Note to Northwest Airlines – It’s not about fuel costs

For the first quarter of 2005, Northwest Airlines posted a loss of $458 million. The main reason cited was high fuel costs.

Northwest complained that fuel prices surged to $630 million from $450 million for the same time period last year. Let’s start by looking at some numbers. During the first quarter of 2004, Northwest lost $230 million. This means the increase in red ink was $118 million while fuel expenses increased $180 million. Obviously, with fuel expenses higher than the change in red ink, one could make an argument that higher crude is responsible. This argument does not hold up to scrutiny when you consider the entire cost of fuel was only $172 greater than the loss. Also Northwest has stated a penny fuel increase equates to $1.6 million in operating costs. A $458 million loss attributable to increased jet fuel cost would need to cost $2.86/gallon using Northwest calculations. At the end of the first quarter, jet fuel averaged $1.27 cents.

Okay, too many numbers, let’s look at it a different way. Based on Northwest’s total fuel bill, if fuel was the reason for the loss, the only way they could have turned a profit would have been to run their planes with only 25% of the fuel actually used. Although this would be a quick fix and return the airlines on paper, if their argument is correct, it would have had a dire effect on reaching each flight’s intended destinations.

If this isn’t convincing enough that Northwest’s blame of fuel costs is invalid, consider Southwest Airlines. The first quarter of 2005 was the airlines 56th consecutive quarter of earnings – earning $76 million dollars. Southwest, which has been able to compile a winning streak of 32 straight years of profits did not need to make excuses for their earning, despite fueling their planes sufficiently to reach their destinations. However, Southwest did comment on rising fuel prices when they released their earnings statement. Their comment, “While we are not immune to the challenging industry revenue environment and glut of capacity, we are well positioned for growth and will continue to explore long-term profitable market opportunities.”

Blaming operational costs, including price increases from suppliers, is common among businesses. Entrepreneurs and Fortune 500 companies fall pray to this invalid excuse. Successful business professionals see increased costs in advance, and prepare for them. For example, Southwest Airlines has hedged their fuel expenses through 2009 in anticipation of higher prices. They said, “Excluding fuel, our unit costs declined 3.8 percent. This superb performance reflected a tremendous effort by our Employees, and they continue to work hard to improve productivity throughout our Company.”

To create consistent earning, Southwest Airlines offsets the volatile fuel prices by buying crude oil derivative contracts to limit their risk to sharp changes in jet fuel costs. This practice makes it easier to budget for fuel. Although there is not a jet-fuel derivatives market, airlines can hedge indirectly by dealing in closely related oil futures, then use the proceeds to offset the higher fuel costs.

Rather than making excuses for higher costs, look at ways to offset those higher expenses through a team attack on budget waste. If possible, prepay or set aside money to counteract those costs when they do go up. Predictable increases should be written into proposals as early as possible.

Proper planning puts you on the path of max impact, where your business will flourish despite erratic business expenses.

Rick Weaver is President of Max Impact, a national leadership and organization development company based in Rochester Hills, Michigan. Rick is an accomplished business executive with experience in retail, market analysis, supply chain and project management, team building, and process improvement. He has worked with hundreds of companies to improve sales, processes, and bottom-line results. MaxImpact offers leadership and organizational development services along with employee assessments and background checks. Contact Rick at 248-802-6138 or via email, rick@getmaximpact.com. MaxImpact is on the web at http://www.getmaximpact.com

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