How Airlines Actually Hedge Higher Fuel Prices

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So that's October 15th at City Winery in Chicago. Get your tickets now. Bloomberg Audio Studios. Podcasts, radio, news. Hello and welcome to another episode of The Adlots Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, there's a topic that we've been wanting to do for a while. Yes, yes. And you would think it's kind of simple, but actually it's been really, really hard finding a perfect guest for this particular topic because it involves airlines. It involves a particular airline strategy. And airlines having been a transportation correspondent for like a couple years, way back in the day. Airlines, they're weird about things. They're kind of secretive and they often don't want to talk about stuff. I actually didn't know this. Like this is an industry thing that I didn't know that they have a reputation or a pattern of. There's like two things in the airline world that I always wanted to know or see. And we're going to talk about one of them today, which is fuel hedging and the sort of inner workings of airline fuel hedging. But the second one, I always wanted to see a completed aircraft contract like an actual aircraft order that included the discounts that airlines would get because we see the announcement like Virgin Atlantic orders. I don't know, a certain number of planes from Boeing or Airbus. It's always at the list prices. So you never actually get a good feel for what they're actually paying for it. So I always wanted to see that never did in my transportation career. But at least I'm going to satisfy the fuel hedging urge right now. I'm very excited about this episode because fuel hedging by airlines, you know, you hear about it all the time or you hear, you know, every time there's a big price or usually jump in oil, there's something people talk about the airlines. And we've all said it, right? This is what I'm fascinated by. All of these things that we talk about all of the times. Oh, did they hedge their fuel? And then the conversation stops there. And though, they did hedge their fuel. So okay, or they didn't hedge their fuel. So their stock is going down, whatever. But we all talk about it and have no idea actually what it means. And I'm very fascinated too by, okay, they have traders, right? Mm-hmm. And when we think of traders, we think of trading floors and all this stuff. But there's so much capital T trading activity happening on the corporate side that almost gets no coverage. The other thing about fuel and airline costs. So fuel is, I think the second biggest cost for airlines after labor, which makes sense. But it's also the most volatile cost. But people always imagine hedging as like, okay, airlines are worried about the price of oil going up. Or to be more specific, the price of jet fuel going up. And so they want to lock in a certain cost so that they don't get caught out suddenly when prices spike as they have been doing for jet fuel recently. But at the same time, there's always another lever that airlines pull when you see higher prices, higher oil prices, which is they raise fairs. Or they raise fuel surcharges. So you can get this weird environment where you both lock in a certain price and oil starts to spike. Maybe the price you locked in is lower. And you can institute a fuel surcharge as well. Because as we all know from doing these inflation episodes, if oil shortages, jet fuel shortages, everything else are in the news. Customers aren't really going to complain that much if they see a big fuel surcharge on their bill. Airline prices are very expensive these days. Yeah, they are. But bookings are really high too. People are flying. And I keep seeing all these things. New TSA records, new global records. We are flying a lot in this world. Of course, you know, if you hedge your oil and your competitor didn't, right? They're going to have to raise prices. Or if they're not going to lose money. And then it's like, okay, well, here's my opportunity, et cetera. So I'm very curious about how it all works, how it feeds through. And I'm just to a little bit of a context recording this September 29th. That could February or March when the Iran War broke out. We were all staring at that Singapore jet fuel chart. Well, one of us was. One of us was like, I was staring at the Europe jet fuel versus Brent Crack spread. Oh, okay. You know, that's the difference. Sorry. No, but it is true. Like, this has been in the news. And of course, with oil prices spiking again, with the shortage of diesel, this has suddenly become a very relevant topic. And you're absolutely right that a smart, hedging strategy can be a competitive advantage for airlines, disclosure, my dad flew for Southwest for a long time. A lot of my inheritance is somewhat, unfortunately, still in Southwest stock. Don't be a little particular one right now. No, I don't want to see it. I don't want to see it. But Southwest famously pioneered a certain hedging strategy that then got copied by everyone else with varying degrees of success. So it can be an enormously important factor for airlines. And I am so, don't show it to me, Joe. I don't want to, don't zoom out. It looks pretty good over like the past couple of years. Just don't zoom out. Tracy, wait a second, it's not that bad. Look, look, it's actually like, I was expecting worse. For those who are just listening, I tilted my computer screen, so Tracy could see their chart. It's not as bad as I expected, the way you let it into them. Yeah. So I'm very happy to say that we finally found the perfect guest to talk about all of this. Someone who did actual fuel hedging strategy at a major carrier and also did it in an extremely interesting way. We're going to be speaking with David Kang. He is former group treasurer over at Qatar Airways and also an all-round oil expert. So David, thank you so much for coming on all thoughts. Happy to be here. We are so glad to have finally found you. Thank you so much for staying up late