Airlines and energy prices

Résumé du document

Business environment is fraught with risks; each company in order to succeed in this unpredictable environment must mitigate risks. Risks can arise from varied sources; the airline industry is like any other industry, also confronted by pressures from several business areas. In the late 90's and beginning of this decade the biggest risk confronting the airline industry was high fixed labor costs and competitive pressure from low cost airlines with substantially less fixed labor costs. Just as the industry reorganized itself to become more competitive and lean from the perspective of labor costs, a new form risk has arisen in the last 3-4 years. Now energy posses the greatest risk to airline industry. The importance of energy in the airline industry is reflected by the fact that airlines like Air India, which had never engaged in energy risk management through hedging using financial derivatives, are now doing so . The objective of this paper is to understand how airlines are mitigating the risks posed by primarily high oil prices.

Extraits

[...] According to the ATA, it is extremely difficult for airlines to be profitable when the average price for a gallon of jet fuel exceeds the $ 1.67 threshold Why Oil Price is of critical value to Airlines? Oil is the second biggest expenditure after labour for airline companies. The record-high cost of commercial jet fuel was the primary reason why the U.S. airline industry posted a $10 billion net loss in 2005. In normal operating environment fuel accounts for 10% of the operating costs, however in the current environment the share of fuel as a percentage of operating costs is almost 20%[3]. [...]

[...] Engine Start-Up and Taxi[12]: Avoiding starting engines at the gate because it will only increase fuel consumption and pollution. Also Taxing with a single engine is recommended where situation permits. Reduced Thrust Take-Off: Compared to full thrust, the use of reduced thrust will not reduce fuel consumption during takeoff. However, it will preserve engine life and reduce fuel consumption over time. The majority of engine wear will occur at higher temperatures. For instance, a reduction from full take off thrust will result in a 10% saving in engine life. [...]

[...] When trading resumes, the limit is expanded by $ 0.25 per gallon in either direction. If another halt were triggered, the market would continue to be expanded by $ 0.25 per gallon in either direction after each successive five-minute trading halt. There will be no maximum price fluctuation limits during any one trading session. Last Trading Day Trading terminates at the close of business on the last business day of the month preceding the delivery month. Settlement Type : Physical. Delivery F.O.B. seller's facility in New York harbor, ex-shore. [...]

[...] On the same day, the New York jet fuel spot price is 80.28 cents per gallon. The director closes out this futures contract on August at 98.59 cents per gallon. As shown below, the director has made a profit of 32.31 cents per gallon ( 98.59 minus 66.28 ) on the futures contract. In essence, the hedger bought a futures contract long hedge) in January and then sold back the futures contract in August. The spot price of NY jet fuel on August 29th is 103.6 cents per gallon. [...]

[...] The Crack spread is the variation between the price of crude oil and the price of Jet fuel. Figure Jet Fuel and Crude Oil price Changes Source: U.S. Energy Information Administration and the Air Transport Association of America Figure 1 illustrates the movement of oil prices it is important to notice that the crack spread widened substantially in the weeks following Hurricanes Katrina and Rita, when major oil supply disruptions prompted refiners to focus their operations on producing gasoline, which is more profitable than jet fuel. [...]