Opinion | No Strategy is Not a Strategy

We met up with some executives of a large asset based company.  They have a HUGE fleet of delivery vehicles.  When we got on the subject of their fuel use, I asked them what their approach was to hedging.  The answer: no approach.
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More discussion and it turned out that this was not actually true.  Their hedging approach is to pass all the costs along to their customers in the form of fuel surcharges.  They are traditionally “old school” and hate the idea of “being in the fuel business.”

Fair enough, but it got me thinking about different strategies.  The structure guy in me went immediately to a “participating” structure.  This is simple enough.  You lock in a year’s worth of fuel (Futures/Forwards) at a fixed price.  Let’s say RBOB at 3.00 a gallon.  Then you add on a RBOB put option at, let’s say, 10 cents /gal.  So, the company’s all in price is $3.10.

So, if prices go up?  This company has capped itself with the futures at a fixed price.  If prices go down, the put options come into the money and pay, effectively allowing the company to “participate” in lower prices.  This will contain fuel charges and prevent a spike by keeping delivery constant and low.  More than likely lower than their competitors who have similar no policy policies.

So, should they do it?  Well, there is the real problem here: this company is missing key market DNA. I don’t mean to sound cocky, but I’ll bet a steak that 3/4ths of the company executives cannot come within 10 cents of the current RBOB price.  The DNA just isn’t in place.  Until the DNA is there, things like participating deals are pie in the sky.  Can a company like this build market DNA?  Sure, but nothing is really broken, so the motivation is lacking.  There is so much momentum behind the status quo that I’m doubtful even simple DNA building has legs.  It most likely won’t be until one of their competitors makes the leap that it becomes a big enough problem to solve.