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Cheaper Oil Isn't the Only Payback

Derivatives don't come cheap, but investors are beginning to reward savvy hedgers

By Duncan Wood | Updated on January 02, 2006

While most airline stocks have been taking it on the chin in the market in recent months–in large part because of the sky-high price of fuel–there is at least one that has managed to turn record oil prices into a competitive edge. The reason? Southwest Airlines Co. seems to know how to hedge–and is in a financial position to do it. “We decided some years ago that we wanted to focus on what we were good at–which is running an airline–and take out the risks that are a distraction. There are upfront costs involved, but it’s a trade-off that works for us,” says Southwest’s CFO, Laura Wright. “We believe we have the right strategy.”

Throughout the second half of this year, Southwest’s jet fuel costs have been capped at $26 a barrel for 85% of its consumption. Next year, Southwest knows that it will need to pay no more than $32 a barrel for 65% of its fuel, and the airline already has hedges in place for 2009, through which it has hedged over a quarter of its consumption at a level of $35. Taking away the risk of rising fuel isn’t cheap, but Southwest is convinced that the peace of mind it gets in return is well worth the cost.

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