miles otoole
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Doubts aired about Southwest
[size=+1]Two reports suggest that higher labor costs may restrain growth
[/size]
[size=-1]09:02 PM CDT on Tuesday, August 17, 2004 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
Southwest Airlines Co.'s soaring labor costs may hobble its growth, according to two research reports released Tuesday.
Rising employee costs – combined with stiffer competition and the threat of sustained high oil prices – could make Southwest look more like a traditional carrier than the low-cost leader, the reports said.
The trend could keep the Dallas-based carrier's stock price grounded, Jamie Baker of J.P. Morgan Chase said in his report.
Its labor costs per seat mile flown are now about equal to those of Continental Airlines Inc.
"Our thesis is that Southwest is entering a period of gradually declining forward valuation," he said.
Higher labor costs, negotiated over the past five years in separate labor agreements, could reduce Southwest's cost advantage over rivals, Unisys R2A Transportation Management Consultants said in the other report.
Southwest has negotiated a rich new contract for its flight attendants, some of whom will see their pay double over the life of the four-year deal. Pilots are due a 14 percent wage hike next month.
Southwest continues to maintain a cost advantage over traditional carriers such as Fort Worth-based American Airlines Inc., the firm said, but mostly because of very low non-employee costs.
Continental's non-employee costs are 84 percent higher than Southwest's, giving the discounter a big advantage.
Southwest executives weren't available to comment on the reports Tuesday because of a daylong meeting, said spokesman Ed Stewart.
But the airline's new chief executive, Gary Kelly, has acknowledged that Southwest faces cost problems.
Cost target
In the second quarter, Southwest missed its own cost target of 7.5 cents per seat mile flown – a measure of what it pays to put a seat in the air one mile. The figure drifted above 8 cents in the quarter.
"We're looking forward to the third quarter where we think we'll be well below 8 cents per available seat mile," Mr. Kelly said in a conference call on July 15, the day he was named CEO.
Keeping costs under control is his top focus in the new job, said Mr. Kelly, Southwest's former chief financial officer.
Accelerated growth in the second half could help spread increased costs over more seat miles, he said.
Both research reports said trends at Southwest are alarming.
Labor costs are about to exceed non-employee costs – a situation that only struggling Delta Air Lines Inc. now faces.
Mr. Baker said Southwest's aggressive fuel hedge positions start to expire next year, exposing the carrier to the high cost of jet fuel that's crushing competitors.
Hedging fuel
Southwest has pre-purchased about 80 percent of its fuel needs using hedges at prices equivalent to $24 a barrel. Spot crude closed at $46.75 a barrel Tuesday.
Also, competitors are adding capacity and implementing aggressive pricing, instead of avoiding head-to-head battles against Southwest, Mr. Baker said.
Traditional network carriers are seeing "meaningful" improvements in revenue results, as measured by fares paid per seat mile flown, for the first time since 1997, he said.
Efficient operations
Airline researcher Unisys R2A's report emphasized that Southwest's efficient operations help to offset the rise in labor costs.
The report said that "it is much too early to conclude that Southwest has lost its competitive edge vis-à-vis the legacy carriers" but that "Southwest holds no dispensation from the laws of economics."
Other analysts, such as Ray Neidl of Blaylock & Partners, are much more optimistic about the prospects for Southwest's business and its stock price.
The carrier is continuing to expand and could announce before year-end that it's launching service to a new city.
"I think people are going to see that Southwest's turned the corner," Mr. Neidl said in a recent interview.
Shares in Southwest closed Tuesday at $14.47, down 3 cents.
E-mail [email protected]
[size=+1]Two reports suggest that higher labor costs may restrain growth
[/size]
[size=-1]09:02 PM CDT on Tuesday, August 17, 2004 [/size]
[size=-1]By ERIC TORBENSON / The Dallas Morning News [/size]
Southwest Airlines Co.'s soaring labor costs may hobble its growth, according to two research reports released Tuesday.
Rising employee costs – combined with stiffer competition and the threat of sustained high oil prices – could make Southwest look more like a traditional carrier than the low-cost leader, the reports said.
The trend could keep the Dallas-based carrier's stock price grounded, Jamie Baker of J.P. Morgan Chase said in his report.
Its labor costs per seat mile flown are now about equal to those of Continental Airlines Inc.
"Our thesis is that Southwest is entering a period of gradually declining forward valuation," he said.
Higher labor costs, negotiated over the past five years in separate labor agreements, could reduce Southwest's cost advantage over rivals, Unisys R2A Transportation Management Consultants said in the other report.
Southwest has negotiated a rich new contract for its flight attendants, some of whom will see their pay double over the life of the four-year deal. Pilots are due a 14 percent wage hike next month.
Southwest continues to maintain a cost advantage over traditional carriers such as Fort Worth-based American Airlines Inc., the firm said, but mostly because of very low non-employee costs.
Continental's non-employee costs are 84 percent higher than Southwest's, giving the discounter a big advantage.
Southwest executives weren't available to comment on the reports Tuesday because of a daylong meeting, said spokesman Ed Stewart.
But the airline's new chief executive, Gary Kelly, has acknowledged that Southwest faces cost problems.
Cost target
In the second quarter, Southwest missed its own cost target of 7.5 cents per seat mile flown – a measure of what it pays to put a seat in the air one mile. The figure drifted above 8 cents in the quarter.
"We're looking forward to the third quarter where we think we'll be well below 8 cents per available seat mile," Mr. Kelly said in a conference call on July 15, the day he was named CEO.
Keeping costs under control is his top focus in the new job, said Mr. Kelly, Southwest's former chief financial officer.
Accelerated growth in the second half could help spread increased costs over more seat miles, he said.
Both research reports said trends at Southwest are alarming.
Labor costs are about to exceed non-employee costs – a situation that only struggling Delta Air Lines Inc. now faces.
Mr. Baker said Southwest's aggressive fuel hedge positions start to expire next year, exposing the carrier to the high cost of jet fuel that's crushing competitors.
Hedging fuel
Southwest has pre-purchased about 80 percent of its fuel needs using hedges at prices equivalent to $24 a barrel. Spot crude closed at $46.75 a barrel Tuesday.
Also, competitors are adding capacity and implementing aggressive pricing, instead of avoiding head-to-head battles against Southwest, Mr. Baker said.
Traditional network carriers are seeing "meaningful" improvements in revenue results, as measured by fares paid per seat mile flown, for the first time since 1997, he said.
Efficient operations
Airline researcher Unisys R2A's report emphasized that Southwest's efficient operations help to offset the rise in labor costs.
The report said that "it is much too early to conclude that Southwest has lost its competitive edge vis-à-vis the legacy carriers" but that "Southwest holds no dispensation from the laws of economics."
Other analysts, such as Ray Neidl of Blaylock & Partners, are much more optimistic about the prospects for Southwest's business and its stock price.
The carrier is continuing to expand and could announce before year-end that it's launching service to a new city.
"I think people are going to see that Southwest's turned the corner," Mr. Neidl said in a recent interview.
Shares in Southwest closed Tuesday at $14.47, down 3 cents.
E-mail [email protected]
