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Speaker 1: Hey, Odd Lots listeners, the Odd Lots tour continues and

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Speaker 1: our next stop is in Chicago.

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Speaker 2: That's right. Joe and I will be at the City

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Speaker 2: Winery Chicago on October 15th for a live Odd Lots recording.

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Speaker 2: Tickets are on sale now at Bloomberg.com forward slash Odd Lots.

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Speaker 1: And of course, a special thank you to Barclays for

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Speaker 1: supporting Odd Lots Live.

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Speaker 2: So that's October 15th at City Winery in Chicago. Get

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Speaker 2: your tickets now.

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Speaker 1: Bloomberg Audio Studios.

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Speaker 2: Podcasts, radio, news. Hello and welcome to another episode of

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Speaker 2: the Odd Lots Podcast. I'm Traci Alloway.

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Speaker 3: And I'm Joe Weisenthal.

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Speaker 2: Joe, there's a topic that we've been wanting to do

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Speaker 2: for a while. Yes, yes. And you would think it's

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Speaker 2: kind of simple, but actually it's been really, really hard

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Speaker 2: finding a perfect guest for this particular topic because it

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Speaker 2: involves airlines. It involves a particular airline strategy. And airlines,

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Speaker 2: having been a transportation correspondent for like a couple years,

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Speaker 2: way back in the day, airlines They're weird about things.

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Speaker 2: They're kind of secretive and they often don't want to

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Speaker 2: talk about stuff.

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Speaker 3: I actually didn't know this.

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Speaker 2: Yes.

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Speaker 1: This is an industry thing that I didn't know that

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Speaker 1: they have a reputation or a pattern of.

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Speaker 2: There's like two things in the airline world that I

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Speaker 2: always wanted to know or see. And we're going to

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Speaker 2: talk about one of them today. which is fuel hedging

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Speaker 2: and the sort of inner workings of airline fuel hedging.

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Speaker 2: But the second one, I always wanted to see a

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Speaker 2: completed aircraft contract, like an actual aircraft order that included

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Speaker 2: the discounts that airlines would get.

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Speaker 3: Because when you.

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Speaker 2: See the announcement, like Virgin Atlantic orders, I don't know,

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Speaker 2: a certain number of planes from Boeing or Airbus, it's

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Speaker 2: always at the list prices. So you never actually get

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Speaker 2: a good feel for what they're actually paying for it.

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Speaker 2: So I always wanted to see that. Never did in

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Speaker 2: my transportation career. But at least I'm going to satisfy

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Speaker 2: the fuel hedging urge right now.

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Speaker 1: I'm very excited about this episode because fuel hedging by airlines,

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Speaker 1: you know, you hear about it all the time or

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Speaker 1: you hear, you know, every time there's a big price,

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Speaker 1: they're usually jumping oil.

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Speaker 3: There's something people talk about the airlines.

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Speaker 1: And we've all said it.

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Speaker 4: Right?

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Speaker 1: This is what I'm fascinated by. All of these things

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Speaker 1: that we talk about all of the time. Oh, did

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Speaker 1: they hedge their fuel? And then the conversation stops there.

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Speaker 1: And they're like, oh, they did hedge their fuel, so okay.

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Speaker 1: Or they didn't hedge their fuel, so their stock is

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Speaker 1: going down, whatever. But we all talk about it and

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Speaker 1: have no idea actually what it means. And I'm very

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Speaker 1: fascinated too by, okay, they have traders, right? And when

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Speaker 1: we think of traders, we think of trading floors and

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Speaker 1: all this stuff. But there's so much capital T trading

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Speaker 1: activity happening on the corporate side that almost gets no coverage.

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Speaker 2: The other thing about fuel and airline costs. So fuel is,

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Speaker 2: I think, the second biggest cost for airlines after labor,

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Speaker 2: which makes sense. But it's also the most volatile cost.

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Speaker 2: But people always imagine hedging as like, okay, airlines are

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Speaker 2: worried about the price of oil going up, or to

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Speaker 2: be more specific, the price of jet fuel going up.

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Speaker 2: And so they want to lock in a certain cost

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Speaker 2: so that they don't get caught out suddenly when prices spike,

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Speaker 2: as they have been doing for jet fuel recently. But

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Speaker 2: At the same time, there's always another lever that airlines

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Speaker 2: pull when you see higher prices, higher oil prices, which

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Speaker 2: is they raise fares or they raise fuel surcharges. So

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Speaker 2: you can get this weird environment where you both lock

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Speaker 2: in a certain price and oil starts to spike. Maybe

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Speaker 2: the price you locked in is lower. And you can

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Speaker 2: institute a fuel surcharge as well, because as we all

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Speaker 2: know from doing these inflation episodes, if oil shortages... Yeah, yeah.

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Speaker 2: Jet fuel shortages, everything else are in the news. Customers

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Speaker 2: aren't really going to complain that much if they see

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Speaker 2: a big fuel surcharge on their bill.

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Speaker 3: Airline prices are very expensive these days.

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Speaker 4: Yeah, they are.

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Speaker 3: But bookings are really high, too. People are flying.

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Speaker 1: And I keep seeing all these things, new TSA records,

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Speaker 1: new global records.

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Speaker 3: We are flying a lot in this world.

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Speaker 1: Of course, you know, if you hedged your oil and

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Speaker 1: your competitor didn't, right, they're going to have to raise prices.

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Speaker 1: Or if they're not going to lose money. And then

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Speaker 1: it's like, OK, well, here's my opportunity, et cetera. So

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Speaker 1: I'm very curious about how it all works, how.

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Speaker 3: It feeds through.

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Speaker 1: And I'm just to a little bit of context, according

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Speaker 1: to September 29th, back in February or March when the

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Speaker 1: Iran war broke out, we were all staring at that

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Speaker 1: Singapore jet fuel chart.

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Speaker 2: Well, one of us was. I was staring at the

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Speaker 2: Europe jet fuel versus Brent crack spread. That's the difference.

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Speaker 1: Sorry.

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Speaker 2: No, but it is true. This has been in the news.

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Speaker 2: And of course, with oil prices spiking again with the

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Speaker 2: shortage of diesel, this has suddenly become a very relevant topic.

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Speaker 2: And you're absolutely right that a smart hedging strategy can

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Speaker 2: be a competitive advantage for airlines. Disclosure, my dad flew

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Speaker 2: for Southwest for a long time. A lot of my

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Speaker 2: inheritance is somewhat unfortunately still in Southwest stock.

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Speaker 3: Do you want me to pull up a ticker for

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Speaker 3: you right now?

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Speaker 2: No, I don't want to see it. I don't want

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Speaker 2: to see it. But Southwest famously pioneered a certain hedging

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Speaker 2: strategy that then got copied by everyone else with varying

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Speaker 2: degrees of success. So it can be an enormously important

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Speaker 2: factor for airlines. And I am so, don't show it

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Speaker 2: to me, Joe. I don't want to, don't zoom out.

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Speaker 2: It looks pretty good over like the past couple of years.

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Speaker 2: Just don't zoom out.

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Speaker 3: No, wait a second. It's not that bad.

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Speaker 1: Look, look.

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Speaker 3: It's actually like, I was expecting worse.

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Speaker 1: For those who are just listening, I tilted my computer

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Speaker 1: screen so Tracy could see the chart. It's not as

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Speaker 1: bad as I expected, the way you led into that.

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Speaker 4: Yeah.

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Speaker 2: So.

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Speaker 2: I'm very happy to say that we finally found the

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Speaker 2: perfect guest to talk about all of this. Someone who

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Speaker 2: did actual fuel hedging strategy at a major carrier and

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Speaker 2: also did it in an extremely interesting way. We're going

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Speaker 2: to be speaking with David Kang. He is former group

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Speaker 2: treasurer over at Qatar Airways and also an all-round oil expert.

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Speaker 2: So David, thank you so much for coming on All Thoughts.

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Speaker 4: Happy to be here.

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Speaker 2: We are so glad to have finally found you. Thank

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Speaker 2: you so much for staying up late from Singapore. Why

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Speaker 2: don't you just go ahead and tell us who you are,

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Speaker 2: and why I just described you as a general oil

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Speaker 2: market expert, in addition to being the former group treasurer

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Speaker 2: of Qatar.

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Speaker 4: That is a long story. And I'm going to pretty

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Speaker 4: much put into a synopsis where I traded effects in Toronto.

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Speaker 4: I traded interest rates in New York. 425 Lexington was

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Speaker 4: the building I was in for a Canadian bank, which

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Speaker 4: is just down the road from you. And I Came

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Speaker 4: back to Singapore, joined NatWest, sent to London to sell

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Speaker 4: government bonds, and then became a bond trader with a

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Speaker 4: Japanese trading house and lost my job in the 1998

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Speaker 4: Asian financial crisis. So then became an oil broker, and

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Speaker 4: did that for about six, seven years. In 2006, my buddy,

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Speaker 4: who was the MD of J.P. Morgan for Asia, the

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Speaker 4: head of commodities for them, basically asked me to join him.

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Speaker 4: And so then I moved from becoming an oil broker

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Speaker 4: to a structurer. And then I went to Sumitomo, the

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Speaker 4: Japanese trading house, and became the head of trading for

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Speaker 4: Asian products. And it's just gone from there. And I've

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Speaker 4: worked in the coal industry. I've worked in the LNG industry.

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Speaker 4: So I'm pretty much an energy man, all in. But

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Speaker 4: I think working for Qatar Airways, I learned a lot. well,

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Speaker 4: the aviation industry and how technical it gets and how

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Speaker 4: interesting it can get as well. It's a very interesting sector.

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Speaker 1: We love airline episodes. Our listeners love airline episodes. So

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Speaker 1: extremely excited about that. Just real quickly, what were the

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Speaker 1: years you were at Qatar?

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Speaker 4: 2011 to 2013. Well, two and a half to nearly

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Speaker 4: three years.

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Speaker 3: Got it.

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Speaker 1: So former group treasurer. What is the basic expectation of

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Speaker 1: that role within the airline? What is the obligation of

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Speaker 1: the treasurer to do for the company?

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Speaker 4: The actual title is vice president, treasury, and risk management.

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Speaker 2: Okay.

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Speaker 4: So basically, I do the treasury and I do the

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Speaker 4: risk management for all financial products of the airline. So

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Speaker 4: I protect the airline financially. That's what a treasurer does.

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Speaker 2: Who actually hedges? Because my understanding is that some of

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Speaker 2: the U.S. carriers weren't as prevalent when it comes to

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Speaker 2: hedging as they had been in the past.

