July 14, 2005
I (heart) Southwest Airlines
Posted by Darren Roulstone

I flew Southwest Airlines last month and was amazed at how nice the experience was.  The seats were wider and had more leg room than the usual seats at American and United.  Today's Wall Street Journal gives me another reason to admire Southwest: if I was as smart as its executives are, I'd only be paying $1.19 a gallon for gas.

The Journal article reports Southwest had 41% higher earnings in 2005's second quarter compared to the second quarter last year.  This increase was helped out considerably by a hedging program that lowers the airline's fuel costs: "...Wall Street's focus remains on Southwest's ability to fight off the crippling effects of high oil prices with financial contracts that have essentially locked in lower fuel prices for the airline while its competitors groan under heavier costs. Though oil prices topped $60 a barrel in the quarter, Southwest has secured financial hedges that limit 85% of its fuel costs during the year to an equivalent average oil price of $26 a barrel."  If 85% of my gas costs were at less than half the going rate I'd be paying $1.19 a gallon (based on my last purchase at $2.29 a gallon).

The hedging strategy saved Southwest almost $200 million in fuel costs; while competitors saw fuel costs rise 50%, Southwest's fuel costs only rose 25%.  This was on top of an 8% decrease in non-fuel expenses per seat-mile flown.  Cost management like this (and nice seats!) is one reason Southwest has a market cap of $11 billion: that's more than the combined market cap of American, Delta, United, Continental, and Northwest (you'd need to throw in JetBlue and British Airways as well to get to Southwest's market value).

(And to keep gas prices in perspective: I remember the early 80's when gas cost $3.00 a gallon in 2005 dollars AND I'm aware that pumping crude oil out of semi-war zones, transporting it half way around the world, refining it in complex and dangerous refineries, shipping it to my neighborhood, and aggresively taxing the sale still results in a product cheaper than the bottle of water one of my colleagues bought at lunch today--less than a mile from Lake Michigan.)

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