Consider Taking Off The Rose-Colored SWA Glasses For a Moment and Discuss...

[Voice Of Reason]

Considering that not too long ago UAL was the "holy grail set-for-life" pilot job, and most people thought that nothing could change that...I have a topic for discussion about SWA.

Please don't turn this into a SW hating thread, or a "we'll always be on top thread" from the opposite side.

I'd like to hear from some people who feel they might have a bit of financial sense (of which I have absolutely none) which might explain to me HOW SWA can succeed in THIS economic climate (and worsening), especially once the effects of no longer benefiting from smart fuel hedges kicks in.

The only rational-seeming way for airlines to survive, seems to be to clear out the negativity that makes them so hated in the eyes of the general public, AND raise prices and pass costs along to customers, not cheap tickets from employee subsidies....

Which brings me to SWA... just HOW will they be able to continue (in THIS economic env & worse) to pay employees the way they do (well) and keep tickets dirt cheap? I just don't see how people are talking one minute as if these low cost carriers will survive (in THIS climate) and then how fares need to raise exponentially another minute (which seems to be the solution I see).

I could understand if SWA was on a Wal-Mart type road (cheap/mass product/PITIFUL wages)...but I don't get how they can continue to be on top with their current model (as the economic climate worsens, and the effects of loss of great fuel hedges kicks in).

What makes people think that SWA won't find itself in the same position as a UAL (recently the holy grail, now the polar opposite)? Yeah, maybe they have much better management than UAL...but HOW do they survive (and continue to survive) in these unprecedented conditions and remain "low cost"?

Again...break it down for the financial knowledge impaired... I am genuinely curious as to how to gauge this and not get in the mode of jumping from ship to ship (remaining at the bottom at each ship) following a good job that may not exist anywhere transporting passengers in any venue (that doesn't involve the following : being away 7 or 8 days at a time for your entire careers, justifying your flight plans to some (fractional) CEO you're flying that think he knows it all, or
going to a foreign country and fly for an Emirates type operation)....

 

[CaptainKiwi]

Productivity.....

 

[RDG]

The fuel hedges never run out friend. Three guys at SWA buy and sell those contracts all day. Its their job. The only way they would work against us is if a new oil field was found somewhere, and the cost of oil dropped by a huge amount and stayed down.

SWA isn't saddled with huge overhead for airport lounges or first class seats that get given away more than sold, and they don't throw big bucks at lawyers to work on mergers that never happen.

SWA could stumble if we got bad leadership at the top, but I think they handle changing economic environments better than anyone.

 

[Voice Of Reason]

The fuel hedges never run out friend. Three guys at SWA buy and sell those contracts all day. Its their job. The only way they would work against us is if a new oil field was found somewhere, and the cost of oil dropped by a huge amount and stayed down.

SWA isn't saddled with huge overhead for airport lounges or first class seats that get given away more than sold, and they don't throw big bucks at lawyers to work on mergers that never happen.

SWA could stumble if we got bad leadership at the top, but I think they handle changing economic environments better than anyone.

Good insight...

So, if they are still doing fuel hedges...they are now much more in line with high fuel prices, though, right (as opposed to $50 a gal or something)?

I also get that they manage their money much better than most airline mgts, but with the low cost fare structure....

...I don't know....I guess I just don't get how ANYONE will stay in business as far as things have come, and where it seems to be headed...
:bawling:

 

[XJ-spartacus]

You run lean and fast. Take advantage of the economic environment by lowering ticket prices when your competition can't. This way, you can bleed your competition and still not look preditory. Plus, chapter 7 liquidation sales are cheaper and less complicated to aquire assets through, verses through merger acquisition laws. Same tactic the Russians used to defeat Napoleon. Let the environment kill your enemy, it takes less effort and the produces the same results.

-Spartacus

 

[Bavarian Chef]

Red Lion Hotels. Camp counseler FA uniforms. They distill their own whiskey. It's the little things.

 

[RDG]

I don't know the details of the hedges, but they are home heating oil contracts, not jet fuel. Home heating oil is traded on the commodity markets (I think) and jet fuel is not, so when you hear about hedges, it sort of misleads you that we pay less at the pump.

You're exactly right in that it is better money management, but it is also cost control. Our seat mile cost is between 6-7 cents a mile, not including fuel.

