[AnthonyDunn]

@ SimonS1 – 19/01/2016 15:42 GMT

It does make me wonder at the value (and cost) of these crystal ball gazers when, as you state, none had predicted current oil prices. Presumably none had considered the extent of China’s economic deceleration, the prospect of an ending of Iranian sanctions and the Saudi determination to scupper the US shale oil/gas industry.

But, as you correctly observe, it’s always easier to be wise after the event. Shame that we don’t allow our politicians the same slack.

[SimonS1]

I think the world order changes so fast that these things are impossible to predict. Looking back I don’t think many people forecast Saddam invading Kuwait and the various events that caused oil to rocket up either.

All the hedging does is to give some stability to the business model. If everything was done at spot prices I don’t think the airlines would be able to quote prices a year out, at least not without the ability to amend the price or add a surcharge later on.

The fortunate thing is there is someone willing to take the risk and offer futures. Governments never seem to take any risk and as the airports debacle shows they are more likely to sit with fingers up their wotsits for fear of doing something that costs votes.

[FDOS_UK]

SimonS1 – 19/01/2016 13:59 GMT

I hope you mean Jet A1, not Avgas.

[AnthonyDunn]

@ FDOS_UK – 19/01/2016 18:21 GMT

Err, yes. Well spotted:

https://en.wikipedia.org/wiki/Avgas

and, yes Simon, entirely understood about the role of futures contracts. I was paying attention during the finance course part of the Sloan at LBS.

[SimonS1]

In which case I’m not sure why you make the point about “on the basis that BA is paying more through its fuel hedging strategy than it would be from buying on the spot market, what does this say about BA’s hedging strategy…?!”

If someone from Sloan/LBS could give us the next 3 years’ spot prices we would be able to get it 100% spot on.

[AnthonyDunn]

@ SimonS1 – 20/01/2016 06:02 GMT

It is one thing to understand the role of futures contracts, it is another thing to query just how effective a hedging strategy, using futures contracts, has been. Exactly the same comment could be made of economic forecasters. Very few of them ever expect to get things entirely correct but, to have credibility, they would expect to get the direction of travel right.

There is, in my opinion, no inconsistency. If you see things differently, that’s your call.

[SimonS1]

Plenty of analysts got the direction of travel right. That’s why futures had come down from $100 plus to around $75.

But you clearly made a comment that ‘if BA is paying more through its hedging than it would be buying at spot then what does it say about its hedging strategy?’

If not intended as a criticism, what does it say?

[canucklad]

Here’s my take on it, whether or not BA hedge correctly or not is irrelevant.
The bottom line for most of us is, how much we’re paying and more importantly value for money for the fare paid.

For BA, rightly or wrongly, and it depends on your own priorities, their corporate responsibility is to build profit. This in turn is used to fund the payment of dividends to BA’s main priority group, their shareholders.
Only after that does the customer experience become important. And this is very much in relation to how they are competing. Hence, the influx of Ex-Europe fares.

Plus, if I was sitting in Watersides Ivory towers I’d be keeping a very nervous eye on continuing developments in the Middle East.
We are just one unknown atrocity away from an escalation that will see oil prices rise significantly, so best to collect your profit nuts now, ready for a bleak jihadist inspired winter .

[PeterCoultas]

canucklad +1

[AnthonyDunn]

@ SimonS1 – 20/01/2016 15:52 GMT

Oh dear; you now appear to be firmly in hair-splitting territory. Can you offer an explanation for this?

To return to the bigger picture, IAG/BA’s CMD14 made reference to using an average 2015 SPOT price of USD950/metric tonne whereas IATA calculated this to have been USD520/metric tonne, or some 55% of IAG/BA’s planning price. We (I assume) neither of us know just what proportions of IAG/BA’s fuel spend is bought forward or spot. However, IAG/BA themselves stated (CMD15) that the benefits to their bottom line could be anything up to €2Bn over the following three years (to 2018) and it is their intention (having banked only 15-20% of these gains) to retain as much as possible of this. Indeed, such is the fall in the fuel price that Willy Walsh has just stated that the cost focus is now firmly on manpower.

My post of 14/01/2016 14:45GMT, in reply to Openfly, was to indeed to question/criticise the stance being taken by IAG/BA. With pressure now being applied to utility companies in the UK to start passing on some of their gains from lower energy costs, exactly the same point could be made towards BA (and, I daresay, other carriers). Both have been very prompt when it comes to either raising prices or imposing surcharges but extraordinarily slow when it comes to lowering/removing them. My cynicism is in response to theirs.

[SimonS1]

@canucklad – I certainly agree on the first bit. The airline industry is one of the most competitive industries in the world, if we don’t like BA’s prices then of course our option is to go elsewhere. Plus in real terms I believe airline prices (including surcharges) are as cheap as they have ever been or pretty close to it.

BA would also defend itself on the grounds that profits now help balance out years like 2008/9/10 when there were losses or minimal profits.

On the oil price I don’t really buy it unless you are talking something really extreme. A lot more countries like US and Brazil are self sufficient and proven reserves elsewhere. The US was producing a surplus of 1m barrels a day before mothballing capacity. You can hedge for 2 years to Jan 2018 at only $38 a barrel and for end 2019 at $42 so I doubt the chaps at Waterside will be sweating much.

[SimonS1]

No Anthony that wasn’t my point at all. To me the actual figures are irrelevant. BA hedged (as all the airlines did) because it was right for their business. The fact that oil prices have collapsed so spectacularly doesn’t say anything about the strategy. If the markets could have foreseen the fall then the forward price would have been lower, but it’s easy to be smart and criticise after the event.

As far as prices are concerned of course BA will drag its feet. That’s how business works. Of course if competition dictates then prices will come down. If not then they will bank the excess profits and as a shareholder I will be very happy.

[openfly]

So Airlines For Europe, the gang that includes BA, are complaining about being ripped off by the airports and their charges. That’s a bit strong. Now the airlines know how we feel being ripped off by them still charging “fuel surcharges”. You’ve got to laugh! :-))

[openfly]

@SimonS1

Some weeks ago you said you hadn’t flown BA for some time, and preferred Easyjet by far. You have also intimated several times that you are not a fan of BA.

Today you say that “as a BA shareholder, I am happy to see high fuel prices”.

As a very simple person, you leave me confused.

[SimonS1]

Did I say I “preferred Easyjet by far”? Where was that? A figment of your imagination I fear.

I didn’t say I am “happy to see high fuel prices” either (another figment of your imagination as well).

What I did say is BA will bring prices down as slowly as competition permits. That is because the airline will always try to maximise profits. Maximising profits is good for shareholders. You don’t have to fly BA to be a shareholder. Think about it.

[Author]

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