wnflyer

From the Dallas Morning News
http://www.dallasnews.com/sharedcont...11a244a34.html

Southwest Airlines loses $120M in 3Q on fuel charge 7:26 AM CT

07:48 AM CDT on Thursday, October 16, 2008
By ERIC TORBENSON / The Dallas Morning News
[email protected]

The words “quarterly loss” and Southwest Airlines Co. haven’t been put together for nearly 18 years, but the Dallas-based company said it lost $120 million in the third quarter based on accounting charges related to its fuel-hedging program.

Southwest said its streak of profitable quarters remains alive at 70, however, if you remove the $247 million related to the accounting charge. Without the “special item” the world’s largest low-fare carrier earned $69 million, or 9 cents per diluted share. Analysts surveyed by Thompson First Call had predicted a quarterly profit of 7 cents a share.

“Our outlook on fuel prices has actually dramatically improved,” said Gary Kelly, chief executive officer, in an early-morning conference call with reporters. “The even bigger issue in our world is what is going on with the broader economy.”

Southwest’s bookings are solid for the rest of the year and its unit revenues — what it earns for each seat mile flown — for October are up 14 percent from last year, helped in part by its marketing campaign highlighting its lack of fees compared with rivals, Mr. Kelly said. “We’re going to have a decent fourth quarter,” he added.

After that, it’s anybody’s guess what demand for air travel will be, and Southwest is battening down its hatches for what may lie ahead. It drew down $400 million of a $600 million credit facility to help weather the storm and will be cutting its capacity in January compared to what it flew in the first quarter of this year. It will continue to fly all its 535 aircraft, but will cut some “unpopular” flights at odd times of the day in its schedule, he said.

Third quarter revenue grew 11.7 percent to $2.9 billion from a year earlier, and the carrier expects to see strong revenue growth in the fourth quarter as rivals cut capacity by an average of 15 percent, Mr. Kelly said. The $69 million profit compared with a net income of $156 million for the year-earlier quarter.

The fuel hedges that have helped Southwest save $1.3 billion this year can also take a bite of the income statement when fuel prices fluctuate wildly as they have in the past few months. Crude oil traded at below $70 a barrel Thursday morning, and the difference between the positions Southwest holds in the future and current prices forced the airline to “mark” its hedging to “market” prices, which is also called mark-to-market accounting.

It’s the same accounting rule that has put a lot of banks in trouble with mortgage assets and it has stung other carriers badly that bought fuel at prices well above today’s spot market, though Mr. Kelly said he’s not at all concerned about his carrier’s hedges going forward or his ability to manage the airline’s finances.

Southwest has 75 percent of its estimated fuel needs pre-purchased at capped prices of about $75 a barrel for all of 2009; Mr. Kelly said that the carrier’s actual costs would be lower than the $75 figure, and added that if oil prices continue their downward trend that the airline would look to “de-hedge” itself by selling positions. Half of Southwest’s fuel consumption for 2010 is hedged at about $90 a barrel of oil.

Despite the hedging protections, Southwest’s third-quarter fuel bill rose 44 percent to an even $1 billion. That pushed the airlines’ costs up 20 percent over the previous year, and the cost outlook isn’t going to get better as the airlines slows its growth for the current quarter to 1 percent and prepares to cut its capacity.

“Now is not the time to be growing capacity,” Mr. Kelly said. “I’m comfortable that we’re making just the right moves at the right time.”

jhayes_1780

oh my.... so WN is human after all?

toomanybooks

I wager that, in retrospect, this will be shown to have been EXACTLY the right time to aggressively expand.

Ask Warren Buffett.

Beckles

Southwest did grow by 2.2% in the quarter, but revenue passengers were down 5.6%, so further expansion is difficult to justify because there is significant capacity still in the system for more customers. As a percentage of capacity in the industry they are still growing pretty aggressively since they're not cutting capacity anywhere near as much as other domestic airlines.

