The Double EQM offer is not at all like the CO we all know and love...when I saw they went for it and an even more generous offer than either UA or AA... I knew that it meant that things were pretty bad.

I notice you were careful not to say that my statement of 36 consecutive years of profitability was incorrect, because it is not incorrect. They have been profitable for 36 consecutive years.

Now, their 69 quarter streak of quarters with positive net earnings came to an end in Q3 2008. Of course, they still had operating profits in both quarters, so what exactly moved them from operating profits to net losses one may ask? Well, it was unrealized losses on previously unrealized gains. In other words, they marked to market some assets in previous quarters and had to recognize those gains, but subsequently those gains were erased when those assets were marked back down. Without arguing the merits of mark to market in general, it can cause large fluctuations in net income that have nothing to do with the operational profitability of the company, as it did with LUV. Where the rubber hits the road is operational income, and they still have 71 consecutive quarters of showing an operational profit (when the hedges are actually impact fuel price, they are shown as operational profit/loss).

What do you mean by "filing"? I would take that to mean SEC filings, but I don't believe they've made any such statements in any of their SEC filings (LUV SEC filings). What you may be referring to are recent statements made by Gary Kelly at the JP Morgan conference a few weeks ago (link to his presentation), and actually what he said was January was strong, but February and the first week of March have "sequentially" weakened. In fact, at another conference in early February LUV said that PRASM was up 6% in January (link to presentation) year-over-year, despite weaker bookings, so their revenue through January was actually about in line with previous years, though it appears that may not be the case with February and March.

I hardly think you can lump them with the other major US carriers, they still have the lowest cost structure of any major US carrier, nothing has changed to erase that advantage.

It doesn't matter how good their product is if they don't make money providing it.

That is an awfully short historical view, CO has been bankrupt as many times in the past 30 years as UA and DL combined.

I think one would be hard pressed to find an article in the Chronicle the last few years that is anti-CO... especially by the author of that article. That is not to say that it is not a well done piece.....but the Chronicle is VERY CO friendly.

I am curious how many of the 69 quarters of profit were as a result of similar mark to market accounting gains in their fuel hedge positions versus operational profits. In other words, had they not been hedged, would they have been profitable in all those quarters? I have to believe that the answer is no, but this time they got caught on the wrong side of the hedge so they're deflecting the focus from those numbers. I don't know it for certain, but it seems that way to me.

While it's great if it works, I don't think luck with fuel hedging translates to good business. I think it translates to good luck. Hedging is nothing more than glorified gambling of a commodity and Southwest had an incredible long run with good luck. And good for them --Im glad they were able to keep their fuel prices in check for so long.

But something is awry with the industry if you need a major element of gambling on your #1 expense to maintain profitability.

I think you are overstating the case. Properly done hedging is just that, a hedge. As far as I can tell, WN isn't making outsized bets on fuel in an attempt to make a profit on the hedge itself, they are using hedges to manage the risk inherent in buying a commodity. I don't consider that gambling anymore than I consider sitting around and doing nothing gambling.

Even at WN, fuel costs (inclusive of hedge costs) was 35% of expenses during 2008. Even during the cheap oil days of 2004, it was 18%. What kind of company doesn't try to manage the inherent pricing risk for 20-35% of their expenses? At the end of the day, the airlines have two options with regards to fuel: hedge, or cross their fingers and pray. Choosing to hedge is no less a part of running an airline than choosing not to hedge (or route planning, or product choices, or fare structure).

I think it's all too easy to get caught up in the did / didn't they achieve x quarters type of statistics. Take a step back and look at the bigger picture. WN have consistently out performed the legacy carriers. Even today, while their operating performance may be down, they still aren't as bad as any of the legacies.

How did they achieve this? Not by heavy emphasis on the supposedly more profitable international routes, but by good, solid performance on the un-attractive, allegedly un-profitable domestic routes.

How was that possible, when all the legacies keep telling us thye're losing their shirt on domestic routes and are now starting to ask for monopolies, or at least price protection? The answer, surely, is Marketing 101 - WN built a product they can deliver at a price lower than the customers are willing pay, ie they're inherently profitable rather than lucky. Note, WN are not always the cheapest, yet their brand image is strong and, here's the rub for CO - it's WN who are setting the price on many domestic routes, with the legacies forced to follow. That's how much the industry has changed in the last couple of decades.

All is not, however, rosy in the garden - my hunch is WN is relying more and more on business travellers, which is actually hurting them more than they realised it would in the current climate. In a way that shift to business traffic may be inevitable - there isn't a lot of scope for growth geographically so maybe that's the only way they can continue to grow?

It's always easier running a business and motivating staff when you're growing, so to my mind they face some big adjustments if they can't get back to growth within a year or so. Like everyone else, WN needs one of the legacies to disappear. No more Chapter 11. A Chapter 7 would take out capacity and be good for everyone, eliminating some of the push for protection.

And I was being a bit obtuse in my comments, starting with the "are you kidding me ..." but this is the heart of the matter, what I read was LK wanting government protection against WN. Re-regulation would basically eliminate WN's cost advantages and force us all to pay the higher fares necessary to support the higher cost structures of the legacy carriers.

As far as cost structures go, WN is right up there these days.

Presumably that would leave WN piling up cash? Wonder what they would do with it? Our, under your scenario, what they would be allowed to do with it?

You think so? Because that is not the way that I see things. CO is at a distinct disadvantage when it comes to labor over the past couple of years due tot he fact that they couldn't force the unions into a corner with their bankruptcy proceedings. Yes, CO has been bust a few times before, but that was quite some time ago, and things are so different now that those concessions don't really influence the way that they do business these days, imho.

If WN's costs are now are high as CO's then the only conclusion you can reach is they're able to sell their tickets for higher prices? Or get significantly higher load factors?

It's always hard to compare the two because of the nature of the routes, but as I said earlier, the legacies have been telling us longer international routes are more profitable than short domestic services. Something is wrong with this picture, and it isn't fuel hedging.

No, they're not.

I'm not a big fan of "stage adjusted" numbers, but see slide 9 of this presentation for those figures.

If we go non-stage adjusted, WN's advantage is less dramatic, their CASM is $.1047 compared to CO at $.1244 for mainline only (Express and Connection being even higher). Then one might say "but that includes their fuel hedging", so if we exclude fuel cost (though I don't know why anyone would, buying fuel is pretty important to running an airline), the advantage is less dramatic yet, but still significant, WN's CASM is $.0664 while CO's is $.0765, so WN still has a 13% cost advantage over mainline CO.

Quite frankly the highly-unionized work force would probably get a lot of it, making them even more well compensated compared to their industry peers. I would imagine some of it would be used then to provide an even better product to differentiate itself further from the service provided by other carriers.

Yeah, I do, because I don't see how a business structure can so "admirable" if it only came around after two bankruptcies. Yeah, CO is doing some good things now, but quite frankly they did get the benefit of bankruptcy in the not too distant past (twice) and they still can't consistently make money anyway. What's so admirable exactly? I don't think it's fair to claim DL and UA have some great advantage because they each went through bankruptcy recently just because CO hasn't gone through bankruptcy lately.

Actually, CO's bankruptcy was quite some time ago, and the whole financial, airline, energy, etc. markets were miles away from where they are now. The difference is that DL, NW and UA had their latest filings in an environment much more similar to the one that we have today, and that's the difference. Admirable -- I was just meaning lately. I can remember how furious I was when I saw UA destroy their pensions in the name of poor management.

The reason that CO can't make money is several reasons, but this is just another strike against their efforts currently.