High Fare Leader?

[insp89]

Simple question then...if Southwest "sets" a fare of say $200 on a route, and they have these fuel hedges that are eating away profits of other airlines...what's the theory behind those airlines charging $150 for the same trip?

Simple Answer, These other airlines are evidently able to make a profit at that fare level, [Thanks to the crooked bankruptcy courts],
Due to the rising costs at Southwest [erosion of fuel hedges], I would say that Southwest can no longer make a profit at the $150.00 fare in your above example.

 

[BuffaloJoe]

Simple Answer, These other airlines are evidently able to make a profit at that fare level, [Thanks to the crooked bankruptcy courts],
Due to the rising costs at Southwest [erosion of fuel hedges], I would say that Southwest can no longer make a profit at the $150.00 fare in your above example.

Back in 1983 I flew PHL-LAX for $338 RT and that was a good price at the time.

 

[KCFlyer]

Simple Answer, These other airlines are evidently able to make a profit at that fare level, [Thanks to the crooked bankruptcy courts],
Due to the rising costs at Southwest [erosion of fuel hedges], I would say that Southwest can no longer make a profit at the $150.00 fare in your above example.

More than one airline has been thru bankruptcy more than once. I think that's partly because they CAN'T make a profit at $150, but somehow feel that leading in market share equates to leading in profits. It doesn't. Here's the thing...Southwest makes a profit and has fares that are no higher than $339 one way. Other airlines couldn't make a profit when their highest fares were 4 to 5 times that much one way. That tells me that they were filling their cabins with far too many $150 fares, and not enough $1000 fares. But...even if Southwest raises fares - have they raised them enough to take the title of "high fare leader"? Or is it simply doing what it takes to insure profitability. I mean...Southwest flies you one way on a fully refundable fare from BWI-LAS for $339. An unrestricted ticket on AA is $864, and an unrestricted ticket on the new "low fare leader" UAL is $516. So...who is the "high fare leader"? Damn man...first SWA is 'dragging the industry down'...now they are the "high fare leaders". You'd think someone could make up their minds.

 

[boxer]

Reminds me of the guy selling silver dollars for fifty cents. When asked how he expected to make a profit, he said "Volume, volume, volume".

That was the point of my post.

 

[ramper_in_las]

Damn man...first SWA is 'dragging the industry down'...now they are the "high fare leaders". You'd think someone could make up their minds.

 

[insp89]

More than one airline has been thru bankruptcy more than once. I think that's partly because they CAN'T make a profit at $150, but somehow feel that leading in market share equates to leading in profits. It doesn't. Here's the thing...Southwest makes a profit and has fares that are no higher than $339 one way. Other airlines couldn't make a profit when their highest fares were 4 to 5 times that much one way. That tells me that they were filling their cabins with far too many $150 fares, and not enough $1000 fares. But...even if Southwest raises fares - have they raised them enough to take the title of "high fare leader"? Or is it simply doing what it takes to insure profitability. I mean...Southwest flies you one way on a fully refundable fare from BWI-LAS for $339. An unrestricted ticket on AA is $864, and an unrestricted ticket on the new "low fare leader" UAL is $516. So...who is the "high fare leader"? Damn man...first SWA is 'dragging the industry down'...now they are the "high fare leaders". You'd think someone could make up their minds.

KC,
As I have said before, I do not like the way airlines use bankruptcy as their tool to get out of their obligations to employees and creditors, any more than you do.
But we must face reality, The so called "legacy" carriers that have been thru bankruptcy and are preparing to exit soon, are in a much better position to compete in this highly competitive industry.[Even American was successful in lowering their labor costs at the mere threat of filing for bankruptcy protection].
Personally, I prefer the way Southwest prices their product, but in this capitalistic society in which we live, airlines are free to charge what the market will bear.[Supply and Demand].
I don't take much stock in some of the labels that are thrown around, "low fare leader", "high fare leader", "dragging the industry down".
Bottom line, the legacy airlines are beginning to be successful at making profits off the backs of labor and creditors.

 

[KCFlyer]

Bottom line, the legacy airlines are beginning to be successful at making profits off the backs of labor and creditors.

But I tend to agree with Gary Kelly...when those same airlines start showing consistant profits...that same labor force that was bent over without benefit of vaseline are going to want a share of those profits.

 

[whatkindoffreshhell]

Nonsense ?

Don't get me wrong, Southwest is a well managed company, but what you consider "whining" is nothing more than people being able to accept the reality that Southwest is losing it's ability to set the fares in this country, due to their eroding fuel hedges.
Southwest's "market position" is not the same as it once was.

Yeah, the people are very upset indeed at this reality. WTF??

When legacy mgmt & labor were fat & happy on ridiculous fares they didn't give a hoot about WN nor would any of them work there.