And like KaptainKiwi said, we are a productive group. By the end of June I will be close to 500 hours so far, and that is with between 14-17 days off each month. I'm ok with that because I have no problem earning my paycheck. When you are getting paid to stay home, deadhead, sit in your hotel, etc., its great for you, but not the group.

Work hard, play hard, go home. Works for me.

 

[Bavarian Chef]

1000 hrs of block a year and 14 days off a month ... my how the dream has changed.

The good news is we get to do it until we turn 65!

 

[Voice Of Reason]

I don't know the details of the hedges, but they are home heating oil contracts, not jet fuel. Home heating oil is traded on the commodity markets (I think) and jet fuel is not, so when you hear about hedges, it sort of misleads you that we pay less at the pump.

Home heating oil?
Now I am totally confused... :erm:

 

[vixin]

1000 hrs of block a year and 14 days off a month ... my how the dream has changed.

The good news is we get to do it until we turn 65!

I have never had only 14 days off. But, we are productive when we go to work. What a concept.

 

[GuppyWN]

Home heating oil closely follows the price of crude oil. Since you can't buy crude oil on the futures market - they buy home heating oil futures.

Productivity is huge. We fly our airplanes more per day and turn them around quicker than most. Our pilots work more per day than most. BIG.

Our linear system is big. We don't take you back forth to the hub and sit for 4 hours. We take you in the general direction you want to go and the airplane keeps moving.

I hate to say it like this but we don't have to outrun the bear, we just have to outrun the other guy.

I am confident in WN's leadership and direction. We have always prospered when times were the bleakest. I believe you are seeing that again now. The balance is too not grow more than you can support.

Cheers,
Gup

 

[Wesb737fo]

If you want an interesting read, try "NUTS", basically a history of SWA and their business philosophy.

Yeah I know there is alot of Kool Aid in this book, nevertheless, it might answer alot of questions as to why they are, and have been so successful.


The hedging thing could come home to roost if oil crashes because their pricing advantage would erode but I wouldn't bet on oil coming down anytime soon.

You probably would have better luck digging up Jimmy Hoffa and seeing him pitch in the World Series.

 

[Voice Of Reason]

Home heating oil closely follows the price of crude oil. Since you can't buy crude oil on the futures market - they buy home heating oil futures.

Okay...I am VERY dense when it comes to this stuff, so bear with me...
So how does an airline "hedging" home heating oil directly help the airline with its jet fuel costs (or does it?)?

 

[The Victors]

It doesn't. It's just profit in the stock market like anyone else could do.

 

[Voice Of Reason]

It doesn't. It's just profit in the stock market like anyone else could do.

Thanks, got it...

I was confused because in the beginning we were hearing SW was paying much less for jet fuel due to fuel hedges.

Thanks everyone for your intelligent responses!

 

[BrokenWing]

The fuel hedges never run out friend. Three guys at SWA buy and sell those contracts all day. Its their job. The only way they would work against us is if a new oil field was found somewhere, and the cost of oil dropped by a huge amount and stayed down.

So, if oil goes to $500 a barrel and SWA is hedged at $350, that's okay? Don't think so.

 

[Voice Of Reason]

Haven't heard anything lately about the whole SWA/FAA fiasco, and what kind of economic impact (if any) huge fines (if there will be) would have on the airline?

 

[airlinepilot]

Word at HQ is the fine will be much, much less because SWA had the FAA primary inspector's approval to do what we did. When it gets to court that should weigh heavy in our favor. As far as any problems it cased with daily ops....that was very minimal.

 

[B727Driver]

So, if oil goes to $500 a barrel and SWA is hedged at $350, that's okay? Don't think so.

If oil gets that high, SWA maybe the only one around who can afford it. In reality, the US economy will be on life support before this happens. Leisure travel, yeah right, gone as would be most of the airlines not only here but worldwide. If oil goes to $500, our dollar would be so weak that the peso would be worth a bunch more. Then Mexico would be building a fence.

 

[JumpJetter]

SWA actually pays the same for fuel as everyone else. Each quarter you will have a column on the balance sheet titled "Realized Gains from Fuel Hedging". Something to that effect. Anyway, any money you made from that offsets what you spent in fuel.

