Not too long ago Southwest Airlines Co. (NYSE: LUV) used fuel hedging to lock in a $2.19 average per gallon fuel price with its providers. Betting that prices were going to rise, they took a gamble and agreed to pay a set price for a large amount of fuel for their operating costs.
This isn't the first time an airline has done this. But if the cost of fuel had gone down, Southwest would have been sitting on an obligation to pay for fuel at a higher than market price. Fortunately for Southwest, the bet cashed in, and so did Southwest. The Airline company was able to buy fuel at a rate cheap enough to keep its costs lower than rival companies. Southwest reported this week that it increased revenue by 11%, earning $321 million, or 44 cents a share.
But Southwest's fuel hedging earning the company $511 million. When that sweet deal ends, Southwest will be facing fuel costs almost double what they've been paying over this last year. As a nod to that Southwest is slowing growth.
Despite the worries about the upcoming adjustments, Southwest has continued its canny ability to stay nimble and profitable. This is the company's 69th straight profitable quarter.
Southwest Airlines' fuel hedges give it edge over rival airlines
Posted Jul 25th 2008 6:30PM by Tobias Buckell
Filed under: Southwest Airlines (LUV)
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Reader Comments (Page 1 of 1)
7-26-2008 @ 12:18AM
Catherine Bossi said...
hedging contributes to fuel price increase. Not very heroic on Southwest's part
7-26-2008 @ 9:47AM
Michael Schneider said...
Southwest started buying hedges when oil was down and the risks of it falling further were small- that was the time to buy oil for the long term.
In regard to the comment above by Catherine Bossi-- hedging could drive up energy prices if done by many businesses and speculators but remember Southwest started this when prices were low and if it had any impact at all it probably helped support oil at a time when people were dumping it (remember the Asian crisis) and making bad long term decisions as a result of cheap short term prices (buying gas guzzlers and SUVs). If more people had taken the long view back then the oil crisis would not have hit so hard the past few years. Southwest also is in position to take possession of newer more fuel efficient aircraft over the next few years-- which is also good for the country and for consumers. Hedging is just part of the market and Southwest is helping to keep costs and inflation in check as a result of hedging decisions which- if made by other airlines- means Southwest makes money and consumers do not have to pay extra for checking bags.
7-26-2008 @ 9:50AM
Michael Schneider said...
Correction-- in the above I meant to say that if good hedging decisions had been made by other airlines as well we would all be better off.