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SWA, The Street's Love Fades

FDJ2

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By Christopher Palmeri



Southwest: The Street's Love Fades

Its earnings and stock are down while those of Continental and AMR are way up. Has the majors' reorganization erased the low-cost carrier's edge?



Passengers were queued in three long rows to board the 5:05 p.m. Southwest Airlines (LUV) flight from Las Vegas to Burbank, Calif., on a recent Sunday as a gate agent tried to coax seven people into relinquishing their seats on the overbooked flight. He was offering an overnight hotel room, a flight in the morning, and $300 additional credit toward a future Southwest flight. "Come on, folks," the agent pleaded. "Somebody must want to leave Las Vegas with some money."

You'd be hard-pressed to find evidence that Southwest is out of favor by visiting airports at rush hour these days. But on Wall Street, the nation's largest low-fare airline has indeed been losing altitude. The stock is down nearly 5% for the year, even as old-school carriers such as Continental Airlines (CAL) and American Airlines' parent, AMR Corp. (AMR), have seen their share prices soar 65% and 25%, respectively, in 2006. Worse, Southwest reported on Oct. 19 that its third-quarter earnings slid 77% to $48 million, due to higher fuel costs and traffic slowed by the latest restrictions on carry-on items.

It's generally been a brighter earnings season for other airlines, however. AMR reported on Oct. 18 that its profits hit $15 million, a $168 million swing from the prior year's loss and the company's second-quarter-in-a-row of profitability. Continental reported earnings of $237 million on Oct. 19, up from $61 million in the same quarter last year. JetBlue Airways (JBLU) reported a loss of $500,000 on Oct. 24, about what analysts had been expecting.

In an interview, Southwest Chief Executive Gary Kelly acknowledged that his company is battling an image problem on the Street. "There is a theme of more turbulent air for some of the low-cost carriers," Kelly says. "That's just not factually correct. On any basis that you compare our results, we're still easily the leader."

Majors Matching Low Fares What's happening is a shift in fortunes in the airline industry. When business fell off in the wake of the September 11 attacks, the major airlines cut back on domestic flights and renegotiated their labor contracts, in many cases through bankruptcy court. The industry is now enjoying the fruits of those reorganizations. Traffic has returned, planes are running fuller, and fares have risen sharply. The major airlines are taking more advantage of those fare hikes than the lower-cost carriers. The average revenue per seat among the major carriers is expected to rise nearly 15% this year vs. only 9% for the low-fare airlines, according to the brokerage firm Calyon Securities.

The thinking now is that major airlines, with their cost structures much lower, will have more flexibility to match low-fare rivals. With less difference between their ticket prices, perks such as assigned seats, first-class cabins, private lounges, and frequent-flier miles good for international trips will keep customers choosing the major carriers. "It used to be a low-cost carrier could go into a market and the legacy carriers would either not match it or match one flight per day," says Scott Kirby, president of US Airways Group (LCC). "Now all the airlines match that price."

With low-cost rivals such as JetBlue and AirTran Airways' parent, AirTran Holdings (AAI), continuing to add flights, albeit it at a slower pace than in recent years, Southwest may have trouble raising fares. Lehman Brothers airline analyst Gary Chase estimates that the industry as a whole will see gains in revenue per seat of only 1%-2% next year. He figures that Southwest's return on capital isn't likely to hit previous highs of 12% and will likely hit only about 8% next year.

Business Costs Still Cheap Southwest's Kelly is having none of that. "We're trying to get back to record profitability," he says. "It's true (the major airlines') costs are coming down, they're coming from extremely high to high. We're going from low to extremely low. The employees at these bankrupt carriers will be clamoring to get back what they feel they deserve as soon as profitability returns."

Indeed, Dallas-based Southwest still enjoys some of the lowest costs, the best balance sheet, and the highest profit margins in the industry. And Kelly has still found new opportunities for growth, starting up service in Pittsburgh, Philadelphia, Denver, and Washington-Dulles International Airport in recent years. A phase-out of the controversial Wright Amendment that went into effect on Sept. 29, he notes, will allow more flights from Dallas, and the continuing rebuilding of New Orleans will do the same for that city.

Last summer, Kelly experimented with changing one of the core components of Southwest's business model. He tested assigned seating in the San Diego market. Kelly says the results were mixed, with the company's famous cattle call-like boarding process still the fastest way to load the plane and make the quick turnarounds so critical to the company's low-cost operations. "There are some people who like one brand of soft drink, some who like another," Kelly says. And judging by the crowds at the Southwest gates in Las Vegas recently, there are still plenty of people who like the company's product as well.
 

canyonblue

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"The employees at these bankrupt carriers will be clamoring to get back what they feel they deserve as soon as profitability returns."

