SWA "dings" up 321M profit!

[FatesPawn]

Interesting stat:

Since 1998, it has saved $3.5 billion over what it would have spent if it had paid the industry's average price for jet fuel. That's equal to about 83% of the company's profits over the last 9½ years.

That's exactly what our senior management tells us every day. We just wouldn't be making money without our hedges :shaking head solemnly:

Interesting fact:

If we didn't buy hedges, we would have used the $$ to INVEST in some other aspect of our airline - to make more money - not just stick the $$ under our pillow.

If fuel stagnated or went down, we would have looked silly for not buying more airplanes.

-fate

 

[ivauir]

If you actually read the annual and quarterly reports it's clear that in fact the advantages of the fuel hedges are going away over time and by the CEO's own admission SWA needs to raise some serious cash. They do have a rock solid balance sheet and loads of cash however so anyone waiting for the demise of SWA will be waiting a long time.

Thanks for making comments based on fact. Please keep in mind that SWA CEOs are always conservative in these types of statements and that multiple labor groups are in contract negotiations. If you compare GKs comments to previous statements I find him almost euphoric...

I believe we face many challenges, but "the hedges going away" are not among them.

 

[Newf Dog]

"Interesting fact:

If we didn't buy hedges, we would have used the $$ to INVEST in some other aspect of our airline - to make more money - not just stick the $$ under our pillow."


Fate,

If you hadn't bought the hedges you would be paying out the wazoo for fuel like everyone else. Good luck with your INVESTMENT in some other aspect of your airline.

I find it funny that SWA folks are so sensitive about this. Your CEO, Gary Kelly, is a brilliant guy who made an excellent move many years ago in emphasizing the fuel hedging strategy. It has paid off way beyond even his wildest imagination. You have now and have always had outstanding management and a great company. Be glad for that. You're so much better off than the rest of us.

Your brilliant CEO, like most of us accountant types, also knows how to crunch some numbers. The numbers show that the hedge effect is running out. Yes you can hedge forever but only at increased $$ amounts. That's not enough to offset your costs let only generate the 15% net growth required by the Wall Street investor types.

Your hedges have granted you cash and the time needed to reduce your other costs and generate new revenue. Surely you are aware of the efforts of your company to come up with new revenue streams. That's why the Westjet codeshare and other forthcoming codeshares will be so important.

Don't take my word for it though. I just post here out of occasional boredom. Read your financial statements and listen to your CEO. He's not selling you a bill of goods to keep your wages down. He could have easily gone for that a long time ago.

I don't wish any ill on you SWA folks or anyone else. Been through two BK's myself. "Bad...very bad." You've great leadership and an enviable market position.

I'd be saving my money though just in case. Eventually it gets all of us.

Newf

 

[Dude]

The discussion regarding our hedges is stupid. A profit is a profit. Protection is protection. Wall street doesn't like WN because it is impossible to achieve 15% ROIC with today's dollar, economy, fuel prices, consumer and market saturation even in spite of billions in hedge protection. Investors like the legacies because they are volatile and likely to be a quick sure thing. Oil drops a few bucks and their stock has a quick gain. Lots of folks are betting on the volatility of these stocks for a little while. There will come a time, in the near future, when they all get out.

Because Southwest's management is homegrown, they are less likely to see concessions as a viable option to help the balance sheet. Management tends to have a sense of proprietorship regarding their leadership style. Their fortunes are directly tied to mine. If the goal is to "weather the storm" or "live to fight another day", then that is what we are doing. Survival is all that can be hoped for in today's environment and to tout the contrary is foolish.

 

[Newf Dog]

[FONT=Arial, Helvetica][/FONT]
the Company had fuel derivative contracts in place for over 70 percent of its expected fuel consumption for the remainder of 2008 at approximately $51 per barrel; over 55 percent in 2009 at approximately $51 per barrel; nearly 30 percent in 2010 at approximately $63 per barrel; over 15 percent in 2011 at $64 per barrel; and over 15 percent in 2012 at $63 per barrel.

2007 revenue per ASM 9.9cents
2007 costs per ASM 9.1cents
2007 Fuel costs per ASM 2.55​

 

[vikesfanIV]

the Company had fuel derivative contracts in place for over 70 percent of its expected fuel consumption for the remainder of 2008 at approximately $51 per barrel; over 55 percent in 2009 at approximately $51 per barrel; nearly 30 percent in 2010 at approximately $63 per barrel; over 15 percent in 2011 at $64 per barrel; and over 15 percent in 2012 at $63 per barrel. ​

2007 revenue per ASM 9.9cents
2007 costs per ASM 9.1cents​

2007 Fuel costs per ASM 2.55​

I believe those numbers were from 1st quarter. Here's the new #'s from today's earnings release.

