Thanks to lucky bet, Southwest flying high with oil supply
By Peter Pae
Los Angeles Times
By Peter Pae
What would it be like to pay $2 for a gallon of gas when everyone else is paying twice that much?
Southwest Airlines knows, and that's why many analysts believe it may be one of the few U.S. carriers — if not the only one — to post a profit this year while still offering bargain fares.
The airline locked in more than 70 percent of the fuel it expects to consume this year at about $51 a barrel.
By comparison, other large airlines only have 20 percent to 30 percent of their fuel "hedged" this year and at an average cost about $100 a barrel.
With the huge cost advantage, Southwest hasn't had to hike air fares or impose new fees like other carriers including last week's controversial decision by American Airlines to charge domestic fliers $15 for the first checked bag and increase other fees.
The advantage won't last forever since oil prices could plummet, and even if they stay high, the amount of fuel Southwest has been able to hedge in future years diminishes considerably from 55 percent next year to 30 percent in 2010.
But because of a calculated risk the airline took last year — essentially betting correctly that fuel prices would escalate — Southwest "may be the only one left standing" by the end of this year, said Terry Trippler, an airline analyst who expects most of the major carriers to post a loss this year with perhaps a few even going into bankruptcy.
"Southwest," he said, "is sitting there looking really good."
Southwest's aggressive fuel hedging is having a broader impact on fares in the markets it serves, travel experts say.
Tom Parsons, publisher of travel Web site www.Bestfares.com, said that travelers flying between two cities where there is no competition from Southwest pay about $340 more round trip than they did just six months ago.
www.Farecompare.com, an online air fare search service, noticed for instance that American last week dropped the price of round-trip ticket by average of about $30 on routes also served by Southwest including San Diego, Seattle and Las Vegas. At the same time, American was raising fares by an average of $60 in other markets and imposing the new bag fees, according to fare www.compare.com.
Emboldened with lower fuel costs than its competitors, Southwest has been able to offer promotional fares as low as $29 one-way.
The airline has also been able to respond to the woes of other airlines with a bit of smugness.
When American last week said it would have to begin charging for checked bags because of the high fuel costs, Southwest quickly responded by saying that it was doing "everything" to boost revenue, "but it's not our goal to nickel and dime our customers."
"We want to assure you that Southwest Airlines still allows you to check up to two free bags when you travel with us," the airline said in a posting on its Web site. "We look forward to seeing you onboard very soon. And bring your luggage!"
The cost difference between Southwest and others that don't hedge as much can be dramatic. Fuel costs were up 20 percent for Southwest in the first quarter, while American said its fuel costs were up nearly 50 percent, which wiped out profits for the United States' largest airline. On average Southwest paid about $1.98 for a gallon of gas while American, which hedged about 27 percent of its fuel use, paid $2.74 a gallon.