Plenty of companies will breathe a big sigh of relief if stronger business spending comes back soon. But whether the economy is firing on all cylinders or falling like a brick, airlines seem engaged in a perpetual mad scramble for elusive profits.
Yesterday, Southwest Airlines (NYSE: LUV) was the first of a handful of its peers to report earnings for the late summer months. Most of them, including Delta Air Lines (NYSE: DAL), US Airways (NYSE: LCC), and Continental Airlines (NYSE: CAL), are expected to beat last year's same-quarter adjusted earnings.
As is so often the case, though, Southwest was the exception. Analysts predicted the company would post earnings of $0.02 per share, or a decline of 78%. If you take out special items related to fuel hedging and the company's employee early-out program, Southwest managed to beat Wall Street's numbers by a penny. Taking those special items into account, Southwest lost $0.02 per share on revenues that fell 7.8% to $2.67 billion.
Black sheep
To be clear, Southwest still looks pretty good compared with the other airlines. Of the carriers listed above, only Continental is expected to eke out even a modest profit. Yet since reporting a year ago its first quarterly loss in 17 years, Southwest has clearly struggled to return to its winning ways.
Foremost, other carriers have been raking in cash through surcharges that have helped insulate their top lines from the dwindling numbers of business travelers. Southwest has famously stated in advertising that bags fly free, although Southwest still does charge extra for some things, like heavy bags, pets, unaccompanied minors, and use of its EarlyBird Check-in system.
Very clever
Yet that's one of the ways Southwest goes about differentiating itself from competitors without losing big money. While other airlines get jeers from customers for baggage charges, which customers interpret as a forced tax, Southwest instead tries to get customers to fork over their extra cash voluntarily for perks. It's a psychological but very real benefit, and if recent comments from CEO Gary Kelly are any indication, you could see similar features appear in a revamped frequent-flier program in the future.
Personally, I think such ideas reveal the innovative thinking that people have come to expect of Southwest's management, and they might even work. Airlines like Delta, JetBlue (Nasdaq: JBLU), and UAL's (Nasdaq: UAUA) United Airlines have found customers receptive to buying carbon offsets, as has delivery company UPS (NYSE: UPS). So it's reasonable to believe that people will pay extra for perks from which they'll get a more immediate benefit. If so, it may help Southwest emerge faster from one of the most difficult periods in its history.
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