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

[TSA/TWA/AA/TSA]

With hedging, you look into the future, and you have the chance to make variable costs fixed through futures contracts, you take the unknown factor out of it.

This is what a lot of people don't understand. Many airline sell tickets a year out(this is changing), setting pricing more than one year out is RISKY BUSINESS because you have varible costs(namely fuel). Well if you are hedged, its a whole lot easier to set ticket prices profitable(in the black). Have you ever noticed at the legacies how big of swing in loses and profits. This is a concept that WN management understands, reduce risk makes companies more profitable in good times and bad.

Now in these bad times, WN with their cost more fixed can determine if new markets can be profitable. MORE MARKET SHARE, and in MHO their is going to be more market share to be found as other management teams shrink their airlines while whining about some varible cost. "who would of thought gas would be over a $100 a barrel"

WN management now has the opportunity to gain marketshare just like they have for the past 30+ yrs.

Anyone avalible to walk my resume in @ SW, if I'm betting on anyones management team its SW.

WN fuel hedging will never run out, they are constantly hedging fuel, fixing future costs.

 

[U2DRVR]

Hedging from a business standpoint gets its name because you are trying to hedge risk, speculative investing on the other hand is a whole different game. With hedging, you look into the future, and you have the chance to make variable costs fixed through futures contracts, you take the unknown factor out of it. Your finance team is not in the business of speculative investing. There is a lot of money to be made and lost in commodities, and there are plently of people that spend 20 hours a day studying the charts to take a speculative position. Your finance guys are not in the business of doing that, they don't have access to the information, and they don't have the time to do it. So, they got lucky. I am not saying they aren't smart guys, but don't give them more credit than they deserve. I am pretty sure if you got them out at the bar after a couple of drinks, they would tell you the same thing.

This is an excellent point and one I think that is missed by most. Hedging is done primarily to fix costs at todays rates. SWA doesn't hedge to make money, they hedge to control costs so that their profitability and pricing is not at the mercy of the spec market in oil. Ticket pricing can be set based on known costs so that when oil is cheap, they make money off of ticket prices and when oil is expensive, they make money off of hedges.

The real advantage that SWA has is a lot of cash and great credit that allows them to hedge to such a large extent and leadership (not management) that is willing to take the risk.

 

[The Victors]

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.--->

Everyone at swa realizes how lucky they are to have that job. If you were there, you'd know this about the employees. The fuel hedges are ongoing. It wasn't a shot in the dark 10 years ago. I highly doubt you understand. I too, can not wait until everyone is on a level playing field. Airtran capt.'s go to work for the same wage that swa fo's earn, for example. Swa strives to pay their employees a proper wage while struggling to keep costs low. Once other pilot groups demand and receive swa pay or better, then we can talk about a level playing field.

 

[Tejas-Jet]

I guess they have been "lucky" for 35+ years now.

Couldn't have said it better myself

 

[pipejockey]

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.

I sure hope I am misreading your post. Is that 718 for 2 tickets roundtrip? If so, that IS dirt cheap. My goodness how people have been brainwashed into thinking these current prices are appropriate. Even people, apparently, within our own industry. This profession is doomed I say! DOOMED!!

 

[pipejockey]

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.

So swa has you guys thinking that working your a**es off is merely being productive? We all don't want to work the max FAA flight times of 1000 hours you know? But this what the rest of us must do now in the name of being "productive" so we can compete with swa.

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.

This is what we should all be earning at minimum line guarantee, not for working your a** off at 30 in 7, 100 a month or 1000 a year. Management expects US to work our a**es off in order to earn more, yet it is business as usual for those lazy a** sorry excuses for human beings.

 

[CaptainKiwi]

The thoughts of two different employees...

SWA employee -- *How can WE take care of this company so it will take care of US for OUR careers*

Pipejockey -- *How can I starve this company so I make the most and laugh at how little my peers make. My union will protect my job even if I hardly ever work. Oh No, I just got furloughed. How could this have happened? *

Just an observation...

