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Southwest Grounds Competition


No-frills approach still a winner.

Here's a yawn - but it's the kind of clockwork boredom that thrills investors: Southwest Airlines (LUV) reported its 69th consecutive quarterly profit.

On Thursday, Southwest Airlines said second-quarter earnings rose to $321 million, or $0.44 a share, compared with $278 million, or $0.36 a share for the same period last year.

Excluding special items, including a one-time gain related to hedging its fuel cost, profit totaled $121 million, or $0.16 a share. The consensus estimate of analysts surveyed by First Call was $0.12.

Southwest shrewdly hedges its fuel costs, often locking prices in years ahead of need. Since 1998, the airline has saved about $3.5 billion over the average industry price for jet fuel, or about 80% of the company's profits since 1998.

Hedging reduces risk. The company secures a price for fuel and saves money if it correctly gauges future market moves. Had oil prices fallen sharply in the last 12 months, the airline almost certainly would have overpaid for fuel and may have lost money.

Low fuel costs and Southwest's no-frills approach give it one of the smartest business plans in the industry.

Southwest flies nothing but Boeing (BA) 737s to reduce maintenance costs. It also keeps the fare structure simple, which lets customers know they've gotten a good price. The airline operates with a heavily unionized workforce.

There are no assigned seats on Southwest and only one class of service. This further simplifies its reservation system and keeps costs down.

Industry-wide, U.S. airlines plan to ground about 465 jets and eliminate about 26,000 jobs to cut costs.

Southwest, by contrast, plans to add flights this year.

Southwest's stock recently fetched $15.45 a share. The 52-week range is $11.02 to $16.96.

That may not bring back memories of hot Internet stocks in the 1990s -- those sweet companies with scant or no earnings and price/earnings ratios in the stratosphere -- but it beats American (AMR) at $9.27, United (UAUA) at $8.99, Delta (DAL) at $8.09, Continental (CAL) at $14.06 and Northwest (NWA) at $9.98 per share.
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