Southwest Reports Decline in 4Q Earnings

[canyonblue]

Wednesday January 19, 8:27 am ET

Southwest Airlines Reports Decline in 4Q Earnings, Predicts Continued Profitability in 2005



DALLAS (AP) -- Southwest Airlines Co. reported a decline in fourth quarter earnings Wednesday and predicted continued profitability in early 2005.

The Dallas-based airline said it earned $56 million, or 7 cents per share, despite higher fuel prices and continuing fare wars that are sapping revenues of major carriers.

Analysts surveyed by Thomson First Call had expected profit of 8 cents per share, which would have matched Southwest's mark from a year earlier, when it earned $66 million.

Revenue rose 9 percent, to $1.66 billion from $1.52 billion in the October-December period of 2003. That was slightly below analysts' prediction of $1.68 billion.

Southwest said it saved $174 million during the fourth quarter by hedging, or buying fuel in advance under long-term contracts. Still, it said fuel costs per gallon jumped 20.1 percent. Other costs declined 4.5 percent per mile flown by each passenger, the company said.

The airline said traffic, measured in miles flown by passengers, rose 12.6 percent, enough to overcome a 10.5 increase in capacity. As a result, Southwest's planes flew slightly fuller than they did a year earlier.

For all of 2004, the company earned $313 million, or 38 cents per share. That compared to $298 million, or 36 cents per share, in 2003, excluding a government grant to cover security costs. Including the grant, the airline earned $442 million or 54 cents per share in 2003. Annual revenue rose to $6.53 billion from $5.94 billion in 2003. Chief executive Gary C. Kelly said earning revenue continued to be a challenge because of a glut of airline seats, a situation that will persist into this year. He said the airline has locked in 85 percent of its first-quarter fuel purchases at the equivalent of $26 per barrel oil.

 

[AA717driver]

Decline in earnings? I hate it when people brag!

These days, if you make an annual profit of $.01 you're ahead of the pack. Congrats all.TC

 

[TriStar_drvr]

The Dallas-based airline said it earned $56 million, or 7 cents per share, despite higher fuel prices and continuing fare wars that are sapping revenues of major carriers.

Southwest said it saved $174 million during the fourth quarter by hedging, or buying fuel in advance under long-term contracts. Still, it said fuel costs per gallon jumped 20.1 percent. Other costs declined 4.5 percent per mile flown by each passenger, the company said.

So without fuel hedging contracts, SWA would have lost $118 million ($174 million saved minus $56 million earned) in the fourth quarter. I don't want to sound like Chicken Little and proclaim the sky is falling, but it doesn't look good for the industry, when the industry leader made money only because of fuel hedging contracts. The current contracts won't last forever, and then I doubt even SWA's negotiators can get a hedge for $23 a barrel oil when the spot market rate is in the high $40s.

I guess when everyone else runs out of money, then SWA will raise ticket prices to match costs when they are the only one left to do so.

 

[kelbill]

We are darn lucky we have the fuel hedging, else we would have lost money for a few quarters at least, and that would have been a psychological hit to our psyche. Unfortunatley for one or two others, but fortunately for us, I think our fortunes are looking up for the future. Somebody is going to go belly up for good, which in turn will reduce capacity, allowing fares/revenues per seat mile to improve. That in turn will allow the survivors to turn the corner or at least bleed less. As I believe noted in the press release, excluding fuel, our costs per seat mile went down, so we are sitting well for a post fuel price drop profit drive.

The Delta price drop will hurt us in the short run, but in the long run it will only drive them to ask for more cuts in wages and/or a reduction in schedules. I don't think you can build a LCC after the fact. It has to be home grown like us, JBLU, or AAI. Human nature, with the bad blood between mgt and worker bees. Good luck to all though.

Heard in training yesterday that ATA folks getting furloughed ARE getting priority for interviewing. Good for them, as they are a good group and have always been nice to us at SWA from what I've seen.

 

[Soccer Stud]

So without fuel hedging contracts, SWA would have lost $118 million ($174 million saved minus $56 million earned) in the fourth quarter. I don't want to sound like Chicken Little and proclaim the sky is falling, but it doesn't look good for the industry, when the industry leader made money only because of fuel hedging contracts. The current contracts won't last forever, and then I doubt even SWA's negotiators can get a hedge for $23 a barrel oil when the spot market rate is in the high $40s.

