Southwest Airlines is another major North American airline that was affected by the pandemic. As we know the airline was ranked the best airline by consumers in the JD Power survey for this service in economy class. However, the airline has been affected by the surge in demand for staff when pandemic restrictions were reduced. However, the company has welcomed the reduction in pandemic restrictions in the US and for the first time since the pandemic is making a profit.
Southwest’s Financial Performance
So how well is Southwest Airlines doing? According to the latest press release, its net income (profit) is now 760 million US dollars. This is a significant improvement on the 278 million US dollar loss made in the first quarter ending March 2022. In comparison to pre-pandemic 2019 at the same time, there was also an improvement in net income from 741 million US dollars. The percentage improvement was 2.6% which some would argue is small. However, this is still significant given the fact that as we know fellow North American aircraft operators American Airlines and Delta Airlines have not yet reached pre-pandemic levels in terms of profitability.
Southwest Airlines’ revenue (total money received) has also increased from 5.909 billion US dollars to 6.708 billion US dollars which was an increase of 13.9 % from pre-pandemic 2019. The fact that revenue has increased by 13.9% but net income has improved by only 2.6% indicates that there has been a disproportionate increase in expenses. Southwest Airlines like many other airlines is having to deal with increased expenses due to the war in Ukraine (affecting fuel prices) and increases in other expenses as airlines recover from the pandemic.
Reasons for Increased Costs
According to the press release fuel costs at Southwest Airlines have increased from two dollars thirteen cents per gallon in pre-pandemic 2019 to three dollars thirty-six cents per gallon more recently. This is a significant increase of 57.7%. Southwest Airlines has said however that it is managing this increase by hedging. This means that they agree to commit to purchasing oil at a fixed price which is independent of the price of fuel at the time of receiving it. They often enter into fixed contracts for a fixed quantity of fuel at an agreed price for many months in advance so that they know the price that they will purchase fuel in – for example – 3 months’ time. This predictability means that they can adjust the prices of tickets early on to compensate for the increase in price. In addition, they are also effectively insuring themselves from a higher increase in fuel price by committing to a price that may be higher than the current price but lower than the price that it could potentially go up to.
Southwest Airlines feels that the increase in expenses is more down to other factors, however. The airline states that the increase in costs is down to the fact that the airline at the moment is functioning at sub-optimal productivity levels. This suggests that at the moment resources are not being used as efficiently as they could be. For example, it may be that some flights are carrying fewer passengers to destinations which have not fully recovered to having normal passenger numbers visiting. The airline also mentions that there have been increases in labour costs as well as airport costs (this may include increases in costs for landing at particular airports). The company anticipates the passenger numbers will increase later this year and this will compensate for the increased costs. What this means is that the company is effectively maintaining routes that are not profitable now but will be in the future.
As one can see Southwest has improved in terms of its revenue as well as its profitability since pre-pandemic levels. The fact that it is showing a higher level of profit when compared to pre-pandemic levels whilst other airlines are not, is a positive note to the company. Costs have also increased, however. Southwest Airlines is managing fuel costs by hedging. In terms of other costs, the airline anticipates that more passengers will be flowing in later on in the year to offset this and further improve profitability. We have to wait to see how this progresses.
