Southwest's hedging contracts extend until 2012, although the amount of oil hedged drops steadily after 2009, with only 15% of its oil needs in 2012 hedged at $63 per barrel. As a result, Southwest will become more vulnerable to fluctuations in fuel prices as its contracts mature.
No longer the only low-cost carrier in the U.S. market, Southwest faces increasing competition from newer low-cost carriers, such as JetBlue, Virgin America and Skybus. These newer airlines may have fewer legacy costs, such as pensions, than Southwest.
LUV has kept a no-layoff policy for decades. After almost 600,000 American jobs were cut in January 2009, Southwest essentially has two options:
Keep its no layoff policy and maintain capacity levels that will not be met by consumer demand throughout 2009. The company will struggle to stay afloat as its expenses will easily outweigh revenues.
Throw away the policy and ruin one of the best airline-union relationship in the industry. Southwest has been able to perform incredibly well because of its relationship with its union and the company would have to find a new way to distinguish itself from other discount airlines.
Either way, LUV's no-layoff policy will lead to trouble for the company regardless of whether they keep it or not.
The current standstill between the TWU-555 (Transport Workers Union) and Southwest Airlines is only creating a deeper negative image on a company who has provided a secure future for all of it's employees throughout the past 37+ years. Investors need to have confindence that LUV's bottom line is not increased especially during these challenging economic times.