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 also did something else that was 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
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Reader Comments (Page 1 of 1)
11-30-2007 @ 8:27PM
Eldon Monk said...
Can anyone explain to me why this stock is in the doldrums? The airline stock with the most successive profitable quarters; Lowest operating costs of all airlines; New (but as yet unnanounced) products to increase profitability next year; and Fuel for the next 18 months hedged at about half the current spot market price. What am I missing here? Looks like this stock should be running away from every other airline for sure, and most other stocks in general.
12-13-2007 @ 6:36PM
Captlucky said...
I myself have pondered this question for many years and and I think I finally have the answer. First, Wall St. thinks of SWA as a red headed bastard stepchild and therefore does not belong in the same category as such money loosing airlines like DELTA, United, US AIR, (TWA-Gone), (Pan Am-Gone), Northwest on a bananna peel etc, etc, etc. WS concludes that if the large, well established, premium carriers lose money then surely their red headed step child has no future. When such carriers do bad then SWA receives the doom and gloom run off. God forbid if SWA actually losts money one quarter for surely they would end up under the bus. You see, it doesn't matter how much fuel hedging or how much profit SWA makes. For example, in the past, I have witnessed AMR stock rise 20% in one day because they did not lose as much as the WS estimate, conversely, that same day, SWA stock fell 15% because the company did not meet the street estimate. Is this insane or what?