Southwest CEO talks mergers

[50Pesos]

What exactly does SWA have hedged? Have they been hedging oil at 90?

The resaon hedges are bought, is not the intention of making money off of them. The fact that the do make money is a bonus. They are bought to make a fixed number to predict opersting costs.

Lets say SWA hedges at $100 til 2014. Then Some form of hybrid vehicle come out and they are cheap and reliable and everything else and oil drops to $70 a barrel. SWA is not required to use the $100/brl fuel they can just buy off the current market at $70.

Now if oil goes to $120 they still have the right to purchase fuel at $100 and thus giving them fixed numbers to plan on. Operating at $70 just gave them and everyone else more profit.

Hedging will never go away. There is always someone out there willing to sell you insurance again anything. It is called the futures market in the WSJ.

 

[Tanker Clown]

The problem with hedges is that you have to have cash to do it. Or credit. It's too bad that the legacies that hid in BK have not exactly made themselves the best credit risk. So, I'm sure the legacies would love to hedge, but as we can see by their last quarter, the cash is a little hard to come by. As for credit...If I loaned you a dollar and you paid me back a quarter, I wouldn't be exactly jumping for joy to loan you another dollar.

 

[jke406]

If I loaned you a dollar and you paid me back a quarter, I wouldn't be exactly jumping for joy to loan you another dollar.

That's what General Lee would call a "good business model."

 

[radarlove]

Lets say SWA hedges at $100 til 2014. Then Some form of hybrid vehicle come out and they are cheap and reliable and everything else and oil drops to $70 a barrel. SWA is not required to use the $100/brl fuel they can just buy off the current market at $70.

Now if oil goes to $120 they still have the right to purchase fuel at $100 and thus giving them fixed numbers to plan on.

Let me summarize: you have no idea how futures contracts work.

 

[Secret Squirrel]

Let me summarize: you have no idea how futures contracts work.

That is true. SW fuel hedges are heating oil contracts. Jet fuel is not a commodity which is exchanged on the futures market. There are some contracts with private hedge funds but SW seems to be exclusively Heating oil contracts which they exchange for jet fuel. They are basically making money in the futures market. If the price of oil started going down they could potentially still make money by betting on heating or crude oil futures to decline.

 

[Jon Rivoli]

For the record, on Jan. 1 one trader put in a limit order for ONE contract of light sweet crude at a price of $100. He did it to make headlines. I'm sure he (or she) is still laughing every time someone mentions $100 oil and probably wishes they have copywrited the phrase. Adjusted for inflation oil today ($88/brl) is no more expensive than during any other oil price spike. Exon Mobile just reported an anualized profit for 2007 of $40 Billion. It is a pretty safe bet that they will invest at least some of that in developing new reserves. Within two years oil will more likely be in the neighborhood of $40/brl than $100. At that point SW will lose it's advantage from hedges which they have employed brilliantly during a very tough time. With cheaper oil hopefully everyone will make truck loads of money like back in the late 90's and we'll all get rich.

Cheers

 

[B727Driver]

General, does BWI come to mind? I believe that's where Metrojet (SWA big competitor) was based. What is USAirways in BWI now? All know how that ended as well as other legacy fiascos. SWA hedges so it has cash to do what it wants when they want to do it. Others cannot say or do the same.

As far as the stock buy back, it is simple. When you cried because you didn't get your Tickle-me-Elmo doll, you didn't understand basic economics. If the toymaker made 100 million of these, the price was low, if they make a smaller number, the price goes up. Same with the stock, fewer shares = higher price. 800 million shares outstanding were too many. SWA's ability to buy $1.8 billion over the last 2 years speaks volumes and still make a profit without BK or stealing employee money or benefits...wow, nicely done SWA.

 

[Jon Rivoli]

"SWA's ability to buy $1.8 billion over the last 2 years speaks volumes and still make a profit without BK or stealing employee money or benefits...wow, nicely done SWA."

WN stock is still trading at something like a 6 year low even after buying back that $1.8B and almost doubling the size of the company. Why? As you know "Stockholders" own the company. If they're not happy, you're not going to be happy. GK is a smart guy and has a lot of options available, but he seems inclined to keep doing more of the same which doesn't seem to be doing anything for the owners portfolios.

To get this thread back on topic; Why not buy Alaska, ditch the Mad Dogs and overnight you get a lock on the Pacific Northwest, Canada, Mexico, ETOPS and Hawaii; not to mention a great group of aviators.

 

[satpak77]

Note that I am not bashing SWA, I admire the company and its management.

However my points were discussed along the theme of discussion the airline business environment

 

[klr1395]

Let me summarize: you have no idea how futures contracts work.

Exactly right. He/She and others also still seem to think our hedges somehow effect what we pay for jet-A.. They don't, they are HEATING oil hedges; an investment on the wall street commodities market that offsets jet fuel costs. Smart business yes, but we still pay the same at the pump so to speak...

 

[Hose A. Jiminez]

Within two years oil will more likely be in the neighborhood of $40/brl than $100. At that point SW will lose it's advantage from hedges which they have employed brilliantly during a very tough time. With cheaper oil hopefully everyone will make truck loads of money like back in the late 90's and we'll all get rich.

Cheers

If oil drops this will be true. Which is in part why SWA has not increased ticket prices very much. High oil price while hedged are sort of a blessing. SWA can offer artificially low prices while hiding behind hedges, and put increased pressure on those who are not as protected.

Further, -AND THIS IS FOR YOU, SATPAK-
this is also why the "if not for the hedges" mantra doesnt hold water. If not for the hedges, ticket prices would likely rise, and be matched by other carriers, to where SWA and others would be profitable. Or to a level where noone could attract pax and we all tank.

 

[Heavy Set]

General, does BWI come to mind? I believe that's where Metrojet (SWA big competitor) was based. What is USAirways in BWI now? All know how that ended as well as other legacy fiascos. SWA hedges so it has cash to do what it wants when they want to do it. Others cannot say or do the same.

As far as the stock buy back, it is simple. When you cried because you didn't get your Tickle-me-Elmo doll, you didn't understand basic economics. If the toymaker made 100 million of these, the price was low, if they make a smaller number, the price goes up. Same with the stock, fewer shares = higher price. 800 million shares outstanding were too many. SWA's ability to buy $1.8 billion over the last 2 years speaks volumes and still make a profit without BK or stealing employee money or benefits...wow, nicely done SWA.

Metrojet was abandoned well before the merger with America West.

 

[Tanker Clown]

Metrojet was abandoned well before the merger with America West.

Well, BWI was a different story. There's no way SWA could make a go of it at MEM or CVG.

 

[RedDogC130]

Well, BWI was a different story. There's no way SWA could make a go of it at MEM or CVG.

I think Brittany Spears has access to a computer in her mental hospital.

Tanker clown you have no clue what you speak about here are you a fortune teller?

 

[Tanker Clown]

I think Brittany Spears has access to a computer in her mental hospital.

Tanker clown you have no clue what you speak about here are you a fortune teller?

It's called sarcasm.

By the way, the SWA poolies sure thought that I had "no clue" what I was talking about back in Nov when I started posting that the classes in '08 were going to be few and far between. All in all, I think my fortune telling has been decent recently.