LUV Stock Discussion Thread
Sep 30, 2005, 5:41 pm
#1
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LUV Stock Discussion Thread
I know we had a fairly lively discussion about 2 or 3 months ago regarding LUV stock and earnings numbers, etc in the following thread:
Southwest Load Factor Falls
Since that thread is not easily distinguished due to the thread title, I thought I'd start a new thread to discuss LUV stock. Since today is the last day of Q3 2005, I figured what better a time to start a new discussion. That and of course my prediction from 7/6/05 to load up on LUV stock come 10/5/05 which is less than a week away:
Looking at the LUV price, maybe my prediction was a month off. LUV is up ~13% in the past month. I originally bought in at $14.99 a day before I thought USAir was going to liquidate this spring. The gov't bailed out USAir and my stock didn't pop like I thought it would. I then doubled down a couple weeks ago @ $13.82 because the stock price seemed so low and Earnings would be coming out soon. So now I'm FINALLY ahead overall on LUV (that's about a first ever for me 
). Anyways, I'm posting to find out what other's thoughts are on two things:
1. Fuel Hedging
2. The effect of Katrina/Rita on SWAs bottom line.
1. The fuel hedging is a simple question. Does anybody know exactly how SWA is hedged? Are they hedged in terms of jet fuel prices or are they hedged in terms on crude oil prices? I know they are hedged 85% thru the end of this year at $26 per barrel. But did they actually hedge themselves in crude oil or do they just "translate" into crude oil prices so the average layperson can understand it since most people don't know what jetfuel costs? Recently I have been reading a lot about how the price of refining the crude into jetfuel is what is actually driving up prices for airlines since this increase is FAR higher than just the increase in crude oil. Anybody know the answer to this? Is SWA's hedging contracts are for jetfuel, they should be in great shape. If their hedges are only for crude, then they are not in nearly as good shape since they still have to pay the high prices to refine the crude into jetfuel.
2. Now the question that will probably be more difficult to answer: What will the effect of the hurricanes be on SWA's bottom line? I'd like to "Triple Down" and stick to my guns and throw some more $$$ into LUV, but the effect of the hurricanes has me worried somewhat. Initially I thought I'd just wait until the Load Factor #s for Sept came out (they should be out next Tuesday or Wed. would be my guess). I figured I could tell from that how SWA's Q3 would turn out. If the Load Factors for Sept. weren't down significantly, then I would Triple Down. If they were down, then I would just remain as is and hope that their July & August would carry them through on the Q3 numbers, probably not as blockbuster as I had predicted a few months ago, but I was hoping they would be good enough to beat analyst's numbers nonetheless. However after thinking about it more, the Sept. load factors probably won't reveal too much due to the hurricanes since the flights were completely cancelled, thus not harming the load factors too much. But just because the load factors are not harmed doesn't mean the bottom line isn't harmed. Cancelling all those flights would probably decrease the revenue significantly for the month. Or do airlines have some type of insurance policy or something for instances such as this? And how quick did they get their planes deployed and add flights to other cities after MSY closed? And did they really get paid a decent amount for all the relief flights they flew or is that money down the toilet? Please feel free to add any comments or thoughts if you have any. I'd like to see what you think about this.
Oh yeah, another interesting thing to note: Since the previous discussion a few months ago, LUV is up ~5% while JBLU is down ~17%. I know there was some comparisons over the two stocks and which company was in a better position. I guess that says that the free market thinks SWA is in a better position. That's OK, B6 will still be profitable at $80 a barrel, remember Neeleman's words back then when oil was in the $50s?
Now oil is closer to $80, we'll see if he was correct or not.
Southwest Load Factor Falls
Since that thread is not easily distinguished due to the thread title, I thought I'd start a new thread to discuss LUV stock. Since today is the last day of Q3 2005, I figured what better a time to start a new discussion. That and of course my prediction from 7/6/05 to load up on LUV stock come 10/5/05 which is less than a week away:
Originally Posted by gregorygrady
.......My guess is that SWAs real quarterly blockbuster numbers will actually occur in Q3 2005. Most of the cheapie fares (booked pre-4/22) will have already been flown prior to Q3. Also, summer is the peak travel period for Southwest so that should help increase load factor. My advice, load up on LUV stock on approximately Oct. 5, 2005..............
