Will Southwest Be A Threat In 3 Years?

[enilria]

DISCLAIMER: First, let me say that this is not intended to imply that US Airways is not threatened by Southwest. If Southwest does fall apart, JetBlue or another LCC will step up.

It seems to me that Southwest is headed the wrong way. Here's my evidence:

1) If it weren't for their very favorable fuel hedge, Southwest would lose more than $200m in 2004. According to Southwest's 10-Q, Southwest has gained $937 million from its fuel hedges currently in place. Fuel is effectively capped at oil prices of $24 per barrel, which is 1/2 of recent prices. The hedges will expire in 36 months.

SOUTHWEST ON A FAIR FUEL BASIS IS QUITE UNPROFITABLE

2) Southwest's pilot wages will be the highest in the industry after NW and DL complete their cuts. Even worse, Southwest's wages continue to rise quickly and there is absolutely no sense of urgency being communicated that they are moving in the opposite direction from everybody else.

SOUTHWEST WAGES ARE VERY HIGH AND HEADED HIGHER

3) Southwest is abandoning much of their original strategy.
a) They are cutting frequency in short routes where they have had the greatest cost advantage and expanding in long routes.
B) They are moving away from value pricing in monopoly Texas markets where they are now quite expensive. Soon this will spread to California.
c) They are now more motivated by fear of LCCs than anything else. They are expanding in MDW to compete with Air Tran. They expanded in PHL to head off JetBlue. They are now in favor of repealing the Wright amendment to head off Air Tran growing at DFW. The trouble with this is #2 above...labor costs. Air Tran, JetBlue and the other LCCs are now much lower cost than Southwest.

THROWING AWAY STRATEGY THAT WORKED FOR YEARS

4) BTW, does anyone consider it interesting that after years of trying to beat Alaska Airlines (not exactly the lowest cost airline), it appears to most people that Southwest has lost that battle. No more expansion out there in the PacNW, while Alaska reports big profits without a giant fuel hedge. Oh, and finally, Spokane and Boise are in the bottom five in load factor among Southwest stations according to AvDaily (below 60%).

THEY CAN BE BEATEN

I think the fact that Southwest is toying with eliminating open seating is indicative of just how unsettled the whole airline is and shows the desperation level when one looks toward the future. The massive number of planes Southwest plans to take next year (50+) may well be the straw that breaks the camel's back.
If Alaska can beat them, can't Air Tran, JetBlue, maybe even US Airways? Food for thought.

 

[WOJetDreamer]

I've been saying this all along. US just needs to buy some time to correct 20 years of mismanagement. Unfortunately wages are the biggest piece of the pie.

[post="200656"][/post]​

I have been saying this all along. Southwest is getting to big for its own good. They are doing the same thing that all the Legacy carriers has done over the years. When things are good, as it has been for SW for the past few years, workers wages increase and the airline keeps buying aircraft and expanding. Again, if it was not for SW fuel hedge then they would be singing a different tune. SW has to expand to be profitable. WHY? Because they keep getting older and wages only keep going up. Therefore they must expand and hire new people to off set the high end of their work group and hope the markets they expand in will be profitable enough to keep them flying. Same thing happened here at US Airways. U has a very high labor cost right now because everyone at U are at the top end of the payscale and U has not expanded in years. This is why U is trying to come up with a plan to expand and cut wages. Expansion means new workers working for bottom of scale pay which offsets those at the top end of the payscale.

I think if U can get new contracts in place soon, then we will be a airline to reckon with. Delta, NW, AA etc. are just now starting to try to come up with a way to do what U has done for the past 2-3 years and they cant do it over night. If U comes out swinging in Feb. I project Delta and others doing some major downsizing to compete with the new U along with AirTran, SW, JetBlue ect..

 

[bwipilot]

There is a fallacy with argument #1. Lower fuel prices will not hurt SWA's profit. I agree that SWA will not profit from its hedges if oil prices fall. Still, SWA's fuel costs will go down about the same amount. Hence, the two will cancel each other out and the bottom line will be about the same. The difference would be that other carriers won't be crushed by the high fuel prices making them more competitive.

Argument #4: only seems as desperate as calling once for a second date.

Argument #2 and hence#3: employee costs have risen. Still, the mood is "let's remain profitable." Efficiency and productivity are holding the ball of wax together. If they remain high and wages don't advance higher, SWA should have no problems lasting another four years.

