July 26, 2018
DALLAS, July 26, 2018 /PRNewswire/ -- Southwest Airlines Co. (NYSE:LUV) (the "Company") today reported its second quarter 2018 results:
Net income of $733 million, net margin of 12.8 percent
Operating income of $972 million and operating margin of 16.9 percent
Excluding special items, net income of $729 million, net margin of 12.7 percent, and second quarter record earnings per diluted share of $1.26
Excluding special items, operating income of $967 million and operating margin of 16.8 percent

http://investors.southwest.com/news-and ... -113124751


Looks pretty good to me, but I will let’s others who know more analyze this.

They are definitely beneficiary of fuel hedging this quarter. Revenue front is down 3% YoY and expected to be -1 to +1% YoY next quarter.

tphuang wrote:

They are definitely beneficiary of fuel hedging this quarter. Revenue front is down 3% YoY and expected to be -1 to +1% YoY next quarter.

I don’t believe fuel hedging is included in operating income, is it?

cledaybuck wrote:

tphuang wrote:

They are definitely beneficiary of fuel hedging this quarter. Revenue front is down 3% YoY and expected to be -1 to +1% YoY next quarter.

I don’t believe fuel hedging is included in operating income, is it?

if you do fuel hedging, then it shows up in the price you paid for the fuel and overall cost. For example, Q2 2017, WN paid a lot more for fuel than competitors which made their 21.5% margin even more impressive. This quarter, they paid less than competitors. Fuel hedging helps when cost of fuel goes up and hurts cost when cost of fuel goes down.

cledaybuck wrote:

tphuang wrote:

They are definitely beneficiary of fuel hedging this quarter. Revenue front is down 3% YoY and expected to be -1 to +1% YoY next quarter.

I don’t believe fuel hedging is included in operating income, is it?

AA's fuel costs went up ~40% 2Q18 to 2Q17, including mainline and regional. Delta's was up 39%. UA's was up 43%. Southwest's was up 17%. That was fuel hedging at work. (The four carriers had different rates of ASM growth but WN's success - in this quarter - remains.)

Why is it that WN seems to be the ONLY airline on this forum that folks bring up fuel hedging on like it's some evil plot by them to fudge their numbers to look better? Other airlines can do it too...and sometimes they come out better per quarter because of it.
It reminds me of that interview with AArpey last decade when he had this **** eating grin when he talked about how it was marginally unfair that his company lost money while WN made money solely because of their fuel hedging before the oil spike in 2008.

AWACSooner wrote:

Why is it that WN seems to be the ONLY airline on this forum that folks bring up fuel hedging on like it's some evil plot by them to fudge their numbers to look better? Other airlines can do it too...and sometimes they come out better per quarter because of it.
It reminds me of that interview with AArpey last decade when he had this **** eating grin when he talked about how it was marginally unfair that his company lost money while WN made money solely because of their fuel hedging before the oil spike in 2008.

They all fuel hedge. What we don't know are each airline's specific position on fuel and how much spec trading they may have.

Not bad after the accident back in April. Seems like the general population has moved on.

WN732 wrote:

Not bad after the accident back in April. Seems like the general population has moved on.

I do not think the Riordan family has moved on.

If fuel hedging was the reason for keeping fuel costs in check, good job swa.

Just finished listening to the conference call. Everyone very bullish for both 3rd and 4th quarters as well. Stock up big today. Great quarter for SWA.

WN732 wrote:

Not bad after the accident back in April. Seems like the general population has moved on.

WN claimed a $100 million revenue hit from the incident.

kiowa wrote:

WN732 wrote:

Not bad after the accident back in April. Seems like the general population has moved on.

I do not think the Riordan family has moved on.

If fuel hedging was the reason for keeping fuel costs in check, good job swa.

Well duh - what’s the point of stating the obvious?

I put my son on a WN bird the other day and didn’t give it a thought. Signed - Gen. Population

I believe several years back the only reason the had a net income when everyone bleeding was due to their fuel hedges. It was discussed a lot on here as they tout never an unprofitable quarter. I'm not bashing WN at all. I do fly them and very much enjoy their service

SteveXC500 wrote:

AWACSooner wrote:

Why is it that WN seems to be the ONLY airline on this forum that folks bring up fuel hedging on like it's some evil plot by them to fudge their numbers to look better? Other airlines can do it too...and sometimes they come out better per quarter because of it.
It reminds me of that interview with AArpey last decade when he had this **** eating grin when he talked about how it was marginally unfair that his company lost money while WN made money solely because of their fuel hedging before the oil spike in 2008.

