Observation on SWA

[B767Driver]

Just an observation looking at their financial results. They spent $3B in fuel in 2007 and are hedged at about 50% of spot fuel prices currently. If they were paying market prices for fuel...they would have lost $700M this quarter...and probably around $2B for the year.

[wheelsup]

I disagree. I think they would've charged more for their tickets, found ways to cut costs, or increased revenue some other way. Or a combination of the above.

They've calculated their ticket costs based upon what they need to make + %, and use the hedges to be better able to plan. That's the whole idea of hedging. I don't think it used to be to pay less for gas (it was cheap and I doubt it had as big of an impact as it does today). They just got reallllllllllllly lucky.

[SoCalAprch]

Im sure they are but they should start figuring out how not to use those hedge funds or start weening themselves off of them. If they could find a way to be profitable with prices what they are now it would be nice to have those hedges sitting there for a rainy day. Probably impossible but its not like fuel prices are going to go down any time soon so may as well start learning to cope with the costs early.

[wheelsup]

But the hedges are based on time, if my understanding is correct they are buying options to buy at $XX.XX price on a specific date. So what you're saying isn't possible.

Now, I suppose what they could do is charge more for their product to keep pricing level with their compeitiors, charge for extra bags, charge to change your ticket, don't refund your unused ticket even if you bought a non-refundable etc. But they don't, because they're not out to screw people. They're out to make on honest profit and that's it. I admire that. I love how you can cancel your non-refundable ticket on SWA and they give you credit on account. It doesn't just go to waste.

[SoCalAprch]

I didn't know exactly how they worked. I was under the impression that they bought a certain amount of fuel that they could use when ever they pleased. I didn't know that they had to use them by a certain date. Kinda like buying a bunch of fuel for your car and leaving it in drums in your garage and using it as you pleased. Shows how much I know, back to my beer...

[wheelsup]

I don't think they even buy Jet-A. I think it is home heating oil if I remember correctly. SWA has publicly said that they would make more money parking their planes and just selling their hedges.

Here, found this article:

NEW YORK, March 13 (Reuters) - U.S. airlines hedge their expected
jet fuel purchases to protect themselves from rising fuel costs.

A hedge typically involves buying a financial contract in a related
product such as crude oil CLc1 or heating oil HOV7. The financial gains
from those contracts, when the price rises, can help offset higher costs for
jet fuel, which vies with labor as an airline's largest expense.

Other hedging strategies include so-called "collars," which are
combinations of put and call options. They generally cost less to put in
place.

[...source...]

There's a place in MN that does what you are referring to for consumers, although I can't find the article anymore. I think is was on MSNBC.com.

[B767Driver]

Originally Posted by wheelsup

I disagree. I think they would've charged more for their tickets, found ways to cut costs, or increased revenue some other way. Or a combination of the above.

.

This will be interesting to watch over the next few years as cheap fuel will not be found and the counterbalance of hedges expire. It reminds me a lot of Delta's position over a decade ago...wildly profitable, industry leading pay, benefits and retirement. It will be interesting to see how that employee group handles adversity and what happens if they ask employees for industry standard pay.

[wheelsup]

Yes I agree - SWA might have a storm brewing in the future. It's quite possible they will need to cut employee pay if they cannot raise revenues.

[planesiscool]

Southwest is already a finely tuned machine. Unless they cut capacity and raise prices or, expand to international flying. I have a few friends that fly for southwest and they have said there are rumors southwest may by 787s and go international. I think they will be just fine though.

[Cptnchia]

Originally Posted by planesiscool

Southwest is already a finely tuned machine. Unless they cut capacity and raise prices or, expand to international flying. I have a few friends that fly for southwest and they have said there are rumors southwest may by 787s and go international. I think they will be just fine though.

HA! I got family members and friends who work for SW and that rumor is just wishful thinking.

[mrivc211]

Originally Posted by wheelsup

I disagree. I think they would've charged more for their tickets, found ways to cut costs, or increased revenue some other way. Or a combination of the above.

They've calculated their ticket costs based upon what they need to make + %, and use the hedges to be better able to plan. That's the whole idea of hedging. I don't think it used to be to pay less for gas (it was cheap and I doubt it had as big of an impact as it does today). They just got reallllllllllllly lucky.

i agree with this statement.

[mrivc211]

Originally Posted by wheelsup

Yes I agree - SWA might have a storm brewing in the future. It's quite possible they will need to cut employee pay if they cannot raise revenues.

thats not the solution, if they can't pay pilots an above avg wage, they aren't charging enough for their ticket.

I recently read an article that said United Airlines was successful in raising fares the last 6 of 10 times. They said they had no other choice but to do so because of fuel prices. So mgmt is telling us that they will raise prices for fuel, but wont to give employees back their living?

[mpenguin1]

Originally Posted by wheelsup

I disagree. I think they would've charged more for their tickets, found ways to cut costs, or increased revenue some other way. Or a combination of the above.

