Hedges Continue To Fuel Low-Cost Carrier
What just last year looked to be a
declining advantage for Southwest Airlines, is surging as quickly
as the price of oil.
The New York Times reports Southwest's years-long policy of
hedging fuel prices may once again prove to be highly lucrative for
the Dallas-based low-cost carrier. While the airline is paying more
for fuel than it was just a few years ago, it's still far below the
going rate for other airlines.
Southwest is enjoying fuel prices calculated if oil only cost
$51 per barrel... and it has that cost locked in through 2009. With
oil prices currently topping $90 per barrel -- and projected to hit
$100 per barrel in the very near future -- the higher the cost of
oil goes, the better Southwest is positioned for the next two years
against its rivals.
And that means Southwest is enjoying a little schadenfreude --
or "shameful joy" -- against other US airlines. "It's true,"
Southwest treasurer Scott Topping -- who negotiates fuel hedge
agreements -- said.
It's not that Southwest isn't hurt by higher oil prices; it
wasn't long ago the airline was paying around $35 per barrel. The
hedges mean the airline is affected by price spikes on a level far
removed from other carriers, however.
Which puts Topping, and Southwest, in the unusual position of
welcoming higher fuel prices. "We’re not sure what to root
for," he admits.
Just 10 months ago, it appeared Southwest's hedging advantage
was coming to an end. In January, the price for oil hovered around
$52 per barrel... presenting Southwest with little cost advantage
over other airlines. It was in that mindset the airline started
pursuing other revenue opportunities, such as its increased
emphasis on business-class fliers.
As the year progressed, however, the airline's hedge advantage
continued to grow... leading industry insiders to question why
other airlines didn't follow Southwest's lead in securing hedges
when they had the chance last year.
"Maybe they were distracted," said Bear Stearns analyst Frank
Boroch. "It's a copycat industry. If everybody is in the same boat,
that's going to give you comfort, or an excuse... 'Why hedge at $52
when it might go to $40?’"
Topping says Southwest usually expects high fuel prices to
prevail... even when prices fall in the short-term. "In hindsight,"
he said, "we’d have picked more [hedges] up."