Blame Low (not High) Oil for the End of Southwest's 17-Year Profit Streak

By Jennifer Yousfi

Southwest Airlines Co. (LUV) has always been extremely proud of its string of profitable quarters, which began in the spring of 1991, and traversed a major recession and the massive drop-off in air travel that followed the 2001 terrorist attacks.

But when the much-admired carrier bet that oil prices would continue their record climb – and they plummeted instead – the Dallas-based Southwest was forced to report its first quarterly loss in 17 years.

Southwest today (Thursday) reported a net loss of $120 million, or 16 cents per share, for the third quarter, down from a net gain of $162 million, or 22 cents per share, for the same period the year prior.

Despite the loss, the airline’s shares were up 48 cents each, or 4.15%, to trade at $12.04 at 11:54 a.m. in New York – even though the Dow Jones Industrial Average was down 1.25%. Jet fuel costs for Southwest increased 52% during the quarter, but oil’s dramatic fall from its record highs in July forced Southwest to write down its jet-fuel hedging portfolio by $247 million. Applying mark-to-market accounting rules to its bets against rising oil costs resulted in a quarterly loss for the Dallas-based air carrier.

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Comments

[Owen:]

LUV's hedge book is well known, so the loss from it was no surprise to the market.

Over the long term, hedging commodity costs neither improves nor worsens earnings, but it may reduce their fluctuations, if done properly.

2008 Oct 16 06:38 PM