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LUV Adjusts Fuel-Hedging Strategy

AA767AV8TOR

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Heat getting turned up on LUV. Welcome to the real world.

AA767AV8TOR

http://www.dallasnews.com/sharedcontent/dws/bus/stories/122408dnbusssouthwest.399369b.html

Southwest Airlines adjusts fuel-hedging strategy

09:45 PM CST on Tuesday, December 23, 2008

By: TERRY MAXON tmaxon@dallasnews.com

Southwest Airlines Co. – which maintained a competitive advantage by locking in prices when fuel costs soared – has adjusted its fuel-hedging strategy as prices have fallen.

The financial maneuvering means that Southwest's fuel bill next year will be about $1.4 billion less than the Dallas-based carrier projected five months ago.

Southwest also said Tuesday that it reinforced its dropping cash balance by raising more than $700 million through aircraft sales and debt secured by airplanes.

The Dallas-based carrier has been hurt in the second half of 2008 as it held fuel hedges priced well above current market prices for crude oil. As a result, the carrier said it has slashed its fuel-hedging position for the next five years.

In a filing with the Securities and Exchange Commission, Southwest said it is now "essentially" hedged for only 10 percent of its fuel needs for 2009 through 2013.

As recently as mid-October, Southwest had hedged 75 percent of its 2009 fuel usage at the equivalent $73 a barrel of crude oil, 50 percent of 2010's needs at $90 a barrel, 40 percent of its 2011 usage at $93 a barrel and over 35 percent of 2012 fuel at about $90 a barrel.

But energy prices have been in a near free-fall in recent months, with futures prices falling below $40 a barrel. While Southwest had benefited as crude oil prices soared well over $100 a barrel earlier in 2008, it had to put up more cash to cover its hedges toward the end of the year.

Fuel hedges are investments that airlines use to protect themselves from rising fuel costs, often by locking in a price or capping the maximum they may have to pay.

A steady program of hedging had benefited Southwest for years as it had locked in lower fuel prices than most of its competitors. But 2008 marked a turnaround as its low-priced hedges were running out and new hedging had to be done at much higher prices.

While Southwest and other carriers have benefited from lower market prices for jet fuel in recent months, they also have been hurt as the value of their hedges declined.

Southwest said that as of Monday, it has had to post about $230 million in cash as collateral for its hedges. "This collateral balance would have been approximately $600 million higher had the company not taken steps during the fourth quarter to substantially modify its hedge position," Southwest said in its SEC filing.

As recently as Sept. 30, Southwest was holding $2.5 billion in collateral posted by other parties as hedges were working in Southwest's favor.

Southwest said its cash balance on Monday was $1.3 billion, compared with $2.4 billion in cash and cash equivalents on Sept. 30 and more than $4.6 billion on June 30. Including short-term investments, Southwest's Sept. 30 balance was over $3.4 billion and the June 30 balance was more than $5.8 billion.

Southwest also said Tuesday that it agreed to sell 10 of its Boeing 737-700 aircraft to a third-part lessor. The first five were sold Tuesday for $175 million and leased back for 12 years. It said it expects to sell the second five in first quarter 2009 and lease them back for 16 years.

The $1.3 billion cash balance did not include the proceeds from the sale and leasebacks.

Southwest also said that it agreed Monday to borrow $400 million, secured by a pool of 17 airplanes. The deal, expected to close Tuesday, involves three-year notes paying 10.5 percent annual interest.

Southwest also said it modified one of its fuel-hedging agreements to provide that it can use 20 airplanes as collateral if it has to post between $300 million and $700 million.
 

Quimby

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Heat getting turned up on LUV. Welcome to the real world.

AA767AV8TOR

http://www.dallasnews.com/sharedcontent/dws/bus/stories/122408dnbusssouthwest.399369b.html

Southwest Airlines adjusts fuel-hedging strategy

09:45 PM CST on Tuesday, December 23, 2008

By: TERRY MAXON tmaxon@dallasnews.com

Southwest Airlines Co. – which maintained a competitive advantage by locking in prices when fuel costs soared – has adjusted its fuel-hedging strategy as prices have fallen.

The financial maneuvering means that Southwest's fuel bill next year will be about $1.4 billion less than the Dallas-based carrier projected five months ago.

Southwest also said Tuesday that it reinforced its dropping cash balance by raising more than $700 million through aircraft sales and debt secured by airplanes.