). Anyways, I'm posting to find out what other's thoughts are on two things:1. Fuel Hedging
2. The effect of Katrina/Rita on SWAs bottom line.
1. The fuel hedging is a simple question. Does anybody know exactly how SWA is hedged? Are they hedged in terms of jet fuel prices or are they hedged in terms on crude oil prices? I know they are hedged 85% thru the end of this year at $26 per barrel. But did they actually hedge themselves in crude oil or do they just "translate" into crude oil prices so the average layperson can understand it since most people don't know what jetfuel costs? Recently I have been reading a lot about how the price of refining the crude into jetfuel is what is actually driving up prices for airlines since this increase is FAR higher than just the increase in crude oil. Anybody know the answer to this? Is SWA's hedging contracts are for jetfuel, they should be in great shape. If their hedges are only for crude, then they are not in nearly as good shape since they still have to pay the high prices to refine the crude into jetfuel.
2. Now the question that will probably be more difficult to answer: What will the effect of the hurricanes be on SWA's bottom line? I'd like to "Triple Down" and stick to my guns and throw some more $$$ into LUV, but the effect of the hurricanes has me worried somewhat. Initially I thought I'd just wait until the Load Factor #s for Sept came out (they should be out next Tuesday or Wed. would be my guess). I figured I could tell from that how SWA's Q3 would turn out. If the Load Factors for Sept. weren't down significantly, then I would Triple Down. If they were down, then I would just remain as is and hope that their July & August would carry them through on the Q3 numbers, probably not as blockbuster as I had predicted a few months ago, but I was hoping they would be good enough to beat analyst's numbers nonetheless. However after thinking about it more, the Sept. load factors probably won't reveal too much due to the hurricanes since the flights were completely cancelled, thus not harming the load factors too much. But just because the load factors are not harmed doesn't mean the bottom line isn't harmed. Cancelling all those flights would probably decrease the revenue significantly for the month. Or do airlines have some type of insurance policy or something for instances such as this? And how quick did they get their planes deployed and add flights to other cities after MSY closed? And did they really get paid a decent amount for all the relief flights they flew or is that money down the toilet? Please feel free to add any comments or thoughts if you have any. I'd like to see what you think about this.
Oh yeah, another interesting thing to note: Since the previous discussion a few months ago, LUV is up ~5% while JBLU is down ~17%. I know there was some comparisons over the two stocks and which company was in a better position. I guess that says that the free market thinks SWA is in a better position. That's OK, B6 will still be profitable at $80 a barrel, remember Neeleman's words back then when oil was in the $50s?
Now oil is closer to $80, we'll see if he was correct or not.
Sep 30, 2005, 6:00 pm
#2
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Originally Posted by gregorygrady
So now I'm FINALLY ahead overall on LUV (that's about a first ever for me ).
).
Seriously, I am beginning to wonder whether any substantial improvement in earnings this quarter would be pushed into future quarters through accounting tricks. Are SWA's earnings unreasonably stable? That would indicate some degree of this sort of maneuvering.
Sep 30, 2005, 6:32 pm
#3
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Originally Posted by nsx
Seriously, I am beginning to wonder whether any substantial improvement in earnings this quarter would be pushed into future quarters through accounting tricks. Are SWA's earnings unreasonably stable? That would indicate some degree of this sort of maneuvering.
Oct 2, 2005, 10:31 pm
#4
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All I know about the Katrina effect is that it pales in comparison to what would have happened if Rita had pounded HOU head-on, since operations at HOU are roughly 3 times that of MSY. At least the Boeing strike happened when it did, allowing Southwest to use planes previously allocated to MSY to fill in the gaps created by delays in aircraft deliveries.
Unfortunately it seems the planets have to be in allignment for LUV to rise, even when Southwest announces a profit. The rest of the industry drags LUV down. Did anyone else notice US Airways new ticker symbol is LCC as in "low-cost carrier"? HA, far from it I say. In their dreams. Too bad LCC is trading at $21.01. What the ....?
Unfortunately it seems the planets have to be in allignment for LUV to rise, even when Southwest announces a profit. The rest of the industry drags LUV down. Did anyone else notice US Airways new ticker symbol is LCC as in "low-cost carrier"? HA, far from it I say. In their dreams. Too bad LCC is trading at $21.01. What the ....?
Oct 3, 2005, 6:56 pm
#5
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Originally Posted by gregorygrady
1. The fuel hedging is a simple question. Does anybody know exactly how SWA is hedged? Are they hedged in terms of jet fuel prices or are they hedged in terms on crude oil prices? I know they are hedged 85% thru the end of this year at $26 per barrel. But did they actually hedge themselves in crude oil or do they just "translate" into crude oil prices so the average layperson can understand it since most people don't know what jetfuel costs? Recently I have been reading a lot about how the price of refining the crude into jetfuel is what is actually driving up prices for airlines since this increase is FAR higher than just the increase in crude oil. Anybody know the answer to this? Is SWA's hedging contracts are for jetfuel, they should be in great shape. If their hedges are only for crude, then they are not in nearly as good shape since they still have to pay the high prices to refine the crude into jetfuel.
