SWA Beats the Street

[herc17]

.08 vs est of .05 cents per share. 36th straight year of profitability Pretty sweet considering this economy.

 

[CatfishVT9]

This can't be true. Flightinfo "experts" said they would lose money because of their hedges!!!!!!!

 

[hoover84]

Southwest Airlines reports 4Q loss
Thursday January 22, 8:13 am ET Southwest Airlines reports fourth-quarter loss on higher fuel spending

DALLAS (AP) -- Southwest Airlines says it lost money in the fourth quarter as its fuel-hedging strategy lost punch.
It was Southwest's second losing quarter of 2008 after 16 straight years without finishing a three-month period in the red. Southwest said Thursday it lost $56 million, or 8 cents per share, compared with a gain of $111 million, or 15 cents per share, a year ago. Excluding charges and other items, it earned 8 cents per share.

 

[GuppyWN]

Operating income for fourth quarter 2008 was $70 million, a decrease of 44.4 percent as compared to $126 million in fourth quarter 2007.

Plus we didn't take the bath I expected on the hedges.

Gup

 

[dooork]

.08 vs est of .05 cents per share. 36th straight year of profitability Pretty sweet considering this economy.

And the stock still does hardly anything. Can someone explain this to me?

 

[redflyer65]

Up 7 percent before the open so far...

 

[herc17]

Loss of .08 is due to hedges. Operating profit of .08

Hedges are a one time charge and should not dramatically effect operating profits in 2009. Also stock is up 10 percent in pre-market trading suggesting wall street is happy (if you trust wall street). CEO on CNBC at 0730 EST also said cash balance is strong and bookings look good so far in 1st quarter.

 

[jetdawg]

CHICAGO (Reuters) - Southwest Airlines (NYSE:LUV - News) on Thursday reported a quarterly net loss due to one-time charges related to its fuel-hedging program, and said it was seeing softness in bookings for this year as the recession eats away at demand for flights.

Just shows we can not trust Wall Street, or some CEO's

 

[Diesel-9]

They have unhedged themselves at an extremely high cost and taken a hit on balance sheet. Selling assets to raise cash and save credit rating. A new challenge and window of vulnerability for SWA. Have alot of firm orders also coming up. SHouldn't have to take any more hits for the hedges going forward. Low oil should keep them O.K.

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.

 

[Andy Neill]

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.

 

[B727Driver]

Stock up 13.25%+ as of 1120. Nice job SWA.

A$$clown......oh never mind, probably back in homeroom class.

 

[Benjamin Dover]

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.

According to the General, one time charges and write offs don't count Excluding those, .08 vs. .05 did beat the streat as far as our operations go. But, net we still did lose money as you say. Hope the economy magically gets better in '09.

 

[huronip]

And the stock still does hardly anything. Can someone explain this to me?

Southwest Air Rises Most Since 1980 After Paring Expansion Plan
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By Mary Schlangenstein
Jan. 22 (Bloomberg) -- Southwest Airlines Co., the largest discount carrier, rose the most since at least 1980 after saying it will cut seating capacity this year as the recession slows travel demand.
The plan for a 4 percent reduction in flying snaps a 20- year expansion streak in which the Dallas-based airline relied on lower prices to win customers while full-fare carriers struggled. Southwest also delayed some 2010 jet deliveries.
“The best news is they are planning a capacity cut,” said Ray Neidl, a Calyon Securities analyst in New York. “That’s very wise in this environment. They are planning for a slow recovery, which is what they should be doing.” He rates Southwest as “underperform.”
Southwest disclosed the move as it posted a second straight net loss on fuel costs. Excluding those expenses, it had a fourth-quarter profit of 8 cents a share, beating the 5-cent average estimate of 14 analysts surveyed by Bloomberg.
The net loss was $56 million, or 8 cents a share, compared with a year-earlier profit of $111 million, or 15 cents, Southwest said. The carrier’s third-quarter net loss ended a 17- year profit streak.
“Now is not the time to be growing,” Chief Executive Officer Gary Kelly said in an interview. “Passenger traffic is declining. We’re slowing our growth at just the right time.”
Shares Advance
Southwest rose $1.30, or 16 percent, to $9.68 at 10:33 a.m. in New York Stock Exchange composite trading. The shares touched $9.83 earlier for a 17 percent advance, the biggest intraday gain in Bloomberg data dating to 1980. The stock declined 30 percent in the past 12 months through yesterday.
Southwest’s results mean that all of the nine biggest U.S. airlines probably will report net losses for last quarter as consumers pare travel plans and business passengers move from premium seats to coach.
American Airlines parent AMR Corp. and United Airlines parent UAL Corp., the second- and third-largest U.S. carriers, both announced losses yesterday and said 2009 demand was weakening.
“We have seen notable softness in post-January bookings,” Kelly said in a statement.
Southwest’s run of quarterly profits was driven in part by its ability to trim costs with fuel bought in advance. Those bets soured after jet fuel fell 65 percent in 2008’s second half, forcing the airline to put up cash collateral for the contracts and spurring the third- and fourth-quarter net losses.
In December, Southwest reduced most of its so-called hedges, slashing the amount of cash it had to pay by $600 million to $230 million.
“We’ve made dramatic adjustments to our fuel hedging to take advantage of collapsing prices,” Kelly said. “Prices are going to be soft for quite some time.”
Fourth-quarter costs related to fuel hedging were $117 million, Southwest said.
Southwest last reduced flying on a year-over-year basis in 1988, when it shrank by 0.1 percent. Airlines measure capacity in available seat miles, or the number of seats on their planes multiplied by the number of miles flown.
To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net
Last Updated: January 22, 2009 11:01 EST

 

[Andy Neill]

Excluding those, .08 vs. .05 did beat the streat as far as our operations go.

Have you got a source that says the operational profit expectation was a nickle?

 

[vikesfanIV]

Have you got a source that says the operational profit expectation was a nickle?

Source? How about common sense. The stock is currently up 16.23%. Does that sound like a company that just badly missed earning expectations?

 

[Newpilot2b]

Andy - analysts were looking for a .05/share profit - they posted a .08/share profit. The net loss of .08/share included the fuel hedge accounting.

http://biz.yahoo.com/ap/090122/earns_southwest.html?.v=9

 

[Andy Neill]

The analysts were looking for a nickle bottom line profit. SWA delivered an 8 cent operational profit and an 8 cent bottom line loss.

 

[momalley81]

The analysts were looking for a nickle bottom line profit. SWA delivered an 8 cent operational profit and an 8 cent bottom line loss.

SWA lost nothing.

GAAP reporting requirements anyone?

 

[Secret Squirrel]

Hey MO,

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.

 

[momalley81]

Hey MO,

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.

No they didn't.

Let's say you buy a widget for $10, then soon after that widget becomes in high demand and the value shoots up to $100. You still have the widget so did you make $90? No. Since no money has been put in your bank account the value of your widget going from $10 to $100 is relatively meaningless.

But due to GAAP requirements you would have to report that gain in value. In this case $90.

Now, lets say the next year the value of your widget drops to $50. It losses almost HALF its value. In GAAP accounting you have to report that loss. But did you really lose anything?

No, the value of your widget is up from $10 to $40. But again that price increase and subsequent decrease is relatively meaningless. However, due to GAAP reporting requirements they are accouted for.

Understand?