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What's The Real Story On WN's Hedging?  
User currently offlineHPRamper From United States of America, joined May 2005, 4037 posts, RR: 8
Posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4834 times:

I keep hearing from many different sources...WN's hedges are expiring soon, no they aren't, WN will be in trouble, WN will be fine...

What is the real story on WN's hedges? Are they expiring or not? And can another carrier snap them up?

31 replies: All unread, showing first 25:
 
User currently offlineOPNLguy From , joined Dec 1969, posts, RR:
Reply 1, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4825 times:

Quoting HPRamper (Thread starter):
I keep hearing from many different sources...WN's hedges are expiring soon, no they aren't, WN will be in trouble, WN will be fine...

SWA has hedges (to varying percentages and costs) all the way out to 2009. I'll see if I can find the exact numbers...

[Edited 2005-09-09 02:46:10]

User currently offlineAAgent From United States of America, joined Mar 2001, 560 posts, RR: 14
Reply 2, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4809 times:

Quoting OPNLguy (Reply 1):
SWA has hedges out (to varying percentages and costs) all the way out to 2009. I'll see if I can find the exact numbers...

Likewise, I don't know the exact percentages, but it is my understanding that the heavy hedging percentages will fade by the end of 2006, with smaller less significant hedges remaining thereafter for a few more years.

I await OPNLguy's final figures.

Best Regards,
AAgent



War Eagle!
User currently offlineOPNLguy From , joined Dec 1969, posts, RR:
Reply 3, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4798 times:

From the 10-Q...

The Company currently has a mixture of purchased call options, collar structures, and fixed price swap agreements in place to hedge approximately 85 percent of its remaining 2005 total anticipated jet fuel requirements that effectively cap crude oil-equivalent prices at $26 per barrel. As of June 30, 2005, the "spot" market price for a barrel of crude oil was over $56 and "futures" prices for the subsequent 12 months all exceeded this "spot" price. The Company is also approximately 65 percent hedged for 2006 at approximately $32 per barrel, over 45 percent hedged for 2007 at approximately $31 per barrel, approximately 30 percent hedged for 2008 at approximately $33 per barrel, and approximately 25 percent hedged for 2009 at approximately $35 per barrel. As of June 30, 2005, the majority of the Company's remaining 2005 hedges are effectively in the form of unleaded gasoline-based and heating oil-based option contracts. The majority of the remaining hedge positions are crude oil-based positions.

..and AAgent, your civility has been greatly missed over on you-know-where....

[Edited 2005-09-09 02:47:28]

User currently offlineTornado82 From , joined Dec 1969, posts, RR:
Reply 4, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4781 times:

OPNLGuy, or others: Any idea as to when WN invested in these hedges... because those prices are VERY low, and unless these things were invested in the post 9/11 / Asian economy collapse... they probably hedged for less than the spot prices. Some investors somewhere lost ALOT of money on their bet with WN. Betting that oil will remain low like they did back then is kind of like proverbially betting with the devil... you won't win. I guess in that case WN could be called the devil. (Not bashing WN with that!)

User currently offlineAirRyan From United States of America, joined Mar 2005, 2532 posts, RR: 5
Reply 5, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4772 times:

I'd like to know what Middle-Eastern country continues to subsidize WN's fuel at below market rates because I can't imagine some business would continue to be so stupid to as to continually supply WN with fuel at such low rates.

Hedging fuel is like a bet between two people - one side bets that the other that fuel prices will not go above a certain amount but if it does, WN in this case will only have to pay that set amount - but if it goes below that set amount WN still pays that predetermined amount.

So my question is when will whomever is hedging fuel for WN wakeup and realize that fuel just isn't going down very low anytime soon?! What a moron a business has to be to forecast the cost of fuel 4 years in advance - who's @ss did WN kiss to get this kind of offer and why wasn't the rate offered to other airlines than?!


User currently offlineTornado82 From , joined Dec 1969, posts, RR:
Reply 6, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4753 times:

Quoting AirRyan (Reply 5):

So my question is when will whomever is hedging fuel for WN wakeup and realize that fuel just isn't going down very low anytime soon?! What a moron a business has to be to forecast the cost of fuel 4 years in advance - who's @ss did WN kiss to get this kind of offer and why wasn't the rate offered to other airlines than?!

