When is it worth taking a fuel contract?

[hohum]

220K/mo seems steep for 6 planes. 

[spiff23]

Look at you income statement by month.  Then multiply the proposed discount. Cut that amount in half and compare to $220k.  If greater yes.

  Someone can correct if, I'm wrong...but you only get the discount on flights leaving your hub, Hence the extra step in the math

Generally they aren't need until you have more planes.

[Cardinal]

Yes, the fuel contract is only for fuel purchased at your hub. The outstations are all at pump prices (or your hedged price). But the fuel bought for the plane at the outstation is always charged to that plane's base, which is why you take the base's monthly number and divide by two.

Here's my formula:

Monthly fuel cost at that hub, divided by two.
Multiply that number by the discount. So if the discount is 5.8%, multiply by 0.058 to get the discount.
Then compare that number to the monthly fee for the contract. If the discount > fee, it's a good deal. If the fee > discount, it's a bad deal.

Protip: If you're in growth mode at that hub and a fuel contract is a slightly bad deal but it's for a long term (3+ years), jump on it before you schedule any more planes.  Because your fuel cost at that hub is going to grow dramatically and that slightly bad deal will quickly become a very good deal for several years. If you try to get a fuel contract later the deals likely won't be as good.

Protip #2: The "renewal" deals are always crap. Let the contract expire and then a better deal will show itself.

[Obi-Gunsmokenobi]

Perhaps when/if you believe the contracts weekly/monthly costs added to the weekly/monthly fuel costs with the discounts, will likely average less than your weekly/monthly fuel costs without the contract and its discount? 

It's something I've long pondered, but never invested the energy to evaluate...

[spiff23]

... But the fuel bought for the plane at the outstation is always charged to that plane's base, which is why you take the base's monthly number and divide by two.

...

Interesting, I never put these 2 variables together

[Infinity]

Protip #2: The "renewal" deals are always crap. Let the contract expire and then a better deal will show itself.

That's not true, they can be just as good as new deals.

[DanDan]

Generally, the fuel contracts will not save all that much money, BUT:

- if you know that you will expand your service (new fleet type) or
- if you know there is a fuel crisis coming (73/79) or
- if you know that for some reason you will be facing higher fuel costs in the future (switching from F27 to B747)

you can save enormous amounts. Be aware: its not only about percentages; 8% over 1 year is possibly not as good as 6% over 4 years.

[groundbum2]

just to reinforce what others have said, definitely take out a fuel contract sooner rather than later.

The prices quoted are based on last weeks or months fuel usage. So say you have 50 planes and spend $2m/month on fuel, the 3 quotes are based on that. But since the whole point of AWS is to grow and grow and grow and get super big, then when you have 200 planes and a fuel bill of 8m/month, the prices quotes will all be 4 times higher. So it's better to get a contract in while small, and for many years, at a low price. And reap the benefits as you grow and add planes.

Simon