazil had a freeze in the coming summer months
(winter months down there--yeah it's confusing to me too.)

One may buy a "call option" or buy a "put option." of coffee, sugar,
oil etal.

The "premium" is the fee for the option.

If SW spent a million dollars for their futures margins and options
premiums in 2007, then that would be considered it's "risk," albeit I
suppose
options are "less risky" than futures contracts directly..

Surely the other companies will be interested in protecting themselves
too, since it has apparently done well for SW.

One can buy and/or sell options and futures contracts in the various
commodities.

It takes skilled commodities traders to play the games well.

The traders-players utilize bits of information, statistics, reports
and other intelligence about their markets.

They do "spreads" and and other exotic tricks or derivative tactics in
the option & futures games to try to minimize their losses and
maximize their wins.

On May 30, 8:06 pm, Robert Cohen wrote:
On May 30, 3:24 pm, wrote:



On May 30, 11:23 am, Robert Cohen wrote:

On May 30, 2:04 pm, wrote:

On May 30, 1:17 am, bucky3 wrote:

On May 29, 7:32 am, Robert Cohen wrote:

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

it costs a premium to buy futures and lock down rates. if oil prices
don't rise significantly, then you would lose money buying futures.

Let's not confuse futures, forwards and options, shall we. What SWA
has are a combination of swaps and call options, not futures or
forwards. The airline is not in the oil speculation business but
rather has hedged its exposure to price fluctations. Option calls are
like insurance policies - futures and forwards are investments with
risk. Swaps are a derivation on the theme and again act like
insurance policies, not risky investments.

al

I understand call and put options.

The premiums are the prices of options.

There are no "premiums" for futures contracts.

Give me an idea or estimate of how much in premiums the airline spends
or risks.

They risk nothing - that is the value of an option over a future or
forward contract. It's no different than any other insurance a
company may purchase. I have no idea what SWA spends for these
options but I imagine if you wanted to calculate the value you could
by looking in their 10K or annuals and doing a little math.

Can the other companies do similarly (thru 3rd parties or however they
trade)?

I agree that an option is not as risky as a futures contract, though
there are also several (complex to me) strategies or tactics in
hedging or "playing" options.

There is no risk to an option unless you are playing in the
derivatives market and trading them. There is a known cost to the
option and a firm date and strike price that does not change
regardless of what the market does.

As I said earlier - SWA is NOT in the business of playing in the
futures market - and most large commercial companies aren't either. A
hedge with a call option is a risk reduction strategy, not an
investment strategy for companies (outside of financial firms, of
course).

al- Hide quoted text -

- Show quoted text -

I bought a London coffee call option in the early 1970s, and later
trained as a broker with the same broker and also another broker
before that.

I luckily made a few bucks on my call option, though fishing for
prospects didn't do well for me.

I am no salesman nor cogent trader.

A JOURNAL OF COMMECE subscription was how I followed my call option
back then--not a computer.

It was a premium of approx $700 for one call option.

I was lucky that Brazil had a freeze in the coming summer months
(winter months down there--yeah it's confusing to me too.)

One may buy a "call option" or buy a "put option." of coffee, sugar,
oil etal.

The "premium" is the fee for the option.

If SW spent a million dollars for their futures margins and options
premiums in 2007, then that would be considered it's "risk," albeit I
suppose
options are "less risky" than futures contracts directly..

Surely the other companies will be interested in protecting themselves
too, since it has apparently done well for SW.

One can buy and/or sell options and futures contracts in the various
commodities.

It takes skilled commodities traders to play the games well.

The traders-players utilize bits of information, statistics, reports
and other intelligence about their markets.

They do "spreads" and and other exotic tricks or derivative tactics in
the option & futures games to try to minimize their losses and
maximize their wins.

SWA is not in the business of derivatives. They purchased an
insurance policy for a fee to lock in the price of a barrel of oil
(actually it really was likely Jet A-1). This effectively eliminated
the risk of price changes in the future. This is what a call option
is. They did not invest in futures, they did not trade option-based
derivatives, they did not play at forwards - they simply capped there
upside price risk through insurance.

The key is that the only cost to do this is the premium. The price,
time, and cost are all known. In the absence of any uncertainty - all
is known - there is NO risk. This would not be the case for a future
or forward contract.

I am happy to hear that you are the consummate trader but SWA is not.
They fly airplanes, they do not do spreads, exotic tricks, or future
games as an investment strategy. If you go to their annual report,
you will see, in the detailed tables, the cost of risk reduction.

al

wrote:

The key is that the only cost to do this is the premium. The price,
time, and cost are all known. In the absence of any uncertainty - all
is known - there is NO risk. This would not be the case for a future
or forward contract.


In order to buy such hedges or whatever they are, the buyer must show
that it has the money to pay for it when the contract comes to term and
the owner of the contract is then forced to actually buy the commodity
at that price.