from Singapore. Why don't you just go ahead and tell us who you are and why I just described you as a general oil market expert in addition to being the former group treasurer of Qatar? That is a long story. And I'm going to pretty much put into a synopsis where I created effects in Toronto. I traded interest rates in New York. 425 Lexington was the building I was in for a Canadian bank, which is just down the road from you. Yeah. And came back to Singapore, joined net west, sent to London to sell government bonds. And then became a bond trader with the Japanese trading house and lost my job in the 1998 Asian financial crisis. So then became an oil broker and they did that for about six, seven years. In 2006, my buddy who was the MD of JP Morgan for Asia, the head of commodities for them basically asked me to join him in the desk. And so then I moved from becoming an oil broker to a structureer and then I went to Sumitomo, the Japanese trading house and became the head of trading for Asian products. And it's just gone from there. And I worked in the coal industry, I worked in the LNG industry. So I'm pretty much an energy man all in. But I think working for Qatar always, I learned a lot about the aviation industry and how technical it gets and how interesting it can get as well. It's a very interesting sector. We love airline episodes. Our listeners love airline episodes. So extremely excited about that. Just real quickly, what were the years you were at Qatar? 2011 to 2013. Well, two and a half to, yeah, nearly three years. Got it. So former group treasure, what is the basic expectation of that role within the airline? What is the obligation of the treasure to do for the company? The actual title is vice president, treasury and risk management. Okay, so basically I do the treasury and I do the risk management for all financial. So I protect the online financial, that's what a treasure it does. So who actually hedges because my understanding is that some of the US carriers weren't as prevalent when it comes to hedging as they had been in the past? Well, I think the US carriers honest prevalence because they got smacked in 2014 and 2015. So they realized, right, Delta recently, 2020, or they'd lost nearly over a billion dollars. So they were still hedging as well. But most of the marine carriers, especially the small ones, especially the smaller airlines, they just put everything into the search, into the search challenge, if we passed all the costs on to the customer and that's built into the ticket. Now you will never see a ticket that tells you the percentage of your search challenge. It'll just tell you, it's a fuel search challenge. And then that's it. And some of them even have done away with that. They say, that's a ticket price, you pay it, and you fly. And then that's it. Don't worry about the fuel you want to get somewhere to take you. So in that aspect, that's when some of the US carriers actually dropped out, right, because they don't have a hedge book big enough, or rather, they don't have a balance sheet big enough to maybe take on these risks of hedging. And that's what the international carriers do have is they have a balance sheet. And they have a hedge book that's big enough, plus they have a revenue book that's big enough as well. And that's why they can charge the search charge at the same time as they're hedging the fuel on the consumption side. So think of an airline, very similar to an oil refinery, okay, so what's an oil refinery do? It takes in crude, sends it to this crude distillation unit, the CDU, and all of that comes out on the outside of the products, right? So you've got LPG at the top, then you've got gasoline, and then you've got NAFTA, and then after that you've got your mildest jet carazine, and then your gas oil, and then after the fuel residue. So all these are products that come out from crude. So what does the refinery do? They sell the crack. That's the difference between the product and the underlying crude. That's a spread. So they sell the crack. So they sell the product, right, which is basically our producer hedging because it's called revenue hedging. They've got revenue here because they sign the product. They're also buying, right, so they're at risk, so they need to buy the crude. So the same thing happens with an airline. And airlines, what we do is, I mean, I had to get creative for a number of reasons which I won't go into, but because of those reasons, we had to sit down and really think about how hedging is going to be, because we had a 6.6 million balance sheet, and we were consuming the first year of consumption with something like anywhere from 24 to 27 million barrels. The Nixio was at one of the three moment in barrels, and then had another. So we hedged, we look, we forecast out to three years. One of the reasons why we did that was because we were accepting 1.5 aircraft a month. And basically, we were planning new routes, probably once every two months, we'd begin a new route. So we could schedule all of this. We knew what was coming in, we knew the planes that were coming in. So our construction was going up at a steady rate. So we understood what we were doing. And so we also saw that the world was looking good, people were trying to fly again. And so we started buying the bottom and hedging, but sometimes you have to look at the price really, and start to think about it. And what's your probability when it was a triple digit? Because you use brand as your proxy, because jet fuel market is too thin. What the American carriers use heating oil is their proxy, not jet, because jet markets too thin, Northwest Europe's gift jet, it's a very thin market. So you cannot use these instruments to help you hedge, or you have to go and use brand as your proxy, where it's liquid, and there are people at both sides of the table for brand. I mean, if you go to a table or a hit where they're airlines, they're the only buyers of jet fuel. So you've got a ton of refinery saying, yeah, I've got the fuel for you, I've been Glen Paul. We're curious. You know, this goes on, right? VTOL, you'll also jet fuel for the airline. Morgan's down. You can too, as well. I've dealt with Morgan's down. Goldman Sachs. I bought physical jet from them at certain locations around the planet. There's some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays brief podcast every week, experts from Barclays markets and research get you up to speed on what matters and what to watch next about the time it takes to grab a coffee. So search Barclays brief wherever you get your podcasts. Some people treat Chachy PT like some kind of smart search engine and some use it to get work done. