Finance, Accounting and Control Case Study

Southwest Airlines: Profitability through Fuel Hedging?

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Abstract:
Southwest Airlines Company is a US-based low cost airline with the largest and most profitable operations. Until January 2008, it had posted profits for 35 consecutive years. It had been a strong advocate of the financial strategy of fuel hedging to contain its fuel costs and maintain profit margins. Fluctuating fuel prices had always been beneficial to Southwest Airlines. But now with the fall in fuel prices the situation has changed radically. As of 1 December 2008, the price of Jet fuel has declined 8.5% from the last week of November 2008 to the equivalent of $1.71 a gallon and that was 38.7% down from the previous year 2007. The dark side of fuel hedges had cropped up for Southwest Airlines and it had a setback in its continuous string of profits and made a loss of $120 million in the third quarter of 2008. The case analyses and evaluates whether fuel hedging is a critical tool for the aviation industry.

Pedagogical Objectives:

• To study the scenario in the US aviation industry after September 11 2001.
• To analyse Southwest Airlines fuel hedging strategy.
• To analyse the future of Southwest Airlines in the aftermath of the dwindling percentage of fuel hedging.

Keywords :  Southwest Airlines, Fuel hedging, Profitability, Largest US domestic carrier, Southwest Airlines business model, Financial strategy, Fuel hedging efficiency, Drop in oil prices, The fuel hedging contracts dwindle, A double-edged sword