No idea how the hurricane situation is gonna affect WN. It was the biggest carrier at MSY, and now runs two daily flights. Of course, this allowed WN to expand other regions faster then otherwise. But the hurricanes affected all airlines, as all airlines have substantial presence in MSY and IAH (as well as HOU).
Originally Posted by gregorygrady
That's OK, B6 will still be profitable at $80 a barrel, remember Neeleman's words back then when oil was in the $50s? Now oil is closer to $80, we'll see if he was correct or not.
Now oil is closer to $80, we'll see if he was correct or not. 
Neeleman's gonna love having that bravado thrown back in his face in the coming weeks. As mentioned above, the crack spread has widened in recent weeks to over $40/bbl, raising the price of a barrel of JetA to over $110 (even over $120 for a while). JetFuel is bleeding JetBlue - B6 is gonna be really blue when those 3Q numbers are announced.
The other day, AA announced that mainline unit revenue is up about 12% in the third quarter over 3Q2004. Wonder if unit revenue was up half that percentage at B6??
Oct 3, 2005, 7:25 pm
#6
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Originally Posted by FWAAA
WN's hedges consist primarily of home heating oil positions, since heating oil tends to mimic jet fuel pricing. (Very similar distillate.) Dunno if there are any jet fuel hedging vehicles. WN's hedges should protect it against the widening "crack spread" (the ever-widening gap between crude prices and jet fuel prices). The WN 3Q numbers are gonna be very impressive as a result, compared to other airlines.
No idea how the hurricane situation is gonna affect WN. It was the biggest carrier at MSY, and now runs two daily flights. Of course, this allowed WN to expand other regions faster then otherwise. But the hurricanes affected all airlines, as all airlines have substantial presence in MSY and IAH (as well as HOU).
Neeleman's gonna love having that bravado thrown back in his face in the coming weeks.
As mentioned above, the crack spread has widened in recent weeks to over $40/bbl, raising the price of a barrel of JetA to over $110 (even over $120 for a while). JetFuel is bleeding JetBlue - B6 is gonna be really blue when those 3Q numbers are announced.
The other day, AA announced that mainline unit revenue is up about 12% in the third quarter over 3Q2004. Wonder if unit revenue was up half that percentage at B6??
No idea how the hurricane situation is gonna affect WN. It was the biggest carrier at MSY, and now runs two daily flights. Of course, this allowed WN to expand other regions faster then otherwise. But the hurricanes affected all airlines, as all airlines have substantial presence in MSY and IAH (as well as HOU).
Neeleman's gonna love having that bravado thrown back in his face in the coming weeks. As mentioned above, the crack spread has widened in recent weeks to over $40/bbl, raising the price of a barrel of JetA to over $110 (even over $120 for a while). JetFuel is bleeding JetBlue - B6 is gonna be really blue when those 3Q numbers are announced.
The other day, AA announced that mainline unit revenue is up about 12% in the third quarter over 3Q2004. Wonder if unit revenue was up half that percentage at B6??
I cannot find exact links, but I believe that your claim of hedging in home heating oil is not true. I believe that that are hedged specifically to jet fuel and specifically at certain airports. Consequently, when they land at an airport where they are not hedged, they only take enough fuel to get to the next landing, and when they are at an airport where they are hedged, they 'fill er up'.
Louis
Oct 3, 2005, 9:09 pm
#7
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Originally Posted by lougord99
I cannot find exact links, but I believe that your claim of hedging in home heating oil is not true. I believe that that are hedged specifically to jet fuel and specifically at certain airports. Consequently, when they land at an airport where they are not hedged, they only take enough fuel to get to the next landing, and when they are at an airport where they are hedged, they 'fill er up'.
I'm sorry, but your post reveals a complete lack of understanding of the issue. Fuel hedges are independent financial arrangements having absolutely nothing to do with particular airports. WN pays market prices for fuel at the airport (just like every other airline). Unlike most other airlines, however, it then realizes large profits on its hedging contracts. Those large investment gains are recorded as a reduction in fuel cost on its financials. The Southwest 10-K is a great source of information (more on that later).
