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.