Chrysler Guaranteed Gas Program Not as Insane as Previously Thought

I've been doing some more research on Chrysler, LLC's "Let's Refuel America" plan, which as we mentioned earlier this week, locks anyone who buys a new eligible car into 3 years worth of gas at $2.99/gallon.  I haven't been able to confirm this with the company yet, but it appears that Chrysler is not giving customers a pre-paid gas card based off the mileage of the particular vehicle, but essentially subsidizing the difference customers pay at the pump from any prices (at participating stations, of course) over that $2.99/gallon price.

As our friend Stupid Equity Guy pointed out the other day, given our assumptions of direct subsidies to customers, the program reeked of desperation and looked like it could possibly inflict severe harm to the Company.  Taken in this new light, however it seems that Chrysler, with prudent hedging, could come out relatively unscathed from this experiment.  Of course as we've seen with Airlines and countless others who tried to hedge their fuel exposure, this is a task far easier said than done.

Further reducing potential losses and ill-effects from the Program, it is only set to last until June, 2, 2008 - less than a month away.  Given that Chryslers, Dodges, etc aren't exactly flying off the lots these days, their total outlay shouldn't put too much pressure on the bottom line over this short period.

At least, thats how it may appear at first glance.  The truth, however, paints an entirely different picture (click for larger version, or see the file which you can play around with, Download) chrysler_gas_expenses.xls

In our low-end estimate with gas prices at $3.50/gallon, Chrysler is on the hook for about $100 Million.  At the opposite, high end of the spectrum with gas prices at $4.50/gallon, Chrysler's liability (given the other assumptions in the spreadsheet, realistic or not is another story) over the 3-year life of the program jumps to over $300 Million!

For a company in the midst of an aggressive restructuring, these are not numbers to sneeze at.  Obviously some of our assumptions may be either too aggressive, or not aggressive enough, but with Chrysler being privately-held our access to information is limited.  Regardless, it is painfully clear that an aggressive promotion - open for only one month - may end up costing the Company dearly.  One last point is that the fine-print of the promotion does contain the phrase "...up to 3 years...", which indicates that Chrysler (under pressure from Cerberus) reserves some legal rights to cut their losses if expenses stemming from this promotion start to materially affect the Company's liquidity position or ability to fund its operations.

While we maintain faith in the discipline of Cerberus, we still remain skeptical - especially in light of this information - that the PE firm will be able to turn around this ailing American Icon.

Comments

[Stupid Equity Guy]

Sir Anal,

Thank you for taking the time to ponder the implications of an energy spike. The far end of the CL market is in rocket mode... Backwardization is being backed up into a setup where contango will take over...

Expectations of inflation are growing...

~SEG

[Stupid Equity Guy]

Here is an interesting chart about gas price taxes and possible savings if removed for the summer...

http://graphics8.nytimes.com/images/2008/05/06/us/0506-nat-sub-webGAS2.jpg

[Anal_yst]

SEG, expectations of inflation may be growing, but the equity markets continue to - in my mind - presume that the worst is over. Just look at the "teen retail" numbers that came out recently. Markets seem to be focused on the y/y revenue increases and not on any of the macro fundamentals (high commodity, food, energy prices), ballooning consumer credit balances, and every other piece of relevent information.

Hopefully I won't fall victim to Keynes' (in)famous phrase about the markets and liquidity...

[Calgary Schmooze]

By referring to recent teen retail numbers, are you talking about your recent trip to the mall?

[Stupid Equity Guy]

Schmooze,

That was how I read it... BUTT I am not trying to put words into Sir Anal's mouth...

~SEG

Who's secret identity might become known if I pull off a take down in a sector you and I both work/invest in... No more details until later... but if it happens, you will hear about it up there... and I will probably write an obituary/after action report for the boys to post here...

[Calgary Schmooze]

SEG - I didn't know you were that into p0rn. haha

But if you're going to take anyone out, please make it involve SU. I can't think of a better way to open up the eyes of Canadian citizens and politicians than to have the crown jewel get plucked by foreigners.

[Anal_yst]

Not so much referring to my trip to the mall, as I am referring to the retail same-store sales numbers that came out this week. Whoohoo ARO posted 25% increase in same-store years over same quarter last year - oh yea, thats sustainable...

[Stupid Equity Guy]

Schmooze,

Even with the worlds smallest GS Institutional account, I doubt they will let me leverage up to take down SU...

Being an honest Piker... I have to say its small cap time, and its south of the border... but you will hear about it on the grapevine because of the approach taken...

~SEG

Being a piker I have to recruit someone with actual experience in running one of these suckers... I am more of the Hitman then the race car driver in this one...

[Fake Steve Fienberg]

Analyst, don't bring this spotty analysis with you to the buyside.

This is a simple fixed for floating swap, they can either hedge it in the futures market, buy insurance or take on the risk unhedged. The issue with the airline industry is not one of unhedged energy costs but rather one of too much competition being kept afloat in the market by a cabal between AIG, GE Capital and Boeing in order to sell air planes and excise huge financing fees.

[Anal_yst]

@ Fake Steve Feinberg

Besides being just a back-of-the-evelope "analysis", my point was that Airlines (on the whole) have tried and mostly failed (miserably) at hedging their fuel exposure in the futures market, save Southwest who seems to be the only airline who understands hedging in the slightest. I wish "yourself" the best of luck in this endeavor though.

As far as the fixed-for-floating swap goes, good luck getting any bank (or half-intelligent) counterparty to do that deal in the current environment. Ordinarily I'd agree with your suggestions that its a simple proposition, and maybe 2 years ago, but again, best of luck. Going unhedged leaves them with the uncertain out-lays I pointed out. Playing the futures market could be even worse (again, using airline's efforts here as a guide). Maybe they'll suck it up in return for the big deal fees they're hoping to get from you in the future?