DETROIT – As jet fuel prices sent airlines on a stomach-churning ride, spurring new fees and higher prices, Southwest Airlines customers have had a smoother trip.

Southwest took a gamble on fuel purchasing that has paid off for consumers. It’s been able to keep fare increases much lower than those of most carriers because it locked in jet fuel prices before crude oil skyrocketed to almost $150 a barrel earlier this year.

That protection is likely to wear off a bit in 2009, but many analysts say the Dallas-based airline’s strong financial position will allow it to remain one of the cheapest deals for travelers.

“They are still king of the low-cost carriers,” said Tom Parsons, chief executive of bestfares.com.

Southwest works hard to preserve its image, presenting itself as a fun, lower-cost alternative. There is no fee for the first two checked bags, no fee for aisle and window seats, and no fee for snacks. When its gates opened in a new terminal at Detroit Metro Airport, Southwest employees handed out T-shirts and other trinkets to passengers and decorated its gates with balloon arches.

But the key to Southwest’s success has been fuel hedging. With a hedge, the airline enters into a contract with a bank or other financial services firm. The airline bets oil prices will go up; the other side bets they will go down. The loser must pay the difference to the other party.

With oil hovering around $100 a barrel, Southwest has come out on top. For 2008, it has locked in the price for about 70 percent of its jet fuel based on oil priced at $51 per barrel. For 2009, it has locked in 55 percent of its jet fuel based on that same price.

That makes Southwest more protected than any other airline if oil prices remain around where they are now, said Stuart Klaskin, an aviation analyst at KKC Aviation Consulting.

“No one else is positioned like that. No one else has the cash to hedge with,” Klaskin said. “Southwest has the most sophisticated fuel-hedge operation of any airline … they have top fuel traders who work for them.”

Southwest officials declined to comment on the airline’s strategy.

Darin Lee, a principal at LECG, said Southwest’s hedges have been crucial to its ability to report profits in 2008.

“They probably would have lost money, had they not had the fuel hedges,” said Lee, an analyst for the Cambridge, Mass.-based firm.

In the second quarter, Southwest reported net income of $321 million, nearly setting a record for its most profitable quarter. Most other airlines were reporting losses in the same period.

Lee said jet fuel now accounts for nearly 30 percent of passenger carriers’ costs, more than twice what it was in 2000. Crude oil prices have almost quadrupled since then, Lee said.

But even with hedging, Southwest customers have seen fare increases. The airline has boosted fares about 7 percent to 14 percent since the summer of 2007, said Rick Seaney, chief executive of farecompare.com. But that’s about one-third of the increase seen from legacy carriers like Northwest, American and United.

Southwest will likely keep fares lower despite having less fuel hedged in the coming years, Seaney said. Its strong financial position could allow it to continue to lock in fuel prices, analysts say. For 2012, Southwest has only around 15 percent of its jet fuel locked in based on $63 a barrel.

Part of the airline’s success is seizing opportunities to expand when other airlines are offering fewer flights.

“They know how to cherry-pick the good stuff,” Klaskin said about Southwest.

Southwest has added flights in Denver as United and Frontier have pulled back. By Nov. 2, Southwest plans to have 115 daily flights out of Denver, a ninefold increase from mid-2007.

However, this isn’t the most likely time to see significant growth in the industry, even at Southwest, Seaney said.

“At $120 oil, nobody is in a position to grow very much … the likelihood of anything growing is slim,” he said.


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