The Dallas-based carrier has been hurt in the second half of 2008 as it held fuel hedges priced well above current market prices for crude oil. As a result, the carrier said it has slashed its fuel-hedging position for the next five years.

In a filing with the Securities and Exchange Commission, Southwest said it is now "essentially" hedged for only 10 percent of its fuel needs for 2009 through 2013.

As recently as mid-October, Southwest had hedged 75 percent of its 2009 fuel usage at the equivalent $73 a barrel of crude oil, 50 percent of 2010's needs at $90 a barrel, 40 percent of its 2011 usage at $93 a barrel and over 35 percent of 2012 fuel at about $90 a barrel.

But energy prices have been in a near free-fall in recent months, with futures prices falling below $40 a barrel. While Southwest had benefited as crude oil prices soared well over $100 a barrel earlier in 2008, it had to put up more cash to cover its hedges toward the end of the year.

Fuel hedges are investments that airlines use to protect themselves from rising fuel costs, often by locking in a price or capping the maximum they may have to pay.

A steady program of hedging had benefited Southwest for years as it had locked in lower fuel prices than most of its competitors. But 2008 marked a turnaround as its low-priced hedges were running out and new hedging had to be done at much higher prices.

While Southwest and other carriers have benefited from lower market prices for jet fuel in recent months, they also have been hurt as the value of their hedges declined.

Southwest said that as of Monday, it has had to post about $230 million in cash as collateral for its hedges. "This collateral balance would have been approximately $600 million higher had the company not taken steps during the fourth quarter to substantially modify its hedge position," Southwest said in its SEC filing.

As recently as Sept. 30, Southwest was holding $2.5 billion in collateral posted by other parties as hedges were working in Southwest's favor.

Southwest said its cash balance on Monday was $1.3 billion, compared with $2.4 billion in cash and cash equivalents on Sept. 30 and more than $4.6 billion on June 30. Including short-term investments, Southwest's Sept. 30 balance was over $3.4 billion and the June 30 balance was more than $5.8 billion.

Southwest also said Tuesday that it agreed to sell 10 of its Boeing 737-700 aircraft to a third-part lessor. The first five were sold Tuesday for $175 million and leased back for 12 years. It said it expects to sell the second five in first quarter 2009 and lease them back for 16 years.

The $1.3 billion cash balance did not include the proceeds from the sale and leasebacks.

Southwest also said that it agreed Monday to borrow $400 million, secured by a pool of 17 airplanes. The deal, expected to close Tuesday, involves three-year notes paying 10.5 percent annual interest.

Southwest also said it modified one of its fuel-hedging agreements to provide that it can use 20 airplanes as collateral if it has to post between $300 million and $700 million.

you're an angry person. go have a beer.
 

Scope out RJ's

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Hmmmmmm, sounds all too familiar. Selling aircraft, leasing them back. Stalled contract negotiations with pilots. Code shares. $million quarterly losses.
A legacy carrier, they are!
 

Bavarian Chef

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Interesting article.
 

GuppyWN

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There is a reason Gary Kelly is #3 on CEO Magazines list of wealth destroyers.

Gup
 

pacswaski

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Its amazing to me that people are still waiting for the demise of SWA. First the story, over the past so many years, was how SWA would be " welcomed back to the real world " when their hedges run out, now they are welcomed back because they are " losing their arse " on hedges. AA dude, and others: we're all just worker bees, and we all just happen to work for different airlines. Its not a question of my dad can beat up your dad........we're all being beat up by the man. But thats a different discussion all together.
Perhaps all the doom and gloom on SWA people need to realize that the " millions of dollars SWA is losing" are paper losses. Losses on the future value of their hedging portfolio. They are the same type of losses, mark to market accounting voodoo, which enabled AIG to show massive profits on their CDS accounts. Those were value of future profits......which were obviously BS.
SWA is not losing on hedged fuel like some carriers, who hedged at 145 a barrel. And as the article showed, they are able to dump out future hedges, which is not happening at a 1 for 1 basis. They lose a deposit, not the entire number. And I do believe the same article mentioned a 1.4 billion dollar " gain " because fuel is cheaper next year....for everyone.
So.....SWA's ability to keep making profits ( yes, even last quarter was a profit...they are paying profit sharing on it....not the mark to market number), will remain steady, aided by low fuel prices and fueled by smart management........so far.
 

