...Hedge: The Dilemma Airlines Face when it comes to Jet Fuel” “GLOBAL FINANCIAL STRATEGIES” Instructor: Dr. William Hardin III FLORIDA INTERNACIONAL UNIVERSITY Professional Master’s in Business Adminstration Program- Panama May 5th, 2012 Project Outline Introduction 1. “Hedging” Defined 2. The Hedging Process 1. The Fuel Hedging Decision-making 2. Steps in the Hedging Process 3. Different types of Hedging Strategies 4. The Accounting Aspects of Hedging 5. Formula used in the Spot Pricing of Jet Fuel 3. Pros and Cons Arguments of Hedging Jet Fuel 4. Risk Factors that may affect the Hedging of Jet Fuel. 5. Conclusion 6. Data Analysis, Graphics and Tables 7. Bibliography Introduction The hedging of jet fuel by major airlines is the topic of this project. Hedging is considered by some as a form of insurance, similar to the kind you buy for your personal use (health, life, auto) or for your business (fire, flood, cargo). The process of hedging fuel and its derivatives is far more complicated than going out to buy a homeowner’s insurance policy, for example. We will address the different types of hedging strategies that can and are being implemented by some of the major global carriers and we will also take a look at those carriers who do not practice hedging at all. Hedging allows airlines to “insure” themselves against a negative event, such as a sharp rise in fuel prices due to a...
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...Low-fare strategies are reoccurring external environment factors affecting Southwest Airlines and the entire airline industry. “Southwest management fully understood that low fares necessitated zealous pursuit of low operating costs and had, over the years, instituted a number of practices to keep its cost below those of rival carriers” (Southwest Airlines in 2008, Case 23). Southwest Airlines has and continues to utilize various methods to overcome these obstacles. One method is fuel hedging and derivative contracts. Southwest began using fuel-hedging strategies, in 1998, to reduce their volatility to fluctuating fuel costs. “Southwest’s oil-hedging prowess has made it the master of the airline universe…locked in low cost fuel prices in advance” (Southwest’s hedge on fuel backfires, 2011). In the past, this has been tremendous savings for Southwest. However, when crude oil prices drop to $69 per barrel, Southwest paid higher prices for their fuel because they are locked into derivative contracts. According to the case, the derivative contracts are over twenty percent for 2011/2012 for roughly $76 - $77 per barrel. “The company was hit with its first quarterly loss in two years…Southwest lost money on its fuel hedges—future purchases of gas for its jets” (Southwest fuel hedge misstep, 2011). Assuming fuel prices continue to decline, Southwest does not have any alternatives solutions in place to combat their derivative contracts. Analysis and experts in the industry...
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...FUTURES IN RISK MANAGEMENT From: To: Senior Management - Airlines Company November 2011 0 University of Westminster - Westminster Business School International Risk Management COURSEWORK THE ROLE OF OIL FUTURES IN RISK MANAGEMENT Student: Student ID: Course: Word count: MSc. Finance and Accounting 2557/2617 1 EXECUTIVE SUMMARY In the world today, oil is being used as the main source of energy for a lot of core industries. Due to its non-renewable characteristics and the global rising demand, oil has increased in its value, which results in many oil price crises recently. For all those industries using large amount of oil in operation, the risk of rising oil price is an extensive problem. The most efficient method to hedge against this risk is by using oil futures contracts. Because of its effectiveness, oil futures contracts are playing a key role in risk management for a number of industries including transportation and manufacturing. This report provides principal knowledge about oil futures and its role in hedging the risk of oil price volatility. A case study of US airline industry with most updated data obtained from Bloomberg system is also discussed, which suggests the effectiveness of oil futures in risk management for most airlines companies. However, in some case, the inflexible use of oil futures may create a burden in financial costs while not producing effectiveness in risk hedging. 2 TABLE OF CONTENTS LIST OF FIGURES 3 I...
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...Fuel Hedging in the Airline Industry: The Case of Southwest Airlines Executive Summary From December 21, 1998 to September 11, 2000, jet fuel prices increased 255%, from 28.50 cents/gallon to 101.25 cents/gallon. While jet fuel prices have declined from their highs, at a price of 79.45 cents/gallon, they are still significantly above the December 1998 lows. With the future price of jet fuel being unpredictable, Southwest has decided to implement a trading strategy in an effort to mitigate its exposure to adverse price movements in jet fuel. To do this, Southwest has settled on 5 possible strategies: (1)Do nothing; (2) Hedge using plain vanilla jet fuel or heating oil swap; (3) Hedge using options; (4) Hedge using a zero-cost collar strategy; or (5) Hedge using a crude oil or heating oil futures contract. The merits and demerits of each strategy are discussed in depth below. After evaluating the possible scenarios, it is our recommendation that Southwest implement a hedging strategy that involves a combination of the jet fuel swap and the heating oil swap. The combined strategy will allow Southwest to achieve the lowest net jet fuel costs, while limiting the risks associated with the strategies individually, such as counterparty risk for the jet fuel swap and basis risk for the heating oil swap. Concerning the split between the two strategies, a 50/50 even split is recommended. Why Hedge? Hedging is a financial strategy that enables airlines or other investors...
