But Fuel Hedges Can Only Last So Long

Wednesday was a day for Southwest Airlines executives, managers, shareholders and employees to reflect back on the 38-year career of founder Herb Kelleher. Fortunately -- for Southwest, at least -- there was little in the way of bad news to ruin the party, even as cross-town rival American Airlines gave all indications it may be one grounded MD-80 away from the brink.

The Fort Worth Star-Telegram reports incoming chairman Gary Kelly (above), in his state-of-the-airline address at the airline's annual meeting in Dallas, said that while marginal flights will be trimmed, "We have no plans at present to close any operations at any of the cities we serve."

Kelly also told shareholders that Southwest's run of 68 consecutive, profitable quarters will not end anytime soon.

The contrast to American could not have been more stark. As ANN reported, American announced at its annual meeting in Fort Worth it plans to cut 12 percent of its flight capacity, thousands of employees will be furloughed, and passengers will be charged an extra fee for every checked bag, even the first one, starting June 15.

The airline also plans to charge customers added fees for such previously-complimentary items as placing reservations over the phone. In other words, the airline wants customers to pay for the privilege of paying for a flight... but American says all these measures are necessary, to combat high fuel prices.

Likely with a touch of envy, Kelleher's name even came up at American's meeting -- where AMR Corp. CEO Gerard Arpey recalled the battle over turning back legal restrictions in the federal Wright Amendment, which limits Southwest's growth at Dallas Love Field.

"When I crossed swords with him, I felt like I was in a gunfight and all I had was a knife," Arpey said. "I'm proud to call him a friend, and I wish him the very best."

In addition to a workforce culture renowned throughout the corporate community as a model for management-worker relations, Southwest has an important advantage in the current market other airlines are lacking: the carrier's policy of purchasing a sizable amount of its fuel years in advance at pre-determined prices, a practice called "hedging."

That's a big gamble... as there's no guarantee the price an airline agrees to pay now, won't be significantly higher than the actual market rate when the time comes for that price to go into effect. Like all big gambles, however, there's also the potential for a big payoff -- as is the case for Southwest. With oil trading now well north of $130 per barrel, Southwest will only pay the equivalent of about $51 per barrel through 2009.

After that, however, it's anyone guess what the market will look like... meaning even Southwest should probably enjoy the "good" times while they last.

FMI: www.southwest.com, www.aa.com