I think Kelly is wrong here. The Management at the Legacies bitch slapped the pilots so hard that they will never fear them. The pilots showed their hand and proved that they would work for peanuts. Arpey, Tilton, Parker, Grinstein and Steenland are holding the chain, and will pull it. Otherwise, prove me wrong. There will be a bark, but no bite. God forbid we ever have to take a paycut, imagine how much farther down the Legacy rates would go. "get back what they feel they deserve", that time has come and gone. Why do you think "the street" loves the Legacies? Pilot costs that will never change.
 

Irishav8r

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By Christopher Palmeri



Southwest: The Street's Love Fades

Its earnings and stock are down while those of Continental and AMR are way up. Has the majors' reorganization erased the low-cost carrier's edge?



Business Costs Still Cheap Southwest's Kelly is having none of that. "We're trying to get back to record profitability," he says. "It's true (the major airlines') costs are coming down, they're coming from extremely high to high. We're going from low to extremely low. The employees at these bankrupt carriers will be clamoring to get back what they feel they deserve as soon as profitability returns."
Canyon,
I disagree. This sentence is absolutely true. These guys have given their respective companies what they needed to get back on their feet with always having the intention of getting much of it back. (Not talking about the pensions, they are gone forever I'm afraid.)
 

MRYFLYER

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I think Kelly is wrong here. The Management at the Legacies bitch slapped the pilots so hard that they will never fear them. The pilots showed their hand and proved that they would work for peanuts. Arpey, Tilton, Parker, Grinstein and Steenland are holding the chain, and will pull it. Otherwise, prove me wrong. There will be a bark, but no bite. God forbid we ever have to take a paycut, imagine how much farther down the Legacy rates would go. "get back what they feel they deserve", that time has come and gone. Why do you think "the street" loves the Legacies? Pilot costs that will never change.

Glad to see you can accept the pitfalls with dignity and grace. What is it you always say about the legacy carriers? "Don't blame the LCC's for your problems!" Well it is time for you to do the same. It is YOUR own house that is starting to show signs of age and the landlord that built it is now in a retirement home sipping Wild Turkey while the new guy is still trying to figure out the wiring diagram on the money machine.

The street loves the legacies because they are the carriers that take you to every corner of the world. Our economy has changed to a global enterprise. Traditional domestic companies have production facilities abroad now and much like European companies had to adapt to the EU the Americans are now adapting to the world travel market. Also, more and more Americans are taking vacations to Mexico, Caribbean and other places that LUV does not fly. So while you guys will still get the ELP to TUS prison guard going to see his seniorita for a weekend and the various drunks and Wal-Mart shoppers the lack of a true world network will continue to hammer LUV.

Finally, if you have not been in the airline industry the cycles come and go. Just hope that you survive the cycle and it is time to see how good Messr Kelly is at dealing with adversity. I certainly hope he will not continue with his crybaby method and think that he can blame others for HIS mistakes.

Good Luck
 

Bubba Dog

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I think Kelly is wrong here. The Management at the Legacies bitch slapped the pilots so hard that they will never fear them. The pilots showed their hand and proved that they would work for peanuts. Arpey, Tilton, Parker, Grinstein and Steenland are holding the chain, and will pull it. Otherwise, prove me wrong. There will be a bark, but no bite. God forbid we ever have to take a paycut, imagine how much farther down the Legacy rates would go. "get back what they feel they deserve", that time has come and gone. Why do you think "the street" loves the Legacies? Pilot costs that will never change.


You are totally out of touch with reality. Salaries will increase at all carriers as the recovery continues. Don't you get it,we are all in this together. We should all demand the highest compensation packages possible. Isn't that what what all CEO's do. Pilot's are just a cost to airlines,we need to get as much as we can for our product. Take no prisoners,full speed ahead and dang the torpedoes!!!!!!!!!!!!!!!
 

canyonblue

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You are totally out of touch with reality. Salaries will increase at all carriers as the recovery continues. Don't you get it,we are all in this together. We should all demand the highest compensation packages possible. Isn't that what what all CEO's do. Pilot's are just a cost to airlines,we need to get as much as we can for our product. Take no prisoners,full speed ahead and dang the torpedoes!!!!!!!!!!!!!!!

I hope you're right. I just don't see Legacy pay going up ever again. It was one major game of chicken and the pilots jumped out. Tell me which pilot group has the balls to play chicken again. You will be more likely to see management bonuses increase, and their compensation skyrocket. All the Legacy CEO's will just look at the pilot groups and say "Whatcha gonna do?" "HA!". I do get it, we are all in this together. Unfortunately you have shown your hand and what CEO would fear any pilot group now?
 

canyonblue

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The street loves the legacies because they are the carriers that take you to every corner of the world.

No the street love the legacies because it is the new "sweat shop" to invest in. No upward costs in your lifetime 32LT10.

