Fuel bills knock off cap on Southwest's airfares

BUSINESS DIGEST

March 14, 2006|By KNIGHT RIDDER/TRIBUNE

FORT WORTH, Texas -- After more than three years of capping airfares at $299 each way, Southwest Airlines has raised prices above that limit, blaming the high price of fuel.

The Dallas-based airline's highest fares are now $309 each way, spokesman Ed Stewart said yesterday.

"Here's the problem - fuel, fuel, fuel," he said. "It was inevitable, at some point, that we were going to have to take some action."

The fare cap was raised amid a broad increase in ticket prices of $2 to $10 each way. Southwest increased fares over the weekend. It was Southwest's largest single price increase, Stewart said.

Other airlines quickly matched the increase. American Airlines, United, Delta, Northwest, Continental, AirTran and US Airways all increased fares after Southwest boosted prices late Friday, spokesmen said.

Airline analyst Jamie Baker of JP Morgan Securities called the fare increase "unexpectedly large."

Last year, Southwest was largely protected from the rapid jump in jet-fuel costs because contracts locked in lower prices. The airline prepurchased much of its fuel at much lower than spot prices by using futures markets in the past few years.

For the first three months of this year, Southwest has three-quarters of its fuel bought at an equivalent crude oil price of $36 per barrel, compared with spot prices now of over $60 per barrel.

But some contracts will expire this year, increasing Southwest's fuel bill by an estimated $600 million in 2006, exposing the carrier to the same financial pains that have forced competitors to rethink their business plans, cut jobs and even slash expenses under bankruptcy court protection.

Baker said the fare increase, the year's second, is good news for the industry.

"Southwest's continued push for higher fares represent the two most unique components of the industry's continued return to profitability," he told investors in a report yesterday.

Southwest, the dominant carrier at Baltimore-Washington Thurgood Marshall International Airport, capped fares at $299 in August 2002, calling itself the leading low-fare carrier. The price forced most competing airlines to lower fares on similar routes.

Southwest continues to face significant challenges, Baker said, including higher labor costs as well as fuel prices. Many competitors, including Delta Air Lines, are cutting costs in bankruptcy. "Southwest is a carrier flying into significant cost head winds," Baker said.

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