Can fuel hedges keep Southwest in the money?

Southwest Airlines luv Thursday reports what almost certainly will be its 69th-consecutive quarterly profit, a string dating back to 1991.

It won't be the first time that the USA's leading discount carrier has earned money while a financial crisis threatened other carriers' survival.

What is its secret?

There are lots of factors, but easily the most important is that Southwest is the champion oil price hedger among airlines worldwide.

Using some simple and some complex investment strategies, Southwest has for a decade locked in the prices it pays for large amounts of jet fuel months and even years ahead of time. Its success at that has protected it from run-ups in crude oil prices and dramatically cut its fuel expenses. Since 1998, it has saved $3.5 billion over what it would have spent if it had paid the industry's average price for jet fuel. That's equal to about 83% of the company's profits over the last 9½ years.

On the spot market, jet fuel sold at an average price of $3.95 a gallon for the week ended Friday. A week earlier, the average price was $4.10. American Airlines paid an average $3.17 a gallon last quarter. Delta, $3.13. And Southwest? Its second-quarter average will be disclosed Thursday, but its recent estimate was about $2.35 a gallon.

That advantage will narrow, and perhaps disappear, as Southwest's $5 billion in fuel-hedging contracts expire over the next four years. With crude oil prices having fallen more than $20 a barrel the past two weeks to $124, the risk of a plunge in prices is higher, the odds of another steep, fast run-up more uncertain, and Southwest's hedging profits harder to sustain.

In fact, oil prices have been so high and have risen so fast that the airline hasn't bought a significant hedging contract in 15 months. Southwest Treasurer Scott Topping, who runs the airline's hedging program, says its successes have produced a crucial benefit: time to adapt its determinedly low-cost business model to paying full market price for jet fuel if necessary.

Southwest is no longer growing at double-digit rates as it has for decades, but the nation's leading domestic passenger carrier is the only big airline that's still growing. As other airlines burn through cash, slash their schedules and lay off employees by the thousands, Southwest is poised to gain market share.

And while other carriers seem to be raising fares somewhere almost every week, Southwest's fare increases have been less frequent and smaller. In national print and broadcast advertising, it's even flaunted its refusal to follow ailing competitors that have begun charging for checking bags, preferred seat assignments and other passenger services.

Southwest's hedging program "means that they'll still be there in a couple of years when you want to fly, even though some other carriers may not be," says Paul Stebbins, CEO of World Fuel Services, a Miami firm that sells fuel management services to transportation companies.

Managing risk

Page
  • 1
  • |
  • 2
  • |
  • 3
  • |
  • 4
null
Join the Discussion
You are using an outdated version of Internet Explorer. Please click here to upgrade your browser in order to comment.
blog comments powered by Disqus
 
You Might Also Like...