The Economy

Fuel? You want the planes to have fuel now? Ha! As if the entire global economy isn’t a chimera built on lies and unicorn wishes. Nobody has really been able to afford a tank of fuel since we went off the gold standard. Only when every last plane goes nose down into a box canyon can we begin to readjust and unwind this irrational expectation everyone who makes less than me has that they should live under a roof supported by four walls and not dine on the maggots crawling out of their open sores! Fools! If only they would listen.

 

At the risk of triggering Ragu, I'd put at least some part of it on Wall Street's becoming fixated on meeting the profit predictions for the next quarter, perhaps two, to the detriment of long term strategic planning and investing in R&D. Between top executive's concern with their bonus and stock options and the mantra of "we owe it to our stockholders to maximize profits" (which I can't help but suspect is at least in part a pious justification for focusing on their own personal bonus, stock options, and buying back stock which helps both) , investment in that aspect of running a business has become far less emphasized than in the past.

Note that I responded to this before seeing Ragu's posts further down this page from Azrael's quote and that I wasn't thinking about SWA. I understand that funds are spent on research without any guarantee of ROI, but there are many cases of unexpected discoveries catching lightning in a bottle to a company's benefit and profit. Cutting that budget helps the bottom line in the short term but makes developing such new products and techniques much less likely to lift a company's future prospects.

 

Southwest Airlines reported 13.7 billion dollars in cash at the end of Q3. They can come up with a billion for a new computer system.

Airline earnings have fluctuated a lot over the last couple years due to the pandemic and the government subsidies that airlines such as Southwest received. But in the years before the pandemic Southwest was earning over two billion dollars a year. In 2019 Southwest earned 2,3 billion after tax and the company decided to buyback two billion dollars of shares.

As long as country has publically held companies there will be pressures on management to increase earnings. I think what happened at Southwest is that they were holding their systems together with shoestrings. Since the systems worked the company kept procrastinating on upgrading systems and instead allocated capital in ways that more visibly and immediately increased earnings per share. But what happens is that if the company keeps growing operations become more complex and the shoestrings on the system break. That is what happened at SouthWest. t will not be the first or last time that occurs.

 

Southwest's computer problems align with Boeing's 737 Max catastrophe. That's what happens when Big Aviation (and other business) is allowed to essentially self-regulate.

 

Yeah, but the bottom line is that SWA's business model requires precise scheduling of planes and aircrew to maximize time that the planes are in the air and moving their customers. There are multiple ways to keep track of the location and availability of both planes and employees, and SW has not bought into any of them. The fact that their aircrew was calling in to give their location and availability and to get direction on where and when the company wanted them and spending as much as six to eight hours on the phone holding says that these systems have been neglected severely.

You want to talk about cash on hand versus liabilities? How much money in making their customers whole and future ticket sales did that incident cost them in a day?

 

I’ll make sure to bring it up next time we play racquetball at the club. Meantime, is it still OK if people say things on a message board?

 

Sigh.

 

It's OK.

 

We're so sorry Uncle DocQuant
But the kettle's on the boil
And we're so easily called away

 

Southwest has a cash position of 13.7 billion dollars. Current liabilities are 10 billion but about half of that is the liability generated from their frequent flyer program. Unless it violates debt covenants it should have the ability to draw down at least some of that cash. I don't think it is in risk of violating covenant because it just restarted its dividend that they suspended for the pandemic (the government required them to suspend the dividend to receive pandemic aid.)

Airlines have been battered by the pandemic and Southwest hs not completely recovered. They have about three billion dollars of debt due in 2025 that carries an average interest rate of about 3.25%. If they refinance at 9.25% annually in 2025 that would only cost about 200 million a year against a when they currently are booked a billion dollars of earnings pretax through the first three quarters of 2022.

I understand you point about cheap money causing corporations to make crazy decisions and pay their dividend with additional debt. GE may be the most prominent example. And perhaps Southwest has reached a stage where it will no longer grow rapidly. But I think they are still a solid company generating enough of a profit to reinvest in their business and roll over their debt.