Interesting article that describes very well the impact of SWA on the pricing side of house. Near the end Boyd gives his usual predictions of impending hell to pay for SWA...oh well. Some other interesting points to consider not included in the article:
1. SWA's 2005 10K states SWA raised fares last year by 5.6%.
2. Airline analysts are predicting airlines will raise fares anywhere from 6-12% in '06.
3. Financial analysts estimate that if SWA raised its current fares 1%, an additional $80m in revenue would be generated.
4. If SWA increased fares (they're hovering around $90 I think) by the same amount they did last year, additional revenue of $450m could be generated
4. Fuel costs this year will add, according to GK, $600m to the cost side of he house.
5. To offset that difference either fare increases greater than last year but less than the analysts predict legacy carriers will raise them or more areas of productivity/efficiency can be found.....one involves slightly higher air fares, one doesn't. Sometimes it gets as simple as that.
6. Last webcast & 10K I believe also stated CASM minus fuel in '06 is projected to be slightly less than last year.
7. Legacies still carry around 70% of passengers...there is a great need for them to remain in business....I wish all of their employees well
8. The entire industry is changing and those leaders who are visionary in predicting & then moving their company in the right direction should be praised & respected...I hope for their employees sake that occurs among many of the carriers...history doesn't have a good track record of showing that happens however.
This is a crazy business & as a senior executive for RyanAir said recently, every year this is some sort of catastrophy in the airline industry that no one predicts & raises all mighty heck on the bottom line....having an ability to "flex" when that happens is a luxury that SWA has, very fortunate indeed for SWA.
GK along with the employees are always searching for more ways to be productive....also GK & his team are searching for more ways to generate revenue in "creative" ways that are longer laster than merely fuel hedges (not bad mouthing fuel hedges, they just have term limits though). Those are good things. SWA is attempting to continue to give low fares to folks who deserve them, the American public. What other carriers are doing isn't as much a concern in my opinion to the leadership of Southwest as the fact the company appears to still be interested in focusing on delievering a quality product, at a fare price & with outstanding customer service....it isn't a lot to some but it is what's made Southwest successful. Hopefully you'll find the article interesting.
Not trying to pat SWA on the back or rub any other carriers in the nose as much as to provide an article to the occasional visitor, potential new hire or recurring lurker with an article that illustrates in a clear & concise description of the focus of Southwest Airlines. Hope I didn't offend anyone with the article...cheers.
Why Airfares Stay So Low -- While Airlines Struggle
Carriers Hesitate to Raise Prices too Much, for Fear of Losing More Customers to Southwest
//http://abcnews.go.com/images/Business/apgb_southwest_060209_sp.jpg
Southwest's discount prices pressure the bigger legacy carriers to keep airfares low. (AP Photo)
By Alexandra Marks
http://abcnews.go.com/images/site/story/byline_thechristiansciencemonitor.gif
NEW YORK, Feb. 10, 2006 — Oil prices might be hovering just below record highs, but it's still almost as cheap to fly as it is to take the bus.
In fact, airfares are almost 20 percent lower than they were in 2000, even though jet fuel is more than twice as expensive.
That's expected to change this year, but not by much. Fares, which have been inching up in response to the spiraling oil prices, will probably continue to rise in only modest increments.
That's not good news for the ailing aviation industry, which, despite record cost-cutting and restructuring, is expected to rack up its sixth straight year of multibillion-dollar losses in 2006. But fliers — who are taking to the skies in record numbers — can thank something that could be called the Southwest effect for continued bargain-basement prices.
"Given how big Southwest is, they're a pricing leader, and they'll continue to keep [downward] pressure on airfares," says Helane Becker, an airline analyst at the Benchmark Co. in New York. "So there's a limit as to how high fares can go."
Southwest is now the nation's third-largest carrier, and it's growing at 10 percent a year. Its current ability to keep fares low is partly because it has 75 percent of its jet fuel hedged for this year. That has allowed it to pay about $1.20 a gallon, compared with the $2 a gallon most other carriers are paying.
