US low-cost airlines seek temporary tax relief to address soaring fuel costs
Posted by graveyardofgoodsense@reddit | aviation | View on Reddit | 37 comments
kacheow@reddit
I’m ok with doing whatever it takes to keep Spirit customers on Spirit flights instead of mine
us1549@reddit
Are they asking for the gov to waive the PFC fee or they want to keep the PFC fee they collect?
gamehenge_survivor@reddit
Both. The government will waive the tax but the airline won’t reduce the price. So I believe that works to $13-$18 per passenger.
ABoutDeSouffle@reddit
Yes and no. The airline has to pay more for fuel, so they either use the tax break to offset those costs or they have to raise ticket prices. OFC they could try to pocket the money and still raise prices, but they are in a very competitive environment and that probably isn't going to work unless they all do.
CowboyLaw@reddit
Another example of “privatize profits, subsidize losses.” It used to be that airlines hedged their fuel costs. Recently, a lot of them stopped doing that. Because, you know, they’re much smarter than all of us (and all of their predecessors). Plus, the CEO needs to add another nickel to the quarterly profits so he can qualify for his options package. Then, oil prices rise. Who could possibly have foreseen that?!? And so now, you’re screwed. Better go to the Bank of Americans and cover your losses with some sweet taxpayer dollars.
inimicali@reddit
Sorry but what do you mean by hedged fuel cost?
lukenamop@reddit
Essentially, place bets on the stock market that fuel price would go up - if it did, they would get extra money from their bets which they could use to pay for fuel. If it didn’t, they would spend less on fuel anyway.
CowboyLaw@reddit
The one quibble I have with your otherwise good explanation is that you're treating the hedge cost as though it's co-equivalent with the functional cost of the underlying commodity (gasoline, in this case). That would almost never be the case. The cost of the options for the airline would almost always be WAY less than the actual cost of purchasing gas, because that's how unexercised OOTM options work. The airline would be buying OOTM (out of the money) gas contracts for a pretty small face value (per option, obviously if you're buying thousands of options, the overall cost goes up accordingly). If the cost of gas stays steady or declines, the airline lets the options expire, and their only loss is the face value (again, pretty small, relatively speaking). If the cost of gas rises enough to put the options in the money, then the airline sells the options and uses the profits on the options to offset (usually only in part, but occasionally in large part) the higher cost of gas.
To illustrate with a parallel example from right now. Apple is currently selling for $273/share. Let's say I'm worried about Apple's share price going up (like an airline would be worried about gas prices going up), so I want to buy some options that will protect me if Apple's stock price soars. I can buy an options contract (for the right to purchase 100 shares of Apple) that will expire on July 17, 2026 (88 days from now), and if I want an Apple strike price of $290/share (which is OOTM now, but will be IN the money at $291/share), I'll pay $7.55/option (or, since they're sold in contracts of 100, I'll pay $755). But you can see that my options purchase price ($755) isn't the same as the price of the underlying fluctuation I'm hedging (100 shares @ $17 of price increase = $1700 in value IF the options come into the money). And since hedging at a commercial level would mean buying THOUSANDS of these options, the total gap between the options purchase price would be HUGE.
Take this knowledge, go over the r/wallstreetbets, and laugh at people. It's a nice diversion.
I_am_Mun_C@reddit
Some fuel hedge contracts are like options, but many are not. Vanilla call options actually aren’t typically used in the airline industry, and if an airline opts to use options, it’s usually some form of Collar type deal where there is simultaneous buying and selling of calls/puts.
Swaps are more common. Fuel swaps are private binding contracts that say something like “For the next 2 years we agree to pay you $90/barrel No Matter What.”
If fuel goes to $120, the airline still gets to buy at $90. If the price crashes to $55, they cannot get out of their obligation to purchase their fuel at $90. Considering fuel is a consumable that the business cannot operate without, there’s no way to simply let the contract expire worthless. The company must fulfill their obligation and eat the losses.
inimicali@reddit
Thank you, I googled it but I always like to have a human answer since many times it's explained a lot better or has more information.
icancounttopotatos@reddit
You sign contracts with fuel suppliers to purchase at a certain price for a length of time in the future. Protects you from price spikes but obviously isn’t ideal when fuel prices drop
imapilotaz@reddit
They work until they dont. Theres serious real world cost to hedge fuel. Tens to hundreds of millions depending on size of airline.