Good Luck
 

Bubba Dog

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I hope you're right. I just don't see Legacy pay going up ever again. It was one major game of chicken and the pilots jumped out. Tell me which pilot group has the balls to play chicken again. You will be more likely to see management bonuses increase, and their compensation skyrocket. All the Legacy CEO's will just look at the pilot groups and say "Whatcha gonna do?" "HA!". I do get it, we are all in this together. Unfortunately you have shown your hand and what CEO would fear any pilot group now?

Conditions are different now with airlines in the black. I definitely see larger compensation packages on the horizion. Unions have many tools available to them during the good times to fix problems.
 

YourPilotFriend

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I think Kelly is wrong here. The Management at the Legacies bitch slapped the pilots so hard that they will never fear them. The pilots showed their hand and proved that they would work for peanuts. Arpey, Tilton, Parker, Grinstein and Steenland are holding the chain, and will pull it. Otherwise, prove me wrong. There will be a bark, but no bite. God forbid we ever have to take a paycut, imagine how much farther down the Legacy rates would go. "get back what they feel they deserve", that time has come and gone. Why do you think "the street" loves the Legacies? Pilot costs that will never change.
I agree with this guy, but for not the same reasons. His company also has the same problem, which is the regionals are too big to demand higher compensation. Management at all carriers that pay well have at least 50 apps for each job they offer. If you brand scope the airlines right now, that number moves to at least 2 positions for every application, because there is a pilot shortage.

At NWA when they return to profitabilty, the regionals that are being beaten right now will demand those profits and NWA will be egar to give them back. Most if not all profits will be spent on the regional subsidaries to purchase larger aircraft. The remaining profits will be filtered up to the holding companies for management services. The cost of operating a regional aircraft right now is twice that of a mainline jet that is double its size.(i.e. the CRJ 200 is more expensive than the DC-9 to operate) The regionals HAVE TO DIE before there is any fighting chance, even at SWA.
 

MRYFLYER

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Tell me which pilot group has the balls to play chicken again. All the Legacy CEO's will just look at the pilot groups and say "Whatcha gonna do?" "HA!".

How about SWA leading the way for change? You talk a big game. So when Kelly comes to you guys for a pay cut please dig in your heels and say "NO". Tell him to stuff it and start flying the airplanes like you did not steal them. Safe stabalized approaches, conservative taxi speeds, stop lying about out and in times. Put the pressure on him to deal you a contract increase no matter how much the company might be losing.

SWA has gotten where they are by riding the coat tails of the legacy carriers. Always lurking just below them on pay. It was not until the downturn that SWA was left at the front. They did not ply their way there. When everyone takes two steps back and you stay in place then you are the front.

Kelly is running out of ideas and markets pretty quickly. So "ding" it is time for you guys to lay down the gauntlet for the rest of the industry. Come on be the man and show us your "cajones".
 

canyonblue

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satpak77

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whether a stock goes down or not is not a direct reflection of that company's product quality or management. MSFT, Microsoft stock, has basically been flatlined for 5 years. I suppose they are a "bad company"?

http://finance.yahoo.com/charts#cha...harttype=line;crosshair=on;logscale=on;source=

Stock shares, billions of them, are owned by Mutual Funds, Hedge Funds, State pension plans, etc. Typically, managers rotate in and out of the sectors that are "hot". It may be airlines for a few months, then fiber optics, then biofuel companies. As such, as "sectors go cold", the companies in those sectors will suffer stock hits, as their shares are sold and come back on the open market.

Just because SWA went down does not mean SWA The Company is doing things wrong or losing the airline game.

For balance, indeed, Enrons stock tanked and we all know what happened over there.

But, generally speaking, routine market ups and downs are not a direct reflection on the company itself.
 

ReverseSensing

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Kelly said:
"It's true (the major airlines') costs are coming down, they're coming from extremely high to high. We're going from low to extremely low.

I don't think I'd be quite so smug if this is what my CEO was telling analysts/reporters. Especially given how some of you feel about the powerlessness of pilot groups compared to their CEO's.
 

Bosley

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So "ding" it is time for you guys to lay down the gauntlet for the rest of the industry. Come on be the man and show us your "cajones".
If it wasn't for the "low paying" jobs at UAL, we wouldn't have to fight so hard to keep our pay at current rates. Thanks for bringing the industry down with your substandard service and pay! You girls at Yo Nited really showed us all how to do it right!
 

Green

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No the street love the legacies because it is the new "sweat shop" to invest in. No upward costs in your lifetime 32LT10.

Good Luck


I can't believe a SWA pilot actually said this. Why don't you look at the bulk of the last 30 years a little more closely. I guarantee the 'sweat shop' wasn't at the legacy carriers...
 

canyonblue

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canyonblue

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Just because you have ACARS does not mean you have not cheated for years.

Oh man you got me. Since DOT reports late as being :15 past scheduled arrival time, I figured I would rather have Southwest be "on time" then get that overblock pay so I backlogged the "in" time to reflect that. Man, all those flights I could have made more money what was I thinking? :rolleyes:

Loser. :puke:
 
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