Rebuttal of "An open letter to all airline customers"

mistaken impression for the better part of my adult life that the whole point of going long, going short, and/or implementing various trading strategies using derivative securities such as options and futures contracts is that innovations such as these facilitate price discovery and help ensure that markets allocate resources to their most highly valued uses. I think that the energy markets are telling these executives that their business models are broken and that they better start thinking of ways to restructure themselves so that they and their firms can live another day, week, month, year, decade or whatever. The worst thing we can do as a society is to continue to shield the airline industry from the consequences of continuing to pursue unsustainable business models. I also find it very curious that the CEO for Southwest Airlines is one of the signatories on this “open letter”, since Southwest Airlines has been making money hand over fist from hedging their energy exposures in the futures markets (according to a July 1, 2008 Associated Press story entitled “Airlines try to hedge against soaring fuel costs”, hedging (e.g., by purchasing futures contracts) has saved Southwest $3.5 billion since 1999). I guess when an airline takes positions in energy-related derivative securities, that’s okay; it’s just wrong for you or me or some other so-called “oil speculator” to do the same.]]>

Rebuttal of "An open letter to all airline customers"

I received an email recently from a major airline company entitled “An open letter to all airline customers”. This letter has as it signatories 12 Airline CEOs, and it lays the blame for the airline industry’s current financial problems at the feet of all those “evil” oil speculators who are buying and selling oil futures contracts. Of course, the timing of the letter coincides perfectly with recent efforts of the US Congress to turn oil speculators into scapegoats for the energy crisis rather than doing something which could actually make a difference, such as taking steps to increase supply and/or reduce demand for oil.

No wonder the US domestic airline industry is losing money hand over fist. The industry’s CEO’s apparently must not comprehend the most rudimentary economic principles which underlie global energy markets. I will be the first to admit that I am definitely not a particularly big fan of market volatility; e.g., I haven’t particularly enjoy watching my retirement assets go bungee jumping as they have been prone to do recently. I guess that I could blame all the evil short sellers for driving down the prices of my favorite stocks, but perhaps the real problem is that I am not that good of an investment analyst. I guess that I have been operating under the apparently mistaken impression for the better part of my adult life that the whole point of going long, going short, and/or implementing various trading strategies using derivative securities such as options and futures contracts is that innovations such as these facilitate price discovery and help ensure that markets allocate resources to their most highly valued uses. I think that the energy markets are telling these executives that their business models are broken and that they better start thinking of ways to restructure themselves so that they and their firms can live another day, week, month, year, decade or whatever. The worst thing we can do as a society is to continue to shield the airline industry from the consequences of continuing to pursue unsustainable business models.

I also find it very curious that the CEO for Southwest Airlines is one of the signatories on this “open letter”, since Southwest Airlines has been making money hand over fist from hedging their energy exposures in the futures markets (according to a July 1, 2008 Associated Press story entitled “Airlines try to hedge against soaring fuel costs”, hedging (e.g., by purchasing futures contracts) has saved Southwest $3.5 billion since 1999). I guess when an airline takes positions in energy-related derivative securities, that’s okay; it’s just wrong for you or me or some other so-called “oil speculator” to do the same.

Cross-Price Elasticity of Demand

During the course of the last three months, Greg Mankiw has collected an interesting assortment of anecdotal evidence concerning the effect of high energy prices on all sorts of different transactions, including the demand for online courses, bicycle sales, small car sales, scooter sales, home buying practices, the demand for mass transit, and even the demand for camels and mules!