Forbes: SWA Going Nowhere
 

Dream over for Southwest?

Prudential Equity Group downgraded the stock, saying the company's business model "does not appear to be working anymore."

Bob McAdoo lowered his rating to "Underweight" from "Overweight" and reduced his price target to $16 per share from $22.

Foremost among Southwest's problems is over-expansion: the airline continues to swell its fleet at the rate of about 35 planes per year, even though it is losing money on many of its recently added routes. McAdoo added that Southwest lacks direction, and lowered his target price from $22 to $16, and dropped second quarter estimates to 26 cents from 41 cents as well. "Lacking some new direction, we believe LUV shares are going nowhere," McAdoo says.

What is going on? Has reality set in?

Your opinions please

Full text:
http://www.forbes.com/markets/2007/0...markets10.html

http://www.forbes.com/markets/2007/0...markets10.html

Their saving grace the past few years has been the brilliant decision to hedge on fuel. Now that the hedges are running out, watch out. I agree with the article, that they're likely expanding too fast.

It wasn't a brilliant decision. Every large company or entity that uses energy hedges it...not to make windfall gains in speculation, but to dampen price fluctuations and permit accurate planning. But since hedges can bite you if price goes the wrong way, you need a good credit rating to do it. Post 9/111 SWA had the distinction of being the only airline with a credit rating that would allow hedges. Now the $25/bbl hedges are mostly expired...

Actaully, Indy had the chance to hedge as well. The upper management geniuses decided not too. Thinking fuel prices would go down. Idiots.

...the only thing they didn't predict well is how the oil monopolies can get away with charging whatever they want. People continue to drive SUV's, there is no oversight, and the price continues to go up. How many refineries have been down for "maintenance" this year? When was the last refinery built?

The barriers to entry for oil are so great that they know they can get away with murder.

I think that they are trying to gain as much market share as possible while they have the fuel cost advantage. They'll slow down the growth as the hedges expire.

AMR had hedges, but sold them...even bigger idiots earning an even bigger bonus.

Running out? They don't run out until 2009! Brilliant isn't the word.

Bob Crandall does not call it fuel hedging. He calls it a gamble. He noted recently that many airlines have lost a lot of money on fuel hedges in the past. You are only "brilliant" if you guess right, just like picking a stock. Having said that, fuel hedging is not their magic formula. It is their incredibly low employee to airplane ratio. It keeps their costs untouchable even with high wages.

The hedges help, but when they run out it won't be the end for a number of reasons. Their overall cost structure is much lower than any legacy out there. The point-to-point route structure allows for fewer gates and fewer employees at each station. Their business model used to target leisure travel but it attracts the all important business customer now too. Their frequent flier program is dirt-simple, and relatively cheap for them to upkeep. Because of this, they can raise their fares, and still be competative. As far as expansion, they really don't expand fast into new markets. They have a tendancy to go all out when they enter a city however. They don't just add three or four flights a day like say, Air Tran. They add a couple dozen and saturate the market so the competition has to react.

Also, who's to say that these hedges are going to "dissapear". They have lots of cash and are in a strong position to adjust. Fleet modernization, outfitting their fleet with winglets (I think they were the first on that bandwagon). I'm sure they have lots of resources working on this. Hedging is pure speculation as stated. If they hedge at $60 a barrell and prices go to $80 a barrell, they'll still smell like roses.

And exactly what is it in this business that's a "sure thing"?

If you're not willing to gamble, this is the wrong business.

Bob McAdoo? Didn't he used to play for the Buffalo Braves? Spent some time as a Laker too. I think he's retired now.

He retired in '85 after winning a championship with the Lakers. He's an assisstant coach for the Miami Heat now.

Apparently, he still owns a pawnshop in Buffalo, but I found no mention of his stock picking prowess or his knowledge of the airline industry.;)

Attachment 903

I was about to say, who cares what this "bob mcadoo" has to say?

Perhaps. I was just relaying the opinion of one of the best former airline ceo's in the business. I think everyone is making too big a deal on the fuel hedge thing. You can lose just as easily as you can win.

Not working? But still making $$
 

Well, let's see....SWA continues to make a profit, even though the cost of their hedged fuel went up 83% over the past year. And as you expand, that's more planes and more fuel...