There are other factors other than just fuel. You can't just assume that SWA would lose money if the company was not hedged. That is an assumption from the business plan. You have to look at the whole picture. You have to look at the earnings statement which includes the following:

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of
property and equipment, net (409) (383)
Initial payment for assets of ATA
Airlines, Inc. (34) - (34) -
Debtor in possession loan to ATA
Airlines, Inc. (40) - (40) -
Other, net (1) - (1) -
Cash flows used in
investing activities (484) (383)

By the same logic then. SWA would have made $366 million ($484 million saved minus $118 million) if they did not shell out money for ATA.

 

[TexaSWA]

It doesnt take a genius to figure out that SWA would have lost money without hedged fuel. Unless you are talking about the people who decided to hedge the fuel in the first place.

The fuel hedging wasnt luck or an accident. I was a calculated decision. And to say that the fuel hedging is the sole reason for success at SWA is a bit myopic. It is about finding was to operate efficiently in every area of operation. There are many other things that SWA does that, if done differently, would have resulted in a loss.

Fuel hedging is but one part of a plan to operate as efficiently as possible.

 

[sandman2122]

gooooooood day

 

[TexaSWA]

I believe the SWA guys are probably the highest paid 737 drivers out there........not bad for a "national airline"!

I kid, I kid, but seriously, I'm impressed....

Back to my coffee

Once again, 8 destinations outside the UnitedStates:

SAN LAX ONT SNA OAK SMF SJC BUR.

Ok

ELP and HRL too.

 

[canyonblue]

I guess when everyone else runs out of money, then SWA will raise ticket prices to match costs when they are the only one left to do so.

I am not a Math Major, but I believe we are one of the only carriers whose ticket prices not only match costs, but are above. The price we charge obviously pays the bills, even if it only leaves a $56 million profit. Try the other carriers who are charging less than their costs, and therefore losing money. There are plenty out there.

 

[lowecur]

cash dwindles

Gary is a gambler, and a smart one at that. He has been able to keep from going back to the employees for give backs because of the fuel hedge. If fuel prices remain high(which they will unless we have a global recession), then WN is good to go until 2007. At that time SWA better hope that there has been a steep reduction of seats so that everyone can raise prices, or they will be coming back to the well for givebacks. I'm waiting to see what kind of reaction the employees take if that happens. The old expression, "everybody luvs a winner," may seem like a distant memory if the employees follow history and draw a line in the sand. This mgt team has been nothing short of brilliant, but when you begin to start taking money out of peoples wallets, that is quickly forgotten. Let's hope not.

Cash is down to $1.3B due to the purchase of the fuel hedges and the ATA deal.

 

[SWAdude]

Gary is a gambler, and a smart one at that. He has been able to keep from going back to the employees for give backs because of the fuel hedge. If fuel prices remain high(which they will unless we have a global recession), then WN is good to go until 2007. At that time SWA better hope that there has been a steep reduction of seats so that everyone can raise prices, or they will be coming back to the well for givebacks. I'm waiting to see what kind of reaction the employees take if that happens. The old expression, "everybody luvs a winner," may seem like a distant memory if the employees follow history and draw a line in the sand. This mgt team has been nothing short of brilliant, but when you begin to start taking money out of peoples wallets, that is quickly forgotten. Let's hope not.

Cash is down to $1.3B due to the purchase of the fuel hedges and the ATA deal.

If we are relying on our fuel hedges for the next two years to show a profit, the rest of the industry will have larger challenges during this time. Not one but two legacies would fail or cut back so far on their mainline business that when this "depression" in the industry recovers the landscape will have a totally different look. The legacies will be more of a long haul business with their regional partners feeding the long hauls or the absence of two legacies will bring capacity to profitable levels. This is a simple supply and demand problem. If the fuel hedges run out SWA will raise the price enough to compensate for this change. But not enough for the legacies to get out of their competitive situation.

