"Southwest, Alaska Airlines Perform Well"

Thursday, October 20, 2005

Southwest, Alaska Airlines Perform Well
By DAVID KOENIG
The Associated Press


DALLAS -- Southwest Airlines Co. and the parent of Alaska Airlines on
Thursday, cashing in winning bets they made on the direction of fuel prices.

U.S. airlines are seeing strong demand for travel, and they've even had a
bit of success in pushing up ticket prices, but high fuel prices have kept
giants like American Airlines in the red.
  
Not so at Southwest and Alaska Air Group Inc., which were more aggressive
than their rivals in taking options to buy fuel far in the future at set
prices, a practice known as hedging.

Southwest said Thursday it earned $227 million, or 28 cents per share, in
the third quarter, including an $87 million gain from its hedging. Analysts
had expected 18 cents per share, according to a survey by Thomson Financial,
and the results beat Southwest's year-ago profit of $119 million, or 15
cents per share.

Seattle-based Alaska Air Group, which operates Alaska Airlines and Horizon
Airlines, used hedging to save on half the fuel it bought. Its profit rose
to $90.2 million, or $2.71 per share. After special items, net income would
have been $71.5 million, or $2.16 per share, still enough to beat Wall
Street's forecast of $2.12 per share.

JetBlue Airways Corp. reported a profit of $2.7 million, or 2 cents per
share, when analysts were forecasting a penny per share loss. But JetBlue
was not as insulated from fuel prices as Southwest and Alaska, and it fell
short of a year-ago profit of $8.1 million, or 7 cents per share.

New York-based JetBlue also said high fuel costs would push it to a loss for
the fourth quarter and the year as a whole.

Shares of JetBlue dropped $1.49 or 7.6 percent, to close at $18.05 on the
Nasdaq Stock Market. Shares of Southwest fell 51 cents or 3.3 percent, to
$15.07, and Alaska shares dipped 16 cents, to $29.34 on the New York Stock
Exchange.

Airlines have long taken steps to guard against spikes in fuel prices,
usually buying options to acquire fuel at set prices. Southwest was more
conservative than other carriers but stepped up its hedging against high
fuel prices after prices spiked in 1999.

Other carriers were too weakened after the industry downturn in 2001 to make
hedging deals, and now it's too late to get the kind of deals that Southwest
and Alaska got, said Betsy Snyder, an airline credit analyst for Standard &
Poor's.

Dallas-based Southwest, however, said it will pay the equivalent of $26 a
barrel of oil _ less than half the current price _ for 85 percent of the
fuel it will need in the fourth quarter.

Alaska locked in 50 percent of its fuel for this year at about $30 a barrel
of oil. By contrast, JetBlue hedged against only about 20 percent of its
fourth-quarter fuel at about $30 a barrel, and American Airlines only 8
percent at $48 a barrel, leaving them largely at the mercy of open market
prices.

Hedging let Southwest cut its average cost of fuel to 95 cents per gallon in
the third quarter _ far less than the other carriers who have released
financial results for the July-September period. Alaska Airlines paid $1.56
a gallon, and JetBlue paid $1.70 _ and expects $2 a gallon the rest of the
year. Continental Airlines Inc. paid $1.88 a gallon, and AMR Corp.'s
American Airlines nearly $1.89.

Fuel was 19.6 percent of Southwest's operating expenses, compared to 23.7
percent at Continental, 27 percent at Alaska and Horizon, 29 percent at
American and 31.4 percent at JetBlue, according to figures provided by the
companies.

And Southwest is poised to continue reaping this advantage, with deals to
buy more than half their fuel through 2007 at prices far below current
levels.

Southwest Chief Executive Gary Kelly said the rising cost of fuel is the
biggest risk facing airlines and hedging is a valuable insurance policy.
Flying without such coverage, he said, "is just unwise."

There are limits to Southwest's maneuvering. The company warned that even
with hedges, its price for fuel in the fourth quarter could jump to $1.25 a
gallon or higher because of hurricane damage to refineries on the Gulf
Coast.

"This year was as good as it gets," said Snyder, the S&P analyst.

All the carriers reported strong demand for travel, with planes flying more
full than a year ago. Combined with recent price increases, that resulted in
higher revenue.

JetBlue said revenue jumped 40 percent from a year earlier, to $453 million.
Still, analyst Ray Neidl of Calyon Securities said high oil prices could
force JetBlue to raise prices and drive away customers. He downgraded the
stock.

Southwest's revenue rose 19 percent, to $1.99 billion, and Alaska said sales
gained 10 percent, to $846 million.

Analysts said the revenue outlook could improve further if weaker airlines _
three large ones are now in bankruptcy _ cut flights and reduce the supply
of seats, driving up prices.

Southwest announced Thursday it would begin service to Denver early next
year, taking advantage of cutbacks there by UAL Corp.'s United Airlines,
which is in bankruptcy protection, along with Delta Air Lines Inc. and
Northwest Airlines Corp.

JetBlue increased its capacity 28.2 percent in the third quarter and, like
Southwest, has more airplanes on order. Meanwhile, industry leader American
expects to hold U.S. capacity flat next year.


 Do you have an opinion about this story?
Share it with other readers in our CAA Discussion Forums

http://www.californiaaviation.org/dcfp/dcboard.php


*****************************************