Traders for large banks use the bank's assets as collateral when buying
such contracts, and they always end up selling them before they are due
, ensuring the buyer of the contract will have the resources to buy the
commodity if the buyer holds on to the contract to term.

What this means to an airline is that it must have cash in hand (un
incumbered) to prove it can buy that oil at the end of the contract.
This becomes a liability to the airline (just like aircraft leases are
considered a liability because it commits the airline to paying large
sums of money over the next X years).

Southwest, being in good financial health, has plenty of credit/cash
available, so it can hedge a large portion of its annual fuel needs (and
even many years ahead).


An airline in bankrupcy protection cannot buy such hedges because it has
0 credit (unless creditors all agree and the judge also agrees).

The irony is that healthy airlines can hedge more and become healthier
(in current environment) while those who didn't hedge when it was time,
are getting sicker and sicker.

United only has a portion of its current needs hedged and they are at
$85. The rest is bought at currnent market prices. It becomes hard for
legacy airlines with very little of their fuel hedged to compete. and
the cash they spend on market priced fuel is cash they can't use to buy
hedges, so it makes matters worse.

On May 31, 12:55 am, John Doe wrote:
wrote:
The key is that the only cost to do this is the premium. The price,
time, and cost are all known. In the absence of any uncertainty - all
is known - there is NO risk. This would not be the case for a future
or forward contract.

In order to buy such hedges or whatever they are, the buyer must show
that it has the money to pay for it when the contract comes to term and
the owner of the contract is then forced to actually buy the commodity
at that price.

This is ONLY the case in futures and forward contracts - because these
are contracts. In the most general terms, the future or forward
requires a "deposit" of (typically) 10% and as the spread between the
future and the spot exceeds this the seller (or buyer) is required to
"mark to market". Futures and forwards are actual contracts that are
ultimately executed on the specified date.

This is NOT the case for options. There is NO requirement that the
holder of an option actually execute the option on the date the option
expires. He can (and in the case of falling prices) may prefer to
allow the option to simply expire. That is not the case of the seller
of the option in that (as is the case of SWA) the seller of the option
(the counterparty) may have a cash collateral deposit requirement
depending on the strike and spot differential. In the case of SWA, in
the latest annual report (see Note 10 to the Consolidated Income
Statements) they have 9 counterparties with 2 billion in collateral
deposits.

Traders for large banks use the bank's assets as collateral when buying
such contracts, and they always end up selling them before they are due
, ensuring the buyer of the contract will have the resources to buy the
commodity if the buyer holds on to the contract to term.

What this means to an airline is that it must have cash in hand (un
incumbered) to prove it can buy that oil at the end of the contract.

This not the case in the purchase of options.

This becomes a liability to the airline (just like aircraft leases are
considered a liability because it commits the airline to paying large
sums of money over the next X years).

No - the options (which are technically a form of derivative
contracts) are valued using traditional options valuation (BS for
example is one though SWA reports using a standard PV) and in the case
of an option which is "under water" the value reported is zero. The
options that SWA holds as a hedge against rising fuel prices cannot
appear on a balance sheet as a liability as there is no downside risk
exposure. They do appear as two types of assets, one for the short
term instruments (and these are listed as "Fuel Deriaitive Contracts")
and one for the long term instruments which are included under "Other
Assets". At the close of the 2007 books, the combined asset value was
reported as $2.4 billion.


Southwest, being in good financial health, has plenty of credit/cash
available, so it can hedge a large portion of its annual fuel needs (and
even many years ahead).

An airline in bankrupcy protection cannot buy such hedges because it has
0 credit (unless creditors all agree and the judge also agrees).

No - that is not correct. All the majors hedged to a certain extent -
including UAL. The type of hedge available is determined by their
credit position - for example, futures and forwards require certain
collateral, options do not.

The irony is that healthy airlines can hedge more and become healthier
(in current environment) while those who didn't hedge when it was time,
are getting sicker and sicker.

Hedging is not cost free.

United only has a portion of its current needs hedged and they are at
$85. The rest is bought at currnent market prices. It becomes hard for
legacy airlines with very little of their fuel hedged to compete. and
the cash they spend on market priced fuel is cash they can't use to buy
hedges, so it makes matters worse.

Q1 2008 reports show that all the majors have some degree of risk
reduction through hedges and that the actual cost of Jet A is from
$1.98 for SWA to $3.02 for UAL with the spot price at the end of Q1 at
3.50+.

And as a conclusion - SWA is NOT in the business of jet fuel
speculation, they are in the business of flying airplanes.

al

On May 31, 3:55*am, John Doe wrote:
wrote:
The key is that the only cost to do this is the premium. *The price,
time, and cost are all known. *In the absence of any uncertainty - all
is known - there is NO risk. *This would not be the case for a future
or forward contract.

