Boyd: "Okay, Panic Is Now Acceptable Behavior..."

[MachPi]

Ok, that's the most retarded thing I've yet heard on this board and that's saying something.

Okay, I guess I'm as retarded as Tref because I studied things other than economics during school. I logically assume that when one entity is, for example, procuring a product at $X, while all its competitors are having to buy it at $1.7X, somebody, somewhere is losing money. I guess I'm an idiot for thinking that.

I don't expect much from the dismal science, as long as it tries. And it tries so hard, like the pitiful neighbor's kid at the special olympics.

 

[arthompson]

Danger my apologies, I must have confused his bio with someone else. I have been reading alot of big wig bios lately and am posting from work. My apologies to you and everyone else for posting bad information.

 

[StaySeated]

Wow is this a boyd love thread or what. I fail to be impressed with this gent. no hard feelings, I just lost interest when he repeatedly divided a big number with a small number and discovered that 50 seat casm is higher than 100 seat casm. He must have someone new on staff because he failed to mention his biggest client (emb) for the first time in over two years of over the top, unoriginal press releases.

 

[Nindiri]

Boyd has a keen eye for the obvious. He is usually right because he is usually saying things that everyone else has known for months or even years.

 

[Phil O'Sopher]

I have never been very impressed with anything that Mr. Boyd had to say or with his "sermon from the mount" manner. His full bio from his website is very unimpressive and he strikes me as just another self proclaimed expert who couldn't make it in the business and joined a large group of snake oil salesmen who try to convince everyone that they have a legitimate service to sell. He is to aviation consulting what Kit Darby is to aviation employment.

 

[Tref]

Ok, that's the most retarded thing I've yet heard on this board and that's saying something. I don't know much about SWA or the specifics of their hedges, but I know all about futures contracts.

A futures contract is simply today's spot price (let's say oil at $66) plus the cost of borrowing money for the length of the contract (let's say 1 year) plus a bid/ask premium.

If you buy a contract, you are just paying for the cost of the commodity today plus the cost to borrow the money for the length of the contract. That's it. There is no "company that does it's fuel hedging through", it's the open futures market.

Boyd, although often full of a bit of hot air really pooched this one, nobody took the other side of a bet with SWA, instead a financial firm simply bought the rights to oil at $25, sold those barrels to SWA at the cost to borrow the money and a bid/ask spread. There is ZERO RISK on the side of the market maker that sells a future.

My explanation leaves out a little bit of detail, but not much. Any basic undergrad finance course has this as a homework assignment---open the WSJ, pick a commodity, and by the spot price and today's interest rate, you can use a simple calculation to figure out the price of the futures--then you go check (in the same section) the price of the futures and voila, they're the same!

The way I understand it is that you can't buy jet fuel on the futures market and there is some kind of a swap with heating oil futures. Obviously I don't know the details, that's why I was asking.

Having said that, I was told by someone who should know. I don't know enough about it to argue with you, but I don't know you and I do know the person who told me this. I'm betting he's right.

Maybe you should check into the details of the SWA hedge and then tell me with more confidence how retarded I am.

 

[Gillegan]

Ok, that's the most retarded thing I've yet heard on this board and that's saying something. I don't know much about SWA or the specifics of their hedges, but I know all about futures contracts.

A futures contract is simply today's spot price (let's say oil at $66) plus the cost of borrowing money for the length of the contract (let's say 1 year) plus a bid/ask premium.

If you buy a contract, you are just paying for the cost of the commodity today plus the cost to borrow the money for the length of the contract. That's it. There is no "company that does it's fuel hedging through", it's the open futures market.

Boyd, although often full of a bit of hot air really pooched this one, nobody took the other side of a bet with SWA, instead a financial firm simply bought the rights to oil at $25, sold those barrels to SWA at the cost to borrow the money and a bid/ask spread. There is ZERO RISK on the side of the market maker that sells a future.

