With all the bankruptcies in the airline industry over the last few years, companies blame high fuel prices, the war in Iraq, the industrialization of China and India, and several other factors for their difficulties. But Southwest Airlines, based in Dallas, Texas, took a different approach that is paying dividends as oil prices rise. In 2000, the company realized fuel prices could rise dramatically and hedged their gas price.
As Moira Herbst wrote,
For 2008, 70% of its fuel needs are hedged at $51 a barrel. That means that while competitors have to contend with spot prices hovering around $120 a barrel, Southwest can buy oil at less than half that… For 2009, the company is covered about 55% at $51 a barrel; for 2010, 30% at $53 per barrel; and for 2011 and 2012, at more than 15% at $64 and $63 per barrel, respectively.
Although continuing this strategy will prove more expensive as fuel prices continue to go up, Southwest has continued to make profits while other airlines have failed. Former CEO of American discount airline JetBlue David Neeleman hoped to follow a similar strategy, but the company rejected his Idea.
As airlines continue to fail and the number of bankruptcies continues to rise, it is not difficult to imagine the Federal Government following the same path it did in the 1980s with Chrysler and recently with Bear Stearns. But Southwest proves that innovative thinking and sound strategy can carry a company through the most difficult times. Government intervention allow less wise companies to unfairly take away Southwest’s business, once again rewarding incompetence and penalizing intelligence.