61 of 73 new markets lose money for SWA

[shearedshaft]

I always thought that a company being low on debt was a GOOD thing, and that an airline that owes fifteen times what it's worth was a bad thing...

You're making the mistake of choosing "good" or "bad" when it comes to a straightforward tax strategy, low debt isn't good, high debt isn't bad, like there's some sliding schedule.

Public companies are valued on free cash flow and by using after tax dollars, LUV has reduced its free cash flow, which lowers the stock price.

Make sure not to compare corporate debt with consumer credit card debt, they're two different animals and paying Uncle Sam more than you have to is dangerous--it leads to LBOs by guys who can do a better job on tax strategy.

 

[Juan Tugo]

Hmm...

Gents-

I don't know if it's been covered yet, as I don't have time to mull over 7 pages of greatness in this thread, but I would encourage everyone to go to finance.google.com and take a look at LUV. Now look at the news items there on the right side bar...what do you see? A story dated June 5th that calls for slower expansion at SWA and exudes gloom and doom. Now look at the June 8th story..."Investor Hopes Climb for Southwest." Three days and all is right with the world?? Shocking! And thus, the stock climbed.

My point is, do not base the longterm viability of a company on what these analysts are saying. Their view is very shortterm (3 days?), as that's where the quick, big money is made in the stock market. Essentially, they are doing their darndest to get this stock to work for them. They know those 61 unprofitable markets will eventually make money, and if they were able to buy the stock at $14, well, you do the math...

 

[igneousy2]

You're making the mistake of choosing "good" or "bad" when it comes to a straightforward tax strategy, low debt isn't good, high debt isn't bad, like there's some sliding schedule.

Public companies are valued on free cash flow and by using after tax dollars, LUV has reduced its free cash flow, which lowers the stock price.

Make sure not to compare corporate debt with consumer credit card debt, they're two different animals and paying Uncle Sam more than you have to is dangerous--it leads to LBOs by guys who can do a better job on tax strategy.

I still disagree. Debt leverages a company - If a company is making a lot of money - it makes a lot more money if it is highly leveraged. But the reverse is also true - a highly leveraged company will lose a lot more money then a company with a conservative balance sheet.

If you are a stock-picker - then you are exactly right - a company with too little debt is not the best choice. This works fine for a stock investor who can get in and out of a stock at will. When things are going great - you buy the stock, when things start going south real fast, you sell it and find something else to buy.

This doesn't work if you are a pilot trying to determine the viability of the company you work for. Once you are there it is not so easy to change when things go south.

This is why Southwest has always had the highest credit rating of any airline, but the stock has not done very well.

Pull up the stock charts since 9/11 and compare LUV to AMR.

Pre 9/11 LUV = $20 AMR = $20
after 9/11 LUV = $15 AMR = $1.25
Recently LUV = $14.50 AMR = $26.13

That wild ride that AMR's stock took was/is due to it's highly leveraged position.

Now think about the experience of the pilots at these two airlines immediatelly before, during, after the mess of 9/11.

SWA - never furloughed - only stopped hiring for a very short while. Upgrade to CA in 5 years.

AMR - HUGE ammount of hiring right before 9/11, HUGE ammount of furloughs after 9/11, only began recalling this year. Upgrade? - what upgrade?

So...if you are a pilot-looking for job security, a low D/E is GOOD and a high D/E is BAD.

As far as the value of a company is concerned - FCF is only one of the things that drive a stock price. In fact - I doubt FCF is looked at much to value SWA except to the extent that it feeds takeover speculation. FCF is more directly corelated to stock price at companies that pay high dividends or have a habbit of acquiring companies. The more FCF a company has, the more money it has to do things like pay higher dividends or acquire other companies. SWA isn't either of these.

I also disagree with your assessment that "corporate debt" is different then "consumer credit card debt". Debt is debt, it's the terms of the debt that is important. If a company is paying 15% or an individual is paying 15% - interest doesn't care who is paying.

The danger with debt is that it exacerbates bad decisions. Consumer Debt has such a bad reputation because most consumers make stupid decisions with what Assets to buy with that debt - new car, new stereo. If that same consumer used that debt in a smarter way - you could make the same arguments for consumers also.

If you maxed out your visa and bought $10,000 worth of AMR stock in January 2003 for $1.25 a share you would have got 8,000 shares which today would be worth $209,000. You would have used leverage (high D/E) to your great advantage. On the other hand, if AMR did end up filing bankruptcy which was the fear - and why the stock price at the time was so low - you would have lost all $10,000 and would be paying interest on $10,000 debt today.

Low D/E = boring = probably not going to get huge returns on the stock.

High D/E = exciting = potential for high returns/huge losses on the stock. But again - not relevant to job seekers.

Later

 

[TOGA]

Conservative pilot - 1 takes all his extra cash and puts it towards his principal. In 15 years say...he has his house paid off. He has 100% equity in a total of one house. His house payment at the end of the 15 years is $0.

Aggresive pilot - 2 takes all his extra cash and saves it for a down payment on a 2nd house. Every time he accumulates enough for a down payment in either equity from appreciation or cash he buys another house. At the end of 15 years - he probably owns 20 % of 10 houses. His house payments might be $30,000 a month - I hope he has great tenants.

