Southwest Sees Higher Fares, Mergers
December 5, 2007
Southwest Airlines expects soaring fuel costs to lead to higher fares and may push rivals into mergers, its chief executive said on Wednesday.
"It feels like fares will need to continue to rise on an annual basis because costs are escalating rapidly," Gary Kelly said at the Reuters Aerospace and Defense Summit in Washington.
Oil prices, which hit record levels in recent weeks, are driving up the cost of jet fuel. Combined with a darkening outlook for the US economy, the US airline industry, which emerged from a five-year slump in 2006, may be heading for another rough patch.
"There is a lot of peril that remains," Kelly said.
The recent run-up in oil "isn't a spike. We're at a new level. The industry hasn't adjusted to it yet. We haven't adjusted to it yet."
Higher fuel costs could help cripple the industry's hard-won turnaround, which has come through deep wage cuts and reduced fleets. But airlines remain vulnerable and may look to merge to survive.
"You will have a recession some time, and the impact on the airline industry will be dramatic," said Kelly. "All of that leads to consolidation, I think."
Southwest, one of the few US carriers to consistently post profits, is adjusting to rising fuel, labor, and airport costs by looking to boost revenue, with new products such as its Business Select fares, which come with faster boarding and a cocktail on board.
The new initiatives are expected to boost revenue by more than USD$1 billion by 2010, but they may not be enough on their own to keep from boosting fares, Kelly said.
Southwest is better positioned than its rivals because of its aggressive fuel hedges, which locked in prices well below the current level.
Those hedges are likely to generate a gain of "a couple hundred million dollars" in the fourth quarter, Kelly said.
Still, even with this protection, Southwest expects its costs per available seat mile, or unit costs, to rise by 4 percent in the fourth quarter and by "mid-single digits" in 2008.
Despite plans to rein in growth in 2008, Southwest may expand capacity faster than the currently planned 4 percent to 5 percent rate.
"If our competitors start retreating, that may cause us to accelerate our growth plan," Kelly said.
(Reuters)