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Get started at chachy PT dot com by selecting work mode available on plus and pro plans. Anyone can now use AI to build software for work, but AI can't make your team adopt that software. 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Okay, so there are these various entities that you can trade with. Let's start with what is the most plain vanilla thing that this sort of modal trade perhaps so to speak of how I imagine there are all sorts of complex way complexifiers, etc. But what is the sort of core most common trade that one would do? How does it walk us through the steps of it? Well, there's a swap and the swap is actually a derivative of your futures market. So from your futures market, you can tell what the swap rate is right two months out. So this is your swap rate for April. It takes to account May and June for the futures. Okay. And that's our April swap rate. So you would buy swaps and when you buy swaps, it's symmetric. So I mean, you could go up through a down and you could, you know, and if the price of all goes up, you're looking good because you've locked in your exposure and you've locked in your cost. But if it goes down, you bleed. So it's best to do swaps when I think all is low and it's, you know, in the lower double pages somewhere around $25, $35, it's an issue to buy swaps. But as it gets, it's a moose further up around $70, $80 and I think everybody starts to think about that risk going up because how long will oil still elevate it? So they'll try and do options. So they'll buy call options, but things you have to pay, for that insurance, you have to pay a fee, you have to pay a premium. Right. So some airlines are, for lack of a better term, too cheap to pay for their calls. So they fund it, all right, by selling puts. So that's how they can afford a zero cost caller and they can use that. So you can buy options. You can do zero cost callers and you can do swaps. These are pretty much plain vanilla. But the stuff that I used to structure for Jake Morgan was a target redemption note and then you have a vanilla side on the option and you have the exotic side. So that's where it gets a little bit more complicated. So the idea is that we have banks that are actually selling target redemption notes for the purposes of fuel hedging two airlines? Okay. On the vanilla side, you do a zero cost caller with the airline if I'm the back. But on the back of it, I structure the note as an target redemption note, it means it's basically going to redeem in five months, redeem in one year or redeem in two years. So off the back of that on the exotic side, I can get you a better rate where you can buy the oil and I can get you better rate for your option, your call options. I mean, so I can basically pull the call off, just but there. Actually, inside the empty money, in the money fall options that I can sell to you, but with this exotic behind that. And so you, a lot of these exotics, they're called extendables. Some of them are just like selling, like what I did, all right, a strangle. That means basically I sold both wings. I sold calls at the top, you know, above 120 bucks. I sold puts below 80 bucks or anywhere else stayed in between. I would profit from that because the banks were paying me the premium. It's so funny because I'm so used to thinking about those sorts of notes and structured products in Asia as being sort of like, yeah, to, you know, mom and pop, someone betting on like a big move or lack thereof in the cost fees, something like that. I hadn't even thought for a second that, yeah, that it could be related to fuel. Litch it. David, can I just ask you said something really interesting earlier, which is that most of the fuel hedging is done via Brent trades as opposed to jet fuel because the actual jet fuel trading market is so thin. Does that mean that airlines end up being exposed to big differences between, I guess, the direction of the price of jet fuel and the price of Brent because sometimes, you know, that difference does change very fast and very quickly, as we saw earlier this year. The fair comment, right? I would say yes and no. So yes to the fact that we, that's an airline. What do we burn? We've been jet A1. So basically we're exposed to the jet fuel market. We should hedge with jet, but the jet market's too thin. So that's why we use the Brent market. Now, for lack of a better term again, it's better to have a hedge on than no hedge at all. If you cannot hedge in gent, then you're totally exposed, right? So for lack of a better proxy, people use Brent because it's the international carrier. Some airlines use, like in the United States, some of them use WTI, West Texas Intermediate. Some of them, almost, them use heating oil because it's very close. So the heating oil spread between the jet and heating oil in the United States is tighter than what you would get. I mean, just recently, you had heating oil versus TI go through $100 for the crack. It was at like $107, so that's like insane amounts of money, right? It's $230 per barrel, while crude is trading at 110. Then Brent's trading at 1,020 metric tons, you've got probably like a $74 to $75 crack on gas oil in Europe. I'm not sure who the jet market is in Europe because it's so hard to pin down. There's no real open market for it. There are agencies like Argus or Plats