What I like to see is the company's "long range" market development philosophy. Some markets may not be big money makers right now, but as the airline continues with it's methodical, pre-planned expansion, with competitive costs per seat mile traveled, I think the airlines future is bright. Personally, I think LUV stock is at a very reasonable price right now, and if I had to own an airline stock, it would be on my short list.

This analysts opinion is a typical short-term, instant gratification one, typical of today's MTV generation.

My opinion is if SWA is in a situation where they are under pressure, JetBlue is royally scruwd

Good Luck Gman...

Not only that, but their two sides to the profit equation. Expenses vs. Income. Low cost are great but if you don't have a decent yield from your product the end result is the same.

The biggest danger to the Legacy carriers is their high costs!

The biggest danger for the LCC carriers is their Low yields!

Onfinal

Yes. But more importantly he was a TARHEEL!!:D

Perhaps old Stevie Boy should take a look in the mirror. Where is he going? Nowhere out of Somerset NJ... that's where unless he uses daddy's legacy to take him there.

McAdoo. LOL
 

And then he says: "The company's net income of $499.0 million last year is less than what it earned in 2001, and its stock has spent the last four years shuttling between $12 and $20 a share."

Has any other passenger airline made $499 million in the last FIVE years?

This from our employee newsline dated March 12, 2007.

"We had a couple of announcements last week. First of all, we were honored to be named to the Fortune Magazine’s list of Most Admired Companies. For 2006, we came in number five on the overall list, and that’s really great! Ahead of us were General Electric, Starbucks, Toyota, and Berkshire Hathaway. So, that’s pretty good company."

For full disclosure...."In the specific airline industry list, we came in second,
following Continental."

Great job Continental!

S.B.

U.S. Airline Companies' Jet Fuel Hedging Percentages
 

Boys, I’m not a Wharton School of Business grad nor did I sleep at a Holiday Inn Express, but it looks to me like Southwest’s hedges are just fine. I think Southwest is ‘flooding’ the market to artificially keep yields low to decrease the likelihood of success of new entrants, i.e. Skybust and Virgin. It’s either a plan of sheer genius or pure stupidity. Time will tell.


Tom

PS It will be tough to reinvest with low yields. I hope
SW will continue to be the Walmart and not SkyBUST.

http://www.bloomberg.com/apps/news?p...d=atVih.eTATM4


U.S. Airline Companies' Jet Fuel Hedging Percentages (Table)
By Phillip Cruz
May 31 (Bloomberg) -- The following table shows the percentage of hedging by U.S. airlines against fluctuations in jet-fuel prices. Data is compiled from company regulatory filings, statements and interviews. The table is sorted in alphabetical order by company name.

Hedge Price As of
Company Percentage Period ($/Barrel) Date
================================================== ====================
AirTran 22.5% CY 2007 1.81 (1) 3/31/07

Alaska Air 53.0% Q2 2007 57.31 3/31/07
49.0% Q3 2007 56.98 3/31/07
41.0% Q4 2007 59.67 3/31/07
36.0% Q1 2008 61.92 3/31/07
29.0% Q2 2008 63.53 3/31/07
21.0% Q3 2008 63.94 3/31/07
23.0% Q4 2008 64.20 3/31/07
5.0% Q1 2009 67.68 3/31/07
5.0% Q2 2009 67.50 3/31/07
6.0% Q3 2009 68.25 3/31/07

American Airlines 26.0% CY 2007 64.00 3/31/07

Continental Airlines 35.0% Q2 2007 66.08 (4) 3/31/07
10.0% Q3 2007 66.08 (4) 3/31/07

Delta Air Lines 48.0% Q2 2007 1.91-1.71 (3) 4/18/07
21.0% Q3 2007 1.94-1.76 (3) 4/18/07

JetBlue Airways 41.0% CY 2007 na 3/31/07

Midwest Air 90.0% CY 2007 2.06 (2) 3/31/07

Northwest Airlines 29.0% CY 2007 53.00-56.70 (6)(2) 3/31/07
10.0% CY 2007 62.00-64.98 (2) 3/31/07

Southwest Airlines 95.0% CY 2007 50.00 Mid-Jan '07
65.0% CY 2008 49.00 Mid-Jan '07
"over" 50.0% CY 2009 51.00 Mid-Jan '07
"over" 25.0% CY 2010 63.00 Mid-Jan '07
15.0% CY 2011 64.00 Mid-Jan '07
15.0% CY 2012 63.00 Mid-Jan '07

