How WN Will Beat US (And Others_

[gaucho99]

You're right. But using fuel hedges to keep the prices low is not really sustainable for a single carrier the size of SWA. They are using their gambling winnings to subsidize customers ticket costs.

Fuel hedging is gambling, pure and simple. SWA has been notoriously successful at it; Parker and the Tempe brain trust has been notoriously terrible at it.

If I owned a good sized company that sold widgets at retail, and subsequently won $250 million playing the PowerBall lottery, I could use those winnings to undercut all my competitors selling their widgets. I could slash my prices to half of my competitors' and thereby have the pricing power to hurt them, possibly mortally. That's what's happening right now in the airline business. SWA has the pricing power because they play a great game of oil-price poker, not because of their admittedly efficient business model.

Good analogy and I agree to a certain extent except that WN had been the most profitabl airline for years...well before they had the fuel hedge advantage. So the fuel hedge gambling is just another tool they hav added to their arsenal.

 

[CynicalResAgent]

Plus don't forget WN does not charge any change fees and their tickets are transferable.

What's the domestic change fee for US, $150.00?

 

[mrman]

When a commodity is over 35% of your cost hedging is not a gamble, it is good businees. And if you purchase those hedges over years and weighted average that cost you take much of the risk away. This is the reason there is a hedge market, to let entities know their future cost in advance so they can plan and set pricing for the future. WN does not set pricing based upon what US charges, frankly they don't view US as much competition. They view the automobile on the short hops their competiion. Any business whether it be farming or trucking, or airlines where a high % of their expense is a commondity would be foolish not to hedge.

I think its an unfair proposition to say WN got lucky. They did what was prudent in a business where a large % of your expense is fuel. The fuel they are using now was purchased pre 9-11 when just about any airline had the cash to purchase the hedges.

The gamble that was made was by the legacies that did not purchase them. And now the employees and shareholders are paying the price of that gross missmanagement

 

[FlyUs]

You're right. But using fuel hedges to keep the prices low is not really sustainable for a single carrier the size of SWA. They are using their gambling winnings to subsidize customers ticket costs.

Fuel hedging is gambling, pure and simple. SWA has been notoriously successful at it; Parker and the Tempe brain trust has been notoriously terrible at it.

If I owned a good sized company that sold widgets at retail, and subsequently won $250 million playing the PowerBall lottery, I could use those winnings to undercut all my competitors selling their widgets. I could slash my prices to half of my competitors' and thereby have the pricing power to hurt them, possibly mortally. That's what's happening right now in the airline business. SWA has the pricing power because they play a great game of oil-price poker, not because of their admittedly efficient business model.

Spot on!!

 

[jimntx]

The fuel they are using now was purchased pre 9-11 when just about any airline had the cash to purchase the hedges.

Not all of them. Some were purchased post-9/11 from AMR when our management made the canny decision to sell some spectacular fuel hedges to WN to raise cash.

 

[CynicalResAgent]

This is EXACTLY right....see my post on the topic: http://www.usaviation.com/forums/index.php...st&p=618981

Many people have, in my opinion, incorrectly placed Bush at the center of this crisis...and drilling in new and other places...when I believe the real issues is futures trading.

off topic

I know you were not necessarily advocating it but I don't believe drilling for oil will help consumers much if any. I would imagine it would take a while, at least a few years to locate the best place to drill and get an oil rig in place and start production. I think the best thing for us to do is to try and lead in innovation moving everyone towards alternatives.

Everything is a trade off. We can trade in our kinda clean beaches and already stressed coastal enviroments (that provide income, food and recreation for us) for a little bit more oil that the oil companies will probably sell to us for the same price they do now.

 

[oldiebutgoody]

When a commodity is over 35% of your cost hedging is not a gamble, it is good businees. And if you purchase those hedges over years and weighted average that cost you take much of the risk away. This is the reason there is a hedge market, to let entities know their future cost in advance so they can plan and set pricing for the future. WN does not set pricing based upon what US charges, frankly they don't view US as much competition. They view the automobile on the short hops their competiion. Any business whether it be farming or trucking, or airlines where a high % of their expense is a commondity would be foolish not to hedge.

I think its an unfair proposition to say WN got lucky. They did what was prudent in a business where a large % of your expense is fuel. The fuel they are using now was purchased pre 9-11 when just about any airline had the cash to purchase the hedges.

The gamble that was made was by the legacies that did not purchase them. And now the employees and shareholders are paying the price of that gross missmanagement

Futures trading is, plain and simply put, gambling. It may be an educated method, but it is still gambling on the prices at some time in the future. It's really not much different than betting on horses or sports teams. You can do your research, then place your bet.

