Southwest flies past high oil prices

Jeff Tyler Jun 27, 2008

Southwest flies past high oil prices

Jeff Tyler Jun 27, 2008


Bob Moon: We’re seeing the results of all this financial turbulence in the not-so-friendly skies lately. Both American and United have announced they’re cutting flights domestically and internationally.

Across the industry, companies are trying to nickel and dime their way to profitability, hitting consumers with fuel surcharges or extra fees for baggage, but one carrier has managed to navigate a relatively smooth flight path.

Marketplace’s Jeff Tyler looks at how Southwest has steered clear of trouble.

Jeff Tyler: Hedging is the practice of locking in prices now on the assumption that they will be higher in the future, and no airline has done better at hedging fuel than Southwest.

Henry Harteveldt is an airline analyst with Forrester Research.

Henry Harteveldt: They have struck black gold, because they’ve hedged their fuel for several years into the future, at rates far, far below market rates.

Southwest is paying the equivalent of $51 a barrel for oil. That’s about one-third the current market rate. Aviation analyst Richard Aboulafia is with Teale Group.

Richard Aboulafia: When you’ve locked in a fuel price that is lower than everybody else’s, and when fuel is 40 to 50 percent of an airlines operating cost, you’re at a terrific advantage.

Enough of an advantage that Southwest can continue to offer low prices and add more routes. Again, Henry Harteveldt.

Harteveldt: Southwest can now literally afford to charge less than its competitors and still make money.

I asked Richard Aboulafia, why haven’t other airlines hedged their bets?

Aboulafia: Locking in fuel prices takes two things: One, very forward-looking management. And the other, a strong balance sheet. And the airlines simply don’t have either.

Several carriers have recently emerged from bankruptcy and don’t the funds to buy fuel in advance. Others have been burned in the past. In 2006, Delta lost over $100 million after it bought fuel hedges and the price of oil dropped.

Still, this insurance policy has paid off well for Southwest. In the last 10 years, the company has saved $3.5 billion on fuel.

I’m Jeff Tyler for Marketplace.

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