They all fuel hedge. What we don't know are each airline's specific position on fuel and how much spec trading they may have.

AFAIK, AA does not hedge fuel. They cannot think of a consistent reason as to how you decide to hedge more and hedge less. Consistently buying next year's fuel today is crazy. Big transaction cost without a possibility of a benefit. You need to implement market timing and buy inconsistently. Which makes you a fuel speculator. And airlines are not as smart as other commodity speculators. There just isn't a proven, logical story for hedging fuel in bulk.

This goes back to 2008 era when WN reported "operating profit" with fuel hedging baked directly in. At the time, I argued this is really against the spirit of airline accounting. Since fuel hedging has no established method within the industry, it is not appropriate to call it operational activity. It is a special item. IMO

cledaybuck wrote:

WN732 wrote:

Not bad after the accident back in April. Seems like the general population has moved on.

WN claimed a $100 million revenue hit from the incident.

$100 million is not much when they had $5.7 billion in revenue. And I’d assume this was skewed towards the first 2 months of the quarter when the accident happened.

ericm2031 wrote:

cledaybuck wrote:

WN732 wrote:

Not bad after the accident back in April. Seems like the general population has moved on.

WN claimed a $100 million revenue hit from the incident.

$100 million is not much when they had $5.7 billion in revenue. And I’d assume this was skewed towards the first 2 months of the quarter when the accident happened.

Well, it's 1.75%, which is nothing to sneeze at. They actually showed a fractional revenue decrease yoy for the quarter - they would have been up close to 2% had the accident not happened.

Flighty wrote:

SteveXC500 wrote:

AWACSooner wrote:

Why is it that WN seems to be the ONLY airline on this forum that folks bring up fuel hedging on like it's some evil plot by them to fudge their numbers to look better? Other airlines can do it too...and sometimes they come out better per quarter because of it.
It reminds me of that interview with AArpey last decade when he had this **** eating grin when he talked about how it was marginally unfair that his company lost money while WN made money solely because of their fuel hedging before the oil spike in 2008.

They all fuel hedge. What we don't know are each airline's specific position on fuel and how much spec trading they may have.

AFAIK, AA does not hedge fuel. They cannot think of a consistent reason as to how you decide to hedge more and hedge less. Consistently buying next year's fuel today is crazy. Big transaction cost without a possibility of a benefit. You need to implement market timing and buy inconsistently. Which makes you a fuel speculator. And airlines are not as smart as other commodity speculators. There just isn't a proven, logical story for hedging fuel in bulk.

This goes back to 2008 era when WN reported "operating profit" with fuel hedging baked directly in. At the time, I argued this is really against the spirit of airline accounting. Since fuel hedging has no established method within the industry, it is not appropriate to call it operational activity. It is a special item. IMO

Except fuel is a direct Cost of Goods expense. They are offsetting risk by hedging it and thus it is a direct part of their operations. All expenses must tie to revenue per GAAP rules. Plus, positions they have on hedged commodities are brought to market each month so they will have unrealized portions to recognize until the effective hedge is realized.
My guess here, and I don't work for an airline, is they may also have some speculative positions, meaning they may trade spreads between months figuring one will go up and another will go down...or just flat out buy a particular month and assume the price will go up and then sell it.

They will also likely have trading limits set by CFTC before they become a speculator...there is cushion whereby they don't need to be in a zero position with their hedges.

I don't understand how you can simultaneously think that fuel hedging is needless and dangerous speculation but advance ticket sales are not. Airlines sell tickets for many months in the future with no idea how much it will cost them to operate that flight. If the fuel is hedged then they have a much better idea of future costs. If all fuel is bought at spot prices maybe tickets should all be sold just on the day of the flight.

In reality not only are airlines speculating on future ticket sales, so are the passengers, except maybe on Southwest. That is the only airline I know of (or that I use) that will let me buy a ticket 6 months in advance but cancel it and buy a cheaper ticket closer to the flight date. That happened to me last spring when I bought a roundtrip RNO-LAX and had to change the flight dates. I ended up about $50 ahead!

aklrno wrote:

I don't understand how you can simultaneously think that fuel hedging is needless and dangerous speculation but advance ticket sales are not. Airlines sell tickets for many months in the future with no idea how much it will cost them to operate that flight. If the fuel is hedged then they have a much better idea of future costs. If all fuel is bought at spot prices maybe tickets should all be sold just on the day of the flight.

