Southwest Hedges Its Bets -- and Wins

Airline's fuel hedge means carrier pays $51 a barrel for most of its fuel.

ByABC News
June 11, 2008, 2:40 PM

June 11, 2008— -- "No surprise fees." Those are the first words you'll notice when you visit Southwest Airline's Web site.

It's a declaration that puts Southwest in a class by itself today, as most airlines are doing everything they can to make money while fuel prices rise to new heights.

While other carriers are parking planes, cutting staff and tacking on fees in a desperate attempt to balance the books, Southwest has, in many ways, dodged the crisis. The carrier hasn't added fees. It hasn't cut capacity. It hasn't grounded planes.

Watch "World News With Charles Gibson" tonight at 6:30 p.m. ET for the full report.

Southwest can declare that "Fees don't fly with us" because the carrier made a business move that has paid off dramatically. Today, while much of the competition struggles to pay for jet fuel, Southwest buys 70 percent of its oil at approximately $51 per barrel, a significant savings over the going price of more than $130 a barrel.

The practice, called hedging, allows carriers to put in money up front to secure a set fuel price. For Southwest, it has really paid off, sheltering the airline from steep oil price increases that are hurting other carriers. The Air Transport Association estimates that the airlines will pay a $61.2 billion fuel bill this year, up from $41.2 billion last year.

Airlines are even scrambling to remove any bit of extra weight from their planes to save on fuel costs: American is using lighter food carts; Delta jets have less water in the toilets and bathrooms; and Northwest is trimming the size of the inflight magazine.

But according to aviation consultant Michael Boyd of The Boyd Group, the unprecedented price of fuel means the little things carriers are doing to save money are not enough.

"This is not a situation where we have to adjust," Boyd said. "This is a situation where we have to totally rebuild the industry."

Meantime, at Southwest, an earlier investment in fuel at a lower price has given the carrier a leg up on the competition.

"We paid the money to have that coverage in place, and absolutely it is providing us tremendous protection right now," said Southwest CEO Gary Kelly.

"Without that, all else being equal, we would be losing money like every other airline this year," Kelly said. "So it keeps us in the black. This year alone, it is going to save us $2 billion."

"Southwest was the only one with the foresight, and the only one with the cash," said David Field, U.S. editor of Airline Business Magazine.