In a story on Money Magazine’s website HERE, we find out that airlines wouldn’t mind seeing more regulation. 

 More regulation of derivatives trading in the oil markets that is.  Most airlines buy and sell futures in the markets to offset the costs of their fuel.  That is, in order to stabilize their costs in fuel, they trade in fuel futures to make their costs more predictable.   For more info, you can read these posts HERE and HERE. 

 One thing that has hurt airlines over the past 3 years is how volatile the oil markets have been.  Wild swings in prices have occured because traders are “betting” on the prices being really high or really low.  Because the capital in the markets has few places to be used right now, that capital is attracted to things that are more “sure bets” like oil.  The truth is, oil will not collapse like mortgage derivatives did.   There has been more and more speculation in oil because there are fewer and fewer places to speculate.

 Airlines have resented this because it made what was a very sensible thing for them to do a very volatile thing for them to do.  It’s brought less control to their equation now.   And they would like to see that changed with a bit more regulation involved in the trading of derivatives. 

 Trading in derivatives is a complex business that very few people can engage in reliably.  Lots of people think they get it and they really don’t.  I have a degree in economics and finance and the most I would profess to knowing is the basic structure of that kind of trading.  Airlines have pretty good traders but they don’t trade in oil or jet fuel.  They trade in derivatives based on fuel oil which tracks closely to the pump price of jet fuel. 

 What can they do?  They can either find another commodity to hedge with that tracks closely to the price of their fuel in a stable manner or they can wait for capital to seek profits elsewhere.  The latter is probably not going to happen for some time. 

 Should there be better regulation in derivatives trading?  Yes, there certainly should be more transparency in the transactions.  People are now trading in the oil markets to simply make money rather than ever take delivery of an oil future.  We don’t know their needs, liquidity or who they’re answerable to when these trades are going on.  It would probably be more appropriate for this to be more exposed in the marketplace.  Why?  Because people won’t take “bets” from sketchy or insolvent entities.  Just like a bookie won’t take a bet from someone who doesn’t have the cash to back it up.

Filed under: Airline News by ajax