Honestly, the productivity at SWA is quite amazing. They fly the jets A LOT. Don't spend a lot of time on the ground, cause planes don't make money on the ground. Without a hub and spoke system you are not rushing folks to a hub to make the final connection.

I've worked at a regional and another major and I can say in they are far more efficient with aircraft than the other guys. That is not enough to offset the cost of fuel right now, but the hedging is helping that. This is the most important thing to remember regarding hedging. IF THE MASSIVE FUEL HEDGES WERE NOT IN PLACE A SWA THE BUSINESS PLAN WOULD HAVE BEEN DIFFERENT.

 

[say again]

Honestly, the productivity at SWA is quite amazing. They fly the jets A LOT. Don't spend a lot of time on the ground, cause planes don't make money on the ground. Without a hub and spoke system you are not rushing folks to a hub to make the final connection.

Very true!! BUT on SW, to get from A-B you need stops at C and D with a connection at E. JK, but my east to west trip and vice versa certainly felt that way. :beer:

Productivity+great customer service goes a long way.

 

[skywdriver]

The fuel hedges never run out friend. Three guys at SWA buy and sell those contracts all day. Its their job. The only way they would work against us is if a new oil field was found somewhere, and the cost of oil dropped by a huge amount and stayed down.

SWA isn't saddled with huge overhead for airport lounges or first class seats that get given away more than sold, and they don't throw big bucks at lawyers to work on mergers that never happen.

SWA could stumble if we got bad leadership at the top, but I think they handle changing economic environments better than anyone.

I think that post is misleading. Although they may continue to hedge fuel, they are not hedging it at $60 a barrel any more. Futures contracts work like stocks or anything else that is sold, you have to have someone willing on the other end to sell for what you are willing to pay. Nobody is selling futures contracts for that cheap. Southwest locked in all of those cheap fuel contracts a long time ago. Each year they are less and less hedged. I think the fuels hedges are completely gone by 2012, however you can find that information in their annual report or even the quarterly 10Q's Point being, eventually the real environment will catch up to Southwest as well. And, for the health of the industry as a whole, the sooner that happens the better. They have a good business plan, but those fuel hedges were complete luck - no one saw fuel going where it did today when they locked in those contracts. However, now they are able to keep the ticket prices much lower than they should be based on such an advantageous cost structure. So, the public thinks it is their born right to fly in a commercial airliner for cheaper than they can drive their car. Totally ridiculous, and I think it will be hard for the industry to correct itself, while there are still companies that are able to underprice tickets.

In addition, you can't compare Southwest to a legacy carrier that feeds international flights. Apples to Oranges. Totally different business models. I for one can not wait until everyone is on a level playing field. I highly doubt the people working at Southwest realize how lucky they are that a couple of guys in the finance group took a huge chance on locking into oil prices 10 years into the future. Of course i guess its always better to be lucky than good.

 

[Tejas-Jet]

1000 hrs of block a year and 14 days off a month ... my how the dream has changed.

The good news is we get to do it until we turn 65!

Only if you want to...this guy's schedule is done that way by choice....his choice....some months I fly alot...some I don't fly so much...depends on what I've got going....

Cowboys game....wedding....Star Trek convention...

 

[JumpJetter]

Very true!! BUT on SW, to get from A-B you need stops at C and D with a connection at E. JK, but my east to west trip and vice versa certainly felt that way. :beer:

Productivity+great customer service goes a long way.

I agree with ya! Just a couple of things to remember, for the most part, SWA does not operate routes that do not make money. How can I know that? I don't. But they do make lots of stops to pick up more people, and FOR THE PRICE, peeps seem to be OK with it.

 

[JumpJetter]

I think that post is misleading. Although they may continue to hedge fuel, they are not hedging it at $60 a barrel any more.

True, it's $53/brl this year.

Each year they are less and less hedged. I think the fuels hedges are completely gone by 2012

It changes every quarter. I will find a couple of reports and post them chronologically for ya. As recently as the fourth qtr of 2007 we were 70% hedged at $53/brl in 2008. When the first qtr plan came out it was 75%.

real environment will catch up to Southwest as well.

At which point SWA will adjust the business plan

but those fuel hedges were complete luck - no one saw fuel going where it did today when they locked in those contracts.

