Newsstand - Marketplace: Southwest's Fuel Hedges Backfire

From yesterday's broadcast of the public radio business news program Marketplace:

The discount carrier's been in the black every single quarter for the past 17 years. Until this one. It's managed to make money recently by playing played its fuel hedges just right. Now that oil prices are dropping, Southwest's fuel contracts have cut into profits. (http://marketplace.publicradio.org/display/web/2008/10/16/southwest/)

If I have the right to buy fuel at $50/bbl, mark-to-market accounting says that when the futures price went from $80/bbl to $140/bbl, I recorded a profit of $60/bbl. Now I report a similar loss.

This doesn't make getting to buy fuel at $50 when the spot market is $80 a bad thing. Or that anything "backfired" on them.

If I have the right to buy fuel at $50/bbl, mark-to-market accounting says that when the futures price went from $80/bbl to $140/bbl, I recorded a profit of $60/bbl. Now I report a similar loss.

This doesn't make getting to buy fuel at $50 when the spot market is $80 a bad thing. Or that anything "backfired" on them.

Agreed. The question, of course, is whether any of their recent profitable quarters were only because of the mark-to-market accounting rules. If so, it seems disingenuous to claim that this loss doesn't really count.

What really matters:

"Without the charges, Southwest said it earned its 70th straight operating profit — $69 million, or 9 cents per share...Analysts, who typically exclude one-time items from their forecasts, had expected Southwest to earn 7 cents per share...Revenue rose to $2.89 billion from $2.59 billion, beating analysts’ forecast of $2.83 billion."

"Backfire" and "losses" are fun for the mass-media headline writers. Folks who understand looking past accounting artifacts into the realities continue to drive them to outperform their peers.