SWA Hedging
 

SWA hedging will not run out. Here's an analogy for some:

When XYZ college places in the top 10 or wins the Rose Bowl, it doesn't mean that they will suck the next year. The college is continually recruiting talent to develope every year. So, last years Juniors may do as well or better (or worse) than the Seniors that graduated.

That is how hedging on heating oil derivatives works.

The recruiters (hedgers) forcast the future ability (profit) of players (heating oil) to continue their success. It's not 100% luck that the same teams stay in the top 10 alot of the time. There are smart guys doing it with the cash to back them.

That's about as basic as it gets. The process is ongoing and will never end. He who recruits the best has the most successful team.

Possible pitfalls to this strategy;

The government hands the other team 14 points (pensions gone).
The oil prices drop.

[I could be wrong and everything is subject to change.]

I think Southwest will still-- despite the hedgehogs-- post its first quarterly loss ever in 2008. Their profit margin this time was very, very small. With oil above $115 per barrel, even the best managed airline in the business will have a hard time staying in the black.

Not to fire up the SWA masses but your fuel hedges will run out in 2010 and your competive advantage will be out next year. (I have previously posted SWA fuel hedge position so you can look under that thread.)

Without doubt, SWA has the highest paid pilots/flight attendants (Have you seen what your senior f/as are making (I have, my neighbor is one) if not ask them and you will find that there are a good portion that are making 70-80K a year plus!

Ok, so what does SWA do? If you keep fares lower via your hedge advantage as in the past some airlines may go out of business but that makes the other airlines stronger or do you raise fares and build up your cash position? (If raising fares is possible without massive decline in load factor) but either way there will come a point where SWA will be at a competive disadvantage not to mention that SWA is 100% exposed to an ever growing weakening US economy.

I will SWA credit. It is the only airline out there that has not, as of to date, asked it employees for cash to help subsidize the business model. It is the only airline that has been consistently profitable. However, aren't you SWA guys a wee bit concerned at all?

I would suggest that the SWA folks have the least to be concerned about.

Been checking the headlines at the other airlines lately?

To put it in terms we are all familiar with...

"...the current threat level is orange..." (for the non-swa among us!)

Sure - at the moment SWA's fuel hedges run out in 2010, but they are buying new ones all the time. What for the life of me I can't figure out, is why are people selling fuel hedges two years in the future for such low amounts?

I can't imagine that SWA is the only ones who thought "hey, oil might go up - let's hedge". For all the money that SW makes from hedging, there's some speculator or financier losing their shirt.

I guess I'd get fired up if you were correct but since you are WRONG, Perhaps I might educate you. SWA already has hedges through 2012.

What's your point? Envy?

Our CASM ex-fuel is still one of the lowest in the industry, so even without hedges, we still have an advantage. I don't think 67 consecutive quarters of profit is an accident. I think I'll stick to Gary and the team over your predictions.

That is perhaps because our business model includes paying our people well. You might be confusing hourly pay with labor cost. There are other variables that allow us to be well compensated .... namely productivity.

Hope this info helps you out with some of your misconceptions Opus.

I don't get what benefit the fuel hedges even have. Mainly because, ever since they started hedging it, it seems profits have been going down. Southwest is still offering $29 fares....that's just crazy. I know commitment to your customer is one thing. However, as a company, shouldn't southwest be maximizing profits to ensure even greater safety going into the future?

the biggest benefit is not having to buy fuel on the spot market and absorbing the spike in fuel costs.

Great question! It's my belief that the hedges are being used strategically. I think that it is allowing us to build market share going forward thus reducing competition. When we do raise fares, there will be less competition on our routes to exert downward pricing pressures resulting in higher yields. Disclaimer: I do not presume to me as smart as our SWA leadership team. This is just my take on it.
I think some of us do similar things in our personal financial lives. I save 25% of my gross income (my hedge) for retirement. If I didn't save anything, there would be more to spend (higher yields) for my family members (shareholders) but I'd be 'out of business' when I retired. By being lean now, I am planning to be able to maintain my current income in retirement and leave my children windfall profits (inheritance or 'return in invested capital).

"I dont get what benefits the fuel hedges even have"

Are you serious?