hoya99

Military guy here just starting to research airline jobs....have a question for the experienced/knowledgeable fellas. This artcle shows how much profit or loss each airline will see if oil prices are$75, $95, $100 or $110 for the rest of the year.
I am perplexed......why will all of the airlines lose hundreds of millions, but Southwest projects $400+ million profit regardless? Does Southwest have like a sheik running the company with his own oil reserve? Joking obviously, but I guess I don't understand this at all?
There's a great chart in the article that shows the respective airlines and their projectd profits/losses.

http://www.usatoday.com/money/indust...el-costs_N.htm

shane123

I have heard that Southwest has hedged the price they buy fuel at until 2009, so that may have something to do with it.


Not really sure though, just throwing out ideas.

UAL T38 Phlyer

Hoya:

Used to be, all the major airlines "locked-in" a long-term fuel price by making a contract on future purchases.

For example, if Jet-A was selling at $2.00 a gallon, they could take a chance and buy 3 years-worth at $2.05. The process is called Hedging. If you guess right, you will buy your fuel ahead of time (more up-front cash), but pay less for it in the long-run.

In essence, the military does the same thing--if you've ever gone to a civil airport and bought military fuel with "Mil Contract" price (not a direct analogy, because Mil-Contract doesn't include Federal taxes, but you catch my drift).

However, you can guess wrong, and end up with a hedge that costs more than the current price.

After 2001, most of the legacy carriers did not have lots of excess cash, so they stopped hedging fuel, or were very limited.

Southwest hedged until, by some rumors, 2009.

It is my belief that:

1. Southwest got a hedge that gives them fuel BELOW actual production cost--by guessing extremely luckily, and being in the envious position of having enough cash to make a long-term hedge.

In other words, the oil company(ies) lose money everytime SWA takes on fuel.

2. To insure jet fuel stays profitable, the oil companies have raised spot-market prices to offset their losses with SWA.

While flying Part 135, I paid $6.20/gallon at BOS.

3. For my entire adult life, jetfuel has been cheaper than auto gas--until now. Similarly, Diesel fuel was always cheaper than gas. Why the reversal?

The raw oil in a barrel can be refined into a variety of products. I believe, in an effort to hold down auto fuel prices (and consumer/political firestorms), the Federal Government has directed or coerced the oil companies to refine a greater percentage of oil into auto gas--at the expense of jet fuel and diesel oil.

As such, these two fuels are now in shorter supply--which has exacerbated the price gouging.

4. In other words, I think SWA has been profitable (and no one else has) because they got lucky on fuel, and everyone else is making up the difference.

5. Legacy carriers are finally in a position where they can hedge again, albeit for shorter duration contracts. It will be interesting to see when SWA's hedge runs out if they continue to be as profitable--my guess is they will not.

I am not saying they are a poorly-run airline---no, my own company is a leader in that regard. But I do think a lot of the credit SWA gets is really luck.

The Duke

That's a pretty good article and I agree, the chart does a good job of illustrating what an uphill climb the airlines have w/ fuel prices as is...nevermind a continued rise in price. Also goes to show the forward-looking planning on the part of Southwest in terms of anticipating the future rise in price of jet fuel.

It's interesting to note that Southwest is a Texas-based company. Many of these big oil comapanies also have headquarters there in Texas, namely Houston. I'm beginning to wonder if Southwest's stellar decision to hedge may have been aided by close ties to big oil based in the same state. It's like all the other airlines were cocky and thought oil was gonna stay cheap, while Southwest had a pretty clear understanding that was not going to be the case. Paints a pretty clear picture of where competent management can get you.

cal73

So Thats about equal to $70.00 a seat for "about" a transcon. Thats just jetA at 3 dollars a gallon. I did not figure in Landing fees, gate/airport fees, MX/upkeep of A/C, employees, and uncle sam getting his ticket tax.

ghilis101

How does SWA keep its fuel hedging plans private? Nobody can say for sure if it runs out in 2009? Seems kind of odd?

shinysideup

Southwest is a very profitable hedge fund that happens to own an airline.

TheGreatChecko

Hedging has nothing to do with buying Jet-A at any cost, it essentially is a cash based bet on heating oil. That is why when you look at the financial documents of WN or any airline that hedges, the gains are their own separate line item.

Also, the oil companies have nothing to do financially with this. Jet-A is expensive because Signasty likes to tack on tons of fees, it isn't cheap to make, and it goes to a pretty limited segment of the economy. The refiners would much rather be making regular unleaded and many do.

High demand and a limited supply equals higher prices, Econ 101.

All fuel hedging really is, is trading on the futures market. However, since there is no futures market in jet fuel, it is done in other oil detrivatives like heating oil.

Just like you or I could go out and buy futures in any number of commodities, an airline does it in much larger amounts of money. Because we are talking millions of dollars, they can often can get separate contracts written at different prices, especially if they can front a ton of cash, which WN can.

Essentially, if the price is lower than the hedge, the airline pays the difference but has more or less locked in a certain price of fuel they can plan for. If it is higher, they get paid the difference and that is money that is put straight into the bottom line.

This is why you often hear Gary Kelly saying that Southwest would not have been profitable without the hedges. In other words, the money they got from the hedges went to pay for the losses and then they had some left over.

Checko

Thedude

I agree with most of what you said except for that statement. The airlines that had hedges sold the hedges to make some quick cash (except SWA) and they paid dearly for it. Something about long term planning that some of the CEOs toss away in order to make a quick buck on stock prices.

Then again a few of 'em had to make the bottom line look as bad as possible so they could declare BK and gut the labor conracts. It took NWA 3 yrs to get their numbers massaged to do so.

Where were you buying fuel in BOS? Signature? Most places I have been Jet A is still cheaper than 93 octane but then again who pays retail for Jet A. Even most 135 companies usually have some sorta into-plane fuel contract. The more you buy the cheaper it gets.

Box Office

I can't add anything to the explanations already posted in refernce to your question. But I have to say excellant article. Thanks for posting it.