Stung by its fuel hedging strategy, Southwest Airlines has broken its unprecedented sequence of profitable quarters - 69 in a row - and posted its first quarterly loss in 17 years. The carrier recorded an accounting charge of $247 million for the third quarter because of the decline in the value of its fuel hedges, brought about by the falling price of oil. That brought its net loss to $120 million. Without the charge, it would have earned $69 million.
The airline's chief financial officer, Laura Wright, says the non-cash charges were related to "mark-to-market adjustments on our future-period fuel hedge portfolio", which is required under the Generally Accepted Accounting Rules. Mark-to-market rules mean that a company must account for such provisions as hedges at current prices, not at the prices it paid for them. In some quarters, the same rules pushed up Southwest's results.
The airline has begun drawing down a $400 million line of credit, but chief executive Gary Kelly insists that is for payments to Boeing. "You get cash when you can, not when you have to have it, and we are in essence making sure that we have financing in place for next year's deliveries," Kelly says. The carrier expects to take 13 new Boeing 737-700s next year, three of which were due for delivery in 2008 but have been delayed by the Boeing strike.
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Southwest incurred a net loss of $120 million in the third quarter |
Wright says Southwest is about 85% hedged at $62 a barrel for the fourth quarter, and for 2009 it is over 75% hedged at $73 a barrel. Kelly says September unit revenues grew by 11%, year-on-year, and by around 14% for the beginning of October. However, he told analysts that "we certainly share the concerns around the world about the economy and especially for next year".
For more on airline fuel hedging strategies, read our recent feature at: flightglobal.com/hedgevalues
Source: Airline Business
