28 July 2008

Fuel hedging only one reason Southwest continues to fly high

In the wake of most airlines facing huge deficits, Southwest reported its 69^th consecutive quarterly profit in a string dating back to 1991. How did they do it?

There are many factors but easily the most important is that Southwest has done the best of anyone in the business at oil price hedging.

Using various 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 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 9Ã~½ years.

Other factors:

ÃƒËœ Seat reductions by competitors. Ã¢â¬ÅâœA burning cauldron of issuesÃ¢â¬~¦including a weak economy and soaring operating costsÃ¢â¬~¦is being offset by huge seat reductions by our competitors in most markets,Ã¢â¬~ said Chairman, President and CEO Gary Kelly.

ÃƒËœ Some markets have no competition at all anymore.

ÃƒËœ Southwest has raised prices four times since the start of the second quarter. But thatÃ¢â¬â¢s not the end. "We know that we've got to get our average fares up and we've got to get them up substantially," Mr Kelly told analysts.

ÃƒËœ The airline has also taken a cautious approach to growth, with aircraft deliveries ranging from zero to 14 planned for next year. "We're already in a mode where we're essentially not growing [for the remainder of the year] and it's not hard to believe that will continue through 2009," Mr Kelly said.

ÃƒËœ And while other carriers seem to be raising fares continuously, 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.

Most airlines recorded gains on hedging activities in the second quarter because their locked-in prices were lower because of the rapid rise in energy prices. But their locked-in prices are higher than Southwest's, and their gains were smaller.

When other airlines were selling their fuel hedges in the early 2000s to pay their bills and try to stave off bankruptcy, Southwest kept on buying. It's paying off now. But once the price of fuel is high, you can't buy hedges to get you out of the high prices. So Southwest's fuel costs are going up steadily, too.

That advantage will narrow, and perhaps disappear, as Southwest's $5 billion in fuel-hedging contracts expire over the next four years.

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.

Report by David Wilkening

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Your Comments (1)

5 Star Airline

As this story indicates, it's not all about fuel...it's about a true heart for customer service..simplified fare structures, NO PENALTIES, transferability of ticket value to someone else, and no fee to check baggage...who could ask for anything more?

By terri Davis, Thursday, July 31, 2008