Again, it's a continually adjusted thing. Not all of them were made in 2000. Plus I'd rather be lucky that good any day!

In addition, you can't compare Southwest to a legacy carrier that feeds international flights. Apples to Oranges.

In some ways I agree with you, but Pan Am eventually became an International ONLY airline. Is that where the legacys are going? Seems to me there would be a lot MORE domestic opportunity available for other airlines if that is the case.

Good discussion. Rare for FI

 

[say again]

True. Each of the legs were full or very close. I really don't mind multiple legs. Granted it wastes a day, but I find flying SW to be enjoyable (by myself, no family). The FA's and CSR are by far the most pleasant and seem to actually care about the customer. :beer:

 

[Tejas-Jet]

Southwest locked in all of those cheap fuel contracts a long time ago.--->The hedge contract are a work in progress. What you see today isn't want we had 3 or even 5 years ago....it is also not what we will be hedged in 2-3 or even 5 years from now. Each year they are less and less hedged.---> and that due to the changing fuel market. The final numbers are not yet done for 2009...negotiations are still in progress. I think the fuels hedges are completely gone by 2012,--->Take notes...the fuel hedges are part of the long term business strategy...they aren't going away They have a good business plan, but those fuel hedges were complete luck - no one saw fuel going where it did today when they locked in those contracts.--->I really don't think the CEO signed off on "luck" back then...I'm sure the Hedging presentation had some level of "facts" associated with it. The first Hedge contract prices are not the same as the hedge contracts in place today....sure, we are paying more today than we did then...but it's a much more lucrative business proposition today than it was back then...and it works for SWA...why? Because to get in the hedge game....you gotta pay up front....not too many airlines got that kind of "jack".

I for one can not wait until everyone is on a level playing field.--->We live in a capitalist society...no business is guaranteed a "level playing field" in this country I highly doubt the people working at Southwest realize how lucky they are that a couple of guys in the finance group took a huge chance on locking into oil prices 10 years into the future.--->I can't speak for everyone here, but your "Highly doubt" feeling is misplaced when it comes to me. Thats because I sure do realize how blessed we are to have top notch people working for us. And of course, that comes from having flown at a "legacy" carrier where our dim-witted management team couldn't see into the next month....much less 10 years in advance. BTW....lots of Pilots here share my feelings toward those who work in our fuel office.

Maybe some people need to work for an airline like that to realize how good we have it here.

 

[Whataburger]

So, if oil goes to $500 a barrel and SWA is hedged at $350, that's okay? Don't think so.

We pay $350. The other airlines pay $500. We can charge less for a ticket.

The other reasons include:
Great leadership, common goals, efficiency, teamwork, forward thinking mgmt., and luck. Luck is where timing and preparation come together. Was it Parker that said, "Southwest has predicted 10 out of the last 2 recessions."

 

[Mach 80]

>>>1000 hrs of block a year and 14 days off a month ... my how the dream has changed.<<<

Hey Bavarian,

You should check out a SWA pilot's line sometime. For the same relative seniority compared to any other narrow body major airline pilot's line, a SWA pilot's line will work fewer days a month. Instead of going out to a city then back to a hub only to get 2 hours for a plane swap, eat yogurt, and cruise the magazines at the airport store, the SWA pilot is doing 25 minute turns on a point to point route and rarely messes with swapping planes. Ergo, he can typically fly 7 to 7+55 each day he goes to work. It's called EFFICIENCY. Some guys pick up a lot, some don't ever. Some guys work hard for two months and then give away some trips the third, using the extra money from the hard working months pay for his boat, etc. There are even a couple of SWA Captains who make >$300,000 and one who made over $400,000 last year. Not unusual for some F/Os to make > $130,000.

 

[SDCFI]

Not all SWA tickets are "dirt cheap" either. I'm flying to Boston in August for a wedding. AAL DFW-BOS roundtrip: $718 for two non-stop each way. SWA DAL-MHT: $850 with 3! stops there and 2 coming back. Southwest makes money by pricing their product at a level that actually covers the cost of operating plus some profit. Their productivity and low-cost structure means they don't have to charge as much in most cases to meet that point. It's their efficiency that drives their success, the hedges are just icing on the cake if you ask me.