Just before Christmas my friend and I were discussing the airline industry and how we both thought it was miraculousness that a major carrier (airline) had not gone bankrupt. We then agreed that somewhere out their a major airline will go bankrupt from this current global recession and so we have it, Japan Airlines (JAL) has now officially become bankrupt only to reemerge as a government supported 'zombie'.
The volatility of the JAL bankruptcy can be seen in the futures market more so oil, in the case of JAL going bust it sent the Brent Crude oil futures down to a low of $75 a barrel. The reason behind the sudden sell off of Brent Crude was the hedging fuel contracts pegged to Brent Crude oil in the amount of $441 million. Fuel hedging contracts are done to protect the buyer from currency volatility. When bankruptcy occurs for a company hedging on forward contacts for oil, it triggers defaults and the contacts are terminated which creates a sell for the oil market (as terminated forward contacts add to price tension)
This can be seen on the following graph:
Note the high of $77.14 on the 19th Jan 2010 and the low on the 20th Jan (market reaction to JAL bankruptcy) at $75.37
What should be also noted is the subsequent rise from lows back to 77.76 on the same day (20th Jan 2010). The reason for a sharp rise was the goverment support of the bankrupt airline. Once again liabilities of failed private companies are shifted onto the public accounts. A future scenario (one that has been discussed by a handful of economists) is when the public accounts do eventually (Government) go bust, the turmoil will be an ensured shockwave through the markets. It would appear that no market (asset supported by goverment) will be left unscathed, except maybe gold, if such a scenario occurs.
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