and they will print a number. But the numbers that they print sometimes have no offer on the back of that and there's a bid and then they just update and they assume that there's an offer or sometimes the market's offered and there's no bid and then they just pick a number, so it's very arbitrary. So that's the reason why most people don't trust these agencies, right, with their jet forecast. So they move something they understand better and it's more liquid, like gas, London gas oil, heating oil in the United States. I just pulled up a chart, speaking of charts, on the terminal and it's very interesting because if I go back, normalize it to early February. So before the war started in March, basically Brent crude rose, rose 50%. Singapore jet fuel rose over 100% or more than doubled during that time. I could imagine just start there like at least for that period from say March to the middle of May, you could have been a well hedged carrier hedging Brent and still bleeding a lot if what you're buying is Singapore jet fuel. It is true, but well, I'm buying Singapore jet fuel, except for the incumbent. Wait, can you explain what is when I look at, tell me about this chart that we always pull up. Is it not that meaningful? Stop saying we, Joe. Sorry, that I, when I say we, I mean, like all the people I talk with on the internet not me and Tracy. Okay. Tell me about this chart that I've been looking at ignorance in ignorance. Singapore jet is a different animal because there are certain trading houses with certain oil majors that control that market very heavily because they know that the only buyers of this market are the airlines. And how I'd put this nicely, sometimes people talk to each other and they agree on something and then what they agreed on happens because all of them are looking the same way and are trading the same way. So it's not a very objective market, it's a very subjective market. And that's why like I said, only the incumbent in Singapore actually does some jet fuel hedging alright. Everybody else does not. How much money can airlines actually make from raising just the fairs and the fuel surcharges? Like why even bother to hedge? If in theory, I mean, I'm sure you have thoughts on the price elasticity of air travel. But if in theory, I could just fully pass on the additional fuel cost to the customer. Why do I need to hedge at all? Hedging helps, like I said, when oil prices are low, because when oil prices are low, your fuel surcharge can't do anything. You cannot charge the person on the fuel, right? And your ticket price has to be low because oil is low. And usually when oil is low, usually the global economy is not doing well. It wasn't the case in 2014 and 2015, but most of the time in 1998, in 2008, in 2020, and right now what we're seeing with the 2026 war between Iran and the US and Israel, a lot of times, right? It's something to do with the global economy and geopolitics. So what I would say is that hedging has its uses, because it can protect you from a low level as it moves up. So you're making money and you've locked in your cost. So that's where using swaps and calls and zero-cost calls work. Now at the same time, because oil is going up and it's part of what makes up an airline, you can charge the surcharge as well. So the airlines that want to make money can actually do that, right? The surcharge doesn't go through P&L, but the hedge goes through P&L. So then the hedge goes up, right? Nobody sees the surcharge coming in. Nobody sees the revenue from there, but they see the revenue coming in from the hedge. So if you've done it well and you've bought the market, still going up, economy's improving, everybody wants to travel, people are paying up, they don't really care right now. How much is the surcharge is? You can make twice as much money, but all you can, but at the same time, right? You've got to be very aware and situation, you're aware, right, then. Like I said, it's like a refinery, right? Your ticket is the product. In that product, right? You have the ticket price. Now, nobody tells you where the ticket price is, but right now I'll tell you, right? Because of the fuel surcharge, the ticket price is probably 25% of the ticket charge. And that's true. That would, you would say that would just be generally true globally, on average, right now. Very much. But by the tickets, 25%. Actually, you talked a little bit about the cost. So overall, when you say we talk about the cost of a flight or the cost of running an airline, it's fuel basically 25% of the cost, Tracy mentioned that it was number two after labor. But for cuts, our airways, how significant was this one component for them? 44%. Did you say 44%? Yes, I said 44%, that's the reason why I had to get creative. Wow. It was huge for us. I mean, you know, if you're like the rest of the world's airlines, right? So anywhere from 25%, 30% of your cost is jet fuel and labor is a big cost. But labor for us was a low cost, very low cost, right? Because we were getting a lot of crew and we were paying them decently, but not, you know, but prices would be better in Doha than it was back in their home country. So we had a lot of crew and, you know, cabin crew and flight deck as well for Eastern Europe from Asia and, you know, we kept the cost low on the, on the labor side, but our cost are exposure to the, you know, to the barrel to jet fuel, right? It was 44%. That's nearly half your expenses. Wow. So you mentioned having to get creative and this is actually the way you came to this particular program, but you published a paper all about a particular hedging strategy that you undertook while you were at Qatar. Why don't you, just to begin with, explain to us the problem that you were trying to solve for your employer here. I'll just run this anecdote for you. It's just a little story. I'll keep it very short, right? But basically our hedge book was down, a very decent amount of money, something like 280 million dollars. So, that's when I came on board and I had this hedge book