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Speaker 4: I think the U.S. carriers aren't as prevalent. It's because

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Speaker 4: they got smacked in 2014 and 2015. So they realized, right,

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Speaker 4: Delta recently, 2020, lost nearly over a billion dollars. So

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Speaker 4: they were still hedging as well. But most of the

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Speaker 4: American carriers, especially the small ones, especially the smaller airlines,

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Speaker 4: They just put everything into the surcharge to pass all

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Speaker 4: the costs on to the customer. And that's built into

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Speaker 4: the ticket. Now, you will never see a ticket that

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Speaker 4: tells you the percentage of your surcharge. It will just

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Speaker 4: tell you it's a fuel surcharge. And then that's it.

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Speaker 4: And some of them even have done away with that.

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Speaker 4: They say, that's a ticket price. You pay it and

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Speaker 4: you fly. Then that's it. Don't worry about the fuel.

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Speaker 4: You want to get somewhere? Take it. So in that aspect,

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Speaker 4: that's when some of the U.S. carriers actually dropped out

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Speaker 4: because they don't have a hedge book big enough or

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Speaker 4: rather they don't have a balance sheet big enough to

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Speaker 4: maybe take on these risks of hedging. And that's what

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Speaker 4: the international carriers do have is they have a balance

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Speaker 4: sheet and they have a hedge book that's big enough. Plus,

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Speaker 4: they have a revenue book that's big enough as well.

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Speaker 4: And that's why they can charge the surcharge at the

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Speaker 4: same time as they're hedging the fuel on the consumption side.

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Speaker 4: So think of an airline very similar to an oil refinery. Okay,

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Speaker 4: so what does an oil refinery do? It takes in crude,

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Speaker 4: sends it to this crude distillation unit, the CDU, and

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Speaker 4: all of that comes out on the other side of

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Speaker 4: the products, right? So you've got LPG at the top,

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Speaker 4: then you've got gasoline, and then you've got NAFTA, and

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Speaker 4: then after that you've got your mildews, jet kerosene, and

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Speaker 4: then your gas oil, and then after that the fuel residue.

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Speaker 4: So all these are products that come out from crude.

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Speaker 4: So what does a refinery do? They sell the crack.

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Speaker 4: That's the difference between the product and the underlying crude.

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Speaker 4: That's a spread. So they sell the product, which is

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Speaker 4: basically producer hedging because it's called revenue hedging. They've got

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Speaker 4: revenue here because they're selling the product. They're also buying,

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Speaker 4: so they're at risk. So they need to buy the crude.

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Speaker 4: So the same thing happens with airlines. And airlines, what

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Speaker 4: we do is, I had to get creative for a

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Speaker 4: number of reasons, which I won't go into, but Because

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Speaker 4: of those reasons, we had to sit down and really

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Speaker 4: think about how hedging is going to be because we

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Speaker 4: had a 6.6 billion balance sheet and we were consuming,

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Speaker 4: the first year of consumption was something like anywhere from

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Speaker 4: 24 to 27 million barrels. The next year was added

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Speaker 4: three more million barrels and then added up. So we hedged,

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Speaker 4: we forecast out to three years. One of the reasons

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Speaker 4: why we did that was because we were accepting 1.5

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Speaker 4: aircraft A month. And basically we were planning new routes,

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Speaker 4: probably once every two months, we'd get a new route

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Speaker 4: so we could schedule all this. We knew what was

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Speaker 4: coming in. We knew the planes that were coming in.

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Speaker 4: So our consumption was going up at a steady rate.

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Speaker 4: So we understood what we were doing. And so we

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Speaker 4: also saw that the world was, you know, was looking good.

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Speaker 4: People were trying to fly again. And so, you know,

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Speaker 4: we started buying at the bottom and hedging. But sometimes

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Speaker 4: you have to look at the price really and start

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Speaker 4: to think about it. And what's your probability when oil

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Speaker 4: goes at triple digit? Because you use Brent as your

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Speaker 4: proxy because the jet fuel market is too thin. Or

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Speaker 4: the American carriers use heating oil as their proxy, not jet.

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Speaker 4: Because like I said, the jet market is too thin.

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Speaker 4: Northwest Europe, SIFJET, that's a very thin market now. So,

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Speaker 4: you know, you cannot use these instruments to help you hedge, right?

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Speaker 4: You have to go and use Brent as your proxy,

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Speaker 4: where it's liquid and there are people at both sides

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Speaker 4: of the table for Brent. I mean, if you go

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Speaker 4: to a table, right, where there are airlines, they're the

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Speaker 4: only buyers of jet fuel. So you've got a ton of, like,

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Speaker 4: refineries saying, yeah, I've got jet fuel for you. I've

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Speaker 4: got Glencore, Mercuria. The list goes on, right? VTOL. You'll

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Speaker 4: also jet fuel to be online. Morgan Stanley was the

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Speaker 4: two as well. I've dealt with Morgan Stanley, Goldman Sachs.

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Speaker 4: I bought physical jet from them at certain locations around

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Speaker 4: the planet.

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Speaker 1: Okay, so there are these various entities that you can

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Speaker 1: trade with. Let's start with what is the most plain

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Speaker 1: vanilla thing, the sort of modal trade, perhaps, so to speak,

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Speaker 1: of how I imagine there are all sorts of complex ways, complexifiers, etc.

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Speaker 1: But what is the sort of core, most common trade

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Speaker 1: that one would do? How does it walk us through

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Speaker 1: the steps of it?

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Speaker 4: Well, there's a swap. And the swap is actually a

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Speaker 4: derivative of your futures market. So from your futures market,

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Speaker 4: you can tell what the swap rate is, right? Two

263
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Speaker 4: months out. So this is your swap rate for April.

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Speaker 4: It takes into account May and June for the futures. Okay.

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Speaker 4: And that's your April swap rate. So you would buy swaps.

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Speaker 4: And when you buy swaps, it's symmetric. So, I mean,

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Speaker 4: you could go up or go down and you could,

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Speaker 4: you know, and if the price of all goes up,

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Speaker 4: you're looking good because you've locked in your exposure and

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Speaker 4: you've locked in your costs. But if it goes down,

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Speaker 4: you bleed. So it's best to do swabs when I

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Speaker 4: think oil is low and it's in the lower double digits,

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Speaker 4: somewhere around $ 25, $ 35. It's not an issue to buy swabs.

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Speaker 4: But as it gets, as it moves further up around

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Speaker 4: $ 70 to $ 80, I think everybody starts to think about

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Speaker 4: that risk going up because how long will oil stay elevated?

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Speaker 4: So they'll try and do options. So they'll buy call options,

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Speaker 4: but thing is you have to pay for that insurance.

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Speaker 4: You have to pay a fee. You have to pay

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Speaker 4: a premium. So some airlines are for lack of a

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Speaker 4: better term, too cheap to pay for their calls. So

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Speaker 4: they fund it. All right. By selling puts. So that's

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Speaker 4: all they can afford is zero cost color. And they

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Speaker 4: can use that. So you can buy options. You can

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Speaker 4: do zero cost colors and you can do swaps. These

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Speaker 4: are pretty much plain vanilla. But the stuff that I

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Speaker 4: used to structure for J.P. Morgan was a target redemption note.

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Speaker 4: And then you have a vanilla side on the option

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Speaker 4: and you have the exotic side. So that's where it

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Speaker 4: gets a little bit more complicated.

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Speaker 2: So the idea is that we have banks that are

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Speaker 2: actually selling target redemption notes for the purposes of fuel

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Speaker 2: hedging to airlines.

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Speaker 4: Okay. On the vanilla side, you do a zero cost

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Speaker 4: collar with the airline. If I'm the bank, But on

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Speaker 4: the back of it, I structure the note as a

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Speaker 4: target redemption note. That means it's basically going to redeem

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Speaker 4: in five months, redeem in one year, or redeem in

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Speaker 4: two years. So off the back of that, on the

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Speaker 4: exotic side, I can get you a better rate where

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Speaker 4: you can buy the oil. And I can get you

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Speaker 4: a better rate for your call options. That means I

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Speaker 4: can basically pull the call options, but they're actually inside

304
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Speaker 4: the money. It's like they're in the money. that I

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00:16:20,410 --> 00:16:23,790
Speaker 4: can sell to you, but with this exotic behind that.

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Speaker 4: And so a lot of these exotics, they're called extendables.

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Speaker 4: Some of them are just like selling, like what I did,

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Speaker 4: a strangle. That means basically I sold both wings. I

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Speaker 4: sold calls at the top above $ 120. I sold puts

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Speaker 4: below $ 80. And wherever oil stayed in between, I would

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Speaker 4: profit from that because The banks will be paying me

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Speaker 4: the premium.

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Speaker 2: It's so funny because I'm so used to thinking about

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Speaker 2: those sorts of notes and structured products in Asia as

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Speaker 2: being sold to like, yeah, to, you know, mom and pop,

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Speaker 2: someone betting on like a big move or lack thereof

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Speaker 2: in the Kospies, something like that. I hadn't even thought

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Speaker 2: for a second that it could be related to fuel.

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Speaker 4: Yeah.

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Speaker 2: David, can I just ask, you said something really interesting earlier,

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Speaker 2: which is that most of the fuel hedging is done

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Speaker 2: via Brent trades as opposed to jet fuel because the

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Speaker 2: actual jet fuel trading market is so thin. Does that

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Speaker 2: mean that airlines end up being exposed to big differences between,

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Speaker 2: I guess, the direction of the price of jet fuel

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Speaker 2: and the price of Brent? Because sometimes, you does change

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Speaker 2: very fast and very quickly, as we saw earlier this year?

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Speaker 4: It's a fair comment, right? I would say yes and no.

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Speaker 4: So yes to the fact, right, that as an airline,

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Speaker 4: what do we burn? We've been jet A1. So basically,

331
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Speaker 4: we're exposed to the jet fuel market. We should hedge

332
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Speaker 4: with jet, but the jet market's too thin. So that's

333
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Speaker 4: why we use the Brent market. Now, for lack of

334
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Speaker 4: a better term, again, it's better to have a hedge

335
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Speaker 4: on than no hedge at all. If you cannot hedge

336
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Speaker 4: in gent, then you're totally exposed, right? So for lack

337
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Speaker 4: of a better proxy, people use Brent because it's the

338
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Speaker 4: international carrier. Some airlines use, like in the United States,

339
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Speaker 4: some of them use WTI, West Texas Intermediate. Some of them,

340
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Speaker 4: or most of them, use heating oil because it's very close.

341
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Speaker 4: So the heating oil spread between the jet and heating

342
00:18:33,760 --> 00:18:39,100
Speaker 4: oil in the United States is tighter than what you

343
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Speaker 4: would get. I mean, just recently you had heating all

344
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Speaker 4: versus TI go through a hundred dollars for the crack.

