Southwest Navigates Airline Hell to a Fourth-Quarter Profit

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In yet another horrifically bad year for the airline industry, Southwest Airlines has risen above the fray again with a fourth-quarter profit -- contributing to its 37th straight year in the black. Less expected was a profit from Continental, which ended a string of 8 consecutive quarterly losses.

The airlines said that business travel was slowly beginning to recover, and they have taken steps to hedge against a steep expected climb in oil prices this year.


Continental reported net earnings of $85 million, 60 cents a share. This was especially striking when contrasted with the airline's $269 million loss a year earlier. Chairman Jeff Smisek told the Financial Times (subscription only link) that a small uptick in business travel had boosted the company's revenues but that full recovery would be a long time coming.

Although the airline has struggled with the same fickle fuel prices as its competitors, it has figured out a way to navigate the squalls.

Airlines use hedging to control their fuel costs, usually by purchasing a contract that sets a price it will pay for jet fuel in the future. If the market price rises above this set amount, airlines are sitting pretty. If it drops below it, they're scrambling.

Southwest has played this field relatively successfully over the past ten years. It lost money on the drop in fuel costs in 2008, but was insulated from soaring prices earlier in the year. So far the airline has not had to skimp on customer service like its rivals, who have begun charging for luggage. Southwest did, however, cut capacity 4 percent in 2009 and does not expect to see growth this year.

Anticipating rising fuel prices, Chairman Gary Kelly has decided to amp up his hedging strategy. But frequent flyers beware: he has also announced his intention to raise fares "as aggressively as we dare" until Southwest hits its profit targets, a strategy that will allow other airlines, who usually have to compete with Southwest's rock-bottom fares, to hike theirs even higher.

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Nicole Allan is a former senior editor at The Atlantic.

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