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Southwest's hedge on fuel backfires

Southwest Airlines planes

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Kai Ryssdal: Crude dropped briefly below $69 a barrel today. That's less than half its record high this past summer. Worked out pretty well for most airline stocks. But Southwest isn't most airlines. The discount carrier's been in the black every single quarter for the past 17 years. Until this one. It's managed to make money recently by playing played its fuel hedges just right. Now that oil prices are dropping, Southwest's fuel contracts have cut into profits.

Marketplace's Janet Babin reports from North Carolina Public Radio.


Janet Babin:
Southwest's oil-hedging prowess has made it the master of the airline universe. The company locked in low cost fuel prices in advance. As a result, its bottom line soared while competitors' profits were eaten up by rising oil prices.

Travel analyst Peter Yesawich says Southwest bet right on oil for a long time, but in this volatile market . . .

Peter Yesawich: Trying to predict the price of a barrel of oil is a little bit like playing Russian Roulette today.

Oil prices fell so fast last quarter that Southwest had to take a $247 million accounting charge. It's also put its hedging on hold. But Analyst Ray Neidl at Calyon Securities says it's just a temporary setback.

Ray Neidl: Southwest, like other airlines, is still going to benefit going forward from lower oil prices.

That doesn't mean the airlines will escape a drop in demand. As the economy weakens, companies have started pulling back on business trips. Airlines that specialize in business class to and from financial hubs, have already felt the backslide. And consumers will likely be next to reign in travel.

Still, Neidl is cautiously optimistic. Things are so bad everywhere else, that by comparison, he says the airlines are starting to see some blue sky.

Neidl: The airline industry is no longer the worst industry. Airlines had their crisis last year and earlier this year when oil prices went up and as a result they prepared for this.

They cut back on flights, and reduced capacity -- a trend expected to continue into next spring.

I'm Janet Babin for Marketplace.

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