Southwest’s cost-cutting spree now includes a big gamble on oil prices
Fuel hedges are going off the menu at the airline.
As part of its cost-cutting spree, Southwest is ending a practice that has saved the company billions.
Further plans to reduce expenses include “the discontinuation of our fuel hedging program, which eliminates additional fuel hedge premiums in the future,” CEO Bob Jordan said at JPMorgan’s Industrials Conference. “We’ll be opportunistic in unwinding our existing positions based on market conditions.”
The airline is pulling out all the stops to cut costs lately: unveiling a freeze on hiring and promotions in January, announcing the elimination of nearly 1,800 employees in February, and now this revelation in March.
Putting on and maintaining hedges costs money, and fuel is the second-largest operating expense for the airline after labor costs. But in the past, spending that money to hedge its exposure to fluctuations in fuel prices has been a way that Southwest ultimately kept costs down.
Bloomberg wrote that Southwest Airlines is “one of the few” airlines that maintained oil hedges following the financial crisis, which saved the company $3.5 billion in the 10 years through 2008. Its fuel costs have generally fluctuated much less than competitor American Airlines (which hasn’t hedged its exposure), and Southwest also outperformed its peers in the first half of 2022 when oil prices spiked following Russia’s invasion of Ukraine.
If fuel costs rise, the unwinding of these hedges could backfire in a big way for Southwest (and likely put upward pressure on ticket prices). And if fuel costs go down, well… I wouldn’t hold your breath waiting for Jordan & Co. to pass the savings along to you.
Southwest is certainly in a state of transition, if not upheaval, after a pressure campaign from activist Elliott Investment management led to a mass shakeup of its board last fall. Along with the recent bevy of cost-cutting measures, the company just announced the end of its “bags fly free” policy, which management expects will generate additional revenue going forward. Time flies — just six months ago, it said “bags fly free” would stay because cutting it would “drive down demand and far outweigh any revenue gains created.”
Add this to the list of signs that Southwest is trying to be just like every other airline.