345
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Speaker 4: Is it like $ 107? That's like insane amounts of money, right?

346
00:18:52,290 --> 00:18:56,869
Speaker 4: It's 230 bucks per barrel while crude is trading at

347
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Speaker 4: 110 and then Brent's trading at nearly 120 and metric tons.

348
00:19:03,670 --> 00:19:09,880
Speaker 4: You've got probably like a $ 74 to $ 75 crack of

349
00:19:10,080 --> 00:19:14,040
Speaker 4: gas oil in Europe. I'm not sure where the jet

350
00:19:14,080 --> 00:19:17,060
Speaker 4: market is in Europe because it's so hard to pin down.

351
00:19:17,869 --> 00:19:21,950
Speaker 4: There's no real open market for it. There are agencies

352
00:19:21,990 --> 00:19:26,280
Speaker 4: like Argus or Platts, and they will print a number. But,

353
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Speaker 4: you know, the numbers that they print sometimes have no

354
00:19:29,160 --> 00:19:31,140
Speaker 4: offer on the back of that. And there's a bid.

355
00:19:31,460 --> 00:19:33,959
Speaker 4: And then they just up it and they assume that

356
00:19:33,980 --> 00:19:37,619
Speaker 4: there's an offer. But sometimes the market is offered and

357
00:19:37,640 --> 00:19:39,609
Speaker 4: there's no bid. And then they just pick a number.

358
00:19:40,369 --> 00:19:43,330
Speaker 4: So it's very arbitrary. So that's the reason why most

359
00:19:43,350 --> 00:19:47,500
Speaker 4: people don't trust these agencies, with their jet forecasts. So

360
00:19:47,600 --> 00:19:51,020
Speaker 4: they move either something they understand better and it's more liquid,

361
00:19:51,420 --> 00:19:55,119
Speaker 4: like gas, London gas oil, heating oil in the United States.

362
00:19:55,680 --> 00:19:58,830
Speaker 1: I just pulled up a chart, speaking of charts, on

363
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Speaker 1: the terminal. And it's very interesting because if I go back,

364
00:20:01,810 --> 00:20:06,050
Speaker 1: normalize it to early February, so before the war started,

365
00:20:06,710 --> 00:20:12,230
Speaker 1: In March, basically, Brent crude rose 50%. Singapore jet fuel

366
00:20:12,369 --> 00:20:16,520
Speaker 1: rose over 100% or more than doubled during that time.

367
00:20:16,970 --> 00:20:19,720
Speaker 1: I could imagine just start there, like at least for

368
00:20:19,760 --> 00:20:23,420
Speaker 1: that period from, say, March to the middle of May,

369
00:20:23,800 --> 00:20:28,139
Speaker 1: you could have been a well-hedged carrier hedging Brent and

370
00:20:28,240 --> 00:20:32,160
Speaker 1: still bleeding a lot if what you're buying is Singapore

371
00:20:32,380 --> 00:20:32,740
Speaker 1: jet fuel.

372
00:20:33,490 --> 00:20:36,790
Speaker 4: Is true, but when I buy Singapore Jet Fuel, except

373
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Speaker 4: for the incumbent.

374
00:20:39,570 --> 00:20:40,910
Speaker 3: Wait, say that again?

375
00:20:41,010 --> 00:20:43,410
Speaker 1: Can you explain what is, when I look at, tell

376
00:20:43,450 --> 00:20:45,290
Speaker 1: me about this chart that we always pull up.

377
00:20:45,570 --> 00:20:46,690
Speaker 3: Is it not that meaningful?

378
00:20:46,910 --> 00:20:48,190
Speaker 2: Stop saying we, Joe.

379
00:20:48,310 --> 00:20:49,109
Speaker 3: Sorry, that I.

380
00:20:49,750 --> 00:20:51,510
Speaker 1: When I say we, I mean like all the people

381
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Speaker 1: I talk with on the internet, not me and Tracy.

382
00:20:54,520 --> 00:20:56,899
Speaker 1: Tell me about this chart that I've been looking at

383
00:20:56,920 --> 00:20:57,300
Speaker 1: in ignorance.

384
00:20:58,270 --> 00:21:02,609
Speaker 4: Singapore Jet is a different animal because there are certain

385
00:21:02,670 --> 00:21:07,189
Speaker 4: trading houses with certain oil majors that control that market

386
00:21:07,330 --> 00:21:11,189
Speaker 4: very heavily because they know that the only buyers of

387
00:21:11,230 --> 00:21:15,859
Speaker 4: this market are the airlines. Right. And how would I

388
00:21:15,900 --> 00:21:19,840
Speaker 4: put this nicely? Sometimes people talk to each other. Okay.

389
00:21:20,140 --> 00:21:23,760
Speaker 4: And they agree on something. And then what they agreed

390
00:21:23,859 --> 00:21:27,200
Speaker 4: on happens because all of them are looking the same way.

391
00:21:27,770 --> 00:21:31,389
Speaker 4: And are trading the same way. So it's not a

392
00:21:31,430 --> 00:21:36,730
Speaker 4: very objective market. It's a very subjective market. And that's why,

393
00:21:36,750 --> 00:21:40,960
Speaker 4: like I said, only the incumbent in Singapore actually does

394
00:21:41,140 --> 00:21:44,159
Speaker 4: some jet fuel hedging. Everybody else does not.

395
00:21:45,020 --> 00:21:48,840
Speaker 2: How much money can airlines actually make from raising just

396
00:21:48,920 --> 00:21:52,440
Speaker 2: the fares and the fuel surcharges? Like, why even bother

397
00:21:52,460 --> 00:21:55,580
Speaker 2: to hedge if, in theory, I mean, I'm sure you

398
00:21:55,619 --> 00:21:58,810
Speaker 2: have thoughts on the price elasticity of air travel. But if,

399
00:21:58,869 --> 00:22:01,750
Speaker 2: in theory, I could just fully pass on the additional

400
00:22:01,790 --> 00:22:04,810
Speaker 2: fuel cost to the customer, why do I need to

401
00:22:04,850 --> 00:22:05,390
Speaker 2: hedge at all?

402
00:22:06,230 --> 00:22:09,690
Speaker 4: Hedging helps, like I said, when oil prices are low.

403
00:22:10,310 --> 00:22:13,570
Speaker 4: Because when oil prices are low, your fuel surcharge can't

404
00:22:13,650 --> 00:22:17,190
Speaker 4: do anything. You cannot charge the person on the fuel, right?

405
00:22:18,109 --> 00:22:20,490
Speaker 4: And your ticket price has to be low because oil

406
00:22:20,820 --> 00:22:24,300
Speaker 4: is low. And usually when oil is low, usually the

407
00:22:24,320 --> 00:22:27,380
Speaker 4: global economy is not doing well. It wasn't the case

408
00:22:27,420 --> 00:22:29,119
Speaker 4: in 2014 and 2015, but most of the time in 1998,

409
00:22:29,100 --> 00:22:37,000
Speaker 4: in 2008, in 2020 and right now what we're seeing

410
00:22:37,340 --> 00:22:40,460
Speaker 4: with the uh you know the 2026 war between iran

411
00:22:40,500 --> 00:22:43,920
Speaker 4: and the us and israel a lot of times right

412
00:22:44,070 --> 00:22:46,369
Speaker 4: it's it's something to do with the global economy and

413
00:22:46,410 --> 00:22:51,530
Speaker 4: geopolitics so what i would say is that hedging has

414
00:22:51,609 --> 00:22:54,710
Speaker 4: its uses because it can protect you from a low

415
00:22:54,730 --> 00:22:58,090
Speaker 4: level as it moves up so you're making money and

416
00:22:58,109 --> 00:23:03,070
Speaker 4: you've locked in your costs so that's where using swaps

417
00:23:03,190 --> 00:23:10,080
Speaker 4: and calls and zero-cost calls work. Now, at the same time,

418
00:23:10,740 --> 00:23:15,119
Speaker 4: because oil is going up and it's part of what

419
00:23:15,160 --> 00:23:18,220
Speaker 4: makes up an airline, you can charge the surcharge as well.

420
00:23:18,359 --> 00:23:21,590
Speaker 4: So the airlines that want to make money can actually

421
00:23:21,640 --> 00:23:24,990
Speaker 4: do that. The surcharge doesn't go through P & L,

422
00:23:25,570 --> 00:23:28,780
Speaker 4: but the hedge goes through P & L. So then

423
00:23:28,800 --> 00:23:33,119
Speaker 4: if the hedge goes up, nobody sees the surcharge coming in.

424
00:23:33,180 --> 00:23:36,300
Speaker 4: Nobody sees the revenue from there. But they see the

425
00:23:36,359 --> 00:23:40,340
Speaker 4: revenue coming in from the hedge. So if you've done

426
00:23:40,380 --> 00:23:45,210
Speaker 4: it well and the market's still going up, the economy's improving,

427
00:23:45,330 --> 00:23:48,010
Speaker 4: everybody wants to travel, people are paying up, they don't

428
00:23:48,030 --> 00:23:51,369
Speaker 4: really care right now how much the surcharge is, you

429
00:23:51,410 --> 00:23:55,699
Speaker 4: can make twice as much money while you can. But

430
00:23:55,740 --> 00:23:58,340
Speaker 4: at the same time, you've got to be very aware

431
00:23:58,460 --> 00:24:02,340
Speaker 4: and situationally aware that, like I said, it's like a refinery.

432
00:24:02,920 --> 00:24:07,200
Speaker 4: Your ticket is the product. In that product, you have

433
00:24:07,240 --> 00:24:10,020
Speaker 4: the ticket price. Now, nobody tells you what the ticket

434
00:24:10,060 --> 00:24:12,480
Speaker 4: price is, but right now, I'll tell you, because of

435
00:24:12,540 --> 00:24:15,379
Speaker 4: the fuel surcharge, the ticket price is probably 25% of

436
00:24:15,400 --> 00:24:16,030
Speaker 4: the ticket charge.

437
00:24:16,660 --> 00:24:18,910
Speaker 1: And that's true. You would say that would just be

438
00:24:19,130 --> 00:24:22,810
Speaker 1: generally true globally, on average, right now.

439
00:24:22,830 --> 00:24:23,370
Speaker 4: Pretty much.