 

[wnbubbleboy]

DISCLAIMER: First, let me say that this is not intended to imply that US Airways is not threatened by Southwest. If Southwest does fall apart, JetBlue or another LCC will step up.

It seems to me that Southwest is headed the wrong way. Here's my evidence:

1) If it weren't for their very favorable fuel hedge, Southwest would lose more than $200m in 2004. According to Southwest's 10-Q, Southwest has gained $937 million from its fuel hedges currently in place. Fuel is effectively capped at oil prices of $24 per barrel, which is 1/2 of recent prices. The hedges will expire in 36 months.

SOUTHWEST ON A FAIR FUEL BASIS IS QUITE UNPROFITABLE

Fuel Hedge courtsey of the insight of Gary Kelly. 36 months is 3years alot can happen in 3years. The management team is proactive and has 2 billion cash reserves "Money talks" the negotiation power cash on hand of this is very helpful I am sure.


2) Southwest's pilot wages will be the highest in the industry after NW and DL complete their cuts. Even worse, Southwest's wages continue to rise quickly and there is absolutely no sense of urgency being communicated that they are moving in the opposite direction from everybody else.

SOUTHWEST WAGES ARE VERY HIGH AND HEADED HIGHER

I can only speak for a department I know which is MX. Mechanics are making in the mid- $30's per hour. Stockclerks make around 20$ per hour. Aircraft techs' (Southwest's version of Utility) around 18-19$. All of uur contracts are good through 2008. Mechanics/Stock clerks are very good a ensuring warranty items are expideted. Of course this saves the company money I can't give you direct figures but I remember one year we save the company 24 million in expideted warrenty items. That's a good return for taking care of you people.

3) Southwest is abandoning much of their original strategy.
a) They are cutting frequency in short routes where they have had the greatest cost advantage and expanding in long routes.
B) They are moving away from value pricing in monopoly Texas markets where they are now quite expensive. Soon this will spread to California.
c) They are now more motivated by fear of LCCs than anything else. They are expanding in MDW to compete with Air Tran. They expanded in PHL to head off JetBlue. They are now in favor of repealing the Wright amendment to head off Air Tran growing at DFW. The trouble with this is #2 above...labor costs. Air Tran, JetBlue and the other LCCs are now much lower cost than Southwest.

THROWING AWAY STRATEGY THAT WORKED FOR YEARS

We are the nation's #1 carrier for domestic passengers for the US. We have to change to accomidate demand. For example if we are "McDonald's" and set up at a corner you have Burger King set up accoss the street since they see you can make a profit at your corner. Airtrain is our "Burger King" we HAVE to beat them they are stealing our market share. Southwest took on Braniff with only three airplanes in the 70's that spirit is still here. Back again to Labor costs. It should be labor production. They company receives a great return on it's investment.

4) BTW, does anyone consider it interesting that after years of trying to beat Alaska Airlines (not exactly the lowest cost airline), it appears to most people that Southwest has lost that battle. No more expansion out there in the PacNW, while Alaska reports big profits without a giant fuel hedge. Oh, and finally, Spokane and Boise are in the bottom five in load factor among Southwest stations according to AvDaily (below 60%).

THEY CAN BE BEATEN

Southwest is going where the money is. Right now with U's troubles with inept management, as well as the increased threat of Jetblue/Airtan taking over markets that are being reduced buy U if we are to stake a claim best to do it now. If we don't someone else will.

Also regarding the west coast. I worked in Salt Lake on the ramp sometimes we would only have say 29 passengers up top flying to SEA say as an example. But down below we would have 4,000 lbs of mail and freight. So load factors aren't always a gauge for profit. Of course I'm no expert.

I think the fact that Southwest is toying with eliminating open seating is indicative of just how unsettled the whole airline is and shows the desperation level when one looks toward the future. The massive number of planes Southwest plans to take next year (50+) may well be the straw that breaks the camel's back.
If Alaska can beat them, can't Air Tran, JetBlue, maybe even US Airways? Food for thought.

No one here is desperate. Anyone can beat us if we let them.

[post="200642"][/post]​

 

[wings396]

Up to this point, SWA's big advantage has been their pricing. Once that has been matched by other carriers, Be it LCC's, or Leagacy the game will change. In the past others have matched their fares, but they have not had their costs inline with SWA. As stated above, this is changing with OA cutting wages and benefits far below those of SWA. It is no secret that SWA in not know for their high level of C/S. Passengers have chosen them based on one thing...Low Fares. In the past other carriers have matched SWA's fares, but have not been able to do it without losing money in the market. When they day comes that they can compete and make a profit, SWA could be in for a battle. SWA will be caught in several battles all over their system coming from more than one other carrier. Can they compete while paying thier C/S and Ramp people $24 an hour with others in the $15-$16 range? Only time will tell if this will hurt them.