Calm down bud. Any airline, business, railroad, etc. could have joined those hedges. Who had the cash though? Only WN. You need to pay a large sum of cash up front for that, and have good enough credit that someone will buy it for you those years in advance. I could be wrong, but I believe some of the larger railroads hedged diesel for their locomotives too, just not to the significance of WN's hedging.


User currently offlineOPNLguy From , joined Dec 1969, posts, RR:
Reply 7, posted (8 years 10 months 3 weeks 5 days 18 hours ago) and read 4728 times:

Quoting Tornado82 (Reply 4):
OPNLGuy, or others: Any idea as to when WN invested in these hedges... because those prices are VERY low, and unless these things were invested in the post 9/11 / Asian economy collapse... they probably hedged for less than the spot prices.

As per the 10-Q excerpt above...

"The Company currently has a mixture of purchased call options, collar structures, and fixed price swap agreements in place..."

As to how it all works in detail, I'll point out that "OPNLguy", not "FINANCEguy"....  Wink


User currently offlineClickhappy From United States of America, joined Sep 2001, 9603 posts, RR: 69
Reply 8, posted (8 years 10 months 3 weeks 5 days 17 hours ago) and read 4718 times:
AIRLINERS.NET CREW
PHOTO SCREENER

For airlines, 'hedging' on commodity pricing can be a risky strategy

http://www.post-gazette.com/pg/05245/564203.stm


User currently offlineCitationJet From United States of America, joined Mar 2003, 2425 posts, RR: 3
Reply 9, posted (8 years 10 months 3 weeks 5 days 17 hours ago) and read 4707 times:

Quoting AirRyan (Reply 5):
So my question is when will whomever is hedging fuel for WN wakeup and realize that fuel just isn't going down very low anytime soon?

I don't think you understand the concept very well, based on your comments. WN has entered into a contract with another company. It is an insurance policy of sorts, to reduce the risk of fuel price flucuations by buying an up front insurance policy of sorts.

You need to read some articles on WNs fuel hedging.

http://www.nd.edu/~ezakem/Fuel%20Hedging/SW%20Case%20Analysis.doc


Southwest is 83 percent hedged for the second quarter, with crude oil prices capped at $26 per barrel. The airline expects its second-quarter jet fuel costs per gallon to exceed the first quarter's 90.3 cents.

Looking ahead, the carrier is hedged 85 percent in the second half at $26 per barrel; 65 percent in 2006 at $32 per barrel; more than 45 percent in 2007 at $31 per barrel; 30 percent in 2008 at $33 per barrel; and more than 25 percent in 2009 at $35 per barrel.
http://abcnews.go.com/Business/wireStory?id=669227

http://www.usfca.edu/~gonzales/web35...west%20airlines%20fuel%20hedging'



Boeing Flown: 701,702,703;717;720;721,722;731,732,733,734,735,737,738,739;741,742,743,744,747SP;752,753;762,763;772,773.
User currently offlineHPRamper From United States of America, joined May 2005, 4037 posts, RR: 8
Reply 10, posted (8 years 10 months 3 weeks 5 days 17 hours ago) and read 4664 times:

So basically they are in good shape for the next two years or so, assuming oil prices stay as they are. After that, they may be in trouble unless their profits after fuel expenditures are absolutely astronomical.

The risk inherent with hedging is less a factor these days of sky-high oil prices...only recently has the practice of fuel hedging potentially had the result of making or breaking an entire airline.

Up until fuel started going up in a big way it could only mean the difference between more profit/less profit and that's why nobody (general public and the media) really cared about it until recently. WN was in the fortunate position of having the capital to invest in these hedges while seeing that the oil surge was not going to be a shot in the pan so to speak, judging from their long-term contract.


User currently offlineB4real From United States of America, joined Aug 2003, 2629 posts, RR: 5
Reply 11, posted (8 years 10 months 3 weeks 5 days 17 hours ago) and read 4647 times:

These call options could be defaulted by the provider, however. That would be bad news for WN!


B4REAL, spelled like it sounds
User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 12, posted (8 years 10 months 3 weeks 5 days 17 hours ago) and read 4628 times:

Quoting AirRyan (Reply 5):

good question, AirRyan.

Let's say you are WN, and wanted to hedge your fuel price risk out 5 years. The simplest way to do that is to buy 5 years worth of fuel at today's prices, but that's quite an outlay of funds, not to mention interest cost. So you go to Citigroup, and they sell 30B$ worth of contracts out 5 years to you at 30$/barrel in 2003. If the prices go up to 60$, then they have to go out and get oil at 60$ and sell to you at 30$, losing 30B$ in the deal (Actually, it's netted financially). You would have to be very creditworthy as a bank to take on that kind of a loss!

