Things in the Sky

You may have seen headlines yesterday about how Southwest lost money for the first time in 17 years, or something to that effect. Including special items, yes the airline did lose $120 million, $0.16/share.  But excluding those special items, there was a profit of $69 million ($0.09/share).

In this case, it is important to consider those special items. In Southwest’s case, one of them was a $247 million charge involving its hedging program. Curbcrusher over at FlyerTalk explained it the best in a post:

It is due to “mark-to-market” accounting. When oil was $140/bbl, the then-current market value of their hedge positions shot through the roof and was reported accordingly. Conversely, now that oil is roughly half that, the current market value of those hedge positions is not so high. So I believe the loss is the difference between the hedge position market values between the end of 2Q and 3Q.

Basically, not a big deal, in my opinion.

Overall, I found the results pretty good. Southwest’s total revenues increased 12.5%. To compare, Delta’s went up 9%, Continental’s 9.9%, and American’s 8%. Southwest was able to increase its revenue more even though it hasn’t followed the other airlines in terms of fees. To be fair, many of the new fees didn’t come into effect until the third quarter was underway. The fourth quarter results will paint a clearer picture but so far I find this to be a good sign for Southwest, and it appears that CEO Gary Kelly is optimistic too, as he told one analyst that “we had 14% unit revenue growth in October on top of a capacity increase and I feel really good about that.”

Fees seemed to be a big topic of both the analyst call and the media call. It seems that the airline is getting good feedback on the no-fees policy. One thing that was mentioned is that more people need to know about Southwest’s lack of fees, hence Southwest becoming a bit more aggressive in marketing it. Gary had a few words on the no-fees approach:

We think that the no fees approach will also earn us more customers that will more than pay for what incremental fees would be. That’s our view and we’ll know. We’ll know in a year or two or maybe sooner or maybe later whether that was the right choice or not, but the way we see it this is just a gift from our competitors and we’re taking full advantage of it.

He did leave the door open for changes, though:

But in the end the customers are going to tell us what they want. If they want fees and they want fares unbundled, we’ll do that. It’s just based on our knowledge of our customers, and we carry more customers than any other airline in the world. We don’t think that’s the right thing to do and so far I feel like we’re being rewarded for it.

I really liked his comment on the fees of other airlines:

There’s this assumption I think that people are making that the fees are additive and there’s certainly no evidence yet that that will be the case.

I was able to ask Gary a couple of questions during the media call which was pretty cool considering that I’ve only been at this for a few months. Thanks very much to Southwest for letting me join in! Anyway my first question was on WestJet and how the timetable looked for that, and he said it was still on schedule for late 2009, and that both airlines still need to get some work done to get everything running. I also asked about future international service and codeshares, and he said that Southwest still has plenty of opportunities to expand here in the US, and that it is not ready to announce any new international partners. Finally, I asked about the upcoming enhancements to Rapid Rewards that were hinted at during the call. I wanted to see if I could get any more details about, but sadly these changes seem top secret for now – Gary said he would be “slapped silly” if he revealed them.