Two US carriers resume hedging fuel costs
24 July 2015
At least two US airlines had started hedging their fuel costs following a months-long hiatus, further adding to their losses.
Southwest Airlines Co and United Continental Holdings Inc had added new hedges against a rise in oil prices only months following bets last year that cost them hundreds of millions of dollars.
With US crude prices down 21 per cent since early June, at Southwest the decision was being viewed with regret.
"We were concerned that market prices would continue to escalate, so we did add some positions for the second half of this year," Southwest's chief financial officer Tammy Romo said on an investor call yesterday.
At prices prevailing on 20 July, the hedges would cost Southwest $308 million when they settled this year. Through 2018, according to Southwest, its hedge book was $1.3 billion in the red, although that could change in case prices increased.
Contracts now accounted for 40 per cent of its expected fuel use in 2016 and 2017, up from 10 per cent and 30 per cent covered respectively as of April according to filings.
"We're mostly focused now on working our current position off, burning that position off in the most cost-effective way," chief executive officer Gary Kelly said on the call.
Meanwhile the carrier had been packing more passengers on planes than last summer and paying sharply lower prices for fuel, which was adding up to more record profits at the fourth-biggest airline in the US.
The company said it would use upto $500 million to buy back shares, which was designed to boost the value of the stock. The shares were up over 5 per cent in midday trading.
Southwest said yesterday that it earned a record $608 million in the second quarter, up 31 per cent from a year earlier, which was the airline's ninth straight quarter of record profit.
According to the company, excluding one-time items such as employee bonuses and fuel contracts, the company the adjusted profit was $1.03 per share, a penny higher than analysts expected, a survey by FactSet showed.
With the sharp drop in oil prices late last year, Southwest had saved a whopping $420 million, or 29 per cent, on jet fuel as against the same period last summer.
The savings of about $1 per gallon - more than offset a $201 million increase, or 14 per cent, in labour costs. Southwest projects fuel costs to be higher in the July-through-September quarter, though much below 2014 levels.
Revenue rose a modest 2 per cent, to $5.11 billion. FactSet said analysts expected $5.14 billion.
Southwest CEO Gary Kelly said results through the first six months of the year "are exceptional, and our current outlook for the second half of 2015 is also strong."