In order to buy such hedges or whatever they are, the buyer must show
that it has the money to pay for it when the contract comes to term and
the owner of the contract is then forced to actually buy the commodity
at that price.

Traders for large banks use the bank's assets as collateral when buying
such contracts, and they always end up selling them before they are due
, ensuring the buyer of the contract will have the resources to buy the
commodity if the buyer holds on to the contract to term.

What this means to an airline is that it must have cash in hand (un
incumbered) to prove it can buy that oil at the end of the contract.
This becomes a liability to the airline (just like aircraft leases are
considered a liability because it commits the airline to paying large
sums of money over the next X years).

Southwest, being in good financial health, has plenty of credit/cash
available, so it can hedge a large portion of its annual fuel needs (and
even many years ahead).

An airline in bankrupcy protection cannot buy such hedges because it has
0 credit (unless creditors all agree and the judge also agrees).

The irony is that healthy airlines can hedge more and become healthier
(in current environment) while those who didn't hedge when it was time,
are getting sicker and sicker.

United only has a portion of its current needs hedged and they are at
$85. The rest is bought at currnent market prices. It becomes hard for
legacy airlines with very little of their fuel hedged to compete. and
the cash they spend on market priced fuel is cash they can't use to buy
hedges, so it makes matters worse.

I think I understand what y'all are saying.

SWA and United are trying to protect themselves.

SWA seemingly has purchased more insurance to get the stuff at $51 a
barreal & United pays for less insurance to get it at $85 per barrel.

SWA is thus proven sharper, luckier, more risk aversive.

It takes experience, shrewdness, skillfulness, knowledge though also
there is an element of guess/risk/luck .

Only that consummate fool would say that United was not as "lucky" as
SWA period.

On May 31, 6:30 am, Robert Cohen wrote:
On May 31, 3:55 am, John Doe wrote:



wrote:
The key is that the only cost to do this is the premium. The price,
time, and cost are all known. In the absence of any uncertainty - all
is known - there is NO risk. This would not be the case for a future
or forward contract.

In order to buy such hedges or whatever they are, the buyer must show
that it has the money to pay for it when the contract comes to term and
the owner of the contract is then forced to actually buy the commodity
at that price.

Traders for large banks use the bank's assets as collateral when buying
such contracts, and they always end up selling them before they are due
, ensuring the buyer of the contract will have the resources to buy the
commodity if the buyer holds on to the contract to term.

What this means to an airline is that it must have cash in hand (un
incumbered) to prove it can buy that oil at the end of the contract.
This becomes a liability to the airline (just like aircraft leases are
considered a liability because it commits the airline to paying large
sums of money over the next X years).

Southwest, being in good financial health, has plenty of credit/cash
available, so it can hedge a large portion of its annual fuel needs (and
even many years ahead).

An airline in bankrupcy protection cannot buy such hedges because it has
0 credit (unless creditors all agree and the judge also agrees).

The irony is that healthy airlines can hedge more and become healthier
(in current environment) while those who didn't hedge when it was time,
are getting sicker and sicker.

United only has a portion of its current needs hedged and they are at
$85. The rest is bought at currnent market prices. It becomes hard for
legacy airlines with very little of their fuel hedged to compete. and
the cash they spend on market priced fuel is cash they can't use to buy
hedges, so it makes matters worse.

I think I understand what y'all are saying.

SWA and United are trying to protect themselves.

SWA seemingly has purchased more insurance to get the stuff at $51 a
barreal & United pays for less insurance to get it at $85 per barrel.

SWA is thus proven sharper, luckier, more risk aversive.

It takes experience, shrewdness, skillfulness, knowledge though also
there is an element of guess/risk/luck .

Only that consummate fool would say that United was not as "lucky" as
SWA period.

Read this - though a bit dated, it describes the airlines approach to
hedging. SWA uses a dynamic strategy that eliminates risk - what they
do is options, collars, and swaps depending on the cyclical nature of
the the commodity price.

http://www.kellogg.northwestern.edu/...s/jet_fuel.pdf

On May 31, 10:38*am, wrote:
On May 31, 6:30 am, Robert Cohen wrote:





On May 31, 3:55 am, John Doe wrote:

wrote:
The key is that the only cost to do this is the premium. *The price,
time, and cost are all known. *In the absence of any uncertainty - all
is known - there is NO risk. *This would not be the case for a future
or forward contract.

In order to buy such hedges or whatever they are, the buyer must show
that it has the money to pay for it when the contract comes to term and
the owner of the contract is then forced to actually buy the commodity
at that price.

Traders for large banks use the bank's assets as collateral when buying
such contracts, and they always end up selling them before they are due
, ensuring the buyer of the contract will have the resources to buy the
commodity if the buyer holds on to the contract to term.