440
00:24:23,390 --> 00:24:26,080
Speaker 1: Anyone who buys a ticket is 25%. Actually, you talked

441
00:24:26,119 --> 00:24:30,199
Speaker 1: a little bit about the cost. So overall, when you

442
00:24:30,240 --> 00:24:32,109
Speaker 1: say we talk about the cost of a flight or

443
00:24:32,140 --> 00:24:36,490
Speaker 1: the cost of running an airline, is fuel basically 25%

444
00:24:36,490 --> 00:24:38,670
Speaker 1: of the cost? Tracy mentioned that it was number two

445
00:24:39,090 --> 00:24:44,070
Speaker 1: after labor. But for Qatar Airways, how significant was this

446
00:24:44,150 --> 00:24:45,050
Speaker 1: one component for them?

447
00:24:45,050 --> 00:24:46,710
Speaker 4: 44%.

448
00:24:46,710 --> 00:24:47,310
Speaker 3: Did you say 44%?

449
00:24:47,310 --> 00:24:50,690
Speaker 4: Yes, I said 44%. That's the reason why I had

450
00:24:50,730 --> 00:24:54,240
Speaker 4: to get creative. Wow. It was huge for us. I mean,

451
00:24:54,260 --> 00:24:57,369
Speaker 4: you know, if you're like the rest of the world's airlines, right?

452
00:24:57,390 --> 00:25:01,010
Speaker 4: So anywhere from 25, 30% of your cost is jet fuel.

453
00:25:01,550 --> 00:25:04,010
Speaker 4: And then labor is a big cost. But labor for

454
00:25:04,130 --> 00:25:06,609
Speaker 4: us was a low cost, very low cost, right? Because

455
00:25:06,710 --> 00:25:10,580
Speaker 4: we were getting a lot of crew and we were

456
00:25:10,619 --> 00:25:14,490
Speaker 4: paying them decently, but not You know, but prices would

457
00:25:14,520 --> 00:25:17,060
Speaker 4: be better in Doha than it was back in their

458
00:25:17,100 --> 00:25:20,580
Speaker 4: home country. So we had a lot of crew and,

459
00:25:20,600 --> 00:25:23,419
Speaker 4: you know, cabin crew and flight tech as well from

460
00:25:23,500 --> 00:25:28,100
Speaker 4: Eastern Europe, from Asia. And, you know, we kept the

461
00:25:28,119 --> 00:25:31,580
Speaker 4: cost low on the labor side, but our cost, our

462
00:25:31,660 --> 00:25:36,130
Speaker 4: exposure to the, you know, to the barrel, to jet fuel, right,

463
00:25:36,170 --> 00:25:40,130
Speaker 4: was 44%. That's nearly half your expenses. Wow.

464
00:25:40,790 --> 00:25:43,560
Speaker 2: So you mentioned having to get creative, and this is

465
00:25:43,840 --> 00:25:48,000
Speaker 2: actually the way you came to this particular program. But

466
00:25:48,020 --> 00:25:52,740
Speaker 2: you published a paper all about a particular hedging strategy

467
00:25:52,800 --> 00:25:55,460
Speaker 2: that you undertook while you were at Qatar. Why don't you,

468
00:25:55,840 --> 00:25:58,640
Speaker 2: just to begin with, explain to us the problem that

469
00:25:58,680 --> 00:26:01,790
Speaker 2: you were trying to solve for your employer here?

470
00:26:01,810 --> 00:26:05,590
Speaker 4: I'll just run this anecdote for you, just a little story.

471
00:26:05,670 --> 00:26:09,090
Speaker 4: I'll keep it very short, right? But basically, our hedge

472
00:26:09,130 --> 00:26:12,169
Speaker 4: book was down. a very decent amount of money, something

473
00:26:12,190 --> 00:26:17,270
Speaker 4: like $ 280 million. So that's when I came on board

474
00:26:17,330 --> 00:26:19,859
Speaker 4: and I had this hedge book and we were down

475
00:26:19,859 --> 00:26:24,359
Speaker 4: $ 280 million. And as I was learning about the airline,

476
00:26:24,400 --> 00:26:27,639
Speaker 4: because I come from a trading background, I'm not a

477
00:26:27,680 --> 00:26:30,500
Speaker 4: corporate guy. So I have to learn how to be

478
00:26:30,540 --> 00:26:33,240
Speaker 4: a corporate person. I have to learn about what the

479
00:26:33,300 --> 00:26:36,340
Speaker 4: treasury is about and what the hedge book has and

480
00:26:36,400 --> 00:26:40,430
Speaker 4: how I can add value. And in that time that

481
00:26:40,490 --> 00:26:43,149
Speaker 4: I was trying to learn and add value, we were

482
00:26:43,190 --> 00:26:47,300
Speaker 4: down to, we were at one point down $ 360 million.

483
00:26:48,500 --> 00:26:51,540
Speaker 4: And so the CEO calls the CFO and I up

484
00:26:51,580 --> 00:26:55,600
Speaker 4: to his office to chat with us. And basically he

485
00:26:55,680 --> 00:26:59,679
Speaker 4: says to the CFO, Daniel Ho, when he says, Dan,

486
00:27:00,030 --> 00:27:03,130
Speaker 4: why are we down $ 360 million? And I had just

487
00:27:03,170 --> 00:27:05,810
Speaker 4: come on board, right? And I'm the group treasurer. And he,

488
00:27:06,310 --> 00:27:08,270
Speaker 4: you know, do you know what a hospital pass is?

489
00:27:09,160 --> 00:27:12,180
Speaker 4: Basically you pass the ball and you know, everybody's running

490
00:27:12,240 --> 00:27:13,540
Speaker 4: for it and everybody can see you're going to get

491
00:27:13,580 --> 00:27:16,320
Speaker 4: the ball and you get smacked. So that was me.

492
00:27:16,660 --> 00:27:19,790
Speaker 4: So I got the hospital pass from Daniel and I

493
00:27:19,850 --> 00:27:23,810
Speaker 4: talked to the CEO and I said, look, right. You know, chief,

494
00:27:24,230 --> 00:27:27,530
Speaker 4: when oil goes up, right. We make money on swaps, right.

495
00:27:27,550 --> 00:27:29,590
Speaker 4: You know, we lose money in the physical because we

496
00:27:29,630 --> 00:27:32,290
Speaker 4: don't pay more, but we float in our exposure. And

497
00:27:32,330 --> 00:27:34,429
Speaker 4: then when oil comes down, yes, we're losing on the

498
00:27:34,470 --> 00:27:37,490
Speaker 4: hedge book, but jet fuel comes down as well. And

499
00:27:37,530 --> 00:27:39,550
Speaker 4: when jet fuel comes down, we're making on the physical.

500
00:27:40,250 --> 00:27:43,740
Speaker 4: And he said, look, you are losing on the hedge book.

501
00:27:43,920 --> 00:27:48,520
Speaker 4: You're also losing on revenue management because, right, if oil

502
00:27:48,580 --> 00:27:52,460
Speaker 4: is coming down, that means the probability is at that

503
00:27:52,540 --> 00:27:54,969
Speaker 4: time when I was at Qatar Airways, the probability is

504
00:27:55,010 --> 00:27:58,250
Speaker 4: that the global economy is not doing too hot. So

505
00:27:58,310 --> 00:28:01,389
Speaker 4: it's not doing too hot, right? we will not be

506
00:28:01,450 --> 00:28:05,139
Speaker 4: able to have people sitting in their seats. We cannot

507
00:28:05,200 --> 00:28:07,640
Speaker 4: fill up the plane. So the aircraft is not going

508
00:28:07,660 --> 00:28:11,580
Speaker 4: to take off. If the aircraft doesn't take off, we

509
00:28:11,619 --> 00:28:15,080
Speaker 4: have fuel that we haven't burned. So we're losing money.

510
00:28:15,400 --> 00:28:18,780
Speaker 4: We're losing money on revenue on the ticket, and we're

511
00:28:18,800 --> 00:28:20,379
Speaker 4: losing money on the hedge book. And that was a

512
00:28:20,440 --> 00:28:25,580
Speaker 4: double whammy. So the CEO was very, it was tough.

513
00:28:25,920 --> 00:28:28,199
Speaker 4: He said, David, you're the group treasurer. I do not

514
00:28:28,270 --> 00:28:31,620
Speaker 4: want to see you read any more on the balance sheet,

515
00:28:31,840 --> 00:28:35,220
Speaker 4: do you understand? So that's when I came away from

516
00:28:35,260 --> 00:28:39,660
Speaker 4: that meeting with him, with this now awareness that I

517
00:28:39,800 --> 00:28:43,420
Speaker 4: actually had to do something where it's either we come

518
00:28:43,460 --> 00:28:47,250
Speaker 4: out flat or make some money, but no red. So

519
00:28:47,510 --> 00:28:50,130
Speaker 4: that's one of the reasons why I did what I

520
00:28:50,170 --> 00:28:51,710
Speaker 4: had to do and get creative.

521
00:29:07,830 --> 00:29:10,260
Speaker 2: So this actually reminds me one of the first things

522
00:29:10,470 --> 00:29:13,340
Speaker 2: that I learned as an airline correspondent, which was someone

523
00:29:13,400 --> 00:29:15,260
Speaker 2: who had been in the business for a very long

524
00:29:15,300 --> 00:29:19,640
Speaker 2: time as an airline consultant, basically told me that it's

525
00:29:19,760 --> 00:29:23,440
Speaker 2: very much like running a grocery business in the sense

526
00:29:23,480 --> 00:29:27,970
Speaker 2: that you have these fixed perishable costs. And if you

527
00:29:28,030 --> 00:29:31,890
Speaker 2: don't sell everything right away or fill up the capacity

528
00:29:31,930 --> 00:29:35,640
Speaker 2: of the airplane and all those costs, you eat them, right?

529
00:29:35,700 --> 00:29:37,560
Speaker 2: It's like, you know, I don't know, you have like

530
00:29:37,560 --> 00:29:39,950
Speaker 2: 10 bags of lettuce. Cauliflower, yeah. If you don't sell

531
00:29:40,010 --> 00:29:42,990
Speaker 2: it on that day, you lose all that money. And

532
00:29:43,040 --> 00:29:46,130
Speaker 2: so I always thought of airlines and air travel as

533
00:29:46,170 --> 00:29:49,920
Speaker 2: this very perishable industry, even though one big part of

534
00:29:49,960 --> 00:29:52,460
Speaker 2: the expense is very, I guess, fixed cost in the

535
00:29:52,480 --> 00:29:55,020
Speaker 2: form of aircraft. But you have to get people in

536
00:29:55,060 --> 00:30:00,280
Speaker 2: the plane- At a particular price on a certain day. Otherwise,

537
00:30:00,300 --> 00:30:01,220
Speaker 2: you just lose money.

538
00:30:01,380 --> 00:30:01,580
Speaker 4: Right.

