Ny Times Article

[ClueByFour]

According to an article in today's NY times, Southwest's lucrative fuel hedging will be cut by
one third in 2006, and it will add 500-600 million dollars to cost, erasing the 313 million dollar profit in
2004, and expected 400 plus in 2005.

Welcome to the real world?

It says 500 million bucks to the bottom line.

They fly about a million trips a year (or probably will next year). 1 million flights.

They need 500 additional dollars in revenue per flight. They traditionall run a %70 load factor (although even that's going up--but we'll assume with their growth plans it remains around %70). That means (if you discount the 25 or so planes that seat 122), they are filling around 96 seats/flight.

That's roughly a five dollar increase in every fare. Since LUV basically dictates what the bottom fare is in any case, and usually raises fares $1-$3 oneway periodically, I'd say that the solution is a whopping $5 fare increase.

Two increases of $3 if it's closer to $600 million or if they really go nuts. That solves the problem, excluding any additional revenue growth or cost out.

Let's keep things in perspective before predicting Southwest's demise.

 

[wnbubbleboy]

You can't understand why people who have had to have their wages cut 50-100% in order to compete with a carrier who decided it would charge $39 for a ticket? The airline didn't charge 20% less. The airline didn't charge 50% less. In many cases it charged 75% less than the incumbents, and due to it's ability to gain market mass it eroded the profitability out of the entire industry to the point that what little there is to be made is being made by that one airline. Even if the incumbent airlines had thrown out all their union contracts and slashed their costs overnight, the people who worked there would still feel the way they do today.

You are confusing our sucess with a business plan that works to one that does not. Metro Jet for example was the brain child of U's management. How is it our fault if failed? We did what we do everyday, nothing changed when MJ started up or while it operated. Yet it failed.

Mismangament, poor comunication, and a disconnect between upper management and the frontline people are their downfall. We haven't had that here and that why we excel.


The so-called "Southwest effect" is to train the traveling public that they don't have to pay more than $99 for a flight. Which, if you only want to fly in 737's to less then 70 cities only in the continental US and with limited non-stop service, and you can pay 50% less than everyone else for fuel, maybe under those circumstances you can justify ruining the industry with cheap tickets. But many airlines have higher costs related to providing a wide variety of services from international to small-city service. But those airlines are seen as robber-barons who rip off customers with astronomical fares. One only has to look at the historically thin profit margins the airline industry has lived with, to see that these fares were in line with the cost of production.

Forward thinking by our management team is why we pay less for fuel, paid for in advance with Southwest Cash not through bankruptcy but by profits. Nobody gave us this advatage. We paid for it the old way we earned it. We don't provide international service it's not our bag baby, again not our problem.

But quite a few folks thought that airline people were overpaid and they applied to work for less at Southwest. Now the wages they were willing to work for have become the high water mark of industry wages and you still can't understand why some people harbor ill will towards Southwest? Be proud of your success, but realize that you didn't win the game, you changed it. It went from basketball to football and the 300lb linemen you sent in decimated the other team. Blame the management for failing to adapt? Partially. But a fair measure of blame for this industry's woes can be placed at the feet of a competitor who decided to unilaterally change what airline fare pricing would be.

Starting over is tough. I was out of a job several times while others over at brand X were safe and secure never thinking of giving back money or losing their job. Now it's a problem though now that people you know or maybe even your self have been affected, T.S. get over it and move on. We are all responsible for our own lives. The game hasn't changed we are the Shaq of the airline industry learn how to play against us.

While a mature industry doesn't need or deserve any regulatory protection, what Southwest did to the industry is precisely why the airlines were regulated in the first place. Now there is insufficient profit industrywide to stimulate investment or much technological advancement. If there was a Southwest 50 years ago, we would still be flying in Convairs and DC-3's.

Why do you think Boeing Built the -700? We needed it. Change will always be driven by profit. Your argument here is flawed.

So in closing be proud of what you've accomplished, take the blame for what you've caused and realize that you can't be the hero to those you've vanquished.

I see hero's here. I respect the things they do everyday. I take offense though when some openly hopes for our demise. Never once after being laid off three times did I ever hope ill will toward a company that my freinds worked at. Waiting for failure to happen to us though is kind of morbid. Shame on all of you who feel that way.

 

[luver41]

It says 500 million bucks to the bottom line.

They fly about a million trips a year (or probably will next year). 1 million flights.

They need 500 additional dollars in revenue per flight. They traditionall run a %70 load factor (although even that's going up--but we'll assume with their growth plans it remains around %70). That means (if you discount the 25 or so planes that seat 122), they are filling around 96 seats/flight.

That's roughly a five dollar increase in every fare. Since LUV basically dictates what the bottom fare is in any case, and usually raises fares $1-$3 oneway periodically, I'd say that the solution is a whopping $5 fare increase.

