On a day in which the stock market was hammered generally, Dallas-based Southwest Airlines savvy use of fuel hedges allowed it to offset high fuel costs and nearly triple its profit to $76 million in the first quarter. Southwest’s net profit was equivalent to nine cents a share, which compared with a profit of $26 million (three cents a share) in the year-earlier quarter.
However, after Southwest, first quarter results from other airlines will likely be bleak. With several airlines wallowing in bankruptcy, JetBlue Airways — another discount airline — is the only other airline that is expected to report a profitable first quarter.
Southwest’s hedging program allows the company to lock in fuel prices and protect itself from soaring fuel costs. Southwest saved $155 million during the quarter by capping 86% of its fuel expenses at the equivalent of just $26 a barrel of crude oil, close to half the actual cost of oil during the quarter. Southwest has also hedged 85% of its 2005 jet fuel costs at the equivalent of $26 a barrel of crude oil, 65% of its expected 2006 fuel needs are hedged at $32, and 45% of 2007 fuel costs are hedged at $31.
Meanwhile, Southwest also reduced its costs almost 4% from a year ago, while operating revenue rose 12% to $1.66 billion.
Southwest is one well-managed business.