Southwest is poised to reign as area’s busiest

Southwest Airlines Co. this fall is on track to become the busiest carrier at Los Angeles International Airport and at three of the four regional airports in Southern California as high fuel prices force its main competitors to cut flights.

The low-fare carrier, benefiting from a successful fuel-pricing strategy, has been able to hold down its fuel expenses while rivals have scrambled to cope with record fuel costs.

Using long-term contracts, Southwest last year locked in the price it would pay for most of the fuel it planned to use this year based on a crude oil price of $51 a barrel, far less than the prevailing price of oil that has hovered around $126 this week.

In the second quarter, Southwest paid an average of $2.19 a gallon, before tax, for jet fuel, compared with an industrywide average of $3.51 a gallon.

Thanks to this fuel-price hedging, Southwest on Thursday reported a 15% jump in second-quarter profit, becoming the only major airline to make money for the period.

As a result, while other big carriers are slashing routes, Southwest has held steady and is gaining a larger share of the flights at local airports.

After the other major airlines are finished making their expected cuts this fall, Southwest will have shot from its No. 3 spot to knock American Airlines from the No. 1 perch at LAX. By November, Southwest will account for nearly 17% of all flights at LAX, the nation’s fourth-largest airport.

“Our competitors are in a full-retreat mode,” Southwest Chief Executive Gary Kelly said in a conference call with analysts Thursday.

Other carriers in Southwest’s markets are cutting capacity by 15%, far more than the industry average of 10%, he said. “In some cases, we’ve seen competitors exit from our markets completely.”

The shift is dramatic. At Ontario International Airport, Southwest will account for 56% of flights, up from 43% last year. At Burbank’s Bob Hope Airport, 63% of the flights will be operated by Southwest, while at Orange County’s John Wayne Airport, Southwest will account for 29% of flights. Southwest has no flights at Long Beach Airport, which is dominated by another low-fare carrier, JetBlue Airways.

For Southern California travelers, Southwest’s grip on air service at four of the five airports could have mixed consequences. With legacy airlines such as American and United cutting flight schedules, consumers will have fewer choices and could potentially face higher fares.

On the other hand, Southwest, thanks to its fuel-hedging program and low-cost service, typically has lower fares. Southwest keeps costs down, for instance, by flying only Boeing 737 jets rather than a mix of aircraft. Having only one aircraft type reduces training and maintenance costs.

On some lucrative West Coast routes such as LAX to San Francisco, Southwest still faces stiff competition from Alaska Airlines and upstart Virgin America, which is expected to keep fares low.

Also, Southwest at LAX is seen as a key driver of “feeder” traffic for international flights, which have remained steady despite a drop in domestic service.

So far, Southern California passengers have in general benefited from Southwest’s presence.

With the huge cost advantage, Southwest hasn’t had to increase fares as much as other airlines or follow other carriers in imposing new baggage fees. Southwest said it had raised fares modestly four times this year, compared with more than 20 increases by other major airlines.

“Right now, it comes as a sweet advantage and we are trying to take advantage of it,” Kelly said. “Reservation agents tell me the first question they get when customers call right now is ‘Do you charge for the first bag?’ I believe deeply we are gaining passengers because of our approach.”

But the advantage won’t last forever, and it has its risks. Southwest hasn’t been able to hedge as much as it wanted for fuel it will need in 2009 and 2010, potentially raising its fuel costs by next year.

Also, if oil prices plummet instead, Southwest could lose the advantage. It could find itself stuck with fuel that is more expensive than what’s available in the market.

Kelly said Thursday that Southwest would have to raise fares to help offset its rising fuel bill, but he said the carrier hoped to do it gradually, over the next 18 months, “without scaring passengers away.”

Even with its fuel strategy, overall fuel expenses rose 35% in the second quarter, the airline said.

“We’ve got a lot of experience over 37 years of lowering fares, stimulating demand and meeting that,” Kelly said. “Now we have a reverse scenario where we are forced to raise fares. We just want to be wise about how we go about that.”

Separately Thursday, Alaska Air Group Inc., which operates regional carriers Alaska Airlines and Horizon Air, said it posted a second-quarter profit of $63.1 million thanks to a one-time accounting gain. Without the gain, the company said it lost $14.1 million in the quarter, compared with a profit of $47.2 million a year ago.

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