Now that the market has inevitably corrected itself you guys are going to blame WN for fuel hedging?

Yeah, riiiiiiight.....

 

[Rhino]

Let's view this intelligently.

When SWA raises fares, they stick. Why?

Where do legacy profits come from? Domestic or international? Why?

Wait til SWA starts flying int'l.

Only a moron would short LUV.

 

[insp89]

Yeah, the people are very upset indeed at this reality. WTF??

When legacy mgmt & labor were fat & happy on ridiculous fares they didn't give a hoot about WN nor would any of them work there.

Now that the market has inevitably corrected itself you guys are going to blame WN for fuel hedging?

Yeah, riiiiiiight.....

I don't "Blame" Southwest for fuel hedging.
Who are the "very upset" people that you are talking about ? WTF ?

 

[insp89]

Let's view this intelligently.

When SWA raises fares, they stick. Why?

Where do legacy profits come from? Domestic or international? Why?

Wait til SWA starts flying int'l.

Only a moron would short LUV.

SWA's fares "stick" because this is a supply and demand market we live in..
You should be asking WHY is WN raising fares ?

Can't speak for all "Legacy Profits", That's a very broad spectrum, But Usairways does not have that large of a International Presence, So I would say that their profits are mainly Domestic.

I did'nt realize WN had any wide body aircraft on order, or are they planning to fly from Philly to London in a 737?

Only a moron would keep his head in the sand when it comes to WN's Fuel Hedging Erosion.

But I tend to agree with Gary Kelly...when those same airlines start showing consistant profits...that same labor force that was bent over without benefit of vaseline are going to want a share of those profits.

KC, Kelly IS right, The problem is that there are long range contracts in place that will keep these employees and at bay for 4-5 more years.
By that time, The line will be Blurred between so called "legacy" and "low cost" carriers.

 

[sfb]

SWA's fares "stick" because this is a supply and demand market we live in..
You should be asking WHY is WN raising fares ?

SWA's fares stick because even with a diminished advantage due to hedging, they are still the lowest-cost producer in the industry.

In 2006, SWA's ASM cost, excluding fuel, was 6.49 cents. Even with higher pay rates for employees, that was an increase of just 1.3% over 2002's ASM cost, excluding fuel, if 6.41 cents.

US Airways claims to be a "low-cost carrier," and yet, their ASM cost in 2006, excluding fuel and special items, was 7.55 cents -- over 16% higher than WN. If one were to adjust for stage length, the comparison would be even more skewed in WN's favor, given that the US/HP average stage length was 49% higher than WN's.

WN can afford to pay its employees more because its employees are just more productive. WN had 0.6% more employees at year-end than US/HP -- but they generated 20% more ASM's for the year.

I did'nt realize WN had any wide body aircraft on order, or are they planning to fly from Philly to London in a 737?

Well, so far, they haven't needed to fly internationally to post operating margins above 10%. But I wouldn't be surprised if the 737 replacement could manage BWI/PHL/ISP/PVD/MHT-Europe. (Actually, I wouldn't be surprised if they were in NYC and BOS at that point, either).

Only a moron would keep his head in the sand when it comes to WN's Fuel Hedging Erosion.

But only a moron continues to ignore the structural cost advantages WN continues to enjoy over virtually all (if not all) of its competitors. They pay cash for their new 737's, have an investment-grade credit rating (which has helped them to hedge fuel), and have very little debt. Their employees are extraordinarily productive and they typically use their facilities more efficiently than other airlines.

KC, Kelly IS right, The problem is that there are long range contracts in place that will keep these employees and at bay for 4-5 more years.
By that time, The line will be Blurred between so called "legacy" and "low cost" carriers.

Well, I suppose what you have to ask yourself is whether the "legacy" carriers will try to use the next "4-5 more years" to shore up their balance sheets or to get into fare wars with WN. You also seem to forget that WN remains well-hedged through 2009 and has hedge contracts in place through 2012.

The other airlines are welcome to try to undercut WN if they choose to.

 

[insp89]

SWA's fares stick because even with a diminished advantage due to hedging, they are still the lowest-cost producer in the industry.

In 2006, SWA's ASM cost, excluding fuel, was 6.49 cents. Even with higher pay rates for employees, that was an increase of just 1.3% over 2002's ASM cost, excluding fuel, if 6.41 cents.

US Airways claims to be a "low-cost carrier," and yet, their ASM cost in 2006, excluding fuel and special items, was 7.55 cents -- over 16% higher than WN. If one were to adjust for stage length, the comparison would be even more skewed in WN's favor, given that the US/HP average stage length was 49% higher than WN's.

