Southwest Second Story

Southwest Airlines reported a third quarter net loss of income of $140 million or $.18 per share despite posting an all-time quarterly record of $4.3 billion. Southwest blames the shortfall on its use of fuel hedging.
Fuel hedging is a form of risk-management that allows the company to buy future fuel at a pre-established price, thus protecting itself against fluctuations in the price of fuel. That policy seems to have backfired in this quarter.
“In accordance with fuel hedge accounting rules,” Gary C Kelly, Chairman of the Board, President and CEO said, “Our third quarter GAAP net results included $227 million of unrealized, noncash mark-downs relating to future periods’ fuel hedges. These special items resulted in a GAAP net loss for the quarter; however since September 30th, market prices have rebounded, and our future fuel hedge portfolio has gained back over $300 million in fair value.”
According to David Koenig of Businessweek, Southwest would have earned $122 million ($.15 per share) without the fuel hedging and mark-down expenses.
On Southwest’s quarterly report, it reported fuel costs at $1.6 billion, as opposed to $926 million for last year’s third quarter. This is a sharp rise of 71 percent. For the year Southwest reported $4.1 billion in fuel costs, also a steep jump over the same point last year of $2.7 billion.
Southwest reported a net profit of $205 million last year. The difference in fuel costs from each year’s quarter more than explains the $345 swing in profitability. The company’s recent acquisition of AirTran seems to have boosted profit for the quarter, helping to insulate some of the damages caused by fuel hedging. “[W]e have produced $60 million (before taxes and profitsharing) in annualized cost synergies, primarily attributable to renegotiation of certain AirTran contracts.”