The really detrimental thing about it is that it causes HUGE "emotional" swings in the market, since relatively small investments can ultimately control large segments of the economy.

The Saudis and many economists have said that these outrageous prices for oil are due to these "unnnormal" market forces. I think that it may largely be true that since there is not a supply problem, and demand is fairly steady, they may have a point. One of the reasons the prices have shot up is that folks are "gambling" that there will be a supply issue with the new demand caused by developing nations. The demand has not yet occurred, but the price "spike" is threatening to send the world into a major depression, which will decrease demand for years or decades.

Futures trading should be illegal in ALL forms and ALL commodities. It's gambling, plain and simple! Just a scheme for rich corporations to get richer.

 

[vantheman63]

Futures trading is, plain and simply put, gambling. It may be an educated method, but it is still gambling on the prices at some time in the future. It's really not much different than betting on horses or sports teams. You can do your research, then place your bet.

The really detrimental thing about it is that it causes HUGE "emotional" swings in the market, since relatively small investments can ultimately control large segments of the economy.

The Saudis and many economists have said that these outrageous prices for oil are due to these "unnnormal" market forces. I think that it may largely be true that since there is not a supply problem, and demand is fairly steady, they may have a point. One of the reasons the prices have shot up is that folks are "gambling" that there will be a supply issue with the new demand caused by developing nations. The demand has not yet occurred, but the price "spike" is threatening to send the world into a major depression, which will decrease demand for years or decades.

Futures trading should be illegal in ALL forms and ALL commodities. It's gambling, plain and simple! Just a scheme for rich corporations to get richer.

Bravo! Again....did we just go to the same conference on this topic? LOL Sheesh....

It is gambling...and has anyone noticed that WN isn't "gambling" right now? ie: "Hedging?" Anyone think it's because they are out of money or can't raise cash? Anyone out there really silly enough to believe WN "can not" hedge any more or that they would actually allow their hedges to expire?

If you do, go back to Footh Tairy and Easter Bunny land....WN is gambling this run on oil is about done...and why hedge at $100 or $110...when it's only a matter of "when," not if, the prices are going to come back.

I'm not sure I agree with "depression," but a world-wide recession is possible...which is why OPEC is absolutely concerned...and why even Iran, who would love to wage an economic "war" with Isreal or the US has publicly stated, "these prices aren't right." The Chinese, I believe it was on Wednesday, said their overall consumption was not expected to grow double digits and that this price spike was indeed a threat to them as well. NO ONE wants it....except the people cashing in on it.

If I'm not mistaken, the Fed has more or less stated the US Economy can absorb prices on oil up to $150 a barrel with minor pain and harm inflicted. From my vantage point, we're starting to see some pain now. But I can't prove it.

But it is gambling, it is emotional...and the gambling "risk" can be minimized when you are aware or are a market setter in the game. I would be COMPLETELY less then stunned if someone connected the good folx at WN to the spin machine out there who originally touted China and India as "threats" to the world's oil supply.

Big, corporate money? Maybe...and an interesting thought....albeit, a little to "conspiracy-like" for me....But if you look at who benifits from this, I can understand the statement. One person I know said, "it's all a conspiracy and plan to take prices higher." Maybe. But I think that's too "complicated." I think it's good old fashioned gambling...and profiteering.

And to think....Doug Parker tried to woo the world by saying, "I'm so confident in our airline, I'll put the equivalent of my salary into stock and show my confidence."

No Mr. Parker....you bet on lowering oil prices...because you can hear the fat lady tuning up. Thats all you're betting on...

 

[vantheman63]

off topic

I know you were not necessarily advocating it but I don't believe drilling for oil will help consumers much if any. I would imagine it would take a while, at least a few years to locate the best place to drill and get an oil rig in place and start production. I think the best thing for us to do is to try and lead in innovation moving everyone towards alternatives.

Everything is a trade off. We can trade in our kinda clean beaches and already stressed coastal enviroments (that provide income, food and recreation for us) for a little bit more oil that the oil companies will probably sell to us for the same price they do now.

No, I'm not advocating more drilling...and ironically, I just got back from Alaska...of all crazy things. And I attended a conference on the topic of commodities, oil pricing, etc. And I did LOTS of sight seeing.

Oddly enough, I'm a capitalist, through and through...and I've always had the idea, "screw it, drill in Alaska"....until I saw it. Absolutely BREATHTAKING and unimaginably gorgeous.

