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Dec 8, 2007 | 1:04 pm

#28

USirritated

Join Date: Jun 2007

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Quote:

Originally Posted by dayone

Very entertaining fiction.

No, actually, there is nothing fictional about what I said, with the possible exception of the way that I described Southwest's employees "all got raises," however, the meaning is still the same, as you will see below...

Black section below, as excerpted from a 11/29/2007 article in the New York Times:

"Southwest also has the highest labor rates in the industry because it was the only big airline that had not demanded deep wage concessions from workers.

Gary C. Kelly, chief executive of Southwest, was the architect of the fuel hedging program when he was chief financial officer. The big hedges were put on starting in 2000.

The hedges have helped keep Southwest profitable, producing gains on the hedging contracts of $455 million in 2004, $892 million in 2005 and $675 million in 2006, as well as $439 million for the first nine months of 2007, as oil prices have nearly doubled this year.

These gains mostly offset rising fuel prices while other airlines were largely unprotected against the increases.

Mr. Kelly does not play down the need for Southwest to change its business, including finding ways to charge more per ticket and to reduce operating costs."

Below blue section, from various sources, including the Securities and Exchange Commission; Southwest Airlines 2006 Corporate Annual Report; Commodities-now.com ("Airlines Hedging Strategies: The Shareholder Value Perspective")

"Southwest has a longtime program to hedge fuel prices. It has purchased fuel options years in advance to smooth out fluctuations in fuel costs.

In 2000, Southwest said it had "adjusted its hedging strategy" to "utilize financial derivative instruments... when it appears the Company can take advantage of market conditions." Additionally, the company hoped to "take advantage of historically low jet fuel prices." SEC statement Southwest's decision proved to be a prescient and, for a time, extremely profitable effort.

To lock in the low historical prices Southwest believed were occurring at that time, Southwest used a mixture of swaps and call options to secure fuel in future years while paying prices they believed were low. The company also stated that with this new strategy, it faced substantial risks if the oil prices continued to go down, but they did not. Previously, Southwest had been more interested in reducing volatility of oil prices. Now, they hoped to reap large gains from oil price appreciation.

In 2001, Southwest again substantially increased its hedging in response to projections of increased crude oil prices. The use of these hedges helped Southwest maintain its profitability during the oil shocks related to the Iraq War and later Hurricane Katrina.

According to their annual report, here is the company's fuel hedge for forward years ("approximate" per barrel basis, as of mid-January): 2007 is 95% hedged at $50/barrel; 2008 is 65% hedged at $49/barrel; 2009 is over 50% hedged at $51/barrel; 2010 is over 25% hedged at $63/barrel; 2011 is over is 15% hedged at $64/barrel; 2012 is 15% hedged at $63/barrel.

According to its 2006 Annual Report, Southwest paid low prices for fuel thanks to the benefit of fuel hedges:

2004 - 82.8 cents
2005 - 103.3 cents
2006 - 153.0 cents
These are well below market rates, which Southwest factors into its low operating costs. However, this below-market oil cost will not continue forever; executives have said that Southwest faces increased exposure to the raw oil market every year. This is not a good sign for the airline, which is also facing tough competition from US legacy carriers that have lowered costs through bankruptcy. Southwest CEO Gary Kelly has decided to slow the airlines' growth as a response to this cost.

Risk managers find it difficult to endorse the style of profit-motivated energy trading Southwest did between 1999 and the early 2000s. Risk managers have suggested that rather than hedging business risk, (such as a hedge on weather to a farmer), Southwest was simply speculating on energy prices, without a formal rationale for doing so. As an airline company, the goal of "taking advantage" of the commodity market's flaws was quite unusual. Hedge or no hedge, the long-term speculative outcome does not lessen the marginal cost of monthly flight operations. If flights lost money at market prices, they still would be canceled to maximize shareholder value -- since, crucially, the fuel hedges could be sold for cash on the open market.

At present, Southwest has enjoyed much positive press (and a strong financial boost) from its energy trading skills. However, while most analysts agree that volatility hedges can be beneficial, speculative hedges are not widely supported as a continuing strategy for profits. The early 2000s hedges may in retrospect be an anomalous, lucky event and also a claim to fame for Southwest Airlines' reputation as a financially adept company."

Green section below, as Excerpted, Wed, July 18, 2007

Southwest offering buyouts to about 9,000
By Mary Schlangenstein

Bloomberg News, as reported in the Philadelphia Inquirer and Philly.com

Southwest offering buyouts to about 9,000
By Mary Schlangenstein

Bloomberg News

"Southwest Airlines Co., already slowing growth to help boost profits, is offering buyouts to 27 percent of its employees to reduce operating costs.
About 9,000 workers are eligible for the buyouts, which include $25,000 in cash, medical and dental benefits, and travel privileges, spokeswoman Brandy King said yesterday. It is the second such program in the Dallas airline's 36-year history...........The buyout is Southwest's latest effort to offset rising spending on labor and fuel, its two largest expenses. The airline said in June that it would slow capacity growth in this year's fourth quarter and all of 2008 to maximize revenue on each flight."

Brown section below from: Airfleets.net; Wikipedia.org/wiki/Boeing_737 page; Wikipedia.org/wiki/Southwest_Airlines page; and Boeing.com

"The 737-300 was the first major change of the 737 design, incorporating improvements while also retaining commonality with previous 737. The -300 was launched in 1981 by USAir and Southwest Airlines, becoming the base model of the 737 Classic series. The 300 series remained in production until 1999."

"The 737-700 was launched by Southwest Airlines in 1993 and entered service in 1998. It replaced the 737-300 in Boeing's lineup, and its direct competitor is the A319."

As you can see below, Boeing has not been able to keep up with Southwest's demand to replace the 737-300 series with the more fuel efficient 737-700, and as you will see below, Southwest already makes up 9% of Boeing's 737 production, more than any other single customer.

Boeing 737-300 194 Launch customer

Boeing 737-500 25 Launch customer

Boeing 737-700 296 (111 orders) Launch customer

"Since production of the 737-300 and 737-500 has ended, recent Southwest orders have been exclusively for the 737-700 model."

"Southwest is the world's largest operator of the 737. Their current active fleet is over 500 aircraft. In terms of total 737 production (all models in history), deliveries of new aircraft from Boeing to Southwest accounts for approximately 9% of total production. Southwest has one of the largest fleets in North America."