539
00:30:01,620 --> 00:30:06,000
Speaker 1: I guess the idea is airline capacity is not something

540
00:30:06,020 --> 00:30:07,500
Speaker 1: that you can hold in inventory.

541
00:30:07,620 --> 00:30:07,870
Speaker 4: Right.

542
00:30:08,010 --> 00:30:08,610
Speaker 2: Exactly.

543
00:30:08,620 --> 00:30:08,700
Speaker 4: Yeah.

544
00:30:09,270 --> 00:30:11,730
Speaker 1: It's super interesting, and I hadn't really thought about it

545
00:30:11,770 --> 00:30:14,250
Speaker 1: that way. So, okay, your boss comes to you and says,

546
00:30:14,570 --> 00:30:19,370
Speaker 1: stop losing money. I guess every boss of every trader

547
00:30:19,430 --> 00:30:21,150
Speaker 1: everywhere would like to say that.

548
00:30:21,410 --> 00:30:22,170
Speaker 4: Do better.

549
00:30:22,790 --> 00:30:26,900
Speaker 1: Now you have your suddenly stop losing money thing. mandate

550
00:30:27,140 --> 00:30:29,820
Speaker 1: in this environment what do you do after.

551
00:30:29,680 --> 00:30:32,820
Speaker 4: That i sat down with my deputy treasurer and uh

552
00:30:32,920 --> 00:30:35,580
Speaker 4: you know talked about it and looked at it from

553
00:30:35,620 --> 00:30:38,440
Speaker 4: many different angles and you know then of course me

554
00:30:38,500 --> 00:30:41,420
Speaker 4: coming from an oil trading background i look at a

555
00:30:41,460 --> 00:30:44,460
Speaker 4: refinery and i see that they're a consumer and they're

556
00:30:44,500 --> 00:30:48,000
Speaker 4: a producer and so i said look as an airline

557
00:30:48,040 --> 00:30:51,160
Speaker 4: we have to produce something we're producing a seat for

558
00:30:51,180 --> 00:30:53,600
Speaker 4: you to sit on to get you from point a

559
00:30:53,620 --> 00:30:56,410
Speaker 4: to point b so we're producing that seat But what's

560
00:30:56,550 --> 00:30:59,310
Speaker 4: in that seat? What goes on? So we kept on

561
00:31:00,070 --> 00:31:03,890
Speaker 4: extrapolating until the point where we got the ticket. And

562
00:31:03,910 --> 00:31:07,570
Speaker 4: then in the ticket, you have your fuel surcharge. And

563
00:31:07,590 --> 00:31:12,090
Speaker 4: we ran correlations between the fuel surcharge and Brent. And

564
00:31:12,110 --> 00:31:17,690
Speaker 4: the correlations came back around 75%, which is significant. And

565
00:31:18,070 --> 00:31:24,400
Speaker 4: of course, for our hedge fund, and we buy the swap, right,

566
00:31:24,420 --> 00:31:29,900
Speaker 4: we're 88% hedged, about 88% correlated with Jet. So the

567
00:31:29,940 --> 00:31:34,280
Speaker 4: fuel surcharge is 75% correlated with Jet, and our Brent

568
00:31:34,680 --> 00:31:39,120
Speaker 4: is 87% or 85% correlated with Brent. So we use

569
00:31:39,220 --> 00:31:42,820
Speaker 4: Brent as the proxy, and in the surcharge, right, we

570
00:31:42,920 --> 00:31:45,800
Speaker 4: now knew there was a correlation there. So that we

571
00:31:45,840 --> 00:31:50,590
Speaker 4: can hedge. That is a product. That is something we sell.

572
00:31:51,690 --> 00:31:55,450
Speaker 4: So in that ticket, we have a product and we

573
00:31:55,490 --> 00:31:58,320
Speaker 4: have revenue and that's where you do revenue hedging. So

574
00:31:58,340 --> 00:32:01,860
Speaker 4: you have consumption hedging and you have revenue hedging. So

575
00:32:01,960 --> 00:32:04,680
Speaker 4: that's how we came, you know, we really extrapolate out

576
00:32:04,720 --> 00:32:07,150
Speaker 4: the curve. We, you know, we sat down for a

577
00:32:07,160 --> 00:32:09,970
Speaker 4: couple of weeks and really brainstormed and we came up

578
00:32:10,010 --> 00:32:13,230
Speaker 4: with this. And from there, we went to the revenue

579
00:32:13,270 --> 00:32:16,690
Speaker 4: management department, talked to Ankur Vandiver, who was the senior

580
00:32:16,710 --> 00:32:20,170
Speaker 4: VP at that time of revenue management and his right-hand man,

581
00:32:20,300 --> 00:32:25,740
Speaker 4: Sven Larsen. And we talked about this and even they

582
00:32:25,780 --> 00:32:29,920
Speaker 4: didn't realize, right, that they were actually, they actually were

583
00:32:30,200 --> 00:32:34,810
Speaker 4: long oil. I actually said, you know, you're long oil.

584
00:32:35,480 --> 00:32:37,690
Speaker 4: That's how you get your revenue, right? Because you've built

585
00:32:37,730 --> 00:32:38,790
Speaker 4: that long oil.

586
00:32:38,810 --> 00:32:42,870
Speaker 2: Through the surcharge, right? Yes. Wait, so the basic idea

587
00:32:42,950 --> 00:32:47,070
Speaker 2: was that because the airline was in fact long oil,

588
00:32:47,150 --> 00:32:51,280
Speaker 2: because you could charge higher prices when oil prices went up.

589
00:32:51,850 --> 00:32:57,030
Speaker 2: that you could use that to buy a certain option

590
00:32:57,150 --> 00:33:02,790
Speaker 2: strategy that would have been riskier without the extra operating revenue.

591
00:33:02,890 --> 00:33:03,650
Speaker 2: Is that what you mean?

592
00:33:04,370 --> 00:33:07,790
Speaker 4: Absolutely. All right. So what happens is now we're long

593
00:33:07,850 --> 00:33:10,830
Speaker 4: fuel on one side on the ticket. We're short fuel

594
00:33:11,110 --> 00:33:14,050
Speaker 4: because to fly the plane or to fly the aircraft,

595
00:33:14,070 --> 00:33:17,650
Speaker 4: you need jet fuel to take off. So we're short

596
00:33:17,690 --> 00:33:20,100
Speaker 4: fuel on one side, but long fuel on the other side.

597
00:33:20,660 --> 00:33:23,860
Speaker 4: So now... What do we think about? We think about

598
00:33:23,920 --> 00:33:26,820
Speaker 4: doing like a producer hitch. And that's one of the

599
00:33:26,840 --> 00:33:30,600
Speaker 4: reasons why we did the strangle where we sold calls. Now, uh,

600
00:33:30,780 --> 00:33:35,150
Speaker 4: when we sold calls, they're not naked because right. They

601
00:33:35,170 --> 00:33:40,310
Speaker 4: had the surcharge in there protecting that call. So yes,

602
00:33:40,450 --> 00:33:42,810
Speaker 4: if we got, if the calls got taken out or,

603
00:33:42,850 --> 00:33:46,820
Speaker 4: you know, they were exercised. Yes. A surcharge would take

604
00:33:46,900 --> 00:33:50,520
Speaker 4: care of that call of those calls that we sold.

605
00:33:51,310 --> 00:33:57,380
Speaker 4: So we're protected there. Now, on the downside, we've sold puts. Now,

606
00:33:58,300 --> 00:34:01,219
Speaker 4: if the oil goes down and we're selling puts, it's

607
00:34:01,260 --> 00:34:04,420
Speaker 4: good for us anyway. So yes, we'll eat some loss

608
00:34:04,560 --> 00:34:06,420
Speaker 4: on the puts, but the thing is we're going to

609
00:34:06,440 --> 00:34:09,950
Speaker 4: be buying cheaper jet because it's going down in price.

610
00:34:10,610 --> 00:34:15,770
Speaker 4: So this whole strangle or this strategy, there was no,

611
00:34:16,730 --> 00:34:19,319
Speaker 4: for lack of a better word, nudity to it. There

612
00:34:19,340 --> 00:34:23,150
Speaker 4: were no naked parts to it. And we covered all bases.

613
00:34:23,230 --> 00:34:27,250
Speaker 4: We looked only at direction, not so much. We didn't

614
00:34:27,290 --> 00:34:30,050
Speaker 4: take a view of where oil was going to go.

615
00:34:30,190 --> 00:34:33,680
Speaker 4: What we did was, right, we understood that there would

616
00:34:33,700 --> 00:34:36,540
Speaker 4: be a price mean reversion. It was holding at a

617
00:34:36,580 --> 00:34:40,020
Speaker 4: hundred bucks. It would do that for five months and

618
00:34:40,060 --> 00:34:44,359
Speaker 4: we would come away either flat, slightly losing a little

619
00:34:44,380 --> 00:34:48,550
Speaker 4: bit of money or making a decent amount. And we

620
00:34:49,230 --> 00:34:50,510
Speaker 4: kind of got lucky.

621
00:34:50,790 --> 00:34:53,630
Speaker 2: It had to stay within a certain band, right?

622
00:34:53,910 --> 00:34:54,270
Speaker 4: Correct.

623
00:34:54,430 --> 00:34:55,110
Speaker 3: Okay, okay.

624
00:34:55,390 --> 00:34:59,710
Speaker 1: So this is very interesting. I guess from the perspective

625
00:34:59,810 --> 00:35:03,910
Speaker 1: of any... You know, again, I think in our heads,

626
00:35:04,350 --> 00:35:08,090
Speaker 1: someone hears the word trader, and they think someone at

627
00:35:08,110 --> 00:35:10,570
Speaker 1: their computer trying to make money, right? And every day

628
00:35:10,590 --> 00:35:14,840
Speaker 1: you're trying to get more cash, etc. However you want

629
00:35:14,880 --> 00:35:19,219
Speaker 1: to do it. How much then... of the job of

630
00:35:19,300 --> 00:35:23,600
Speaker 1: the trader in any corporation, not the speculator, but the

631
00:35:23,640 --> 00:35:27,970
Speaker 1: someone who's using the markets for their own business needs,

632
00:35:28,590 --> 00:35:33,070
Speaker 1: how much then is the job to actually identify the

633
00:35:34,070 --> 00:35:38,089
Speaker 1: natural trade of the corporation? So what you discovered or

634
00:35:38,130 --> 00:35:41,290
Speaker 1: what you were able to clarify is that because of

635
00:35:41,350 --> 00:35:46,350
Speaker 1: the ticket charge, Qatar Airlines was structurally long-branded. So that

636
00:35:46,410 --> 00:35:50,740
Speaker 1: allowed you to create this sort of position without a view.