WN can afford to pay its employees more because its employees are just more productive. WN had 0.6% more employees at year-end than US/HP -- but they generated 20% more ASM's for the year.
Well, so far, they haven't needed to fly internationally to post operating margins above 10%. But I wouldn't be surprised if the 737 replacement could manage BWI/PHL/ISP/PVD/MHT-Europe. (Actually, I wouldn't be surprised if they were in NYC and BOS at that point, either).
But only a moron continues to ignore the structural cost advantages WN continues to enjoy over virtually all (if not all) of its competitors. They pay cash for their new 737's, have an investment-grade credit rating (which has helped them to hedge fuel), and have very little debt. Their employees are extraordinarily productive and they typically use their facilities more efficiently than other airlines.
Well, I suppose what you have to ask yourself is whether the "legacy" carriers will try to use the next "4-5 more years" to shore up their balance sheets or to get into fare wars with WN. You also seem to forget that WN remains well-hedged through 2009 and has hedge contracts in place through 2012.

The other airlines are welcome to try to undercut WN if they choose to.

sfb,
WN's fares stick because, like you said, they STILL have a big fuel cost advantage today, even though it is eroding.
Please tell me why WN is finding it necessary to raise fares.
I have no doubt that WN's employees are productive, But I don't believe they are a super human race.
The reason WN pays their employees well may have something to do with, union contracts ?
I am not a cheer leader for Usairways management, But some of your numbers you use can be misleading.
For example, WN outsources more of their maintenance than U,which skews your numbers, if you [Fairly] want to compare U to WN, You would have to include the outsourced employees that work on WN's aircraft in your numbers. U and WN are very different airlines.
Also U operates more than one type of aircraft, which drives costs up, but also allows U to fly international.
While it is more "efficent" to fly only the 737 family of aircraft, it limits WN due to range.
You seem to be fixed on the "cost" side of the equation,what about the "revenue" side?
Only a "moron" looks at only one side of the equation.[BTW, I don't like calling people "morons", but if thats the way it is, so be it. 😉

 

[Rhino]

I said that only a moron would short love, Insp89. I doubt that includes you, so relax.

The intuitively obvious reason that WN raised fares was to increase revenue. WN's business plan has a goal of 15% operating margin. WN's costs have gone up (employee compensation, less hedges, etc.) disproportionately to the fare structure.

WN's fare hikes stick, if you don't know why, then you really know little about the industry and how it works, as indicated by your posts. But simply put, WN can set a city-pair price where they make a profit and nobody else can because their costs are lower. So when WN raises fares, the OALs are happy to join in. They then make a ltttle more or lose a little less, depending on city/carrier.

As far as int'l goes, there is a lot of 737 int'l flying already. Much of it at premium fares.

 

[sfb]

sfb,
WN's fares stick because, like you said, they STILL have a big fuel cost advantage today, even though it is eroding.

But... it's not just fuel. It's everything else, too.

Please tell me why WN is finding it necessary to raise fares.

Rhino answered it just as well as I could; they have earnings growth targets that they've set, and they need to nudge the fare levels up to get there. Bumping up fares by $10 on longer stages works out to be an increase of 3-10%.

I have no doubt that WN's employees are productive, But I don't believe they are a super human race.

It has nothing to do with them being super-human; the company's processes are geared toward having them work efficiently, and they are well-trained. You don't need as many people to run the WN operation in, say, PHX (even with a comparable number of mainline departures) because they don't operate a banked hub. They need to lease about half as many gates as US for a similar number daily mainline flights.

The reason WN pays their employees well may have something to do with, union contracts ?

And the network airlines have union contracts; your point being?

I am not a cheer leader for Usairways management, But some of your numbers you use can be misleading.
For example, WN outsources more of their maintenance than U,which skews your numbers, if you [Fairly] want to compare U to WN, You would have to include the outsourced employees that work on WN's aircraft in your numbers. U and WN are very different airlines.

True, but you'd need to include all the IT and reservations functions which US & HP have outsourced as well. And the outsourced ground handling, cleaning, etc. where those occur.

Also U operates more than one type of aircraft, which drives costs up, but also allows U to fly international.
While it is more "efficent" to fly only the 737 family of aircraft, it limits WN due to range.
You seem to be fixed on the "cost" side of the equation,what about the "revenue" side?

The whole point is that WN's cost advantage (going beyond just fuel) allows them to control the revenue side in markets where they compete head-to-head. Southwest will choose to price at levels where they can make a profit and allow other airlines to choose if they want to try to burn money by getting into fare wars.

When WN initiates a fare increase and everyone marches in lock-step with them, they control the revenue side of the equation. When other airlines initiate fare increases, they almost always exclude markets where WN competes -- because WN controls the revenue side.

Only a "moron" looks at only one side of the equation.[BTW, I don't like calling people "morons", but if thats the way it is, so be it. 😉

I quoted you directly from your statement that "Only a moron would keep his head in the sand when it comes to WN's Fuel Hedging Erosion."