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I've admittedly not done extensive research, this is mostly from memory, so if someone else remembers differently please correct me. BUT - the reason Southwest
by tw04 9y ago
I've admittedly not done extensive research, this is mostly from memory, so if someone else remembers differently please correct me.
BUT - the reason Southwest was the "low fare" leader was because they locked in fuel prices back before we had the massive spike in prices in the early 2000s. That gave them a tremendous advantage over the other airlines given fuel is such a massive part of their overall costs. That combined with standardizing on a single plane (less impactful but still helpful) allowed them to both claim and honor the "low-cost leader" title.
Now that fuel prices have returned to a more "normal" state, their prices had to revert to the mean. They may be cheaper on some legs, but it's not universal anymore.
- brianwawok 9y agoIts worse than that. A hedge on oil price is a bet on the way it will swing. When oil prices went up, Southwest got to make record profit. When oil prices went down, Southwest got to make record losses. Southwest also just offers no service to many unprofitable markets. If Southwest were the only carrier, many smaller airports would shut down. There would be maybe 40 larger airports, with high volume flights.
- Retric 9y agoSouthwest has been profitable for the last 43 years: http://investors.southwest.com/news-and-events/news-releases/2016/01-21-2016-112617923 http://investors.southwest.com/news-and-events/news-releases... So, if by record losses you mean lower profit than normal then sure they got hammered in 2008.
- brianwawok 9y agoYes it was a bit in jest. But the same amount they save as price goes up, they lose when the prices go down. And yes stability is good, but it's not as big of a deal as ppl make it out to be
- Retric 9y agoHedging can be a net win. A simple example suppose if price of commodity increases by x your company fails and that has say a 10% chance of happening. If you usually profit 10 billion per year and you can hedge for say 1 billion per year then money wise it seems like a break even. However, failure costs not just this years profits, but every year after that. So, your expected profit over the next 10 years increases even if the hedge does not save you any money over that same 10 years.
- dude_no_come_on 9y ago"A bit in jest"? You made a strong and easily falsified statement. Why is it so many people on this message board are incapable of admitting they're wrong?
- ssanders82 9y ago"A hedge on oil price is a bet on the way it will swing." Well I mean it's implemented that way (buying long-term futures) but it's really just locking in a set price. Oil prices skyrocketing doesn't make them infinite money, because they have to either take contract delivery at the price they originally bought at, or use their futures profits to buy at the spot market. In the same way, falling oil prices doesn't cost them huge amounts of money, they just won't be able to take advantage of the fall in prices like a non-hedged carrier would. I assume they try their very best to hedge to actual predicted usage and not try to profit from swings either way. If they could do that they'd be better off running a hedge fund.
- gommm 9y agoAnd this is what happened with Cathay Pacific who lost a lot when oil prices went down...
- echaozh 9y agoWell, why shouldn't some small airports close if they're not profitable?