Southwest's Hedge Fund Pays Huge

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:

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.


Read/Post Comments (0) | Recommend This Article (5)

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.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 692082, ~/Articles/ArticleHandler.aspx, 8/23/2014 7:38:28 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...


Advertisement