My older sister is on Spring Break this week and I began reminiscing about my college years. I remember the infamous traveling agencies that would come to campus to sell their Spring Break Packages. All of my friends couldn’t resist opening the credit card account to purchase the package and fly high to their destination. But I was always the cautious one (they like to say that I’m just cheap). I would create my own package. I would shop on the internet and purchase my flight and hotel accommodations ‘a la carte’. I came across Southwest Airlines one year but they weren’t flying to my destination but I ‘bookmarked’ them because I was very impressed with their low prices….

A few weeks after my Southwest discovery I was assigned a business case about Southwest for one of my finance courses. My Finance professor told me in April of 2005 that if I invested in LUV (Southwest’s stock) for one year that I would see a return of at least 11%. And guess what? He was right! On March 22, 2005 LUV closed at $14.05 and on March 22, 2006 LUV closed at $17.70 (that’s a 26% return). I am risk-adverse so of course I didn’t believe my professor or his teachings of the famous CAPM equation that magically calculates the expected return on a stock when given the expected risk.

[I missed out on that investment opportunity, but I wonder what my professor is telling his students to invest in this year (Considering the current financial crisis). Do you think I would take his advice now? Probably not!! I’m still trying to figure out how my “low-risk” mutual fund fell 36% in October 2008. No more investments for me!]

Now back to Southwest. What an amazing strategy they HAD! Let’s go over how they managed to be one of the few profitable airlines in the world.

Fuel hedging. Whoever managed their financial derivatives did a superb job. Southwest purchased swaps and call options to secure fuel price in future years.
Human Capital.
One aircraft Model.
No Hub site.
Can only buy tickets from Southwest. Not on Expedia or third party sites.
Customer Service. There are no assigned seats, the flight attendants sing songs, and no hidden fees (literally).

Southwest managed to fly high above their competitors and achieve a profit for the 35th consecutive year in January 2008.

Unfortunately, Southwest was not able to exclude themselves from the financial disaster during October of 2008 and took a loss. But, let’s give credit where credit is due. All Aboard!!

So I conclude with this…. The fabulous financial equations that I spent 2 years learning could not have calculated the tragic financial events that happened in October 2008. Almost everybody has been affected by this. So we all need rethink about how we consume. Most of what people buy, they do not need. Let’s spend a little more time shopping around for lower prices. Be proud when your friends call you cheap! You’ll be better prepared to handle the economic conditions we’re currently in. And let’s not forget to read the small print of those credit card offers, vacations packages, and loyalty programs.

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A.Marie Woods

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