What really happens is that Citi also hedges itself on the other side of this deal through opposite contracts, and can also 'sell' this deal to someone else who takes the opposite risk. So risk eventually gets spread around to other 'counterparties'.

At some point, however, if the market really moves too strongly against the counterparty, they could fail on the obligation. There's also a risk of a domino effect for larger failure throughout the chain - just as it happened at LTCM and the Feds had to step in. While there is a system of margin calls in the derivatives business, there's always a possibility of a really big, bad bet on oil futures that can bring large firms to their knees.

You're right in thinking that with huge gaps between spot (today) and strike (agreed upon) price, there is a lot of natural economic pressure on third parties to fail.


Hope this helps, and that it isn't too simplistic...


User currently offlineTornado82 From , joined Dec 1969, posts, RR:
Reply 13, posted (8 years 10 months 3 weeks 5 days 17 hours ago) and read 4628 times:

Quoting OPNLguy (Reply 7):


"The Company currently has a mixture of purchased call options, collar structures, and fixed price swap agreements in place..."



Quoting OPNLguy (Reply 7):

As to how it all works in detail, I'll point out that "OPNLguy", not "FINANCEguy".... Wink

Heh... I know you're OPNLguy. I just thought maybe from reading that report that they had a Date as to when they purchased. If I'm placing an educated guess, I'd say around Jan 1, '02.


User currently offlineApodino From United States of America, joined Apr 2005, 4234 posts, RR: 6
Reply 14, posted (8 years 10 months 3 weeks 5 days 16 hours ago) and read 4602 times:

Just a question. What if the people Southwest has there hedging through decide to renege and demand market value for fuel instead of the hedged price? What would happen then?

User currently offlineTornado82 From , joined Dec 1969, posts, RR:
Reply 15, posted (8 years 10 months 3 weeks 5 days 16 hours ago) and read 4566 times:

Quoting Apodino (Reply 14):
Just a question. What if the people Southwest has there hedging through decide to renege and demand market value for fuel instead of the hedged price? What would happen then?

I would think they'd have to go bankrupt or something to back out of the contract, they've signed a contract just like if you sign a mortgage to buy a house, or a lease on a car, etc. But as to what would happen... WN would be forced to by their fuel at fair market values at least while it was being wrangled through the court systems.. just to keep the 737's in the air... currently crude is running roughly $65 a barrel. I would think there are multiple hedges.. so that if one hedge collapses like that, WN would only face an incremental price increase.


User currently offlineMrmoose From United States of America, joined Jun 2005, 39 posts, RR: 0
Reply 16, posted (8 years 10 months 3 weeks 5 days 16 hours ago) and read 4566 times:

"Just a question. What if the people Southwest has there hedging through decide to renege and demand market value for fuel instead of the hedged price? What would happen then?"

I would imagine that either the options are either exchange traded in which case the options are guaranteed by the clearinghouse or that they are OTC with the contra party being either a large financial institution that is AAA rated or a multinational oil company. In any of those cases the contra party is probably hedged.


User currently offlineComorin From United States of America, joined May 2005, 4896 posts, RR: 16
Reply 17, posted (8 years 10 months 3 weeks 5 days 16 hours ago) and read 4516 times:

Quoting Mrmoose (Reply 16):

Well and clearly put!

In the energy markets, Offshore Hedge Funds are holding very large proprietary derivatives positions with a directional view. Just as LTCM shook up its clearinghouse, these funds are quite capable of generating system shock all over again.


User currently offlineAirRyan From United States of America, joined Mar 2005, 2532 posts, RR: 5
Reply 18, posted (8 years 10 months 3 weeks 3 days 3 hours ago) and read 4316 times:

Quoting CitationJet (Reply 9):
I don't think you understand the concept very well, based on your comments.

As well as most in the commercial airline industry I would assume - this is more than just the "rich get richer."

Tell me, why wouldn't a gas-station company just hedge their fuel like Southwest and than we all at the pump wouldn't have to be paying $3 a gallon right now at the pump? Or better yet how come our Federal Government wasn't as smart as Southwest - Lord knows they can just print more currency and pay cash for it.

