Southwest Sells Five Planes, Will Lease Them Back

[Matt Molnar]

Southwest sells aircraft, modifies fuel hedges

The Associated Press December 24, 2008, 9:04AM ET

By HARRY R. WEBER

ATLANTA

Discount carrier Southwest Airlines Co. sold five aircraft for $175 million and agreed to lease the planes back from the buyer for 12 years.

The Dallas-based airline also modified its fuel hedge portfolio to limit its exposure from falling oil prices. [Full Article]

[Matt Molnar]

Some people on other boards are screaming that this is a "desperate" move and the beginning of the end for Southwest. Baloney. I did some math.

Credit is still frozen despite the President's claims that it is "thawing." Even behemoths like GE are paying 10% or more to borrow cash.

Based on the first 6 months of lease payments totaling $7.8 million, total payments would add up to $187,200,000. If this were a loan, that would be around 8% interest.

But wait: the payments are reassessed every six months. It's reasonable to expect that as credit becomes cheaper and these planes get older, the payments will decrease. Southwest's total cost for this cash infusion might end up being 5%-6% of the sale price. Not bad under the circumstances.

[T-Bird76]

Sale and lease backs are common in every industry. The fuel hedges are what are going to hurt the airlines in the coming quarters. They hedged at such high prices (compared to what oil is now) that these hedges are huge risks to their bottom line. WN is in a transition state right now. They know if they are to compete they need to change their model to capture revenue streams that weren't open to them in the past, hence the LGA move. WN has the muscle to enter markets like this and make a profit.