So Southwest can remain profitable while other carriers — even Southwest's low-cost cohorts like JetBlue — wallow in jet-fueled red ink. Even though most airlines won't make enough money to cover their basic operating costs, they're hesitant to raise prices too much for fear of losing even more customers to Southwest.
That means the so-called legacy carriers like United, which just emerged from three years in bankruptcy during which it shed $7 billion in annual costs, face another unprofitable year.
"They are going to limp along, but how long they can do this depends on the next economic downturn and the severity of it," says Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. "If it's in the next couple of years, it could be difficult, because there's just nothing left to mortgage."
Better Times on the Way?
Yet some analysts believe this could at least be a turnaround year — if not a profitable one — for the legacy carriers. That's because as fuel prices push fares up — even if only a little for the leisure travelers — the legacy carriers will be able to increase business fares more. And because the legacy carriers have more extensive networks than their low-cost rivals, they can begin charging bigger premiums for people who want to go to out-of-the way places that aren't served by the low-cost carriers.
"The auto-part salesman in North Carolina that has to get to Erie, Pa., will pay anything to get there. There's huge growth in those markets, and Southwest can't get their paws on those passengers," says Michael Boyd, president of the Boyd Group in Evergreen, Colo.
While the legacy carriers can begin to cash in on their networks, Boyd notes, the low-cost carriers are more constrained in how much they can raise their fares because their success — and profits — depend on extremely price-sensitive travelers, many of whom would rather stay home on the couch than pay too much to see relatives. Add to this the fact that Southwest would also be losing money were it not hedged out until 2009, and Boyd believes that analysts will be talking about a very different "Southwest effect" come 2007.
"They're living on borrowed time, and they know that," says Boyd, referring to Southwest. "The Southwest model today doesn't work unless someone's paying 30 percent of your fuel. So I'd say, the Southwest effect [we're talking about now] is the reason that a year from now we'll be talking about the low-fare carriers as being in such deep trouble."
1. SWA's 2005 10K states SWA raised fares last year by 5.6%.
2. Airline analysts are predicting airlines will raise fares anywhere from 6-12% in '06.
3. Financial analysts estimate that if SWA raised its current fares 1%, an additional $80m in revenue would be generated.
4. If SWA increased fares (they're hovering around $90 I think) by the same amount they did last year, additional revenue of $450m could be generated
4. Fuel costs this year will add, according to GK, $600m to the cost side of he house.
5. To offset that difference either fare increases greater than last year but less than the analysts predict legacy carriers will raise them or more areas of productivity/efficiency can be found.....one involves slightly higher air fares, one doesn't. Sometimes it gets as simple as that.
6. Last webcast & 10K I believe also stated CASM minus fuel in '06 is projected to be slightly less than last year.
7. Legacies still carry around 70% of passengers...there is a great need for them to remain in business....I wish all of their employees well
8. The entire industry is changing and those leaders who are visionary in predicting & then moving their company in the right direction should be praised & respected...I hope for their employees sake that occurs among many of the carriers...history doesn't have a good track record of showing that happens however.
This is a crazy business & as a senior executive for RyanAir said recently, every year this is some sort of catastrophy in the airline industry that no one predicts & raises all mighty heck on the bottom line....having an ability to "flex" when that happens is a luxury that SWA has, very fortunate indeed for SWA.
GK along with the employees are always searching for more ways to be productive....also GK & his team are searching for more ways to generate revenue in "creative" ways that are longer laster than merely fuel hedges (not bad mouthing fuel hedges, they just have term limits though). Those are good things. SWA is attempting to continue to give low fares to folks who deserve them, the American public. What other carriers are doing isn't as much a concern in my opinion to the leadership of Southwest as the fact the company appears to still be interested in focusing on delievering a quality product, at a fare price & with outstanding customer service....it isn't a lot to some but it is what's made Southwest successful. Hopefully you'll find the article interesting.
