One of my father’s default tag lines was “sometimes you get the bear, sometimes the bear gets you.” I use this phrase frequently when discussing hedging future price changes — if prices move in the direction you anticipated, you earn a profit, if they move in the opposite direction, you earn a loss.
Last quarter the bear got Southwest Airlines (hey, that’s a good pun too). Southwest reported a net loss last quarter, due in large part to their fuel price hedging position:
The loss included net charges of $117 million related to the falling value of its fuel-hedging positions. Without the charges, Southwest would have earned $61 million, or 8 cents per share, which beat expectations of analysts surveyed by Thomson Reuters, who forecast a gain of 5 cents per share excluding special items.
Recently, Southwest has cut back sharply on fuel hedging. It also said Thursday that it plans to reduce capacity this year by 4 percent and will rein in fleet-expansion plans.
In periods of uncertainty, you manage this risk by hedging your hedge, buy buying an instrument that in essence allows you to get out of buying the fuel at the price you contracted. I’m thinking of instruments like put options. Of course, you are unlikely to recoup all of your money by doing this, but you can mitigate your losses.
But, being the “glass is half full” person that I am, I focus on the fact that their net income before special items was higher than analyst expectations. I doubt that’s the case for other airlines in this market.