I'm surprised that they still managed an operating profit (which excludes the unrealized losses), but their 11.7% increase in total revenue and 16.6% increase in yield certainly helped them.

num1bearsfan

This is confusing to me.. So they're claiming that they incurred $120 Million just in administrative fees from it's hedging program? In other words, office work? I'm just trying to understand..

irabk

This might be the fees involved in getting out of underwater hedges.

curbcrusher

It is due to "mark-to-market" accounting. When oil was $140/bbl, the then-current market value of their hedge positions shot through the roof and was reported accordingly. Conversely, now that oil is roughly half that, the current market value of those hedge positions is not so high. So I believe the loss is the difference between the hedge position market values between the end of 2Q and 3Q.

num1bearsfan

Hmm... Something about this smells foul. I'm not going to dive into details, but I'll just say that it would actually work into the company's favor to report a loss right about now, and it looks like they've sort of manufactured a way to do so. The timing is just all too perfect..

I'm sure 90% of you have no idea what I'm talking about, but some might..

FWAAA

After reading post #5 and now this one, it's apparent that you have no idea what you're talking about. I, on the other hand, know exactly what you're talking about, and I suspect that everyone else here (like those who understand the words "accounting charge") know what you're talking about as well.

Given that WN didn't actually lose money in the third quarter from its flying, any suggestion that the loss was "manufactured" in order to get a leg up in labor negotiations is ludicrous. Carry on.

num1bearsfan

So basically what you've achieved with this post is to insinuate that I'm stupid, and that my theory is completely false.. Message received..

But you might want to support your case with something that holds more water than to simply say "it's ludicrous", otherwise I'm not going to take it seriously. Maybe I don't have much knowledge of the market, but I am privy to information that you're not on the labor negotiations end, and the timing could not have been more perfect. It also seems like sort of a semi manipulated way of posting a loss.. Like you say, it's not from actual operations, it's from "special items"..

wlau

Yay! Finally SWA is losing money because of hedging... What goes up must come down and what's good for you one day could kill you the next... I knew this was coming!

Now it will be interesting to see how long Southwest keep the "No Fee" thing while losing 1.3 mil a day... What's funny is that the CEO doesn't think the write off should be taking into consideration of the company performance. Is he joking? Every airline plays with hedging. The gain or loss is always becomes a part of the the fuel expense. Why do you think other airlines are losing money? Because of fuel! If everyone starts to excludes losses from hedging, most every airline would be making money...

dwebb

Based on the conference call right now it seems that they're pretty optimistic on no fees.

dwebb

I highly doubt that. So much. It's not like WN made up the accounting rules.

num1bearsfan

I can't help but notice how excited you are of the news. Why is it that you seem to put so much energy into your obvious disdain for Southwest? You must be the type who revels in the misfortune of others more than you simply enjoy the positives of your own life.

See most typical people who are not fans of a certain business or service simply opt not to do business with said business. They don't actually dwell on it and proactively go after the business any chance they get.. There's something fundamentally wrong with someone who trolls a message board of an adversarial entity, and puts forth the amount of energy you do towards making negative comments about it. It's not healthy. Go buy a kitten or something.

FWAAA

No, you're not stupid and that's not what I posted. You obviously lack knowledge of legally-mandated accounting standards applicable to publicly held companies and thus have advanced a conspiracy-laden agenda.

I couldn't care less if you take it seriously. I'm not going to write a treatise on FASB rules and US securities laws in a vain attempt to convince the uninformed that all WN has done here is to follow required accounting conventions and US law. Not when a small segment of the audience has already accused WN management of violating those rules and laws. Some knowlege of financial accounting and US securities laws would serve you well.

"Semi-manipulated." That says it all.

I agree with much of this paragraph. You lack knowledge of financial accounting and securities laws (more than just "the market") and you obviously possess details of the labor negotiations that I do not.

Good luck with your labor negotiations. But heaven help the represented groups if your negotiators share any of your beliefs that you have posted in this thread.