Southwest Airlines does not expect to earn a profit in the first quarter, the reason, as with the quarters before, is because of higher fuel costs following Southwest’s missed fuel hedging opportunity last year. More importantly though by far, and the reason for renewed pressure on Southwest shares, is the fact that bookings seem to be weakening. Southwest CFO, Laura Wright said yesterday that fuel prices have been higher than the airline expected — about $3.50 per gallon instead of the $3.35 it had been forecasting. "Fuel unfortunately is the story of the quarter," Wright said. In January, Southwest expected fuel prices to be high but stable in the first quarter. Instead, they have risen, leading the airline to add 15 cents per gallon to its forecast for first-quarter fuel expenses. "This fuel increase is a significant hurdle for us to overcome, and based on the current revenue and fuel estimates, we currently do not anticipate a profit in the first quarter."
Wright also confirmed that ticket bookings for spring travel weakened in late February but was unsure whether it was a short-term blip or the effect of the wider economic environment.
Southwest has been the most consistently profitable US airline for many years, so news that it won't make money in the first quarter and that bookings are down is a clear sign that other airlines in the US must also be struggling. Or are they?
Southwest has raised fares 10 times in the past 12 months to offset higher fuel prices, but it has also launched frequent fare sales, sometimes every week, to fill seats that has acted to offset increases. Other US airlines have also raised fares over the past year but have not had constant sales. Bookings so far in March "remain good, but we are cautious based on what we saw in late February," Wright said "It's really too early for us to know whether it's a sign of something going on in the economy or whether February was an anomaly.”
Southwest is putting itself in-line with expected first-quarter losses from United, Delta, US Airways and American Airlines. This is significant as JetBlue, Alaska Airlines, Spirit and Allegiant, are all expected to turn a profit in the first three months of this year. Spirit remains the airline to watch. Southwest on the other hand needs to hold seat sales to fill its aircraft and even then it is having trouble, in this market of high fuel costs this is not an option without a good fuel hedge in place and this is the difference between Southwest today and Southwest of yester-year. Give it one more month then we will know if the past few weeks were a blip or if Southwest needs to adjust its thinking to the fact that it was the fuel hedges that allowed for seat sales all these years. Either way I am convinced that the Spirit model is the best in the US market today and it, not Southwest, holds the true claim to be a modern low cost. Southwest could do with looking over its shoulder and noting some of the aspects that make Spirit so attractive – and duplicate them…..
Southwest (LUV) stock has dropped sharply since early February 2012 when it traded as high as $10.05 a share. LUV stock traded as low as $8.27 a share yesterday before attracting bargain hunters and increasing slightly.