And its all fine and dandy until your hedges go upside down.
Southwest famously saved billions in the 2000s to early 2010s hedging.
They were much less public on the billions they lost on upside down hedges after that a decided to upside didnt offset the cost + risk.
maple_syrup777@reddit
European majors still have treasury teams that hedge. A lot of talk recently with Lufthansa hedging in oil instruments but jet fuel sky rocketed comparably, so they “lost” a billion 😂
I wonder if a quant firm could specialize in “delta hedging airline profits” and take them on as clients lol. Airlines pass on the specialty to real players.
inimicali@reddit
Thank you, I googled it but I always like to have a human answer since many times it's explained a lot better or has more information.
PerfectPercentage69@reddit
Just like traders hedge stock prices with options and other derivatives, airlines used to do that with fuel prices. Of course, the downside to hedging against wild swing in prices is that it ends up costing you more.
inimicali@reddit
What I understood is that, to say it simple, they're paying a premium to keep the gas prices stable which helps them with ticket cost or like when there's a spike in prices like now, isn't it?
PerfectPercentage69@reddit
Pretty much.
For example , they buy derivatives which bet that price of fuel will go above a certain level. If the price does, then they get a return on those derivatives which cover the cost of actual fuel being above that level.
However, if the price doesn't go above that, then they've lost money to the derivatives traders who bet that the price won't rise that high. It acts like insurance.
mduell@reddit
Recently? More like a decade ago after they had big losses on the hedges following the post-2008 drama.
DamnGoodDownDog@reddit
Nononono no more tax subsidies for fucks sake
angelic_sun@reddit
chances spirit is still around in the near future atp?
OptimusSublime@reddit
Zero. They'll get merged with someone else
RespectedPath@reddit
They got too much baggage. They won't merge. They will liquidate.
Sauniche@reddit
This, no one wants those pratt engines and the cost to refit the single class cabins into something useable for anyone else isn't insignificant.
angelic_sun@reddit
thought so, just hope the staff are doing alright
UNDR08@reddit
Doubtful
TimberBiscuits@reddit
Cool where is my temporary tax relief?
broberds@reddit
Take the money out of executive pay maybe?
mduell@reddit
Zeroing out exec pay would provide them with a tiny fraction of their increased fuel bill.
cordialcatenary@reddit
Maybe the should go and claw back the 8 million a year in total compensation they gave the previous CEO while the company burned cash like there was no tomorrow for 4 years.
ConfoundedHokie@reddit
Next time we bailout airlines, we need to add stipulations. Larger seats, stopping the bullshit fees with everything. Taxpayer money should come with strings attached that make the experience just slightly better than what it is.
davidspdmstr@reddit
My price is a new Omega Aqua Terra
MonsterTruckCarpool@reddit
Socialize losses, privatize the gains
WhatADunderfulWorld@reddit
The government is broker than you. You don’t need this. Just charge extra and let the market and votes decide.
imbasicallycoffee@reddit
"7.5% federal excise tax on airline tickets and $5.30 per segment tax. Waiving the fees would offset about one-third of the incremental cost of higher jet fuel, said the Association of Value Airlines."
Can someone in the industry explain to me what the "per segment tax entails"
Also, don't they just pass those costs onto the consumer? Why aren't the big 3 doing the same? They got bailouts from covid relief.
halfty1@reddit
It’s the tax you pay per a flight.
They do pass that tax on to the customers. What these low cost airlines are asking is for the government to suspend collecting the money from them (the airline)…the airline is still going to collect that money from you (the passenger). They just want to keep it for themselves now instead of passing off to government.
The Big 3 are not on the brink of going under with the high fuel prices so don’t need the tax relief, hence why they are not asking. Spirit was already teetering on the edge before the fuel cost spike and are on the verge of going out of business without this bailout.
Qwerkies@reddit
Can I have one too?
post-explainer@reddit
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