hamburlger,
Thanks for the great info regarding the accounting of ground equipment, plane purchases, etc. That was very interesting and informative.
Originally Posted by hamburgler
One of the things that's missing from LUV's 10-Q is any discussion about the exact timing nature of the hedge agreements, swaps, collars, etc. It may be that LUV has a lot of discretion in when they choose to use their instruments and chose not to use as much in Q2 and defer it instead to Q3/Q4/'06. We should learn more this quarter (and again, I dunno what the professional community has gleaned from other filings on this) as it is Q4 and thus their 85% at $26 number should hold. One thing worth noting though is that the Q4 hedging was based upon gasoline and heating-oil contracts, as opposed to the long-term hedges which are more on the price of crude. To the extent that gasoline and heating oil moves asymetrically to crude (and I believe they have in Q3 given Katrina/Rita/etc.) the $26 number may be less meaningful.
Hmmm you're right, this could explain why the Q2 cost per gallon of fuel was off. However I don't see how SWA can carry those numbers into 2006. If they say they are 85% hedged thru 2005, it would seem like they would have to realize the full impact of the 2005 fuel hedges in 2005. Yes, I could see how they could end up carrying those numbers from Q2 to Q3/Q4, but not to 2006. That would seem a little shady.
As far as my numbers, the $300M gain from fuel hedging that I calculated was IF SWA used the average fuel price that I thought they should for Q3 (96 cents per gallon). I mentioned it in my original post, but the more I think about it, the more I think there is no way that SWA will use 96 cents as the average fuel price in Q3. Looking back on my data, I redid my assumptions a little. Here's the data:
04Q1 = 79.6 cents paid per gallon of fuel ($35.26 avg. market price per barrel)
04Q2 = 81.9 cents ($38.33)
04Q3 = 80.3 cents ($43.86)
04Q4 = 89.1 cents ($48.31)
05Q1 = 90.3 cents ($49.71)
05Q2 = 102 cents ($53.04)
05Q3 = ??? cents ($62.35)
I guess there were actually 2 fuel number anomalies (04Q3 + 05Q2) whereas I only mentioned one of them earlier. Keep in mind the hedges for the above numbers were:
04 Q1 = 82% @ $24 per barrel
04 Q2, Q3, Q4 = 80% @ $24 per barrel
05 Q1, Q2, Q3, Q4 = 85% @ $26 per barrel
Now my math is as follows:
The average cost of jet fuel (in cents) is roughly 3X the average price of a barrel of oil. So for example at $50 a barrel, jet fuel would cost 150 cents per gallon. The exact cost is slightly different depending on location (NY Harbor/US Gulf Coast/L.A.), but this 3X approximation works surprisingly well. However the "spread" after Hurricane Katrina (Sept. #s) was a bit higher, maybe more like 3.2X.
So for Q2, if 85% of the fuel cost ~ 78 cents per barrel, the other 15% would have to cost 229 cents (which equates to ~$76 per barrel). And the average price per barrel of oil in Q2 was nowhere near $76 (it was $53). So I'm like I said, I'm not sure what to expect for the Q3 price per gallon of jet fuel. It SHOULD average 96 cents. But since in Q2 SWA claimed it averaged 102 cents when I calculated it closer to 92 cents, my guess is that SWA will again overinflate their fuel per gallon costs. Seeing as how SWA claimed their average fuel cost went from 90 cents to 102 cents from Q2 to Q3, I should probably make a more conservative assumption and say that the Q3 increase will be at least that big. So maybe my 107 cent estimate in my original calculations was probably a bit low. Maybe I should use 114 cents per gallon (even though I can't see anyway that they could pay that much per gallon if they are in fact 85% hedged at 78 cents per barrel). Using 114 cents per gallon, I still come up with Earnings of $236M ($0.29 per share). So any way you look at it, I really think SWA is going to blow by the analysts estimates. I guess we'll see for sure in a few days.
I wonder if the SWA accountants got done with their numbers on Thursday night and that's why LUV was up so much (5%) yesterday. They must've told their friends to go buy LUV. The airline index was only up ~2% on the day, so something else had to be at play there................... I don't know when the last time I saw LUV stock jump 5% in one day. That's unheard of!!!
Originally Posted by hamburgler
Your numbers are calculating a $300 MM gain from fuel hedging in Q3, which would be impressive given the net gain in Q2 was only $196 MM.
If I use a much more conservative $1.14 average cost per gallon of fuel used, SWAs gain from fuel hedging would only be ~$250M.
Looking at it another way if the market price of a gallon of jet fuel went from ~$1.59 to $1.87 from Q2 to Q3 and SWA used 331M gallons of jet fuel and 281M of those gallons were hedged, simple math tells you that they should have saved ~$79M more from hedges during Q3 than during Q2. Using that number, the amount SWA saved on hedges should be $275M. We'll see for sure in a few days I guess..................