and we were down to $80 million and as I was learning about the airline, because I come from a trading background, I'm not a corporate guy, so I have to learn how to be a corporate person and I have to learn about what the Treasury is about and what the hedge book has and how I can add value. And in that time that I was trying to learn and add value, we were down to $1.360 million. And so, the CEO calls CFO and I up to his office to chat with us. And basically, he says to the CFO, Daniel Hogue, when he says, "Damn, why are we down $360 million?" And I just come on board and I'm the group treasurer. Do you know what a hospital pass is? Basically, you pass the ball and everybody's running for it and everybody can see you're going to get the ball and you get smacked. So, that was me. So, I got the hospital pass from Daniel and I talked to the CEO and I said, "Look, Chief, when oil goes up, we make money on swaps." Right? You know, we use money on the physical because we don't pay more, but we don't put food in our exposure. And then when oil comes down, yes, we're losing on the hedge book, but jet fuel comes down as well. And when jet fuel comes down, we're making on the physical. And he said, "Look, you are losing on the hedge book. You're also losing on revenue management because, right? If oil is coming down, the probability is, at that time, when I was at Qatar Airways, the probability is that the global economy is not doing too hot. So, it's not doing too hot, right? We will not be able to have people sitting in their seats. We cannot fill up the plane. So, the aircraft is not going to take off. If the aircraft doesn't take off, we have fuel that we haven't burnt. We're losing money, we're losing money on revenue on the ticket, and we're losing money on the hedge book, and that was a double winery. So, the CEO was very, is tough. He said, "David, you're the group treasure. I do not want to see red anymore on the balance sheet, do you understand?" So, that's when I came away from that meeting with him, right? With this now awareness that I actually had to do something where it's either become flat, or make some money, but no red. So, that's when the reason is why, right? I did what I had to do and get creative. [Music] Some people treat Chachee PT like some kind of smart search engine, and some use it to get work done. Chachee PT work is a new way of working in Chachee PT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. So, all the source materials, briefs, and scattered information that you have to grind through to turn into something useful can just become something useful. Put Chachee PT to work on your most ambitious ideas and projects. Get started at chachee PT dot com by selecting work mode, available on plus and pro plans. 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CrownCoins.com, that's C-R-O-W-N-Coins.com, no purchase needed. Code Val for new users on Void were prohibited by law. 18+ terms and conditions planned. Crown coins to see no! So this actually reminds me one of the first things that I learned as an airline correspondent, which was someone who had been in the business for a very long time as an airline consultant. Basically told me that it's very much like running a grocery business in the sense that you have these fixed perishable costs. And if you don't sell everything right away or fill up the capacity of the airplane, all those costs you eat them. It's like, you know, I don't know, you have like 10 bags of lettuce and if you don't sell it on that day, you lose all that money. And it's thought of airlines and air travel as this very perishable industry, even though one big part of the expense is very, I guess, fixed cost in the form of aircraft. Yeah, you have to get people in the plane at a particular price on a certain day, otherwise you just lose money. Right. I guess the idea is airline capacity is not something that you could hold in inventory. Right. Exactly. Very interesting. And I hadn't really thought about it that way. So, okay, your boss comes to you and says, stop losing money. I guess every boss of every trader everywhere would like to say that. Do better. Yeah. Now you have your suddenly do stop losing money mandate in this environment. What do you do after that? Instead, with my deputy treasurer and, you know, talked about it and looked at it from many different angles and, you know, then of course me coming from an oil trading background. I look at a refinery and I see that they're a consumer and they're a producer. And so I said, look, as an airline, we have to produce something. We're producing a seat for you to sit on to get you from point A to point B. So we're producing that seat. But what's in that seat? What goes on? So we kept on extrapolating up to the point where we got the ticket. And then in the ticket, you have your fuel surcharge and we ran correlations between the fuel surcharge and Brent. And the correlations came back around 75%, which is significant. And of course, for our hedge, when we buy the swap, right, where 88% hedged on the 80% correlated with jet. So the fuel surcharge is 75% correlated with jet and our Brent is 87% or 85% correlated with Brent. So we use Brent as the proxy and in the surcharge, right, we now knew there was a correlation there. So that we can hitch. That is a product. That is something we sell. So in that ticket, we have a product and we have revenue. And that's where you do revenue hedging. So you have consumption hedging and you have revenue hedging. So that's how we came, you know, we really extrapolate out the curve. We, you know, we sat down for a couple of weeks and really brainstormed and we came up with this. And from there, we went to the revenue management department, talked to ankle Von DeWolf, who was the senior VP at that time of revenue management and his right handman Sven Lawson. And we talked about this and even they didn't realize that they were actually, they actually were long oil. I actually said, you know, you're long oil. That's how you get