They've calculated their ticket costs based upon what they need to make + %, and use the hedges to be better able to plan. That's the whole idea of hedging. I don't think it used to be to pay less for gas (it was cheap and I doubt it had as big of an impact as it does today). They just got reallllllllllllly lucky.

Not arguing with you, but, I do not think that it has anything to do with just luck, but rather, good business sense.

You know you need fuel, so, lock in the price so that it makes it easier to put together a good business plan....

On a side note, the day that Southwest starts to lose money, is the day to get out of the aviation industry

[wheelsup]

Originally Posted by mpenguin1

Not arguing with you, but, I do not think that it has anything to do with just luck, but rather, good business sense.

You know you need fuel, so, lock in the price so that it makes it easier to put together a good business plan....

Absolutely. I was referring to them making out in terms of cost. I think they got really lucky on that end. As I stated, the point of hedging is to lock in the price to be able to plan. Back when they were buying hedges fuel was $.25/gal and had been for a really, really long time. There was very little downside to hedging at that point. I doubt anyone, even SWA, thought it would be $3.60+ in early 2008.

[wheelsup]

Originally Posted by mrivc211

thats not the solution, if they can't pay pilots an above avg wage, they aren't charging enough for their ticket.

Possibly. If their pilots provide above average service and operating efficiency vs. [Brand X] pilots, then they would certainly command that premium. Personally I think SWA pilots do a great job and really strive to get the job done vs. some of the legacy guys I've seen, who are beyond wasteful.

[Doug Taylor]

Originally Posted by mpenguin1

Not arguing with you, but,

That's one of my favorites... It's like when people say, "I don't mean to be mean, BUT I'm going to say something mean."

[777forever]

I've been hearing the SWA will run out of their fuel hedges story for years now. So approximately when are they going to be on a level playing field with everybody else?

[mpenguin1]

Originally Posted by Doug Taylor

That's one of my favorites... It's like when people say, "I don't mean to be mean, BUT I'm going to say something mean."

Well, I wanted to chime, but, wanted to make sure it was not an argument, on the internet, you have to be careful how your post come across, so there

[Maximillian_Jenius]

Originally Posted by Doug Taylor

That's one of my favorites... It's like when people say, "I don't mean to be mean, BUT I'm going to say something mean."

Another one of my favorites is. "I'm not racist, but..."

[tonyw]

This is nothing new.

As far back at 2005, without hedging, SWA would have lost money in some quarters.

But since hedging is part of SWA's business plan, I don't think that it should be held against them.

[PCL_128]

Originally Posted by mrivc211

thats not the solution, if they can't pay pilots an above avg wage, they aren't charging enough for their ticket.

I recently read an article that said United Airlines was successful in raising fares the last 6 of 10 times. They said they had no other choice but to do so because of fuel prices. So mgmt is telling us that they will raise prices for fuel, but wont to give employees back their living?

Amen, brother!

Originally Posted by 777forever

I've been hearing the SWA will run out of their fuel hedges story for years now. So approximately when are they going to be on a level playing field with everybody else?

The problem is that the people saying those things don't really understand hedging and how SWA does business. Hedging isn't something that you "run out of." Hedging is a continual practice. Yes, they "run out" of hedges at $50/bbl, but it doesn't matter because they've been smart enough to buy more hedges at $60/bbl for the next year when everyone else is paying $100/bbl. As long as you're buying hedges that keep your costs below what everyone else is paying for fuel, you still have the advantage, because you have the pricing power on fares. In other words, SWA will never "run out of hedges."

[kellwolf]

Originally Posted by Maximillian_Jenius

Another one of my favorites is. "I'm not racist, but..."

"Don't take offense to this, but....."

In the South, everyone always tries to make it sound nice when they're really being a-holes.

THe 787 rumor has been around at SWA forever. Only difference was it was 757s when I was there.

[777forever]

Originally Posted by PCL_128

Amen, brother!



The problem is that the people saying those things don't really understand hedging and how SWA does business. Hedging isn't something that you "run out of." Hedging is a continual practice. Yes, they "run out" of hedges at $50/bbl, but it doesn't matter because they've been smart enough to buy more hedges at $60/bbl for the next year when everyone else is paying $100/bbl. As long as you're buying hedges that keep your costs below what everyone else is paying for fuel, you still have the advantage, because you have the pricing power on fares. In other words, SWA will never "run out of hedges."

That makes perfect sense. Hedging is part of and always will be part of the SWA business plan. Thanks for clearing that up.

[SoCalAprch]

Originally Posted by Doug Taylor

That's one of my favorites... It's like when people say, "I don't mean to be mean, BUT I'm going to say something mean."

"I'm laid back but by the book" Huh? not one of you...

[B767Driver]

Originally Posted by PCL_128

In other words, SWA will never "run out of hedges."

Yes...but what type of hedge can you buy today for 5 years out? And would you purchase it?