Bavarian Chef

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Its amazing to me that people are still waiting for the demise of SWA. First the story, over the past so many years, was how SWA would be " welcomed back to the real world " when their hedges run out, now they are welcomed back because they are " losing their arse " on hedges. AA dude, and others: we're all just worker bees, and we all just happen to work for different airlines. Its not a question of my dad can beat up your dad........we're all being beat up by the man. But thats a different discussion all together.
Perhaps all the doom and gloom on SWA people need to realize that the " millions of dollars SWA is losing" are paper losses. Losses on the future value of their hedging portfolio. They are the same type of losses, mark to market accounting voodoo, which enabled AIG to show massive profits on their CDS accounts. Those were value of future profits......which were obviously BS.
SWA is not losing on hedged fuel like some carriers, who hedged at 145 a barrel. And as the article showed, they are able to dump out future hedges, which is not happening at a 1 for 1 basis. They lose a deposit, not the entire number. And I do believe the same article mentioned a 1.4 billion dollar " gain " because fuel is cheaper next year....for everyone.
So.....SWA's ability to keep making profits ( yes, even last quarter was a profit...they are paying profit sharing on it....not the mark to market number), will remain steady, aided by low fuel prices and fueled by smart management........so far.

You're being too sensitive, Sally.
 

pacswaski

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Sensitive?? Just hate stupid uninformed posts of the " us against them " mentality. I don't want any carrier doing badly. Guess I am in the minority.

PS. Not a SWA Koolaid drinker. Before we start that route.
 

Bavarian Chef

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Sensitive?? Just hate stupid uninformed posts of the " us against them " mentality. I don't want any carrier doing badly. Guess I am in the minority.

PS. Not a SWA Koolaid drinker. Before we start that route.

You got all of that from the first post? From "welcome to the real world"?
 

bravodude

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There is a reason Gary Kelly is #3 on CEO Magazines list of wealth destroyers.

Gup

Now you know as well as I do last year SWAPA was all up in arms about how we could be the subject of a leveraged buyout. The company has done this before. They get cash and increase their leverage. I suppose you were against this from the get go, I also believe you were the mastermind of our hedgeing program that has saved us millions of dollars. think I will nomnate you for the positon of SWA CEO the next time the board meets. You seem to be a verry angry man and for that i'm sorry but you need to relax.
 

Sedona16

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Now you know as well as I do last year SWAPA was all up in arms about how we could be the subject of a leveraged buyout. The company has done this before. They get cash and increase their leverage. I suppose you were against this from the get go, I also believe you were the mastermind of our hedgeing program that has saved us millions of dollars. think I will nomnate you for the positon of SWA CEO the next time the board meets. You seem to be a verry angry man and for that i'm sorry but you need to relax.

You might want to go re-read the thread starting article.....the hedging mastermind hasnt done so well lately.
 

humveedriver

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Southwest said its cash balance on Monday was $1.3 billion, compared with $2.4 billion in cash and cash equivalents on Sept. 30 and more than $4.6 billion on June 30. Including short-term investments, Southwest's Sept. 30 balance was over $3.4 billion and the June 30 balance was more than $5.8 billion.

Those seem like big numbers to me. The point is, SWA is no longer operating in a fuel hedge bubble anymore. Not wishing "ill will", I just want to see if LUV can make a buck on even ground. It helps everyone if they can (negotiations, pricing, etc...).
 

GuppyWN

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Now you know as well as I do last year SWAPA was all up in arms about how we could be the subject of a leveraged buyout. The company has done this before. They get cash and increase their leverage. I suppose you were against this from the get go, I also believe you were the mastermind of our hedgeing program that has saved us millions of dollars. think I will nomnate you for the positon of SWA CEO the next time the board meets. You seem to be a verry angry man and for that i'm sorry but you need to relax.

I try to not be an angry man. I just feel like my Koolaid drip is running low or maybe the rose colored glasses have come off. Don't know. Hope it is temporary but I most certainly don't LUV all things Southwest like I have in the past 10 years. The whole codeshare "trust me" line is my biggest problem. I just cannot condone Mr. Kelly farming out our futures.

