- Feb 5, 2002
- Total Time
.08 vs est of .05 cents per share. 36th straight year of profitability Pretty sweet considering this economy.
At September 30 the company noted it had $2.4 billion in cash equivalents and $2.5 billion in Fair Value of fuel derivatives, already a big drop from the $4.7 billion in cash and $4.3 billion in derivatives 2 months prior (WTI was at $100 on Sept. 30). Also the company decided to access $400 million of the $600 million available under its revolver in October, so the net cash balance would have been roughly $3.0 billion around that time, excluding the FV of fuel derivatives.
On a December 23 update the cash balance had dropped to $1.3 billion, net of $250 million in cash collateral calls, a huge drop from 2 months prior. One could say the FMV at this point is negative: over $4 billion in "value" lost from June 30, and $3.5 billion in cash equivalents burned in less than six months for a company which is otherwise supposed to be free cash flow positive!
On the same update, the company announces it has essentially offset/sold its derivatives and only hedges 10% of its 2009-2013 fuel costs.
[URL="http://1.bp.blogspot.com/_FM71j6-VkNE/SXOQf8Sg-lI/AAAAAAAAARE/G1Gn2gdgWL8/s400/LUVhedges.jpg"]http://1.bp.blogspot.com/_FM71j6-VkN.../LUVhedges.jpg[/URL]Allegedly, the "modification of the hedge portfolio has significantly reduced the Company's current exposure to cash collateral requirements."
Nonetheless, at the same time LUV is feverishly raising cash: the day before the Dec. 23 update it sells $400 million 10.5% Notes due 12/2011 which are secured by 12 737-400 aircraft; On Dec. 23 it announces it is pursuing a $350 million sale-leaseback of 10 737-700 planes at an interest rate of roughly 9%, the leaseback is completed on Jan 8. Also curiously, an amendment (8.01.b) to its fuel hedge agreement on Dec. 23 stipulates that until January 2010, LUV has to continue to post cash collateral if "the obligation is below $300 million or over $700", but if it is inbetween the company has agreed to "pledge 20 737-700s in lieu of cash"... quite odd, yet we wouldn't be surprised if this is exactly what happens.
If the company's claim that its hedges are truly no longer a drain of cash, then its cash balance on the January 22 earnings call should be about $2 billion ($1.3 billion + $750 million new proceeds), all else equal.
Furthermore, the company has a cash collateral rating trigger: if its credit rating (Baa1/BBB+ currently) drops below investment grade, it would have to post cash collateral with many more counterparties. This would imply a three notch downgrade. While S&P, in a recent omnibus report claims it is not likely to downgrade LUV soon, a significant downside surprise on January 22, or additional debt-capital raises could easily change analyst Betsy Snyder's opinion.
The continuing contango steepening is indicative that someone keeps on unwinding costless collars: is it JetBlue, Delta, or is Southwest continuing to deleverage its bad future exposure all the while having to post cash collateral?
Aside from just meeting its ongoing cash needs, Southwest is faced with a cliff of future contractual obligations. Its current fleet of 520 737s (425 owned, 95 leased as of the 10-K filing) is due for modernization, with 200 aircraft approaching retirement age at 16.7 avg. years (mostly 737 -300s and -500s). Its replacement plan consists of firm contracts and options to purchase up to 246 737-700s from Boeing; assuming it scraps its options, it still is on the hook to buy 108 airplanes over the next 5 years at a cost of $3.2 billion.
And what happens if the company manages to unhedge successfully only to see a dramatic increase in the cost of crude? Goldman Sachs research currently expects LUV's 2009 fuel expense to be $2.1 billion based on 1,459 mm mainline gallons at $1.47/gallon or $62/barrel. If hypothetically oil were to go up to $90, the impact on LUV's EBIT and EBITDA, left naked without any hedges, would be -$1 billion (in other words each $1 change in oil cost is about $35MM in EBIT). And if oil is, again hypothetically, $90/barrel, there goes the company's projected $1 billion in 2009 EBIT.
Not to throw water on the flame of enthusiasm here, but an eight cent loss vs an analyst prediction of a nickle profit is not what can be termed beating the street. Congratualtions to SWA for a good year.
And the stock still does hardly anything. Can someone explain this to me?
You keep throwing around the term GAAP accounting, but I don't think you actually know what it means. SWA actually lost money trying to get out from under upside down fuel hedging.