SWA Fuel Hedges

[Avi8tor2000]

Just out of curiosity (and no ill-will at all as many of my friends work there) but when do the fuel hedges Southwest secured run out? I'm sure I could use the search function but I'm just that lazy so get over it.

 

[fugghedabowdit]

They don't run out, SWA continually buys home heating oil futures as part of its business plan.

 

[airlinepilot]

It is a 5 year outlook program...if you look at the next 5 years on any given day SWA is hedged at various percentages over that period. It is continually changing for each year as you go forward. The closer the given year the higher the percentage of hedges. Permanent part of the daily business at SWA

 

[vixin]

OMG not another thread on how SWA hedges are running out. Please stop this before it begins. We already know how doomed SWA is once the headges run out.

 

[shagadelic]

Wanna do an interesting search? Do a search of SWA hedging from a few years ago. Look at everyone saying how much we would have lost in 2005 without hedges. Look at all the talk of us running out of hedges by 2008-2009.

Remember when oil dipped to the 60's a year and a half ago? What did SWA do? We bought hedges out to 2012. What did everyone else do? Not that. Now granted it takes cash to make cash, and I understand not all the airlines were in a position to buy a bunch of hedges. But it has been suggested that SWA stumbled in to these through luck. I know we lost money on hedges in the 90's, but fixing our known costs in to the future has always been and hopefully always will be in our management's playbook.

 

[chase]

Think. of SWA's fuel hedging as a "program". It is occurring as described constantly, nearly every day.

The term "dollar cost averaging" is used to describe a stategy in which you purchase a set amount of shares of stock or mutual fund shares each month on the assumption you will ride out the highs and lows of the market and on average (assuming many things but the biggest is you have hitched your wagon to a good stock/mutual fund). Over the life of this strategy the theory is your costs will be lower than if you are trying to buy on just the highs and lows and possibly guessing wrong.

While the comparison isn't exact, there are similarities. There is discipline to our hedging "program"/strategy...we do attempt to buy "home heating oil futures" on a recurring and regular basis, not necessarily though each day, each month however.

The goal is always out there, have 80% of our fuel hedge each year at a predetermined price to reduce the risk and volatility in predicting costs for that fiscal year.

To make sure that occurs you have very smart folks make constant evaluations at when and how much to pay for fuel with "today's dollars" for fuel hedges (home heating oil options and several other forms of hedge devices SWA uses since they are the closest thing in price to jet fuel) that will result in the goal of being 80% hedged in 5 years.

That is why you see a scaling of percentages starting in '09 through I think '11 or '12 on the quarterly reports showing what our percentage of fuel hedges are each year for several years down the road.

SWA has bought on dips in the price (hasn't happened in the recent months) but normally prices are higher going into the summer months when usage is higher. The hope is we buy on those dips and over the course of the strategy, each quarter add to our ever increasing hedge positions in the "out years."

It is a strategy no different than a frequent flyer program to get customers such as business select that will generate more revenue or any other strategy.

It has morphed from a strategy that was designed to be a safety net to one that has become a profit maker. It wasn't intended to become one but you don't see us cutting back on a winning strategy.

Some will argue when an airline goes from generating profits with flying airplanes with passengers to making profits through a fuel hedge program, the overall business model is doomed.

That would be true except it is what is allowing SWA to keep fares at a price that allows SWA to gain from the shrinkage of other carriers thereby allowing SWA to gain market share when companies shrink. Who would've thought loading first would generate extra revenue either but we have incorporated that into our revenue strategy....the same will be said of the airborne internet options coming next year. It is simply another revenue stream that we'd be foolish to ignore....plus the original intent...minimize the pain of fuel spikes and maintain predictability....is still occurring.

The theory of unintended consequences is what fuel hedges clearly demonstrates...by planning ahead and being discipilined about fuel hedges SWA has survived what can be arguably one of the toughest times in the industry.

Some may find that to be disturbing and there is a strong arguement SWA's strength makes the other airlines more vulnerable. A simple reminder though brings everyone back to the basic fact that SWA doesn't control fuel prices....others do....SWA has simply planned ahead better than others and no business should be looked down upon for planning properly to take care of its people and customers.

If there is angst about SWA keeping fares lower than some might believe they should be that should be directed toward those countries who control the production of oil, our congressmen for not allowing drilling in the US in known reserves and leaders of airline companies who haven't properly planned ahead to insure profitability during unforeseen and difficult times versus worrying about shorterm financial gains.

Just my $.02 worth.

 

[skywdriver]

Wanna do an interesting search? Do a search of SWA hedging from a few years ago. Look at everyone saying how much we would have lost in 2005 without hedges. Look at all the talk of us running out of hedges by 2008-2009.

Remember when oil dipped to the 60's a year and a half ago? What did SWA do? We bought hedges out to 2012. What did everyone else do? Not that. Now granted it takes cash to make cash, and I understand not all the airlines were in a position to buy a bunch of hedges. But it has been suggested that SWA stumbled in to these through luck. I know we lost money on hedges in the 90's, but fixing our known costs in to the future has always been and hopefully always will be in our management's playbook.