 

[CA1900]

Yep, because there are only two possibilities there... If you're not giving every last waking hour to the company, I guess you're bleeding it dry.


"With us or against us," eh?

 

[dispatchguy]

We are lucky to have very smart, good people in management that we can trust. They are not over paid and they work hard. They keep coming up with better ways to do things and control cost.

This is a career of luck.

Truer words were never spoken. You had Mr Kelleher who embodied all that SWA is; work hard - have fun. You look at the SWA officer bios, and a lot of them have been at SWA forever - they know what works for SWA. You look at some legacy carrier officer bios, and the CEO has hopped between company and industries that all he truly knows is how to squeeze the employee; and make his ownself rich.

I remember watching something on YouTube about Herb. He said the reason that SWA is as successful as they are is their entire focus.

If you were to ask every airline CEO as to which group is the most important, employees, customers, or shareholders, my guess is that without question, most legacy management would say the shareholders.

At SWA it is the employee; you take care of the employee, they take care of the customer - and a lot of customers getting taken care of takes care of the shareholder.

And for 30+ years, that idea appears to still be working.

 

[Quimby]

So swa has you guys thinking that working your a**es off is merely being productive? We all don't want to work the max FAA flight times of 1000 hours you know? But this what the rest of us must do now in the name of being "productive" so we can compete with swa.



This is what we should all be earning at minimum line guarantee, not for working your a** off at 30 in 7, 100 a month or 1000 a year. Management expects US to work our a**es off in order to earn more, yet it is business as usual for those lazy a** sorry excuses for human beings.

Lots of "shoulds" & "wants" in there. Nothing is perfect in life. If you don't want to fly 1000 hrs a yr, or even 5......then don't. No one is stopping you. Whining about how a company has ruined your life (or expectations) on FI probably won't change things.

 

[satpak77]

Some misunderstations on Futures Market

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.

Home heating oil (and gasoline, etc) follow crude because everything is a derivative product from Crude. If crude is high, so is heating oil. Etc.

I personally, on my own time, trade futures, and thus am familiar with how those markets operate. I do not profess to be a know-it-all, but wanted to provide the below for FYI:

Crude Oil futures can be purchased (and sold/traded) on the futures markets, please see

http://www.nymex.com/lsco_fut_descri.aspx

Crude oil is the world's most actively traded commodity, and the NYMEX Division light, sweet crude oil futures contract is the world's most liquid forum for crude oil trading, as well as the world's largest-volume futures contract trading on a physical commodity. Because of its excellent liquidity and price transparency, the contract is used as a principal international pricing benchmark. Additional risk management and trading opportunities are offered through options on the futures contract; calendar spread options; crack spread options on the pricing differential of heating oil futures and crude oil futures and gasoline futures and crude oil futures; and average price options.

The contract trades in units of 1,000 barrels, and the delivery point is Cushing, Oklahoma, which is also accessible to the international spot markets via pipelines. The contract provides for delivery of several grades of domestic and internationally traded foreign crudes, and serves the diverse needs of the physical market.

A penultimate, financially settled crude oil (WS) contract is available for trading on the CME Globex® platform. The contract is listed for 72 months.

Light, sweet crudes are preferred by refiners because of their low sulfur content and relatively high yields of high-value products such as gasoline, diesel fuel, heating oil, and jet fuel.

As far as SWA trading Heating Oil, it is not because "Crude can't be traded" (Crude can be, but Jet-A futures cannot), but it is because modeling has shown that HO more accurately correlates to Jet-A pricing, and thus probably works out best for SWA business model/future planning. See discussion here

www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf

Jet fuel costs have substantially risen over the past several years putting consistent pressure
on airlines to maintain positive cash flows. While the costs are hedgable, there is not a perfect
hedge available in either the over-the-counter or exchange traded derivatives markets. Over-the-
counter derivatives on jet fuel are very illiquid which makes them rather expensive and not
available in quantities sufficient to hedge all of an airlineís jet fuel consumption. Exchange-traded
derivatives are not available in the United States for jet fuel, so airlines must use futures contracts on commodities that are highly correlated with jet fuel, such as crude and heating oil. As such,
airlines employ a variety of strategies ranging from not hedging to fully hedging using a
combination of products.

