Southwest Cuts Future Fuel Hedges

According to the Dallas Morning News, Southwest will drastically reduce its remaining fuel hedges for 2009 through 2013, after relying heavily on this strategy during recent years. The airline now has only 10 percent of its fuel needs hedged for that time period.

The News‘ Terry Maxon writes that, “As recently as mid-October, [[Southwest]] had hedged 75 percent of its 2009 fuel usage at the equivalent $73 a barrel of crude oil, 50 percent of 2010’s needs at $90 a barrel, 40 percent of its 2011 usage at $93 a barrel and over 35 percent of 2012 fuel at about $90 a barrel.” With prices now below $40 a barrel, these hedges, once lucrative money-savers for the airline, have become costly.

Does this mean Southwest thinks fuel prices will keep plummeting? More likely, Southwest is merely trying to lay low during this period of extreme fuel price volatility. In the News‘ Airline Biz Blog, Maxon writes that Southwest, and the rest of the industry, is coping unprecedented drops (and spikes) in fuel prices, leaving Southwest no choice but to abandon its practice of long-term hedging—at least for now.

What does this mean for customers? Depends on how much stock you put in Southwest’s skills of prognostication. The airline tends to have a good sense of industry trends—after all, its fuel hedging was a business masterstroke, shielding the airline from economic forces that nearly toppled many of its competitors—so its decision would seem to hint at further fuel-price chaos in the coming year. That could be good for customers, especially if airlines are able (or are forced) to discount flights in the face of weak demand. Of course, if prices spike again, look out.

Either way, Southwest’s move surely signals one thing: 2009 will pick up right where 2008 leaves off. Buckle up!