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Southwest Hedges Curb Rising Fuel Costs

The airline expects its third-quarter fuel price will work out to around $2.50 per gallon.
Stephen Taub, CFO.com | US
July 24, 2008

As a result of its ability to hedge against rising fuel costs, Southwest Airlines is making money while virtually all of its competitors are racking up huge losses.

Southwest's reported net income for the second quarter was $321 million, up 15 percent, from $278 million, for the same period a year ago. Excluding special items, second-quarter 2008 net income worked out to $121 million, compared to $195 million for the comparable period last year.

Southwest said it benefited in part from having locked in lower fuel costs, which resulted in favorable cash settlements of $511 million from fuel contracts.

Looking ahead, the airline added that it has derivative contracts for about 80 percent of its third quarter 2008 estimated fuel consumption at an average crude-equivalent price of about $61 per barrel. That, however, compared unfavorably to about 90 percent at about $51 per barrel for the third quarter of 2007--when market prices for fuel were a good deal lower, of course.

Based on its derivative positions and current market prices, Southwest said, it currently anticipates its third quarter fuel cost will work out to around $2.50 per gallon. The company also said it has derivative contracts for about 80 percent of its estimated fuel consumption for the fourth quarter at an average crude-equivalent price of about $58 per barrel.

Over the next few years, the company will be hedged less and less for rising fuel prices, however. Southwest has derivative contracts for about 70 percent of its estimated fuel consumption in 2009 at an average crude-equivalent price of $66 per barrel; about 40 percent in 2010 at an average crude-equivalent price of about $81 per barrel; and over 20 percent each in 2011 and 2012 at an average crude-equivalent price of about $77 and $76 per barrel, respectively.




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