Travel News Today

Southwest Airlines and its pilots will sit down next month to negotiate a new contract to test the carrier's ability to respond to growing cost pressure.

Hedging fuel purchases has enabled Southwest to undercut most rivals with cheaper fares and still deliver strong profits. But with fuel hedges gradually unwinding, Southwest faces the difficult task of reigning in already lean costs.

«They're a company in great transition right now,» said Stuart Klaskin, a partner at KKC Aviation Consulting. «It's going to be a tumultuous couple of years.»

Rejigging its pilot contract, which becomes amendable on Friday, is key, because Southwest's pilots have become the highest paid in the industry after generous past contracts and the no-frills airline has few other areas to reduce spending.

«I don't know that they can go in and trim enough savings out of other areas to compensate and offset the increase in fuel costs,» said Andrew Siebert, senior portfolio manager at Pittsburgh-based S&T Wealth Management.

The fuel hedges will be hard to offset. Last quarter, the company booked USD$225 million cash benefit from its fuel hedges. Its net income was USD$333 million.

The upcoming contract negotiations, which are due to begin in the third week of September, according to the Southwest Airlines Pilots' Association, come as the airline experiments with ways to trim costs.

That's tough to do, because Southwest is one of the industry's leanest operators. Last quarter, its cost per available seat, excluding fuel expenses -- a measure of airline efficiency -- was 6.68 cents per mile, almost a penny less than competitors American Airlines and United Airlines.

In recent months, Southwest has tested new scheduling options in an attempt to get its pilots -- already the most frequent flyers in the industry -- to fly even more hours. That experiment, however, led to an unexpected increase in pilot overtime costs last quarter, the company said.

Southwest is also installing drag-reducing winglets on over 400 planes, a move it expects to save over USD$50 million in fuel costs this year.

Meanwhile, the discount airline is experimenting with assigned seats rather than its general seating free-for-all. While such a move would add costs, it could also allow the airline to charge a premium for an assigned seat and generate additional revenue, said Klaskin.

The company has also raised fares at least twice this year in response to rising fuel costs, but the strategy is problematic for a company that likes to call itself the «low-fare leader.»

Southwest has historically had strong relations with its employees, and there are few signs that talks with pilots will become adversarial this time.

«We're very aware of market conditions,» said Carl Kuwitzky, vice president of SWAPA. Higher pay is «not a top bargaining objective.»

«Attitudes seem pretty positive so far,» said Southwest spokeswoman Marilee McInnis.

Southwest's pilots are the highest paid in the industry after legacy carriers like United and American cut wages after the September 11 attacks led to a long recession in the airline industry.

According to JPMorgan, Southwest pays its pilots USD$186 an hour. American is the next highest at USD$161 an hour. But with the extra pay also comes extra work. Southwest's pilots fly on average about 20 percent more than other airline pilots, according to SWAPA.

(Reuters)