The Airline With A Success Secret

CBS Evening News: With Fuel Prices Soaring, U.S. Airlines Are Losing Money Fast - All But One

(CBS)  With jet fuel prices sky-high, all the airlines are losing money. All of them but one, CBS News transportation and consumer safety correspondent Nancy Cordes reports.

Southwest Airlines was the only major U.S. carrier to turn a profit in the last financial quarter. It did it without charging a dime for pillows, water, or even checked bags - all while poking fun at its rivals.

What's Southwest's secret? Well, two decades ago, it made a bet on a strategy called "hedging," paying more up-front to lock in the price it pays for oil. Today, the going rate for a barrel of crude is $112 - but Southwest pays just $51.

"Just this year alone, 2008, our fuel hedges will likely save us close to $2 billion," said Gary Kelly, Southwest Airlines' CEO. "And our annual revenues are about $11 billion, so it's a very, very significant part of our success."

But it's far from the only part, according to aviation analyst Peter Goelz.

"Well, Southwest has done it right from the start," he said. "And it starts with the aircraft."

That aircraft, a Boeing 737, is the only jet in the Southwest fleet. That's compared to the six to 11 models most airlines maintain.

"They have less training costs, less spare parts to carry, they have essentially a uni-plane fleet. Smart move," Goelz said.

It is all about efficiency. With just one cabin class, coach, and no assigned seats or meals, boarding goes quickly, and cleaning does, too.

"A plane comes in here to BWI; it's ready to go out in 20 minutes. Nobody else comes close to that," Goelz said.

And crucially, Southwest steers clear of those big hubs with their high landing fees and congestion.

Bypassing, say, Chicago's O'Hare, where one out of every three arriving flights is delayed, it files to nearby Midway, where only one in five arrive late.

Instead of flying to Washington's Reagan National, which charges airlines $12.44 per passenger, it staked a claim in Baltimore, which charges just $4.33 per passenger.

But even high-flying Southwest, with its no-frills approach, isn't immune to the challenges currently rocking the industry. Some analysts predict that next quarter, for the first time in more than 30 years, Southwest will fail to turn a profit.

"It's a very successful fuel-hedging company with an unprofitable airline on the side," said Hubert Horan, an airline industry analyst.

He says Southwest has strayed from the winning formula it developed in the '70s, when it was a maverick airline in the Lone Star state.

Back then, it was all about short-distance flights on sunny routes. And lots of them. Today, the airline flies to 64 cities, losing money on many cross-country routes.

"The industry as a whole is broken. There's way too much capacity that is fundamentally unprofitable, there are airlines that are much much worse run and until those go away," Horan said. "Nobody can make money."

Plus, those legendary hedging deals? Most are set to run out by 2012. If the cost of fuel doesn't drop, Southwest could be over a barrel … just like all the rest.

[beehive21-2009]

Speaking of oil increase ,oil went up to $ 121 / because Russia an the USA are waving the swords ? How funny , Bush in the past has called upon Iran, to boost Oil prices now, it''s Russia ? Bush and Cheney going for another Billion before they leave ? Why so Greedy ? Hope, they enjoy it,they''re going to be dealt with in the future, and will do time in a Cuban prison, Guantanamo, with the rest of the Evil Doers.

[ibzjem]

I fly often in my career and I pick Southwest every chance I get. I''ve flown them all. They have the best "frequent flier" program I''ve seen and you can get "credit" for flights you''ve taken up to two years ago. I like being able to choose my own seat after I board. I''m not real crazy about the business priority plan they have going now, but it''s a bit better than the red carpet *** other airlines do.

[aggiekat2004]

I love Southwest...fun, on-time, and they do what they say they''re going to do.

As an MBA...yeah, they''ve made some smart moves and decisions...we studied them in one of our cases in school. It''s all about efficiency, and none of the other airlines even come close.

