Southwest Airlines: Straightening up and flying right


Among airlines, Southwest has been famous for keeping its fares relatively low by using fuel hedging. Its accountants have kept the airline profitable by safeguarding itself against market volatility. It locked in low prices for a significant portion of its fuel needs, so when the price of oil jumped, the carrier was sitting pretty. The tactic meant the airline posted its 69th straight quarter of profit even in the throes of the summer gas-price crisis. Meanwhile, bungling airlines like United got in the hedging game near the peak of the market, and paid the price.

By the end of 2008, Southwest was paying a bit of a price, too, as the value of its original hedges declined and it had to come up with $247 million to pay for them. On balance, that's nothing compared to what it saved over the past few years -- $4 billion worth. But that's what happens when you gamble with hedging -- you take risks. And it looks like Southwest isn't interested in taking quite so many risks with its precious cash going forward.

The airline is easing up on the hedging game. Last summer, as much as 75% of its fuel was hedged. But between 2009 and 2013, only 10% of its fuel will be so. As long as fuel prices are spiking and plummeting, it's too tricky for an airline to anticipate the sweet spot when it comes to the ideal hedge price. The sweet spot keeps moving around.

Some industry observers think that the airline's reluctance to keep up with the practice means that we're in for dramatic volatility in fuel prices in 2009. Does Southwest know something we don't?