Southwest CEO Expects High Fuel Costs 'From Now On'

[SWAdude]

Southwest CEO Expects High Fuel Costs 'From Now On' >LUV

Wednesday January 19, 3:53 PM EST

ST. LOUIS (Dow Jones)--Southwest Airlines Co. (LUV) does not expect fuel prices to decline anytime soon, "if ever," Chairman Gary Kelly said Wednesday.

"We have to be prepared for ever-increasing energy prices," Kelly told reporters during a conference call. "Ultimately, some of these costs have to be passed on to customers, like they are in other transportation industries."

Kelly said the only other alternatives if fuel prices remain high are using less fuel and reducing other costs.

The company credited its hedging on fuel prices with keeping it profitable in the fourth quarter.

Earlier Wednesday, Southwest reported fourth-quarter net income declined 15% to $56 million, or 7 cents a share, from $66 million, or 8 cents a share, last year. Wall Street had forecast 9 cents a share.



The company attributed the drop to higher fuel costs and low-fare competition.

Chief Financial Officer Laura Wright said the low-cost airline has hedged 85% of its fuel needs at $26 a barrel in 2005, 65% at $32 a barrel in 2006, 45% at $ 31 a barrel in 2007, 30% at $33 a barrel in 2008, and 25% at $35 a barrel in 2009.

"We have a great hedge in place," Kelly said. But he said rising fuel costs will create problems for the airline as the percentage of its fuel that is hedged declines and fuel prices rise.

Still, Kelly said, "We're not in any immediate danger" because Southwest is a low-cost leader in the industry.

"If we can't make a profit," Kelly said, "I don't know who can."

- By Greg Edwards, Dow Jones Newswires; 314-588-8443; greg.edwards@ dowjones.com

 

[TAZ MAN]

Looks like if oil prices stay high then SWA will have some fuel cost advantages for a good while.

That management team has to be the envy of the industry.

 

[tranceport]

The company attributed the drop to higher fuel costs and low-fare competition.

Chief Financial Officer Laura Wright said the low-cost airline has hedged 85% of its fuel needs at $26 a barrel in 2005, 65% at $32 a barrel in 2006, 45% at $ 31 a barrel in 2007, 30% at $33 a barrel in 2008, and 25% at $35 a barrel in 2009.

"We have a great hedge in place," Kelly said. But he said rising fuel costs will create problems for the airline as the percentage of its fuel that is hedged declines and fuel prices rise.

Still, Kelly said, "We're not in any immediate danger" because Southwest is a low-cost leader in the industry.

"If we can't make a profit," Kelly said, "I don't know who can."

Omg, I thought I'd never see the day SWA say revenues are down due to other low cost carriers. Someone please check the temperature in hell.

 

[BID]

Quoted fro an article in "The Wall Street Journa" 01-20-2005

"Had it not been for fuel hedges that saved Southwest $174 million in the quarter, it also would have reported a quarterly loss. And had fourth quarter oil prices been at year-earlier levels, AMR would have been profitable."

 

[FlyBoeingJets]

Quoted fro an article in "The Wall Street Journa" 01-20-2005

"Had it not been for fuel hedges that saved Southwest $174 million in the quarter, it also would have reported a quarterly loss. And had fourth quarter oil prices been at year-earlier levels, AMR would have been profitable."

The cause and effect relationship here is murky at best.

It's possible fares would have been higher overall if SWA, with fewer hedges, had raised prices. But this price increase may have reduced loads and reduced overall revenue. Yeah capacity is key, but capacity changes are slow and reach bubbles when managements smell opportunity (or their funny cigarettes).

Lower prices get more people to travel, but where does this diminish? We simply don't know.

From another Macro perspective, if people have less to spend on travel with "globalization" and wage decreases we will see less travel as fares inch upward in the years ahead.

 

[TAZ MAN]

Omg, I thought I'd never see the day SWA say revenues are down due to other low cost carriers. Someone please check the temperature in hell.

"The company attributed the drop to higher fuel costs and low-fare competition."

I didn't take this as low cost carriers as much as low fares in the industry.

 

[Hoot R. Hunter]

That management team has to be the envy of the industry.

IMHO, the only envy you will see from any given management team towards that of another company is if the other management team does a better job of protecting its own pay, benefits, bonuses, and pensions. The management equivalent of sex, salary, and seniority number.

 

[capt. megadeth]

IMHO, the only envy you will see from any given management team towards that of another company is if the other management team does a better job of protecting its own pay, benefits, bonuses, and pensions. The management equivalent of sex, salary, and seniority number.

Ha! Ain't that the truth

 

[tranceport]

"The company attributed the drop to higher fuel costs and low-fare competition."

I didn't take this as low cost carriers as much as low fares in the industry.

oops, you're right. Low cost carrier doesn't mean low fare. And low fare (airline) doesn't necessarily mean low cost (carrier). The way I took it that surprised me is SWA is finally jumping on the 'revenues are down due to low fares' bandwagon....not used to hearing this from the mother of all low cost carriers. Low fares as an explanation for low revenues something we at the legacy carriers have come to expect time after time (and right before consession time)

I'll revise my statement:

Omg, I thought I'd never see the day SWA say revenues are down due to low fares . Someone please check the temperature in hell.

 

[SWA/FO]

SWA wants to raise fares like everybody else. Fact. When we have raised fares (by a few bucks) bookings drop off. Fact.