US Airways Dividend Miles (Pre-FlightFund Merger) - Reading this SW Air right?

:QUOTE: Quarterly income rose to $76 million, or 9 cents a share, from $26 million, or 3 cents a share, last year. Revenue climbed 12 percent to $1.66 billion from $1.48 billion.
Analysts surveyed by Thomson Financial expected Southwest to earn 5 cents a share on sales of $1.65 billion for the period.

The company said it was 86 percent hedged for the first quarter, reducing fuel and oil expense by $155 million and enabling it to record a $27 million related accounting gain. Hedging is a strategy to buy fuel in advance at set prices and has paid substantial dividends to airlines that have used it.

Southwest is 83 percent hedged for the second quarter, with crude oil prices capped at $26 per barrel. The airline expects its second-quarter jet fuel costs per gallon to exceed the first quarter's 90.3 cents.

Looking ahead, the carrier is hedged 85 percent in the second half at $26 per barrel; 65 percent in 2006 at $32 per barrel; more than 45 percent in 2007 at $31 per barrel; 30 percent in 2008 at $33 per barrel; and more than 25 percent in 2009 at $35 per barrel.


I take the above to mean that if SW was not hedged so well that they in fact would have lost money this quarter? It says the profit was $76M but the fuel savings were $155M...so, if the fuel were not hedged 86% at $26 a barrel, but 65% at $32 a barrel (like next year) they would have had small, if any profit?

I read this to mean that it is in fact saving on fuel that is giving SW their profit at the moment and starting next year they will be on a more similar field with the other players?

If true, does that bode well for US, UA, etc...in terms of competitive edge? It will obviously be bad for all air carriers if fuel stays so expensive, but I envision that once everyone is paying the same the fares will reflect that equality.

Any thoughts?

:QUOTE: Quarterly income rose to $76 million, or 9 cents a share, from $26 million, or 3 cents a share, last year. Revenue climbed 12 percent to $1.66 billion from $1.48 billion.
Analysts surveyed by Thomson Financial expected Southwest to earn 5 cents a share on sales of $1.65 billion for the period.

The company said it was 86 percent hedged for the first quarter, reducing fuel and oil expense by $155 million and enabling it to record a $27 million related accounting gain. Hedging is a strategy to buy fuel in advance at set prices and has paid substantial dividends to airlines that have used it.

Southwest is 83 percent hedged for the second quarter, with crude oil prices capped at $26 per barrel. The airline expects its second-quarter jet fuel costs per gallon to exceed the first quarter's 90.3 cents.

Looking ahead, the carrier is hedged 85 percent in the second half at $26 per barrel; 65 percent in 2006 at $32 per barrel; more than 45 percent in 2007 at $31 per barrel; 30 percent in 2008 at $33 per barrel; and more than 25 percent in 2009 at $35 per barrel.


I take the above to mean that if SW was not hedged so well that they in fact would have lost money this quarter? It says the profit was $76M but the fuel savings were $155M...so, if the fuel were not hedged 86% at $26 a barrel, but 65% at $32 a barrel (like next year) they would have had small, if any profit?

I read this to mean that it is in fact saving on fuel that is giving SW their profit at the moment and starting next year they will be on a more similar field with the other players?

If true, does that bode well for US, UA, etc...in terms of competitive edge? It will obviously be bad for all air carriers if fuel stays so expensive, but I envision that once everyone is paying the same the fares will reflect that equality.

Any thoughts?

I don't think one can assume that without hedges WN would have a loss. One must consider without hedges WN would price differently, have different profit sharing contributions, purchase differently etc

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I take the above to mean that if SW was not hedged so well that they in fact would have lost money this quarter? It says the profit was $76M but the fuel savings were $155M...so, if the fuel were not hedged 86% at $26 a barrel, but 65% at $32 a barrel (like next year) they would have had small, if any profit?

I read this to mean that it is in fact saving on fuel that is giving SW their profit at the moment and starting next year they will be on a more similar field with the other players?

If true, does that bode well for US, UA, etc...in terms of competitive edge? It will obviously be bad for all air carriers if fuel stays so expensive, but I envision that once everyone is paying the same the fares will reflect that equality.


You are correct that WN's Q1 profit would have instead been a sizable loss were it not for the fuel hedging. You can't assume, however, that it will not hedge any more of its future needs.

Unless fuel prices decline dramatically during 2005, your optimism that WN's fuel price advantage will begin to disappear next year is misplaced.

During 2005, it is reasonable to expect that WN will hedge more of its 2006-2009 fuel needs at prices lower than current spot prices. Each quarter for the past couple of years, WN has reported that its hedged position stretches farther and farther out, and at a higher and higher coverage. This quarter's report is the first in a long time to not show greater fuel coverage than the last, but I attribute that to the sky-high fuel prices during Q1. WN may very well have gambled that prices would fall (as they are now) and will hedge more of its 2006-2009 fuel needs during the remainder of this year.

If fuel does plunge in price this year, then the liquidation of USAir and UAL become less certain. But if fuel does not drop sharply this year, WN will enjoy a sizable advantage for a number of years, which will enable it to outlast the ailing legacy airlines, especially the bankrupt ones.

Fuel hedging does not completely insulate WN from higher fuel prices, but it will enable WN to outrun its weaker competitors.

First off - this is one of the more interesting threads in a while. I am tired of reading (and posting to) threads about how much US sucks.

I think there are several facts that merit pulling out of the replies above.

1) At the margin, Southwest would have lost money last quarter (no surprise given how radically expensive fuel is now).

2) They arent operating at the margin - so as pointed out above, they obviously "knew their cost schedule" and how it included el cheapo fuel. Had that not been the case, they likely would have had a different pricing strategy. Whether that would have ensured yet another profitable quarter or not is left to us to guess.

One thing though - it is interesting to see how hard it is getting for even the almighty WN to make money in this environment. Hedging almost 90% of your fuel bill is a lot of work (and requires lots of money to do). Sure it pays off, but thats work I am sure they would rather not be doing.

First off - this is one of the more interesting threads in a while. I am tired of reading (and posting to) threads about how much US sucks.

I think there are several facts that merit pulling out of the replies above.

1) At the margin, Southwest would have lost money last quarter (no surprise given how radically expensive fuel is now).

2) They arent operating at the margin - so as pointed out above, they obviously "knew their cost schedule" and how it included el cheapo fuel. Had that not been the case, they likely would have had a different pricing strategy. Whether that would have ensured yet another profitable quarter or not is left to us to guess.

One thing though - it is interesting to see how hard it is getting for even the almighty WN to make money in this environment. Hedging almost 90% of your fuel bill is a lot of work (and requires lots of money to do). Sure it pays off, but thats work I am sure they would rather not be doing.

I know there's probably more to the financial statements than mentioned above but my thought was that it is getting more level in terms of operating costs & fuel prices. I am guessing there will be consolidation in the airline industry eventually but I hope we are not moving more towards a SW is the Gold Standard system simply because they have the cash to outlast everyone else.

Further thoughts?