With a $56 million loss in the fourth quarter of 2008, Southwest has posted its first consecutive quarterly losses in nearly 18 years. As Ben Mutzabaugh at Today in the Sky reports, Southwest’s once-impenetrable armor is showing serious cracks, forcing the airline to rethink its policies of fuel hedging and growth. The airline will shrink by roughly 4 percent in 2009, and its fuel hedges, once the backbone of Southwest’s financial success, have already been drastically cut back.
So what happened? Two things: Fuel prices dropped, and the economy took a nosedive. The Wall Street Journal (subscription required) notes that Southwest had previously hedged 60 percent of its fuel for 2009, but suddenly those hedges are “on the wrong side of market rates,” forcing the carrier to cancel many of them last quarter. But as USA Today reports, Southwest couldn’t cancel them fast enough, paying “$117 million in fourth-quarter charges mostly tied to fuel contracts bought earlier in the year before oil prices plunged.”
Which brings us to the economy, and the dwindling traffic being felt across the industry. Among the most significant lines from Southwest’s earning release was the admission that, “Although it is too early to accurately predict first quarter 2009 traffic and revenues, we have seen notable softness in post-January bookings.” To cope with this “notable softness” in bookings (not to mention the damage caused by its suddenly unfortunate fuel hedges), the airline will shrink capacity by about 4 percent in 2009. This snaps a 20-year streak of growth for the carrier. As Southwest CEO Gary Kelly told Bloomberg, “Now is not the time to be growing. Passenger traffic is declining. We’re slowing our growth at just the right time.”
All this puts Southwest in perhaps the most precarious position it has seen in decades. Does that mean fans of the airline should worry? Probably not. But it’s clear Southwest has very quickly come back to Earth. This means Southwest’s fiercely loyal fans could be the airline’s strongest asset in 2009—if they continue to fly. A strong resurgence in bookings could buoy the airline to success and see it through this rocky time. But with continued softening the airline will likely struggle to achieve profitability in the coming quarters, much like its competitors did last year.
Could Southwest, the erstwhile no-fee airline, turn into just another carrier? Comment below and share your thoughts on Southwest’s future.