Gnomon
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The Oil Crunch And The Future Of LCCs

Tue Apr 25, 2006 11:52 am

Oil prices spiked more than an unprecedented $75 this week, then tapered off slightly. With the spike has come renewed speculation about the long-term health of U.S. carriers.

While a few non-bankrupt legacies seem on the verge of recovery, having stimulated international growth, slashed labor costs, and increased productivity, I'm chiefly concerned about the low-cost carriers if oil prices continue to soar in line with expectations, with B6 already expected to remain unprofitable for the foreseeable future.

Even Southwest has fuel hedges that one day -- in several years' time -- will expire. By then it'll be hard-pressed to find any traders willing to sell fuel hedges or options for much less than the current going rate. And everyone knows from its last earnings report that without its fuel hedges, at today's oil prices, Southwest would be moderately unprofitable today.

When its current favorable fuel hedges expire, and if it's forced to purchase hedges at a substantially higher rate -- that's an "if" -- Southwest will be left with a load of new 73Gs, some of the industry's highest-paid labor groups, and a dependency on finite domestic growth. (Granted, it's hinted at crossing borders, so to speak, but no firm plans as of yet.) Consider too that Southwest is much different today than it was 30, 20, even 10 years ago -- in many respects. I don't think one can legitimately say, as one could 20 years ago, that Southwest is attracting passengers who'd otherwise be going Greyhound.

That has left some, including me, to wonder about Southwest's -- and other LCCs' -- long-term profitability in a scenario in which the legacies recover by slashing labor costs, increasing efficiency, and focusing on lucrative international routes, and in which LCCs' cost advantage because of fuel-hedging contracts evaporates.

I don't want to start any flame wars among the Southwest loyal on this forum, so let me say also that I'm genuinely interested in the answer to what I see as an objectively identifiable problem. So I objectively ask: Are we finally seeing the pieces fall into place for the industry's reconfiguration? What will Southwest do to remain profitable when the fuel bill finally catches up?

(Of course, I'm assuming that Southwest will not be able to lock in $60/barrel hedges ad infinitum... That would seem unrealistic given the trend in oil prices. But please correct me if you have thoughts otherwise.)
 
swissy
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RE: The Oil Crunch And The Future Of LCCs

Tue Apr 25, 2006 12:21 pm

Gnomon you have a very good point with SWA fuel hedging and if SWA is not working on there restructuring prior to that day sh.. could hit the fan......

Airlines will try to save as much as they can somewhere else before they will
accept the fact that they have to raise the ticket price. It is like the "new"
motto "who can hang in longer"

Cheers,
 
Broocy
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RE: The Oil Crunch And The Future Of LCCs

Tue Apr 25, 2006 2:31 pm

While the oil price affects an airline's expenses, one also has to look on the demand side. Rapid changes in oil prices have triggered recessions in times past. These economic tough times then lead to changes in demand. The real threat that I foresee is that the economy will be dampened, demand for air travel will fall while prices rise due to the oil cost pressures. A double whammy that will squeeze demand. This will have a greater impact on the legacies with their traditional higher cost structures.

The reason I say this is because hedging oil prices, even if they are more expensive than current rates, gives a degree of certainty for the financial planners. They can then make short and long term strategic plans based on those set figures. It's the airlines that haven't hedged that have taken the real battering. The more variables an airline can control, the better quality decisions it can make.

Personally I think that WN, with its brand strength and focused operations, will be in the best position to survive any long term change in the operating environment. WN's sound balance book also indicates that it has the war chest to last any price war mounted by weaker carriers.

You have to remember that the comment about high wages needs to be seen in context. I think WN has higher wages than average, but also far higher employee productivity. So long as the gap remains, that factor should not be a problem. (Forgive me if I am wrong, but don't have the stats here.)
 
m404
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RE: The Oil Crunch And The Future Of LCCs

Tue Apr 25, 2006 2:40 pm

Since the LCCs and particulary WN are arguably, and dependant on the route, the new controller of air fares in the US would not it make sense that if WN and others, as low end price models simply raise the fares to match the fuel prices. Then everyone else can do the same. The sooner the better.