What this means to an airline is that it must have cash in hand (un
incumbered) to prove it can buy that oil at the end of the contract.
This becomes a liability to the airline (just like aircraft leases are
considered a liability because it commits the airline to paying large
sums of money over the next X years).

Southwest, being in good financial health, has plenty of credit/cash
available, so it can hedge a large portion of its annual fuel needs (and
even many years ahead).

An airline in bankrupcy protection cannot buy such hedges because it has
0 credit (unless creditors all agree and the judge also agrees).

The irony is that healthy airlines can hedge more and become healthier
(in current environment) while those who didn't hedge when it was time,
are getting sicker and sicker.

United only has a portion of its current needs hedged and they are at
$85. The rest is bought at currnent market prices. It becomes hard for
legacy airlines with very little of their fuel hedged to compete. and
the cash they spend on market priced fuel is cash they can't use to buy
hedges, so it makes matters worse.

I think I understand what y'all are saying.

SWA and United are trying to protect themselves.

SWA seemingly has purchased more insurance to get the stuff at $51 a
barreal & United pays for less insurance to get it at $85 per barrel.

SWA is thus proven sharper, luckier, more risk aversive.

It takes experience, shrewdness, skillfulness, knowledge though also
there is an element of *guess/risk/luck .

Only that consummate fool would say that United was not as "lucky" as
SWA period.

Read this - though a bit dated, it describes the airlines approach to
hedging. *SWA uses a dynamic strategy that eliminates risk - what they
do is options, collars, and swaps depending on the cyclical nature of
the the commodity price.

http://www.kellogg.northwestern.edu/.../jet_fuel.pdf- Hide quoted text -

- Show quoted text -

I encourage those that comprehend enough of the complex machinations
discussed in the article to get into the lucrative game as a vocation
or "moonlight" pursuit.

I recall more than a few salesmen (commodity brokers) that do not seem
to understand sophisticated strategies and plays/trades.

Some of the brokers do seem to well understand of course, tho not as
many as one would think.

I subscribed to FUTURES Magazine, and hereby admit it didn't help me.

So, why haven't the other airlines been playing
the game as well as SWA apparently does.

Are they dumb stumps like yours truly?

In message

wrote:

And as a conclusion - SWA is NOT in the business of jet fuel
speculation, they are in the business of flying airplanes.

All the more reason to hedge -- SWA can tell you more about what their
costs will look like six months from now then an airline who doesn't
hedge.

Sure, it might cost them more then it saves in some cases, but
predictability is worth a lot, especially when dealing with lenders and
stockholders.

On May 29, 7:32*am, Robert Cohen wrote:
Thir boss was interviewd on CNBC yesterday.

He says Southwest has been hedging (buying, selling) in futures
contracts for a decade (or more or less).

This is what futures markets ought to be about.

The food processing companies hedge their bets too.

Oil producers hedge to protect themselves too.

Farmers can and do too.

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

If they survive the current awfulne$$, they oughta copy Souhwest--
individually, collectively, however.

Many say the oil market is a true bubble at $127 *barrel, and anything
could happen.

One probable desirable regulation: No more ten percent margins.

Fifty percent margin should stabilize the hellacious chaos, taking
some of the gambling out of it.

Cynical comment: Commodity oil gamblers should instead please just bet
on football & other sports like many do mostly illegally.

Yes, reality is convoluted.

Oil supply falls, oil is $131+ as I post this ****sy "moral" rant.

Based on my observations, the types that run Southwest are a bit
smarter than the rest of the industry.

On Jun 1, 3:25*pm, Stan de SD wrote:
On May 29, 7:32*am, Robert Cohen wrote:





Thir boss was interviewd on CNBC yesterday.

He says Southwest has been hedging (buying, selling) in futures
contracts for a decade (or more or less).

This is what futures markets ought to be about.

The food processing companies hedge their bets too.

Oil producers hedge to protect themselves too.

Farmers can and do too.

Why the other airplines, trucking companies, etal don't do it: Je ne
sais pas.

If they survive the current awfulne$$, they oughta copy Souhwest--
individually, collectively, however.

Many say the oil market is a true bubble at $127 *barrel, and anything
could happen.

One probable desirable regulation: No more ten percent margins.

Fifty percent margin should stabilize the hellacious chaos, taking
some of the gambling out of it.

Cynical comment: Commodity oil gamblers should instead please just bet
on football & other sports like many do mostly illegally.

Yes, reality is convoluted.

Oil supply falls, oil is $131+ as I post this ****sy "moral" rant.

Based on my observations, the types that run Southwest are a bit
smarter than the rest of the industry.- Hide quoted text -

- Show quoted text -

Maybe some sharp pilots are playing the markets.

They could save their companies from bankruptcy court with their extra-
curricular skill.