Much is made of Southwest having "hedges" on fuel. Let me just clarify that "hedging" in this context is basically trading futures. If you think the price of oil is going to go up in the future, you buy futures contracts on oil (for a fee...called a "premium"), and when those future contracts expire, you are obligated to buy the underlying commodity at the contract (negotiated) price. So you are taking a risk...essentially you are agreeing to buy X barrels of oil for 40 dollars at the expiration date of the contract. Now if the MARKET price of X barrels of oil at the expiration date is HIGHER than the 40 dollars (+ the fee (premium) you paid for each contract) you have essentially MADE money on the deal. As an example, lets say that the market price of a barrel of oil on this theoretical expiration date was 55 dollars. You get to buy a barrel of oil for 40 dollars because you agreed to buy a futures contract (sometime in the past) that obligated you to buy it, and you paid a 1 dollar premium for that future contract. So 55-41 = 14. You have "made" 14 dollars of profit on each barrel because if you were to turn around and sell that barrel at market price, you would make that 14 dollar difference between the price you agreed to when you bought the contract and what it costs now. Since historically back then, oil had not gone up that much that quickly (we are talking the late 90s early 00s), the fees for the contracts were cheaper, and WN
was able to make a lot more money, now everyone has basically got the picture...oil is expensive and its not going to get much cheaper...so it has become harder to hedge in this manner.
This is an ongoing process, the point of which is to manage (or "hedge") your risk (your risk being the chance of oil going up in price) and to shield yourself from fluctuations in these prices (in both short and long run terms). I would venture to guess that all the airlines do it to some degree. If I owned an airline, I certainly would want the price that I pay for fuel to be relatively stable, instead of going up and down and ruining my business plan. Southwest is known for it probably because they made a huge gamble back when few thought oil would go this high this quickly, and it paid off for them. It could have easily gone the other way, in which case Southwest would have lost money.
If you want to think of it in somewhat simpler terms, think about going to the gas station to fill up your car. If the price of gas has been fluctuating up and down very frequently, and you think that the price will go down next week, you might fill up only half of your gas tank and wait to fill up the rest next week, when the price may or may not be lower. This way you will be able to fill up next week for a cheaper price than if you filled up all the way right then, and take advantage of the fluctuation. It is still a gamble, because if the price goes the other way, you lose money.
There is no set date that Southwest will start having to pay "what it costs" for fuel. Its not like on January 1st, 2010, Southwest will be like, "woah, our supply of cheap gasoline ran out, now we have to pay market price". It doesn't work like that.
Just wanted to add some clarification to the whole issue as it seems there are some misconceptions.
[Edited 2008-04-10 15:00:20]