And SHOULDN''T oil be $51 a barrel anyway? I''m sure all of what''s going on right now is from speculation...and betting AGAINST our economy. If it weren''t for the corporate criminals (yeah, probably mostly MBAs) out there, our economy wouldn''t be upside down right now.

[jtormey3]

... and betting against the American economy, is an un-American thing to do. Just like consorting with the oil families in the mid-East to the detriment of your own country''s citizens.

http://southwestairlinesalmostkilledyou.blogspot.com/

[godseyesore-2009]

Betting against American economy sounds like an excellent bet given realities of world, and obviously, it was.

[jtormey3]

So - Southwest Airlines bets AGAINST the American economy; the story breaks that Southwest flew hundreds of thousands of unsuspecting human passengers in cracked airplanes accompanied by threats made to aviation inspectors, still FBI-investigated; and Southwest''s former head Herb Kelleher bails out - and NOW your newspaper assumes "all is forgiven" and publishes a laudatory fluff-piece about "Air Kevorkian" at the behest of the FAA and USDOT? CBS is now just as bad as USA Today a/k/a "News McNuggets". Congratulations, folks. News reporting is now officially dead.

[dragonmouse-2009]

Yes fuel costs are a problem for most airlines...HOWEVER...before fuel prices started rising to their current ridiculous level...many airlines were going bankrupt and hurting a lot. The fuel costs are only an "excuse". Fuel hedging saved Southwest but...they still would have made a profit regardless.

I almost had to pay for 1 pound over the limit but I just rearranged and all was fine. After all you get TWO FREE bags for every ticketed passanger.

[afmca]

I think most of the responders got it right ... SWA is run by competent long term thinking and planning managers while the rest of the industry is run by a bunch of idiots knowing tax-payers will foot the bill for their ultimate failures. That is the GOP enterprise world ... no responsibility and no accountability. SWA shows that if you treat your employees with respect and think beyond your next bonus, you can have success.

[creeper00]

Who knew the service at Southwest would turn out to be better than that at Delta?

I''ve watched Southwest since the day they made their first takeoff. They do one thing...get you and your bags from point A to point B, intact and on time...and they do it very well. In the history of the airline there has been one fatality...a child on the ground in Chicago when a Southwest airplane went off the end of the runway in a snowstorm.

I worked twenty years in the airline business. It was always a disappointment to me that I didn''t sign on with Southwest. Through five carriers I weathered four furloughs and the disaster that was deregulation, until finally, a bankruptcy drove me to abandon a career I loved.

My heart goes out to all airline employees who go to work every day wondering if, like me, they will hear on the radio after they get home that they no longer have a job.

I wouldn''t go back to that business now for anything. But it was sure fun while it lasted.

[neo267-2009]

Airlines are the most mindnumbingly badly run businesses on the planet. They treat the vast majority of their customers (coach passengers) as if they are nothing more than freight, using them in attempt to break even while they clean up on outrageously priced business and first-class seats. Treat your customers right and they will pay a fair price for a ticket.

[gpr0989]

I think he''ll be great for the show. Hate to see Peterson go, but the show will still go on. I love all the CSI series.

[labourboss]

Isn''t amazing that the most heavily unionized airline is also the most sucessful. I fly SWA as often as posible, sometimes I can''t and you can see the difference.

[rwsmith29456]

That is called ''far-sightedness'', a trait that most of corporate America sorely lacks.

[timdgrim]

Herb Kelleher put together a great airline that was definitely ahead of its time. I still remember the days of (OK, this is se*ist, but I don''t care) the flight attendants (female) who wore the hot pants.
Good old days for us old farts...anyway, I digress..
Plus, Herb did not have all those upper management dic*weeds to pay and took care of his employees, who worked hard for Southwest.

[sistatee-2009]

"Plus, those legendary hedging deals? Most are set to run out by 2012. If the cost of fuel doesn''t drop, Southwest could be over a barrel %u2026 just like all the rest."

By then, Southwest will be the ONLY airline.