Some background reading for you to get you up to speed on airline fuel hedging techniques (including some background on WN's strategies):
http://www.kellogg.northwestern.edu/...s/jet_fuel.pdf
Some specific Southwest pronouncements on it fuel hedging techniques from last year's 10-K (filed 02/04/05):
As detailed in Note 10 to the Consolidated Financial Statements, the Company has hedges in place for approximately 85 percent of its anticipated fuel consumption in 2005 with a combination of derivative instruments that effectively cap prices at a crude oil equivalent price of approximately $26 per barrel. Considering current market prices and the continued effectiveness of the Company’s fuel hedges, the Company is forecasting first quarter 2005 average fuel cost per gallon, net of expected hedging gains, to exceed fourth quarter 2004’s average price per gallon of 89.1 cents. The majority of the Company’s near term hedge positions are in the form of option contracts, which protect the Company in the event of rising jet fuel prices and allow the Company to benefit in the event of declining prices. (emphasis added)
More 10-K discussion from WN on its hedges:
The Company utilizes financial derivative instruments primarily to manage its risk associated with changing jet fuel prices, and accounts for them under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133). See “Qualitative and Quantitative Disclosures about Market Risk” for more information on these risk management activities and see Note 10 to the Consolidated Financial Statements for more information on SFAS 133, the Company’s fuel hedging program, and financial derivative instruments.
SFAS 133 requires that all derivatives be marked to market (fair value) and recorded on the Consolidated Balance Sheet. At December 31, 2004, the Company was a party to over 300 financial derivative instruments, related to fuel hedging, for the years 2005 through 2009. The fair value of the Company’s fuel hedging financial derivative instruments recorded on the Company’s Consolidated Balance Sheet as of December 31, 2004, was $796 million, compared to $251 million at December 31, 2003. The large increase in fair value primarily was due to the dramatic increase in energy prices throughout 2004, and the Company’s addition of derivative instruments to increase its hedge positions in future years. Changes in the fair values of these instruments can vary dramatically, as was evident during 2004, based on changes in the underlying commodity prices. The financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, and fixed price swap agreements. The Company does not purchase or hold any derivative instruments for trading purposes.
The Company enters into financial derivative instruments with third party institutions in “over-the-counter” markets. Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values. Depending on the type of instrument, the values are determined by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets. Also, since there is not a reliable forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices, as required by SFAS 133. Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as crude oil, heating oil, and unleaded gasoline) and adjusted based on historical variations to those like commodities.
Fair values for financial derivative instruments and forward jet fuel prices are both estimated prior to the time that the financial derivative instruments settle, and the time that jet fuel is purchased and consumed, respectively. However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements. Based on these actual results once all values and prices become known, the Company’s estimates have proved to be materially accurate. (emphasis added)
SFAS 133 requires that all derivatives be marked to market (fair value) and recorded on the Consolidated Balance Sheet. At December 31, 2004, the Company was a party to over 300 financial derivative instruments, related to fuel hedging, for the years 2005 through 2009. The fair value of the Company’s fuel hedging financial derivative instruments recorded on the Company’s Consolidated Balance Sheet as of December 31, 2004, was $796 million, compared to $251 million at December 31, 2003. The large increase in fair value primarily was due to the dramatic increase in energy prices throughout 2004, and the Company’s addition of derivative instruments to increase its hedge positions in future years. Changes in the fair values of these instruments can vary dramatically, as was evident during 2004, based on changes in the underlying commodity prices. The financial derivative instruments utilized by the Company primarily are a combination of collars, purchased call options, and fixed price swap agreements. The Company does not purchase or hold any derivative instruments for trading purposes.
The Company enters into financial derivative instruments with third party institutions in “over-the-counter” markets. Since the majority of the Company’s financial derivative instruments are not traded on a market exchange, the Company estimates their fair values. Depending on the type of instrument, the values are determined by the use of present value methods or standard option value models with assumptions about commodity prices based on those observed in underlying markets. Also, since there is not a reliable forward market for jet fuel, the Company must estimate the future prices of jet fuel in order to measure the effectiveness of the hedging instruments in offsetting changes to those prices, as required by SFAS 133. Forward jet fuel prices are estimated through the observation of similar commodity futures prices (such as crude oil, heating oil, and unleaded gasoline) and adjusted based on historical variations to those like commodities.