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...welcome on flight: Southwest Airlines allows customers to carry small pets (cats and dogs only) on board all domestic Southwest Airlines flights. All in-cabin pets must be carried in an appropriate pet carrier. The pet fee is $95 each way per pet carrier. Each customer is limited to carrying one pet carrier on board. The carrier may contain up to two cats or dogs of the same species. The carrier will count as the customer’s carry-on bag. Southwest does not require a health certificate or any other documentation from the customer’s veterinarian for pets to travel. Pets are not permitted on international flights. Other several airlines carriers also allow pets on board, like United, Delta, American and US Airways, put the advantage of southwest airlines that is less expensive than its competitors, southwest airlines charge 95$ for one pet carrier, other mentioned airlines are charging a 125$ for one pet carrier. - Cashless cabin: Southwest airlines applied the cashless cabin technique to all of its units, this technique helped improving consumer’s goodwill, a traditional scenario that irritates consumers usually, buying 5$ juice and give the flight attendant a 20$ note, and wait half an hour for the change to come back. Also, this technique saved the time and reduced the jam on atm machines at airports, because travelers can dispense cash if buying items with credit card is possible. But southwest airlines is not alone, American Airlines, United Airlines, AirTran and JetBlue...
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...September 28, 2014 Southwest Airlines Executive Summary Company: Southwest’s philosophy; “We manage in good times so that our company and our people can be job secure and prosper through bad times,” has served the 47 year old airline very well. Southwest has differentiated itself in the market by creating a low cost and efficient strategy which has allowed it to distinguish itself from any other airline. This being said, in the past few years it has run into some threats that could greatly affect the financial future of the company. SWOT Analysis: Strengths ● ● ● ● ● ● ● ● ● ● ● Best low cost carrier Reliable Standardized fleet Fleet is owned High number of flights Direct flights Utilizes less popular/expensive airports Focused on customer service No frills Open seating philosophy Great relationship between management and staff ● Established and reputable brand name ● Conservative growth philosophy Opportunities ● ● ● ● ● ● ● Expansion into international markets Expansion of domestic destinations Acquisitions of competitor airlines Improve turnaround efficiency Upgrade fleet Offer customers perks for a price Improve customer satisfaction ● ● ● ● ● Weaknesses ● Confusion caused by open seating philosophy with new customers ● Fleet is aging ● Focused on business travelers ● Growing operating expenses ● Conservative growth philosophy ● Being imitated by other airlines ● Limited destinations Threats Being copied by airlines Economic recession Volatile...
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...SOUTHWEST AIRLINES CO. CASE STUDY 2013 1) Financial data from 2012-2008 | Revenues(b) | Net Income (b) | Load Factor | Trips flown | 2012 | $17.09 | $0.42 | 80.3% | 1,361,558 | 2011 | $15.66 | $0.18 | 80.9% | 1,317,977 | 2010 | $12.10 | $0.46 | 79.3% | 1,114,451 | 2009 | $10.35 | $ 0.099 | 76.0% | 1,125,111 | 2008 | $11.02 | $0.18 | 71.2% | 1,191,151 | 2) Blue Ocean Strategy Blue ocean strategy refers to the creation of a new, uncontested market space by a company that makes competitors irrelevant and that creates new consumer value often while decreasing costs. Southwest airlines is a very good example for using Blue Ocean Strategy as by creating a new market by offering the speed of air travel with the low cost and flexibility of driving. The three main aspect of Blue Ocean Strategy are as follows and how the Southwest Airlines applies these to its business: FOCUS: Southwest focus only on three factors: friendly services, speed and frequent point-to-point departures. They doesn’t make investment in meals, lounges and seating choice and able to price against car transportation DIVERGENCE: While the other Airlines operated through hub-and-spoke systems, Southwest Airlines doesn’t followed them instead created new rules and alternatives by choosing point-to-point travels between midsize cities. COMPELLING TAGLINE: A Good strategy has a clear cut and compelling tagline, which not only provides clear, cut message but also advertise...
