Southwest Airline in Focus: Is it in a better position than peers?
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Greatly known for its low fare brand, Southwest Airlines (NYSE: LUV) is trading below its 50-day moving average of $9.33 on Tuesday, primarily down on rising oil prices and Greek woes. Rising oil prices is an industry-wide concern, but nowhere near the 2008 levels when oil prices hit over $140 per barrel. Southwest is in a better shape than its peers to continue to flourish.
How is Southwest preparing for spikes in fuel price?
For decades, Southwest has strongly engaged in fuel hedging. Basically, a fuel hedge contract allows airlines to purchase the right to buy oil at a set price at some point in the future. If the price of oil goes up, they use the option to buy oil at the lower price. If the price of oil goes down, then the option simply served as an insurance policy that never got used.
“For the second half of this year, we have 40 to 60 percent of fuel hedging coverage,” said Brad Hawkins, spokesman for Southwest. “They fall at about $105 to $110 per barrel range and protect us against catastrophic oil prices.”
Competitor U.S. Airways (NYSE: LCC) does not hedge its estimated fuel consumption and thus is more vulnerable to oil price hikes than its rivals. Since February 1, shares of U.S. Airways lost about 23 percent.
Will Southwest pass on the fuel price increase to consumers?
“Low fare is so much part of our brand that one of the last strategies for us is to take an increase in fares,” said Hawkins.
In February when airlines attempted to raise fares, Southwest did not match all the attempts.
“We are often the low fare policeman of the skies,” said Hawkins, “And when we don’t go in to the increases, it is very hard for others to.”
What about revenue generation and cost controls?
Southwest carries more U.S. passengers than any other airline and continues to focus on revenue generation.
“We don’t charge fee for things that customers should get for the cost of a plane ticket,” said Hawkins. The carrier’s “No Change Fees” and “Bags Fly Free” policies greatly distinguish it as the carrier of choice for budget-minded travelers.
“We want to have the lowest average fare flown across the United States and we continue to do that as measured by the department of the transportation,” said Hawkins. “So we really have to control our costs.”
Southwest primarily offers short-haul flights that require no connections through a hub and most of its customers fly nonstop. By avoiding the hub-and-spoke structure favored by other major airlines, interlining, feeder services and congested airports, Southwest has been able to keep aircraft turnaround times low. Additionally by serving mainly short-haul markets, Southwest is able to hold down food costs, as well as ground service that keeps aircraft out of service and requires leasing more airport gate space.
“It is really part of our internal initiative to control our costs at every level in our business where we can control it,” said Hawkins.
What is going on with AirTran?
“Southwest will continue to grow as AirTran shrinks,” said Hawkins.
Marking a key milestone in the integration of the two airlines, Southwest announced last week that it received approval by the Federal Aviation Administration (FAA) for a Single Operating Certificate (SOC). The process of a full integration of AirTran fleet into Southwest fleet is not complete and the transition to a single ticketing system is a large and complex process that will take several years to complete.
“Most employees and customers will see little or no immediate difference in the two airlines' flight operations as allowed by having both carriers named on the Single Operating Certificate," said Mike Van de Ven, chief operating officer at Southwest. "This will enable us to continue our integration in a coordinated and thoughtful manner, while our customers will continue to receive the highest level of service and safety they have come to expect from both carriers."
AirTran shares a low cost culture and has a strong presence in Atlanta, a heavy business travel market. In February, Southwest added Atlanta to a route map of service now totaling 73 U.S. airports.
While Southwest is taking on more complexity with the addition of AirTran’s new plane types, it is in a good position to manage this risk. The benefits of AirTran’s acquisition outweigh the risks.
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