[Edited 2006-04-25 07:40:25]
Less sarcasm and more thought equal better understanding
 
atrude777
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RE: The Oil Crunch And The Future Of LCCs

Tue Apr 25, 2006 2:58 pm

Quoting Gnomon (Thread starter):
When its current favorable fuel hedges expire, and if it's forced to purchase hedges at a substantially higher rate -- that's an "if"

At this point SWA doesn't need to worry about hedges going away for another 3 years, 2009. A LOT can change in these three years.

Quoting Gnomon (Thread starter):
And everyone knows from its last earnings report that without its fuel hedges, at today's oil prices, Southwest would be moderately unprofitable today.

I find that hard to believe, with the current stands SWA would have just raised prices earlier, to compensate for the fuel cost. Either way I am quite sure WN would have been profitable.

Quoting Gnomon (Thread starter):
While a few non-bankrupt legacies seem on the verge of recovery,

AA and CO and United and US are the only ones not in current BK, AA and CO are the only ones who never had to file in these times of trouble. United miscalculated the Fuel and Oil Price, so they are already struggling with that, US is going through the stuff with AWA, so I will not comment on that. AA and CO both seem to be well of the big 6.

Quoting Gnomon (Thread starter):
dependency on finite domestic growth.

Southwest has quite a lot to cover domestically before it even enters the intl side, also stated by Kelly himself. B6 as well as FL also have a lot of domestic growth to look at and build at too.

Quoting Gnomon (Thread starter):
Consider too that Southwest is much different today than it was 30, 20, even 10 years ago -- in many respects. I don't think one can legitimately say, as one could 20 years ago, that Southwest is attracting passengers who'd otherwise be going Greyhound.

Isn't domestically Southwest has the best coach class of any airline, including service and such? on an Average 500 mile route?

Quoting Gnomon (Thread starter):
That has left some, including me, to wonder about Southwest's -- and other LCCs' -- long-term profitability in a scenario in which the legacies recover by slashing labor costs, increasing efficiency, and focusing on lucrative international routes, and in which LCCs' cost advantage because of fuel-hedging contracts evaporates.

Only LCC and Airline that hedged was SWA. SWA is the leading fare in the United States on routes it serves, if it isn't the cheapest, it forced airlines to be cheaper. So if WN decides they need more money, they will raise the fares and be assured other airlines will follow too. As I sais Fuel Hedging still has another 3 yrs with WN, so they have time to figure it out.

Alex
Good things come to those who wait, better things come to those who go AFTER it!
 
Gnomon
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 2:41 am

Hi Alex,

Quoting Atrude777 (Reply 4):
Either way I am quite sure WN would have been profitable.

I wish you were correct, but in WN's 1Q results announced April 20, the company reported net income of $61 million, which included a $133 million benefit from hedging. Without the hedges, ostensibly, WN would've reported a $72 million net loss.

The proportion of its hedged fuel, moreover, decreases year-over-year from 75 percent next quarter to a mere 35 percent in 2009.

I think we agree that in the next three years, if oil prices continue to increase (which they most undoubtedly will, given instability in Iran and exponentially soaring demand in India and China), Southwest WILL have to do something. My question is: What will it do?

Will it exercise its position, as M404 noted, as the pricing leader and raise fares? There's a point on the demand curve at which demand tapers off as airfares get increasingly high; in fact, Gary Kelly was quoted recently saying that he's unsure why we haven't already reached that point.

