Southwest's fuel hedges

[katbuad]

Some one posted some info earlier about Southwest's fuel hedges. A pal sent me this info that may even shed a bit more light on the subject.

SWA's fuel hedge allows carrier to be more competitive, keep fares down

The Los Angeles Times chronicles Southwest Airlines' much admired strategy of hedging fuel prices, which has for years allowed the carrier to be more competitive in cost control than its peers.

The airline, one of the largest at Los Angeles International, locked in more than 70% of the fuel it expected to consume this year at about $51 a barrel, far below Thursday's closing crude price of $126.62 a barrel, it says. Other large airlines have only 20% to 30% of their fuel hedged this year at about $100.

A hedge is a financial investment used to minimize or cancel out the risk in another investment. Airlines buy fuel at a fixed price in advance for future delivery to protect against the anticipated rises in price.

As a result, Southwest hasn't had to hike fares or impose new fees this year. Tom Parsons, publisher of BestFares.com, tells the paper that the round-trip fares between two cities where there is no competition from Southwest cost about $340 more than they did just six months ago.

The report points out that Southwest's advantage won't last forever because oil prices could drop and the amount of fuel it has been able to hedge diminishes from 55% next year to 30% in 2010.

But for now, the strategy has paid off handsomely for Southwest. Last year, the airline saved $727 million in fuel costs. In the first quarter this year, its fuel costs were up 20% vs. American Airlines' 50%. American hedged only about 27% of its fuel.

On average, Southwest paid about $1.98 for a gallon during the quarter, while American paid $2.74. --Roger Yu

Posted at 11:27 AM/ET, Jun 02, 2008 |

[pilotwife38]

Thank you for posting that info!

Tonya

[ccbegay]

Good thing I read this, I was going to ask what Fuel Hedging was! Thanks!