Southwest CEO Warns of Bumpy 1Q Ride
The first quarter of 2006 is likely to be a difficult time for Southwest Airlines, thanks to fuel prices and the timing of the Easter holiday, Gary Kelly, the airline's chief executive, said Thursday.
Speaking to a conference of airline analysts in New York, Kelly said he remains hopeful that Southwest will achieve its goal of 15 percent earnings growth this year despite higher costs. But he said that it won't be easy.
Costs during the fourth quarter were up nearly 11 percent, and they should go even higher during the first quarter, Kelly said, largely because of high fuel prices.
Unlike most airlines, Southwest has some protection from high oil prices through contracts that allow it to buy fuel at lower prices. But those contracts provide less protection this year than in 2005.
"Even with our fuel hedge, our fuel prices per gallon will be up 60 percent" during the quarter, he said. "That's a pretty stout hurdle to overcome."
For the year, higher fuel prices could mean as much as $600 million in additional costs for Southwest, he said.
Although he hopes that revenue will be strong, Kelly pointed out that the Easter holiday, which traditionally spurs brisk travel, falls in the second quarter this year.
Last year, it was during the first quarter, which could skew comparisons between the first quarters of the two years.
Still, Kelly pointed to some news that could help Dallas-based Southwest. The demise of Independence Air means less competition along the East Coast, he said. And with most major airlines cutting domestic flights this year, revenue should be stronger.
"We have a very strong balance sheet, and we're prepared for tough times," he said.
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