Fair values for financial derivative instruments and forward jet fuel prices are both estimated prior to the time that the financial derivative instruments settle, and the time that jet fuel is purchased and consumed, respectively. However, once settlement of the financial derivative instruments occurs and the hedged jet fuel is purchased and consumed, all values and prices are known and are recognized in the financial statements. Based on these actual results once all values and prices become known, the Company’s estimates have proved to be materially accurate. (emphasis added)
Still more 10-K discussion from WN on its fuel hedging techniques:
Note 10. Fuel contracts - Airline operators are inherently dependent upon energy to operate and, therefore, are impacted by changes in jet fuel prices. Jet fuel and oil consumed in 2004, 2003, and 2002 represented approximately 16.7 percent, 15.2 percent, and 14.9 percent of Southwest’s operating expenses, respectively. The Company endeavors to acquire jet fuel at the lowest possible cost. Because jet fuel is not traded on an organized futures exchange, liquidity for hedging is limited. However, the Company has found that crude oil, heating oil, and unleaded gasoline contracts are effective commodities for hedging jet fuel. The Company has financial derivative instruments in the form of the types of hedges it utilizes to decrease its exposure to jet fuel price increases. The Company does not purchase or hold any derivative financial instruments for trading purposes.
The Company utilizes financial derivative instruments for both short-term and long-term time frames when it appears the Company can take advantage of market conditions. As of December 31, 2004, the Company had a mixture of purchased call options, collar structures, and fixed price swap agreements in place to hedge its total anticipated jet fuel requirements, at crude oil equivalent prices, for the following periods: 85 percent for 2005 at approximately $26 per barrel, 65 percent for 2006 at approximately $32 per barrel, over 45 percent for 2007 at approximately $31 per barrel, 30 percent in 2008 at approximately $33 per barrel, and over 25 percent for 2009 at approximately $35 per barrel. As of December 31, 2004, the majority of the Company’s first quarter 2005 hedges are effectively heating oil-based positions in the form of option contracts. For the remainder of 2005, the majority of the Company’s hedge positions are effectively in the form of unleaded gasoline-based and heating oil-based option contracts. The majority of the remaining hedge positions are crude oil-based positions. (emphasis added)
The Company utilizes financial derivative instruments for both short-term and long-term time frames when it appears the Company can take advantage of market conditions. As of December 31, 2004, the Company had a mixture of purchased call options, collar structures, and fixed price swap agreements in place to hedge its total anticipated jet fuel requirements, at crude oil equivalent prices, for the following periods: 85 percent for 2005 at approximately $26 per barrel, 65 percent for 2006 at approximately $32 per barrel, over 45 percent for 2007 at approximately $31 per barrel, 30 percent in 2008 at approximately $33 per barrel, and over 25 percent for 2009 at approximately $35 per barrel. As of December 31, 2004, the majority of the Company’s first quarter 2005 hedges are effectively heating oil-based positions in the form of option contracts. For the remainder of 2005, the majority of the Company’s hedge positions are effectively in the form of unleaded gasoline-based and heating oil-based option contracts. The majority of the remaining hedge positions are crude oil-based positions. (emphasis added)
Well, Whaddayaknow? WN uses various hedging techniques, including home heating oil options contracts - which constitute a majority of its positions. Looks like my recollection (even from my old geezer memory) was substantially correct after all.
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Oct 4, 2005, 8:59 am
#8
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Southwest Sept. Traffic Up 18.9 Percent
Looking good for LUV!! Traffic jumped 18.9% while SWA added 11.5% more capacity. I guess the jump in traffic answered my earlier question about the effect of the hurricanes. Also interesting is that the overall Q3 load factor is up from 72.7% to 74.9% from Q3 2004. Looks like it's time to load up on the LUV while you still can near $15 per share! Link to article here.
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Southwest Airlines September Traffic Jumps 18.9 Percent As Co. Adds 11.5 Percent More Capacity
DALLAS (AP) -- Southwest Airlines Co. on Tuesday said September traffic jumped 18.9 percent as the company added 11.5 percent more capacity.
The air carrier posted 4.7 billion revenue passenger miles, up from 4 billion a year ago. A revenue passenger mile equals one paying passenger flown one mile.
Available seat miles, or capacity, increased to 7 billion from 6.3 billion in September last year. Meanwhile, load factor, or the number of passengers carried as a portion of available seats, rose 4.2 percent to 67.4 percent.
During the third quarter, Southwest flew 16.4 billion revenue passenger miles, up 15.5 percent from 14.2 billion in the prior-year period, and added 12.2 percent more available seat miles for a total of 21.9 billion. Load factor in the quarter was 74.9 percent versus 72.7 percent in the third quarter of 2004.
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Southwest Airlines September Traffic Jumps 18.9 Percent As Co. Adds 11.5 Percent More Capacity
DALLAS (AP) -- Southwest Airlines Co. on Tuesday said September traffic jumped 18.9 percent as the company added 11.5 percent more capacity.
The air carrier posted 4.7 billion revenue passenger miles, up from 4 billion a year ago. A revenue passenger mile equals one paying passenger flown one mile.
