Herb Kelleher, the legendary CEO of Southwest Air (LUV), is retired now. He made his reputation as the best airline executive of the last 25 years by setting up a low cost airline that beat larger companies for passengers in and out of some of the biggest cities in the US. Low fares and great service.
But, Kelleher’s greatest legacy may be that he decided to hedge the price of oil long before the idea was popular. According to The New York Times "Southwest owns long-term contracts to buy most of its fuel through 2009 for what it would cost if oil were $51 a barrel. The value of those hedges soared as oil raced above $90 a barrel, and they are now worth more than $2 billion." Even if that is spread over two or three years, it is a lot of money.
Last year, Southwest has operating income of $934 million on revenue of $9.1 billion. A few hundred million in lower fuel prices would mean a lot there.
And, over at a company like American (AMR), not having a long-term hedging plan could cost investors in a big way. American made just over $1 billion on $22.6 billion in 2006. A few hundred million in higher fuel prices could cut American’s operating income in half.
Herb Kelleher may be gone, but he is not forgotten.
Douglas A. McIntyre
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