Will it negotiate concessions and givebacks from employees? Seems to me that would change the entire Southwest dynamic.
 
ltbewr
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 2:49 am

There is also the issue that higher energy prices, combined with the squeeze on middle-class incomes from that and many other daily costs, may dampen the demand for lsieure airline travel. Higher fares to cover increasing fuel costs will also lead to some leveling off or even an overall decline. Those whom are still flying for leisure may choose LCC's vs. legacies, as the legacy fuel costs will be going up just as much as those of the LCC's and have to raise their fares as well. People will save money any way they can and will continue to use LCC's even if well off.
 
rentonview
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 3:28 am

While a loss of the fuel hedging advantage for SW will be significant, they'll likely make up for some of it by being the launch customer for the 737RS, once the program is announced (maybe when the first 787 rolls off the line). It's doubtful that even the most fuel efficient new aircraft can offset the impact of skyrocketing oil, but SW will certainly have a competitive advantage in being the first to roll out the 737 replacement. Likewise, if B6 can get to the front of the line for the A320 replacement/modernization, they can reap its potential fuel savings, too. I'd be more concerned with other LCCs (and legacies) that don't have large cash reserves or buying power with Boeing and Airbus, and will therefore take longer to acquire next generation equipment.
 
L1329II
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 4:08 am

Quoting Atrude777 (Reply 4):
Only LCC and Airline that hedged was SWA. SWA is the leading fare in the United States on routes it serves, if it isn't the cheapest, it forced airlines to be cheaper. So if WN decides they need more money, they will raise the fares and be assured other airlines will follow too. As I sais Fuel Hedging still has another 3 yrs with WN, so they have time to figure it out.

SWA was not the only LCC to hedge. They may have more of a percentage hedged but certainly not the only ones.
"By the way, is there anyone on board who knows how to fly a plane?"
 
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jetpixx
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 4:19 am

Why does everyone think WN's fares are so cheap? I've been objective and looked at using them numerous times -- either short-haul from FLL-MCO or TPA, medium to FLL-MHT, PVD or CLE and long to FLL-PDX or SEA and have found cheaper fares every time on another carrier.

Now, I am sure that if they were not around that the fares on these other carriers would be a lot more expensive, but they are not all that cheap. Usually, those ridiculous fares sell out quite quickly and what is left is that all that attractive. I'd rather pay the extra money and fly next to someone not wearing flip-flops or a cowboy hat.
 
HPRamper
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 4:27 am

Quoting Jetpixx (Reply 9):
I'd rather pay the extra money and fly next to someone not wearing flip-flops or a cowboy hat.

Hear hear. We actually told a guy he couldn't board the plane the other day because he had no shoes on, and hadn't brought any. Told him he had to buy some shoes in the terminal, somewhere.

As for how my LCC is doing...regardless of fuel prices. I'm a bit surprised, myself.

"US AIRWAYS NEW 52-WEEK HIGH ON UPGRADE
US Airways Group Inc. stock rose to a new 52-week high of $41.25 in afternoon trading Monday, after an analyst upgraded the company on predictions of strong revenue growth. Bob McAdoo, an analyst with Prudential Equity Group LLC, wrote in a research report that he expects US Airways to make a larger profit per share this year than his previous estimate, excluding some one-time costs. McAdoo upgraded US Airways to "Overweight" from "Neutral Weight." The stock began trading in September after US Airways left Chapter 11 bankruptcy protection. Its previous high was $40.75.
SOURCE: Associated Press, April 24, 2006"

And it's up to $42.85 today.
 
Lumberton
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 4:41 am

Good topic, but please don't restrict it to only U.S. based LCC's. What about Ryanair, EasyJet, Air Asia, and the new start ups in India? Just to name a few.... (Edited for spelling)

[Edited 2006-04-25 21:51:43]
"When all is said and done, more will be said than done".
 
commavia
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 4:56 am

Boyd had an interesting analysis of this recently (scroll down to "$75 Oil - A Whole New Dimension," if interested), and postulated that as fares rise in the face of skyrocket fuel prices, and as fares actually begin to reflect reality once Southwest becomes more and more exposed to the actual market price for this critical commodity, low-fare airlines might actually be at a serious disadvantage to the legacies for three main reasons:

. ex-fuel, the legacies' costs are now much, much closer to the LCCs than they were pre-9/11, and
. the low-fare, discount crowd that the low-fare airlines cater to will be much more price sensitive to fuel-driven fare increases than the higher-yielding traffic that populates the legacy universe
. because of this dependance by LCCs on more cost-concious travelers, and their natural aversion to operational complexity, they don't have access to the same revenue streams of customers to garner more incramental revenue (namely, regional and international markets)
 
airfrnt
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 5:00 am

Quoting Gnomon (Thread starter):
nd everyone knows from its last earnings report that without its fuel hedges, at today's oil prices, Southwest would be moderately unprofitable today.