United Airlines 23.0% Q2 2007 59.00-69.00 (2) 4/24/07

US Airways 60.0% Q2 2007 (5) 4/26/07
44.0% Q3 2007 (5) 4/26/07
27.0% Q4 2007 (5) 4/26/07

(1) Weighted average price per gallon of aviation fuel.
(2) Fuel hedge "collars" with floor and ceiling prices.
(3) Combination of swaps and collars w/ave cap and floor.
(4) Additional heating oil swaps at $1.65 and option contracts at
$1.87/$1.70 call/put.
(5) Heating oil cost collars w/jet fuel equivalent between $2.11/$2.23 and
$1.91/$2.03.
(6) Plus related call options at $72.

Hey Gman, what's Kobe buying?

and once again let's not forget that new routes take , on average, 2-5 years to be profitable ( closer to two if you already fly to those 2 cities and closer to 5 or a bit more if they are both new cities), so in 5 years we will see.

for now who cares about stock prices as an employee or long term investor? long term company success is what matters, not the stock price for 1-5 years. and who cares what airline analyst think? do they even think?has any of you ever heard them asking questions on the conference calls of different airlines? I'm embarrassed for them, how can they keep their jobs?

I agree.

Tom

:cool: I figured I might chime in before this thread is relagated to the afterlife of threads. First of all Gman, I am still waiting for Neeleman to come dump my lavs since he has free time now. Second point is that Gman made a decision to go to JBLU and the only way he can defend his career decision is to put everyone else down (mostly SWA) and pump up JBLU. It has been increasingly difficult to pump up a baloon which has been slowly descending lately. I hope that all the employees (including a friend of mine who is a chief pilot) at JBLU can patch the holes and begin ascending again. Neeleman was too much in the balast area (mostly hot air) and things should get better.

SWA has faced many difficult situations in the past and I will say that the current obstacles will have to be overcome. The idea that the sky if falling is overkill and those who are chicken littles like Gman are no more knowledgeable than palm readers. They hope for the failure of someone else to justify their own existence.

Examples abound during the existence of SWA of other airlines trying to squash our business model. Most beat their chest predicting the likely demise of SWA, because they had suddenly found the holy grail. History is littered with those such as Shuttle by United, Delta Express, Metrojet, Ted (although not dead yet), Western Pacific, Song, as well as others. Everyone is a formidable opponent, but Cost is the true threat and we are certainly trying to keep that area low and maintain our salary levels.

The most formidable threat of late has been the bankruptcy system which has robbed from the efficient and given to the inefficient. Costs at airlines that have gone through bankruptcy have been lowered on the backs of employees and have created an environment where efficient airlines (SWA) are put at a competitive disadvantage. The failure of one or more airlines would improve things drastically for the majority of employee groups with the unfortunate ending (or restarting of) those at inefficient airlines.

Bottom line is that Bankruptcy has stolen income from one group and given it to another. Sounds like welfare to me! Cheers!:p

Very well said. Unfortunately, CEOs and management don't suffer during this process, just the stockholders and the employees.

I'm a right wing, gun-nut, long time Republican. But that is just wrong. Somehow we have to find a way to tie business success or failure to the leadership. I ain't no pinko leftist...but I can see who the workers of the world could unite for revolution with that kind of injustice continuing to take place.

How did we steal from you? Do tell.

tom

I have an extra red bandana and a t-shirt of the che if you wan to borrow them;)

seriously I do agree with you " the history of all hierto existing society is the history of class strugless" . I won't tell you who wrote that since I 'm afraid your right wing nuts friends will try to send me to guantanamo ;)

the protetarians already outnumber the burgeoissie in this coutry, so the only thing separating us from a peaceful revolution to change systems is the will and IQ of the people.

we need to start another First International :)

of my soap box now with my left fist up in the air

...disregard

Just so you know this is nothing personal towards anyone or towards any particular airline. I am trying to use simple economic principles that in the event of a failed business plan or even a catastrophe (9-11) a business or airline would have been allowed to fail. No government grants, loans, etc. for any airline after 9-11 and the "majority" of airline employees would have been better off over time. With less capacity the easier it is to raise prices to cover costs. Same principle applies to personal bankruptcy where an individual is allowed to forgo payment of his bills forever therefore causing the business that he stiffed to raise their prices to make up for the loss of revenue. Everyone else pays for the mistake (or misfortune) of individuals (or airlines) who don't pay their bills. My use of the word stealing while maybe a poor word choice was meant to indicate that money was diverted (through the bankruptcy process)from one business to another. Therefore taking money out of the pocket of one and placing it in another without their consent.

