Southwest: No Frills, All Profit
By Scott Reeves Jul 09, 2008 12:47 pm
Airline soars above competitors with cost-saving measures.
Its down-home philosophy: One size fits all.
That includes flying nothing but Boeing (BA) 737s to reduce maintenance costs. Southwest’s simple fare structure also helps: it lets customers know they’ve gotten a good price, and keeps them from having to paw through endless pages to book a flight. It also cuts administrative costs.
Southwest flies point-to-point, avoiding the traditional hub-and-spoke system that gathers passengers from the hinterlands, then flies them to a major airport where everyone scrambles for flights on to their final destination. This allows Southwest to avoid congested airports, keeping its planes in the air longer each day, generating income.
There are no assigned seats on Southwest and only one class of service, further simplifying its reservation system. Passengers can check two pieces of luggage free of charge. The airline has never offered in-flight meals; even the snacks are as basic as they come. This tactic keeps costs down and makes it easy to restock planes when on the ground.
Southwest hedged its bets on fuel, now a major concern with oil trading at about $140 a barrel.
While the competition cuts back, Southwest plans to add flights to its schedule this year, including Denver to Orange County, California (three daily round-trip flights); Denver to Tulsa (two flights); Fort Myers, Florida to St. Louis (one flight); and Fort Lauderdale to Las Vegas, Kansas City and Albany (one flight to each destination). Schedules were reduced, however, at Chicago Midway, Oakland and Phoenix.
Southwest Airlines has been profitable since Gerald Ford was president, although net income fell to $34 million in the first quarter, as compared with $93 million for the same period last year.
Southwest’s stock recently fetched $13.45 a share - not exactly at the the level of Internet stocks during the dot-com mania, but way better than American Airlines (AMR) at $5.53; United Airlines (UAUA) at $4.80; Delta Airlines (DAL) at $5.58; Continental Airlines (CAL) at $9.75; Northwest Airlines (NWA) at $6.81 or JetBlue (JBLU) at $3.50.
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2008-07-09 16:42:16
Hedging Right!
Southwest benefits from a hedging program thats been right and in a big way. While that good for the short & medium term fluctuations in oil it still does not protect them long term.
That would make me want to ask what are the profits like once the gains from hedging oil are taken away. It would provide a true picture of how they are going to do long term and how a LCC model would perform in a world of $140 per barrel.
That would make me want to ask what are the profits like once the gains from hedging oil are taken away. It would provide a true picture of how they are going to do long term and how a LCC model would perform in a world of $140 per barrel.
2008-07-09 18:47:25
Hedging Right!
Why are you comparing them to LCC? They invented their business model over 35 years ago and the over 35 years of consecutive quarters of profit, even throught the 911 problems. No other airline comes close. They have by far the smartest management in the business, and will take great advantage of all the other airlines troubles. Just watch where they expand next. Yes, they are expanding, not cutting flights.
2008-07-09 23:04:53
Hedging Right!
I know the history. This is a well managed airline. I am not arguing that. But no one can argue a huge reason for there good fortune right now has been their hedging strategy. Infact they have been the best oil traders the past few years. But that while good in the next few years will not protect them in the long term or forever.
What i was getting at is are they able to make profits without relying on their hedging profits. Because no matter how good the management if you have to pay $140 per barrel you are going to have some trouble being profitable in a slowing economy.
What i was getting at is are they able to make profits without relying on their hedging profits. Because no matter how good the management if you have to pay $140 per barrel you are going to have some trouble being profitable in a slowing economy.
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