637
00:35:51,460 --> 00:35:54,780
Speaker 1: So how much is the job of anyone in your seat,

638
00:35:54,960 --> 00:35:57,960
Speaker 1: either today or at a different airline, or maybe even

639
00:35:58,000 --> 00:36:01,279
Speaker 1: a different company who is in a trading capacity to

640
00:36:01,340 --> 00:36:06,109
Speaker 1: truly understand the business so that they understand, you know,

641
00:36:06,250 --> 00:36:09,569
Speaker 1: what is the company's sort of, I guess, natural exposure

642
00:36:09,890 --> 00:36:12,490
Speaker 1: or natural direction to any given market?

643
00:36:13,070 --> 00:36:15,630
Speaker 4: I've only worked for an airline in a corporate sense,

644
00:36:15,790 --> 00:36:18,330
Speaker 4: so I can only talk about that. But what I

645
00:36:18,410 --> 00:36:22,390
Speaker 4: can say is that the word hedging is a bit

646
00:36:22,430 --> 00:36:23,380
Speaker 4: of a misnomer.

647
00:36:23,660 --> 00:36:23,890
Speaker 3: Okay.

648
00:36:24,219 --> 00:36:28,420
Speaker 4: It's actually a view, right? It's actually a trade. And

649
00:36:28,500 --> 00:36:30,259
Speaker 4: it's a good word that you said that, you know,

650
00:36:30,380 --> 00:36:34,799
Speaker 4: these traders in the corporate, they don't call themselves traders because, right,

651
00:36:34,980 --> 00:36:40,399
Speaker 4: that sends compliance into a fit because they believe that

652
00:36:40,680 --> 00:36:44,620
Speaker 4: hedging is is good for them. So compliance goes ballistic.

653
00:36:44,780 --> 00:36:48,040
Speaker 4: And they'll say, no, no, we're not trading. We're hedging.

654
00:36:49,100 --> 00:36:51,420
Speaker 4: So what do we hedge? We're a consumer. We have

655
00:36:51,460 --> 00:36:54,359
Speaker 4: to buy whatever we're consuming in order to lock that

656
00:36:54,420 --> 00:36:57,000
Speaker 4: price in. If we're a producer, we've got to sell

657
00:36:57,500 --> 00:37:00,640
Speaker 4: to make sure we lock in our revenue that we

658
00:37:00,660 --> 00:37:05,700
Speaker 4: made at the top. So the word trading is not

659
00:37:06,200 --> 00:37:09,279
Speaker 4: very well accepted at corporates. They don't believe in it.

660
00:37:10,120 --> 00:37:14,250
Speaker 4: And auditors don't like it either. But I think if

661
00:37:14,430 --> 00:37:18,790
Speaker 4: I can find that little bit of a tweak where

662
00:37:19,150 --> 00:37:21,610
Speaker 4: I can get something as a product and the product

663
00:37:21,690 --> 00:37:24,859
Speaker 4: is linked to the underlying risk that I have, which

664
00:37:24,880 --> 00:37:28,040
Speaker 4: is exposure to jet fuel, I'm sure in another company

665
00:37:28,380 --> 00:37:31,040
Speaker 4: you can find links like that. And then you can

666
00:37:31,080 --> 00:37:33,400
Speaker 4: put on hedges that will protect you. It's like the

667
00:37:33,460 --> 00:37:37,620
Speaker 4: food market. It's perishable. It's got to be within one day.

668
00:37:38,219 --> 00:37:40,280
Speaker 4: I'm sure that somebody's going to be able to find

669
00:37:40,400 --> 00:37:44,279
Speaker 4: out that with certain techniques they can prolong that. And

670
00:37:44,420 --> 00:37:49,080
Speaker 4: by prolonging that, now they're long vegetables. They're not short.

671
00:37:49,880 --> 00:37:51,200
Speaker 4: Something in that vein.

672
00:37:51,960 --> 00:37:53,819
Speaker 2: I just want to hear the sort of stories of

673
00:37:54,580 --> 00:37:57,540
Speaker 2: how much money you made from this particular hedge and

674
00:37:57,620 --> 00:38:04,180
Speaker 2: what happened at Qatar Airways when this was unveiled to

675
00:38:04,239 --> 00:38:04,989
Speaker 2: your management.

676
00:38:05,760 --> 00:38:08,839
Speaker 4: Okay. It was $ 130 million. And actually that year our

677
00:38:08,880 --> 00:38:13,970
Speaker 4: revenue side lost 65. So if not for my hedge,

678
00:38:15,230 --> 00:38:17,810
Speaker 4: we would have lost money. But on top of that,

679
00:38:17,950 --> 00:38:21,489
Speaker 4: because of my hedge, right. Going out the curve, we

680
00:38:21,610 --> 00:38:24,800
Speaker 4: may have lost that money at that time, but because

681
00:38:24,820 --> 00:38:27,020
Speaker 4: of that hedge and making money, I was able to

682
00:38:27,120 --> 00:38:32,460
Speaker 4: give the revenue department the ability to cut fares. So

683
00:38:33,000 --> 00:38:36,560
Speaker 4: Qatar Airways used to be a follower. They'd follow EK,

684
00:38:36,620 --> 00:38:40,410
Speaker 4: sometimes even EY, right? So EK is Emirates, EY is Etihad.

685
00:38:41,510 --> 00:38:45,629
Speaker 4: So they're always a follower. And when Emirates cut, then

686
00:38:45,670 --> 00:38:48,290
Speaker 4: they cut fares, right? When Emirates put up the fares,

687
00:38:48,550 --> 00:38:52,110
Speaker 4: they put up their fares. But I worked with Ankur

688
00:38:52,450 --> 00:38:55,940
Speaker 4: and I gave him advantage, first mover advantage, and he

689
00:38:56,000 --> 00:38:59,460
Speaker 4: took advantage of that. And he cut fares by 20%

690
00:38:59,460 --> 00:39:02,779
Speaker 4: and then we led the market, right? And sorry to say,

691
00:39:02,880 --> 00:39:05,819
Speaker 4: bums on seats. We sold. I mean, you know, we

692
00:39:05,880 --> 00:39:08,330
Speaker 4: had every plane that was nearly 80 to 90% full.

693
00:39:09,410 --> 00:39:13,009
Speaker 4: So we were able to give them that ability and

694
00:39:13,170 --> 00:39:14,930
Speaker 4: they were able to make use of it. So I

695
00:39:14,969 --> 00:39:18,650
Speaker 4: think as with anything that you do in life, you

696
00:39:18,670 --> 00:39:21,560
Speaker 4: always try to add value to that food chain.

697
00:39:37,960 --> 00:39:41,120
Speaker 2: Since you brought up the other Middle Eastern airlines, I'm

698
00:39:41,160 --> 00:39:44,040
Speaker 2: going to ask what is a potentially sensitive question, but

699
00:39:44,080 --> 00:39:47,069
Speaker 2: I'm sure a lot of people will be wondering about this.

700
00:39:47,120 --> 00:39:49,230
Speaker 2: There are many sensitive questions I could ask when it

701
00:39:49,250 --> 00:39:52,030
Speaker 2: comes to the Middle Eastern airlines, but this one in particular,

702
00:39:52,810 --> 00:39:57,410
Speaker 2: the UAE, Qatar, a lot of those regions are supposedly

703
00:39:58,270 --> 00:40:00,500
Speaker 2: not drowning in oil, but they have a lot of oil.

704
00:40:02,010 --> 00:40:06,210
Speaker 2: Why the need to source jet fuel externally in the

705
00:40:06,290 --> 00:40:12,430
Speaker 2: first place? Why couldn't, you know, these countries subsidize, subsidize?

706
00:40:12,510 --> 00:40:15,880
Speaker 2: I'm using air quotes here for those watching on video.

707
00:40:16,219 --> 00:40:18,520
Speaker 2: Why couldn't they subsidize their airlines with, I don't know,

708
00:40:18,580 --> 00:40:23,820
Speaker 2: exchanging Brent with a refinery down in wherever for a

709
00:40:23,860 --> 00:40:25,600
Speaker 2: lower price jet fuel for their airlines?

710
00:40:26,300 --> 00:40:29,779
Speaker 4: I think with the airline industry, because you have a hub.

711
00:40:30,989 --> 00:40:33,669
Speaker 4: And then you have your spokes, right? So you fly

712
00:40:33,690 --> 00:40:37,920
Speaker 4: all over the world, but everybody flies through the Middle East. Now,

713
00:40:38,719 --> 00:40:42,299
Speaker 4: we can only take so much jet fuel on one

714
00:40:42,400 --> 00:40:44,980
Speaker 4: aircraft and we go long haul. We've got to fill

715
00:40:45,020 --> 00:40:48,029
Speaker 4: up on the other side. So, I mean, it's the

716
00:40:48,070 --> 00:40:52,029
Speaker 4: other side who basically commands the price. So it's not us, right?

717
00:40:52,150 --> 00:40:52,450
Speaker 2: I see.

718
00:40:52,489 --> 00:40:57,050
Speaker 4: So, yes, I mean, you know, with Qatar Petroleum, right? Okay, just...

719
00:40:57,730 --> 00:41:01,390
Speaker 4: It's not the most pleasant of experiences dealing with QP

720
00:41:01,730 --> 00:41:07,819
Speaker 4: because they had a subsidiary named Wokod, W-O-K-Q-O-D, Wokod. And

721
00:41:07,840 --> 00:41:11,880
Speaker 4: they used to sell us jet fuel at 3.65 a gallon.

722
00:41:13,239 --> 00:41:18,040
Speaker 4: And when we fly to Dubai and lift jet from Dubai,

723
00:41:18,530 --> 00:41:23,290
Speaker 4: Chevron's selling it at 295 a gallon. So we were

724
00:41:23,310 --> 00:41:28,640
Speaker 4: getting screwed 70% by our own national petroleum company.

725
00:41:29,239 --> 00:41:29,820
Speaker 2: That's amazing.

726
00:41:29,880 --> 00:41:34,660
Speaker 4: So, you know, when we took delivery of the 787s,

727
00:41:34,680 --> 00:41:39,759
Speaker 4: the Dreamliners, we told the world that we were using

728
00:41:39,800 --> 00:41:43,390
Speaker 4: them for training by going to Dubai and back, right,

729
00:41:43,410 --> 00:41:45,450
Speaker 4: to train the crew. But actually we were going there.