Available seat miles, or capacity, increased to 7 billion from 6.3 billion in September last year. Meanwhile, load factor, or the number of passengers carried as a portion of available seats, rose 4.2 percent to 67.4 percent.
During the third quarter, Southwest flew 16.4 billion revenue passenger miles, up 15.5 percent from 14.2 billion in the prior-year period, and added 12.2 percent more available seat miles for a total of 21.9 billion. Load factor in the quarter was 74.9 percent versus 72.7 percent in the third quarter of 2004.
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Oct 12, 2005, 8:08 pm
#10
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Welcome to Gregorygrady's Squawk Box
Originally Posted by nsx
FT 1, Wall Street 0
OPERATING REVENUE:
Passenger Operating Revenue = $2,002M
Total Operating Revenue = $2,080M
OPERATING EXPENSES:
Salaries, wage, bennies = $656M
Fuel and Oil = $317M
Maintenance & reparis = $98M
Aircraft rentals = $43M
Landing fees = $120M
Depreciation & Amor. = $117M
Other Oper. Expenses = $267M
TOTAL Oper Expenses = $1,618M
OPERATING INCOME = $462M
OTHER EXPENSES = $21M
INCOME BEFORE TAXES = $441M
PROVISION FOR TAXES = $168M
NET INCOME = $273M
NET INCOME PER SHARE = $0.34
If you want, you can compare these numbers to the 2004 Q3 and the 2005 Q2 numbers which I did much of my extrapolating from. But I really do think my numbers are fairly accurate. Using the above numbers, I came up with the following Consolidated Operating Statistics:
Passenger Revenue Yield per RSM = 12.23 cents
Operating Revenue Yield per ASM = 9.52 cents
Operating Expenses per ASM = 7.40 cents
Operating Expenses per ASM, excl. fuel = 5.95 cents
Fuel Costs per gallon, excl tax = 96 cents
Fuel consumed (in millions of gallons) = 331
So basically my number crunching has told me that SWA's Q3 Earnings will be $273M (which is 34 cents/share or a 129% increase in profit over Q3 2004). Now the really interesting thing is that the analysts only have SWA pegged to earn $138M in Q3 (17 cents a share). My numbers tell me that SWA will earn TWICE as much as what analysts are expecting!!!!! How big of idiots are those analysts? I've mentioned it before, but honestly what the hell does Wall Street pay them for? To get completely wrong of an analysis that I have done in less than 20 hours? I know what you are thining, I must be the one that is wrong, but unless SWA seriously fudges some numbers or unless SWA has some fairly big one-time charges this quarter that I don't know about, my numbers should be fairly accurate, trust me I've gone over them dozens of times.
Now I must warn you that there are 2 numbers that slightly puzzle me. The first one is the SWA "Q2 2005 Average Fuel Cost Per Gallon" (found here). Like I've said, I've crunched boatloads of numbers and the Average Fuel Cost for Q2 should have been 92 cents, NOT $1.02 per gallon as reported in their Q2 2005 Quarterly Report. Using jet fuel & crude oil prices for the quarter, I figured out how to calculate what SWAs fuel costs per gallon should be. I was dead on (within less than a penny variance) for all the Quarters in 2004 as well as Q1 2005 but for some reason Q2 was WAYYYYYY off. I don't know if SWA fudged that number to somehow carry over the profit into the future or what. That 10 cents a gallon alone knocked $30M off Q2 Earnings. So either the numbers are fudged, or the hedges are NOT as SWA claims they are (85% hedged @ $26 per barrel thru 2005). BTW, does anybody here know who I would contact to find out more about that Q2 Average Fuel cost number and why it was so far off? SWA Investor Relations Dept.? Would they tell me something like that?
Anyways, in my calculations above for Q3, I used the numbers for Average Fuel Cost that I calculated that SWA "SHOULD" be paying during Q3 (taken from a formula including oil prices and hedge amounts) and that number is 96 cents per gallon. Now I seriously doubt that they will use 96 cents a gallon if last Quarter they "paid" $1.02 per gallon and the price of oil went up 18% in the meantime (from $53.04 for Q2 up to $62.35 for Q3 per barrel). That just wouldn't fly on their quarterly report if their average jet fuel price went down 6% when the price of a barrel of oil went up 18% during the same timeframe. So figuring out the price change in oil and inserting that ratio into the 15% amount of unhedged fuel, I figure that SWA will "probably" report that the average price of fuel in Q3 was $1.07 per gallon. However, even re-crunching all my numbers resulted in SWA Q3 Earnings of $0.31 per share, well above analysts estimates.