Two increases of $3 if it's closer to $600 million or if they really go nuts. That solves the problem, excluding any additional revenue growth or cost out.

Let's keep things in perspective before predicting Southwest's demise.

Logical thinking will only confuse these guys.

 

[luvn737s]

The jet doc is gone code blue again. CLEAR!

The point of the post (since I'm forced to repeat myself) is that Southwest chose to charge so little for it's fares that it changed the public perception of what airfares should be. Not just domestic fares between 65 cities, but airfares in general. The cost of providing services that major airlines provide (regional service, international, connecting luggage, etc. ) is higher than the product WN provides and it is spread over the entire operation. Thus their fares will and should be higher. But Southwest chooses to view and promote these rational fares as rip-offs to the travelling public. To meet an unreasonable perception that all fares everywhere should be $39, major airlines have gone through a debilitating transformation to try and become something they really shouldn't be. Thus the animosity between employees of every gutted airline and the smug folks of Southwest.

Don't try to hide behind the "Lil' ol' Southwest" cover, it makes you look ridiculous.

Are you ready to call time of death (to your weak argument), doctor?

It says 500 million bucks to the bottom line.

They fly about a million trips a year (or probably will next year). 1 million flights.

They need 500 additional dollars in revenue per flight. They traditionall run a %70 load factor (although even that's going up--but we'll assume with their growth plans it remains around %70). That means (if you discount the 25 or so planes that seat 122), they are filling around 96 seats/flight.

That's roughly a five dollar increase in every fare. Since LUV basically dictates what the bottom fare is in any case, and usually raises fares $1-$3 oneway periodically, I'd say that the solution is a whopping $5 fare increase.

Two increases of $3 if it's closer to $600 million or if they really go nuts. That solves the problem, excluding any additional revenue growth or cost out.

Let's keep things in perspective before predicting Southwest's demise.

Two problems:

1) The wall street expectation of profitability. Once the mighty SW begins to show signs of weakness, the vultures start circling. The downward momentum is far more difficult to arrest than the upward is to create.

2) Competiton. As other airlines continue to cut fares matched to WN by $5-6 Southwest will have an even harder time driving people to it's website or res number and raising fares by this amount JUST TO BREAK EVEN. This may force them to compete in the world of Travelocity, etc. which could be disasterous.

Also, promised growth (especially domestic-only growth) in a slowing economy could be hard to live up to, exacerbating the missed-expectations problem of #1 above.

 

[KCFlyer]

The jet doc is gone code blue again. CLEAR!

The point of the post (since I'm forced to repeat myself) is that Southwest chose to charge so little for it's fares that it changed the public perception of what airfares should be. Not just domestic fares between 65 cities, but airfares in general. The cost of providing services that major airlines provide (regional service, international, connecting luggage, etc. ) is higher than the product WN provides and it is spread over the entire operation. Thus their fares will and should be higher. But Southwest chooses to view and promote these rational fares as rip-offs to the travelling public. To meet an unreasonable perception that all fares everywhere should be $39, major airlines have gone through a debilitating transformation to try and become something they really shouldn't be. Thus the animosity between employees of every gutted airline and the smug folks of Southwest.

Don't try to hide behind the "Lil' ol' Southwest" cover, it makes you look ridiculous.

Hmmm...You're right...when Southwest came into the MCI market, they said "Do you really need to pay $500 to fly a 500 mile round trip?". The answer was a resounding "no". And that is the walk up fare that was in the market when TWA owned the market. Today, a last minute round trip costs you about $150. My calculator shows that's about 30 cents a mile...could your airline not turn a profit at that rate? The absolute cheapest fare you can get on Southwest is $63 (before taxes and fees)...that's 12 cents a mile...still above even YOUR old CASM numbers. So yeah...those fares are(were) a ripoff.

1) The wall street expectation of profitability. Once the mighty SW begins to show signs of weakness, the vultures start circling. The downward momentum is far more difficult to arrest than the upward is to create.

True enough. But I believe that Southwest proactively looks for ways to KEEP costs down instead of taking a reactionary stance to GET costs down.

2) Competiton. As other airlines continue to cut fares matched to WN by $5-6 Southwest will have an even harder time driving people to it's website or res number and raising fares by this amount JUST TO BREAK EVEN. This may force them to compete in the world of Travelocity, etc. which could be disasterous.

I don't like the word "competition" when it means the competitor took the bankruptcy route, reneged on debts, screwed shareholders and employees, and THEN undercut Southwest by $5-6. But what would be sweet would be to see Southwest recognize that increasing costs means you have to charge a bit more for your product. My bet is that if this happens, the newly competitive bankrupt airlines will continue to undercut Southwest pricing, which while it might lower Southwest's market share a bit, would end up losing the newly competitive airline even more money, resulting in a second or even third trip to bankruptcy court to "level the playing field". Because remember....Southwest would have raised prices to "break even". And if SWA is only "breaking even", that means the other guys who are undercutting them on fares, are losing (again).

