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Southwest CEO: AirTran Deal 'Imperative' To Counter Fuel Spike

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http://online.wsj.com/article/BT-CO-20110225-710894.html

Southwest CEO: AirTran Deal 'Imperative' To Counter Fuel Spike

PEWAUKEE, Wis. (Dow Jones)--The head of Southwest Airlines Co. (LUV) said Friday it is "absolutely imperative" the company completes its planned merger with AirTran Holdings Inc. (AAI) as a hedge against soaring jet fuel costs.
Gary Kelly, chairman, president and chief executive of Dallas-based Southwest, said both carriers could be forced to shrink without a deal the companies aim to close in the second quarter of this year.
Kelly's comments came during testimony before the Senate Antitrust, Competition Policy and Consumer Rights subcommittee.
The Justice Department in November made a second request for information on the planned deal that would expand Southwest's domestic capacity by more than a fifth and provide entry to key markets such as Atlanta for the first time.
The proposed deal has attracted little opposition from rivals and lawmakers compared with recent consolidation in the U.S. industry.
The field hearing was called by Sen. Herb Kohl (D., Wis.), who in his opening remarks planned to question the potential impact of the deal on competition from Milwaukee's Mitchell Airport.
Southwest and AirTran would have a combined 39% share at the airport.
"The experience of other airline mergers in recent years gives us reason for caution," said Kohl.
Of the Southwest/AirTran deal he said: "I get the feeling that there are goods and bads to it."
Kelly said the enlarged airline would provide "Milwaukee-area customers with access to an even stronger and nationwide low-fare, low-cost carrier network."
He declined to provide Sen. Kohl with a guarantee that Southwest would maintain the airlines' combined capacity at Milwaukee after the deal closes, citing the uncertainty created by fuel prices. "We want to grow...but we have to do that in a fiscally responsible way," he said. Diana Moss, vice president of the American Antitrust Institute, called AirTran a "maverick" and said there was a risk of fares rising and capacity cuts. "It is clear that AirTran is an aggressive discounter relative to Southwest," she said. "Fares could edge higher and rivalry diminish."
Kelly said Southwest was unlikely to maintain AirTran's crew base--of 70 to 90 pilots--in Milwaukee after a merger, though he expected the number of airport staff to expand as it worked to boost frequencies. He also said Southwest has yet to determine the fate of AirTran's code share deal with Skywest Airlines Inc. (SKYW). Southwest's pilots' contract precludes domestic code sharing.
 
I guess it is a merger of equals. Both need each other equally. You do have to wonder what a difference it makes now that SWA no longer has the advantage with fuel hedging like it did last time fuel spiked?
 
I guess it is a merger of equals. Both need each other equally. You do have to wonder what a difference it makes now that SWA no longer has the advantage with fuel hedging like it did last time fuel spiked?

Post of the year!
 
This press release and the similar statement made by our CEO is obviously a very calculated move to pressure the stockholders and regulators.
 
I guess it is a merger of equals. Both need each other equally. You do have to wonder what a difference it makes now that SWA no longer has the advantage with fuel hedging like it did last time fuel spiked?

Dan the man,

Actually we are hedged real nice per LW. This will also allow for AT to be placed under our umbrella. It might be a bumpy road the next year but SWA/AT will come out strong.
 
Airtran is hedged roughly the same as SWA this year, but since the merger was announced, Airtran has not grown their hedge portfolio. Only hedged 5% for 2012. Bob needs this deal to go through or else we enter next year poorly hedged.
 
Making Money during high oil prices

On July 11th 2008 Oil hit a high of 147.27 per brl

AAI closed at $1.70 a share

LUV closed at $13.20

For the year 2008 AAI Had a Net loss of $273.8 million ($2.51 per share)

For the year 2008 LUV Had a Net profit of $178 Million ($.24 per share)

I don't think there is anything Airtran or Bob Fornaro can show Gary Kelly and Southwest about making money when oil prices are high. Let's not kid ourselves people. It's obvious who needs who. Not saying AAI is bringing nothing to the party lets just try to keep some semblance of reality in your posts.

RWAV
 
On July 11th 2008 Oil hit a high of 147.27 per brl

AAI closed at $1.70 a share

LUV closed at $13.20

For the year 2008 AAI Had a Net loss of $273.8 million ($2.51 per share)

For the year 2008 LUV Had a Net profit of $178 Million ($.24 per share)

I don't think there is anything Airtran or Bob Fornaro can show Gary Kelly and Southwest about making money when oil prices are high. Let's not kid ourselves people. It's obvious who needs who. Not saying AAI is bringing nothing to the party lets just try to keep some semblance of reality in your posts.

