Southwest to lose on hedges in 09

Washington DC
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Falling fuel prices could continue to plague Southwest Airlines, with its hedges spurring losses of $100-$150 million in 2009 at fuel prices of $57 per barrel.

Those predictions follow the carrier's first quarterly loss in 17 years for the third quarter of this year driven by special charges of $247 million related to its usually heralded fuel hedging portfolio.

During a presentation at the Credit Suisse Global Airline Conference today Southwest CEO Gary Kelly supplied the prospective losses next year on fuel hedging. In the short term the carrier is attempting to "de-hedge a bit", says Kelly, and has dropped hedging levels for 2009 from 75% to 63%.

Also in the near term, Southwest should post a $45 million cash gain during the fourth quarter if oil stays in the current $50 per barrel range.

While the current volatility in oil prices is presenting challenges for Southwest's hedging portfolio in the short-term, Kelly believes the stage is being "set for fuel prices to spike in the future" and the carrier has to be prepared for that scenario.

Noting that the carrier "wants to remain hedged", Kelly says it is "a problem we just have to manage".