 

[Bagbelt]

They are whispering the BA/AA thing again and there is going to be more consolidation. I think predictions about any airlines performance can be accurate out to about 6 months, after that it isn't even educated guesswork. Southwest themselves may very well acquire someone. To say what is going to happen next year in this business is useless. I thought Branson was going to out WN, WN.etc. WN will deal with their labor costs when they have to. But maybe oil will collapse, maybe flying will be hit if the flu breaks out, maybe alot of things.

 

[wnbubbleboy]

Are you ready to call time of death (to your weak argument), doctor?
Two problems:

1) The wall street expectation of profitability. Once the mighty SW begins to show signs of weakness, the vultures start circling. The downward momentum is far more difficult to arrest than the upward is to create.

2) Competiton. As other airlines continue to cut fares matched to WN by $5-6 Southwest will have an even harder time driving people to it's website or res number and raising fares by this amount JUST TO BREAK EVEN. This may force them to compete in the world of Travelocity, etc. which could be disasterous.

Also, promised growth (especially domestic-only growth) in a slowing economy could be hard to live up to, exacerbating the missed-expectations problem of #1 above.

Southwest Airlines Seen Topping Forecast
10.19.2005, 03:16 PM

Low-cost carrier Southwest Airlines Co. reports third-quarter earnings on Oct. 20. The following is a summary of key developments and analyst opinion related to the period.

EXPECTATIONS: Analysts polled by Thomson Financial expect the company to post a profit of 18 cents per share on $1.96 billion in sales.

ANALYST TAKE: Bear Stearns analyst David Strine said in a note to clients that he was "surprised by the load factor strength in September and (believes) that yield is likely to be stronger than the current consensus estimate reflects." He said Southwest could likely beat Wall Street's quarterly expectations, following its strong performance last month.

QUARTER DEVELOPMENTS: Traffic grew 14.7 percent in July, 13.7 percent in August and 18.9 percent in September. The company raised fares twice during the quarter, even as competitors trimmed flight schedules and made plans to cut capacity.

Southwest, the busiest carrier at the New Orleans international airport, canceled flights to and from the hurricane-ravaged city for roughly two weeks in September following Hurricane Katrina.

COMPETITORS: Several legacy airlines are planning sharp cuts in domestic capacity, including Northwest Airlines Corp. by 10 percent, US Airways Group Inc. by 5 percent and Delta Air Lines Inc. by 15 percent to 20 percent. Both Delta and Northwest filed for bankruptcy in September. Also last month, AirTran Holdings Inc., parent of AirTran Airways, said its unionized aircraft mechanics and inspectors ratified a new, four-year contract.

American Airlines parent company AMR Corp. on Wednesday posted a narrower quarterly loss as cost cuts helped counter soaring fuel prices, yet results lagged analysts' forecasts.

Meanwhile, Continental Airlines Inc. surprised Wall Street on Tuesday by posting a higher-than-expected profit - even with fuel prices at record levels. Lower labor costs benefitted the carrier.

 

[corl737]

The point of the post (since I'm forced to repeat myself) is that Southwest chose to charge so little for it's fares that it changed the public perception of what airfares should be.

I see your angle. However, here's my alternative analysis of how the public's perception was altered:

SWA chooses to charge fares that provide a decent and profitable return in relation to its low-cost business model, the template to which it adheres religiously to this day. Remember, upon its inception in 1971, SWA publicly decreed that its competition was the automobile, not the other airlines. The thought of greedily grabbing for every penny it could wring from the traveling public just didn't fit the plan so fares were set accordingly.

Meanwhile, the existing airlines matched SWA's fares even though in most cases they had to lose money to do so. Instead of maintaining and selling their own superior product to the public -- full service, access to an enormous international network, and a liberal frequent flyer program simply cost more -- the legacy carriers validated SWA's fares as the standard.

I think that a decade or two ago virtually any legacy carrier could have launched a nicely couched public relations program that would explain the differences between their's and SWA's products and thereby justified a somewhat higher fare basis. They had the golden opportunity to create a distinct two-tier airline structure that the public would understand. However, by aggressively taking on SWA through a strategy of fare reductions instead of highlighting their own strengths they unintentionally elevated SWA to being the standard bearer for the industry.

What's that old business school mantra? Find your market, serve it well. You cannot be all things to everyone.

 

[KCFlyer]

You cannot be all things to everyone.

Something the legacies have yet to learn to this day.

 

[ngneer]

SWA reported their 3Q results today, and it showed that they made a tidy $174M profit if you factor out the fuel hedging.