 

[jimntx]

You can play with the numbers all you want. IF SWA didn't have fuel hedges in place, they would be losing money. Yeah, but they DO have fuel hedges in place. You can just as easily argue that if oil wasn't $50/bbl during the 3rd quarter, AMR would have made a big profit. True, but it was and we didn't.

By saying that the wheels are going to come off at SWA in 3 years is assuming that all current conditions will remain static for the next 3 years. In the first place, a $24/bbl fuel hedge is still a good move 3 years from now if forecasts hold. Oil is expected to drop into the $30-$40/bbl, but not into the $20's/bbl.

Why would anyone think that all of a sudden, the SWA management--that has hardly made a mis-step in 30 years--has all of a sudden lost their minds and started granting contracts that they can not afford? No labor group got anything that Herb and company didn't see a way to pay for.

From the current look of things, SWA is going to have less competition in 3 years, not more. UAIR, UAL, ATA, and FLYI being just the current most obvious examples of things to come. And, that's not wishing ill on anyone--an AMR employee is in no position to do that. We are far from "out of the woods."

If you think JetBlue is going to take them to the woodshed, let's wait until JB has to start paying for their planes and the maintenance before you drive that last nail in the SWA coffin. (Their stock price indicates that the bloom may be coming off that rose.) And, even with seatback TVs, I prefer to reserve judgement on the popularity of the coming Embraers at JB. You can argue all you want that it's really a mainline a/c. But, some of us made the same argument about the F100 for years, and it didn't make customers like it any more. And, if the new Embraers have the same maintenance reliability as the current EMBs, well...

 

[deano]

You can play with the numbers all you want. IF SWA didn't have fuel hedges in place, they would be losing money. Yeah, but they DO have fuel hedges in place. You can just as easily argue that if oil wasn't $50/bbl during the 3rd quarter, AMR would have made a big profit. True, but it was and we didn't.

[post="200698"][/post]​

Well stated!


I have very good friend who is employed there. Seems their contract has been altered to fit the realities of the market and they will not be earning $40 an hour after all.

Unlike management at USAirWays, LUV's management has a different approach and that approach doesn't required an bloody ax.

 

[ELP_WN_Psgr]

Everyone should have known I would have to address a few of these mis-statements:

2) Southwest's pilot wages will be the highest in the industry after NW and DL complete their cuts. Even worse, Southwest's wages continue to rise quickly and there is absolutely no sense of urgency being communicated that they are moving in the opposite direction from everybody else.

Southwest has ALWAYS done their own thing with little regard to what other people were doing. The new contracts you mention have locked in wages for a long time. Practically everyone in the workforce throws themselves at the task of trying to find ways to cut costs without denigrating the product. The current contracts have ASM costs under 8 cents. This doesn't sound like a carrier on its last legs.

Southwest is abandoning much of their original strategy.
a) They are cutting frequency in short routes where they have had the greatest cost advantage and expanding in long routes.
They are moving away from value pricing in monopoly Texas markets where they are now quite expensive. Soon this will spread to California.

Southwest is reacting to market realities. They have been replacing 122 seat airplanes (the -200s) with some 137 seat airplanes (the -700s). You don't need to run as many airframes to get the same number of seats. The extra security hassles and the flat fee or tax attached to each ticket associated with 11Sep01 have impacted short haul traffic the most. If demand is down, you don't need to offer quite as much supply. And who said they are "moving away" from value pricing on the Texas intrastate routes (with California next)? I won't argue I would love to still see a walk up fare of $25 between Dallas and Houston...but jet fuel is no longer 11 cents a gallon. A walkup fare of $94 with lots of options available to get the price down to somewhere around $40 each way still sounds like value pricing to me. Have you priced a ticket from Nashville to Atlanta lately?

The trouble with this is #2 above...labor costs. Air Tran, JetBlue and the other LCCs are now much lower cost than Southwest.

Labor costs are just one part of the pie. You have to look at entire ASM costs. Like has been reported on these boards, everyone at USAirways would have to pay the company to work there in order to get your costs to WN levels.

