Even as it reported its 53rd consecutive profitable quarter today, Southwest Airlines (NYSE: LUV) is clearly feeling the pain of higher fuel costs and increased competition in the airline industry. Revenues beat analysts' estimates, but earnings fell two cents short of expectations.
Its executive ranks are also in pain today. Following the firm's earnings release this morning, CEO James Parker abruptly resigned, effective immediately. The official reason given in Southwest's press release was "personal reasons," but the timing can't help but encourage investors to form their own conclusions. Parker ascended to the CEO title in 2001, and has been with Southwest for 18 years. CFO Gary Kelly will step in to fill the position, and treasurer Laura Wright will become CFO.
While revenues of $1.72 billion for the most recent quarter beat both Wall Street estimates of $1.66 billion and the $1.52 billion in revenues for the same quarter last year, earnings fell short. The company reported net income of $113 million, or $0.14 a share, below both Wall Street's estimate of $0.16 per share and last year's results of $246 million, or $0.30 a share.
As I wrote in June, higher fuel costs may actually be good for the industry in the long term by forcing a much-needed shakeout. But in the short term, industry profits are being squeezed across the board. Southwest is 80% hedged on fuel costs through 2005 with prices capped at approximately $25 per barrel. If, despite the hedge, its results are below expectations, weaker carriers that have not been able to hedge will feel an even greater amount of pain from the high cost of fuel.
In addition, pricing is now coming under severe pressure in the industry. As Brian Gorman reported, Southwest recently initiated a vicious price war. Other airlines were forced to quickly follow its price cuts, with JetBlue (Nasdaq: JBLU) announcing that it will slash fares by up to 50% on 1 million seats for the fall. Legacy carriers such as Delta (NYSE: DAL), Continental (NYSE: CAL), and American (NYSE: AMR) as well as other low-cost carriers including AirTran (NYSE: AAI) and ATA (Nasdaq: ATAH) all cut fares. Given that low-cost competition now exists on 70% of domestic routes in the U.S., the legacy carriers have had no option other than to make widespread price concessions.
Southwest is the first airline to announce second-quarter earnings, but a couple of recent announcements from legacy carriers indicate that they are suffering. Delta said earlier this week that it would take $1.65 billion in non-cash charges, including $1.53 billion related to deferred income taxes, because of the fact that it is unlikely to generate sufficient taxable income to realize its deferred income tax assets. In addition, this week United (OTC BB: UALAQ.OB) also stated that it has made the decision to postpone its minimum quarterly payment to its pension funds.
Most airlines will announce second-quarter earnings next week. Based on Southwest's disappointing announcement today, next week's news is likely to be even more painful.
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Fool contributor Salim Haji lives in Denver and does not own shares in any of the companies mentioned.
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