My explanation leaves out a little bit of detail, but not much. Any basic undergrad finance course has this as a homework assignment---open the WSJ, pick a commodity, and by the spot price and today's interest rate, you can use a simple calculation to figure out the price of the futures--then you go check (in the same section) the price of the futures and voila, they're the same!

OK, I don't pretend to be a financial expert in any way, shape or form but your statement about zero risk to the seller of the future has me confused. My understanding is that the original seller of the future is the producer of the commodity itself. What they are trading is possible increased profits (or losses) due to spikes and troughs in pricing for price stability. The way I understand it, there is value to the farmer to know that he can get X dollars per bushel of stuff next year. If his cost of production next year exceeds the value of the futures contract, he has lost the bet. This is why commodity futures and their value on the open market are so dependent on the actual supply of said commodity. The value of the futures contract is based on the difference between the contract value per bushel and the price of that bushel on the open market but at this point, the original seller of the contract has gotten his money, for better or worse.

Now I don't know how far into the future you can purchase a fuel contract for but it seems to me that the longer demand for oil exceeds supply the less incentive there is for the original seller (producer) to sell a futures contract at the differential prices that we are seeing right now. You could say that the original seller (producer) of those contracts has lost additional money by agreeing to sell those barrels at $30 rather than the $65+ that we are seeing now. I guess the bet going forward would be based on demand, supply, refining capacity and stability in the oil producing nations of the world. One thing that I do know is that it is an essentially zero sum game and if someone is winning by possessing a future for oil at $30 a barrel, then someone is losing by not getting the $65 that is being demanded on the open market.

 

[FlyBoeingJets]

Smartest article I've read from Boyd. I find the writing style and hyperbole slightly irritating, but he is right more than wrong in this article.

Legacies will have new found low costs and good international revenue. Revenue the LCC's won't have as they beat each other up on the domestic routes. But they have big debt that will weigh down profits. If international revenue overcomes debt payments, they are golden.

Rising fuel costs are to be feared. To keep loads up ticket prices can't go up much. So other costs have to come down. If not, some passengers will fly less, much less. On the other hand ticket prices might continue to spiral up. I hope that is the case.

Southwest has a decent revenue stream but costs are rising as hedges trend to a lower percentage of fuel needs. Labor costs are going up with yearly union pay raises. Southwest is entering uncharted waters with their industry leading pay rates. Every other carrier with the highest pay has eventually paid dearly for it.

But my conclusion on Southwest is different than Boyd's. I think Southwest will continue to succeed. But they will have stronger competition as Boyd described. Growth will not come easily.

Regionals. This is a tough one. If they get bigger RJ's that can be defined as narrowbodies, their cost structure suddenly becomes competitive.

 

[FlyBoeingJets]

I heard a rumor that the company that Southwest does it's fuel hedging through is in serious financial trouble. That's not hard to believe seeing as how they're losing their shirts. Can anyone confirm this? If that company goes CH 11, does SWA lose it's hedges?

Not sure about this one, but I think Southwest has bought "hedges" as financial instruments through a firm that makes money buying and selling on the market. Like a brokerage that makes commission. After you take a position you sell when you want through whatever firm you choose. That is how Southwest shows investment income on fuel contracts.

If the firm doing the trading goes under it is because the market for these instruments is drying up or they are mismanaged. Southwest will just buy and sell somewhere else.

I'm hoping SWA doesn't hold a "promise" from some small, weak oil company to provide fuel at a low price. That is a business risk instead of a "lock-in" price risk. Haven't heard this one before. I suspect it is vicious rumor.

 

[SDF2BUF2MCO]

Regionals. This is a tough one. If they get bigger RJ's that can be defined as narrowbodies, their cost structure suddenly becomes competitive.

Stating the obvious, but with a stroke of the pen, scope clauses could be rewritten and the real worth (or non-worth depending on your view) of the RJ would be unmasked.