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...Southwest CEO Rashanna Brown MAN103 September 13, 2013 Jean Anderson Southwest CEO The different cultures at southwest airlines that are displayed is, they are always being very serious and cautious about keeping their coast down, they are committed to provide their employees a stable work environment with equal opportunity for learning and personal growth. Southwest airlines are dedicated stated in their mission to high quality customer service delivered with warmth, friendliness, individual pride, and company spirit. None of their employees has ever gone on strike. Southwest Airlines leads industry in on time performance. Through the year 2002 their stock prices has increased for the preceding ten year period. One of southwest missions was to always be dedicated to the highest quality of customer service. The effective skills that Kelly possess that makes him an effective leader is he shows the customers that he care by talking to them and also remembering all the employees names. Kelly always makes sure things are done in an orderly fashion, not only for his benefit, but for the benefit of the company, employees, and customers. Kelley treats his customers as king and queen, but he treats his employee’s even better than the customers, that is a true team leader and in this conclusion Kelly also does things to save the airline money by locking up fuel hedging contracts that results in paying less for jet fuel than competitor airlines. Some of Southwest Airlines’...
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...Education | SouthwestCEO As the big oil companies are reporting big profits, lately airlines are facing some very big bills. The soaring price of fuel has forced the hand of some discount carriers who's business model is based on low fares. JetBlue, AirTran, Spirit, and Southwest Airlines have all up their fairs. In some instances, even making them higher than the major carriers on some of those roots. In this week's destination CEO, Jeff Flock, sat down to talk with the man of the controls of Southwest Airlines, Gary Kelly, to find out how in these turbulent times he's able to keep his company at a safe cruising altitude and as the most profitable airline in the country. Thank you, Gary. How are you doing, Kevin? Gary Kelly may not know the names of all 32,000 Southwest employees-See you, Troy. --but walk with him through the airlines, Love Field home base in Dallas. Althea, I'm Gary Kelly. And you get the impression he knows most of them. Jimmy, how you doing man? The 51-year-old Kelly and wife Carol are headed to their ranch near Austin for some rare R&R. Kelly always sits in the noisiest most cramped back row of the plane. The paying customers get the good seats and when he flies he likes to talk to them. I'm not a flight attendant. I'm just a guy that works in the office. The 6'3 former high school star quarterback was an Arthur Young accountant in 15 years as Southwest CFO he never sought the big job. I've never had any aspiration to be a CEO. 1 ...
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...Introduction: Southwest Airlines has carried more customers than any other U.S. airline for combined domestic and international passengers. Southwest Airlines is one of the world’s most profitable airlines, posting a profit for the 36th consecutive year in January 2009. Southwest has built a successful business on an unusual model: flying multiple short, quick trips into the secondary (more efficient and less costly) airports of major cities, using primarily only one aircraft type, the Boeing 737. Brief History Suppliers, Customers & Rivals: Customers include both residential and commercial sectors. There is no bargaining power for customers, as there is no threat of backward integration; it is unlikely that customers of Southwest Airlines are going to build their own airplanes and fly themselves. Rivalry among competitors sets the price-Southwest Airlines is a discount airliner. Rivalry is increasing, as the market decreases, and competitors downsize, the competitors become more or less equal in size and capacity. This means that as economic conditions worsen, competitors downsize and then compete for the same remaining market. Few of their main competitors are Continental Airlines and American Airlines. Substitute products include the train (Amtrak) and bus (Greyhound) which cover long distances. While these alternates cannot offer the speed of travel, most of Southwest Airlines' customers are attracted to the low price. *Key Success *Strategies of SWA: Organization...
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...one of the most competitive industries in the world. From its onset, Southwest Airlines has made significant inroads in pursuit of low fares. The organization has been determined to be the lowest cost airline in the industry for the selected routes that it flies. Considering their position, the question arises as to how they consistently remain more successful than their competition. The answer is not one that sheds light on one specific area, but a series of factors that, when combined, allow Southwest Airlines to shine above their peers. The goals of Southwest’s management within Southwest include keeping operations simple and consistent, maximizing assets, managing customer expectations, and keeping costs to a minimum. Management has achieved these goals by incorporating the following: 1. Using a One plane fits all philosophy. The competition operates many different jets to meet their missions. Southwest saves millions in inventories, training, maintenance, and other problems associated to non-commonality. This is in addition to having the ability to swap planes from one route to another. 2. Flying from one point to another. Other airlines use the common “hub and spoke” system, unlike Southwest, which flies from one point to another, non-stop. This reduces ground time and delays, while assisting with on-time performance. 3. Implementing a “no frills, no fees” policy. To keep cost to a minimum, Southwest sells seats in three price points. Prices are all inclusive and allow...