Not trying to pat SWA on the back or rub any other carriers in the nose as much as to provide an article to the occasional visitor, potential new hire or recurring lurker with an article that illustrates in a clear & concise description of the focus of Southwest Airlines. Hope I didn't offend anyone with the article...cheers.
Why Airfares Stay So Low -- While Airlines Struggle
Carriers Hesitate to Raise Prices too Much, for Fear of Losing More Customers to Southwest
//http://abcnews.go.com/images/Business/apgb_southwest_060209_sp.jpg
Southwest's discount prices pressure the bigger legacy carriers to keep airfares low. (AP Photo)
By Alexandra Marks
http://abcnews.go.com/images/site/story/byline_thechristiansciencemonitor.gif
NEW YORK, Feb. 10, 2006 — Oil prices might be hovering just below record highs, but it's still almost as cheap to fly as it is to take the bus.
In fact, airfares are almost 20 percent lower than they were in 2000, even though jet fuel is more than twice as expensive.
That's expected to change this year, but not by much. Fares, which have been inching up in response to the spiraling oil prices, will probably continue to rise in only modest increments.
That's not good news for the ailing aviation industry, which, despite record cost-cutting and restructuring, is expected to rack up its sixth straight year of multibillion-dollar losses in 2006. But fliers — who are taking to the skies in record numbers — can thank something that could be called the Southwest effect for continued bargain-basement prices.
"Given how big Southwest is, they're a pricing leader, and they'll continue to keep [downward] pressure on airfares," says Helane Becker, an airline analyst at the Benchmark Co. in New York. "So there's a limit as to how high fares can go."
Southwest is now the nation's third-largest carrier, and it's growing at 10 percent a year. Its current ability to keep fares low is partly because it has 75 percent of its jet fuel hedged for this year. That has allowed it to pay about $1.20 a gallon, compared with the $2 a gallon most other carriers are paying.
So Southwest can remain profitable while other carriers — even Southwest's low-cost cohorts like JetBlue — wallow in jet-fueled red ink. Even though most airlines won't make enough money to cover their basic operating costs, they're hesitant to raise prices too much for fear of losing even more customers to Southwest.
That means the so-called legacy carriers like United, which just emerged from three years in bankruptcy during which it shed $7 billion in annual costs, face another unprofitable year.
"They are going to limp along, but how long they can do this depends on the next economic downturn and the severity of it," says Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. "If it's in the next couple of years, it could be difficult, because there's just nothing left to mortgage."
Better Times on the Way?
Yet some analysts believe this could at least be a turnaround year — if not a profitable one — for the legacy carriers. That's because as fuel prices push fares up — even if only a little for the leisure travelers — the legacy carriers will be able to increase business fares more. And because the legacy carriers have more extensive networks than their low-cost rivals, they can begin charging bigger premiums for people who want to go to out-of-the way places that aren't served by the low-cost carriers.
"The auto-part salesman in North Carolina that has to get to Erie, Pa., will pay anything to get there. There's huge growth in those markets, and Southwest can't get their paws on those passengers," says Michael Boyd, president of the Boyd Group in Evergreen, Colo.
While the legacy carriers can begin to cash in on their networks, Boyd notes, the low-cost carriers are more constrained in how much they can raise their fares because their success — and profits — depend on extremely price-sensitive travelers, many of whom would rather stay home on the couch than pay too much to see relatives. Add to this the fact that Southwest would also be losing money were it not hedged out until 2009, and Boyd believes that analysts will be talking about a very different "Southwest effect" come 2007.
"They're living on borrowed time, and they know that," says Boyd, referring to Southwest. "The Southwest model today doesn't work unless someone's paying 30 percent of your fuel. So I'd say, the Southwest effect [we're talking about now] is the reason that a year from now we'll be talking about the low-fare carriers as being in such deep trouble."
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