61 of 73 new markets lose money for SWA

[canyonblue]

Delta's out of the closet as well.

http://www.delta.com/planning_reser...stinations/getaway_ideas/gay_travel/index.jsp

So is AA: www.aavacations.com/rainbow

and AWA: http://www.nbc11.com/news/3959027/detail.html

 

[igneousy2]

So they have spent 1.4B a year during those times, minimum, for new airplanes. Where is the high debt to show for it? The debt to equity is still way low. It went up for about a year and is now back down.

Answer--They are racking up assets as they increase debt. A low debt to equity operation. Works great in a rising interest rate environment and reduces the need to lease airplanes and equipment. Which, over the long term, is expensive.

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. Southwest has a D/E (1.6B debt/6.5B equity) of about 0.25 which means that SWA's debt is about 1/4 the size of it's equity (owners value). Compare that to AMR which has a D/E (12.7B debt/226M equity) of about 56.1, which means that AMR's Debt is 56 times as large as it's equity. In other words if you liquidated SWA and AMR today, SWA would pay all it's debts and be able to return money to it's shareholders, AMR wouldn't be able to pay all of it's debts and shareholders would get ZERO - 56 times over.

The mistake a lot of you are making is to equate stock-price/performance to career security. The things that an investor is looking for is not necessarilly the same as what a pilot would be looking for if they are trying to assess the long-term viability of a company. To an investor, too low of a D/E means that the company has not been aggresive enough in obtaining debt, which means the company will not benefit as greatly from upturns in the market as a company like AMR that is more highly leveraged.

An analogy I can think of is...two pilots buy a house at the same time with a 30 year mortgage...

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.

How did they do? What the market did in the 15 years is irrelevant to pilot 1, conservative pilot-1 would be okay he's not rich, but he is living free and clear in his very own home. Aggresive pilot -2 would have done OUTSTANDING in an Up Market, and HORRIBBLY in a Down market.

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.

 

[igneousy2]

just reread BBJ's post,

I'll back off a little - your post wasn't backasswards - but I do disagree with you when you imply that a low d/e is a bad thing - at least from a pilot/career perspective.

later

 

[shearedshaft]

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.

Not completely true.

LUV pays for assets with after-tax money, instead of using other people's money and deducting the cost of the interest from taxes. Kind of like your example, but instead where two pilots invest in the stock market for retirement, one uses a 401(k) (before tax money) and the other uses after tax money. Which one has more in the end?

In a capital-intensive industry, LUV is severely "under-leveraged', paying far, far too much to Uncle Sam in taxes every year. Hence the possibility of a buyout, someone who knows how to utilize tax strategy could increase cash flow significantly simply by changing the debt ratio.

 

[Skyboy722]

An analogy I can think of is...two pilots buy a house at the same time with a 30 year mortgage...

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.

How did they do? What the market did in the 15 years is irrelevant to pilot 1, conservative pilot-1 would be okay he's not rich, but he is living free and clear in his very own home. Aggresive pilot -2 would have done OUTSTANDING in an Up Market, and HORRIBBLY in a Down market.

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.

Interesting analogy. Let's say though, for argument's sake, that pilot-1 also buys ten houses, but pays cash for all of them. Now move down the road 30 years, and how did they do? How much money did pilot-1 save in interest?

 

[shearedshaft]

Interest is deductible. LUV doesn't use this deduction as much as others, so it's cash flow is lower than it could be.

An LBO would allow a greater tax deduction. It's as simple as that. More cash for the owners using a more aggressive tax policy.

Debt isn't "good" or "bad", it needs to be engineered to gain the most cash flow without risking the whole enterprise.

Because again, interest is deductible.

 

[Skyboy722]

Interest is deductible. LUV doesn't use this deduction as much as others, so it's cash flow is lower than it could be.

An LBO would allow a greater tax deduction. It's as simple as that. More cash for the owners using a more aggressive tax policy.

Debt isn't "good" or "bad", it needs to be engineered to gain the most cash flow without risking the whole enterprise.

Because again, interest is deductible.

True, But pilot-1 has still saved a TON of money, even after the deductions. This is along the same lines as the argument that when you get a raise you should run out and buy a more expensive house, to get a bigger deduction. When in reality, you would be much better off just paying the extra in taxes and investing the difference.

I will not pretend to be an accountant, or an airline CEO, as there are many reasons why I'm not. I'm just pointing out the fact that debt itself is a LARGE expense, especially over the long term, and should be considered. Interest is indeed deductible, but still costs money.

 

[atafan]

Are you trying to draw attention away from your ginormous a$$ again

I couldn't care less about this thread but I sure hope this isn't accurate because I remember seeing a fine one, well at least when I saw it at C's years ago.

 

[shearedshaft]

I will not pretend to be an accountant, or an airline CEO, as there are many reasons why I'm not. I'm just pointing out the fact that debt itself is a LARGE expense, especially over the long term, and should be considered. Interest is indeed deductible, but still costs money.

Well, it's probably best you are not trying to present yourself as an accountant, because you missed a huge difference. Assets generate revenue in business. Your house example is wrong, unless it was a rental property that brought in positive cash flow. If so, you would want to "lever", or borrow against it as much as possible, allowing Uncle Sam to help pay for it. Do real estate developers save up and put 65% down payment? That's what SWA is doing.

This really does come down to tax strategy, and all of the metaphors about pilots/credit cards/houses don't fit when you're talking about cash-generating assets. LUV uses after-tax cash, which is expensive. Why do they do this? Nobody knows. It seems "safer", but that insurance policy is costing tens, if not hundreds of millions of dollars per year.

 

[Skyboy722]

Well, it's probably best you are not trying to present yourself as an accountant, because you missed a huge difference. Assets generate revenue in business. Your house example is wrong, unless it was a rental property that brought in positive cash flow. If so, you would want to "lever", or borrow against it as much as possible, allowing Uncle Sam to help pay for it. Do real estate developers save up and put 65% down payment? That's what SWA is doing.

This really does come down to tax strategy, and all of the metaphors about pilots/credit cards/houses don't fit when you're talking about cash-generating assets. LUV uses after-tax cash, which is expensive. Why do they do this? Nobody knows. It seems "safer", but that insurance policy is costing tens, if not hundreds of millions of dollars per year.

Uncle Sam isn't helping to pay for the house!! He's helping you pay the interest on the loan against it. And not all of it. The loan still costs you money. But really, nevermind. Believe me, I'm the first to admit that I'm not an expert on this stuff... Hmmm, 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...