You lead off by making the usual WN basher comment. That translates to:

"If WN wasn't so smart... they would be at a loss right now"

Which is really another way of saying

"WN is just stupid, and they gambled, which is why they are making money"

Which completly ignores the fact that WN has been the strongest and steadiest carrier _worldwide_ for the last twenty to thirty years.

If WN didn't have the hedges (and by the way, I have no doubt that WN is still hedging, even at higher costs right now) they would be raising fares to be able to turn a profit. They would also be entering more markets to be able to drive the revenue to ensure that fuel doesn't cripple them.

With nationwide seat availability near historic lows, There is ample evidence that WN raising fares won't kill them.

Quoting Gnomon (Thread starter):
Southwest will be left with a load of new 73Gs, some of the industry's highest-paid labor groups, and a dependency on finite domestic growth.

Given that roughly half of world wide lift is in the United States, being based here means that even a small fish has a lot of water. WN being the third largest carrier by passenger numbers means that they are a very big fish in a very big market.

Quoting Gnomon (Thread starter):
That has left some, including me, to wonder about Southwest's -- and other LCCs' -- long-term profitability in a scenario in which the legacies recover by slashing labor costs, increasing efficiency, and focusing on lucrative international routes, and in which LCCs' cost advantage because of fuel-hedging contracts evaporates.

The legacies are going to be more competitive. No doubt about that. But they also have complex fleet issues, millitant unions that not only tend to be unplesent with customers, but that will be out for blood and cash the next time the carriers have any money sitting aside, very low loyalty numbers from their customers.

WN has proven time and time again that they are really good at optimizing. What's more WN's success at DEN should be starting to put chills down the back of the legacies. If WN can go into fortress hubs like DEN and still pull 70+% load factors, the legacies are vulnerable even at their cash cown hubs. DEN was UA's most profitable hub a year or two ago. Will it be this year?

Quoting Atrude777 (Reply 4):

At this point SWA doesn't need to worry about hedges going away for another 3 years, 2009. A LOT can change in these three years.

Very true. Given the number of other fuels that become profitable around $50 a barrel (oil sands, oil shale, non-sweet crude) it is likely (imho) that fuel will start to stabilize here before too long.
 
Flying-Tiger
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 5:05 am

[quote=Rentonview,reply=7]While a loss of the fuel hedging advantage for SW will be significant, they'll likely make up for some of it by being the launch customer for the 737RS, once the program is announced (maybe when the first 787 rolls off the line). quote]

The A320NG and B737RS should be in ops earliest in 8-10 years, so little impact on operations now. Besides, with such a sizeable fleet WN has, the effects will only be really noteable much later. Would discount this one as irrelevant for now.
Flown: A319/320/321,A332/3,A380,AT4,AT7,B732/3/4/5/7/8,B742/4,B762/763,B772,CR2,CR7,ER4,E70,E75,F50/70,M11,L15,S20
 
m404
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 5:12 am

jetpixx

That might be a good illustration of my point in reply 4. Were the other carriers that were offering lower priced fares than WN profitable? Were they chasing that phantom market share trap at a loss? Were those fares the standard or were only a few available on each flight?

What we are saying is that the sooner WN raises their fares, so can the others, thus raising the possibility of profits and stability. Sooner or later the lowest common denominator has to hit bottom. Fuel prices are what is raising that bottom. WN is an amazing company, one that everyone is hoping their management has learned from so that successful adaptation of relevant tactics within their own companies along with innovations of differentiation can be applied in time to save them from Chapter 7.
Less sarcasm and more thought equal better understanding
 
Gnomon
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 5:36 am

Quoting AirFrnt (Reply 13):
You lead off by making the usual WN basher comment. That translates to:

"If WN wasn't so smart... they would be at a loss right now"

No, it translates to: Southwest, in its own earnings statement, said its net income was $61 million after a $133 benefit from fuel hedging contracts. Hence, without the hedges, it would've lost $72 million. Southwest said that, not me.

