CBS Highlights Southwest's Smart Business Practices

     CBS News finally found a reason to praise one company for oil speculation, despite past criticism of the practice.


     As oil climbed toward its record high over $147 a barrel in July, “CBS Evening News” targeted oil speculators. A June 17 segment even suggested legitimate oil future trading was done on “dark markets.” But on the August 18 “Evening News,” CBS correspondent Nancy Cordes showed how one airline used oil hedging to the company’s and its customers’ advantage.


     “With jet fuel prices sky high, all the airlines are losing money – all of them but one. Southwest Airlines was the only major US carrier to turn a profit last quarter, and it did it without charging a dime for pillows, water or checked bags, all while poking fun at its rivals,” Cordes said. “What's the secret? Well, two decades ago, Southwest made a bet on a strategy called hedging – paying more up front to lock in the price it pays for oil. Today, while the going rate is $112 a barrel, Southwest pays only $51.”


    Southwest Airlines (NYSE:LUV) bought oil futures at $51 a barrel, betting the price would increase over time, and the profitable decision earned praise from CBS. But speculators who bet on the value of oil to increase – contributing in some way to the increase in price – earned scorn.


     The segment showed how Southwest passed $2 billion savings to customers by not charging them for amenities (some airlines are now offering for a fee: pillows, blankets and snacks). But the oil hedges have also given the airline pricing power over other airlines and cause a marketplace phenomenon known as the “Southwest Effect.”


     The “Southwest Effect” is a dramatic decrease in airfares by all airlines at a particular market created by the need to compete with Southwest. Southwest is able to offer lower fares because of its unique “low-cost carrier” business model. Other airports with significantly lower fares because of Southwest’s presence include Baltimore, New Orleans, Raleigh-Durham, N.C., and Nashville, Tenn.


     Cordes also noted that the airline has kept its business plan simple by using only one model of aircraft and by flying out of airports with lower fees.


     “Well, Southwest has done it right from the start – and it starts with the aircraft,” industry expert Peter Goelz explained to “Evening News.”


     “That aircraft – a Boeing 737, the only jet in the Southwest fleet, compared to the six to 11 models most other airlines maintain,” Cordes said.


     “And, crucially, Southwest steers clear of those big hubs with their high landing fees and congestion, bypassing, say, Chicago's O'Hare, where one out of three flights is delayed, in favor of nearby Midway, where only one in five arrive late. Instead of flying to Washington's Reagan National, which charges airlines $12 per passenger, Southwest staked a claim in Baltimore, which charges two-thirds less,” Cordes said.

     The media has attacked the airline industry for safety concerns, as a recent Business & Media Institute report showed. Safety concerns raised after the Federal Aviation Administration failed to maintain inspections included Southwest, but the company emerged from the controversy relatively unharmed and reported an 11-percent increase in revenue in the second quarter of 2008.