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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!
- Joined
- Jan 13, 2002
- Posts
- 1,476
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
- Joined
- Nov 26, 2001
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- 2,314
walkthasky
SWA FO
- Joined
- Nov 26, 2001
- Posts
- 218
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
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