<![CDATA[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.]]>
2 thoughts on “Rebuttal of "An open letter to all airline customers"”
I can’t say too much, because I agree with the main point of the argument–it is not the speculators. However, in defense of Southwest’s CEO, he needed to participate in the “Abilene Paradox” and side with the other captains of his industry as a good long-run move.
I appreciate the email. I have been very curious about the whole price or oil problem. I particularly enjoy the standard response from Congress that taking steps to increase production aren’t worth it because the American people won’t see a result for 5 to 10 years. It is thinking like this 5 to 10 years ago that has led to our current situation. It seems like a no-brainer to increase production during this difficult time, especially when it is clear the problem isn’t going away.
Another interesting thought on the price of oil that I haven’t spent too much time on (I’ve been in the process of moving to Dallas) is the effect of foreign exchange depreciation of the dollar. America’s use of foreign oil has increase over the past decades from 30% to 70%, and in the recent wake of market instability, the dollar has depreciated greatly. I’m curious how much that has had an effect on the recent rise in gas prices.
At any rate, there is no doubt that Congress is trying to blame someone else for its inaction and the greedy business people are the most obvious target.