Supply Chain

Southwest Hedging Fuels Q3 Results

The company's ''successful hedging program'' against higher prices resulted in a $295 million benefit from settled contracts in the third quarter.
Stephen TaubOctober 20, 2005

Who said surging fuel prices destroy profits? Certainly not the folks at Southwest Airlines Co.

Southwest announced that third-quarter net income jumped about 91 percent, to $227 million. This is a far cry from the story at most other airlines, which are either in bankruptcy or trying to avoid it.

One big reason is the Dallas-based company’s “successful hedging program” against higher prices, which resulted in a $295 million benefit from settled contracts in the third quarter, Southwest announced.

According to a statement by current chief executive officer (and former chief financial officer) Gary Kelly, the airline is roughly 85 percent hedged in the fourth quarter of 2005 with average crude prices capped in the $26-per-barrel range. Kelly added that he has hedged the refinery margins on the majority of those positions.

Even allowing for Southwest’s hedging strategy, however, Kelly noted that given the effects of hurricanes Katrina and Rita, the airline’s fourth-quarter jet-fuel cost per gallon could exceed $1.25, significantly higher than the third quarter’s 95 cents.

For 2006, Kelly added, Southwest is more than 70 percent hedged, with average crude prices capped in the $36-per-barrel range; refinery margins are again hedges on the majority of its those positions. The airline is also more than 55 percent hedged in 2007, at approximately $37 per barrel; about 35 percent in 2008, at approximately $37 per barrel; and about 30 percent in 2009, at approximately $39 per barrel.

“In short, we are well-prepared for rising energy costs,” Kelly asserted. “Our people are taking aggressive actions to prepare for rising energy costs and sustain our profitability and financial health.”

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