How can someone be a "WN basher?" Why would I be a "WN basher?"
 
grantcv
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 5:36 am

Quoting Jetpixx (Reply 9):
Why does everyone think WN's fares are so cheap? I've been objective and looked at using them numerous times -- either short-haul from FLL-MCO or TPA, medium to FLL-MHT, PVD or CLE and long to FLL-PDX or SEA and have found cheaper fares every time on another carrier

I fly on Southwest each and every week. And every week I could get a better price from one of the legacy carriers. The LCCs don't win customers on price. They win customers by have sensible pricing structures, reasonable policies, efficient reservation systems, and friendly people. It takes me 2 or 3 minutes a week to book my flight - I don't even look for an alternative elsewhere. This week though I had to book a flight on a legacy carrier. After three calls and an hour and a half on the phone, most of it on hold, I got my ticket. Or at least I hope I do - I get a call from someone asking me how I was going to pay. I already did pay by credit card - I hope. When I pointed that out they agreed that a charge to my Amex had been made. Except I don't have an Amex. What a mess.
 
HPRamper
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 5:49 am

Quoting Gnomon (Reply 16):
How can someone be a "WN basher?" Why would I be a "WN basher?"

Because to many people here on a.net, anything negative about WN, no matter how true or honest, is bashing. Even a simple financial observation.
You could tell a true story about a bad experience on a WN trip and they would accuse you of bashing. They will probably also accuse me of bashing now, since I suggested the possibility of a passenger having a bad experience on WN.
 
Gnomon
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 6:05 am

Quoting HPRamper (Reply 18):
Because to many people here on a.net, anything negative about WN, no matter how true or honest, is bashing. Even a simple financial observation.

HPRamper, thanks. I figured as much. Statements like the one in question are annoying because the several times I've flown WN (unfortunately WN doesn't fly where I am or where I often go), I've been utterly impressed with the standard of service and wouldn't hesitate to fly WN again. If anyone wants WN to do well in the future, I do. I agree with every positive comment regarding WN's superb service.

This is why I prefaced the original post with the caveat that I'm only making an objective, factual observation about something WN itself has admitted.

M404 has some interesting ideas on WN's pricing power. I wonder if that'll be enough to overcome rising fuel prices.

Employee concessions seem like the only other option. That, and perhaps more domestic growth. But the more growth, the more debt, the more union concessions, the less Southwest looks like the solid competitor with 30 consecutive years of profitability...in my eyes, at least...

Quoting Commavia (Reply 12):
Boyd had an interesting analysis of this recently

Yes! Thank you...that's the article that piqued my interest in this concept. It's a surprisingly under-reported and downplayed topic on the forums and in the news, but Boyd raises excellent points. It seems the industry is reconfiguring itself to give domestic LCCs a structural disadvantage, rather than the other way around, as it was five years ago.

Quoting AirFrnt (Reply 13):
If WN can go into fortress hubs like DEN and still pull 70+% load factors,

What's the yield in DEN?
 
atrude777
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 6:22 am

Quoting Gnomon (Reply 5):
I wish you were correct, but in WN's 1Q results announced April 20, the company reported net income of $61 million, which included a $133 million benefit from hedging. Without the hedges, ostensibly, WN would've reported a $72 million net loss.

When I stated "either way" I meant whether WN had hedged or NOT, WN would have found a way to be profitable, just like they did with the Fuel Crisis back in 1993. WN is a smart airline and we can agree to that and I was just saying WN would have find other ways to be profitable, that is what i meant by "either way".

Quoting Jetpixx (Reply 9):
I'd rather pay the extra money and fly next to someone not wearing flip-flops or a cowboy hat.

Good luck finding an airline that is completely 100% business suits, and non flip flops. I have had flip flop passnegers ride on every airline I have flown on including Southwest.

Quoting HPRamper (Reply 10):
Hear hear. We actually told a guy he couldn't board the plane the other day because he had no shoes on, and hadn't brought any. Told him he had to buy some shoes in the terminal, somewhere.

and you think Southwest Would? NO Airline will allow any passenger to board without shoes, or to go further, no shirt, pants etc etc.

