Grumpy
10-16-2008, 06:40 PM
Southwest Airlines gambled and lost. The airline, which traditionally hedges its fuel costs, got caught going the wrong way as energy prices reversed. Its third-quarter earnings, however, were better than Wall Street had expected.
The airline posted its first quarterly loss in 17 years on Thursday after losing the gamble with its fuel hedge. Southwest Airlines (nyse: LUV - news - people ) has been arguably the best in the airline industry at hedging against the rising cost of fuel, allowing it to forego the fees that have overwhelmed consumers at other airlines. But, it finally gambled too much. The company took a charge of $247.0 million during the quarter after the price of fuel rapidly dropped below the hedged amount paid by the company.
"Despite these cost pressures, our operating cost advantage, especially compared to legacy airlines, is as strong as ever," said Gary C. Kelly, the Southwest chairman. "More importantly, we need to aggressively manage costs and productivity to maintain our profitable Low Fare brand. I am very proud of our employees' ongoing efforts to control costs, improve productivity, and preserve our brand during this challenging environment."
Excluding the one-time charge, the airline posted a slight profit. Overall, Southwest reported a quarterly loss of $120.0 million, or 16 cents per share, compared with a profit of $162.0 million, or 22 cents per share, in the year-ago period. Excluding the hedge writedown, the discount airline earned $69.0 million, or 9 cents per share, beating the average Wall Street estimate of 7 cents per share. It reported revenues of $2.9 billion, up 11.7%.
Shares of the company were up, climbing 3.6%, or 42 cents, to $11.98, in afternoon trading on Thursday.
The company has already hedged it consumption for the next few years with 75% of its 2009 fuel consumption at an average crude-equivalent price of $73 per barrel, 50.0% of its 2010 fuel consumption at $90 per barrel, 40.0% of its 2011 consumption $93 per barrel, and more than 35.0% of its 2012 consumption at $90 per barrel.
Light, sweet crude for December delivery fell $3.85, or 5.1 percent, to $71.03 in afternoon trading on the New York Mercantile Exchange, the Associated Press reported. Crude had fallen as low as $68.92 earlier in the session.
The airline posted its first quarterly loss in 17 years on Thursday after losing the gamble with its fuel hedge. Southwest Airlines (nyse: LUV - news - people ) has been arguably the best in the airline industry at hedging against the rising cost of fuel, allowing it to forego the fees that have overwhelmed consumers at other airlines. But, it finally gambled too much. The company took a charge of $247.0 million during the quarter after the price of fuel rapidly dropped below the hedged amount paid by the company.
"Despite these cost pressures, our operating cost advantage, especially compared to legacy airlines, is as strong as ever," said Gary C. Kelly, the Southwest chairman. "More importantly, we need to aggressively manage costs and productivity to maintain our profitable Low Fare brand. I am very proud of our employees' ongoing efforts to control costs, improve productivity, and preserve our brand during this challenging environment."
Excluding the one-time charge, the airline posted a slight profit. Overall, Southwest reported a quarterly loss of $120.0 million, or 16 cents per share, compared with a profit of $162.0 million, or 22 cents per share, in the year-ago period. Excluding the hedge writedown, the discount airline earned $69.0 million, or 9 cents per share, beating the average Wall Street estimate of 7 cents per share. It reported revenues of $2.9 billion, up 11.7%.
Shares of the company were up, climbing 3.6%, or 42 cents, to $11.98, in afternoon trading on Thursday.
The company has already hedged it consumption for the next few years with 75% of its 2009 fuel consumption at an average crude-equivalent price of $73 per barrel, 50.0% of its 2010 fuel consumption at $90 per barrel, 40.0% of its 2011 consumption $93 per barrel, and more than 35.0% of its 2012 consumption at $90 per barrel.
Light, sweet crude for December delivery fell $3.85, or 5.1 percent, to $71.03 in afternoon trading on the New York Mercantile Exchange, the Associated Press reported. Crude had fallen as low as $68.92 earlier in the session.