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Days over for Southwest fuel cost advantage-CFO
September 7, 2011 / 4:40 PM / 6 years ago

Days over for Southwest fuel cost advantage-CFO

* Southwest says still hedged for catastrophic coverage

* Southwest had fuel savings in excess of $4 bln

* Delta says has financing for much of plane order

NEW YORK/CHICAGO, Sept 7 (Reuters) - Southwest Airlines (LUV.N), whose fuel hedges were once the envy of the U.S. airline industry, still uses them to manage volatile fuel costs, but the carrier no longer spends far less on fuel than rivals, Southwest’s chief financial officer said on Wednesday.

Speaking on a webcast of the Dahlman Rose & Co global transportation conference, Laura Wright said the cost of buying options to lock in lower fuel prices has risen and the instruments are best used now to blunt the impact of a sudden surge fuel prices.

Southwest, the largest U.S. low-cost airline, enjoyed a major cost advantage over competitors in the middle of the last decade thanks to layers of hedges that ensured fuel costs that were well below market prices.

The hedging program gave Southwest a significant advantage over unhedged rivals as fuel followed oil futures to a record high in 2008. Southwest’s lucrative hedges have since expired and the industry playing field is more level.

“Those days of having a massive market advantage are over. We certainly benefited in the last decade when prices went straight up,” Wright said.

“We were early and out there and had fuel savings in excess of $4 billion from our hedging program,” she said. “We still are hedged as we go out into the future, but, I would admit, in a different way. Hedging is more catastrophic coverage.”

Wright noted that Southwest has hedging positions out to 2015.

Due to consolidation and capacity cuts, the airline industry is recovering from a years-long downturn that was exacerbated by spikes in fuel prices and an economic downturn that drained travel demand. Some airlines, including Southwest, are curbing growth plans or cutting the number of seats for sale this fall.

Earlier on Wednesday, Hank Halter CFO of Delta Air Lines, (DAL.N) said Delta is cutting capacity by 4 percent to 5 percent for the post-Labor Day period.


Last month, Delta unveiled an order for Boeing Co (BA.N) Next-Generation 737-900ER airplanes valued at $8.5 billion as it looks to replace older aircraft with fuel-efficient models.

Halter said Delta could pay for its order in cash but also has financing lined up and will decide later how to fund the purchase.

“We do have committed financing in place for a significant portion of the purchase,” Halter said. “Our cash flow from operations is sufficient to pay cash for those aircraft. We’ll make more decisions as we approach 2013.”

The more fuel-efficient jets will be delivered from 2013 to 2018 and will add to earnings from the first year. (Reporting by Nick Zieminski and Kyle Peterson; Editing by Steve Orlofsky)

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