Firm Pricing’ Strategy: Fleets Decrease Risk in Fuel Management
As fuel prices become increasingly volatile, the “hedging” (or firm pricing) strategy offers fleets an added layer of protection in fuel management. Automotive Fleet
recently talked with two hedging experts about taking advantage of this proactive strategy.
Dr. Jeff Miller, CEO of Gas-Lock Advisors LLC in Naperville, Ill., created Gas-Lock Advisors to meet industry demand in mid-2005. Miller was a college professor and an investment manager for 20 years.
Livia Whisenhunt, CEO of PS Energy Corp., founded the energy and transportation solutions company based in Atlanta. Since 1984, PS Energy has anticipated customer demands for energy products and services.
AF: Where does hedging fit in with fuel management?
Hedging offers a way to stabilize the fuel budget. Hedging strategies are the perfect complement for the rest of a fuel management program. It is a vital addition, not a substitute. Centralized fueling stations and fuel card programs enable the manager to purchase efficiently in a stable fuel market. But what if those prices are rising rapidly? Fuel hedging lets the manager address a big risk that is otherwise completely out of control.
Hedging can be an important part of a comprehensive fuel management program because it frees up management to concentrate on events they can influence. By addressing the risk of fluctuating fuel prices through a strong hedging strategy, companies can focus their efforts on how to best manage their fleets.
AF: What does a hedge do?Miller:
A good hedge can be any financial instrument that pays off when prices move higher. There are many ways to hedge. The best choice depends on the company needs and current prices. If a company just wants to lock in current price levels, that can be done. If the manager needs protection against price increases, but also wants to benefit should prices decline - that can also be done. The cost varies with the type of protection.
Whisenhunt: A hedge can help a company meet long-term financial objectives by minimizing exposure to price.
AF: What are the characteristics of a good hedge?
Most importantly, a good hedge fits the client needs at an acceptable price. It fits the time horizon - at least the current budget year and maybe longer. A good hedge is not a prediction of where prices will go. The fleet manager is not trying to be an energy trader and “outguess” the market. We all know that there is a risk of higher prices - maybe much higher. Addressing this risk is good business. It lets the manager continue “best practices” in fuel purchasing.
A successful hedging program does not try to “beat” the market, but rather prepares a company to act quickly when the market approaches certain budgetary targets. As a result, a good hedging program should take into account a company’s budget amount and budget period, as well as total volumes. Companies also should consider hedging all or some portion of their total fuel purchases whether they are retail, on-site, or mobile.
AF: How do fleet managers get started?
Miller: The best advice for the fleet executive is: Do something! It is easy to watch prices dip, as they have recently, and think that protection is not needed. Then prices go up and you think it’s too late. That is the trap of trying to predict price movements, instead of risk. The risk has not changed. It is always there.
This is the perfect problem for outsourcing - something that requires specialized expertise but is only needed occasionally. It is a lot better to have your expert dealing with their experts. There are big savings in doing the job right. The best hedges are usually not the simple futures contracts you see listed on an exchange. That’s where a company like Gas-Lock Advisors can help.
Whisenhunt: Information is the key to getting started. Companies must know their volumes from every source, as well as their budget targets. PS Energy provides our customers with the information they need to make informed decisions and then help them identify hedging tools and targets.
AF: What types of services might a fleet manager seek?
I work with FuelCASHBack, the new energy division of SCA Promotions. SCA has been a leader in risk management for 20 years, working with many top companies. Our partnership includes several areas.
First, we work exclusively on risk management for energy consumers. We do not sell fuel, and we do not consult with fuel suppliers or producers. Second, we also work with smaller fleet managers. We can aggregate these customers and get deals and pricing comparable to what the biggest fleets can get. Finally, we recognize that some customers are concerned about pump prices, not just the wholesale price. For those customers, we offer a hedging program based on retail pricing.
A fleet manager should consider any product or service that can help reduce costs and increase efficiency. PS Energy offers a menu of services, including retail cards, bulk fuel, consigned fuel, mobile fueling, data collection and delivery, emergency fueling, and, of course, hedging options. We work with our customers to create total solutions that enable them to better manage their fleet operations.