And that is the second number that concerns me: THE ANALYSTS ESTIMATES!! The analysts estimates are SOOOOO bad that as an average, they are forecasting Q3 Earnings of only $0.17 per share even though the Q2 Earnings were $0.20 per share. So that means that they think SWA's Earnings will go DOWN in Q3 (July-Sept) as compared to Q2 (April-June). And that is even though the Q3 loads are already published and the numbers are GREAT (there were 6% more Revenue Passenger Miles in Q3 than Q2)!!! WHAT GIVES?!?!?!?!? SOMEBODY PLEASE TELL ME!!!!
So I crunched even more numbers, this time assuming the fact that average fuel prices were $1.07 AND that there was ABSOLUTELY NO FARE GROWTH WHATSOEVER between Q2 and Q3 (e.g., avg fare = $92.94). And I found that EVEN IN THAT SCENARIO, the Q3 Earnings will be $0.25 per share, STILL ALMOST 50% HIGHER THAN THE ANALYSTS ESTIMATES!!!! What in the world is wrong with these analysts?!?!?!?!??!?!?!!? Or more importantly, what in the world is wrong with me and how come I am forecasting so much higher profits at SWA than the analysts are?!?!?!?!?!?!?!?!?!
And as we all know here on FT, SWA fares went up a very good amount on April 22. Now maybe those higher fares were only 30-40% integrated into Q2 numbers, due to the people that bought before April 22 (for travel 14-21 days later or more). However those fare increases should be ~90% integrated into the Q3 numbers I would think since the schedule isn't out too far in advance. Here's how I came up with my Q3 average fare "guesstimate". Q1 2005 average fares were $91.15. Q2 2005 average fares were $92.94 (I would have thought that number would be slightly higher due to April 22 fare increases, but whatever). Being VERY conservative, I figure that the Q3 increase should be at least 2X-3X as much as the Q1--->Q2 increase. Let's be conservative and say its a $2 increase due to SWA eliminating all the $29/$39 fares and raising them to $49/$67 fares. Now we FTers also know that SWA increased their fares about twice $1-3 each time. Now being conservative, let's just call it another $2.06 total for those fare increases. Adding up those fare increases brings us to an average fare of $97.00. Honestly it could be much higher, it could even be ~closer to a $100 average fare!! But I'm 99.9% sure that the Q3 average fare will be quite a bit higher than Q2. The fares were higher and there were only maybe 3 weekend fare specials during Q3 in which there were actually decent fares available. So if the average fare isn't at least $97, then my whole number crunching project was a waste and we will know that SWA is just manipulating the numbers in order to bring better numbers forward for next year when their fuel hedges decrease.
BTW, just for your info, I told you above the the average Earnings Estimate is $0.17 per share for Q3. I guess there are 11 analysts that cover SWA. Of those, the low estimate is $0.13 per share and the high estimate is $0.24 per share. As of two days ago, the high estimate was $0.19 per share and the average estimate was $0.16 per share, so I guess the high estimater increased his estimate from $0.19 to $0.24. There are 2 analysts that estimated revenue and their average estimate was $1.96B, which was pretty close to my estimate of $2.08B. The analysts must just get SWA confused with the lagacies in regards to the fuel hedges or something, I dunno. They really have no respect for SWA. I tell you what though, Gary Kelly was a genius with the hedges. I has created over $1B in profit in the last year and a half due solely to his fuel hedges. A lot of investors should be very thankful for those hedges, without them SWA would have been awfully close to being in the red the last 4 quarters. In Q3 from my calculations I estimate that SWA saved about $300M from the fuel hedges alone! My guess is that a lot of SWA probably have Gary Kelly to thank for their jobs as well. Without all those savings, the pressure would definitely be on to start axing jobs just like the legacies.
Anyways, sorry that this post was so long. If anybody even comprehanded all of the above and wants to know how I got any of my numbers that I got above, let me know and I will explain it further. And if you've been able to stomach reading this far down, please give me your thoughts on if I am crazy or is SWA going to blow past analysts estimates next week.
Oct 13, 2005, 11:10 am
#11
Original Poster
Join Date: May 2003
Posts: 6,359
Originally Posted by gregorygrady
...........BTW, just for your info, I told you above the the average Earnings Estimate is $0.17 per share for Q3. I guess there are 11 analysts that cover SWA. Of those, the low estimate is $0.13 per share and the high estimate is $0.24 per share. As of two days ago, the high estimate was $0.19 per share and the average estimate was $0.16 per share, so I guess the high estimater increased his estimate from $0.19 to $0.24. There are 2 analysts that estimated revenue and their average estimate was $1.96B, which was pretty close to my estimate of $2.08B. The analysts must just get SWA confused with the lagacies in regards to the fuel hedges or something, I dunno. They really have no respect for SWA.