DALLAS (AP) -- Southwest Airlines Co. on Thursday reported its third-quarter profit almost doubled as the low-cost carrier relied on fuel hedging to offset the rising price of oil that has hurt the industry.

Quarterly profit rose to $227 million, or 28 cents per share, from $119 million, or 15 cents per share, last year. Profit included $87 million in one-time gains from Southwest's hedging strategy, in which it locks in jet-fuel prices months in advance to protect it from price spikes, is considered to be among the best within the airline industry.

Without that gain, the Dallas-based company reported earnings of $174 million, or 21 cents per share. The results surpassed Wall Street projections for earnings of 18 cents per share, according to a Thomson Financial survey of analysts.

Southwest is more than 70 percent hedged for 2006

Total operating revenues increased 19 percent to $1.99 billion, compared with $1.67 billion last year. Operating income rose to $273 million from $191 million a year ago.

Quarterly traffic increased 15.5 percent to 16.37 billion revenue passenger miles, which is one paying passenger flown one mile. Capacity grew 12.1 percent, and load factor, or the percentage of seats filled, rose 2.2 points to 74.9 percent.

 

[WNrforlife]

Something the legacies have yet to learn to this day.

Legacies - what a bunch of morons.

 

[WNjetdoc]

Meantime, Southwest's quarterly profit rose to $227 million, or 28 cents a share, from $119 million, or 15 cents a share, last year. Profit included $87 million in one-time gains from Southwest's hedging strategy, in which it locks in jet-fuel prices months in advance to protect it from price spikes, is considered to be among the best within the airline industry.

Without that gain, the company reported earnings of $174 million, or 21 cents a share. The results surpassed Wall Street projections for earnings of 18 cents a share, according to a Thomson Financial survey of analysts.

Southwest is more than 70% hedged for 2006.

Total operating revenues increased 19% to $1.99 billion, compared with $1.67 billion last year. Operating income rose to $273 million from $191 million a year ago.

Quarterly traffic increased 15.5% to 16.37 billion revenue passenger miles, which is one paying passenger flown one mile. Capacity grew 12.1%, and load factor, or the percentage of seats filled, rose 2.2 points to 74.9%.


--------------------------------------------------------------------------------

So I wonder what all of our self appointed pundits think now? Im mostly referring to our profits....operative word being PROFITS....EVEN EXCLUDING OUR FUEL HEDGING....I've read on this bb many times about how the ONLY reason SWA is making profits is because of our FUEL HEDGES....what do you say now???? LMAO.

Lets hear your spin again luvn737s....as usual your long winded posts are just a waste of bandwith. Now get out of here and make your airline a better place to work and stop living vicariously off of SWA!!

 

[Bagbelt]

Gary Kelly said the fuel hedge benefit for the quarter was $295 million, not $87 million. Fuel expenses for the quarter were $337 million, so the math says doubling the price is more than $87 million.

 

[WNrforlife]

Meanwhile, the existing airlines matched SWA's fares even though in most cases they had to lose money to do so. Instead of maintaining and selling their own superior product to the public -- full service, access to an enormous international network, and a liberal frequent flyer program simply cost more -- the legacy carriers validated SWA's fares as the standard.

I think that a decade or two ago virtually any legacy carrier could have launched a nicely couched public relations program that would explain the differences between their's and SWA's products and thereby justified a somewhat higher fare basis. They had the golden opportunity to create a distinct two-tier airline structure that the public would understand. However, by aggressively taking on SWA through a strategy of fare reductions instead of highlighting their own strengths they unintentionally elevated SWA to being the standard bearer for the industry.

What's that old business school mantra? Find your market, serve it well. You cannot be all things to everyone.

It's funny to watch all of these Monday morning, armchair quarterbacks explain what the legacies SHOULD have done. What a laugh. 😛 😛 😛

 

[corl737]

It's funny to watch all of these Monday morning, armchair quarterbacks explain what the legacies SHOULD have done. What a laugh. 😛 😛 😛

Hey, I'm not a Monday morning QB ... I sleep in on Mondays! 😀

As I stated in my opinion, the failure of the legacy carriers to establish a clear and decisive 2-tier airline structure in the public's mind only served to validate that SWA's low-fare product was the standard. Perhaps they underestimated the ability of that lil' ol airline from Texas to survive long term and figured it was a better plan to try and eliminate them at their own game than to allow them to exist, even if it was on lower plane (pun intended).

Yeah, I get a laugh out of it, too! Only I'm not laughing at the employees, just the management. (Well, ok, I might laugh at those legacy employees who only a few years ago arrogantly rubbed their high-brow egos in the face of SWA's people. I hope we can keep it in perspective and don't fall victim to the same uncivilized behavior!)