RWAV

And give away their insistence that 17 years at AAI should be equal to 37 years at SWA??? C'mon! (said with the appropriate GOB Bluth inflection - and if you don't get that, I've made a HUGE mistake)

PapaWoody

PS And if you DO get that, then I'm buying the beer any trip that we're on together!!! :beer:
 
I'm hearing a lot of crickets over here.
 
I think it is ironic that the Airtran guys want to disregard everything their CEO has to say as being false but hang on every word Gary has to say. For what it is worth I think both CEO's are trying to make their case for a quicker transaction, which if we as pilots don't screw it up will benefit us all!
 
Airtran is hedged roughly the same as SWA this year.

Now that is funny!

Actually, while both airlines have a decent fuel hedge portfolio covering a good portion of their 2011 fuel needs, Airtran is hedged a little better than Southwest according to the numbers.

Looking at tables towards the end of Southwest's Q4 2010 earnings press release date January 20, 2011, Southwest would save $0.16/gallon on their economic fuel costs if oil averages $125/barrel for 2011. If you look at page 59 of Airtran's SEC filing dated February 4, 2011, Airtran would benefit $75 million from their fuel derivative contracts if oil averages $110/barrel for the year. If you do the math using Airtran's yearly fuel needs in the 370 million gallon range, Airtran will save $0.20/gallon if oil averages $110/barrel. Also from the Southwest release date Janauary 20, 2011, Southwest saves nothing if oil averages $100/barrel for 2011.
 
maxblast72

As was told to us by Kelly at a recurrent. Our hedges are not static and change from quarter to quarter. Our position at the end of 2010 could/would be drastically different than our position 2nd quarter 2011. Also, just like he did last time, Kelly would more than likely get into a bigger hedging position as the middle east continues to melt down.

And, one more point to be made. The Hedges are on oil futures, not on fuel that goes into the planes. Not sure if you were alluding to something different but this is a great misconception that no one seems to get right, even the geniuses on CNBC or FOX business.
 
For the year 2008 AAI Had a Net loss of $273.8 million
For the year 2008 LUV Had a Net profit of $178 Million
AND

For the year 2009, AAI had a Net Profit of $135 million
For the year 2009, LUV had a Net Profit of $99 million despite flying over 4 times as many ASMs as Airtran.

I think the point Gary Kelly made in Milwaukee a week ago Friday is that the revenue possibilities of a combined Southwest-Airtran is greater than the sum of the two airlines operating independently. This greater revenue potential is needed to combat higher energy costs that both airlines are feeling currently.
 
2009

The thread was about fuel (oil) spiking and who is better positioned to weather that storm. I think I more than proved my point. Interesting that you chose 2009 as that was the year Kelly had to pay the piper for the fuel hedges. Had he not guessed wrong we would probably not be talking about this at all as I doubt AAI (and a few others) would still be in business.

Back to 2008

3/28/08 AAI- $6.47
3/28/08 LUV -$12.03
Oil was around $104 a barrel

Eerlily similar to where we are now.

Kelly could pay his fine for reneging on the deal and wait around for oil to spike even higher and then maybe get AAI at around $1.80-$2.00 a share. Or, has something changed so drastically in AAI's business model that they are not in danger of this happening again?
 
As was told to us by Kelly at a recurrent. Our hedges are not static and change from quarter to quarter. Our position at the end of 2010 could/would be drastically different than our position 2nd quarter 2011. Also, just like he did last time, Kelly would more than likely get into a bigger hedging position as the middle east continues to melt down.
Yes, both Airtran's and Southwest's hedge portfolios are not static. Fornaro and Kelly continue to layer protection on by adding periodically to their portfolio (hopefully they are buying on the dips). However, if you didn't have your protections in place prior to this current spike, the contracts available now don't provide the same cost benefit that contracts obtained 6 months ago would of.



And, one more point to be made. The Hedges are on oil futures, not on fuel that goes into the planes.
Yes, I understand that. The tables in Southwest's press release show the difference between economic fuel cost (the fuel cost Southwest "feels") and unhedged market prices. The $0.16/gallon savings shown for oil average $125/barrel is the economic savings per gallon Southwest enjoys when applying their derivative contract gains against their total fuel bill.

Airtran's savings just appear (according to the numbers publicly available) to kick in at lower average crude oil prices than Southwest's do. Both airlines will enjoy fuel cost benefits in 2011 from their fuel derivative contract portfolios if energy prices stay at these levels.
 

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