Whenever something bad happens to the heritage carriers, Southwest is usually held up as the example of how to run an airline. True, Southwest is doing well but even the leader of low budget sees some turbulence ahead. That’s why CEO Gary Kelly was in Seattle last week telling Boeing executives he needs a new plane. Not another 737 (he already has 425 of them) — a whole new air-travel-for-the-masses aircraft that borrows technology from the 787 Dreamliner to make it more efficient. “We are now facing energy prices that no airline can make money at, at least with today’s [ticket prices] so we’re anxious to partner with Boeing to find a successor aircraft,” Kelly told The Seattle Times. Southwest is riding out the fuel price spike better than most thanks to some advance planning that will keep its costs lower than other airlines for the next five years. The airline gambled on fuel hedges and, for 2005, is paying just $26 a barrel for 85 percent of its fuel. Oil is now trading in the $65 range. Southwest has diminishing percentages of those hedges for another five years. So, it’s not much of a surprise that Southwest stock jumped a percentage point on news of the Delta and Northwest bankruptcies.
…Eyeing Fuel, Southwest Requests New Plane
Key Takeaways:
- Southwest Airlines CEO Gary Kelly is pushing Boeing to develop a new, more fuel-efficient aircraft, distinct from the 737 and incorporating 787 Dreamliner technology, due to concerns about high energy prices making current operations unprofitable long-term.
- Despite these long-term concerns, Southwest is currently well-positioned and outperforming competitors thanks to strategic fuel hedges, paying significantly less for fuel (e.g., $26/barrel for 85% of its 2005 fuel) than market rates for the next five years.
- This strong financial advantage, stemming from its fuel hedging strategy, contributed to a rise in Southwest's stock following the news of Delta and Northwest bankruptcies.
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