As far as a leveraged buyout? Are you serious? Gary is the CEO. That makes him the target of my rant. The stock is trading at a TEN YEAR LOW. If you look at the other transportation stocks you'll find they have held up MUCH better than Southwest Airlines. Alaska, for example, is trading at a 52 week HIGH. Our cash on hand is down 4 billion dollars in the past year. Our market cap is down 50% from last year which makes us a much bigger target for the leveraged buyout - not smaller. Gary has screwed the pooch on that front - or maybe not. Depends on his plans.

Just the facts as I see them bro. Please tell me I'm wrong.

V/R,
Gup
 

Jon Rivoli

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target for the leveraged buyout

But who has the money or the inclination? You're safe.
 

Ex737Driver

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Its amazing to me that people are still waiting for the demise of SWA. First the story, over the past so many years, was how SWA would be " welcomed back to the real world " when their hedges run out, now they are welcomed back because they are " losing their arse " on hedges. AA dude, and others: we're all just worker bees, and we all just happen to work for different airlines. Its not a question of my dad can beat up your dad........we're all being beat up by the man. But thats a different discussion all together.
Perhaps all the doom and gloom on SWA people need to realize that the " millions of dollars SWA is losing" are paper losses. Losses on the future value of their hedging portfolio. They are the same type of losses, mark to market accounting voodoo, which enabled AIG to show massive profits on their CDS accounts. Those were value of future profits......which were obviously BS.
SWA is not losing on hedged fuel like some carriers, who hedged at 145 a barrel. And as the article showed, they are able to dump out future hedges, which is not happening at a 1 for 1 basis. They lose a deposit, not the entire number. And I do believe the same article mentioned a 1.4 billion dollar " gain " because fuel is cheaper next year....for everyone.
So.....SWA's ability to keep making profits ( yes, even last quarter was a profit...they are paying profit sharing on it....not the mark to market number), will remain steady, aided by low fuel prices and fueled by smart management........so far.

Welcome back, either way.:beer:
 

Skater

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I try to not be an angry man. I just feel like my Koolaid drip is running low or maybe the rose colored glasses have come off. Don't know. Hope it is temporary but I most certainly don't LUV all things Southwest like I have in the past 10 years. The whole codeshare "trust me" line is my biggest problem. I just cannot condone Mr. Kelly farming out our futures.

As far as a leveraged buyout? Are you serious? Gary is the CEO. That makes him the target of my rant. The stock is trading at a TEN YEAR LOW. If you look at the other transportation stocks you'll find they have held up MUCH better than Southwest Airlines. Alaska, for example, is trading at a 52 week HIGH. Our cash on hand is down 4 billion dollars in the past year. Our market cap is down 50% from last year which makes us a much bigger target for the leveraged buyout - not smaller. Gary has screwed the pooch on that front - or maybe not. Depends on his plans.

Just the facts as I see them bro. Please tell me I'm wrong.

V/R,
Gup

Couldn't agree more. Kelly is completely risk averse. Seemed like a great money guy, but not a visionary. The code share thing has really pissed me off. I am so f^#$ing tired of hearing how we can not go near international, but Volaris, a 19 plane 2 year old company, apparently can grow their fleet and start up Mex/US ops, but we, the largest domestic operator in the US, can't. Just doesn't add up. Oh, and thanks for buying back stock at $14 dollars a share and wasting all that money. Pretty frustrating right now.
 

CaptSeth

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Why can't SW fly International? No reason in the world. You guys could ramp it up and be in the game next week if you wanted to.

But it is soooo much cheaper to have foreign crews flying those routes. Enjoy your helping of whipsaw, boys, your fun has just begun. Feelin' the LUV?
 

Cobraair75drvr

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Are you kidding? NWA was the most financially stable airline by far in the 80s. Posted profits from the mid 50s thru 89 I believe. Paid cash for aircraft(something even the great LUV can't do) Think about that. Well the beach boys(Checci & Wilson) use about 20-30 million of their own cash, then use NWAs cash hoard to buy control then immediatly start loading the company up with debt (releasing shareholder value) Don't think it can't happen at LUV. It can happen and if it does the looting will happen very fast. Then the next thing you will be hearing is LUV is inefficient, needs to address out of line labor cost etc.





But who has the money or the inclination? You're safe.
 

contrail67

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Hmmmmmm, sounds all too familiar. Selling aircraft, leasing them back. Stalled contract negotiations with pilots. Code shares. $million quarterly losses.
A legacy carrier, they are!

No...they are still a low cost carrier....just taking the footsteps of some legacy carriers.
 
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