Blog Post #3: Southwest Commodities Trading

Blog Post #3: Southwest Commodities Trading

One of the most important inputs a company like Southwest worries about outside of paying it's employees is paying for jet fuel. I'm interested in Southwest's commodities trading tactics because using the proper investing strategies can be what separates companies in the airline industry from each other. Much of Southwest's success and stability depends on the companies ability to hedge for the lowest fuel/oil prices possible. Just to be clear, a commodities hedge fund buys and sells commodities such as oil. The way Southwest's hedge fund group invests depends on what they think oil prices will do in the future; if they think prices in the future are going to be higher, they buy sooner rather than later, and on the other hand, if they think prices will be lower in the future they buy later rather than sooner (called a "long"). Also, the investing party can sell futures ("short") in the future if they predict that the market price for oil will go up in order to make profit. To insure against a loss in the hedge fund industry there are a number of risk spreading techniques companies use. The risk in this dynamic has to do with the price you pay in a futures contract. The contract negotiates the price the company pays for its oil and the price it sells at. If hedge fund managers for Southwest are successful, they will have negotiated prices that purchase the rights to oil in the future at a lower price than the actual market price will be. The cheaper oil price that's established can help lower costs for the company or it can generate profits from shorting at a price that is favorable.

 http://images.bidnessetc.com/img/960-crude-oil-trading-low-on-monday.jpg

How Southwest preforms in the hedge fund industry influences its stock value tremendously and selling stocks to investors is very important when it comes to being able to compete against other companies. Making an investment opportunity more marketable is dependent on what people think other investors will think the stock is worth in the future, and a great way to keep investors optimistic is to have a hedge fund group that preforms well and gets the companies commodities for the cheapest possible price.

 

http://media.ycharts.com/charts/e10af075590920fca1905d9924af1d92.png

- http://marketrealist.com/2015/10/wall-street-think-southwest-airlines/ 

In the link above, we can see how Southwest's stock value is effected by its trading performances. Santiago Solar, the author of the article in the attached link, explains that the trading price for a stock in Southwest has the potential to grow by 34%. He also explains that of 20 wall street annalists covering southwest stock, 13 of them have rated it as "buy" and only three have rated it a "sell".

Marketing a investment opportunity is a tricky game because, how valuable the investment is, is completely dependent on the value of the company of interest as well as what people predict the company's value will be in the future. Given this, we could say that Southwest's hedge fund managers influence the sale of investments as much as the companies marketing department does.

 

 Scott Topping named Executive VP of Finance at Southwest

http://www.ksbe.edu/imua/article/scott-topping-named-executive-vp-of-finance/

Here's another interesting article about how Southwest is doing.
 http://www.nytimes.com/2007/11/28/business/worldbusiness/28iht-hedge.4.8517580.html?_r=0