Southwest Airlines gets boost from record oil

By Chris Reiter and Kyle Peterson - Analysis

NEW YORK/CHICAGO (Reuters) - A resounding "yeehaw" heard in Texas as oil prices hit new highs may not just be from the state's oil producers; Southwest Airlines Co (LUV.N: Quote, Profile, Research, Stock Buzz), the lone big-time price hedger among U.S. airlines, might also be whooping it up.

While rising oil prices typically mean soaring jet fuel costs, Dallas-based Southwest's fuel hedges give it a unique edge over competitors that will only have grown as U.S. crude hit a record high above $92 a barrel on Friday.

"The airlines that are less hedged are probably feeling more of a pinch because of the higher prices, especially relative to Southwest," said Michael Waldron, an energy analyst at Lehman Bros. "They have a more advantageous position."

Fuel hedges -- financial products that give a buyer the right to buy fuel at a guaranteed price -- protect companies from price rises, but also boost their costs when prices fall.

Over the last nine months, the value of Southwest's fuel hedging contracts -- the difference between the hedged rate and current market prices -- has risen about 50 percent to $1.5 billion as of the end of September.

For the fourth quarter, the leading U.S. low-cost carrier has hedged 90 percent of its expected fuel needs at an average crude price of just $51 a barrel -- a big advantage in an industry in which fuel vies with labor as the largest expense.

Other carriers also hedge, but not nearly to the extent, nor as successfully, as Southwest. AMR Corp's (AMR.N: Quote, Profile, Research, Stock Buzz) American Airlines, for instance, has hedged 40 percent of its expected fourth-quarter fuel needs, capped at a crude oil price of about $69 a barrel.

Southwest's strong hedging position is evident in its fourth-quarter fuel price forecast.