A month ago, I posted on the question, "Should Airlines Hedge Fuel Costs?" focusing on Southwest's aggressive use of hedging compared to the rest of the industry. Today, we get more evidence for an answer in the affirmative, courtesy of the Wall Street Journal:
Southwest Airlines continued its pattern of profits in the worst of industry times, nearly doubling its net income in the third quarter, as fast-growing rival discounter JetBlue Airways squeaked out a profit and warned of losses for the rest of the year.
Thanks to a fuel-hedging program that locked in lower prices, Dallas-based Southwest has been profitable as other carriers have posted hundreds of millions of dollars in losses amid soaring fuel costs. Southwest, the seventh-largest U.S. airline based on passenger traffic at the beginning of the year, has taken advantage of rising demand for air travel, increasing fares five times since the beginning of the year, according to J.P. Morgan analyst Jamie Baker.
Southwest reported net income of $227 million, or 28 cents a share, compared with $119 million, or 15 cents a share, a year ago. Southwest said the results include a gain of $87 million before taxes associated with its hedging program. Revenue rose 19% to $1.99 billion.
Southwest flexed its muscle yesterday by announcing that it will launch service in Denver, one of the few major U.S. cities it doesn't already serve. Southwest is stepping into the space created as UAL Corp.'s United Airlines, which dominates Denver traffic with a 57% market share, has scaled back in an effort to emerge from bankruptcy protection. Southwest will also be taking on fellow low-cost carrier Frontier Airlines, which has a 19% market share but has struggled with losses because of jet-fuel costs. Southwest said it would begin service early in 2006.
The move underscores Southwest's capacity to grow when rivals are shrinking, but it also is evidence of the increasing risks the maturing carrier must face to expand. Southwest had shunned Denver because the Denver International Airport fees were too high, shaving profit margins too thin for Southwest's low fares. Southwest said it now views Denver's costs as more manageable.
Raymond James analyst Jim Parker downgraded Frontier Airlines, citing Southwest's lower costs and a belief that "it is very difficult for any airline to beat Southwest in head-to-head competition."
He's got that right. And now I'm daydreaming about reliable air service to ski the Rockies.