Southwest Airlines holds $1 billion in fuel hedges

South West Airline
LUV
s reported all-time record revenue and net profit, and currently holds fuel hedges valued at $1 billion in the second half of 2022.

“Travel demand surged in the second quarter, and so far the strong demand trends continue into the third quarter of 2022,” CEO Bob Jordan said in a prepared statement. Leisure demand accounted for most of the second quarter gains.

“While second quarter 2022 managed business revenue remained below 2019 levels, the company was encouraged by the sequential improvement in the quarter, as well as average managed business rates that exceeded 2019 levels. 2019,” Southwest said.

With respect to fuel hedges, “We experienced inflationary pressures and headwinds due to our operating at sub-optimal productivity levels in the second quarter, which we expect will continue into the second half of 2022; however, our fuel hedge continues to provide significant protection against rising jet fuel prices,” Jordan said.

Fuel hedges were valued at $332 million in the second quarter. As of July 21, the fair market value of fuel derivative contracts settled from the third quarter of 2022 through the end of 2024 was an asset of $1 billion, the carrier said.

Southwest said its “multi-year fuel hedging program continues to provide insurance against energy price spikes and significantly offset the increase in jet fuel market prices in the second quarter of 2022. Derivative contracts on The company’s current fuels contain a combination of West Texas Intermediate-based instruments, Brent crude oil, and refined products, such as fuel oil.”

Looking ahead, Southwest expects to be profitable in the third and fourth quarters. “While early in the booking curve, the company is encouraged by ongoing commercial bookings post Labor Day and the expected sequential improvement from the second quarter to the third quarter of 2022,” the carrier said, noting that it had increased short-haul travel in business markets in the current quarter.

Southwest said net income excluding items was $825 million, or $1.30 per share. Revenue was $6.7 billion. The shares, which closed Wednesday at $40.77, were down 7% in premarket trading. “The revenue guide is lower than our/consensus forecast while the (cost) guide is higher than our/consensus forecast,” Cowen wrote.
COW
analyst Helane Becker.

Regarding operations, Jordan said the carrier performed more than 99% of flights in May and June. “Since April, we have been delivering a more reliable product,” he noted, adding “We have added flights in the second half of 2022 – particularly in short-haul business markets – to better support our operations and the restoration of our road network”.

Southwest plans to take delivery of 66 Boeings
BA
aircraft this year, down from the 114 aircraft originally planned. It will end the year with 765 aircraft.

Southwest also announced that its flight credits will not expire, noting, “We’re known for providing industry-leading flexibility to our customers, and that’s a key differentiator for our brand.”