Quoting Gnomon (Reply 16):
No, it translates to: Southwest, in its own earnings statement, said its net income was $61 million after a $133 benefit from fuel hedging contracts. Hence, without the hedges, it would've lost $72 million. Southwest said that, not me.

Understandable, but do knwo SWA is smart as I said above, they would have done something ELSE to be sure they were profitable. Southwest is not one to sit by idly and let other airline make money.
Good things come to those who wait, better things come to those who go AFTER it!
 
HPRamper
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 6:30 am

Quoting Atrude777 (Reply 20):
and you think Southwest Would? NO Airline will allow any passenger to board without shoes, or to go further, no shirt, pants etc etc.

I didn't mention Southwest in any connection with this incident. I'm fully aware that without buying a pair of shoes, he'd be hitchhiking to his destination.
 
atrude777
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 6:32 am

Quoting HPRamper (Reply 21):

I didn't mention Southwest in any connection with this incident. I'm fully aware that without buying a pair of shoes, he'd be hitchhiking to his destination.

No you did not, but the person you replied to about it was reffering to southwest so i took your comment as a WN one too, my apologies then.

Alex
Good things come to those who wait, better things come to those who go AFTER it!
 
AADC10
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 7:32 am

Something that is often forgotten is that fuel hedges are supposed to be revenue neutral over time. Back when fuel prices were very low, they hedged extensively since they assumed, correctly, that prices could only go up. Because of WN's strong balace sheet, there were able to purchase the various financial derivatives, presumably mostly crude and heating oil futures. As anyone knows, in order to purchase an option, you have to pay for it and only WN had actual cash to spare.

It was not necessarily a "smart" move and that they expected it to prop up the airline. The fuel hedge was supposed keep revenues steady. They do realize that they will have to start to raise prices unless fuel starts to drop again.

In some ways LCCs are more vulnerable to fuel prices since it is a slightly larger portion of costs than at legacy carriers. Not much though.
 
atrude777
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 7:35 am

Quoting AADC10 (Reply 23):
They do realize that they will have to start to raise prices unless fuel starts to drop again.

Southwest has already raised the fares to help themselves.

Quoting AADC10 (Reply 23):
In some ways LCCs are more vulnerable to fuel prices since it is a slightly larger portion of costs than at legacy carriers. Not much though.

How so, unless you have hedged don't all airline pay the same price?

Alex
Good things come to those who wait, better things come to those who go AFTER it!
 
airfrnt
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 7:46 am

Quoting HPRamper (Reply 18):
Because to many people here on a.net, anything negative about WN, no matter how true or honest, is bashing. Even a simple financial observation.

That's the point that people don't get. It is not a simple financial observation. It is a prediction being made. If Southwest didn't have the hedges, they would have taken the loss.

Southwest could have acted considerably differently if they didn't have the hedges. The fact that they do have the hedges gives them lots of extra time to figure out what to do when they don't have hedges, but Southwest is, without a doubt, the best managed American Airline over the last 20 years.

Only on A.net can we come up with airmchair CEOing that includes phrases like

"Southwest would have failed if it hadn't done the right thing... so they are doooomed"

Are there interesting elements coming out of Southwest now that they have to look hard at revenue? Sure, their move into DEN was gutsy but it appears to be paying off. I will go further on a ledge and say that DEN is proving to Southwest very quickly that they no longer have to hide from the legacies. I think it's only a matter of time before you see Southwest in ATL and MSP.

If I were stupid enough to invest in the market (but not stupid enough to believe that UA, AA and NW will somehow magically turn over a new leaf and not be back in bankrupcy in 10 years) I would be investing in WN. The internationals have a rude awakinging coming with more fragmentation across the atlantic and the pacific and I see no signs of sanity from the US big boys.

Quoting Gnomon (Reply 19):
What's the yield in DEN?