IF...and it's a huge IF....IF the consumption number matched the price increases, we'd be forced to take a very hard look at drilling off shore. However, that's not the case. And hopefully, this little wake up call can get us motivated to find other, competing sources of energy.

At the end of the day, the numbers simply do not line up....there's a correction in oil pricing coming...lets just hope the Sand Fleas infesting The Sand Castle don't completely destroy US Airways before the prices come back.

 

[UPNAWAY]

You do realize that drilling in Anwar would equate to having Dulles Airport in Virgina and nothing else. Or another way I heard it discribed was a stamp on a football field. No way that will cuase significant enviro harm. Not to mention Anwar is not beautiful Alaska like ANC or Denali, it is much more baren.
Also why is the entire East coast off limits for drilling but the gulf and So Cal isn't?

 

[vantheman63]

Because Ted Kennedy doesn't want the view from his deck in Hyannis spoiled by drilling rigs. :down:

Sadly, that's WAY more true then not...

There was a MASSIVE "wind energey & electricity generating project" set for the Cape about 8 years ago...and guess who quashed that? Yup...the Kennedys.

The elitist libs in this country NEVER cease to amaze me....

 

[ClueByFour]

WN is not gambling. Don't delude yourself into thinking that.

They are controlling the cost of the biggest commodity their business needs to run. This may come as a shock to some of you who don't think outside the airline industry, but controlling your materials costs is a regular thing out here in the real world. It happens all the time.

They also pay the premium on their hedges for "downside protection," in essence, they will lose that premium if the contract in question is not in the money and it's allowed to expire, but they are not on the hook for the whole thing. That is their biggest (and only) risk, which is more than outweighed by knowing in advance what the commodity cost will be (the competitive advantage of the hedge prices is nothing but a bonus). Because of this, it's more apropos to think of it as insurance than gambling, but that won't sit well with the crowd who believes that LUV's entire success is implicit upon the hedges.

Now, as for the future of futures trading in this country, it's not going to be stopped. What will happen is doing it with the degree of leverage that's used today is going to be curtailed. My guess is that futures trading is not going away, doing so with %10 down certainly is. And when you remove the ability to trade futures "on the cheap," it'll drive the speculators out of the market.

 

[flybynite]

It wouldn't surprise me that the reason the oil futures market has gone nuts is because of some ex Enron employees sitting in their living room with a bottle of scotch and a laptop. <_<

 

[YVINTERN]

It wouldn't surprise me that the reason the oil futures market has gone nuts is because of some ex Enron employees sitting in their living room with a bottle of scotch and a laptop. <_<

Actually they're probably at Jimmy Wah's a PHX Strip Club often frequented by ex-enron types...they speculate on oil prices based on Betty Bopp's curvature of the demand.

 

[vantheman63]

WN is not gambling. Don't delude yourself into thinking that.

They are controlling the cost of the biggest commodity their business needs to run. This may come as a shock to some of you who don't think outside the airline industry, but controlling your materials costs is a regular thing out here in the real world. It happens all the time.

They also pay the premium on their hedges for "downside protection," in essence, they will lose that premium if the contract in question is not in the money and it's allowed to expire, but they are not on the hook for the whole thing. That is their biggest (and only) risk, which is more than outweighed by knowing in advance what the commodity cost will be (the competitive advantage of the hedge prices is nothing but a bonus). Because of this, it's more apropos to think of it as insurance than gambling, but that won't sit well with the crowd who believes that LUV's entire success is implicit upon the hedges.

Now, as for the future of futures trading in this country, it's not going to be stopped. What will happen is doing it with the degree of leverage that's used today is going to be curtailed. My guess is that futures trading is not going away, doing so with %10 down certainly is. And when you remove the ability to trade futures "on the cheap," it'll drive the speculators out of the market.

I actually believe we're actually saying the same thing, we're just saying it differently...at the end of the day, "if you don't KNOW for fact the outcome, if you can't preduct it, you are taking risk, you are gambling." Is the risk minimized? Is it an educated risk? Sure....but it's risk and that makes it, losely defined, gambling.

Risk & Reward....

I bought several million in real estate....that was a risk...and a gamble....given the history of real estate in this country, it was a better risk (aka "gamble") then the stock market. But it was risk, gambling. And the real gamble is that the government doesn't significantly raise the "capital gains tax" thus wiping out SIGNIFICANT portions of the gain...that I took a risk and went through tough times on, to earn the reward. Risk....gambling.

There is risk, aka "gambiling," in everything.