4/14/2005

Southwest's Oil

Southwest Airlines, one of the largest in the industry, is currently enjoying high revenues due to lower prices on crude oil. The company made deals year ago that allowed them to buy oil today at less than half the cost of the current market price. This lower cost has allowed the company the opportunity to keep fares low and save nearly $200 million in gas prices. These reduced prices will shortly end for Southwest, but they expect no change in revenue due to planned fare increases. The author of the article believes the company will raise airline fares by the end of the year, which will allow other competitors in the industry to also raise their prices. This is an interesting phenomenon. Usually we think that the market determines the price, but in this case, it appears that a single company can set the industry price.

3 comments:

Vincent said...

Good for Southwest, I am always glad to see companies take a position to hedge themselves for protection in these volatile markets. The speculators involved were probably not as happy with the outcome, but regardless I am glad to see the Southwest save money in an industry were the norm is to lose money.

Diane said...

Southwest Airlines's niche in an industry riddled with problems has allowed it to be successful. This oil contract demonstrates the foward thinking that all business should employ.

Dr. Tufte said...

Post and comments are both good.

I wonder though about the author of the source piece making the assumption that Southwest would be a price leader in the near future - that's speculative at best.