How Is Southwest Airlines Performing? 13 comments
January 25, 2009
| about: LUV
Submit
an article to
an article to
-
Font Size:
-
Print
- TweetThis
Southwest Airlines' (LUV) Q3 & Q4 (net) losses are attributed to fuel hedging/derivative "Special Items".
But, when you look further back, the profits (net) for several quarters are not attributed to the fuel savings due to the same hedging derivatives. Is this called creative accounting or creative reporting?
(Note: Without the fuel cost savings from those fuel hedging derivatives, SWA would have lost money for the past 2-3 years.)
Significant highlights from the Southwest Airlines press release:
- Recent load factors are at or near the industries lowest and have declined to 2005 levels while under performing industry competitors.
- Total Assets at $14.3 billion is down by $2.5 billion y/y and down by an astounding $9 billion when compared to just 6 months ago.
- LT Debt increased 71% y/y to $3.5 billion. This is the highest LT Debt ever recorded by SWA as a percentage of other metrics.
- Cash & equivalents dropped by 35% to $1.8 billion. Cash and equivalent was recorded as $5.8 billion ending Q2 2008. SWA's current cash/equivalent position is at the lowest ratio in many years when compared to other financial metrics.
- Air Traffic Liability dropped by 24% to $963 million. This is the largest q/q reduction I can find.
Disclosure: None.
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
David Fry
-
2
TraderMark
-
3
Don Dion
-
4
Cliff Wachtel
-
5
Mike Havrilla
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
Which quarters are those, Richard? Southwest's quarterly earnings releases certainly seem to acknowledge the role of fuel hedges in reducing fuel costs:
from Southwest's 2007 4th quarter earnings release:
<em>"Even with a superb fuel hedging position and higher than expected realized cash hedging gains of $300 million, our fourth quarter 2007 jet fuel costs increased 10.3 percent from a year ago to $1.72 per gallon (economic)."</em>...
from Southwest's 2008 2nd quarter earnings release:
<em>"Even with $511 million in favorable cash settlements from derivative contracts in the second quarter 2008, our economic fuel costs increased 35.2 percent to $2.19 per gallon."</em>
I'm not sure why you would imply Southwest is guilty of either creative accounting or creative reporting.
If you look at the Q3 and Q4 2008 press release you will see SWA clearly states the loss came from "Special Items" as noted from fuel hedging/derivatives.
"Special Items" work both ways. They can be the cause of a (net) profit -OR- loss.
If you look back at the press releases for time periods prior to Q3 '08, while the savings from fuel hedging/derivatives is noted as you suggest. Those savings are not -labeled- as "Special Items" even though it was those savings which provided the (net) profits.
In fact; SWA adds further that they met or exceeded analyst's EPS profit projections for Q3 & Q4 '08 after discounting "Special Items"
Regards,
Robert Herbst
AirlineFinancials.com
Your profile is very short and only mentions commercial pilot experience. Which airlines have you flown for and are you a member of the pilots union?
Again, I'm not sure which quarters you refer to, Robert, so I may be unable to explain exactly the "creative accounting" you seem to believe exists.
Let's look at 2Q2008, once again. Southwest properly reported that cash settlements of fuel derivative contracts had reduced the company's fuel expense by $511 million. That $511 million reduction was included in deriving the company's operating profit.
In the same 2Q2008 earnings release, Southwest reported "Other income" of $325 million. As the earnings statement explained, "Other income" was primarily the result of unrealized gains in the value of future hedges.
So why were some of the fuel derivative gains reported as "Operating Income" and some of the derivative gains were not? The diference is clear in my sentnces above. $511 million represented cash settlements of derivative contracts. $369 million was mark-to-market impact - a non-cash impact - from fuel contracts to be settled in future periods.
Southwest Airlines was required to mark up the value of future derivative contracts in 2Q2008. That artifically inflated Southwest Airlines 2Q2008 earnings by $369 million.
In 3Q2008, Southwest included in Operating Income a total of $448 million in favorable cash settlements of fuel derivative contracts. Southwest's fuel hedges had again reduced its cost of fuel.
At the same time, Southwest properly reported that its future derivative contracts had declined in value. This was not a cash loss to the company, but rather an artificial reduction from the previous artificial gain in the value of future contracts. Consistent with its reporting all along, Southwest reported these non-cash changes in value as "Other income", though in this case they represented negative income, or loss,
I don't see how Southwest Airlines did anything inconsistent, Robert. All along they treated non-cash Mark to Market value changes differently than they treated true cash settlements of expiring derivative contracts.
I'm pretty sure that other airlines are also separating derivative cash settlements from unrealized gains or losses in future derivatives. In 2Q2008, Continental included $79 mllion of realized fuel derivative contract gains in Operating Income. CAL also reported in non-operating income $33 million in unrealized Mark to Market gains for future derivative contracts.
I hope this helps clear up the confusion.
