Thursday, October 16, 2008

Hedging Cuts Both Ways - Southwest Airlines

Jet Fuel Hedges Keep SWA In The Money from USA Today on 7/24, (when heating oil was over $4.00)

Southwest Posts Loss on Hedge Charge from NY Times 10/16, (after the biggest price retreat ever)

Southwest Airlines has been heralded for its hedging choices. It is important to remember that hedges can make you look both smart and dumb before they are done. However, they are put in place for a reason - to manage volatility or to lock in profitability.
"Throughout this decade, Southwest has been the airline industry’s most aggressive player in purchasing contracts to guarantee the price of fuel. It has contracts covering part of its fuel purchases through 2012, and has begun buying contracts for 2013.

The practice seemed particularly prescient earlier this year, when fuel prices nearly doubled compared with 2007.

In past quarters, Southwest has booked millions of dollars in gains because it paid far below market price for fuel.

At the end of the second quarter, those contracts, which stretch through 2010, were worth $6 billion. But at the end of the third quarter, the value of the contracts had dropped to about $2.5 billion."

Southwest just posted the first quarterly loss in their history.

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