your revenue, right, because you built that long oil through the surcharge, right? Yes. So the basic idea was that because the airline was in fact long oil, because you could charge higher prices when oil prices went up. That you could use that to buy a certain option strategy that would have been riskier without the extra operating revenue. Is that what you mean? Absolutely, all right. So what happens is now we're long fuel on one side on the ticket. We're short fuel because to fly the plane on the fly via craft and jet fields for take off. So we're short fuel on one side, but long fuel on the other side. So now, what do we think about? We think about doing like a producer hitch. And that's one of the reasons why we did this triangle where we sold calls. now all When we sold calls, they were not naked, because they had the search charge in there, protecting that call. So yes, if the calls got taken out of, you know, they were exercised. Yes, our search charge would take care of that call, of those calls that we sold. So we protected there. Now on the downside, we've sold puts. Now, if the oil goes down and we're selling puts, right? It's good for us anyway, right? So yes, we'll eat some loss on the puts, but the thing is we're going to be buying cheaper jet, because it's going down in price. So this whole strangle of this strategy, there was no, for lack of a better word, nudity to it, and there were no naked parts to it, and we covered all bases. We looked only at direction, not so much. We didn't take a view of where oil was going to go, what we did was, right? We understood that there would be a price of mean reversion. It was holding at a hundred bucks. It would do that for five months, and we would come away, either flat, slightly losing a little bit of money or making a decent amount, and we kind of got lucky. It had to stay within a certain balance, right? Correct. Okay. Okay. So this is very interesting. I guess from the perspective of any, you know, when, again, I think in our heads, someone hears the word trader, and they think someone at their computer trying to make money, right? And every day, you're trying to get more cash, etc. However, you want to do it. How much then of the job of the trader in any corporation, not the speculator, but the someone who's using the markets for their own business needs? How much then is the job to actually identify the natural trade of the corporation? So what you discovered, or what you were able to clarify is that because of the ticket charge, Qatar Airlines was structurally long-branded. So that allowed you to create this sort of position without a view. So how much is the job of anyone in your seat, either today, or a different airline, or maybe even a different company who is in a trading capacity, to truly understand the business, so that they understand, you know, what is the company's sort of, I guess, natural exposure, or natural direction to any given market? I've only worked for an airline in a corporate sense, so I can only talk about that, but what I can say is that the word hedging is a bit of a misnomer. Okay. It's actually a view, right? It's actually a trade, and it's a good word that you said that, you know, these traders in the corporate, they don't call themselves traders because, right, that sends compliance into a fit, because they believe that hedging is good for them. So compliance goes ballistic, and you know, they'll say, no, no, we're not trading very hedging. So what do we hedge? We're a consumer, we have to buy whatever we're consuming, in order to lock that price in. If we're a producer, we've got a sell, right, to make sure, right, we lock in, all right, I'll revenue that we've made at the top. So the word fading is not very well accepted at corporates. Okay. They don't believe in it, and auditors don't like it either, but I think if I can find that little bit of a tweak where I can get something as a product, and a product is linked, right, to the underlying risk that I have, which is exposure to jet fuel, I'm sure in another company, you can find links like that, and then you can put on hedges, right, they'll protect you. It's like the food market, right, you know, it's like it's perishable, right, it's got to be within one day. I'm sure, right, there's something's going to be able to find out, right, that with certain techniques, they can prolong that, and by prolonging that, right, now, they're, they're long vegetables. They're not short, something in that vein. I just want to hear the sort of stories of how much money you made from this particular hedge, and what happened at Qatar airways when, you know, when this was, was unveiled to your management. Okay. It was 130 million dollars, and actually that year, our revenue side lost 65. So if not for my hedge, we would have lost my, but on top of that, because of my hedge, right, going out the curve, we may have lost that money in that time, but because of the hedge and making money, I was able to give the revenue department the ability to cut fairs. So Qatar airways used to be a follower. They'd follow EK, sometimes even EY, right, so EK is Emirates, EY is at the hot. So they're always a follower, and when Emirates cut, then they cut fairs, right, when Emirates put up the fairs, they put up their fairs. But I worked with uncle, and I gave him advantage, first move advantage, and he took, he took advantage of that. And he cut fairs by 20%, and then we let the market, right, in, sorry, to say, bumps on seats. We sold, I mean, you know, we had every plane that was in the 80 to 90% fault. So we were, I helped give them the audibility, and they were able to make use of it. So I think, as with anything that you do in life, you always try to add value to that food chain. Some people treat cha-chi-pi-ti like some kind of smart search engine, and some use it to get work done. Cha-chi-pi-ti work is a new way of working in cha-chi-pi-ti that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. Put cha-chi-pi-ti to work on your most ambitious ideas and projects. Get started at cha-chi-pi-ti.com by selecting Work Mode, available on Plus and Pro Plans. Crowdcoins.com. That's C-R-O-W-N-Coins.com. No purchase needed. CodeVal for new users on the void were prohibited by law. 18 plus terms and conditions apply. 