Fuel Hedging Helps Southwest Post Profit

Helped by significant fuel hedging that kept its cost of jet fuel at $39 a barrel in the first quarter of 2006 (the norm is $70 or more for airlines without hedging), Southwest Airlines reported first-quarter 2006 net income of $61 million, compared to $59 million for the same quarter a year ago. Hedging allows airlines to lock in a specific fuel price well in advance for a certain percentage of its fuel purchases; the airline, however, always gambles that the price on the open market will not be lower than its hedging contracts. In recent quarters, skyrocketing jet fuel costs have meant that carriers without hedge contracts are exposed to the wild fluctuations on the open market. Most airlines that do hedge, however, including Southwest, don't have hedging contracts for their entire fuel supply. Southwest saved $133 million from its fuel hedging, but its first-quarter 2006 jet fuel costs were still up nearly 63 percent. Looking forward, the airline is hedged at 75 percent of its fuel supply in the second quarter, with that fuel capped at $36 a barrel. In its first-quarter earnings report Southwest also said load factors were strong, yields were up and bookings looked good for the rest of the second quarter. Passenger revenue yields per mile increased 5.4 percent in first quarter 2006 versus the same quarter a year ago.

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