Fuel Hedges Key To Dallas-Based LCC's Bottom Line

They've done it again. Helped by savings netted from its highly successful fuel hedging policy, on Thursday Dallas-based Southwest Airlines posted second quarter earnings of $321 million, nearly setting an all-time record as most of its legacy competitors are bleeding red ink.

"With the weak domestic economy and unprecedented jet fuel prices, we are pleased to report our 69th consecutive quarter of profitability," said Southwest CEO Gary Kelly (below). "Although we have prepared ourselves well for today's challenging environment and are proud of our ability to sustain profitability, we cannot stand still. We must continue to make the necessary adjustments to adapt to higher jet fuel prices and restore our profit margins."

Parsing the numbers, Southwest earned $121 million, or 16 cents per share, excluding special items but including profits from fuel hedges. The carrier took in $2.87 billion in revenue, reports The Dallas Morning News, compared to $278 million on $2.58 billion in the second quarter of 2007.

Southwest's performance beat estimates from analysts, who had predicted 12 cents per share of profit.

Once a novel experiment -- back in the days when fuel prices were measured in tens of dollars per barrel of oil, not hundreds -- fuel hedging is now a vital part of Southwest's economic strategy, and is its main differentiator from most of its competitors.

Though not immune from rising oil prices, Southwest has put hedges in place that should result in significantly lower fuel costs over the next several years than its rivals... unless oil prices fall significantly, that is, which almost no one expects will happen any time soon, if ever again.

"The current market value of our fuel derivative contracts for third quarter 2008 through 2012 is approximately $4.3 billion as a result of the extraordinary increase in fuel prices this year," Kelly said.

Kelly added Southwest will continue to raise its fares slightly, to cope with rising costs... but it won't charge new add-on fees for niceties like checked luggage.

"With new schedule planning tools and processes and fleet flexibility, we believe we are well-positioned to respond to a rapidly changing environment and have the flexibility to adjust our flight schedule, as necessary, to eliminate unproductive flying," Kelly said.

"At present, we plan to grow our year-over-year available seat mile (ASM) capacity no more than four percent in 2008 to primarily meet Customer demand in developing markets, such as Denver... as a consequence, we will grow to 115 daily departures to 32 markets in November. We are evaluating our current fleet plans and may not grow our ASM capacity in 2009."

Southwest's performance is by far the best among carriers that have reported Q2 numbers so far... but it's not the only airline to announce a second-quarter profit, helped by fuel hedging.

Alaska Airlines also announced a quarterly profit, of $63.1 million. That works out to $1.74 per share... but without special items like hedging, Alaska lost $14.1 million.

FMI: www.southwest.com, www.alaskaairlines.com