Southwest's Hedge Fund Pays Huge

Recs

4

The best stimulus package in the world right now is being run not by the federal government, but by Southwest Airlines (NYSE: LUV).

Earlier today, the carrier defied peers by reporting a 22% improvement in per-share net income during the second quarter. Trouble is, virtually all of that growth was artificial: About $200 million of Southwest's $321 million in Q2 earnings derive from fuel hedging contracts.

The result? While United parent UAL (Nasdaq: UAUA) and peers JetBlue (Nasdaq: JBLU) and U.S. Airways (NYSE: NWA) are planning capacity cuts, Southwest is expanding in profitable cities, such as Denver.

Southwest's core business is in a bit of a holding pattern. The average Q2 passenger fare improved 8%, for example, while load factor fell 900 basis points over the same period. If there's a significant problem with Southwest, it's that, according to today’s release, fuel hedging won't provide the same cushion in future years:

...We currently have derivative contracts for approximately 80 percent of our estimated fuel consumption for the fourth quarter 2008 at an average crude-equivalent price of approximately $58 per barrel; approximately 70 percent in 2009 at an average crude-equivalent price of $66 per barrel; approximately 40 percent in 2010 at an average crude-equivalent price of approximately $81 per barrel; and over 20 percent in 2011 and 2012 at an average crude-equivalent price of approximately $77 and $76 per barrel, respectively.

Someday, Southwest might be like troubled peers Delta (NYSE: DAL), Northwest (NYSE: NWA), and AMR's (NYSE: AMR) American. But that day isn't today. A healthy does of stimulus has made sure of it.

Taxi toward related Foolishness:

“Make Big Money With Options” Motley Fool CFO Ollen Douglass recently made over $100,000 buying options on 7 well known stocks. Now we’re committed to turning his small fortune into a massive one! And we want you to join us! Enter your email address to hear more:

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. He hunts for tech's best as a member of the Motley Fool Rule Breakers team. Get a daily dose of his Foolish musings via this feed for your RSS reader.

The Motley Fool's disclosure policy asks that set your seat backs and tray tables upright for take-off.

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

TD AMERITRADE
more info
ShareBuilder
more info
Power E*Trade

more info
Scottrade
more info
Fool Disclosure

DocumentId: 692082, ~/Articles/ArticleHandler.aspx, 12/2/2009 1:06:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

The Must-Read Story on Fool.com
Is Everybody Losing It in Finance's Nervous Breakdown?

Related Tickers

12/1/2009 4:00 PM
UAUA $8.26 Up +0.50 +6.44%
UAL Corp CAPS Rating: *
AMR $6.29 Up +0.25 +4.14%
AMR Corp CAPS Rating: *
NWA $9.90 Down +0.00 +0.00%
Northwest Airlines… CAPS Rating: *
LUV $9.35 Up +0.15 +1.63%
Southwest Airlines… CAPS Rating: ***
JBLU $5.64 Up +0.13 +2.36%
JetBlue Airways Co… CAPS Rating: ***
DAL $8.62 Up +0.43 +5.25%
Delta Air Lines, I… CAPS Rating: *

Community: Investing Wiki

Term Of The Hour

Contrarian: A contrarian investor makes investing decisions that are often opposite conventional wisdom or the actions of the crowd.

Want to learn more or edit this definition?
Click here to read more!