Southwest locks in fuel prices to save money

WASHINGTON (Reuters) - Southwest Airlines Co. LUV.N, the leading U.S. discount carrier, has already locked in below-market costs for some of its fuel supplies through 2010 and could hedge even more in the future, Southwest's chief financial officer said on Wednesday.

Laura Wright, CFO of the Southwest Airlines, speaks at the Reuters Aerospace and Defense Summit in Washington, December 6, 2006. REUTERS/Yuri Gripas

Dallas-based Southwest has actively hedged its fuel purchases since 1999 and has locked in below-market prices for 85 percent of its 2007 fuel supply, Laura Wright told the Reuters Aerospace and Defense Summit in Washington, D.C.

“We like to go into a year being 80 to 85 percent hedged because (fuel is) the second-largest cost in our cost structure” next to labor costs, Wright said. “It’s our bias to be more hedged rather than less.”

Southwest, along with every other U.S. carrier, has struggled with rising crude oil prices, which have bit into its bottom line.

Southwest has saved $550 million from its hedge positions so far this year, but fuel costs are up $600 million versus a year ago, Wright said.

As of the end of September, the market value of Southwest’s forward hedges was $1.3 billion, she said.

Those hedges lock in the price of crude oil, which is the main factor in determining jet fuel prices.

For 2007 Southwest has hedged 85 percent of its fuel supply needs at $49 a barrel, which is about $13 a barrel cheaper than current U.S. crude oil futures that are trading near $62 a barrel.

Southwest’s 2008 fuel program is 45 percent hedged at $44 a barrel, falling to 38 percent at $47 a barrel in 2009 and 17 percent at about $63 a barrel in 2010.

Southwest will seek to boost those hedging positions over time, Wright said.

“The stakes in the ground that we have give us opportunities ... to increase those hedge positions,” she said.

Hedging is not the only way that Southwest is trying to save on its fuel bill, she said.

For example, Southwest has put life-vests on some of its airplanes, allowing them to take quicker routes over water and save fuel. That’s the case on its Houston-to-Florida routes, she said.

“We could have a more direct routing,” she said. “It lets us get there quicker and burn less fuel.”