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On Oct. 20, reliably profitable Southwest Airlines (LUV) is forecast to earn 17 cents a share, with a range of 13 cents a share to 24 cents a share on revenue of $1.961 billion, according to Thomson First Call. Southwest's hedging strategy will continue to be closely followed to see how well the airline is protected against rising fuel expenses into 2006.-------------------------------------------------------------------------
I don't exactly understand the last sentence. Why will their hedging stategy continue to be closely followed to see how well SWA is protected in 2006? Aren't their 2006 fuel hedges commonly known? It's not rocket science. We already have the hedge numbers. A monkey with a calculator could figure out what 65% their fuel costs will be in 2006, the other 35% there's no reason to worry about because that portion can't be controlled.
Note: The analyst (Jaime Barker from JP Morgan) I quoted 3 months ago obviously was not as smart as a monkey with a calculator since he couldn't figure out simple math:
Snip from Article:
SAN FRANCISCO (MarketWatch) -- J.P. Morgan's airline analyst on Tuesday cut his 2006 profit target for Southwest Airlines to 38 cents a share, down from 45 cents a share, citing expected higher crude oil prices next year. J.P. Morgan analyst Jamie Baker expects Southwest's fuel costs to be 25% higher in 2006. The 38-cent-a-share profit estimate for Southwest's second-quarter results due Thursday remains unchanged.
Oct 13, 2005, 1:28 pm
#12
Join Date: Jul 2005
Location: SLC
Programs: UA 1K//DL Plat//Bonvoy Plat
Posts: 201
Not being the day trader type. I am going out on a limb and buying LUV stock based on gregorygrady's advice. I think it sounds well founded, and who knows. It might just go up. I didn't buy a lot, but hey it's worth a shot.
dave.
dave.
Oct 13, 2005, 1:45 pm
#13
Original Poster
Join Date: May 2003
Posts: 6,359
Originally Posted by davelikestofly
I am going out on a limb and buying LUV stock based on gregorygrady's advice.
Oct 13, 2005, 3:57 pm
#15
Join Date: Apr 2003
Location: DC
Programs: Amtrak slumbercoach value club
Posts: 1,163
Good analysis; hope this validates a financial decision I also made - and helps out those WN employees who have their eyes on the stock price. Two thoughts come to mind -
First, at least here at BWI where Independence is still putting up a pretty good fight for someone without much to stand on, there has been some pretty good discounting. Despite the overall trend to raise fares, I actually flew Q3 on some of the lowest fares I've paid in some time. I agree that the average fare is likely to go up, and think that your estimates are conservative enough to hold - but if it's lower than you would otherwise expect, I wouldn't automatically assume that SWA is just manipulating the numbers (that's more my second point, I guess). There have been some pricing pressures, which will make average fare for Q4 especially interesting to watch.
Second, as much as I would like to see the huge numbers that appear to be warranted, I don't know why WN wouldn't give some guidance to try to get the analysts more in line. In this case, couldn't too big of a surprise backfire - these guys may know little, but I'm guessing they have egos? Don't know if there's accounting practices (e.g. faster depreciation) or special charges that might get the bottom line closer to what's been predicted, but I would think these may come into play.
First, at least here at BWI where Independence is still putting up a pretty good fight for someone without much to stand on, there has been some pretty good discounting. Despite the overall trend to raise fares, I actually flew Q3 on some of the lowest fares I've paid in some time. I agree that the average fare is likely to go up, and think that your estimates are conservative enough to hold - but if it's lower than you would otherwise expect, I wouldn't automatically assume that SWA is just manipulating the numbers (that's more my second point, I guess). There have been some pricing pressures, which will make average fare for Q4 especially interesting to watch.
Second, as much as I would like to see the huge numbers that appear to be warranted, I don't know why WN wouldn't give some guidance to try to get the analysts more in line. In this case, couldn't too big of a surprise backfire - these guys may know little, but I'm guessing they have egos? Don't know if there's accounting practices (e.g. faster depreciation) or special charges that might get the bottom line closer to what's been predicted, but I would think these may come into play.
Originally Posted by gregorygrady
...Honestly it could be much higher, it could even be ~closer to a $100 average fare!! But I'm 99.9% sure that the Q3 average fare will be quite a bit higher than Q2. The fares were higher and there were only maybe 3 weekend fare specials during Q3 in which there were actually decent fares available. So if the average fare isn't at least $97, then my whole number crunching project was a waste and we will know that SWA is just manipulating the numbers in order to bring better numbers forward for next year when their fuel hedges decrease..