Alaska Airlines (not exactly the lowest cost airline), it appears to most people that Southwest has lost that battle. No more expansion out there in the PacNW, while Alaska reports big profits without a giant fuel hedge. Oh, and finally, Spokane and Boise are in the bottom five in load factor among Southwest stations according to AvDaily (below 60%).

Well, most analysts expect Alaska to post a loss for the year when Q4 results are in.....and I would sure like to see a link to the AvDaily LF numbers, because that isn't what I am getting. One other question---where in the Pacific NW does WN not go that they should? Billings? Butte? Eugene? With a 737 fleet, and no plans to buy anything else......I would say they have hit all the places they need to hit....at least for now. Plenty of larger fish to fry. Philadelphia comes to mind. And as far as MDW is concerned....I would say WN's expansion of Midway has more to do with them having outlasted one low-cost-pay-the-employees-pittances carriers (ATA) and less to do with reacting to whatever Airtran proposes to do.

 

[zonecontroller]

Looking at the debt to equity of the following airlines: I would say, if fuel prices do not come down in the next three years LUV might be the only airline still operating.
Data Period ending 31-Dec-03
LUV Total Assets 11,731,000 Total Liabilities 6,227,000
AMR Total assets 29,330,000 Total Liabilities 29,284,000
DAL Total Assets 26,356,000 Total Liabilities 27,015,000
NWB Total Assets 4,154,000 Total Liabilities 15,929,000
AAI Total Assets 808,364 Total Liabilities 506,151
JBLU Total Assets 2,185,757 Total Liabilities 1,514,621
CAL Total Assets 10,649,000 Total Liabilities 9,857,000
UAIRQ Total Assets 8,555,000 Total Liabilities 8,383,000 31-Dec-03
ATAHQ Total Assets 869,987 Total Liabilities 884,757
MESA Total Assets 716,936 Total Liabilities 604,963

 

[US1YFARE]

It says a lot that they are not willing to go up against AA at DFW. AA would crush them.

 

[UseYourHead]

I agree with you WO,

Of course, many around here just want to blame management or anyone, instead of facing up to the realities.

You are right, if US Airways can get our costs down, this place will be a force in the marketplace...then what would everyone here complain about?

Good luck to you and yours!

I think if U can get new contracts in place soon, then we will be a airline to reckon with. Delta, NW, AA etc. are just now starting to try to come up with a way to do what U has done for the past 2-3 years and they cant do it over night. If U comes out swinging in Feb. I project Delta and others doing some major downsizing to compete with the new U along with AirTran, SW, JetBlue ect..

[post="200661"][/post]​

 

[deano]

You are right, if US Airways can get our costs down, this place will be a force in the marketplace...then what would everyone here complain about?

[post="200751"][/post]​

To do that they are bringing the EMPLOYEES DOWN DOWN DOWN which equals total and absolute failure......

 

[firstamendment]

Oh God, what have you guys started?

Just all you have to do is remember the three reasons Herb was quoted for the success of Southwest.

USAir
USAir
USAir

Plane and simple...we gave away the store with poor managment leading the way now for the last 16 years, all claiming somehow they are worthy of their huge salaries, only 1% paycut (really part of the family ,management), and years of arrogance and neglect towards customers and employees alike. Not to mention no clue on how to compete. If you're going to abandon a market, at least salvage some money from it, but oh no, we left, didn't look back and forgot that wrapped around that skeleton was a nice diamond. Southwest merely dusted it off, shined it up and made it worth something. Who could blame them?

I find the entire thread laughable, as our chances of survival are so ridiculously low and you guys want to debate how SWA should run their company or what course they are currently on? ......................................................................
.................................................... oops, sorry, I feel out of my chair laughing so hard. Moderators, send this one to the SW board. They'll love this one.

 

[oldiebutgoody]

The real issue is that SW has competent management and UAIRQ does not. Seems the ONLY REAL issue to me!

 

[jimntx]

This whole thread is predicated on a bunch of IF's. Remember the nursery rhyme that begins
If wishes were horses, beggars would ride.

Add to that...
If Kerry had gotten more votes, he would be President-elect. (Leave it alone. I'm a yellow-dog Democrat, and I'm still in mourning.)
If the Arabs and the Israelis would stop trying to annihilate each other, there would be peace in the Middle East.
If only the Dallas Cowboys would win more games, we would be leading our division right now.


"The saddest words known to men are those that say, 'It might have been.'"
--Robert Burns