IThe one factor Southwest DOES respect is.....once a flight takes off....they can NEVER sell that seat and it's completely lost revenue. They would rather have someone sitting there for $79 from Baltimore to Los Angeles......than $00 because they held firm on their discounts.
Yes and no, sure its lost revenue, but if the revenue earned in filling the seat is less then the cost to do so, it doesn't make sense to fill it, better to let it stay empty.
Example, lets say you offer a $79.00 fare, if the additional fuel costs, baggage transportation and service costs are greater then $79.00, it doesn't make sense to offer the lower fare.
One thing people forget is SWA over the past couple of years did a great job in hedging their fuel costs. So while other airlines were paying extremely high airfares due to less then stellar hedges, SWA was paying far, far less. However, as their hedges expired, the found themselves back on level playing field with other carriers. They lost their advantage in that area. This meant they were now paying more for fuel.
Now of course fuel costs have come down, but hedging can work against you too, if costs drop below your floor hedge, you pay more then market price, sure you can go to the market and get fuel, but then your hedge plus market price makes it even worst. So if you're too conservative or too aggressive with your hedge, you may be better or worst off depending on the movement in fuel prices.
Fuel (plus Salary and Plane leases) are one the largest components of the expenses that make up an air carriers
budget and because it is a volatile componenet hedges are in place to help insulate the expenses from steep drops and increases.