Cool article, thanks for sharing.
Qantas is claiming to have spent 700,000 on hotel accommodation for stranded passengers.
Excellent article - I’ve referenced it on other sites where I’ve been discussing this.
I spoke with several US pilots who were extremely skeptical that many European airlines have this sort of antiquated agreement with pilots and flight attendants. Do you believe a substantial proportion operate this way?
I agree this is a good article. It looks like Alaska Airlines knows more about handling ash than the entire EU.
Also keep in mind that the entire EU is really a bunch of separate entities. There is not FAA that operates across the EU, so even if say, France wanted to open up, they’d be shut down by England and German airspace. EU needs to look at combining these AND learning something from others here.
On the topic of the European air losses, another problem faced here is that the EU does have strict traveler compensation laws that we don’t have in the US, and must reimburse stranded travelers for some things that may be optional in the US.
Finally, I was checking flights for week after next, and the normal cost for a flight between Tampa and Germany has drastically dropped, from about $1000-1500 to below $1000 (easy to find at that price).
Antiquated? The “in the air” part doesn’t hold for the US, but it’s not far off. For the majors, pilots (and inflight crew) are being paid only when the aircraft is off the blocks. That is, from the time the aircraft is pushed back until the time it parks at the gate. There are a multitude of variances for things like reserve pay, etc., and as stated upthread, there is usually a minimum monthly guarantee around 80 hours. But if you’re talking about when pilots are actually earning their hourly base rate, it’s only after the doors are shut until the doors are open (loosely speaking).
Excellent point, and one that’s going to hit the bank pretty roughly on several EU-based carriers. Ryanair has already indicated that, despite law, it isn’t going to provide compensation to stranded customers (nor should they be forced to, aside from the “it’s the law” angle, IMO).
Actually, we were talking about whether airline’s wage expenses cease when aircraft are grounded. The evidence strongly suggests that the answer in most cases is “Hell no.” It’s common that employees who fly (pilots and flight attendants) have minimum wage provisions of the type you allude to. And there are of course a host of non-flying employees as well.
I’m not sure what you mean by saying the rate at which they buy forward is usually reduced. If you mean it is usually less than the current price, that is not the case. The price at which a commodity is traded for future delivery is determined by market expectations and may at any time be more (contango) or less (backwardation) than the spot price. If you mean that their traders can achieve a small discount on the quoted forward price, by negotiation or shopping around, that may well be the case.
However, in general the aim of hedging fuel prices is not to achieve a lower average fuel price; it is to stabilise gross margin by managing market risk. This has the effect of reducing the cost of borrowing.
Yes, I could relative to continental Europe, find no exceptions to labour code there, and the American practice would be clearly illegal under EU labour standards, as I understand them.
What would be the problem with it?
I’m sorry, but if the object of hedging fuel prices is not to achieve a lower overall average cost, then you’re doing it wrong. While you are correct that the commodity future price might be higher than the current price, you are managing risk, as you say, in such a way as to avoid a catasrophic loss if the future price spikes astronomically. In some cases, this can result in an overall higher cost, but in general it results in lower cost and less volatility, or the airlines would not do it.
The object of hedging fuel prices is to reduce risk. It is as simple as that. I don’t know of any evidence for your claim that “in general it results in lower cost”.
If you could “in general” buy forward for less than the spot price on the delivery date, we would all be very, very rich. The reality is the opposite - the market is willing to pay a premium to reduce price risk, and this is reflected in the forward commodity price.
And exactly what “risk” are they reducing? Why, the risk of drastic price fluctuations, which could result in a vast increase in costs. Right?
Right, you’ve got it. It’s a bit like insurance. Your business would be better off not paying for fire insurance, because on average your annual premium will exceed your annual claims (assuming the fire insurance business is profitable). But if there was a fire, it could wipe out the business, so you are willing to pay for insurance to spread the risk of a single event over many years.
Think of it another way: any time the airline gains a dollar by buying fuel forward instead of buying spot, their counter-party loses a dollar. Why would you expect airlines’ commodity traders to be systematically cleverer than their counter-parties, or than the market? If they were, they could make a fortune on speculative trading, and forget the messy business of flying passengers around.
The expected contribution to gross margin of hedging activity is approximately zero. Probably slightly negative if you take account of transaction costs, etc. But it yields real benefits in terms of reduced volatility, which in turn reduces the cost of raising capital.