Southwest Loses Over Falling Oil Prices

Locations in this article:  Dallas, TX

fast planeSouthwest Airlines’ fuel-hedging practices, which normally save the carrier a bundle of money, turned into a losing bet this quarter and caused the airline to post its first losses in 17 years.

The Dallas-based carrier reported a $120 million loss in the third quarter of 2008 even as its revenues rose 11.7 percent, because it took a $247 million charge against a fuel-hedging contract whose value dramatically decreased along with falling oil prices.

In the past Southwest was able to avoid the profit-draining periods when fuel prices rose because it locked in below-market prices sometimes years in advance. Now, however, the airline is the victim of a reverse dynamic, where it is paying locked-in prices that are well above the current market value.

The last time that Southwest lost money was in the first quarter of 1991. The current loss ends one of the longest profitable streaks of any airline in history, but Southwest hopes to be back to profitability next quarter. Airline officials maintain that the loss was a one-off occurrence that likely won’t be repeated as oil prices are unlikely to continue to fluctuate so wildly.

The carrier had been faring well over the last year compared to its struggling U.S. rivals, who were forced to levy fees, cut capacity and raise ticket prices to offset spiraling fuel costs. Southwest was able to avoid making these types of changes, though it did make some concessions to the weakening economy. It slowed capacity growth by 2 percent in the second half of 2008, delayed delivery of some new aircraft and cut some less-profitable flights.

Related links:
USA Today, CNN Money, Associated Press

By Karen Elowitt for PeterGreenberg.com