730
00:41:45,950 --> 00:41:49,469
Speaker 4: Literally we flew there on fumes, probably like, you know,

731
00:41:49,530 --> 00:41:54,569
Speaker 4: we had like, Five tons or less, maybe four, three

732
00:41:54,590 --> 00:41:57,670
Speaker 4: or four. We're flying there on fumes and literally we

733
00:41:57,830 --> 00:42:02,600
Speaker 4: cannot circle Dubai airport once. We have to land straight away.

734
00:42:03,540 --> 00:42:06,440
Speaker 4: And when we land, we can lift a hundred tons

735
00:42:06,500 --> 00:42:06,819
Speaker 4: of fuel.

736
00:42:07,300 --> 00:42:09,299
Speaker 2: You were tankering fuel from Dubai.

737
00:42:09,719 --> 00:42:13,060
Speaker 4: Yes. Yes. And we were putting it in our own

738
00:42:13,160 --> 00:42:18,600
Speaker 4: tanks at Doha international airport. And we had about storage

739
00:42:18,640 --> 00:42:22,600
Speaker 4: capacity of about 9, 10 million gallons. So, you know,

740
00:42:22,739 --> 00:42:25,620
Speaker 4: that's pretty decent. It will be a day's cover for

741
00:42:25,640 --> 00:42:28,259
Speaker 4: the airline should we not get any jet fuel from

742
00:42:28,320 --> 00:42:31,359
Speaker 4: anywhere else. We can still fly for a day.

743
00:42:31,950 --> 00:42:32,469
Speaker 3: Interesting.

744
00:42:33,050 --> 00:42:36,370
Speaker 1: Give us your sense right now. The people who are

745
00:42:36,469 --> 00:42:39,790
Speaker 1: in your seat or equivalent seats elsewhere in the industry,

746
00:42:40,330 --> 00:42:43,750
Speaker 1: give us an update of what they're dealing with right now,

747
00:42:43,870 --> 00:42:47,270
Speaker 1: September 29th. between the ticker revenue side, which I assume

748
00:42:47,310 --> 00:42:49,850
Speaker 1: is booming, and then the price of, you know, the

749
00:42:49,890 --> 00:42:51,870
Speaker 1: surging price of oil and refined products?

750
00:42:52,950 --> 00:42:56,750
Speaker 4: I think with respect to airlines or respect to.

751
00:42:57,010 --> 00:42:58,330
Speaker 3: Yeah, with respect to airlines.

752
00:42:58,710 --> 00:43:01,489
Speaker 1: What is the, what is the, how are they doing

753
00:43:01,570 --> 00:43:03,020
Speaker 1: on the sort of fuel side these days?

754
00:43:03,620 --> 00:43:08,500
Speaker 4: I think they're very wary of the consumption hedging, and

755
00:43:08,520 --> 00:43:11,700
Speaker 4: they're mainly passing it through to the customer right now

756
00:43:12,300 --> 00:43:15,399
Speaker 4: because they don't know what to do. Because, you know,

757
00:43:15,940 --> 00:43:18,979
Speaker 4: a lot of airlines in 2020 lost a lot of money.

758
00:43:20,260 --> 00:43:23,640
Speaker 4: Fuel hedging. Delta dropped over $ 1 billion. Let's just say

759
00:43:23,900 --> 00:43:32,590
Speaker 4: a very highly ranked Asian airline basically lost nearly $ 2 billion. And, yeah, so,

760
00:43:32,650 --> 00:43:37,290
Speaker 4: you know, it's not easy to work or to see

761
00:43:37,370 --> 00:43:40,550
Speaker 4: what the geopolitics are bringing you. But what you can

762
00:43:40,610 --> 00:43:42,379
Speaker 4: do is look, right? At the end of the day,

763
00:43:42,530 --> 00:43:45,379
Speaker 4: it's a pass-through to the customer. So you use your

764
00:43:45,420 --> 00:43:50,690
Speaker 4: ticket as your weapon of choice. And that's pretty much

765
00:43:50,730 --> 00:43:53,810
Speaker 4: what I did as well. This pricing mechanism that I

766
00:43:54,930 --> 00:43:58,890
Speaker 4: kind of thought up, I basically weaponized the revenue.

767
00:43:59,570 --> 00:44:02,740
Speaker 2: Has anyone else used that structure since?

768
00:44:03,300 --> 00:44:05,759
Speaker 4: You know something? I have no idea. But I was

769
00:44:05,820 --> 00:44:12,700
Speaker 4: going to attend a treasury conference in Singapore to talk

770
00:44:12,760 --> 00:44:16,830
Speaker 4: about what I had done And my CEO said, no, go,

771
00:44:16,870 --> 00:44:20,650
Speaker 4: you're not talking at that treasury conference, right? Because we

772
00:44:20,690 --> 00:44:24,560
Speaker 4: do not want to give our secrets away because nobody

773
00:44:24,620 --> 00:44:27,100
Speaker 4: else is doing it. And one of the reasons why

774
00:44:27,140 --> 00:44:30,040
Speaker 4: they're not doing it is because, again, it's the auditors,

775
00:44:30,960 --> 00:44:34,140
Speaker 4: it's the sovereign wealth funds that probably own some of

776
00:44:34,160 --> 00:44:37,650
Speaker 4: the airlines that are not, they don't feel it's kosher

777
00:44:38,210 --> 00:44:42,310
Speaker 4: to sell oil because you're a consumer. I think it's

778
00:44:42,350 --> 00:44:45,120
Speaker 4: a lack of understanding. for most people and a lack

779
00:44:45,140 --> 00:44:48,239
Speaker 4: of understanding for most treasurers in their roles there that

780
00:44:48,380 --> 00:44:52,339
Speaker 4: they cannot think like a horse with blinders. They cannot

781
00:44:52,410 --> 00:44:57,230
Speaker 4: only see that basically by hedging the airline and keeping

782
00:44:57,290 --> 00:45:01,669
Speaker 4: it safe, all you see is buying fuel. There's other

783
00:45:01,810 --> 00:45:03,790
Speaker 4: aspects of the airline as well. And you've got to

784
00:45:03,830 --> 00:45:06,300
Speaker 4: take all that into account and then cook up a

785
00:45:06,320 --> 00:45:11,520
Speaker 4: strategy of your own and create something so that you

786
00:45:11,540 --> 00:45:12,500
Speaker 4: can benefit from it.

787
00:45:13,050 --> 00:45:16,969
Speaker 1: So I realize that this isn't strictly an airline question

788
00:45:17,030 --> 00:45:19,870
Speaker 1: right now, but it's in the news. It is a

789
00:45:19,910 --> 00:45:24,219
Speaker 1: refined products topic. There's all this talk and it could happen,

790
00:45:24,239 --> 00:45:27,100
Speaker 1: this idea of, you know, we have this diesel crisis

791
00:45:27,160 --> 00:45:31,899
Speaker 1: in the United States. Diesel prices are surging. It's possible

792
00:45:32,280 --> 00:45:36,310
Speaker 1: that the U.S. is going to implement a ban on

793
00:45:36,370 --> 00:45:39,629
Speaker 1: diesel exports. When you hear this, what do you think about?

794
00:45:40,520 --> 00:45:42,660
Speaker 4: Okay, maybe it's not right for me to say this,

795
00:45:42,739 --> 00:45:45,300
Speaker 4: but I think of taco. You know, trumpled chicken.

796
00:45:45,380 --> 00:45:47,560
Speaker 3: Yeah, yeah, yeah.

797
00:45:47,580 --> 00:45:51,950
Speaker 1: But specifically on this question of whether a country will

798
00:45:51,989 --> 00:45:55,350
Speaker 1: ban the export of a refined product and how it

799
00:45:55,410 --> 00:45:56,370
Speaker 1: ripples through markets.

800
00:45:56,750 --> 00:46:00,589
Speaker 4: Well, Russia's done that, and China's done that somewhat, all right?

801
00:46:00,690 --> 00:46:03,710
Speaker 4: But Russia's the second biggest diesel exporter on the planet.

802
00:46:04,450 --> 00:46:06,989
Speaker 4: So a lot of diesel has been taken out of

803
00:46:07,010 --> 00:46:11,820
Speaker 4: the whole complex. And honestly, right now, Europe's pretty short,

804
00:46:12,480 --> 00:46:15,020
Speaker 4: and that's one of the reasons why London Gas Hall

805
00:46:15,060 --> 00:46:19,120
Speaker 4: has just gone through the roof. Also, this export ban,

806
00:46:19,140 --> 00:46:22,680
Speaker 4: a lot of it was rhetoric. So because of that rhetoric,

807
00:46:22,700 --> 00:46:26,960
Speaker 4: you had diesel or heating oil in the U.S. come

808
00:46:27,000 --> 00:46:31,260
Speaker 4: down instead of go up. Because a lot of the

809
00:46:31,300 --> 00:46:35,450
Speaker 4: Gulf or Pad 3 in the United States is the kitchen.

810
00:46:35,730 --> 00:46:38,650
Speaker 4: That's where all the refineries are. And so that's where

811
00:46:38,670 --> 00:46:42,460
Speaker 4: all the product comes out of. New York Harbor, right, it's,

812
00:46:42,980 --> 00:46:45,920
Speaker 4: you know, they don't have any access. They maybe have

813
00:46:45,940 --> 00:46:48,980
Speaker 4: a small pipeline, but that's about it. For them, it's

814
00:46:49,020 --> 00:46:52,940
Speaker 4: a seaborne trade for the Gulf to sell internally, right,

815
00:46:53,000 --> 00:46:56,560
Speaker 4: to New York for their jet fuel or their diesel

816
00:46:56,680 --> 00:47:00,660
Speaker 4: or their heating oil. So a lot of times what

817
00:47:00,680 --> 00:47:04,529
Speaker 4: the East Coast does is they buy diesel from Europe.

818
00:47:05,680 --> 00:47:09,060
Speaker 4: in order to make sure that they don't have, you know,

819
00:47:09,200 --> 00:47:14,339
Speaker 4: a shortage at any one time. And so it now

820
00:47:14,620 --> 00:47:17,100
Speaker 4: adds the point, right, that you've got the East Coast

821
00:47:17,140 --> 00:47:20,910
Speaker 4: of the United States buying diesel and London Gas, all

822
00:47:20,930 --> 00:47:23,310
Speaker 4: of course, is benefiting from that and heating oil is

823
00:47:23,330 --> 00:47:26,870
Speaker 4: now taking a hit. And most of the heating oil, right,

824
00:47:26,910 --> 00:47:31,339
Speaker 4: is going to Latin America anyway. So not very much

825
00:47:31,420 --> 00:47:34,120
Speaker 4: is going to Europe, probably like 500,000 barrels per day.