One reason SWA can hedge so well is that they have the credit to do this, as trading futures contracts requires financial credit worthiness and cash on hand. Other Ch.11 airline simply cannot do this. See:

At the other end of jet fuel hedging spectrum, several major airlines have hedged only a
small portion or none of their expected 2004 fuel consumption, including American, Continental, Northwest, and United. Ironically, these are the airlines that cannot afford the increasing fuel costs
due to severe cash flow constraints. Similar to JetBlue and Southwest, these airlines have
historically hedged their jet fuel costs using heating oil and crude options, swaps, and futures.
However, over the past three years, these airlines have had limited fuel hedging operations because they are unable to generate cash flows to finance futures margin deposits or option premiums. In fact, Delta entered 2004 with fuel hedges in place but was forced to close the positions to generate cash for operations. In addition, United had its fuel hedges canceled by its counterparty due to bankruptcy filing and Americanís credit rating limits the types of contracts it can use

Hope this sheds some light on the at-times-confusing concept of futures and hedging

 

[ivauir]

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

Um, not really. While it does provide profit in the commodities market, it is specifically part of our business plan. One of any airline's major costs is fuel and the price of fuel fluctuates wildly, even when it is not making headlines. If an airline is trying to sell tickets 6 months from now, what should the price be? Should it be driven by the competition or should it be based on what it costs the airline to produce the product?

Several years ago SWA decided it should be based on what it costs to generate the product. In order to do that we needed some way to minimize the fluctuation of fuel prices ... fuel hedges - they take the the guess work out of ticket prices. In this environment they take on a life of their own, but those who consider them out of context miss the point - they are part of the business model.

 

[flint4xx]

Common misconception about how much we work. I go for quality of life as a senior F/O. I flew 560 hours in 2007 and made $127k, with plenty of time off. I give stuff away and another guy can pick up and make more if desired. We have that flexibility on our schedule and bidding.

 

[Flyby1206]

Someone else aready said productivity. It is one of the keys. Another is employee attitude. Most folks here care about the company and even each other. Most try very hard to save the company money when and where ever we can. Back to productivity. We have some ofthe highest paid mechanics in the industry but we only have 4 per A/C. If that many. Everone here is addicted to overtime. Hard work pays off around here.

I think this is a key to the SWA success. The corporate culture is one of hard work and busting your a** to help the company and save a nickel. At my particular airline people taxi slow, fly slow, depart early and arrive late so that they can take an extra buck from the company. There are some who do work hard and bust a**, but they are not appreciated or rewarded in any way.

I am amazed at the employee productivity at SWA, but what else can you do when you are the most productive/highest paid pilots in the industry and profit margins are getting tighter? If you fly anymore per month youll have the whole company timing out in November.

I do worry that SWA is trying to over-extend themselves when it comes to things like international flying opportunities, building new gate areas to entice business flyers, selling tickets at wholesale websites (Orbitz) etc. Their business model has always been the industry underdog who fights against the Evil Empire by flying under the radar and taking a small market share. Is it changing now?

 

[Dumb Pilot]

One reason SWA can hedge so well is that they have the credit to do this, as trading futures contracts requires financial credit worthiness and cash on hand. Other Ch.11 airline simply cannot do this. See:

Hope this sheds some light on the at-times-confusing concept of futures and hedging

Very true, since hedging is a result of your ability of finding the best price thru bulk purchase and that is why companies with a solid bottom line like ANA for example, are able to be 100% hedged for years in advanced. But as the executive that is in charge of the fuel hedging at ANA wrote on an article, "hedging fuel doesn't eliminate the effects of rising fuel costs it only delays them "