Even Southwest makes a mistake every now and then

The roller coaster ride of fuel prices over the past 18 months has wreaked havoc on the airline industry, with many carriers going bankrupt, ceasing operations or just losing lots and lots of money.  But in the background there has always been Southwest Airlines, steadily plodding along and profitable for 70 consecutive quarters.

Well that came to an end at Q3 2008, but it is debatable as to whether they really did lose or not.  See their operational results showed a profit of $69MM.  But they had to take a $247MM charge against the books based on charges associated with fuel hedging.  Yup, fuel hedging.  That has been one of the major keys to Southwest’s success for most of recent memory.  But they finally got burned on it this quarter, with prices taking a tumble to less than $80/bbl recently after spiking at over $140 in the middle of the year.

Southwest isn’t the only airline suffering from hedging charges.  Continental reported charges of ~$70MM and United reported ~$500MM in charges for similar hedge bets this quarter.  Of course, the reported losses are, in many cases, just on paper.  Since the hedges are options contracts and they aren’t all executed in the quarter it isn’t like the airlines necessarily paid out that cash to someone rather than just having the potential future value of the contracts decrease.  Still, the accounting rules are what they are and the numbers have to be reported as such.

So there you have it.  Once the commodity prices actually start fluctuating wildly the pros start to struggle with predicting the future value and they can lose just as easily as they can win.  Makes me feel a bit better about my investing skills when I see that the pros can mess up, too.