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Last Look - Oil soars by $20/Bbl in the third quarter driven by tightening supplies
Fixed-Base Operator (FBO) Hedges Jet Fuel Purchases to Minimize Risk of Rising Prices
MARKETS: REFINED PRODUCTS | COMMODITY: JET FUEL | CLIENT: FIXED-BASE OPERATOR

Situation

With demand decimated by COVID-19, jet fuel prices declined over 46% between January and March 2020. In response to the price decrease, a fixed-base operator (FBO) wanted to lock in the historically low jet fuel prices for as long as possible, enabling the company to mitigate commercial risk during uncertain times.

The FBO had planned to purchase over 4.5 million gallons of Gulf Coast Jet A fuel over the next 18 months but needed a creative way to lock in the prices. The FBO lacked a clear perspective on the forward markets and the drivers impacting jet fuel pricing. The company also had little familiarity with hedging nor the counterparty relationships it required.

Outcome

With AEGIS’ assistance, the FBO purchased call options at a strike price of 89.5¢/gal for the next 18 months. As prices increased to meet returning demand, proceeds would accrue to the FBO, offsetting the rising jet fuel prices. If prices went sideways or lower, the FBO would have been exposed and at risk for the upfront premium.

In the initial months of the hedge program, jet fuel prices rose over 30% and were forecasted to rise another 70% through the term of the hedges. However, the FBO effectively avoided these increases as a result of the hedges put in place by AEGIS. While the past (and continuing) performance of this hedge is not indicative of the future results of this or any hedge program, it met the needs of the client in managing their risk.

With AEGIS’ hedging expertise, the FBO was able to make fast, sophisticated decisions that minimized the company’s exposure to rising jet fuel prices and gave it the flexibility to pass these savings on to customers in an effort to improve competitive positioning or lock-in margins as the economy recovered. This was all accomplished at a fraction of the time and cost that would have been incurred with an in-house hedge program.

 

“We knew there was an opportunity for us to capitalize when the market dropped. AEGIS provided professional guidance in an unprecedented time that allowed us to make a fast and calculated hedge decision on our jet fuel price and volume. Within a month, we saw returns. I could not have asked for more. Working with AEGIS was too easy.”


CFO   |   Fixed-Base Operator

 

This testimonial is not indicative of future performance or success. Commodity interest trading involves risk and, therefore, is not appropriate for all persons; failure to manage commercial risk by engaging in some form of hedging also involves risk. Past performance is not necessarily indicative of future results. There is no guarantee that hedge program objectives will be achieved. Neither this trading advisor nor any of its trading principals offer a trading program to clients, nor do they propose guiding or directing a commodity interest account for any client based on any such trading program. Hedge advisory services are performed by the registered commodity trading advisor AEGIS-CTA, LLC, a wholly-owned subsidiary of AEGIS Hedging Solutions, LLC. This case study is not required to be and has not been, filed with the Commodity Futures Trading Commission ("CFTC"). The CFTC does not pass upon the adequacy or accuracy of this commodity trading advisor disclosure. Consequently, the CFTC has not reviewed or approved this case study.

Recognizing the need for a comprehensive and consistent hedging strategy, the private equity firm partnered with AEGIS, a leading hedge technology and risk management advisory firm specializing in commodity hedging solutions. AEGIS conducted an in-depth analysis of the firm's portfolio, considering each manufacturing company's unique commodity exposures and risk tolerance. Leveraging their expertise and patented analytics, AEGIS crafted a customized hedging program aligned with the firm's investment objectives and risk appetite.   

Working closely with the private equity firm's investment and operations team, AEGIS implemented a consistent hedging methodology across the entire portfolio. The solution involved:  

  • Streamlining internal processes 
  • Implementing market-leading technology 
  • Training key personnel 
  • Establishing robust risk-monitoring systems aligned with the company's objectives 

AEGIS implemented the solution and provided ongoing support and guidance to ensure seamless integration, ensuring the firm and investments met their financial targets and that the portco adhered to the new risk management framework.   

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