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A major domestic airline that provides point-to-point, low-fare service.
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fonzriot (47.18) Submitted: 5/21/08 2:23 PM : Start Price: $12.40 LUV Score: -32.60
I did a presentation on Southwest airlines for a class, and I found information that makes me believe they will underperform the S&P 500 within the next two to four years. In the past, Southwest has posted profits while their competitors have been suffering. Their success comes from hedging oil prices. By the year 2010, our case study reveals that they won't be able to hedge 100%. Rising fuel prices have been a heavy burden on the competitors, and Southwest's hedging strategy provided them a large advantage that made them profitable. When the company is unable to use this strategy, their stock will decrease in value. My second concern with Southwest is that they have new market entrants to worry about. New and growing companies are using the same low cost structure that Southwest implements. One of these new companies is JetBlue airways. They have newer planes, and more amenities for customers such as individual televisions for each passenger and more leg room. I think that new competitors will be a threat to southwest and this will contribute to the stock underperforming the S&P 500 in the next two to four years.
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JustWokeUp (48.64) Submitted: 6/04/08 1:58 PM
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Would you like to explain why they cannot continue hedging 100%?As for JetBlue goes, I think because of the extra amenities and the 'luxury' offered, its ticket price will be quite higher than Southwest - So it is playing on a different market segment than Southwest (Southwest - I just need to get there cheap and fast, JetBlue - I need some 'me time', I need to be pampered, I deserved it)Please close your pick on this one and turn the thumb up, you'll feel better, I promise :))
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shiftomnimega (88.36) Submitted: 6/16/08 8:54 AM
If Southwest cannot hedge oil completely like you say, then this will be a good point to go on for an underperform call. However, considering the date you've attached to it they should be good for the next couple of years and should continue to outperform their peers and the S & P. Actually, they should ideally still be able to carry on, business as usual, for a few years past 2010 by eating up cash flows and cutting their puny dividend. The other carriers' problems have been dragging them down for a couple decades now. I think Southwest has plenty of good years in it.I am simply not convinced that JetBlue is a real competitor to Southwest, but even if it was that makes them the only competition in the industry. There is plenty of room in the market for two carriers.
DLai0001 (48.05) Submitted: 7/01/08 12:38 PM
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As for your first concern. I don't think hedging should factor into the equation any. It just adds a slight overhead to ensure level fuel prices so they pay less in a rising oil economy, and more when the opposite is true. In the long run it hurts profits. But right now it happened to be a strategy that pays off. They really don't need to hedge 100%, just a small bit of hedging is what's needed to keeps them in the black profitable long enough while other airlines suffer. The industry as a whole will suffer and the stock price probably will suffer still. The think I like about Southwest is they're positioned very well for acellerated growth as consolidation in the marketplace happens. As for new entrants. They probably won't be so much of a problem 10 years out. The main advantage is not really their hedging, but that they can afford to hedge. In an industry that is very capital intensive, having a solid balance sheet is one of the biggest advantage you can have. Jetblue, or any new ventures will be very debt heaving and will have alot of financial overhead without scale of operations that Southwest has.JetBlue has however did well as a fairly new entrant by focusing on customer experience. I would say Southwest is like the McDonalds, very large, very well run, and consistently profitable, but everyone seems to associate them with bad food. While JetBlue is like Chipotle, young upstart, everyone likes them, but not quite profitable yet.
flyswajets (< 20) Submitted: 10/03/08 8:19 PM
Above are two arguments that can be easily defeated:1. As for fuel hedges. Saying that SWA's success has come from fuel hedging completely misses the mark. If SWA's Labor and Fuel costs were the same as the other Legacy carriers SWA would still enjoy a 30% cost advantage over its main competitors. Also, if the hedges were not in place and SWA was paying for the going rate of Jet A they would then have to increase fares only 10% to break even and 18.7% to make the same profit that they made in the 1st Qtr of 2008. 2. Another bogus argument. Jetblue only competes with SWA on 1% of the SWA route system. I don't think that the Execs are losing much sleep over Jetblue's attack on 1% of WN's routes.The fact remains that SWA now enjoys a huge cash reserve of $5.8 Billion and it's debt to equity is less than 30%. On the flip side AA's debt to equity ratio is 547% and Jetblue's is 222%
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