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Ebglis can be used with or without topical corticosteroids. Don't use if you are allergic to ebglis. Tell your doctor if you have new or worsening eye problems. You should not receive a live vaccine when treated with ebglis. Before starting ebglis, tell your doctor if you have a parasitic infection. Paid partnership with Lili. Respect your time. Ask your doctor about ebglis and visit ebglis.com or call 1-800-LiliRx or 1-800-545-5979. Since you brought up the other Middle Eastern Airlines, I'm going to ask what is a potentially sensitive question, but I'm sure a lot of people will be wondering about this. There are many sensitive questions I could ask when it comes to the Middle Eastern Airlines. But this one in particular, the UAE, Qatar, a lot of those regions are supposedly not drowning in oil, but they have a lot of oil. Why the need to source jet fuel externally in the first place? Why couldn't these countries subsidize? I'm using air quotes here for those watching on video. Why couldn't they subsidize their airlines with, I don't know, exchanging Brent with a refinery down in wherever for a lower price jet fuel for their airlines? I think with the airline industry because you have a hub and then you have your spokes, right? So you fly all over the world, but everybody flies through the Middle East. Now, we can take so much jet fuel on one aircraft and we go long haul, we've got to fill up on on the other side. So I mean, yeah. the other side who basically commands the price. So it's not us, right? So yes, I mean, you know, we've got our petroleum, right? Okay, just, it's not the most pleasant of experiences dealing with QP because they had a subsidiary named Wocode, WOKQOD, Wocode. And they used to sell us jet fuel at 3.65 a gallon. And when we fly to Dubai and lift jet from Dubai, Chevron selling it at 295 a gallon. So we were getting a screwed 70% by our own national petroleum company. So, you know, when we took delivery of the 787s, the Dreamliners, we told the world that we were using them for training by going to Dubai and back or to train the crew, but actually we were going there, that really we flew there on fumes, probably like, you know, we had like five tons or less, maybe four or three or four. We're flying the on fumes and literally we cannot circle Dubai Airport once, we have to land straight away. And when we land, we can lift a hundred tons of fuel. Are you a tankering fuel from Dubai? Yes, yes. And we were putting it in our own tanks at Doha International Airport. And we had about storage capacity of about nine, ten million gallons. So, you know, that's pretty decent. It will be a day's cover for the airline. Should we not get any jet fuel from anywhere else, right? We can still fly for a day. Interesting. Give us your sense right now. The people who are in your seat or equivalent seats elsewhere in the industry, give us an update of what they're dealing with right now, September 29th, between the ticker revenue side, which I assume is booming, and then the price of, you know, the surging price of oil and refined products. I think with respect to airlines or respect to, you know, with respect to airlines, what is the, what is the, how are they doing on the sort of fuel side these days? I think they're very, very, the consumption hedging, and they're mainly passing it through to the customer right now, because they don't know what to do, because, you know, a lot of airlines in 2020 lost a lot of money. Fuel hedging, Delta dropped over one billion. Let's just say a very highly ranked Asian airline, basically lost 72 billion. And yeah, so, you know, it's not easy to work or to see what the geopolitics are bringing you, but what you can do is look, right? In the day, it's a pass through to the customer. So, you use your ticket, right, as your weapon of choice. So, and that's pretty much what I did as well, right? This pricing mechanism that I, you know, kind of thought up, I basically weaponized the revenue. Has anyone else used that structure since? It was something I have no idea, but I was going to, I was going to attend a treasury conference in Singapore to talk about what I had done. And my CEO said, no, go, you're not talking about that, that treasury conference, right? Because we do not want to give our secrets away. Because nobody else is doing it. And one of the reasons why they're not doing it is because again, it's the auditors. It's the sovereign well funds that probably own some of the airlines that are not, they don't feel it's kosher to sell oil because you're a consumer. I think it's a lack of understanding for most people and a lack of understanding for most treasures in their roles there that they cannot think, like a horse with blinders, they cannot only see that basically by hedging, by hedging the airline and keeping it safe, all you see is buying fuel. There's other aspects of the airline as well, and you've got to take all then to account and then cook up a strategy of your own and create something so that you can benefit from it now. So I realized that this isn't strictly an airline question right now, but it's in the news. It is a refined products topic. There's all this talk and it could happen this idea of, you know, we have this diesel crisis in the United States. Diesel prices are surging. It's possible that the US is going to implement a ban on diesel exports. When you hear this, what do you think about? Okay, maybe it's not right for me to say this, but I think of Taco, you know, Trump. Yeah, yeah, yeah. Yeah. But specifically on this question of whether a country will ban the export of a refined product and how it ripples through markets. Well, Russia's done that and China's done that somewhat, all