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Fri, Dec 26, 2008

Southwest Modifies Fuel Hedges On Plummeting Oil Prices

Sells Five 737-700s On Leaseback To Raise Cash

We might be witnessing the dawn of a new era for Southwest Airlines... one in which the successful airline needs to be especially creative to hold onto its streak of profitability. 

BusinessWeek reports the Dallas-based low-cost carrier is a long way from being in as dire straits as many of its legacy competitors, including cross-town rival American Airlines... but Southwest is nevertheless taking some fairly drastic steps to minimize its losses in the face of ever-changing market conditions.

At the top of Southwest's hit list are its profitable fuel hedging programs. Just six months ago, analysts applauded Southwest's hedging strategies, which would allow the carrier to purchase fuel throughout 2009 at the equivalent of about $75 per barrel... close to half the going rate this past July. But then a funny thing happened: the bottom fell out of the oil market, and today a barrel of crude is trading for under $40.

No one in their right mind expects the price of oil to stay that low for much longer... but in the near term, dipping oil prices have devastated Southwest's bottom line, resulting in a Q3 2008 net loss of $120 million.

As a result, Southwest has modified some of its hedge agreements, and has sold back some others. The carrier now expects to pay about $1.80 per gallon of Jet-A in 2009, before taxes, resulting in an estimated savings of around $1.4 billion... about half what the airline had expected to save versus its rivals in July.

In related news, Southwest has followed other airlines in selling off some of its planes, then operating them on leaseback. In a filing to the Securities and Exchange Commission on Tuesday, Southwest disclosed it has sold five of its Boeing 737-700s to a third party aircraft lessor, to be leased back to the airline... trading short-term profit gains for added expenditures down the line.

The deal includes similar arrangements down the line on five more 737s, BusinessWeek added.

FMI: www.southwest.com

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