Thursday, October 20, 2005

A Question that Answered Itself

A month ago, I posted on the question, "Should Airlines Hedge Fuel Costs?" focusing on Southwest's aggressive use of hedging compared to the rest of the industry. Today, we get more evidence for an answer in the affirmative, courtesy of the Wall Street Journal:

Southwest Airlines continued its pattern of profits in the worst of industry times, nearly doubling its net income in the third quarter, as fast-growing rival discounter JetBlue Airways squeaked out a profit and warned of losses for the rest of the year.

Thanks to a fuel-hedging program that locked in lower prices, Dallas-based Southwest has been profitable as other carriers have posted hundreds of millions of dollars in losses amid soaring fuel costs. Southwest, the seventh-largest U.S. airline based on passenger traffic at the beginning of the year, has taken advantage of rising demand for air travel, increasing fares five times since the beginning of the year, according to J.P. Morgan analyst Jamie Baker.

Southwest reported net income of $227 million, or 28 cents a share, compared with $119 million, or 15 cents a share, a year ago. Southwest said the results include a gain of $87 million before taxes associated with its hedging program. Revenue rose 19% to $1.99 billion.

Southwest flexed its muscle yesterday by announcing that it will launch service in Denver, one of the few major U.S. cities it doesn't already serve. Southwest is stepping into the space created as UAL Corp.'s United Airlines, which dominates Denver traffic with a 57% market share, has scaled back in an effort to emerge from bankruptcy protection. Southwest will also be taking on fellow low-cost carrier Frontier Airlines, which has a 19% market share but has struggled with losses because of jet-fuel costs. Southwest said it would begin service early in 2006.

The move underscores Southwest's capacity to grow when rivals are shrinking, but it also is evidence of the increasing risks the maturing carrier must face to expand. Southwest had shunned Denver because the Denver International Airport fees were too high, shaving profit margins too thin for Southwest's low fares. Southwest said it now views Denver's costs as more manageable.

Raymond James analyst Jim Parker downgraded Frontier Airlines, citing Southwest's lower costs and a belief that "it is very difficult for any airline to beat Southwest in head-to-head competition."

He's got that right. And now I'm daydreaming about reliable air service to ski the Rockies.

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10 comments:

Arun Khanna said...

The rise of Southwest and other point to point airlines has strategic implications for Boeing versus Airbus. Boeing's future focus is tilted towards point to point customers (medium sized fuel efficient planes). Airbus' future focus is tilted towards hub and spoke customers (large super-Jumbo planes).
It will be interesting to see if in the future Southwest expands overseas.

Anonymous said...

intl is an interesting idea for southwest. huge growth. new business model for doing it.

i am also looking forward to some sort of rotation into growth stocks by professional money managers (but am admittedly okay in the meanwhile). i am also looking forward to some sign that the fed may stop raising interest rates in the future.

Anonymous said...

On the WSJ: the edit board called the Robert C. Byrd Scholarship program "pork" in yesterday's WSJ. Back in 1993, I got the scholarship and would argue it is not pork. No bid contracts to Halliburton would be porky.

The scholarship was $1,500 per year back int he 1990s, and apparently it is still $1,500 per year (meanwhile college costs are up big) in the 2000s. This 0% annual per capita increase does not seem like pork.

The current system gives new perks and entitlements to old people and takes from young people.

http://www.ed.gov/programs/iduesbyrd/awards.html

Anonymous said...

one more:

The irony of this to me is that the Byrd scholarship enabled me to spend a summer in an unpaid intern working for guess who... Republicans in Washington DC. Such an experience was enabled by scholarships, including the Byrd scholarship. Now the Republicans want to nix it. Apparently the WSJ thinks it is a good idea to publicize it as some sort of sign of disciplined spending by Republicans.

What a joke.

elhuevon said...

Alta, Snowbird, Park City, Snowbasin - never heard of these? Where they had the Olympics?

Super easy access from Manchester on SWA. Most convenient (and arguably the best) in the lower 48!

Andrew Samwick said...

You are right--the Wasatch range is part of the Rockies and I should have been clearer above, particularly given how much I liked skiing at Alta years ago.

Anonymous said...

Alta does not have snowboarders? and may be great for ski purists. Plus Alta gets tons of snow?

As for places I've never been: I've never put it in any sort of prioritized list...

I want to check out Sun Valley (Idaho) some time. It may be more of a west coast ski destination. There is an interesting book store in Sunny Valley.

Jackson Hole in Wyoming would also be interesting. The mountain looks like it is steep, jagged and intense. Low-tax people may like Wyoming.

Whistler would be fun.

Anonymous said...

One more:

I like snow skiing. I never went to a real mountain for snow skiing until age 24? (around 1999 or so?)and could pay for it myself. It was awesome. I proceeded to binge ski.

Then the economy tanked around year 2001-2002, or at least slowed. The employer that consumed the majority of my time (my most valuable asset) ceased to exist. I have not been snow skiing since the econ downturn around 2001-2002.

I read an article in a newspaper (either NYT or WSJ) that said reservations are up this year for ski places out west. maybe this signals the economy is better, yet I am making no reservations...

This blog topic leads to an interesting hypothesis. Prof DeLong has a "popular" blog where lots of people post. DeLong tends to be a liberal democrat (moreso than Samwick?), and DeLong's blog may appeal to people that may have been marginalized during the last downturn or that do not have opportunities during 1-party rule in Washington. Thus, his blog is popular. I do not think DeLong has a big, Rocky-Mt snowskiing constituency surfing and posting to his blog. A lot of pioneering blogs probably do not have lots of mt. snow skiers. Snow skiing out west takes money and job security. Wealthy people are busy "running" corporate america; when it comes to blogs and posting on blogs, wealthy conservative people are opposed to change, or taking risk. Why blog when you do not need to?

Anonymous said...

What if fuel prices had fallen?

Andrew Samwick said...

Then Southwest would have lost money on its hedged positions. But considering the risks to the airline industry based on cash flow, that would have been a minor problem to have.