Fatty,
The problem with hedging is that it costs a LOT of money to do it, and many of the airlines don't have cash to tie up in hedging right now.

 

Do you think they make decisions in Dallas which are going to benefit the competition? How do you not understand this?

When NWA added a bunch of flts in IND a few years ago to drive a nail into ATA's coffin, do you think they were worried about ATA's health?

 

OK...the hedges will never run out...that is established. The question becomes - what happens when the price of oil goes from $120bbl to $60 in the span of a week? People are blathering on about how oil will never be below $100bbl ever again...but they do not understand the oil business. Oil was at $45bbl in the early 80's, probably higher than the current price on an inflation adjusted basis and there are other points in history where oil prices, as a percentage of peoples incomes, where higher than now probably. I know that oil went from the $45 area to $10 in the span of a month or so. This would seemingly lock in SWA's hedged price which would be much higher. I believe the contracts run 18 months or so...and I know that SWA's traders are savvy and have proably planned for this contigency, but that is where SWA would get screwed - a massive drop in price. One big oil field find, or the Saudi's opening up the pipes and the price drops dramatically and very quickly.

 

Ultimately the quest in this business for any company comes down to one thing: making money as AN AIRLINE hauling people. Fuel hedges have helped SWA stave off losses due to high oil prices. Hedging is a strategy to offset the effects of large swings in oil, not a continuous climb in prices. Ever increasing oil prices simply allows SWA to delay the inevitable: raising fares to offset high fuel prices. I'm sure SWA has collars in place that will limit it's downside risk should the oil bubble bust. The question is, are they making money as an airline or as a commodities trader?

 

Think of hedging like dollar cost averaging. When oil goes up, they make more money on the hedges and less on the passenger travel. When oil goes back down, more is made on passenger travel and less on the hedges.

The bottom line is that they allow SWA to know what their effective cost will be for fuel for long period of time. This allows them to set their fares as needed to make a profit regardless of the price of oil. This is the main reason they remain profitable and are the ones who set prices for the industry (i.e. when SWA raises fares, so does everyone else.)

Most other airlines are less aggressive about hedging because they don't have the cash and/or credit rating to do so. This gives SWA a big advantage in the market.

Just my opinion and $.02

u2drvr

 

If you're saying that SWA or any company is loosing hedging power, you're basically saying that you know what the future price of oil is going to be.

I don't think any of us on this board are qualified to make the billion dollar gamble.

The conventional wisdom is that the price of oil will continue to rise some.

The conventional wisdom has been wrong before. The price of oil could go up substantially more than you think, making hedges the amount and value of hedges as important as they are this year.

It would not entirely surprise me to see some kind of global recession cause the price of oil to fall significantly. A similar thing happened in the late 90's when the Pacific rim had it's monetary crisis.

Basically, none of us have the crystal ball, so you can't really tell what the value of hedges bought (or forgone) today are.

 

No, I don't think they'll do that, but they're hurting a lot more people than just the airlines........they're hurting the consumer too. That's the problem with this industry....everyone always seems to be trying to put someone out of business. Aren't their enough passengers to go around?

 

If I remember correctly analyst,s on pax side of this biz were saying that pax travel would increase and their would be a gazillion ppl traveling by such and such a date .
anyone remember these talking heads saying such? i do and i,m old lol
so this is a wait and see type of deal and yes pax travel schould pick up but when is anyones guess.

 

The problem with oil prices now is as much to do with the weak dollar that with a lack of supply. In June of 2005 the Euro was about $.80 to the dollar. Today it's about $1.55. Oil in 2005 was about $45 or 56 Euros/barrel. Today $110 or about 70 Euros/barrel.

Since the Euro is almost double today than it was a few years ago. In Europe, or just about anywhere else for that matter, the price of oil isn't that much higher in "real" terms (i.e. Euros)

Cut that $110 oil in half due to the exchange rates, and the rest of the world is paying about $55 barrel.

Until the U.S. gets it's financial house in order and the dollar rebounds, oil isn't going to get any cheaper--at least not in dollars, at least not for us.

 

EWR,

You and I have had our disagreements on certain subjects. I believe this area will be no different. Please explain how SWA is hurting the consumer because my next few paragraphs would beg to differ.

The mentality that fares should be raised to make up for a poor business model is flat out wrong. Either your product is in demand at a price that allows for you do stay in business or you fail. Things always change and the airline industry is no different. True competition allows for the failure of more inefficient business models.

I for one will not apologize for SWA allowing people to fly who may not be able to because they are not wealthy. As a matter of fact I am proud to hear someone who is elderly say "this is my first time flying" or having a large family traveling because we made it affordable. I am not a socialist by any means but gouging people because you can is just wrong.

The only thing that bugs me is the idea that some of my pilot brethren believe they are entitled to things they have not earned. Face it, the good old days are gone. The only thing we can expect (or should) is a fair exchange for our labor. If you believe SWA should raise fares so that your airline or anyone elses can make a profit you should not hold your breath. All SWA would like is to provide our product to as many people as we can and make a fair profit. In the end if you are gouging someone they will remember it the next time they book a flight and they will at least look at your competitor first.

1988 SMF-ONT two carriers serve (AA and UA) with best fare being $249 rt.
2008 (today) SMF-ONT with one carrier (SWA) serving highest/worst fare $278 rt. ($118 advanced purchase).

20 years later (not allowing for inflation) our walk up fare is a fair deal and the people of California know it. If we gouged them they would seek an alternative.