Southwest's oil hedge could save it $1 billion or more

[EV_Ares]

Posted Nov 29th 2007 10:35AM by Douglas McIntyre
Filed under: Earnings reports, Forecasts, Industry, Competitive strategy, Southwest Airlines (LUV)

You have to hand it to Herb Kelleher, the famous CEO of Southwest Airlines (NYSE:LUV). He is retired now, and his legacy was to make the airline the best low-cost provider in the US. But, he did something just as important. He bought hedges against higher oil prices.

According to The New York Times "Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion."

While other airlines struggle with the damage that $90 oil will do to their bottom lines, Southwest will have a huge advantage in terms of its cost base for at least two years. That should increase the value of the company compared to almost every other US airline.

Kelleher will now be remembered as more than just a clever cost-cutting and marketing executive.

Douglas A. McIntyre is an editor at 247wallst.com


Tags: airlines, herb kelleher, HerbKelleher, inthenews, luv, oil prices, OilPrices, southwest airlines, SouthwestAirlines

[flyarm]

1. American Airlines has done this since the early 70's ..the first energy crunch in oil

Southwest is only copying what American has done for several decades.

fly

[EV_Ares]

2. They must be doing something else right then also with all the success

they have been having, best ontime, profits, employee & customer satisfaction, etc.

[blondeatlast]

4. Domestically, I try only to fly Southwest. I know LOTS of people who work for them and

they love the place.

Kelleher SHOULD be the business model for lots of other CEOs, but yanno, he just goes against the conventional wisdom--he actually appreciates what his employees did for the company...

Colleen Barret, his successor, absolutely intends to follow Herb's model--"The customer comes SECOND." The employees, of course, come first.

[EV_Ares]

5. Yeah, the same here, whenever we go to Vegas or other places

where Southwest goes, we use them and no complaints. 60 minutes did a segment on them sometime ago and they really seem to have the right idea about things. I see where they are going to changeup the way you are seated, not sure exactly what the changes are but they have done it I guess.

[A HERETIC I AM]

7. One of the other things they did/do right is using only one single aircraft type...

the Boeing 737. Using only one airframe makes their maintenance costs lower because their parts inventory is more efficient. Airlines that do their own maintenance that use many different types or models are forced to carry a huge inventory of spares. Southwest has avoided this extremely expensive issue by staying with the very reliable and common 737.

BTW, their stock (Symbol "LUV") is about $.50 cents above its 52 week low, trading right now (2:10 PM) at 13.43, down .39 for the day. P/E ratio is 17.40 and EPS at .77.

[goforit]

3. Wow. Smart instinct.

[RB TexLa]

6. Would be nice to fly them, oh our country cousins in Fort Worth didn't want us to have that

so too bad.