I certainly would not want to go through what employees at bankrupt carriers have had to go through and I have compassion for their situation. That being said if you take the emotion out of the equation and allow a truly free market to work it would have eliminated the weakest business models after 9-11.

I figured I might offend those who have had to endure the bankruptcy process with huge sacrifices on their part. I again would remove the emotion (which I am sure is very difficult for many) and try to use financial logic. I mean nothing personal.

I will end with a scenario that I read about a few years ago in Business Weekly. It stated that if if United had gone out of business in 2002 (as it would have without government grant money) every airline would have made money that year. While a difficult pill to swallow for the employees of United the rest of the industry would have been better off because of their failure. It would indicate that the bankruptcies at other airlines would not have happened and the givebacks ($ and retirements) by employees at the surviving carriers would have at least been less and perhaps nothing. Just a thought.:)

I just hope SWA matches the fare raises by other airlines and the other do the same for when SWA raises fares; A level playing field helps everyone. Right now about everyones fares are on par with each other, we don't need airlines like skybus and VA lowering the bar. Already I read a report where SWA is operating at a loss on routes to go head to head with Skybus....That can't be good at all.

Well put....
 

OSCARTHEGROUCH-

Well worded, astute, logical and respectful post. I absolutely agree with you.

Oscarthegrouch,

Great post that everyone should mull over. In college I had a proffessor who claimed that by allowing airlines to operate in and out of bankruptcy will hurt the "whole industry" in the future (meaning 2000s and beyond). Hard to believe that he may have been right. He also said that deregulation was the worse thing that could happen to the airline industry as well.

S/F

Flying used to be a luxury service, now it is mediocre bus service. The problem is, while deregulation hurts the industry, it benefits the economy as a whole. That's why the government will allow the airline industry to continually go down into the dumps without penalty.

Yes, it was a great post. Some of you guys have very short memories. How many times have we seen the heavy weight boxer of yesterday working as a doorman today. Who would have believed that Pan Am, TWA, and Eastern would have gone out of business? Things have a way of turning around in this industry. I never thought I would have witnessed Wall Street state that LUV is a worthless stock and they should follow the example of the Legacies. How's that for a turn around?

You guys sit there and complain about a helping hand or corporate walfare. Well, ponder this. If a legacy carrier ceased to exist, it would have created an environment for new no-frills start-ups, like SkyBUST. IF guess you guys think it's ok for an F/O to make 30K and a Capt to make 75 flying a 150 seat aircraft, then carry on. The race to the bottom would be accelerated and the argument would be totally different. Some of you guys are very short sighted.

Airtran just raised fares probably in response to the new T/A the pilots have signed or will sign (I'm not certain), but the fact is they raised fares. LUV raised fares right after their new T/A. Now that your fares are higher, and will have to inch higher, you too are at a disadvantage to SkyBUST and Slut, I meant Virgin. We are not so different afterall. The race to the bottom continues. Take care, Oscar.

Tom

Now THAT is an excellent post. Senator McCain, a third generation Sailor and Naval Aviator, has already stated that pilots are OVERPAID. Gee, I don't feel over paid. With current policy and the direction of new policy, we ALL know that Washington does not have our best interest at heart. I should be working an oil rig for Halliburton ... now theres a secure job with defined benefits, promotions, and the president in it's back pocket.

Tom, our last T/A was in 1994. We had a 10 year contract with a 2 year extension and are in negotiations but nowhere near a T/A.

How are things going with the negotiations? Do you think that pay or work rules will change much?

It stated that if if United had gone out of business in 2002 (as it would have without government grant money) every airline would have made money that year. >>>


Yeah. Yeah. And if SWA did not have fuel hedges...yada yada. If "ifs" and "buts" were candy and nuts.....oh what a merry Christmas we would have. Wait, if Continental would have went out of business in their 2nd bankruptcy, maybe the industry would have been stronger for 9/11. Or if the ATSB would have approved UAL's loan guarantee like they did for US Airways and America West, maybe UAL would have avoided bankruptcy altogether. One will never know.:D