Crybaby Airlines

Phil Hodgen is an international tax lawyer who also Twitters.  So I’m not the only one who has an insatiable desire to talk, all the time, to whomever will listen, to strangers, while out walking the dog or, as Phil has done this week, while climbing in the Alps…  

Phil are you a Gemini too?
Phil was Twittering from Zurich and Murren this week and mentioned this email he received from United Airlines.  I thought it was kind of comical to see the big airlines also complaining about the big, mean speculators.  Although high oil prices are killing them I’m sure, it’s always
something with them. You would think they would have gotten their act together after 9/11. They know what major contraction in demand means. Now they’re seeing major costs. They can’t seem to handle pressure from either side.
I guess United Airlines forgot too that they’re from Chicago, the home of the largest and most successful financial and agricultural futures markets in the world.  Oh yeah, oil is traded in New York.  Maybe there are really bogeymen out there after all.  
And they have a New York accent. Or maybe a British one.
As Phil said, “If they–the airlines–were smart investors and were convinced prices were pushed up by speculation they would do a short squeeze, wouldn’t they? Buy a short position then try rumors and government pressure to manipulate prices down……

Wait a minute….”

An Open letter to All Airline Customers:
Our country is facing a possible sharp economic downturn
because of skyrocketing oil and fuel prices, but by
pulling together, we can all do something to help now.

For airlines, ultra-expensive fuel means thousands of
lost jobs and severe reductions in air service to both
large and small communities. To the broader economy, oil
prices mean slower activity and widespread economic pain.
This pain can be alleviated, and that is why we are taking
the extraordinary step of writing this joint letter to our
customers. Since high oil prices are partly a response to
normal market forces, the nation needs to focus on
increased energy supplies and conservation. However,
there is another side to this story because normal market
forces are being dangerously amplified by poorly
regulated market speculation.

Twenty years ago, 21 percent of oil contracts were
purchased by speculators who trade oil on paper with
no intention of ever taking delivery. Today, oil
speculators purchase 66 percent of all oil futures
contracts, and that reflects just the transactions that
are known. Speculators buy up large amounts of oil and
then sell it to each other again and again. A barrel of
oil may trade 20-plus times before it is delivered and
used; the price goes up with each trade and consumers
pick up the final tab. Some market experts estimate
that current prices reflect as much as $30 to $60 per
barrel in unnecessary speculative costs.

Over seventy years ago, Congress established regulations
to control excessive, largely unchecked market
speculation and manipulation. However, over the past
two decades, these regulatory limits have been weakened
or removed. We believe that restoring and enforcing
these limits, along with several other modest measures,
will provide more disclosure, transparency and sound
market oversight. Together, these reforms will help
cool the over-heated oil market and permit the
economy to prosper.

The nation needs to pull together to reform the oil
markets and solve this growing problem.

We need your help. Get more information and contact
Congress by visiting

6 replies
  1. Chicago Accountant
    Chicago Accountant says:

    “If they–the airlines–were smart investors and were convinced prices were pushed up by speculation they would do a short squeeze, wouldn’t they? Buy a short position then try rumors and government pressure to manipulate prices down……

    Wait a minute….”

    He wants the airlines to double down on their position? Their operations already make them short. Risky move, very risky.

  2. Francine McKenna
    Francine McKenna says:

    @Chicago Accountant I think he means to short oil. Their operations make them long oil, no? Or are you thinking abut this another way?

  3. Chicago Accountant
    Chicago Accountant says:

    Maybe I am thinking a different way and maybe I am wrong. Here goes:

    Some airlines will take long positions in a basket of petroleum based commodities. You can’t buy a call option for jet fuel. You have to buy call options/futures/forwards for oil and other traded fuels and make the basket of these long positions to hedge your exposure. It’s all done with regressions and correlations.

    Going long means you profit when the price goes up. Going short means you profit when the price goes down. Airlines already profit when the price goes down (margins go up). Going short with derivatives just doubles exposure.

    Am I right or wrong?

  4. Chicago Accountant
    Chicago Accountant says:

    And to clarify, you don’t buy a future or forward. Those are costless. That might have been confusing when I lumped the two with buying an option.

  5. Francine McKenna
    Francine McKenna says:

    I think he was thinking that shorting whatever the synthetic hedge would be could help drive the price down, so they win both ways. Hedging their long position of buying so much fuel and forcing the price down for future purchases.

  6. Chicago Accountant
    Chicago Accountant says:

    I see, the object is to try to drive prices down. That could work but there are two inherent assumptions.

    First, you assume that speculators are in fact overly driving prices up, which is disputed. I think speculators are playing a role, but I’m not sure how large. It’s all conjecture on my part. What do I really know about the commodities market?

    Second, you assume you can dump enough capital into short positions that you bring down the underlying price. If you could, it would take a lot of capital. I mean, it would take a lot of capital. What you are really trying to do is “spook” the oil market. You make speculators think, “all of these people are betting the price will fall, what do they know that I don’t”. That is the thinking at least.

    What happens if you fail and the price goes up and you’re stuck with all of these shorts? The downside is theoretically infinite.

    A short position would be, for example, a future with the obligation to sell oil at $130. What happens if it goes to $150 or $160? The sky is the limit for losses. The profit on the other hand is capped at $130. On top of that, you still need to buy oil products at the new, very high prices.

    There is no hedge if an airline goes short in oil unless my understanding of shorts and longs is switched.

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