WN financials hit headwinds

[WorldTraveler]

In a considerable change from just a few years ago when WN benefitted from significant fuel hedge gains, WN has just reported a net loss in the industry's strongest 3rd quarter driven by over $200 million in fuel hedge losses.
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WN's operating profit was 5% - below what analysts expect from a number of WN competitors.

WN had good non-fuel cost control but it also generated passenger RASM improvements of just 1.6%... what will clearly be one of the weakest showings in the industry for the quarter.

http://finance.yahoo.com/news/Southwest-Airlines-Reports-prnews-43427332.html?x=0&.v=1

The implications for WN's internal growth plans as well as its integration plans for FL are highly significant.

 

[jimntx]

Not really. They're operating profit was very good. You know as well as I, this "loss" is nothing but a paper writedown of an asset value that ultimately does not very much other than lower their taxes. It's like losses from currency exchange rate changes. Funny Money.

 

[signals]

Southwest is still better than Delta

 

[WorldTraveler]

Not really. They're operating profit was very good. You know as well as I, this "loss" is nothing but a paper writedown of an asset value that ultimately does not very much other than lower their taxes. It's like losses from currency exchange rate changes. Funny Money.

The issue is not the fuel hedges... I get the accounting stuff and that is not what I am faulting them for, although if you want to say the hedges delivered huge gains for you one quarter, you also have to be willing to take a loss on the same basis.

Their operating margin was 5%; the rest of the industry is expected to be significantly higher than that. Alaska's operating margin was 12%; AMR showed an operating profit.

Every airline that has reported has had stronger RASM growth than WN.

 

[swamt]

The issue is not the fuel hedges... I get the accounting stuff and that is not what I am faulting them for, although if you want to say the hedges delivered huge gains for you one quarter, you also have to be willing to take a loss on the same basis.

Their operating margin was 5%; the rest of the industry is expected to be significantly higher than that. Alaska's operating margin was 12%; AMR showed an operating profit.

Every airline that has reported has had stronger RASM growth than WN.

- Alaska did fantastic this quarter, My hat off to them. SWA only reports a loss do to fuel hedges. And yes your right. We take the good with the bad, we take the positive quarters for good hedging and we take the negative quarters with the "hit" from the hedging when the fuel prices drop lower. However, as you said, it's all in the accounting. Share holders didn't seem to mind, so why do you??? Everyone wants to find any and all negative news about SWA and post it as soon as possible. Because it's so hard to find any negative news. Yes, this is a negative, but it will be more than made up for in the near future... BTW on SWA's 3Q loss report, stock went up .39 cents, can't be all that bad huh??

 

[jimntx]

Every airline that has reported has had stronger RASM growth than WN.

One quarter! I guess all the employees need to call in sick tomorrow so they can be first in line at the unemployment office. The end is nigh for the most successful and successfully managed airline in history. No doubt DL will step in and fill the void when WN is gone.

 

[BoeingBoy]

"Mark to market" on unsettled hedges is an interesting animal, and that's what the majority of WN hedging losses are. You take the hit when the value of the hedge has dropped, as at the end of the 3rd quarter, but the gain is that much bigger if the value of the hedge goes up, which it almost surely will. Since WN generally hedges further in advance than any other airline, it sees a lot more "mark to market" changes than any other airline - both up and down. Recall that as oil/fuel dropped after July 2008 - by a lot - WN paid to get out of their unsettled hedges and suffered two quarters of significant hits to the bottom line. Of course, it then started hedging again in the 1st quarter of 2009 after crude had dropped to the high $30's/low $40's, making up for the 2008 hits and then some - to the benefit of the bottom line. What we're seeing now is similar to late 2008 but on a smaller scale - crude went to about $112 then has settled back to under $80 before rebounding to it's current mid-80ish level. Anyone who tries to make a trend of WN having losses on hedging is foolish at best. A "headwind" one quarter could easily turn into a tailwind the next since "marking to market" losses just mean the hedged price got lower.

Jim

 

[jimntx]

Maybe SKY HIGH is on vacation and WT is just taking on the role of WN Cassandra for the time being.

 

[WorldTraveler]

As usual Boeing Boy understands the real implications.
WN's fuel hedge losses are for now largely on paper because they are longer range - and they can turn into hard cash later on... but you have to take the hits on the same basis that you showed profits in the past - and WN has had realized and unrealized gains on its fuel hedges in the past that have affected its net profits. You cannot argue that we should ignore the bad now even though we should have paid attention to the good in the past.
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The fuel hedges are not the primary story, though.
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The primary story is that WN is NOT generating RASM growth anywhere close to what it once did. This is NOT the first quarter than WN has significantly underperformed the industry in RASM growth; it could be related to the FL acquisition since FL's revenues were not on par w/ WN's - but it also shows the difficulty WN will have in integrating FL's network and bringing its revenues up to the standards of WN's network.
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No one is picking on WN... but a whole lot of people wildly thought that WN would acquire FL and start off on a huge campaign that would harm the rest of the industry.
The simple result is that there are very real issues which WN has to face as part of the merger integration which some failed to recognize.