It sounds like Southwest would be losing money just as well as everybody else if their fuel wasn't hedged. So how much longer can Southwest continue to buck the trend in the market and get their fuel at below market rates? When will Southwest begin addressing their high labor costs with their mechs, I believe their contract expires next year doesn't it?

I guess what I still don't get is how come Southwest is the only one making out like bandits right now - there has got to be more than just dumb-luck and the perks that go with paying in cash.


User currently offlineSCCutler From United States of America, joined Jan 2000, 5490 posts, RR: 28
Reply 19, posted (8 years 10 months 3 weeks 3 days 2 hours ago) and read 4272 times:

Quoting AirRyan (Reply 18):
I guess what I still don't get is how come Southwest is the only one making out like bandits right now - there has got to be more than just dumb-luck and the perks that go with paying in cash.

AirRyan, you've asked the key question; there are those (reference posts above) who seem convinced that the sole reason WN is profitable is that they have well-planned fuel hedging, and this contention is silly.

First of all, bear in mind that the hedges are but one example of excellent planning by WN, and execution of the plan.

Southwest management is always looking out for better ways to do what they do. This extends to every facet of the operation, from:

>> aircraft selection (one fleet of well-designed, efficient and proven aircraft), to

>>labor relations (deal with labor in a straightforward and honest manner, share the rewards of success), to

>>cost control (the best way to make a buck is to not spend it in the first place, if spending that dollar will not yield a better product), to

>> maintenance (absolute commitment to best practices in aircraft maintenance means greater safety and reliability, which means that aircraft have greater dispatch reliability, which means that the "extra" money spent on highest-quality maintenance is made back many times over in greater aircraft utilization), to

>> route selection (only open up markets in which they have a reasonable expectation of profitably operating a sufficient number of flightsdaily to justify the up-front expense of opening up the station).

It does not end there, of course. There is so much more than fuel hedging to explain WN's success, but it *is* a good and illustrative example; bear in mind that hedging is nothing more than buying option contracts for future fuel deliveries, and they could have bet wrong, in which case they'd be paying some extra for the fuel that they puchased- but note, it would still be delivered at a price that they could bear paying and still be profitable- hence, they eliminated one substantial element of the uncertainty of future costs, thus clearing the way for more effective planning in other areas of operations.

Note well, also, that fuel hedging costs a great deal of money, money which Southwest had because they have been consistently profitable and, unlike many other carriers, they never forgot, during the good times, to plan for the bad times.

As for the "they'd be losing money except for the fuel hedges" argument, it is specious and one-dimensional. You could as easily state that they'd lose money if they paid more for their airplanes, had less-productive employees or opened up stations that were big losers. The fuel hedging is but one element of heir overall management plan (and excellent execution by all the line employees, to whom WN management consistently and wisely give credit).

So remember this: when Southwest no longer has good hedged fuel delivery positions (maybe that should be "if," because they are still actively managing fuel cost exposure along with every other cost), they will have planned for that situation, and will adapt in many other areas, as they have always done in the past. As it is, their fuel hedging is but one element among many that has allowed them to maintain profitability while concurrently offering the best-quality, most reliable and most reasonably-priced air travel product in the US domestic market.



...three miles from BRONS, clear for the ILS one five approach...
User currently offlineBarney Captain From United States of America, joined Nov 2001, 926 posts, RR: 13
Reply 20, posted (8 years 10 months 3 weeks 3 days 2 hours ago) and read 4248 times:

Quoting SCCutler (Reply 19):
As for the "they'd be losing money except for the fuel hedges" argument, it is specious and one-dimensional. You could as easily state that they'd lose money if they paid more for their airplanes, had less-productive employees or opened up stations that were big losers. The fuel hedging is but one element of heir overall management plan (and excellent execution by all the line employees, to whom WN management consistently and wisely give credit).

Thank you for that perfectly (imo) worded explanation. I get weary of having to explain that very concept to the many nay-sayers that approach me with that standard...."You'd be losing money if......". It's almost as if they're disappointed that we're NOT losing money. I realize though, that it comes from a place of frustration dealing with furloughs and pay cuts. I long for the day when when we can ALL return to prosperity.



...from the Banana Republic....
User currently offlineSCCutler From United States of America, joined Jan 2000, 5490 posts, RR: 28
Reply 21, posted (8 years 10 months 3 weeks 2 days 14 hours ago) and read 4114 times:

Quoting Barney Captain (Reply 20):
It's almost as if they're disappointed that we're NOT losing money. I realize though, that it comes from a place of frustration dealing with furloughs and pay cuts. I long for the day when when we can ALL return to prosperity.