Not that it relates directly to the SWA D/E ratio debate at hand (which is making my head hurt), but there's a third strategy these pilots could choose. They could pay off their mortgages more quickly without ever paying more, thus allowing them to build equity faster, and/or reduce debt much more rapidly. Pilot 1 could own the house in seven years instead of 15, never having paid extra (not even the extra he was going to pay in order to pay it off in 15 years). Pilot 2 could own the 10 houses without the $30,000/mo in mortgage payments, making any rent pure profit. Check out the link below for details . . . it's not BS or a scam, just a mathematical work-around for the lender-centered U.S. mortgage system.

 

[radarlove]

Not that it relates directly to the SWA D/E ratio debate at hand (which is making my head hurt), but there's a third strategy these pilots could choose. They could pay off their mortgages more quickly without ever paying more, thus allowing them to build equity faster, and/or reduce debt much more rapidly. Pilot 1 could own the house in seven years instead of 15, never having paid extra (not even the extra he was going to pay in order to pay it off in 15 years). Pilot 2 could own the 10 houses without the $30,000/mo in mortgage payments, making any rent pure profit. Check out the link below for details . . . it's not BS or a scam, just a mathematical work-around for the lender-centered U.S. mortgage system.

You're ignoring the appreciation of the houses. If I "lever", by using huge debt, a very expensive house and deduct the mortgage interest every year off of my income and Joe conservative pilot buys a much smaller house (because debt is "bad") and pays off the house early...

Both our houses appreciate at the same rate, so at the end of 20 years, I have a much more valuable house, I have shielded a ton of income from the IRS. Who has more at the end? I do. Plus I had a bigger house all along.

It may seem counter-intuitive, but the math works out.

The same is not true with credit cards, what you purchase with them does not appreciate and the interest is not deductable, lose/lose. But when Uncle Sam helps pay your interest payment, take advantage of it.

In fact, there might be as much as a 20% drop in corporate taxes collected by the US due to all of the "levering" of companies by private equity players taking advantage of the tax law. This was in today's WSJ.

 

[TOGA]

I completely agree with your comment on credit cards . . . their only use is accumulation of reward points and short-term float of expenses. Also, I'd imagine the stats you paraphrase from the WSJ regarding corporate taxes are pretty valid. I guess I don't understand how that's relative to our personal finances. What "Joe conservative pilot" believes about good debt versus bad debt isn't the issue. I understand that mortgage debt is 'good' debt when compared to credit cards and car loans, but it's still debt with a large monthly payment. If Joe wants to keep good debt, he can buy another property . . . and pay that off quickly, as well. As for the appreciation of the houses . . . it will be what it will be, no matter the paydown strategy. However you look at it . . . leveraging, 'Uncle Sam helping you pay your interest', etc . . . you're going to pay $3 in interest to save $1 in income tax liability. And that's if you're in the highest tax bracket . . . if you're not, the math is even worse. As for leveraging, the MMA (the program I'm talking about, link below) allows you to leverage the bank's money against your mortgage. During the shortened paydown period of the mortgage, your spending doesn't change, so you can still do whatever you've been doing with your discretionary income. Then, when the mortgage is gone, you can employ whatever strategy you like with all the money you're not paying to your mortgage lender that you would've otherwise.




Sorry for the thread hijack, everyone . . . I just feel that we've been so well trained for so long by the mortgage lenders in the U.S., everybody needs to know there's a better way to do this! The banks in Europe and Australia offer products like the MMA from the get go, and have for decades . . . U.S. banks don't. Please carry on with the doom and gloom for all those beleaguered SWA employees.

 

[FlyBoeingJets]

NO NO NO! You have it all backasswards. Southwest has a Low Debt/Equity ratio which is a GOOD thing if you are trying to asses financial security of a company.

SWA is like conservative pilot-1, AMR is like aggresive pilot-2.

Analyst/investors would like SWA to act more like aggresive pilot2 then the conservative pilot-1 they have been acting like in the past.

No, No, No eh? You have got the wrong guy if you think I don't know it's a good thing to have low debt. And thanks for the lecture on the use of leverage using the "easy" to understand analogy method.

SWA is conservative? Yes and no. They have been growing at 8% recently. 30-35 planes/year. They have increased their fleet by 200 planes the last 6 years. That is aggressive growth fueled partly by conservative accounting.

AMR has been shrinking since 2001. All with the "aggressive" debt they accumulated during the go-go 1990's. The debt has been an albatross hanging around their neck and they have been struggling to make debt AND pension payments. So it has caused them to be more conservative. Go figure.

So I say to you-- No, No, No. SWA is the aggressive one and AMR is the conservative one. Go ask the AMR furloughes from 1999 hire classes.

 

[radarlove]

I think that looking here would show you which carrier has been aggressive and what leverage can do.

 

[igneousy2]

I think that looking here would show you which carrier has been aggressive and what leverage can do.

Exactly! - try clicking the 5 year button on the bottom of the screen.

Later

 

[FlyBoeingJets]

I think that looking here would show you which carrier has been aggressive and what leverage can do.

You confuse company performance and stock performance.

Coming from the brink of BK will make the stock soar. It doesn't reflect any growth or aggressive company performance.