Airlines Finally Flying Right?

Maybe the airline business isn't so bad after all. Well, OK, it is. But maybe it's getting better. On Wednesday, Southwest Airlines (NYSE: LUV  ) announced its fourth price increase this year. Fares for one-way trips on flights of 751 to 1,000 miles rose by $3, while longer-haul flights were boosted by $10. Published reports say the hikes are some of the largest Southwest has ever imposed.

Naturally, investors want to know whether the increases mean a fundamental improvement in the airline business. I don't think so. Instead, I believe it's a reaction to massive increases in oil prices, which topped $75 per barrel this week.

Remember: Even though Southwest planned for higher oil prices, it has only 70% of its anticipated 2006 fuel needs covered. And its exposure is increasing: Only 35% of its anticipated 2008 requirements are hedged, for example.

What's more, Southwest's fuel advantage -- it can buy most fuel at the equivalent of $36 per barrel -- hasn't trickled to the bottom line. First-quarter diluted earnings per share remained flat year over year despite a 21% increase in operating revenues. Southwest must boost margins to resolve that discrepancy, and that boost will most likely come from fare hikes.

The good news is that, in years past, airlines have had to sneak through price increases because the industry as a whole had zero pricing power. With higher traffic volumes, that may finally be changing. And that's got to be welcome news for investors in beleaguered carriers such as Continental (NYSE: CAL  ) , AMR's (NYSE: AMR  ) American, Delta, and JetBlue (Nasdaq: JBLU  ) .

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Fool contributor Tim Beyers can't remember the last time he was on an empty flight. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out which stocks he owns by checking Tim's Fool profile. The Motley Fool has an ironclad disclosure policy.


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