*shrug* won't know for a bit longer, but filling a 737 consistantly, even if it isn't at great margins will make a profit.
 
supa7E7
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 7:55 am

Quoting AirFrnt (Reply 13):
If WN didn't have the hedges (and by the way, I have no doubt that WN is still hedging, even at higher costs right now) they would be raising fares to be able to turn a profit.

So you are saying WN is refraining from raising fares because they do not wish to make additional profits this year? Or what exactly?
"Who's to say spaceships aren't fine art?" - Phil Lesh
 
airfrnt
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RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 8:00 am

Quoting Supa7E7 (Reply 26):
So you are saying WN is refraining from raising fares because they do not wish to make additional profits this year? Or what exactly?

One thing that Southwest has traditionally done (and B6 has borrowed) is to keep their maximum ticket price a functional of total cost. Ie, don't charge more then 20% more (I think that's B6) for the ticket then your cost. In other words, don't screw the customer.

The big business carriers lost sight of this, messed with their customers, had unrealistic margins, and died after 9/11.
 
atrude777
Posts: 4258
Joined: Wed Aug 13, 2003 11:23 pm

RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 9:08 am

Quoting Supa7E7 (Reply 26):
So you are saying WN is refraining from raising fares because they do not wish to make additional profits this year? Or what exactly?

Southwest is already raising fares right now!

just as he said...

Quoting AirFrnt (Reply 27):
One thing that Southwest has traditionally done (and B6 has borrowed) is to keep their maximum ticket price a functional of total cost
Good things come to those who wait, better things come to those who go AFTER it!
 
SeaTran
Posts: 60
Joined: Sat Aug 06, 2005 11:15 am

RE: The Oil Crunch And The Future Of LCCs

Wed Apr 26, 2006 2:52 pm

Some things that will mitigate the effect of the decline in fuel hedges for SWA:
1) 737-700's are more efficient than the -300's and -500's that make up about half of the SWA fleet. As more 737-700's come on line and the percentage of -700's in the SWA fleet climbs, the fuel CASM will fall.
2) SWA management is smart. Their main advantage is that they realize the predicament they are in right now. The rise in the price of oil is not taking them by surprise. They know they must act. Expect to see carefully selected high-yield international destinations using either SWA or the code-share with ATA. Also, further possibilities include a revisitation of the dedicated cargo fleet idea, assigned seating, IFE, and/or installation of business class seats. Small changes like single-engine taxi can also be implemented.
3) Labor costs can flex at SWA. SWA does not have a defined contribution plan. It uses profit-sharing where other airlines use "A" or "B" plans. Thus, when profit falls, so does the percentage of revenue paid to labor.
4) Mike Bair, Boeing's manager of the 787 program, stated at a recent event sponsored by the Harvard Business School of Puget Sound that he anticipates first delivery of the 737 replacement in the 2012-15 timeframe. It will incorporate all of the advances of the 787 and add improvements that will be developed in the interim. Herb Kelleher has expressed SWA's keein interest in the program saying that Southwest would buy 500 of them if Boeing would build them. I expect that as fuel prices climb, Boeing will come under intense pressure from one of its best and most loyal customers to accelerate development of the 737 replacement. If the 737-replacement burns 30% less fuel (an educted guess) vs the 737, then this could indeed be a saving grace if SWA is able to secure a relatively large proportion of the intial production slots for the new aircraft.
5) New fuel hedges. If SWA is currently buying new hedges in the $70 range, then this could also be another huge savings in coming years. If oil continues to climb and reaches north of $90 or $100 per barrel in coming years, then a hedge at $70 will be quite a bargain. I have no idea of they are currently doing this, but you'd have to think that they are buying them if they are available. The best minds in the energy industry see no abatement in the upward pressure on oil prices ( http://www.theoildrum.com/story/2006/4/23/12186/9663 ). Even members of the Bush administration believe that fuel prices are not headed back down. Pat Wood, head of the Federal Energy Regulatory Commission until 2005, asserted this to be the case at an energy industry conference just last week (Bio: http://www.leadingauthorities.com/24054/Pat_Wood.htm ). If SWA has been able to acquire recent hedges, then this would bode well for them.

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