AirwaySim
Online Airline Management Simulation
Login
Username
Password
 
or login using:
 
My Account
Username:
E-mail:
Edit account
» Achievements
» Logout
Game Credits
Credit balance: 0 Cr
Buy credits
» Credit history
» Credits FAQ

Author Topic: Fuel hedge frustration  (Read 766 times)

Offline Lambert_M

  • Members
  • Posts: 564
Fuel hedge frustration
« on: March 07, 2014, 07:34:52 AM »
How is it possible that I always manage to fuel hedge at the worst possible time? Having seen prices around 260 I hedged 100% as soon as the price came down under 200. So, hedging at 199 means I pay 214, and that was May 91. Since then prices have never been higher than 211. Oh well, IŽll survive I guess.  :P

Offline CUR$E - God of AirwaySim

  • Members
  • Posts: 4028
Re: Fuel hedge frustration
« Reply #1 on: March 07, 2014, 08:02:16 AM »
How often do you go to the casino and play with a good part of the money you need to live for a year?

So... why would you do that with the money your airline needs to survive? ;) Fuel hedge is pure gambling. Either you win or you lose, but normally you'll lose more often than you win.

Offline LemonButt

  • Members
  • Posts: 1895
Re: Fuel hedge frustration
« Reply #2 on: March 07, 2014, 02:04:06 PM »
Fuel hedging is not gambling and if you are hedging fuel to "beat the market" you aren't doing it right.

The purpose of hedging fuel is to lock in pricing so you know what price you will be paying in the coming months.  It is a management tool.  If you can lock in the price at $260 for a year, then you know you will be paying $260 and can reliably spend money on new aircraft, routes, etc. knowing that you won't be paying $350 instead.  Without the hedge, the level of uncertainty is increased and you have to be a little more cautious in your decision-making.  Fuel could go down or it could go up, but even if it goes down you have to plan for it going up unless you are hedged.

BD

  • Former member
Re: Fuel hedge frustration
« Reply #3 on: March 07, 2014, 02:39:16 PM »
The purpose of hedging fuel is to lock in pricing so you know what price you will be paying in the coming months.  It is a management tool.
Correct.  Think of it as a form of "insurance".

An approach that does not get you into the all or nothing scenario you found yourself in would be to spread out your hedges, say in 10% increments one month apart.

That way you can time the cycle within those 30 days and have the possibility of locking in the lowest for that period.

You will still find that you miss the the full benefit of a downswing, but you also mitigate the full brunt of the upswing.  Your price will move a lot more smoothly though and with less havoc on your finances.
« Last Edit: March 07, 2014, 02:42:07 PM by BD »

Offline LemonButt

  • Members
  • Posts: 1895
Re: Fuel hedge frustration
« Reply #4 on: March 07, 2014, 02:57:32 PM »
I will typically hedge in 50% increments when I do.  The reason being if fuel goes down, my price will also go down, but if it goes up then it only goes up by 50% instead of 100%.

Additionally, this allows you to hedge another 50% in 6 months or so.  Since you can't hedge more than 100% for 12 months, you don't want to hedge in one block or when the hedge expires you can have a huge gap up on your fuel prices.

So if you hedge 50% in Jan, 50% in July then you are 50% hedged from Jan-June and 100% hedged from July-Dec and 50% hedged from Jan-June the next year.  This helps smooth out the swings and doesn't leave you vulnerable to a huge gap up when a contract expires.

Offline [ATA] - lilius

  • Members
  • Posts: 1650
Re: Fuel hedge frustration
« Reply #5 on: March 14, 2014, 08:49:14 PM »
Yes LemonButt is so right here. Since we cannot predict the prices its great to have the insurance of knowing the price of fuel wont increase for 12months and I can work on my fleet. That the market can get lower is not that much of a problem long term.

 

WARNING! This website is not compatible with the old version of Internet Explorer you are using.

If you are using the latest version please turn OFF the compatibility mode.