Two weeks ago, Southwest Airlines Co. (NYSE: LUV) CEO Gary Kelly said that Southwest may miss its earnings targets due to fuel costs and weak revenue growth.Yesterday, Kelly promised a number of changes to help improve upon the company's 34 straight years of profitability. He said that to compete, Southwest needs to make changes to create $1 billion in additional revenues over the next several years.
Among the changes are:
• Seating: Southwest will more than likely drop their legendary open seating system. The company has been experimenting with assigned seating during recent months, and will announce its new boarding plan before the end of the year. The company may increase the price of aisle seats like some competitors previously have.
• Schedule Changes: The "discount" airline will cut 39 daily round-trip, non-stop flights by the end of the year, including all non-stop service on some of its biggest routes: Baltimore-Los Angeles; Baltimore-Oakland; Chicago-Orange County, CA; Cleveland-Phoenix; Philadelphia-Oakland; and El Paso-Midland, TX. The change will allow Southwest to create 46 new daily non-stop flights in key growth markets, including Denver and New Orleans.
• Frequent Flier Program: Southwest wants to make the "Rapid Rewards" program attractive to business-class travelers.
• Growth: The plan is to cut its capacity growth to 6% from 8% year-over-year.
As The Wall Street Journal points out , "Southwest's unit costs, or costs to fly each seat one mile, have risen nearly 20% over the past four years on higher fuel prices and increased labor costs."
Over the past two decades, Southwest shares have outperformed every U.S. airline on the Street. In the last two years shares have been range-bound. It looks like Southwest's problems are really starting to impact the bottom line. By moving planes to more profitable routes and cutting labor costs Southwest officially lost its small-company appeal and has become just another airline.
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Reader Comments (Page 1 of 1)
6-28-2007 @ 8:16PM
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6-28-2007 @ 9:05PM
Michael Schneider said...
Southwest isn't just another company however, they have created an efficient and effective business model widely copied by airlines that are able to copy them and they have both one of the top safety rcords in the industry and one of the best on-time performance records in the industry. Southwest is known for strong, innovative management and a strong corporate culture. That doesn't mean the continued high fuel costs won't hurt them. It does mean that if fuel costs decline they are positioned to benefit and also that they may find their way out of short term problems.
Dr. Michael Schneider runs several Web sites including http://www.Barrelomoney.com.