Interesting accounting rules...you have to subtract 10%on fuel hedges from your operating profit. Even though they are still worth $2.5 BILLION. Weird....
Southwest Posts Loss on Hedge Charge
By
MICHELINE MAYNARD
Published: October 16, 2008
Southwest Airlines said Thursday that it lost $120 million in the third quarter, its first quarterly loss in more than 17 years, because of a noncash charge to write-down the declining value of its hedging contracts for jet fuel.
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Southwest said it took a one-time charge of $247 million, reflecting a steep decline in oil prices, which hit record levels in July. The last time Southwest lost money was in the first quarter of 1991.
Without the charge, Southwest said it had earned $69 million. That figure beat analysts’ expectations for the quarter. The airline had record operating revenues of $2.9 billion, up 11.7 percent.
On Wednesday,
Delta Air Lines reported a net loss of $26 million for the quarter, while
American Airlines lost $360 million.
Continental Airlines said Thursday that it posted a third-quarter net loss of $145 million, not including extraordinary items. Continental earned $241 million in the quarter a year ago.
Throughout this decade, Southwest has been the airline industry’s most aggressive player in purchasing contracts to guarantee the price of fuel. It has contracts covering part of its fuel purchases through 2012, and has begun buying contracts for 2013.
The practice seemed particularly prescient earlier this year, when fuel prices nearly doubled compared with 2007.
In past quarters, Southwest has booked millions of dollars in gains because it paid far below market price for fuel.
At the end of the second quarter, those contracts, which stretch through 2010, were worth $6 billion. But at the end of the third quarter, the value of the contracts had dropped to about $2.5 billion. The contracts’ value reflected the drop in the price of oil, which peaked at $147 a barrel in July, then fell to $80 at the end of September.
Under federal accounting rules, Southwest must exclude about 10 percent of its future contracts, and value them at current prices.
When fuel prices are rising, the practice can be beneficial. Indeed, Southwest booked a $511 million gain in the second quarter because of favorable swings in its contracts. But when prices drop, a company is required to take a charge reflecting the decline.
Southwest said it had hedging contracts in place for 85 percent of the fuel it planned to purchase in the fourth quarter; 75 percent of its 2009 fuel and 50 percent of the fuel it planned to buy for 2010.
Gary Kelly, the chief executive at Southwest, said he was not discouraged by the loss, which came in one of the most challenging periods for the industry. “Overall, declining fuel prices are a very good thing for an airline including Southwest Airlines,” Mr. Kelly said in an interview.
Mr. Kelly called the charge a “fluke” saying that Southwest did not anticipate that any future swings in oil prices to be as dramatic as in the second quarter.
He said he was pleased with the airline’s operating profit, and said he expected the airline could maneuver through the nation’s economic crisis.
“The world is on fire, and we’re in pretty good shape,” Mr. Kelly said. “We’re going to fight hard to blast through the headlines.”
Southwest shares closed down 6.17 percent Wednesday, to $11.56.