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Speculation and Manipulation, Redux

By Jim Chen at al.

So the airlines have gotten together to Stop Oil Speculation (SOS). How do I know? Both Northwest Airlines and United Airlines sent me an e-mail with an open letter signed by twelve airlines. They must be serious about this. I have made my thoughts on speculation and manipulation known here and here, and the airlines? arguments are not changing my mind.

The language used on the SOS web site sounds more like ?here?s why you should pay me $15 per checked bag and not complain about it even though I did not hedge my fuel costs appropriately? or "when I asked for deregulation I didn't really mean it," rather than a legitimate complaint. The airlines claim, ?Every time you buy products such as food or gas, you are impacted by unregulated, secretive and often foreign commodities futures markets.? They even dropped in an "Enron" reference later, just to make sure you know the markets are evil. This letter is precursor to a request for another bailout if you ask me.

?Unregulated? and ?secretive? sounds an awful lot like how airlines price their flights. Ever try to get a deal on a flight out of a small market like Grand Forks, North Dakota, or a major hub like Minneapolis? Good luck. And don?t think the airline is going to tell you when you should buy to get the cheapest fare or how they price their flights.

And don't get me started on why I think they included the ?foreign? markets comment.

When it comes to airlines, I am not very sympathetic to their financial problems. CNN Money notes that Southwest Airlines, which also signed the letter, "hedged 70% of its fuel costs at $51 a barrel. As a result of its smart bets in futures markets, the discount airline is paying only about $2 a gallon for its jet fuel." Remind me again which airline is profitable. Right, it is Southwest. Of course, they signed the letter, too, lest they be left out of any government assistance for high-fuel costs.

The worst part of all of this is that large airlines have the ability to work in this kind of market. Southwest showed how to make it work. Farmers, on the other hand, who are seeing similar problems, potentially based on new market speculation, have seen a change in the way the market itself works, as a New York Times article explained in April: "Farmers used to leave the market-watching to traders who work for big grain elevator companies. But with some of those companies now refusing to buy crops in advance because hedging has become so expensive and uncertain, farmers have to follow and trade in those markets themselves."

I don't think the time is right for the government to intervene in either market, but if I were setting the priorities, my first efforts would be to help those who have tried to hedge but no longer have the resources (farmers), as opposed to those who had the chance to hedge and decided not to (airlines). The real speculators here were the airlines. It's just that most of them got it wrong.

Full post as published by Agricultural Law on July 11, 2008 (boomark / email).