 

[TriStar_drvr]

There are other factors other than just fuel. You can't just assume that SWA would lose money if the company was not hedged. That is an assumption from the business plan. You have to look at the whole picture. You have to look at the earnings statement which includes the following:

CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for purchases of
property and equipment, net (409) (383)
Initial payment for assets of ATA
Airlines, Inc. (34) - (34) -
Debtor in possession loan to ATA
Airlines, Inc. (40) - (40) -
Other, net (1) - (1) -
Cash flows used in
investing activities (484) (383)

By the same logic then. SWA would have made $366 million ($484 million saved minus $118 million) if they did not shell out money for ATA.

From what you posted, SWA invested $74 million in ATA, not $484 million.

I am not a Math Major, but I believe we are one of the only carriers whose ticket prices not only match costs, but are above. The price we charge obviously pays the bills, even if it only leaves a $56 million profit. Try the other carriers who are charging less than their costs, and therefore losing money. There are plenty out there.

Yes, revenues do exceed current costs, hence the profit. I'm not denying that. My point is what happens when the $23 a barrel hedges run out? What happens if SWA is only able to hedge fuel for $35 a barrel (a 50% increase over $23)? I admit that SWA is the best at containing costs and operating efficently. However, if fuel prices rise and SWA is unable to obtain favorable hedging contracts, it too could be squeezed by high fuel prices. Will SWA be able to increase revenues and reduce costs to account for a 50% increase in fuel costs? Doesn't this concern any of you SWA guys?

The fuel hedging wasnt luck or an accident. I was a calculated decision. And to say that the fuel hedging is the sole reason for success at SWA is a bit myopic. It is about finding was to operate efficiently in every area of operation. There are many other things that SWA does that, if done differently, would have resulted in a loss.

I never said it was. In other posts, I have stated that those responsible for the hedging contracts at SWA should receive the largest bonuses. And I'll readily admit that some airlines (like mine), could squander away any fuel hedging savings with waste and inefficiencies elsewhere.

Maybe you think I'm trying to rain on your parade. Perhaps you think I'm doing this because I'm jealous (heck, I'll admit it, I am!). But when your CEO says something like this, "Earning revenue continued to be a challenge because of a glut of airline seats, a situation that will persist into this year", I'd be just a little bit concerned.

 

[Cactus73]

We are darn lucky we have the fuel hedging, else we would have lost money for a few quarters at least, and that would have been a psychological hit to our psyche. Unfortunatley for one or two others, but fortunately for us, I think our fortunes are looking up for the future. Somebody is going to go belly up for good, which in turn will reduce capacity, allowing fares/revenues per seat mile to improve. That in turn will allow the survivors to turn the corner or at least bleed less. As I believe noted in the press release, excluding fuel, our costs per seat mile went down, so we are sitting well for a post fuel price drop profit drive.

The Delta price drop will hurt us in the short run, but in the long run it will only drive them to ask for more cuts in wages and/or a reduction in schedules. I don't think you can build a LCC after the fact. It has to be home grown like us, JBLU, or AAI. Human nature, with the bad blood between mgt and worker bees. Good luck to all though.

Heard in training yesterday that ATA folks getting furloughed ARE getting priority for interviewing. Good for them, as they are a good group and have always been nice to us at SWA from what I've seen.

I think those that are waiting for an airline to die off to reduce capacity are still smoking too much. Our CEO came to talk to us last week and said this is a crazy strategy. He said that he used to be in the same camp with the others waiting for an airline to die off but now it seems that probably isn't going to happen. With GE owning the majority of USAirways fleet along with Airbus, there is little chance they are going to let 280 something airplanes sit. GE keeps playing a good game. Everytime a debt payment comes due they put pressure on them to cut more costs. Management goes to labor and gets just a little bit more before the debt due date. Then at the last minute GE puts up additional financing or lets a payment slide. This has been going on for some time now.
Now if the Union's pull the plug and USAirways does turn out the lights, it isn't going to take long for the other airlines to fill the capacity void.

No one expected fuel prices to get this high. Jetblue and Airtran have huge airframe comittments and they have to put them somewhere. Branson is still talking about starting Virgin USA. United has about 25% more domestic capacity then they should. Waiting for seats to dissapear is a dangerous strategy.

