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Harsh Reality Interrupts Southwest Myth
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Patriot328
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A little clearer....
Harsh Reality Interrupts Southwest Myth
By Ted Reed
TheStreet.com Staff Reporter
6/12/2007 5:32 PM EDT
URL: http://www.thestreet.com/newsanalysis/transportation/10362165.html
After years of stunning success, Southwest (LUV) may have finally hit the wall.
The leading low-cost carrier has long set the standard for airline management -- consistent profits, continuing growth and never a layoff, not even after the Sept. 11 terrorist attacks.
In many ways, Southwest became a symbol, not just of how to run an airline but of how to run a business: Keep it simple. Maintain your sense of humor. Have a wild and crazy leader, along with a creation myth about drawing up the plans on the back of a napkin.
Also, and this is really crucial, offer a desirable product. In the critical area of transportation, no single upgrade has been more valuable to a U.S. city than to suddenly become a Southwest destination.
Things have unraveled a bit this spring. First-quarter net income fell 48%, second-quarter unit revenue will fall below last year's level, and CEO Gary Kelly sounded some unprecedented dark notes during the April earnings call.
"Our operating cost structure is permanently changed because of a trickling up in crude oil costs," Kelly said. "We have been very conservative over last 36 years. We may need to run a few new plays." He spoke of efforts to develop new revenue sources.
The following month, a story in the Dallas Morning News challenged the storied creation myth. In an interview, Rollin King -- who came up with the idea for the airline, thought up the name and provided the initial funding -- said there was no napkin. "It's a hell of a story," he told the newspaper, but it never happened.
Slow It Down
An odd phenomenon is that for several years, the airline's stock price has failed to reflect its accomplishments.
Southwest, which will have a presentation at an industry conference Wednesday, saw its shares hit their high near $35 in 2000. On Tuesday, the stock closed at $14.47.
Veteran airline analyst Bob McAdoo recently lowered his price target for Southwest to $16 from $22. McAdoo, an analyst for Prudential Equity until the business was closed last week, contends Southwest should slow its growth because it has been losing money on newer routes.
Of the 73 markets added since early 2003, 61 have consistently lost money, McAdoo wrote in a research report. "Substantial profits in California/West and in Texas are supporting the money losers across the rest of the system and have almost solely been the source of the 34 years of Southwest profitability," he argued.
"Until Southwest takes actions to make the last four year's new flights profitable, or exits some of these markets, or substantially slows the growth, we see little hope that the shares will do other than they have over the past four years," McAdoo wrote.
Since the start of June 2003, the stock has dropped 10%.
Slippery Slope
Southwest has long enjoyed a cost advantage. Despite industry restructuring, its cost per available seat mile remains 20% to 25% below legacy competitors. Fuel hedges contribute to that, as Southwest pays about $1.70 per gallon for fuel, roughly 30 cents less than competitors. But the fuel hedges are gradually unwinding. They cover 95% of 2007 consumption and 65% of 2008 consumption, at about $50 a barrel, McAdoo said.
Beth Harbin, a Southwest spokeswoman, challenges McAdoo's assumptions, saying they focus on newer markets.
"We know from our history that [those] require an investment and time to develop," she says. "With 64 quarters of consistent profitability and Southwest now carrying more passengers in the United States than any other airline, our patience has generally paid off in the long run."
Additionally, Harbin says, Southwest's revenue growth has exceeded capacity expansion over the past four years.
A few days after McAdoo's report, Morgan Greene analyst William Greene upgraded Southwest, saying future downside is limited. (Morgan Stanley has a financial relationship with Southwest that includes beneficial ownership of 1% or more of its shares and ownership of debt securities. It has also provided investment banking and other services.)
Southwest should seek to drive returns higher, he said, by slowing domestic growth and dedicating excess cash to pursuing international growth and ancillary revenue.
"Southwest's stock can break out if management focuses less on growth and more on returns," Greene wrote in his research report.
Harsh Reality Interrupts Southwest Myth
By Ted Reed
TheStreet.com Staff Reporter
6/12/2007 5:32 PM EDT
URL: http://www.thestreet.com/newsanalysis/transportation/10362165.html
After years of stunning success, Southwest (LUV) may have finally hit the wall.
The leading low-cost carrier has long set the standard for airline management -- consistent profits, continuing growth and never a layoff, not even after the Sept. 11 terrorist attacks.
In many ways, Southwest became a symbol, not just of how to run an airline but of how to run a business: Keep it simple. Maintain your sense of humor. Have a wild and crazy leader, along with a creation myth about drawing up the plans on the back of a napkin.
Also, and this is really crucial, offer a desirable product. In the critical area of transportation, no single upgrade has been more valuable to a U.S. city than to suddenly become a Southwest destination.
Things have unraveled a bit this spring. First-quarter net income fell 48%, second-quarter unit revenue will fall below last year's level, and CEO Gary Kelly sounded some unprecedented dark notes during the April earnings call.
"Our operating cost structure is permanently changed because of a trickling up in crude oil costs," Kelly said. "We have been very conservative over last 36 years. We may need to run a few new plays." He spoke of efforts to develop new revenue sources.
The following month, a story in the Dallas Morning News challenged the storied creation myth. In an interview, Rollin King -- who came up with the idea for the airline, thought up the name and provided the initial funding -- said there was no napkin. "It's a hell of a story," he told the newspaper, but it never happened.
Slow It Down
An odd phenomenon is that for several years, the airline's stock price has failed to reflect its accomplishments.
Southwest, which will have a presentation at an industry conference Wednesday, saw its shares hit their high near $35 in 2000. On Tuesday, the stock closed at $14.47.