right, but Russia is the second biggest diesel export on the planet. So a lot of diesel has been taken out of the whole complex and honestly right now Europe's pretty short and that's one of the reasons why London Gasol has just gone through the roof. Also this export ban a lot of it was rhetoric. So because of that rhetoric, right, you had diesel or heating oil in the US come down instead of go up because a lot of the the Gulf or pad three in the United States is the kitchen that's where all the refineries are. And so that's where all the product comes out of. New York Harbor, right, it's, you know, they don't have any access. They maybe have a small pipeline, but that's about it. For them, it's a sea-borne trade for the Gulf to sell internally, right, to New York, for their jet fuel or their diesel or their heating oil. So a lot of times what the MISCO does is they buy diesel from Europe in order to make sure that they don't have, you know, a shortage at any one time. And so it now adds the point, right, that you've got the east coast of the United States buying diesel and London Gasol, of course, is benefiting from that and heating oil is now taking a hit. And most of the heating oil, right, it's going to that in America anyway. So not very much is going to Europe, probably like 500,000 barrels per day. It's going to the RRA, 100,000 barrels per day to the UK and maybe 150,000 to the rest of the world. So RRA is Europe. So yeah, it's not, it's not super significant from the Gulf, but I think there's a US Gulf Coast trade where, you know, they'll run an Affirmax or they'll run a, you know, long range too, or maybe even a panamax through Panama Canal and they'll transport, right, that product, right, to Asia. So it's going from, like, you know, the US Gulf Coast to Chubu in Tokyo, find Japan. Can't wait to heat my house in Connecticut. This winter, um, David King, thank you so much for coming on Odd Lots. I should mention the paper, if anyone wants further details, it's available on SSRN. It is fuel hedging in the 21st century, what every airline can learn about proactively shaping revenue. Thanks so much, David. Thank you very much for having me, appreciate. Joe, I'm so glad we finally got some time to talk about fuel hedging in detail. I have to say the story about Qatar Airways tankering oil from Dubai back to Doha is one of my now all-time favorite airline fuel stories. My top story, I've told this on the podcast before, but I think it's been years, was when Silverjet, the business class only carrier, sort of luxury airline carrier, when they were about to go out of business, their creditors cut credit lines for fuel spending. And so the CEO of the company was putting the entire fuel bill on his personal credit card. And the personal credit card, the reward points were for British Airways miles. So he ended up with a bunch of BA miles. That's amazing. That's great. That's FedEx got it started too, with a bunch of like the founder putting a bunch of the debt on his personal credit card. It's pretty well. I thought it was great. I think the really interesting thing from that episode to me was, I know, I guess it's interesting and I'm not surprised. They don't like the term traders in the corporate context, but that's what they are. Right. You have to have a directional view. Selling calls and buy inputs and all this stuff. But the idea is, again, like, you know, a trader in the typical environment is just seeking to max out PNL. And this idea that it's like, you don't have to take a directional view. If you really understand the core, I guess structural position of the company already on the market. And the job is to balance that out. And you can understand how complex it gets because, you know, this idea that like, okay, the revenue could go up during times of higher oil prices, figuring out that sensitivity, how much you can pass through. You think of like, well, an airline, of course, they're short oil, right? Of course. Right. short oil and that in certain environments, they could actually be implicitly long oil and you have to really identify that exposure. I think that's really interesting. No, totally. I think this is an underappreciated aspect of the airline business, which is there is that other lever to pull and it sort of, it reminds me of the bakery episode. Yeah. Remember where we were talking about how a baker in Chicago increases his prices when the cost of eggs goes up because everyone sees it in the news. There's a lot of elasticity, I guess, baked in to prices for airfares when you're having a big oil shock, but on the other hand, if we evolve into actual physical shortages, which is a possibility, because we'll see what happens then. When I just right now think about the airline industry seems to encapsulate so many things with the economy right now, which is that the cost of everything is going up and also people are flying like crazy. I mean, the numbers are really huge and so it's like, at least if we were to only look at the airline industry, like this, the global economy, the economy is hot. People are, they people look at these sticker prices, they complain about how they don't price or are going up and yet total travel just keeps going up. It does not seem to have dented activity at all. This is a hot economy. All right. Shall we leave it there? Let's see if it there. In the next episode of the AdLots podcast, I'm Tracy Alleyway. You can follow me at Tracy Alleyway. And I'm Joe Wyzenthell. You can follow me at the stalwart. Follow our producers, Kerman Rodriguez, Ed Kerman, Irma Dashobennett, Ed Dashbot, Kail Brooks, and Kail Brooks, and Kevin Lizzano at Kevin Lloyd Lizzano. And for more AdLots content, go to Bloomberg.com/AdLots where we have a daily newsletter and all of our episodes. And you can share about all these topics 24/7 in our discord, discord.gg/odlots. And if you enjoyed this conversation, if you want Joe and I to do more episodes on the airlines, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening. [Music]