Southwest Airlines Posts 300% Profit Growth

It is possible to make money in American civilian aviation, despite the cries from the sidelines that suggest otherwise. While Delta is struggling to stay out of bankruptcy, where United already is, Southwest Airlines is making money for its shareholders. Quarterly income for the three months ended March 31, 2005 reached $76 million or 9 cents a share, up from last year's first quarter when income was $26 million, or 3 cents a share. The company's future also looks rather rosy compared with some of the competition.

The biggest structural advantage that Southwest has compared with the older, "legacy" air carriers is its more flexible labor agreements. Southwest isn't burdened with workers it really can afford. Moreover, it doesn't have the pension fund issues that the older airlines find so difficult to handle. Southwest isn't likely to have to negotiate give-backs with the airline unions because it didn't over-promise in the first place.

Beyond that, though, Southwest has engaged in a very successful hedging program to control fuel costs. As crude oil climbs toward $60 a barrel and beyond, 83% of Southwest's second quarter fuel needs have been hedged with forward contracts capped at $26 a barrel. For the third and fourth quarters of 2005, 85% of fuel needs are hedged with a $26 a barrel cap. Moreover, Southwest is covered beyond 2005; indeed, as far out as 2009, 25% of its anticipated fuel needs are hedged with a cap at $35. In short, smart management has taken the volatility of fuel prices out of the Southwest equation.

Now, part of the first quarter gains stemmed from an early Easter, which brought revenue that usually turns up in the April to June quarter into the January to March quarter. Southwest has already warned the markets of this. And the airline has told investors that load-factors in the second quarter won't measure to to 2004's second quarter. It has said it can't predict passenger unit revenue in the upcoming quarter. In other words, there is some uncertainty for Southwest. But it's profitable.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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