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...like. Southwest grows by entering new markets other airlines overprice and underserve. The company believes it can bring fares down by one-third to one-half whenever it enters a new market, and it expands every market it serves by making flying affordable to people who could not afford it before. Southwest currently serves 68 cities in 35 states, usually secondary cities with smaller airports that have lower gate fees and less congestion —another factor that leads to faster turnaround and lower fares. Another unique cost savings strategy is Southwest's decision to operate Boeing 737s for all its flights. This simplifies the training process for pilots, flight attendants, and mechanics, and management can substitute aircraft, reschedule flight crews, or transfer mechanics quickly. Jet fuel is an airline's biggest expense. According to the industry's trade group. Air Transport Association, jet fuel now accounts for 40 percent of an airplane ticket versus 15 percent just eight years ago. Southwest's biggest cost savings technique and competitive advantage has long been its program to hedge fuel prices by purchasing options years in advance. Many of its longterm contracts allow the airline to purchase fuel at $51 per barrel, a significant savings especially during the oil shocks of the 2000s that drove oil past $100 per barrel. Analysts estimate that Southwest has saved more than $2 billion with fuel hedging. Because lighter planes use less fuel. Southwest rriakeis ...
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...Southwest is an impressive organization because it’s the most flown airline within the United States and has been consistently profitable (Northouse, 2009). Southwest is ranked 205 in the Fortune 500 and their profits in 2011 were 459 million which exceeded their 2009 profits of 363.6 million (CNNMoney, 2011) Against industry problems and business pressures-air-traffic congestion, merger of rivals, stricter government regulations regarding aircraft safety and maintenance, and mounting customer dissatisfaction with airline service, Southwest has managed to continue climbing to the top. The company strategy from day one was to be an airline that pursued a low-cost/low-price/no-frills strategy. This strategy opened their market segment to a larger portion of the U.S population and gave the company their tag line “The Freedom to Fly” (Northouse, 2009). Southwest also known as “the love airline” first took flight in 1971. Herb Kelleher, initially a lawyer retained by the airline to get it off the ground, was running the place by 1978. The airline was initially known for sexy flight attendants in hot pants to gain attention before it became the leader in low cost fares. "You can have a low-cost carrier and people still don't fly it because they don't know about it," Kelleher said. "And so, the schtick kind of fit in with getting known" (CBSNEWS, 2012). The airline now employs 34,000 people, services 64 different facilities, owns 500 planes, and is the nation’s sixth largest airline...
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...Southwest Airlines in 2010 (pages 401-436) Gamble, J. E., Thompson, A. A., Jr., and Peteraf, M. A. (2013). Essentials of strategic management: The quest for competitive advantage (3rd ed.). New York: McGraw-Hill/Irwin. DISCUSSION QUESTIONS 1. What are the key policies, operating practices, and core values underlying Southwest’s efforts to implement its low-cost/no frills strategy? In order for Southwest Airlines to implement its low-cost/no frills strategy, they charge the lowest price possible to make air travel affordable to a wide segment. The lowest fares were usually nonrefundable but could be applied to future travel on Southwest Airlines, while rival airlines charged a change free of $100 to $175. Southwest Airlines also implemented the “Bags Fly Free” policy. Other airlines were charging up to $120 round trip to check bags due to the increase in jet fuel costs, but Southwest chose to let fliers check bags for free, which resulted in a company-record load factor. Southwest also uses dynamic pricing to charge more during peak travel periods. Southwest was able to experience revenue gains from increased ticket sales and passenger traffic. Southwest does not use the hub-and-spoke route systems of rival airlines and instead uses point-to-point scheduling. This allows Southwest to minimize the time aircraft is at the gate to 25 minutes. Southwest’s point-to-point route system minimized connections, delays, and total trip time. Southwest also has no assigned...
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...Strategic Report for Southwest Airlines Tycen Bundgaard John Bejjani Edmund Helmer April 12, 2006 Table of Contents EXECUTIVE SUMMARY............................................................................................... 3 COMPANY BACKGROUND ....................................................................................... 6 PORTER’S FIVE FORCES............................................................................................ 10 MARKET DEFINITION .............................................................................................................. 10 INTERNAL RIVALRY ................................................................................................................. 11 ENTRY ....................................................................................................................................... 12 SUBSTITUTES AND COMPLEMENTS ........................................................................................ 14 SUPPLIER POWER ..................................................................................................................... 15 BUYER POWER .......................................................................................................................... 18 FINANCIAL ANALYSIS.............................................................................................. 19 OPERATION FINANCIALS .................................................................................
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