Sr. Barco

I think this is a more accurate portrayal of how the fuel hedges work. Read it carefully. This was written by one of our captain's with a very extensive knowledge of airline finance.

....Let's look at the concept “this airline is doing fairly well, but
without fuel hedging we would be ‘losing’ money.” In the following I
am not disputing the fuel hedging program has been awesome here at
SWA, just that how you have been presented the information is in error.
Income statements subtract revenues from expenses
to get operating income. From operating income other
adjustments are made to yield “income before taxes.” As
an aside, at SWA these other expenses actually add $54M
to income mainly because of our large cash hoard.3 The
income-before-taxes figure is reduced by taxes to achieve
net income. The rub is that in the “Just Plane Smart”
presentations, management compared net income to an
expense called fuel hedging gains. Then the presentation
inferred to subtract one from the other. Roughly, $500M
- $500M = $0, correct? Well, not at all. If fuel costs were
higher in the operating expenses by $500M then the
operating income is reduced by $500M making the tax
burden less by around $200M. Therefore, if the fuel
hedges were not present, the accounting effect is not:
5 – 5 = 0, but 5 – 5 (times the effective tax rate of around
40 percentish) = 3.
“Just Plane Smart” then infers with “$0” in net income,
we cannot continue to expand and hire. We don’t have any money correct?
$0 is $0, right? This airline is refocused and running down the rails at a high
rate of speed. In 2005, SWA produced a net income of $548M.4 Think for a
second: How in the world did this airline purchase $1.2B in property and
equipment in 2005 with only $584M on hand? Specifically, buy 33 aircraft,
purchase gates, other capital equipment, plus retire debt, repurchase SWA
common stock, and add a load of cash to our fabulous CFO Laura Wright’s
petty cash account? It seems the math here is $584M minus (a ton of money)
= a ton more money? What in the world? Remember the reality the airline
industry requires a high degree of operating leverage discussed earlier? Those
expensive assets get to be written off over the life of the asset. For example,
a $20 million aircraft that lasts 20 years is allowed $1M of depreciation per
year. SWA still possesses this $1M in cash, it just gets to lower its income
similarly to the various write-offs we put on our IRS Form 1040. Last year
SWA produced a little over $2.36B in cash flow from operations.5 In the
airline business, cash is king. Remember in the recent past reading in the
Wall Street Journal or the fish-wrapper (USA Today) that some of the mainline
folks were burning cash at a rate of $3, $4, or even $5 million per day? How
does our little LUV-jet Company producing cash at a rate of $6.5 million per
day sound? Like the place to work is how it sounds! This is why our SWA
Executive team was given the stupendous bonuses and raises for 2005 they
recently received…because they rock!

ryane946

Ok, lets take your new argument and still show you why Southwest would not be making money without fuel hedges.
Quarter 4, 2005:
Southwest's Operating Income: $82 million dollars
Gains from fuel hedges: $258 million dollars
Subtract__________________________________________ _
-$176 million dollars

Now do you truly believe that Southwest was charged an additional $176 million in taxes on $82 million dollar income, that is over 200%!! Imagine being charged 200% for taxes. Most people are ****ed at 20%. Your argument has a slight validity, and it adds up to a few million bucks. But not $176 million!!!


Haha. Do you know which airline has the highest cash balance? I will give you a hint. It is a legacy carrier, that starts with a U, and has a big hub in Chicago. Ah, what the heck, its United (At over $4 billion cash on hand). Nice try.

Brown Dog

United? What a joke. How much money have they made lately? Look how much cash the U.S. government has on hand yet they're in big debt. What is united's debt load? Look at their terrible pay and benefits yet they still can't turn a profit. Sorry man, bad example. I'm not beating the SWA drum but come on, United? I don't care how much cash they have on hand, they're not using it to make money.

CargoBob

This is the same arrogance I saw from several bankrupt airlines...one thing is inevitable: eventually SWA will have problems...maybe 10-20 years from now...but they will.

LuvJockey

One of the most insightful posts by Ryan yet. He's gonna fly the big equipment for U someday, he's got a relative there that says so. Hang onto the dream, dude! Stay away from financial analysis, though. If you're going to school somewhere, take it to a business/finance professor that can explain a quarterly report to you. Hold onto the "Southwest will have trouble someday even if I don't know why" if it makes y'all feel better about where you are. I'm all for bein' happy with your lot in life. Me, I'm buildin' my time at this little domestic carrier hopin' to get a real job someday at a financial juggernaut like U.

80drvr

AA has $5.5B.
Performance Update

Costs: Unit cost forecasts are attached.

Revenue: Second quarter mainline unit revenue is expected to increase between 11.1% and 12.1% year over year. Second quarter consolidated unit revenue is expected to increase between 12.0% and 13.0% year over year.

Liquidity: We expect to end the second quarter with a cash and short-term investment balance over $5.5 billion, including approximately $500 million in restricted cash and short-term investments.

Kenji Hashimoto Managing Director, Investor Relations

bigDummy

AA has 20 BILLION in debt. That's 1 BILLION in debt service per year. When is the last time they made 1 BILLION in a year?

PS i got this info from http://www.businessweek.com/investor...612_815502.htm and he makes the above sound like it's all good news...

so you don't have to read all the fluff...


"HEAVY DEBT. On the negative side, we're concerned that the board can change the number of authorized shares without shareholder approval, and that the board may amend the corporate bylaws without shareholder approval.

There are risks to our recommendation and target price. We consider the shares to be very volatile and high risk for several reasons. First, oil prices have risen dramatically and may continue to rise, which is offsetting a lot of other cost cuts at the company.

In addition, AMR has a very high debt load of about $20 billion (including operating leases) and an underfunded pension plan, both of which are likely to be a drain on cash resources over the next few years. The net pension obligation at the end of 2005 exceeded the fair value of the assets in the plan by about $3.2 billion. AMR is attempting to get its debt level down, but this won't be an easy task, in our opinion. "

Brav989

20 billion? AA needs to go away. How many flights per day is that for other carriers? How many people would get pis sed at the airlines? Maybe people, travellers up to management, will see the light and fix sht.

I just don't see how you can get 20 billion dollars in debt unless you are a national government

Slice

Global warming, of course!

Brav989

Ha. But really..is there any real solution to this? To get the airlines back to making money, hiring pilots and expanding?