Southwest Airlines posts 1st loss in 17 years

DALLAS — Southwest Airlines Co. lost money for the first time in 17 years as falling oil prices forced the company to write down the value of its fabled fuel-hedging transactions in the third quarter.

Southwest said Thursday it lost $120 million in the three months ended Sept. 30 even as revenue jumped 11.7 percent.

The airline took $247 million in charges, mostly to write down fuel-hedging contracts that are less valuable now that oil prices have plunged by nearly half since July.

Without the charges, Southwest managed its 70th straight quarter of operating profit _ $69 million, or 9 cents per share, which was 2 cents per share better than Wall Street expected, according to a survey of analysts by Thomson Reuters.

A year ago, Southwest earned $162 million, or 22 cents a share, in the third quarter.

Revenue rose to $2.89 billion from $2.59 billion, beating analysts' forecast of $2.83 billion.

Southwest is extremely proud of its string of profitable quarters, which began in spring 1991 and spanned a recession and the decline in travel after the 2001 terror attacks.

The third-quarter loss occurred because accounting rules require Southwest to constantly update the potential value of some of its fuel-hedging contracts. On the last day of September, those contracts were worth about $2.5 billion _ down from $6 billion on June 30, just before oil peaked at $147 a barrel.

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"Those gains have evaporated; we never counted on them anyway," Chief Executive Gary Kelly said in an interview.

Kelly said falling energy prices "are a very good thing for Southwest Airlines." The company paid $2.44 a gallon for fuel in the third quarter _ far less than its competitors paid _ and expects to spend $2 a gallon in the fourth quarter.

Southwest has hedged large amounts of its fuel needs through 2012, which offers protection against another surge in oil prices.

"The main thing now is the recession and the impact on travel demand," Kelly said. "We haven't seen any impact yet. My biggest concern now is January."

Southwest also disclosed that it decided to tap $400 million in additional cash through a bank revolving credit account _ it still has $200 million available. The company said it had $2.2 billion in unrestricted cash and short-term investments as of Wednesday. About half of that cash is in deposits used as collateral against fuel-hedging contracts.

While other airlines have been cutting capacity, Southwest announced this month that it would add Minneapolis to its service.

But the company has also made concessions to the weakening economy by delaying delivery of a few new aircraft. It has also slowed its own capacity growth to under 2 percent for the second half of 2008, and has eliminated some less-profitable flights, shifting those planes to faster-growing markets such as Denver.

Southwest has also attempted to lure customers from other airlines by heavily promoting its lack of fees for services such as checking a piece of luggage.

Comments

[KillTheMessenger]

What a text book example of how one can lose money on futures. Conspiracy theorists, take note!

[MajorKong]

How do you make a small fortune in the airline business? Start with a large fortune.

[Paul]

If Southwest is loing money, you know some of the others are terminal.

With the airlines a major borrower, and with the credit crunch crunching, time for a few of the weaker ones to go out of business.

[Sundialsvc4]

Any transportation company has to hedge on fuel. It was a better bet that prices would continue to go up than to hope-and-pray that they might go down. And who knows, "that game still ain't over." Prices could go up again and put those options right back in-the-money. Whether they do or don't, is entirely beyond management's ability to control.

The bottom line is: Southwest still flies on-time. They don't unnecessarily cancel flights. They don't claim "weather cancellations" on a crystal-blue-sky day. And that's the main reason why they're succeeding.

"More than anything else, as a traveler, I want to -know- that I -will- get from Point-A to Point-B, exactly when you promised, with no surprises." Southwest delivers that. I don't know why their competitors can't manage to do the same thing. But, as a traveler, I'm going to vote with my wallet because "I need to get from Point-A to Point-B at precisely 11:35 next Wednesday."

[iambusto]

I dont think they hedge fuel in the options markets.

To my knowledge, fuel hedging is done in the futures markets. so they are stuck paying more for 2008 & 2009 unless the prices go back up.

[iambusto]

A big part of the Southwest Airlines loss is actually the fuel hedge. Just google it and you will find it since the news is recent.

Apparently Southwest Airlines has been hedging fuel contracts better than other airlines and that was behind their profitability. Due to recent collapse in the price of barrel of oil, they got caught unguarded on the wrong side of the trade (they have hedged the price of oil at higher than current price :) )

[Sundialsvc4]

... and to have done otherwise would have required a crystal ball. I expected to be paying $5.00 a gallon for gas by now, not $3.50, and if you asked me what I might be paying even two weeks from now, I'd be saying, "who the hale knows?"

[KISSman]

That sucks. I'm not one to shed a tear for big corporations, but I'd rather see a company like Southwest make a profit since they are the only major airline who aren't nickel-and-diming passengers for every single service these days. I sure don't want to see them have to start doing so.

[Tom95134]

So what? You have to consider the advantage that Southwest gained during the time of rising fuel costs where their hedging allowed them to maintain low fares while every other airline was having to adjust to cover rising fuel costs.

What you really have to ask is, "If the cost per bbl of oil has fallen 50% why isn't gasoline down to $2.25/gal."

[vippy]

Oil is at $ 71.62 and gas should actually be $ 1.661 per gallon. Of course, they are
dragging their feet coming down but sometimes raised the price going up 3 times
per day. Go figure. And where is congressional oversight - yeah right. Vote them out!