In reality not only are airlines speculating on future ticket sales, so are the passengers, except maybe on Southwest. That is the only airline I know of (or that I use) that will let me buy a ticket 6 months in advance but cancel it and buy a cheaper ticket closer to the flight date. That happened to me last spring when I bought a roundtrip RNO-LAX and had to change the flight dates. I ended up about $50 ahead!

+1, this is one of the best posts I have read on A.net.

From the cc, WN faced a lot of challenges in Q2. Flight 1380 and the resulting lower demand in bookings (which are now recovering), lower bookings due to pulling all marketing post 1380 (which have now been reinstated), challenges due to frequent thunderstorms throughout their network which affected many large stations, having aircraft out of service for accelerated fan blade inspections, as well as having 17 aircraft out of service for one week due to a freak hailstorm concentrated over their concourse in DEN.

All things considered, their numbers are really impressive. Other things of note from the call:

-They will end the year with 750 aircraft and will be fleet positive after retiring the Classic fleet last year.

-Hawaii will be a primary focus in Q4 and Q1 2019.

-ETOPS certification preparation work is moving along within their timeframe. FAA is currently inspecting their manuals and procedures.

-Confirmation that inter-island flying is now likely for aircraft routings.

-Many aircraft and options on order, and their aircraft order book allows them a lot of future flexibility.

-There are many facility improvement projects ongoing.

-Received additional flight simulators for pilot training.

-Still no plans to move to assigned seating, no plans to charge for checked luggage outside of their 2 free checked bags policy, no plans to enact change/cancellation fees.

Inter-island flying likely - that’s noteworthy for sure.

SteveXC500 wrote:

AWACSooner wrote:

Why is it that WN seems to be the ONLY airline on this forum that folks bring up fuel hedging on like it's some evil plot by them to fudge their numbers to look better? Other airlines can do it too...and sometimes they come out better per quarter because of it.
It reminds me of that interview with AArpey last decade when he had this **** eating grin when he talked about how it was marginally unfair that his company lost money while WN made money solely because of their fuel hedging before the oil spike in 2008.

They all fuel hedge. What we don't know are each airline's specific position on fuel and how much spec trading they may have.

Almost no airlines hedge anymore. It is too risky.

aklrno wrote:

I don't understand how you can simultaneously think that fuel hedging is needless and dangerous speculation but advance ticket sales are not. Airlines sell tickets for many months in the future with no idea how much it will cost them to operate that flight. If the fuel is hedged then they have a much better idea of future costs. If all fuel is bought at spot prices maybe tickets should all be sold just on the day of the flight.

!

You grossly exaggerate the argument. Last quarter - even with higher fuel costs - 77% of Delta's operating costs were non-fuel. Those costs are well known and substantially fixed. Delta has modest risk selling a few tickets 300 days in advance. AA and UA are no different.

So the reason DL bought a refinery was because they did not want to hedge on their balance sheet but on the consolidated company sheet?

A carrier needs money to hedge, prior to Chpt.11 the other majors were bleeding red ink.....no hedge money available.

MIflyer12 wrote:

aklrno wrote:

I don't understand how you can simultaneously think that fuel hedging is needless and dangerous speculation but advance ticket sales are not. Airlines sell tickets for many months in the future with no idea how much it will cost them to operate that flight. If the fuel is hedged then they have a much better idea of future costs. If all fuel is bought at spot prices maybe tickets should all be sold just on the day of the flight.

!

You grossly exaggerate the argument. Last quarter - even with higher fuel costs - 77% of Delta's operating costs were non-fuel. Those costs are well known and substantially fixed. Delta has modest risk selling a few tickets 300 days in advance. AA and UA are no different.

Actually , no. If 23% of the cost is fuel and fuel can double in price in a few months than fuel has become a very significant cost, enough to eat up any hope of a profit if even a fraction of the tickets were sold expecting cheaper fuel. At airline profit margins it doesn't take much cost increase to destroy profitability. Thats why a $25-30 baggage fee makes such a huge increase in profitability.

You don't have to have tickets bought 300 days in advance to get hurt. Fuel can go up or down significantly in a month or two.