"The current market value of our fuel derivative contracts for third quarter 2008 through 2012 is approximately $4.3 billion as a result of the extraordinary increase in fuel prices this year. In addition to our third quarter 2008 derivative contracts, we currently have derivative contracts for approximately 80 percent of our estimated fuel consumption for the fourth quarter 2008 at an average crude-equivalent price of approximately $58 per barrel; approximately 70 percent in 2009 at an average crude-equivalent price of $66 per barrel; approximately 40 percent in 2010 at an average crude-equivalent price of approximately $81 per barrel; and over 20 percent in 2011 and 2012 at an average crude-equivalent price of approximately $77 and $76 per barrel, respectively."

This is what people don't understand... SWA's hedging is a continuous process. Our fuel hedges don't simply "run out". As oil goes higher and higher they do get more expensive, but as these #'s show we have been active this quarter in hedging fuel all the way out to 2012. That's part of why we can hedge so effectively, we're the only airline with an investment grade credit rating and therefore the only airline that can hedge 4 years in advance. The legacy carries have billions in cash right now but they still can't hedge out past a couple of years because of their credit ratings.

It is true we will be seeing dramatic increases in fuel costs over the next few years but that's where the numerous revenue initiatives and cost cutting measures come into play.... auto-throttles, RNP, business select, code-sharing, wireless internet, etc etc.

 

[Newf Dog]

vikesfanIV:

Thanks for correcting my numbers. Couldn't edit my previous post to make the corrections myself.

You clarified my earlier point: fuel costs will increase dramatically as hedges get more expensive to be offset by other cost cutting and revenue initiatives. The question is whether the aformentioned initiatives will offset the increased costs to generate adequate profit.

Newf

 

[RDG]

Directly From the Dallas Morning News 07/21/06:

Southwest said it earned $333 million, or 40 cents a share, in the three months ended June 30.

That compares with earnings of $144 million, or 18 cents, in the same quarter of 2005.

The earnings bested Southwest's previous record of $246 million, set in the second quarter of 2003.

Excluding gains from accounting changes, Southwest earned $273 million last quarter, or 33 cents a share, above the 26-cent consensus estimate from analysts surveyed by Thomson Financial.

Southwest's aggressive fuel hedging program earned the carrier $198 million during the quarter.
Even so, its adjusted fuel costs increased from $330 million to $518 million.

Southwest senior vice president and chief financial officer Laura Wright said the carrier was 77 percent hedged in the second quarter at $36 a barrel – about half the current market price.

In the third quarter, Southwest has 74 percent of its needs hedged at the same price.


How it is reads, at least from the Dallas Morning News, is that Southwest would have netted $75 million for the second quarter ($273 - $198) without their fuel hedging program. Unless Southwest is using fuzzy math, the $273 net includes the $198 earned from the fuel hedging program. You do not add both numbers together.

Though hedged in 2008, I believe the bulk of Southwest’s hedges run out in 2007. The latest numbers I have for 2007 is 60% hedged at $38.

Still a solid quarter given the current environment. It’s great to see the industry taking a turn for the better.

AA767AV8TOR

The previous post is from July, 2 years ago. You guys keep banging away at those hedges. One day, you might be right.

 

[Whataburger]

Okay after all this legal mumbo-jumbo, I think I've got the hedges figured out. And, I would like to thank everyone for their google searches to back their info up. Here's what I know about hedges: 2007= $,$$$ profit sharing check.

 

[Cornelius]

I would like to see anybody attempt to buy futures contracts today in oil at these levels. Up or down, who knows? I even watched an interview with the SW fuel hedger on CNBC who said it is getting more and more difficult to do his job.

 

[lowecur]

vikesfanIV:

Thanks for correcting my numbers. Couldn't edit my previous post to make the corrections myself.

You clarified my earlier point: fuel costs will increase dramatically as hedges get more expensive to be offset by other cost cutting and revenue initiatives. The question is whether the aformentioned initiatives will offset the increased costs to generate adequate profit.

Newf

It's my understanding oil futures contracts are going for around $100bbl in Dec 08. It's hard to predict the future but I think Gary Kelly is rightfully concerned. This article in USA Today says SWA needs to raise revenue by 8% to break even in the 4th Q. Now that's figuring oil at todays prices. Jaime Baker doesn't think they can do it, and Kelly admits SWA may not continue it's long streak of profitable Quarters.

