* If You Ignore The BIG Hit The Airline Took On Fuel
Fuel hedges are wonderful for
airlines when oil prices are high, as they were this summer... but
when the price of oil falls, those hedges are a noose around an
airline's fiscal neck. Just ask Southwest Airlines.
On Thursday, Southwest proudly boasted of its 70th consecutive
quarterly profit... while at the same time admitting a Q3 2008 net
loss of $120 million, or 16 cents per share. That compares to net
income of $162 million, or $.22 per diluted share, for third
quarter 2007. The airline's net income also fell, with Q3 2008
income of $69 million -- compared with $156 million last year -- on
record quarterly revenues of $2.9 billion.
So... how can Southwest say it made money? The airline's claim
of profitability lies in the phrase "excluding special charges" --
namely, the $120 million financial hit the carrier has taken since
oil prices dropped from a high of $147 per barrel in July, to just
under $70 this week.
Southwest has nearly all of its fuel hedged at $51 per barrel
through 2009... meaning the lower the price of oil goes, the less
competitive Southwest's position is relative to other airlines
paying the market rate. And even while Southwest is still getting a
deal, that discrepancy hits the books sooner or later.
As an example of that hit, Southwest earned $121 million, or 16
cents per share, in the second quarter of this year. That profit
excluded special items... but included profits from fuel hedges,
which have since largely evaporated. And that number was
significantly less than the $287 million profit Southwest made in
Southwest CEO Gary Kelly (below) chose to focus on the positive
aspects of his airline's report.
"Our third quarter 2008 operating revenues of $2.9 billion were
a record performance, increasing a strong 11.7 percent, or 9.3
percent per available seat mile (ASM)," said Kelly. "Since August,
our revenue trends have strengthened, with September operating
revenue per available seat mile (RASM) increasing 11.0 percent and
October month-to-date RASM increasing approximately 14 percent,
versus the respective year-ago periods."
Kelly also pointed out that fuel hedging policies aren't meant
to be consistent profit-makers... but merely to smooth out the
highs and lows of the marketplace.
"The dramatic drop in energy prices since July is a significant
overall benefit for Southwest Airlines, of course, even though the
fuel hedge portfolio dropped over the last three months," Kelly
said. "Even with the drop in prices, our fuel hedge remains 'in the