Fuel-cost drop jolts Southwest

Times Staff Writer

Southwest Airlines Co. posted its first quarterly loss in 17 years as a program that it had used in the past to cut fuel costs backfired amid the recent sharp drop in oil prices.

The airline, one of the largest at Los Angeles International Airport, said Thursday that it incurred a loss of $120 million in the third quarter as it had to take an accounting charge to write down the declining value of a fuel-hedging program.

Until July, when oil prices reached their peak, Southwest was one of the few airlines to show a profit. It did that by paying less than the prevailing rate because it had locked in lower prices months earlier.

But in recent weeks, oil prices have slumped by more than half, to $69.85 a barrel Thursday, from their high of $147 a barrel in July.


In the process, oil prices fell below what Southwest had locked in previously, reducing the value of its so-called fuel hedges in the third quarter.

Still, shares of the Dallas-based carrier jumped 93 cents, or 8%, to $12.49 as operating profits were better than expected and lower oil prices were seen as helping the airline reduce overall fuel expenses.

Excluding the one-time charge, Southwest had an operating profit of $69 million, or 9 cents a share, compared with $156 million a year earlier. Revenue jumped nearly 12% to $2.9 billion on higher airfares.

“The dramatic drop in energy prices since July is a significant overall benefit for Southwest Airlines,” Gary Kelly, the carrier’s chief executive, said, adding that “even with the drop in prices,” fuel hedging still saved the airline $1.3 billion so far this year.


Looking forward, the airline said it was concerned with the slumping economy and was preparing for the downturn by curtailing growth plans.

For the first quarter of next year, the airline plans to cut 190 daily departures and reduce capacity, or the number of available seats, by about 5% to 6%.

Continental Airlines Inc., the nation’s fifth-largest airline, wasn’t hit as hard by fuel hedging. But it reported a loss of $236 million because of high fuel costs during the third quarter when oil prices reached a high in July before they began falling.

Revenue for the Houston-based carrier rose nearly 9% to $3.82 billion.


“We know that demand for air travel will be adversely affected by a recession,” said Lawrence Kellner, Continental’s CEO. “It remains to be seen how deep, wide and long the recession will be.”