From the Dallas Morning News
http://www.dallasnews.com/sharedcont...11a244a34.html

Southwest Airlines loses $120M in 3Q on fuel charge 7:26 AM CT

07:48 AM CDT on Thursday, October 16, 2008
By ERIC TORBENSON / The Dallas Morning News
[email protected]

The words “quarterly loss” and Southwest Airlines Co. haven’t been put together for nearly 18 years, but the Dallas-based company said it lost $120 million in the third quarter based on accounting charges related to its fuel-hedging program.

Southwest said its streak of profitable quarters remains alive at 70, however, if you remove the $247 million related to the accounting charge. Without the “special item” the world’s largest low-fare carrier earned $69 million, or 9 cents per diluted share. Analysts surveyed by Thompson First Call had predicted a quarterly profit of 7 cents a share.

“Our outlook on fuel prices has actually dramatically improved,” said Gary Kelly, chief executive officer, in an early-morning conference call with reporters. “The even bigger issue in our world is what is going on with the broader economy.”

Southwest’s bookings are solid for the rest of the year and its unit revenues — what it earns for each seat mile flown — for October are up 14 percent from last year, helped in part by its marketing campaign highlighting its lack of fees compared with rivals, Mr. Kelly said. “We’re going to have a decent fourth quarter,” he added.

After that, it’s anybody’s guess what demand for air travel will be, and Southwest is battening down its hatches for what may lie ahead. It drew down $400 million of a $600 million credit facility to help weather the storm and will be cutting its capacity in January compared to what it flew in the first quarter of this year. It will continue to fly all its 535 aircraft, but will cut some “unpopular” flights at odd times of the day in its schedule, he said.

Third quarter revenue grew 11.7 percent to $2.9 billion from a year earlier, and the carrier expects to see strong revenue growth in the fourth quarter as rivals cut capacity by an average of 15 percent, Mr. Kelly said. The $69 million profit compared with a net income of $156 million for the year-earlier quarter.

The fuel hedges that have helped Southwest save $1.3 billion this year can also take a bite of the income statement when fuel prices fluctuate wildly as they have in the past few months. Crude oil traded at below $70 a barrel Thursday morning, and the difference between the positions Southwest holds in the future and current prices forced the airline to “mark” its hedging to “market” prices, which is also called mark-to-market accounting.

It’s the same accounting rule that has put a lot of banks in trouble with mortgage assets and it has stung other carriers badly that bought fuel at prices well above today’s spot market, though Mr. Kelly said he’s not at all concerned about his carrier’s hedges going forward or his ability to manage the airline’s finances.

Southwest has 75 percent of its estimated fuel needs pre-purchased at capped prices of about $75 a barrel for all of 2009; Mr. Kelly said that the carrier’s actual costs would be lower than the $75 figure, and added that if oil prices continue their downward trend that the airline would look to “de-hedge” itself by selling positions. Half of Southwest’s fuel consumption for 2010 is hedged at about $90 a barrel of oil.

Despite the hedging protections, Southwest’s third-quarter fuel bill rose 44 percent to an even $1 billion. That pushed the airlines’ costs up 20 percent over the previous year, and the cost outlook isn’t going to get better as the airlines slows its growth for the current quarter to 1 percent and prepares to cut its capacity.

“Now is not the time to be growing capacity,” Mr. Kelly said. “I’m comfortable that we’re making just the right moves at the right time.”