That is quite a lot to subtract. I think that WN's fuel hedge advantage was and is a fundamental part of their strategy. To say that WN wouldn't be profitable if they weren't so good at managing one of their largest expenses is like saying Wal-Mart wouldn't be profitable if they weren't so good at logistics. The domestic airline industry is a low margin business. Successful control of expenses, be it fleet simplification or fuel hedging or labor costs, is the key to being profitable.

LUV has been profitable for 36 consecutive years and delivered profit of over $2 billion over the last five years combined. I don't see how that can reasonably be interpreted as "barely breaking even or losing money for quite some time now" as you characterize it.

My point exactly. For the past few years, much of WN's profitability has NOT been a direct result of flying people around America because doing so on a macro scale is not, in and of itself, a money-making enterprise. And because domestic air travel is both 1) financially unviable in its current form, on a macro level, and 2) essentially necessary, on a macro level, for the functioning of our society, government may have some expanded role to play in reconciling these conflicting realities.

The argument that somehow the cost of buying fuel is not directly related to operating an airline is ridiculous in my opinion (you are hardly the first person on FT I've seen make this claim, so I'm not picking on you). If LUV had hedged more fuel than it bought, this argument would hold water, but they were hedging fuel they purchased to operate the airline.

I'm not in the least bit surprised that Larry Kellner would advocate for a return to the days of the CAB cartel. In his five-year tenure he has shown himself to be a timid manager, ham-handedly cutting costs and apparently tone deaf when it comes to what constitutes value to the customer.

Larry Kellner would have indeed been a model manager in Juan Tripp's front office.

One phrase that really stood out for me in the article is when Kellner said he agonized over the imposition of the first-bag fee, which he estimates will represent "$100 to $150 million in annual revenues."

I couldn't help but think of the article that appeared in USA Today in January, in which jetBlue announced it has been earning "$40 million" annually from its 6 rows of EML seats.

Now, just imagine if Kellner were a slightly more imaginative leader, if instead of charging to check bags, he actually added value (e.g.: economy plus) and charge the customers for this additional value.

WN makes money because the airline is managed by smart, creative people who are focused on what it takes to make money by delivering value, be it through hedging fuel purchases or otherwise.

Instead of dreaming of the glory days of the CAB, Kellner should try to start thinking outside the box a little bit, by delivering more value (not less) and monetizing that value.

No, I don't think it is your point. My point is that it is possible to make money, as long as you control your costs. That includes fuel hedging, but it also includes fleet simplification, efficient ground operations, etc.

We do agree, though, that air travel is necessary. But I see no evidence that there is a shortage of players or potential players. Which is it? There isn't enough demand (or too much supply) for the carriers to make money, or the government must step in to ensure that we have air travel? It can't be both. There is simply no compelling evidence that the government needs to step in to ensure coverage.

Southwest has been experiencing losses since the 3rd Quarter of '08. It was that third quarter net loss that ended their 17-year profit streak.

In Q4, they had an additional net loss of $56million. Not sure what a definition of "quite some time now", but 6 months of losses is a decent amount of time.

And in their recent filings, they said their revenue and bookings are down significantly for the first 2 months of '09, setting the stage for continued losses. Like CO and all the other carriers, Southwest reported that business travel was down significantly...and as a result, their company's "revenue outlook for the remainder of the year is more cautious."

Southwest is no longer immune to the fluctuations of the challenged U.S. aviation market. They offer a very simple, very limited product ...and deliver it with efficiency and ease. But with fuel hedges not delivering what they used to, and the economy a mess, I think Southwest can fairly be lumped with other US carriers as having very troubling times for the foreseeable future.

The issue with the legacies is that it is always something. Last year it was fuel costs. Before that it was labor costs. Now it is demand. They have been scraping by for so long that they have no cushion. That WN is suffering in this market does not indicate that the market is so broken that it requires government intervention any more than a loss at Target would mean that the government should better regulate the price of laundry detergent.