Dealing in futures (wheat, corn, sugar, cocoa, hog bellies, jet fuel, whatever) is a speculation if you never intend to deliver or take delivery of the commodity. People who do that are betting on future outcomes. Producers (farmers, refineries) or end-users (food processors, grain dealers, airlines) use futures to reduce risk. They sell risk to speculators who are trying to leverage their investments to get huge profits or sometimes huge losses.

I do hedging all the time on overseas investments (since all I care about are US dollars) as well as rapidly increasing stock prices. I am a very cautious person so I'd rather sell risk and limit my profit than ride an investment to the bitter end and never get any sleep. In some other thread people were asking who actually pays their own money for premium seats. I do, partly thanks to hedging.

UpNAWAy wrote:

SteveXC500 wrote:

AWACSooner wrote:

Why is it that WN seems to be the ONLY airline on this forum that folks bring up fuel hedging on like it's some evil plot by them to fudge their numbers to look better? Other airlines can do it too...and sometimes they come out better per quarter because of it.
It reminds me of that interview with AArpey last decade when he had this **** eating grin when he talked about how it was marginally unfair that his company lost money while WN made money solely because of their fuel hedging before the oil spike in 2008.

They all fuel hedge. What we don't know are each airline's specific position on fuel and how much spec trading they may have.

Almost no airlines hedge anymore. It is too risky.

But buying and refurbishing a refinery, a la DL, isn't?

usflyguy wrote:

UpNAWAy wrote:

SteveXC500 wrote:

They all fuel hedge. What we don't know are each airline's specific position on fuel and how much spec trading they may have.

Almost no airlines hedge anymore. It is too risky.

But buying and refurbishing a refinery, a la DL, isn't?

It’s not really a hedge since the refinery has to buy the oil. I suppose the refinery could hedge the crude.
It more a case of vertical integration so Delta can keep the refinery profit. Also if there is a refining capacity problem, maybe a damaged refinery that goes offline, Delta can have preferential delivery.

Of course they’ll hedge the crude at the refinery

Once again, Southwest comes out profitable. It's so obvious this airline has some incredible employees and smart leadership. If anyone assumed fuel wouldn't spike again, they need a serious drug test.

I have been flying WN alot lately for business. Nothing, and I mean nothing beats the 2 free bags. I dreaded traveling from SFO to LGA... But... It was actually not bad at all! Good work Southwest!

aklrno wrote:

MIflyer12 wrote:

aklrno wrote:

I don't understand how you can simultaneously think that fuel hedging is needless and dangerous speculation but advance ticket sales are not. Airlines sell tickets for many months in the future with no idea how much it will cost them to operate that flight. If the fuel is hedged then they have a much better idea of future costs. If all fuel is bought at spot prices maybe tickets should all be sold just on the day of the flight.

!

You grossly exaggerate the argument. Last quarter - even with higher fuel costs - 77% of Delta's operating costs were non-fuel. Those costs are well known and substantially fixed. Delta has modest risk selling a few tickets 300 days in advance. AA and UA are no different.

Actually , no. If 23% of the cost is fuel and fuel can double in price in a few months than fuel has become a very significant cost, enough to eat up any hope of a profit if even a fraction of the tickets were sold expecting cheaper fuel. At airline profit margins it doesn't take much cost increase to destroy profitability. Thats why a $25-30 baggage fee makes such a huge increase in profitability.

You don't have to have tickets bought 300 days in advance to get hurt. Fuel can go up or down significantly in a month or two.

Dealing in futures (wheat, corn, sugar, cocoa, hog bellies, jet fuel, whatever) is a speculation if you never intend to deliver or take delivery of the commodity. People who do that are betting on future outcomes. Producers (farmers, refineries) or end-users (food processors, grain dealers, airlines) use futures to reduce risk. They sell risk to speculators who are trying to leverage their investments to get huge profits or sometimes huge losses.

I do hedging all the time on overseas investments (since all I care about are US dollars) as well as rapidly increasing stock prices. I am a very cautious person so I'd rather sell risk and limit my profit than ride an investment to the bitter end and never get any sleep. In some other thread people were asking who actually pays their own money for premium seats. I do, partly thanks to hedging.

Point to the times in the last 20 years where the cost of aviation fuel has doubled in 3 months. Hint - You can't. Here's a chart. https://www.indexmundi.com/commodities/ ... months=240

Has it doubled in 12 months? Yes. Delta, AA, and UA have each sold exactly zero tickets 12 months in advance.