Hey Southwest Airlines - Where’s the Beef?

By Robert Herbst

After only $99 million profit on $10.4 billion in revenues last year, the best Southwest NYSE: LUV) could do for the recent 1st quarter was a paltry $11 million profit ($24 million after excluding special items) on over $2.6 billion revenue.

For months we have been watching Southwest ads promote their no-baggage fee policy against the rest of the industry. It’s worth noting most of Southwest’s competitors have managed to increase operating revenues by 7-12% with their add-on ancillary fees.

For this analyst, Southwest’s 1st quarter financial performance is at best disappointing. Here’s why:

Once again, the first quarter had high and unpredictable fuel costs, the winter weather created some issues, and the airline industry is highly competitive etc. etc.

Southwest has been in the airline business for over three decades. By now I would expect these samo samo issues shouldn’t continually be used as an excuse for what is essentially a zero return from $2.6 billion in revenue and more importantly, from an airline who in large part, sets the minimum passenger fare in most every market they operate?

As I have repeatedly stated, the US airline industry is the disaster it is not because costs are too high but because fares/revenues are simply too low. On average, adjusted for inflation, air fares are half of what they were 20-25 years ago. Yet, quarter after quarter and airline after airline, we read about industry losses, lousy customer service, and little to no return for investors.

What part of pricing your product/service high enough to cover costs and provide a reasonable profit for a US publicly owned business am I not understanding?

The average fare paid by a Southwest passenger in the 1st quarter was a whopping $124.90 with the average distance flown of 854 (air) miles.

Putting this in perspective, it would take from 15-20 hours driving time and $130 for gas, plus wear and tear on a car to go the same distance that Southwest will take just a couple of hours to fly you and your bags at a charge of only $125. And as a bonus you get free soft drinks and those famous Southwest peanuts while sitting back in a nice leather seat!

Is there any doubt why airlines aren’t making any money?

Don’t get me wrong about Southwest Airlines. It is a great company with great employees and has what most would consider some of the best management in the airline industry. But, who is going to tell me that increasing the average fare by little more than the cost of the Starbuck’s latte that a passenger waits in line to buy at the airport is going to “lose” revenue for one of the best airline brands in the world?

An average fare increase of only $5.00 per passenger would have increased Southwest’s profits by $100 million for the 1st quarter.

In this analyst’s opinion, it’s past time for Southwest, the largest airline in the US (ranked by domestic passengers and departures) to put a little more effort into their investors who see a stock price that is 25-30% less than it was 10 years ago.

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Disclosure- The above opinions and comments should not be used to determine the worth of any stock or investment. At the time of writing, the author and his family did not hold stock and/or derivative positions in any of the airlines covered in this article.

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Robert Herbst has been a commercial pilot since 1969. His aviation experience and financial background provides a unique analytical perspective into the airline industry. He is the founder of: Airlinefinancials.com which provides airline industry analysis and commentary for major US carriers.

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