shoelu

What prevented other carriers from hedging? Hedging is a gamble, it always will be. Sometimes it works and your gamble pays off, and sometime it blows up in your face and you lose money like SWA has recently. It seems so often that they are referred to as great gifts to SWA from the aviation Gods. Sometimes you need to gamble to make a big payout. If certain management teams failed to ante up in the high stakes poker game then you have to accept nothing ventured nothing gained. SWA embraced the gamble early on and it paid dividends. Those advantages were paid for with great risk.

blakman7

+1 for Shoelu

OscartheGrouch

So I am the cocky one Bill? First of all I believe the first company to have a monopoly on the PIT-PHL route was...........USair. When they closed the base in PIT we tried to continue it. The former USair employees in PIT were very happy because we saw many of them on our flights to and from. Just like any company (airline) we have to evaluate whether a route makes sense. We have discontinued many including ISP-PVD which didn't look good on the very first flight. I flew that flight and only had 17 pax. Even our revenue anaylists don't get it right every time. At least we don't give up the route to a contractor who pays lower wages.

With regards to the SEA-BOI and the GEG-SEA routes, at least they are operated by Horizon who is owned by ALK (at least they used to be?). The fuel hedges? Not sure if that will be a player any time soon, but I will bet my team is better that most.

The Oscar

jc73drvr

I agree the PHL-PIT route had very low revenue bookings. Most flights were less than 60 revenue pax on average. Of that Most were pax continuing on the other destinations. At times there were more non rev pax on those flights. Commonly referred to as the US Airways employee shuttle flights.
US Airways employees loved these flights because there were almost 6-8 flights daily to PIT. Made commuting easier for those folks. I think it sucks to have to have a difficult time commuting, believe me I have been there done that, and wasn't always thrilled. However it comes to this, if your not making money on a route, it can't continue, simple as that.

RCD73

"Southwest Airlines Co. (LUV) reported Thursday a profit for the fourth quarter that grew 16 percent from last year, reflecting fuel hedge gains as well as strong revenue, traffic and capacity growth" NASDAQ

forgot to bid

I'm here because of the title.

full of luv

CASH..... It takes greenbacks to hedge, it's not cheap!

DAL73n

Shoe,

Don't confuse hedging with hedge funds or gambling. A properly constructed hedge for a business goes like this (this is done with hypothetical numbers for purposes of illustration):

1. Airline A for 2012 (and beyond) does their forecast for fuel prices and determines that they can be profitable as long as fuel remains under $120/barrel. Right now, say fuel is at $100/barrel. Airline A (assuming they have funds to set up and maintain the hedge) figures how much fuel do they have to hedge, for how long, and at what price. Many other industries (Food, Steel, etc.) also have the ability to reduce their risk and minimize their losses, reduce volatility (or make a small profit). This part is not hard to do. It's just a question of how aggressive you want your hedge to be. While SWA has been very good at this in the past they did lose a substantial amount of money to hedges a couple of years ago.

shoelu

I am not in any way confusing fuel hedging with a hedge fund, but hedging is in fact gambling. Hedging is gambling that fuel prices will increase.

Southwest has been more aggressive by hedging a greater percentage of fuel requirements than other airlines. Southwest saved approximately $3.5 billion through aggressive hedging between 1998 and 2008. Fuel hedging provided cost control for Southwest, call it insurance if you like, but it allowed SWA to lock in fuel prices at a rate greatly below market prices for fuel.

Sometimes the fuel gamble does not pay off. A sharp decline in oil prices below what SWA had hedged to buy it at produces losses.

Feel free to call it whatever you like, but hedging will always be a gamble because it requires an entity to predict future prices. Some have embraced the hedging gamble and others have not, but it is in fact a gamble and far from a guaranteed return on investment.

ClipperJet

The financial definition of "risk" is “variability of returns.” When you hedge, in this case fuel, you attempt to minimize the "risk" (or specifically the variability) of the return/profit.

When fuel prices are high, an airline will make money on hedges but lose money on operations. When fuel prices are low, an airline will lose money on hedges but make money on operations. The idea is to smooth out the peaks and valleys.

Technically, hedging is not “gambling” any more than buying health insurance is gambling. (i.e. if you never get sick, than you have "lost" money buy paying premiums for "nothing." If tragedy strikes, you “make” money by getting far more in benefits than you paid.) Some would argue that not hedging is closer to gambling—just like not buy insurance is. Hence the term, "hedging your bets..."

One can compare the relative consequences of high fuel prices to getting sick. If fuel prices get very high (you get sick), the costs are catastrophic, leading to bankruptcy. If fuel prices stay low (you stay healthy), you lose money (premiums), but your other income is high enough to pay those premiums.