Parker also told us that Southwest's fuel hedges weren't some great thing that others didn't think of. Southwest is the only airline with a AAA credit rating. You can't buy fuel hedges for more than a year without this good of a credit rating. Most airlines post 9/11 were just trying to figure out how to make payroll, fuel hedges just weren't going to happen. The good news is that Southwest doens't really price to drive competition out of business as some people think. They just set prices high enough to cover their costs and make a profit. Because of their hedges, this price lends to be low.

I tend to agree with you that you can't build a LCC after the fact. There is just too much baggage from the previous era to deal with. We are doing a pretty good job of it here at AWA but we have some baggage from the past that is hurting us a little bit. We have debt from previous CEO's, some FA's and gate people with really bad attitudes, and a 10 year contract with MESA signed in 1997.

My opinion, no one is going to fade away. Massive consolidation is on the way.

 

[lowecur]

From what you posted, SWA invested $74 million in ATA, not $484 million.

Hedging contracts show as an asset on the balance sheet for over $400M. The investments he is talking about are a combination of the two.

 

[lowecur]

My opinion, no one is going to fade away. Massive consolidation is on the way.

Just like I said: AMR/UAL, and look for NWA and CAL to start talking with 24 months.

 

[canyonblue]

The good news is that Southwest doens't really price to drive competition out of business as some people think. They just set prices high enough to cover their costs and make a profit. Because of their hedges, this price lends to be low.

That is the point I was making above.

 

[kelbill]

Cactus73,

I, let alone the mgt at SWA, are not pinning any hopes on a major dropping out of the game. We run our own plays, and don't just go along with the other players out there. That being said, USAIR is in dire straits, and no matter whose fault it was, as a passenger seeing what happened at Christmas, I would NEVER fly them again. I wish them well, but don't see a bright future. Nor does SWA, else we wouldn't have announced PIT as the next city. In today's environment, with all the politics added in, I wouldn't be surprised if USAIR went under tomorrow, NOR would I be surprised to see them around for another decade of bleeding red ink. Consolidation is fairly equivalent to a major going under. AMR/TWA, now combined, is far smaller than the two were separately before merging/coming together. Doesn't matter if two airlines drop 10,000 seats each, or one big one drops 20,000 seats, same diff. As for others jumping in to fill the void and avoid marketshare loss, I think they have done about as much as they can already. They don't have the cash to up their flights, as that would require hiring back more folks while asking for give backs at the same time. And revenues would then stay low, causing them to bleed even more. As for your CEO's comments, nobody has a crystal ball, it just seems fair to say that unless fuel prices drop big time, something has to give.

Merger talks? Overlapping route structures and dissimilar aircraft types will not bring about economies of scale. It will bring about more job losses.

GE Leasing? Rumor at SWA is we are looking at a short term (few years) lease on 30 or so 737s (-300s believe it or not) to allow for our massive growth this year and next.

 

[SWAdude]

My opinion, no one is going to fade away. Massive consolidation is on the way.

Back in the winter of 91 when I was in class at AWA, Mike Conway said the same thing. He said by 1995 there would be five airlines. Delta, American, United, Northwest and America West.

Ten years later thats not even close to what has happened and in my humble opinion it still won't.

Consolidation does not solve competition or lower costs.

The only solution to today's problem is for the legacies to lower their ASM.

 

[lowecur]

That being said, USAIR is in dire straits, and no matter whose fault it was, as a passenger seeing what happened at Christmas, I would NEVER fly them again.

Obviously, people have a short memory.

US Airways' recent fare sale has proven popular with travelers, the company said Tuesday.The sale, scheduled to end last night, produced the second-most-lucrative day ever for the airline's Web site, taking in $4.7 million on Monday, the company said in a message to employees. In addition, the airline said it sold nearly $3 million worth of tickets over the phone Monday, its best day in more than three months.

"The overwhelming response to the current fare sale and to US Airways as a company speaks volumes about the relationships we build with our valued customers," said Bruce Ashby, the airline's executive vice president of marketing and planning. -- TONY MECIA

 

[SWA/FO]

No other airline could hedge their fuel before 911 as well as after 911. I think DAL or maybe AMR sold their hedges in 2002 for needed cash?