Heck, I still feel a pang of nostalgia for Braniff International, but good ops are good ops and it seems nuts the way some folks take shots at WN. I am just a fare-paying passenger who has flown more than I care to (commercially) and determined for myself that, when it comes to road-warrior domestic business travel, consistent, frequent and reliable service is the ultimate "luxury," and no one can deliver that like Southwest.

P.S.- Wright is wrong!



...three miles from BRONS, clear for the ILS one five approach...
User currently offlineSidishus From United States of America, joined Oct 2004, 519 posts, RR: 4
Reply 22, posted (8 years 10 months 3 weeks 2 days 12 hours ago) and read 4067 times:

Quoting SCCutler (Reply 19):
As for the "they'd be losing money except for the fuel hedges" argument, it is specious and one-dimensional.

http://www.aiada.org/article.asp?id=26303

Southwest "absolutely" would have lost money in the first quarter of this year if it did not have hedges, Chief Executive Officer Gary Kelly said.



the truth: first it is ridiculed second it is violently opposed finally it is accepted as self-evident
User currently offlineSCCutler From United States of America, joined Jan 2000, 5490 posts, RR: 28
Reply 23, posted (8 years 10 months 3 weeks 2 days 8 hours ago) and read 4025 times:

Quoting Sidishus (Reply 22):
Southwest "absolutely" would have lost money in the first quarter of this year if it did not have hedges, Chief Executive Officer Gary Kelly said.

...just as Southwest "absolutely" would have lost money if they had sold fewer tickets, paid too much for aircraft or accidently set fire to a vault full of money. It is, and remains, but one discrete element among the thousands and thousands that go into operating the complex business that is an airline.

Southwest "absolutely" would have lost money in the first quarter, but for their business planning and operational effectiveness which produced profits.

Pound it into your heads, folks: fuel hedges are nothing but financial plays, and are a component part of the business plan. There is nothing magic about the hedging, and talking it to death does not make it any more or any less significant. It is just one "thing" they did as a part of the plan; it just stands out now, because fuel prices are high-profile.

Think of it this way: they applied sound business planning to the decision to hedge on fuel; presuming that they apply the same degree of analysis and planning to other business decisions, it enhances their ability to avoid the next, high-profile, crisis, and the one after that.



...three miles from BRONS, clear for the ILS one five approach...
User currently offlineEMBQA From United States of America, joined Oct 2003, 9364 posts, RR: 11
Reply 24, posted (8 years 10 months 3 weeks 2 days 6 hours ago) and read 3999 times:

Quoting HPRamper (Thread starter):
What is the real story on WN's hedges? Are they expiring or not? And can another carrier snap them up?

I've seen this topic before and I've always wonder why it is so newsworthy.? Southwest hedges fuel because it has the money in the bank to do so. Also, I don't think other airlines can 'snap them up' if Southwest's expires because the agreement is between WN and the fuel broker. Are there only a fixed number of hedging slots out there...??? I'd think any other airline could hedge, but this is a case 'Show Me the Money' with the fuel broker. Hedging is also not limited to aviation....My Mom hedges her home heating oil in the northeast, and has done so for the last 10 years or so.



"It's not the size of the dog in the fight, but the size of the fight in the dog"
25 Sidishus : And, according to the CEO, hedges are the only factor that has kept them in the black of late....But maybe he is just being specious and one dimensio
26 SCCutler : The point is (and I think it is being lost on many here), arguing that Southwest would lose money but for the hedges is an exerc`ise in folly, because
27 Sidishus : Spin it as you wish. As their hedges become less favorable we'll see how they compare to the other majors in fiscal perfromance and labor relations.
28 B744F : Something tells me you won't see such a drastic difference in pay between labor and management as you do in the legacies who are all in trouble.
29 Sidishus : While that may be true, it's not all rosy labor wise. For instance, the FA contract negotiations was not exactly amicable, and regardless off SCCutle
30 Post contains links Adh214 : Actually gas stations do hedge gasoline and other petroleum products. However, there is no incentive for them to pass along the gains on their hedge
31 Mrocktor : The fallacy of the "fuel hedging is only one factor in WN's success" theory is that the hedging - while certainly well done and a sign of good managem
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