It's my guess if we make it through Hurricane season without a blip and the mideast stays calm, 2009 will bring us $70 bbl. Just plug in the numbers folks, and you'll see how artificial profits can turn and bite you.

imp:​

http://www.usatoday.com/money/industries/travel/2008-07-24-airline-outlook-losses_N.htm?csp=N008

 

[AA767AV8TOR]

Indeed, LUV has won the lotto with its fuel hedges. And now for the rest of the story:

Southwest Airlines reports $321M profit, helped by fuel hedging

09:55 PM CDT on Thursday, July 24, 2008
By TERRY MAXON / The Dallas Morning News

[email protected]

As an airline, Southwest Airlines Co. is losing money. As an energy trader, it's doing just fine.


Buoyed by more than $500 million in gains from fuel hedging contracts, Southwest reported net income Thursday of $321 million in the second quarter. Without the fuel hedges, the Dallas-based carrier would have lost $134 million.


Speaking to analysts and reporters, Southwest chairman and chief executive Gary Kelly acknowledged that the airline is under pressure, with unit costs up 10.5 percent in the second quarter because of higher fuel prices.

We're going to need strong revenue growth from now on with those kind of unit cost increases to avoid having an unprofitable quarter," he said.

I can certainly tell you that nobody at Southwest Airlines intends to lose money in any quarter," Mr. Kelly said. "But I can't guarantee you that won't be the case."

Excluding special items but including the fuel costs, Southwest earned $121 million, or 16 cents a share, on $2.87 billion in revenue in the second quarter, compared with $278 million, or 36 cents a share, on revenue of $2.58 billion in the second quarter of 2007.


The consensus estimate from analysts was for a profit of 12 cents a share.


Although Southwest exceeded estimates, its shares declined 98 cents, or 6.2 percent, to close at $14.90 Thursday. However, its decline was the smallest among the nation's 10 largest airlines; the other nine saw their share prices drop an average of nearly 15 percent.


Southwest has benefited by hedging its fuel costs through financial contracts that lock in the price for a percentage of its fuel years in advance.

The airline will continue to be protected by fuel hedges in coming quarters, but the benefit will decline as the hedged prices increase and the amount of fuel hedged declines.


In fourth quarter 2008, Southwest has hedged about 80 percent of its fuel usage at the crude-oil equivalent price of $58 per barrel. That declines to 70 percent at $66 in 2009 and 40 percent at $81 in 2010.


In the short term, Southwest may be helped as other carriers reduce capacity in the fall and winter.

Southwest chief financial officer Laura Wright said other carriers have reduced their capacity 15 percent in markets where they compete with Southwest.


That should be a benefit, Ms. Wright and Mr. Kelly said. "All things being equal, our prospects are very good, based on history, that we'll pick up a significant amount of revenue with that kind of a competitive cutback. But things are never equal," Mr. Kelly said.


One industry analyst, Jamie Baker of J.P. Morgan, raised prospects for a fourth-quarter loss for Southwest, calling it "still likely."


Assuming Southwest averages paying $2.55 a gallon for jet fuel even with its fuel hedges, the airline will need to increase its unit revenue by 8 percent or more to avoid a loss, Mr. Baker said.


"Not impossible, in our view, but this likely represents the best-case outcome for Q4," he wrote in a report Thursday.


Analyst Ray Neidl of Calyon Securities said that Southwest faces a "very delicate balancing act" as it tries to raise fares without chasing away too many customers.

 

[rajflyboy]

You might be making dough.....

But at the end of the day....

You are still a "Pay for Training" company

 

[Mach 80]

>>>But at the end of the day....

You are still a "Pay for Training" company<<<

At the end of the day, deduct the cost of the type rating in a first year pilot's pay, and he STILL makes more than other first year pilots at other airlines....and the chart really goes up in the following years. And SWA pays during their 4 or 5 weeks of training AND pays for the hotel rooms. Considering all that, a 737 type is a small blip. It's like some airlines airlines requiring an ATP....SWA just goes one step further. Certainly not pay for training since SWA is paying the new guy during his 4 or 5 weeks of initial training.

 

[rajflyboy]

>>>But at the end of the day....

You are still a "Pay for Training" company<<<

At the end of the day, deduct the cost of the type rating in a first year pilot's pay, and he STILL makes more than other first year pilots at other airlines....and the chart really goes up in the following years. And SWA pays during their 4 or 5 weeks of training AND pays for the hotel rooms. Considering all that, a 737 type is a small blip. It's like some airlines airlines requiring an ATP....SWA just goes one step further. Certainly not pay for training since SWA is paying the new guy during his 4 or 5 weeks of initial training.

To be honest. I was just kidding with this post. I will also be honest and say that I will NEVER believe in paying for your job as a pilot (expecially BEFORE you know you have the job).