FWAAA

Lotsa nonsense has been posted about Southwest's fuel hedges over the years (NOT by you, but by people who don't understand that it's a continuous process resulting in extending the hedges out into the future each quarter).

Here's the latest fuel hedging positions reported in the recent 10-Q (quarterly report):

Like night follows day, the next quarter will see WN report a greater percentage of their needs hedged for the outlying years. Their hedging advantage will never completely expire unless fuel drops dramatically in price. If it keeps rising, we can be certain that WN will continue to enjoy a cost advantage.

Incidentally, WN reports that $2.6 billion of their $3.1 billion of cash is tied up in connection with their fuel hedging. We often read posters complaining that AA didn't have the foresight to hedge - which is complete nonsense. What AA lacked was the free cash that hedging requires.

ndhapple

Absolutely correct. Since they have shielded themselves from skyrocketing oil prices they can continue the hedging. Since many of the majors weren't able to hedge in 2002, 2003, 2004; they have been forced to pay higher fuel costs and haven't had the capital to effectively hedge.

As Fat ....... once said "It's a vicious cycle! I eat because I'm unhappy and I'm unhappy because I eat." Same moral applies here.

MiamiAirport Formerly NY George

Outside of fuel, WN is now grappling more with higher costs. And from corporate culture standpoint, IHMO it is also struggling with its identity. The simplistic view of treating all flyers the same, particularly highlighted with its original open seating formula, is changing with the recent introduction of Business Select. WN appears to be trying to distance itself somewhat from its original "outsider" of the industry (like having the CEO show up as an Elvis impersonater.)

The problem, and one of prime reasons this industry has been in mostly a money losing situation for 30 years, is that free market forces have not been able to work properly. Government bailouts, bankruptcy protection, constant labor givebacks, and over generosity from lenders have kept weaken airlines flying. However, and again IMHO, this beginning to change. Notice that EOS went belly up because it could not get additional funding even though the thought of an all business class airline was cheered by Wall Street, and Aloha, despite 62 years in business in Hawaii, could not find enough local support to keep it flying.

And I don't think you will see anyone entering this business anytime soon.

Beckles

This is not correct. As of 3/31/08 WN had $3.0 billion of cash and cash equivalents and $140 million in other short-term investments (which would match up with the $3.1 billion of cash you mention). Fuel derivitives are not counted as cash (which seems pretty obvious to me), the current portion of fuel derivitives was valued at $1.25 billion on 3/31/08 (there is a line item on their balance sheet called Fuel Derivitive Contracts) while Other Assets on their balance sheet (which includes non-current fuel derivitive contracts) were $1.9 billion on 3/31/08. (See LUV Quarterly Balance Sheet)

UnitedSkies

I disagree.

Why Southwest is successful is largely because of cost-containment, not revenue generation. Partly due to having no premium cabin, Southwest actually rakes in revenue per ASM compared to legacies.

It's a common myth that since Southwest has good customer service, it is the winner. Not by a long stretch.

FWAAA

You may be right and I may be incorrect, but I relied on this statement by WN:

http://www.southwest.com/investor_re..._releases.html

If I'm mistaken, I apologize. Certainly wouldn't be the first time I've erred.

Beckles

LUV increased its revenue by 15.1% in the first quarter over the year earlier, even if you adjust that to a per available seat mile basis they still grew their revenue by 8.2%, which is not too shabby, and enough for them to make a profit. AMR on the other hand reported revenue growth of 5.0%, which worked out to 6.5% on an available seat mile basis, and certainly was not enough to make a profit. Obviously LUV still knows how to grow revenue better than AMR.
I'm not sure exactly what you mean, but I think many folks view WN as a winner (if not the winner) because of their proven record of profitability that no other US airline can even come close to.

bernardd

Cost containment? I think you have Southwest confused with American!

I said "It's marketing 101 - know your customer and build the right product at the right price." Yes, every business has to get the cost right, even luxury resorts and high-end cars, but you flat out don't get to be profitable 34 (IIRC) straight years by ONLY concentrating on cost. That streak of profitability requires you to build brand images and figure out where to introduce new service and all the rest of the stuff that goes with revenue, ie selling seats for above the breakeven price. Like all good businesses Southwest knows its customers and knows what they're willing to pay. I suspect they deliberately don't glamourise the image but they're as sharp at revenue generation as anyone.

giggy

3 million a day eh?? How about charging $10 for the first bag problem solved. Hey it uses gas to haul it.

Beckles

By its very definition, "cash and cash equivalents" is not "tied up," which is the part I really questioned in your original statement. It appears however that in fact saying they're "tied up" may be closer to the truth than saying they're unrestricted (although in fact LUV is free to spend that cash). Basically those monies are deposits paid to LUV by others in relation to derivitive contracts and are offset by accrued liabilities owed to the same parties. Those deposits are paid if "market risk exposure exceeds a specified threshold amount or credit ratings fall below certain levels." In fact what appears to have happened is that many of the contracts have become so valuable with the increasing price of oil that these deposits have been made to LUV and are basically unrealized gains associated with the contracts. (Maybe some of the deposits are due to "credits ratings fall(ing) below certain levels", but LUV also states they do "not expect any of the counterparties to fail to meet its obligations", which would be represented by decreased credit ratings).

PresRDC

I think that's exactly what they should be doing.

777-DCA

Thanks for the help! ^

al613

I don't know for sure, but I think WN has a lot of their customers money upfront, since they don't have a change fee on any reservations. So, If I don't know which day I would fly for sure, I buy flights on 3 days in a row in advance and then just reuse the money from 2 flights that I didn't use in the future. So, since I'm "hedging" my flights, they use my money to hedge fuel.

zman

How can WN start loosing money?
Hire the AA management team.

WN had the cash to do the hedging due to good management.
Same with the fleet renew.

MJonTravel

Amen.