Upgrade time at SWA?

[radarlove]

But I am not going to let you post stuff about my company that just isn't true. And we ARE adding hedges and will continue to do so. Somehow those hedges are not the same price that we are paying at the pump.

It's not me who's posting stuff that "just isn't true", it's you. I have had this same argument twice already on flightinfo, both times before you with LUV people too. There's nothing nefarious about your incorrect beliefs, but you propegate a complete misunderstanding of hedges and futures.

Your company has NOT been purchasing fuel to be delivered in the future for less than it costs now. that would make for an arbitrage opportunity. If your statement were true, companies would simply use their finance department to borrow and sell short the futures and risk-free be able to get cheaper gas.

Your company bought a lot of financial futures (and other stuff, but it all comes out the same) back when oil was in the $20s. It bought more instruments as the price rose through the $30s, and some more in the $40s and perhaps some in the $50s-they haven't been real clear on this.

It was a very smart hedging move, it has worked very well by flattening the cost of fuel out to a managable figure. But they're not magic workers, they don't have a wand that they can use to wave around and create some more of those instruments that they bought back in the $20s, just like I can't get a mortgage at last year's rates.

Now futures are costing $59 plus the cost of borrowing money for the length of the contract--and I doubt LUV is adding many $64 hedges. But maybe they are.

I do know one thing, although they might be adding $64 hedges, they sure aren't adding any at a price below $59, because those don't exist.

 

[firstthird]

As of June 30, 2005, the "spot" market price for a barrel of crude oil was over $56 and "futures" prices for the subsequent 12 months all exceeded this "spot" price. The Company is also approximately 65 percent hedged for 2006 at approximately $32 per barrel, over 45 percent hedged for 2007 at approximately $31 per barrel, approximately 30 percent hedged for 2008 at approximately $33 per barrel, and approximately 25 percent hedged for 2009 at approximately $35 per barrel.

so to make it easy, I'll compare the above info with the previously posted most recent SEC filing on 11/22/05.
the first set is from July, second from November.

2006 then 65% at $32, now 70% at $36
2007 then 45% at $31, now 55% at $37
2008 then 30% at $33, now 35% at $37
2009 then 25% at $35, now 30% at $39

So, we are adding to our hedges, but it does appear to be at a higher rate. Doing the math, it almost seems like most of the hedges we have added in the last 3 months were average out around 60 a barrel, so I must concede that you might be correct, hedges get bought at the current spot price. Strange.

To check my math, I assumed that we'll need 100 barrels in 2009 (obviously it will be more but it is just a convenience to use the percentages above).
So, in July we had purchased 25 barrels at 35 dollars each for 2009. 25x35 = 875.
Now we have 30 barrels at 39. 30x39=1170.
1170-875=295.
295 divided by 5 barrels = 59 per barrel.

So it looks like we purchased 5% more of a hedged position between July and November at 60ish a barrel, resulting in the new number of 30% hedged at 39, versus the old number of 25% at 35.

 

[radarlove]

Strange.

It is strange, until you actually do the math, like you did (nice job, BTW).

If you pursue this further, you can see that if oil was offered for less in the future than it costs now, a company could arbitrage that opportunity.

It's called the arbitrage pricing theory.

You're not alone, a lot of people think that futures contracts are something exotic, but as I mentioned before, a price for a commodity in the future equals today's spot price, plus the cost of storage (if any) and the risk-free interest rate that can be used to finance the transaction. If any of these factors get out of whack, traders arbitrage the profit opportunity until it goes away.

Now, LUV uses lots o' stuff, including options to collar the price they want to maintain and they run a fairly sophisticated financial operation--but that still doesn't change the fact that they're stuck with today's prices.

There is an interesting academic paper on LUV's hedging, you might find it via Google. I think it was University of Texas.

 

[Yahtzee]

the post was garbled...sorry

 

[Yahtzee]

There is an interesting academic paper on LUV's hedging, you might find it via Google. I think it was University of Texas.

Actually it's from two guys at Northwestern...I posted a link to this about last year, but it didn't get any responses. According to this paper, over the counter derivatives were favored by SWA as being "more customizable".

I do remember SWA had a position or two available last year on their website for folks with derivatives experience....too bad I didn't keep my day job a few years back. Imagine having Thanksgiving, Christmas, New Year's, St. Patrick's Day, Good Friday, Memorial Day, the 4th, Labor Day and Arbor Day off for the rest of your career.

Here's the link:

http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf

 

[radarlove]

The paper I'm talking about was from a Texas university. There are probably a bunch, from the sounds of it.

 

[ivauir]

Here's the link:

http://www.kellogg.northwestern.edu/research/fimrc/papers/jet_fuel.pdf

Thanks for the link! My head is hurting already!

 

[b737swafo]

Talk about about hijacking a thread....jeesh!! Just checked swapa website, said I should upgrade............last month!!! I think it's off a by about 6 months. Who said hijack!!