Not only should it be suggested that you guys stumbled in to the contracts by luck, it is absolutely a fact. Here is an exert from an earlier post I made

"However, please don't tell me that you think the guys on your finance team had that much insight into the oil market to know they were going to make out like they did. Hedging from a business standpoint gets its name because you are trying to hedge risk, speculative investing on the other hand is a whole different game. With hedging, you look into the future, and you have the chance to make variable costs fixed through futures contracts, you take the unknown factor out of it. Your finance team is not in the business of speculative investing. There is a lot of money to be made and lost in commodities, and there are plently of people that spend 20 hours a day studying the charts to take a speculative position. Your finance guys are not in the business of doing that, they don't have access to the information, and they don't have the time to do it. So, they got lucky. I am not saying they aren't smart guys, but don't give them more credit than they deserve. I am pretty sure if you got them out at the bar after a couple of drinks, they would tell you the same thing."

I think what people are saying about your hedges running out, your ability to hedge at such a competitive advantage is done, unless oil continues to increase at the same rate it has. Its all a guess, but I highly doubt oil will even stay where it is now - you can't find many arguments that oil is priced based correctly based solely on fundamentals, and things always in the past have fallen back to fundamentals. A stronger dollar from higher interest rates will crush the price of oil, my guess at least.

 

[chase]

Your finance team is not in the business of speculative investing. There is a lot of money to be made and lost in commodities, and there are plently of people that spend 20 hours a day studying the charts to take a speculative position. Your finance guys are not in the business of doing that, they don't have access to the information, and they don't have the time to do it. So, they got lucky. .

Some of our comments are a fair assessment of some of the realities of commodity trading. I'm not an expert but understand enough to find some truth to your statements.

However, the comment above is a common misconception.

We do have extremely bright folks who do nothing but spend their waking hours doing what you described "experts" must do to be successful commodity brokers.

Lucky is when you hit a hole in one....for nearly 10 years we've been "lucky" with our fuel hedging program (yes it wasn't until the early 2000's that big money occurred but it served its purpose at minimizing risks)....that term is not something that accurately reflects the proper use of the word "lucky" IMHO.....lucky is one or two years running, maybe.

These employees could work for major commodity brokers and probably have been offered jobs to do that for much great money.

There is some luck involved in the airline business as in any business but if a failed airline isn't described as simply having bad luck, why can't it be presumed that a successful airline can be described with other more respectful terms than merely being "lucky"?

No pats on the back are necessary for me or for our fuel hedging team (even though they should never buy a meal or beer wherever they eat with SWA employees around) but to dismiss a defined, well executed strategy as something this side of luck is a bit disingenous my friend....no disrepect intended:0

 

[thor2j]

I know this will stir up trouble but why not have SWA spin off the oil hedging part of the company as a seperate IPO as AMR dir with SABRE. SABRE made a ton of money for AMR as the hedging does. It seems that part of SWA could become quite an impressive company buying and selling the commodity. The airline part of SWA just goes down along with the rest of the industry.

 

[MILPILOT17]

Some of our comments are a fair assessment of some of the realities of commodity trading. I'm not an expert but understand enough to find some truth to your statements.

However, the comment above is a common misconception.

We do have extremely bright folks who do nothing but spend their waking hours doing what you described "experts" must do to be successful commodity brokers.

Lucky is when you hit a hole in one....for nearly 10 years we've been "lucky" with our fuel hedging program (yes it wasn't until the early 2000's that big money occurred but it served its purpose at minimizing risks)....that term is not something that accurately reflects the proper use of the word "lucky" IMHO.....lucky is one or two years running, maybe.

These employees could work for major commodity brokers and probably have been offered jobs to do that for much great money.

There is some luck involved in the airline business as in any business but if a failed airline isn't described as simply having bad luck, why can't it be presumed that a successful airline can be described with other more respectful terms than merely being "lucky"?

No pats on the back are necessary for me or for our fuel hedging team (even though they should never buy a meal or beer wherever they eat with SWA employees around) but to dismiss a defined, well executed strategy as something this side of luck is a bit disingenous my friend....no disrepect intended:0

Chase, Well put!! You saved me the trouble. Thanks!

 

[GuppyWN]

Just out of curiosity (and no ill-will at all as many of my friends work there) but when do the fuel hedges Southwest secured run out? I'm sure I could use the search function but I'm just that lazy so get over it.

Tomorrow.

Gup

 

[MILPILOT17]

Tomorrow.

Gup

Which means by friday we should start to park airplanes! The sky is falling!

 

[GuppyWN]

Yep. We'll be out of business by Monday. Sorry bros.

Gup

 

[dispatchguy]

Dammit - and I have a fone interview for SWA dispatch soon...

 

[Dave's kid]

According to the 2007 SWA Annual Report:

70% of their 2008 fuel at $51 per barrel. 55 percent of expected fuel needs at $51 a barrel in 2009; nearly 30% at $63 per barrel in 2010; more than 15% at $64 per barrel in 2011; and more than 15% at $63 per barrel in 2012.