SWA Declining Edge

[CF34-3B1]

And once we have to start paying for MX costs on the A320s we're really in trouble.

 

[AutoBus]

Southwest's Declining Edge?

By Brian Gorman
January 22, 2007
In the not-so-distant past, things couldn't have looked much better for Southwest Airlines (NYSE: LUV). So-called legacy carriers like AMR (NYSE: AMR) and UAL (Nasdaq: UAUA), the parent companies of American Airlines and United Airlines, were struggling with sky-high fuel prices and burdensome labor expenses. While Southwest remains a fierce competitor, a quick comparison of data from Southwest's and AMR's most recent quarterly reports shows how times have changed.
Southwest has used a variety of tactics over the years to outdo rivals. But in two areas where it used to have a competitive advantage -- fuel and labor expenses -- Southwest's edge appears to have eroded.
As for fuel, the airline long had an advantage thanks to savvy hedging. Even as crude prices peaked at $78 per barrel in July 2006, Southwest investors could revel in the knowledge that their management had locked in 81% of its third-quarter 2006 fuel needs at $41 per barrel. The latest quarterly report, though, indicated that it is approximately 95% hedged for 2007 at about $50 per barrel.
While that's below the current per-barrel price of $53, Southwest clearly doesn't have the kind of fuel advantage it had in the past. Granted, if fuel costs surge again, it will be in a great position, but one has to consider the chances of a reoccurrence of the confluence of events that created the last price spike.
As the company's hedging contracts expire, higher fuel prices already are taking a bigger bite out of earnings. In the fourth quarter, its fuel expense rose 41% year-over-year. By comparison, AMR, which hasn't had much success hedging, saw its fuel expense decline 8.5%.
In a perhaps more troubling sign, Southwest's labor advantage appears gone. Salaries, wages, and benefits expense rose 9.7% in 2006 vs. 2005. The cost per employee at the end of the fourth quarter was $93,436. In contrast, AMR's expense in this area inched up just 0.9% last year, and its 2006 cost per employee was $79,965.
Admittedly, Southwest's fourth-quarter earnings were still more than three times those of AMR, despite having generated less than half of AMR's revenue. And Southwest carries far less debt. Nevertheless, investors should take note that some of Southwest's edges have been blunted.

I wouldn't me over-alarmed at the article, but it does do a good job of illustrating "a trend" that has been appartent for quite some time.

My guess is that Southwest will re-invent themselves in some sort of fashion in the next few years, it will be interesting to see what they do.

 

[YourPilotFriend]

This is for investors to avoid the stock. SWA can't pump out the earnings it's going to take to keep the stock at its current price. $8-$10 is the right price for the stock given its large market share. It's still the best airline for employee's however.

 

[80drvr]

Didn't AMR have $120mil in hedge earnings the 4th Quarter? Yall better watch out, when those hedges run out pop the balloons, drain the pool, and shut out the lights. It's over.

American had significant savings on fuel over 4Q 2005, but their hedges for 4Q 2006 are not in the money. They had hedged approximately 30% of their fuel requirements at the equivalent of $68/bll while the market price was around $60/bll. So yes, they will be happy when those hedges at above market prices run out.

 

[AA767AV8TOR]

I wouldn't me over-alarmed at the article, but it does do a good job of illustrating "a trend" that has been appartent for quite some time.

My guess is that Southwest will re-invent themselves in some sort of fashion in the next few years, it will be interesting to see what they do.

Autobus,

Absolutely this shows a trend at LUV. Though we are going to try our best to make some solid gains this contract, one has to wonder how long LUV can continue the crazy growth without some sort of solid cost advantage. LUV is a long way from hurting, but it could impede their growth plans.

I just hope the LUV pilots vote wisely on their Age 65 vote. Stagnation in the right seat is not a pretty thing. SWAPA's president told our Ralph Hunter that he thinks the vote will be 60 - 40 in favor of Age 65. We shall see.

AA767AV8TOR