826
00:47:34,180 --> 00:47:37,239
Speaker 4: It's going to the ARA, 100,000 barrels a day to

827
00:47:37,260 --> 00:47:41,070
Speaker 4: the UK and maybe 150,000 to the rest. Oh, sorry.

828
00:47:41,110 --> 00:47:44,950
Speaker 4: ARA is Europe. So yeah, it's not, it's not super

829
00:47:44,989 --> 00:47:50,210
Speaker 4: significant from the Gulf, but I think there's a US

830
00:47:50,750 --> 00:47:54,489
Speaker 4: Gulf coast trade where, you know, they'll run an AfriMax

831
00:47:54,590 --> 00:47:58,710
Speaker 4: or they'll run a, you know, long range two or

832
00:47:58,750 --> 00:48:03,489
Speaker 4: maybe even a Panamax through the Panama Canal and they'll

833
00:48:03,530 --> 00:48:09,710
Speaker 4: transport that product to Asia. So it's going from the U.S.

834
00:48:09,750 --> 00:48:13,150
Speaker 4: Gulf Coast to Chubu in Tokyo or in Japan.

835
00:48:13,510 --> 00:48:16,950
Speaker 2: Can't wait to heat my house in Connecticut this winter.

836
00:48:17,690 --> 00:48:21,050
Speaker 2: David King, thank you so much for coming on OddLots.

837
00:48:21,469 --> 00:48:25,020
Speaker 2: I should mention the paper if anyone wants further details.

838
00:48:25,120 --> 00:48:28,750
Speaker 2: It's available on SSRN. It is Fuel hedging in the

839
00:48:28,890 --> 00:48:33,530
Speaker 2: 21st century, what every airline can learn about proactively shaping revenue.

840
00:48:33,890 --> 00:48:34,850
Speaker 2: Thanks so much, David.

841
00:48:34,880 --> 00:48:38,320
Speaker 4: Thank you very much for having me. I appreciate it.

842
00:48:49,960 --> 00:48:52,540
Speaker 2: Joe, I'm so glad we finally got someone to talk

843
00:48:52,739 --> 00:48:55,600
Speaker 2: about fuel hedging in detail. I have to say, the

844
00:48:55,660 --> 00:49:00,080
Speaker 2: story about Qatar Airways tankering oil from Dubai back to

845
00:49:00,120 --> 00:49:05,940
Speaker 2: Doha is one of my now all-time favorite airline fuel stories.

846
00:49:06,100 --> 00:49:09,820
Speaker 2: My top story, I've told this on the podcast before,

847
00:49:09,860 --> 00:49:12,700
Speaker 2: but I think it's been years, was when Silverjet, the

848
00:49:13,000 --> 00:49:17,700
Speaker 2: business class only carrier, sort of luxury airline carrier, when

849
00:49:17,739 --> 00:49:21,620
Speaker 2: they were about to go out of business. their creditors

850
00:49:21,820 --> 00:49:24,610
Speaker 2: cut credit lines for fuel spending. And so the CEO

851
00:49:24,670 --> 00:49:27,810
Speaker 2: of the company was putting the entire fuel bill on

852
00:49:27,870 --> 00:49:31,030
Speaker 2: his personal credit card. You hear about stories like this.

853
00:49:31,090 --> 00:49:35,130
Speaker 2: The personal credit card. the rewards points were for British

854
00:49:35,190 --> 00:49:39,110
Speaker 2: Airways miles. So he ended up with a bunch of

855
00:49:39,190 --> 00:49:40,250
Speaker 2: BA miles.

856
00:49:40,430 --> 00:49:41,210
Speaker 4: That's amazing.

857
00:49:41,469 --> 00:49:42,590
Speaker 3: That's great.

858
00:49:43,160 --> 00:49:46,620
Speaker 1: FedEx got its start too with a bunch of like

859
00:49:46,800 --> 00:49:48,700
Speaker 1: the founder putting a bunch of the debt on his

860
00:49:48,760 --> 00:49:51,920
Speaker 1: personal credit card. It's pretty wild.

861
00:49:51,760 --> 00:49:52,180
Speaker 3: To think about.

862
00:49:52,420 --> 00:49:53,060
Speaker 2: I thought that was great.

863
00:49:53,140 --> 00:49:56,920
Speaker 1: I think the really interesting thing from that episode to

864
00:49:56,980 --> 00:50:00,759
Speaker 1: me was I know, I guess it's interesting, and I'm

865
00:50:00,780 --> 00:50:03,610
Speaker 1: not surprised. They don't like the term traders in the

866
00:50:03,640 --> 00:50:05,350
Speaker 1: corporate context, but that's what they are.

867
00:50:05,370 --> 00:50:07,290
Speaker 2: Right, you have to have a directional view.

868
00:50:07,310 --> 00:50:09,609
Speaker 1: Selling calls and buying puts and all this stuff. But

869
00:50:09,650 --> 00:50:13,350
Speaker 1: the idea is, again, like, you know, a trader in

870
00:50:13,390 --> 00:50:16,870
Speaker 1: the typical environment is just seeking to max out P & L.

871
00:50:17,010 --> 00:50:19,509
Speaker 1: And this idea that it's like, you don't have to

872
00:50:19,550 --> 00:50:23,710
Speaker 1: take a directional view if you really understand the core

873
00:50:23,730 --> 00:50:27,430
Speaker 1: idea I guess, structural position of the company already on

874
00:50:27,450 --> 00:50:30,569
Speaker 1: the market. And the job is to balance that out.

875
00:50:30,910 --> 00:50:34,370
Speaker 1: And you can understand how complex it gets because, you know,

876
00:50:34,410 --> 00:50:37,529
Speaker 1: this idea that like, OK, the revenue could go up

877
00:50:37,989 --> 00:50:41,960
Speaker 1: during times of higher oil prices, figuring out that sensitivity,

878
00:50:42,000 --> 00:50:44,420
Speaker 1: how much you can pass through. You think of like

879
00:50:44,780 --> 00:50:47,160
Speaker 1: an airline, of course, they're short oil, right? Of course,

880
00:50:47,180 --> 00:50:50,739
Speaker 1: they're implicitly short oil. And that in certain environments, they

881
00:50:50,760 --> 00:50:53,000
Speaker 1: could actually be implicitly long oil. And you have to

882
00:50:53,040 --> 00:50:56,600
Speaker 1: really identify that exposure. I think that's really interesting. No, totally.

883
00:50:56,660 --> 00:51:00,020
Speaker 2: I think this is an underappreciated aspect of the airline business,

884
00:51:00,080 --> 00:51:03,219
Speaker 2: which is there is that other lever to pull. And

885
00:51:03,280 --> 00:51:05,900
Speaker 2: it's sort of it reminds me of the bakery episode.

886
00:51:06,080 --> 00:51:06,520
Speaker 3: Yeah.

887
00:51:06,560 --> 00:51:09,049
Speaker 2: Remember where we were talking about how a baker in

888
00:51:09,090 --> 00:51:12,950
Speaker 2: Chicago increases his prices when the cost of eggs goes

889
00:51:13,070 --> 00:51:15,009
Speaker 2: up because everyone sees it in the news. There's a

890
00:51:15,050 --> 00:51:18,790
Speaker 2: lot of elasticity, I guess, baked in. to prices for

891
00:51:18,890 --> 00:51:22,450
Speaker 2: airfares when you're having a big oil shock. But on

892
00:51:22,469 --> 00:51:26,230
Speaker 2: the other hand, if we, you know, evolve into actual

893
00:51:26,310 --> 00:51:30,339
Speaker 2: physical shortages, which is a possibility, I guess we'll see

894
00:51:30,380 --> 00:51:31,140
Speaker 2: what happens then.

895
00:51:31,380 --> 00:51:34,020
Speaker 1: When I just right now think about the airline industry

896
00:51:34,080 --> 00:51:37,899
Speaker 1: seems to encapsulate so many things with the economy right now,

897
00:51:38,080 --> 00:51:41,120
Speaker 1: which is that like the cost of everything is going up.

898
00:51:42,380 --> 00:51:44,819
Speaker 1: And also people are flying like crazy. I mean, the

899
00:51:44,860 --> 00:51:47,880
Speaker 1: numbers are really huge. And so it's like, At least

900
00:51:47,940 --> 00:51:50,420
Speaker 1: if we were to only look at the airline industry,

901
00:51:50,440 --> 00:51:53,940
Speaker 1: we're like, the global economy, the.

902
00:51:53,400 --> 00:51:54,200
Speaker 3: Economy is hot.

903
00:51:54,640 --> 00:51:59,180
Speaker 1: People look at these sticker prices. They complain about how

904
00:51:59,320 --> 00:52:03,420
Speaker 1: they know prices are going up, and yet total travel

905
00:52:03,520 --> 00:52:04,319
Speaker 1: just keeps going up.

906
00:52:04,440 --> 00:52:07,520
Speaker 3: It does not seem to have dented activity at all.

907
00:52:07,600 --> 00:52:08,580
Speaker 3: This is a hot economy.

908
00:52:09,000 --> 00:52:09,880
Speaker 2: All right, shall we leave it there?

909
00:52:09,940 --> 00:52:10,520
Speaker 3: Let's leave it there.

910
00:52:10,860 --> 00:52:13,180
Speaker 2: This has been another episode of the All Thoughts Podcast.

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00:52:13,300 --> 00:52:15,910
Speaker 2: I'm Traci Allaway. You can follow me at Traci Allaway.

912
00:52:16,170 --> 00:52:18,890
Speaker 1: And I'm Joe Wiesenthal. You can follow me at The Stalwart.

913
00:52:19,230 --> 00:52:22,750
Speaker 1: Follow our producers, Carmen Rodriguez at Carmen Irma, Dashiell Bennett

914
00:52:22,870 --> 00:52:26,509
Speaker 1: at Dashbot, Cale Brooks at Cale Brooks, and Kevin Lozano

915
00:52:26,690 --> 00:52:29,779
Speaker 1: at Kevin Lloyd Lozano. And for more OddLots content, go

916
00:52:29,800 --> 00:52:33,120
Speaker 1: to Bloomberg.com slash OddLots. We have a daily newsletter and

917
00:52:33,280 --> 00:52:35,440
Speaker 1: all of our episodes. And you can share about all

918
00:52:35,500 --> 00:52:40,070
Speaker 1: these topics 24-7 in our Discord, Discord.gg slash OddLots.

919
00:52:40,310 --> 00:52:42,529
Speaker 2: And if you enjoyed this conversation, if you want Joe

920
00:52:42,570 --> 00:52:44,810
Speaker 2: and I to do more episodes on the airlines, then

921
00:52:44,890 --> 00:52:48,040
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922
00:52:48,460 --> 00:52:50,900
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923
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924
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925
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