Southwest Airlines with Success Secret – Hedging?

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." 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. 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.