Veteran airline analyst Bob McAdoo recently lowered his price target for Southwest to $16 from $22. McAdoo, an analyst for Prudential Equity until the business was closed last week, contends Southwest should slow its growth because it has been losing money on newer routes.
Of the 73 markets added since early 2003, 61 have consistently lost money, McAdoo wrote in a research report. "Substantial profits in California/West and in Texas are supporting the money losers across the rest of the system and have almost solely been the source of the 34 years of Southwest profitability," he argued.
"Until Southwest takes actions to make the last four year's new flights profitable, or exits some of these markets, or substantially slows the growth, we see little hope that the shares will do other than they have over the past four years," McAdoo wrote.
Since the start of June 2003, the stock has dropped 10%.
Slippery Slope
Southwest has long enjoyed a cost advantage. Despite industry restructuring, its cost per available seat mile remains 20% to 25% below legacy competitors. Fuel hedges contribute to that, as Southwest pays about $1.70 per gallon for fuel, roughly 30 cents less than competitors. But the fuel hedges are gradually unwinding. They cover 95% of 2007 consumption and 65% of 2008 consumption, at about $50 a barrel, McAdoo said.
Beth Harbin, a Southwest spokeswoman, challenges McAdoo's assumptions, saying they focus on newer markets.
"We know from our history that [those] require an investment and time to develop," she says. "With 64 quarters of consistent profitability and Southwest now carrying more passengers in the United States than any other airline, our patience has generally paid off in the long run."
Additionally, Harbin says, Southwest's revenue growth has exceeded capacity expansion over the past four years.
A few days after McAdoo's report, Morgan Greene analyst William Greene upgraded Southwest, saying future downside is limited. (Morgan Stanley has a financial relationship with Southwest that includes beneficial ownership of 1% or more of its shares and ownership of debt securities. It has also provided investment banking and other services.)
Southwest should seek to drive returns higher, he said, by slowing domestic growth and dedicating excess cash to pursuing international growth and ancillary revenue.
"Southwest's stock can break out if management focuses less on growth and more on returns," Greene wrote in his research report.
Yeah, its just business as usual. Not to worry, weve always been ok. We will will it away. Our cattle car operation will make money and succeed no matter what.....we're good to go!
General Lee
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Charlie Brown
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skiandsurf
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Thats what that Pan Am Capt said in the 70s. And the TWA capt, and the Eastern Capt, and the ..... well you get the point.
ivauir
SNIKT!
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My point, and it stands, is that there is no new information here. This is the same tripe that has been on here for more than a month. I know that many wish for SWA's demise (hi Genital Lee) but it is not here yet.
I would further remind you that the pilots at SWA are in a section 6 and the timing of all of this doom and gloom sure is convienient for the company ...
canyonblue
Everyone loves Southwest
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walkthasky
SWA FO
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um no not really. I dont really think SWA is Pan am or is TWA, or is Eastern in any way...well you get the point
AA717driver
A simpler time...
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momalley81
Done spillt mah beer...
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Maybe you learning a little airline history is in order.
Your comparison of Pan Am, TWA, and Eastern to SWA is comparing apples and oranges.
PHXFLYR
USAir by default
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Benhuntn
Deer Fear Me
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I am selling my prius and downsizing to a moped. I will sell my trailer next and get me a nice room to rent at the shadylady motel. When the pro's on here call you out you must be doomed. Anybody know how looks for hiring at Indy or Peoples express? I doubt I can wait for Braniff to come back.
RVSM
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- Posts
- 143
I dont have an MBA so surely I am missing something but...
All the recent negative publicity is focused on the stock price and the ROI for the stock investors.
Mean while SWA is being managed as a long term growing concern that has remained consistently in the black all the while maintaining emplyee numbers and salaries (ie, no paycuts, no layoffs).
Why is this a bad thing? What key element of impending doom am I missing here?
All the recent negative publicity is focused on the stock price and the ROI for the stock investors.
Mean while SWA is being managed as a long term growing concern that has remained consistently in the black all the while maintaining emplyee numbers and salaries (ie, no paycuts, no layoffs).
Why is this a bad thing? What key element of impending doom am I missing here?
Dumb Pilot
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scoreboard
Please keep moving...
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737 Pylt
Um....Floats anyone??
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ivauir
SNIKT!
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Or we could be responding to the usual suspects who love to post anything negative they can find or even make up about our company.
Maybe we are responding to the need some people have to even repeat that same negative information. Which BTW turns out to be mostly opinion and speculation by an airline "expert" who is expert at making airlines fail.
canyonblue
Everyone loves Southwest
- Joined
- Nov 26, 2001
- Posts
- 2,314
Maybe more like the "unusual suspects", the ones who don't like where they work so they can't stand anyone else to be happy where they're at. Gets pretty tiresome.
capt. megadeth
Metal Momma!
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- 2,898
My first thought actually.
capt. megadeth
Metal Momma!
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capt. megadeth
Metal Momma!
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I vote "sensitive bunch"......actually "ultra-sensitive bunch":laugh:
Skybus
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Jammin
I have never before looked through a summary of another persons posts as I am somewhat familiar with most of the regulars agendas. After looking through all of your posts I would like to thank you for all of the incredible insight that you have brought to FI. You are truly an amazingly insightful contributor here and we have all learned so much from all of you one sentence flamers.
Again on behalf of us all. Thank you
Bus
I have never before looked through a summary of another persons posts as I am somewhat familiar with most of the regulars agendas. After looking through all of your posts I would like to thank you for all of the incredible insight that you have brought to FI. You are truly an amazingly insightful contributor here and we have all learned so much from all of you one sentence flamers.
Again on behalf of us all. Thank you
Bus
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