Another Reason to Respect Southwest

Southwest played it smart: using the futures market to hedge their fuel needs. As a legitimate hedge, instead of speculation, their margin requirements would have been a fraction of the usual. They turned an $8 million loss into a $26 million profit!


Oil prices squeeze airlines, but Southwest can gloat

As oil prices hit $40 a barrel, squeezing transportation-company profits, one petroleum user is sitting pretty: Southwest Airlines.

The Dallas airline has hedged more than 80 percent of its fuel needs for the next two years at a price of $24 a barrel. And Southwest is the only U.S. carrier to have hedged most of its fuel.

How important are those fuel hedges for Southwest? ``It's huge,'' said Chief Executive Jim Parker in an interview with Dow Jones Newswires earlier this week.

That foresight was the reason Southwest turned a profit in the first quarter, while other airlines bled due to high fuel costs and depressed air fares. Without the hedges, Southwest's profit of $26 million would have been a loss of $8 million.

The hedges have allowed Southwest to keep its air fares low, thus putting the squeeze on competitors as they attempt to add fuel surcharges.

Mercury News article