I'll attempt to explain this one last time.
There is no confusion on my part regarding "Special Items/charges" or your accounting summary above.
But that is not what I commented about in my original article.
My comment was -specifically- in reference to "Special Items".
I fully agree airlines, including LUV, provide accounting for the hedge/derivative impact in their SEC 10Q/K filings.
LUV clearly identifies the hedging losses -specifically- as a "Special Item" in the Q3 & Q4 press release. An additional note is added that when excluding the "Special Item/charge", LUV met or exceeded analyst projections.
LUV does not identify -gains- from the exact same hedging/derivatives as a "Special Item" in pre Q3 8K filings (please note reference to term: "Special Item").
May I suggest you read the top couple of paragraphs for LUV press releases for Q1 - Q4 '08. My comments regarding "Special Items/charges" are clearly noted in Q3 & Q4 but are not there for many pre Q3 '08 press releases.
Regards,
Bob H
How did LUV report 2Q2008 earnings?
from Southwest Airlines 2Q2008 earnings release:
"Net income, excluding special items, of $121 million, down 37.9 percent"
"Net income ..............$321 million"
from Southwest Airlines 2Q2008 10Q:
"net income, 3 mos ended 6/30/2008 ..... $321 million"
How did LUV report 3Q2008 earnings?
from Southwest Airlines 3Q2008 earnings release:
"Net income, excluding special items, of $69 million, down 55.8 percent"
"Net income/(loss) ..............($ 120 million)"
from Southwest Airlines 3Q2008 10Q:
"net income/loss, 3 mos ended 6/30/2008 ..... ($120 million)"
For both quarters, the gains on settled fuel derivative contracts were included in operating income, and included in "net income, excluding special items".
For both quarters, the unrealized gains/losses on future fuel derivative contracts were included in "net income", but not in "net income, excluding special items"..
Southwest Airlines was completely consistent in their reporting of quarterly results.
Where you seem to have slipped up - and I'm going to assume you did not do so intentionally - is in trying to contrast LUV's 3Q2008 quarterly earnings release with the much more restrictive 10Q from 2Q2008. If you had compared earnings release to earnings release, you would see the consistency of LUV's reporting. If you had compared 10Q to 10Q, you would have seen the consistency of LUV's reporting.
Those statements are definitely in LUV's 1Q2008 and 2Q2008 statements. I can repreoduce them verbatim if you insist.
Why were such statements not included in pre-2008 earnings releases? Very simple. FASB Statement No. 157 - the new Mark-to-Market accounting rules which changed the reporting of net income for all corporations - did not take effect until 2008.
Because there was no FASB 157, LUV had no unrealized gains or losses to report to shareholders. So there was nothing to explain to shareholders in the pre-2008 news releases.
Let's be very clear: LUV always included REALIZED cash settlements of fuel derivative hedges in its operating income.
Your claim that LUV was guilty of "creative accounting" or "creative reporting" seems to be based on differences caused by FASB changes. Those changes affected many of not most large corporations in 2008, and are partially responsible for the demise of some financial firms.
Right. The 86,544,801 passengers who flew LUV's domestic routes in 2008 would have flown someone else had it not been for the fuel hedges. Is that your claim?
Well, txflyguy, we'll have a chance to see where the passengers go in 2009. It appears that LUV's fuel hedges - based on prices well above current levels - will provide no benefit this year.
So which of the major airlines will supplant LUV in 2009 as the leader in U.S. domestic passengers?
On Jan 26 01:40 AM igggy wrote:
> Bad numbers, true. But wait for UAUA to file chapter 11 again. (How
> many billions did they lose last quarter?). I doubt they'll be able
> to bring the airline back intact. The other carriers including LUV
> will greatly benefit as a result.
That seems to be continually in your dreams. The demise of UAUA. It's amazing how many southwest employees openly talk wistfully of the demise of other carriers and the subsequent loss of jobs. I remember when SWA prevented ATA from merging with AM West (757-300 package with lessers) and now I know guys who took a 70% pay cut and are in danger of losing their homes. Well then you LUV guys made out with the MDW gates so who cares? Do they remove the empathy switch in Southwest employees?
On Jan 28 04:11 PM jetbeagle wrote:
> txflyguy: "The one thing (only thing) that has saved them is their
> genius in the fuel hedge department. Had it not been for this, SWA
> would be a basket case today. "
>
> Right. The 86,544,801 passengers who flew LUV's domestic routes
> in 2008 would have flown someone else had it not been for the fuel
> hedges. Is that your claim?
>
> Well, txflyguy, we'll have a chance to see where the passengers go
> in 2009. It appears that LUV's fuel hedges - based on prices well
> above current levels - will provide no benefit this year.
>
> So which of the major airlines will supplant LUV in 2009 as the leader
> in U.S. domestic passengers?
Yes it's easy to add seats to the current market. That would be smart during our 2nd great depression!