Right, and given the framework under which large US carriers operate, it will continue always be "something". That's why examining a greater government role is not a useless exercise.

The main idea here, at least to me, is that the airline industry is right up there with the automobile industry as the most unimaginative industries in the world right now...and any problems that they are having are 100% of their own doing.

LK and others have expressed the same thoughts...that the model is broken, but it is of their own making. :-:

Let's look at the airline industry: other than lowering the price of a ticket from time to time, what innovations have they come up with lately? The upstarts have been the only ones with new ideas (Southwest: simple pricing structure, Virgin America: updated cabins, etc), but the legacy carriers are stagnant and reactionary. It's just like the auto industry. The Chevy Volt? C'mon...that should have been out 10 years ago, and I think that the success of the Toyota Prius is an example of what customers will buy if you don't make it look like something out of the Jetsons.

Same deal with the airline industry. I do not fly WN unless my schedule damends it, because I just don't like their way of doing business -- mainly no seat assignments. However, they were the first airline after deregulation to do things differently, and now they have become a kind of quasi-standard, with pitiful legacy carriers like US trying to emulate them -- with absolutely no success. On the flip side, WN's basic business model (we get you from point A to point B, no frills...basic) have allowed it to differentiate itself currently, when it was basically they way that they were conducting business in the first place.

CO had a watershed moment when it introduced BusinessFirst, and its moves during that time of it's existance really helped it become the airline it is in today. I tell people that the reason that I am so loyal to CO isn't that they do something far and above everyone else...you don't get a $100 bill or something like that when you step on board......but that they do 100 things 3% better than everyone else, and that makes them better. They're still way better than UA, US, AA, DL, NW, and yes, even WN in almost all facets, IMO, but the differing labor cost structures of those airlines post-bankruptcy have changed the rules a bit, and CO's previous (and admirable) business structure prevented it from going belly-up, but now they are at a distinct cost disadvantage as compared to UA, the new DL, etc...just because they did things right.

That being said, methinks that it will be essential for CO to make a splash these days in order to stay in front. E+, improved Y product, or something similar while staying in line with the rest of the industry with regard to fares will be essential...but mereallythinks that CO will be part of another airline and/or merge with someone else soon This joining *A is cool, but as the article says...CO will have "an additional relationship with UA" beyond that, which translates to me that they are going to attempt to bring their systems and practices into line with each other over the next couple of years, and then merge...thus avoiding the merger mess US Airways/AmericaWest had, and the ones that DL/NW are just now beginning to have.

Not that it will be a bad thing, but mealsothinks that it will be hard to operate that large of an organization and keep those 100 things 3% better than the competition. Tough time for them and everyone else....

Or a lesser role. Let a major fail instead of loan guarantees and Chapter 11 reorgs that don't address the problems other than to slash pensions.

If the airlines actually had to be profitable to survive they'd probably find a way to do so. When they are allowed to operate the way they do today that doesn't help so much.

J. Edward summed it up nicely in The Box not too long ago: he said something to the effect that the airline industry operates without business consequence. Maybe if consequences were allowed to be introduced, this discussion wouldn't be unfolding as it is.

Wow - a huge number:

> Continental has seen call volume to its operators drop
> by almost 25 percent, Kellner said.

A lot of what is happening in corporate America today, IMO, is based on corporate arrogance from the economy's bubble. Pardon the cliche, but necessity is the mother of invention. CO, for example, could have tried an E+, AVOD, internet, or a host of other things 5+ years ago, but chose not to because they didn't HAVE TO. Now with corporate Darwinism (only the strong survive), the rush is on to differentiate oneself from the rest of the industry. This is no different from the auto industry, which is also looking over the cliff of a major revolution.

Bulk up its gona be a bumpy ride... Well now I see why the double EQM. Can't afford to lose any volume what so ever. I think one more LCC and one more major will cease to exsist within 12 months. Doesn't help when Washington makes corporate incentive travel evil either.