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Southwest 2Q net profit down 1.3%; fuel hedging pays off
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Southwest 2Q net profit down 1.3%; fuel hedging pays off

Southwest Airlines posted a second-quarter net profit of $733 million, down 1.3% from net income of $743 million the 2017 June quarter, as fuel hedging insulated the carrier from the much larger year-over-year (YOY) profit drops being reported by rival major US carriers.

The US airline industry has largely abandoned fuel hedging, a strategy that paid off in recent years when oil prices were historically low. But a surge in fuel prices over the last year has hit non-hedged airlines hard; American Airlines, for example, paid $954 million more for fuel in the first half of 2018 versus the first six months of 2017 and expects a $2.3 billion higher fuel expense in 2018 compared to 2017.

Southwest, which has approximately 79% of its 2018 fuel consumption hedged, paid just $154 million more for fuel in the first half of 2018 versus the first two quarters of 2017.

“That’s why we hedge,” Southwest CEO Gary Kelly told analysts and reporters. “That’s why we think it’s important to hedge. I think it’s served us extremely well.” With 64% of expected fuel consumption already hedged for 2019, “I’m not overly concerned about fuel price increases from here,” Kelly said.

“As of July 20, 2018, the fair market value of the company’s fuel derivative contracts for the remainder of 2018 was a net asset of approximately $108 million, and the fair market value of the hedge portfolio settling in 2019 and beyond was a net asset of approximately $345 million,” Southwest stated in its second-quarter earnings release.

The airline did have a modest revenue performance in the second quarter (up just 0.2% YOY to $5.74 billion), and acknowledged it was hurt by reduced bookings in the aftermath of the April 17 engine failure on a Boeing 737-700 that led to a passenger fatality. Southwest temporarily suspended advertising and marketing activities after the accident.

“No doubt our competitors benefited from some of our issues in the second quarter, but we will claw that back,” Kelly said. Southwest’s second-quarter RASM dropped 3% YOY to 13.84 cents…

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