Macroeconomic Forecast

Macroeconomic Forecast Component

Oil Prices:

Oil constitutes a major expense for Southwest airlines. Southwest Airlines also involves in hedging of fuel to save costs in the long runs. Hence this is very important indicator on performance of the company.

Figure 1 Oil Prices Forecast- Source EIA

Looking at the Annual Energy Outlook (AEO) provided by the department of energy as shown in Figure 1 above, there is lot of uncertainty in the prices. All projections indicate rise in the prices. However in the AEO the forecast varies by as much as $150.

Figure 2 Oil Prices Forecast- Source EIA

The global oil market projections in the AEO2012 Reference case are based on the assumption that current practices, politics, and levels of access will continue in the near to mid-term. The Reference case assumes that continued robust economic growth in the non-Organization for Economic Cooperative Development (OECD) nations, including China and India, will more than offset slower growth projected for many OECD nations (U.S. Energy Information Administration, 2012).

The short term outlook projects the prices to remain more or less stable. EIA projects that crude oil prices will remain near their current lower levels through 2013, resulting in regular gasoline retail prices averaging $3.49 per gallon in 2012 and $3.28 per gallon in 2013.

For Southwest Airlines it is difficult to offset the cost of rising fuel prices by directly passing those prices to the consumers by raising the prices because of highly competitive nature of the industry. Due to this reason to prevent huge swings in the operating expenses and the bottom line profitability the company involves in fuel price hedging. To effectively hedge the prices the company needs to get the forecasts correct. In the past Southwest Airline has been very successful in hedging these prices in past resulting in huge savings for the company.

Reference

U.S. Energy Information Administration. (2012). Annual Energy Outlook 2012....