 

[BoeingBoy]

The primary story is that WN is NOT generating RASM growth anywhere close to what it once did.

Don't know where you got the 1.6% PRASM growth. The 8-K shows RASM growth for the quarter of 6.7% and for the 1st nine months of 7.5%, while the quarter's PRASM growth was 6.4% and for the nine months was 7.4%. Granted, the 8-K is an apples to oranges comparison - last year's WN-only numbers compared to this year's combined WN/FL numbers after May 2011.

Jim

 

[WorldTraveler]

Don't know where you got the 1.6% PRASM growth. The 8-K shows RASM growth for the quarter of 6.7% and for the 1st nine months of 7.5%, while the quarter's PRASM growth was 6.4% and for the nine months was 7.4%. Granted, the 8-K is an apples to oranges comparison - last year's WN-only numbers compared to this year's combined WN/FL numbers after May 2011.

Jim

here
http://southwest.investorroom.com/index.php?s=43&item=143
about half-way down, category labeled PRASM - 1.6%, 3 months ended Sept 30

 

[BoeingBoy]

The difference appears to be due to the acquisition of FL. One - 1.6% - compares WN/FL consolidated in 2011 to WN only in 2010 while the other compares consolidated 2011 to pro forma 2010. See footnote (1) to the operating statistics you used. I'll take the apples to apples comparison, or at least the closest thing to it...

Jim

 

[WorldTraveler]

The difference appears to be due to the acquisition of FL. One - 1.6% - compares WN/FL consolidated in 2011 to WN only in 2010 while the other compares consolidated 2011 to pro forma 2010. See footnote (1) to the operating statistics you used. I'll take the apples to apples comparison, or at least the closest thing to it...

Jim

FL is a wholly owned subsidiary of WN and thus FL's financials ARE WN's financials.
But it also doesn't change that even if you strip out and use WN's results, their revenue performance underperformed every other network airline on the domestic system. WN has acknowledged their business model of stimulating traffic with high frequency service in smaller markets/secondary airports doesn't work any more.. that is why they bought FL so they could grow into new lines of business (key NE markets) they didn't previously serve.
They have to figure out how to make THAT business model work. As of right now, the network carriers are doing a better job at making that business model work than WN- which isn't surprising since the network carriers have been through umpteen rounds of restructuring focused on working within the shrinking domestic markeplace.

 

[BoeingBoy]

FL is a wholly owned subsidiary of WN and thus FL's financials ARE WN's financials.

It is now. But still, comparing WN/FL 2011 performance to WN alone's 2010 performance is comparing apples to oranges. Since WN hasn't broken out the WN only 3rd quarter 2011 performance the best comparison available is WN/FL to WN/FL - 6.4% PRASM growth. One could certainly say, based on what's available for 3rd quarter 2011, that FL is dragging down the overall PRASM percentage increase so WN only would have PRASM growth higher than 6.4%.

Note that several airlines don't report all the statistical info for their "wholly owned" subsidiaries. AA and AE report separately. US doesn't include PSA or PDT performance in some statistics, only mainline. There are lots of ways to use reported results to distort the true picture. You just discovered one for WN...

If you actually look at the various airlines' way of reporting PRASM, it's almost impossible to make an apples to apples comparison across the industry. Certainly one can compare mainline PRASM for most of the carriers, but that leaves out the "wholly owned subsidiaries" and thus the financials that "ARE" mainline's financials.

Or one can choose which financials best support one's argument...

Hope you've got your tap shoes on...

Jim

 

[WorldTraveler]

Jim,
this is the key part of the post which you didn't address and which is core to why WN has chosen to quit growing for about a year...

But it also doesn't change that even if you strip out and use WN's results, their revenue performance underperformed every other network airline on the domestic system. WN has acknowledged their business model of stimulating traffic with high frequency service in smaller markets/secondary airports doesn't work any more.. that is why they bought FL so they could grow into new lines of business (key NE markets) they didn't previously serve.
They have to figure out how to make THAT business model work. As of right now, the network carriers are doing a better job at making that business model work than WN- which isn't surprising since the network carriers have been through umpteen rounds of restructuring focused on working within the shrinking domestic markeplace.

WN doesn't have a CASM or RASM advantage relative to its network peers - and it has showed up in WN's financials for several quarters... now that another quarter has closed and another is opening, we'll see how quickly WN is adapting.
I have a feeling that WN's leaders in Dallas know exactly what has to be done and are going to fix it whether you acknowledge it or not.

oh, happy new year.