how do companies hedge multi year?

[SanMiguel]

How do companies like Ryanair hedge multi year spending on fuel?
You often see the ceo of ryanair come on and say they are hedged against oil since $84 but is that for 1 fiscal tax year only?
It's one thing to say you have hedged a fixed amount (like house value or foreign currency, fixed assets) but when they don't know their fuel usage year per year, would they just add to the hedge?
Say they were hedged at 84 this year, but next tax year oil was at 100, they could hedge again but then their operating profit would already be significantly lower...

 

[brettus]

How do companies like Ryanair hedge multi year spending on fuel?
You often see the ceo of ryanair come on and say they are hedged against oil since $84 but is that for 1 fiscal tax year only?
It's one thing to say you have hedged a fixed amount (like house value or foreign currency, fixed assets) but when they don't know their fuel usage year per year, would they just add to the hedge?
Say they were hedged at 84 this year, but next tax year oil was at 100, they could hedge again but then their operating profit would already be significantly lower...

They could take delivery?

 

[DashRiprock]

prolly what mostly happens is you get some energy structurerer makin some double knock in triple knock out over easy bums on seats product, who calls up the salesman, and says "sell this to them; tell 'em its a hedge" so salesman calls up finance director of ryanair, and says "buy this botswana-boogie-on-down-baby, it's a hedge" when really fin.dir has 0.0000 clue how to price or even where botswana is, but buys it anyway 'cos he got took to Silverstone VIP.

and when jet fuel rises prices are passed on.

 

[MajorDutch]

How do companies like Ryanair hedge multi year spending on fuel?
You often see the ceo of ryanair come on and say they are hedged against oil since $84 but is that for 1 fiscal tax year only?
It's one thing to say you have hedged a fixed amount (like house value or foreign currency, fixed assets) but when they don't know their fuel usage year per year, would they just add to the hedge?
Say they were hedged at 84 this year, but next tax year oil was at 100, they could hedge again but then their operating profit would already be significantly lower...

hedge by taking future positions. long delivery dates available eg. sweet light crude goes out to DEC 2019. fuel usage modeled ahead. dont know about aviation fuel futures perhaps they hedge in something highly correlated.

 

[scose-no-doubt]

Doesn't have to be exchange traded stuff that we're used to seeing. They could have any number of contracts with any number of parties.

 

[MajorDutch]

sure could be some sort of OTC swap with an institution.

 

[DashRiprock]

its always otc u plonkers

 

[DashRiprock]

(apart from u scouse)

 

[MajorDutch]

what is always otc. swaps? some swaps are exchange traded.

 

[DashRiprock]

err u can have futures on swaps but not prper swaps on exchanges? like the value dates will be all screwed up. not yet but is bot movemenr thats why all mergers in exchanged cos regulations for vanilla swaps to exchanges is policalt goodness

 

[MajorDutch]

i get yer.

 

[DashRiprock]

if u get htat then ur f*kin genius



but rite

 

[MajorDutch]

i would have been a genius if I had bought this.

 

[SanMiguel]

hedge by taking future positions. long delivery dates available eg. sweet light crude goes out to DEC 2019. fuel usage modeled ahead. dont know about aviation fuel futures perhaps they hedge in something highly correlated.

Ok, so they model their fuel usage to 2019.
Fuel rises to $150 and the contract ends in 2019.
Now what do they do?
They must have to remodel every year and take into account the differences.

 

[rsh01]

....take into account the differences.

don't get this.....what differences? its hedged. i wld hope they wld renew their hedging strategy when demand estimations change, not sure how often that wld be but with ash clouds and global recession and greece doing their best to go under it must be more than annually?

also an issue with their otc hedging instruments.......

"Long-dated futures markets for jet fuel are highly illiquid. Much of the hedging is carried out with WTI contracts but the actual fuel is mainly refined from pricier oils"

http://www.economist.com/node/18836760

 

[Papa Lazarou]

It would be something like a fixed vs floating rate OTC swap with a bank or other trade institution.

They pay the institution a fixed price ($85/bbl) and the institution pays them the current average market price (based on the Platts (or other) published price). The difference is netted off and paid periodically.

So as it stands the airline would be making money on their swaps. This is then used to counteract the rise in price of the physical JET FUEL they are buying.

They're an airline after all. So unless they're in the business of refining they won't be buying crude oil. It's just that Platts price the OTC products basis the futures to give a more liquid market, hence the guy's reference to $85 oil.

Their model could have been to hedge out 5 years etc, accepting $85 as their overhead for their term supply fuel.

But you're right, when that runs out they'll have to do more hedging. You'd expect them to maybe do shorter term hedging with the prices at these levels, and they might buy a few put options if they believe the price is going to come off to hedge against paying such a high basic price. Of course with a new known fuel costs they will have to adjust fares accordingly.

Ultimately it comes down the strategy they employ and how well it pays off.

 

[SanMiguel]

don't get this.....what differences? its hedged.

Over how many tax years? 1, 2, 5?
They need to know exactly how much has to be hedged otherwise it is pointless.
Let's say they hedge 1 year's worth of fuel but in the meantime the price goes from $80 to $100, next year their hedge expires, so they hedge again from $100? Well, that's no good for their accounts next year as they have to allocate a 25% increase...of course they pass the cost on but let's assume they don;t for simplicity.l

 

[scose-no-doubt]

If you want an answer you need to read up on IAS 32 and IAS 39. Then you need to see some examples of hedge accounting in practice (including the fiddly bits on embedded derivatives).
I'll be f*cked if I'm going to start waffling on about all that on here let alone try to explain it to someone without an accounting background.

*I'm not too sure if IFRS 9 is to be expanded upon but it doesn't go too deep into hedge stuff as far as I know so it could all just be FVTPL from now on.