First red ink in 17 years blamed on fuel hedging

Southwest Airlines said last week it recorded a net loss of $120 million for the third quarter, its first quarterly red ink in 17 years. That compares with a profit of $162 million for the same period a year ago. But Southwest blamed the loss on accounting rules that cover its fuel hedging contracts – giving it a special charge for the quarter of $247 million; without that, it would have had a $69 million profit. In previous quarters, the accounting rules gave the airline hefty unrealized gains on its balance sheet; but “during periods of decreasing fuel prices, these contracts generally result in recording unrealized losses,” Southwest said. While most airlines are shrinking their domestic operations this fall, Southwest said it expects its capacity in the fourth quarter to grow by one percent – although it added that capacity in the first quarter of 2009 will likely shrink by 5 to 6 percent from the same period in 2008. In other airline results released last week, American blamed a $1.1 billion increase in its fuel bill for a third quarter loss of $360 million – although a one-time item, the sale of its American Beacon Advisors investment unit, left it with a net gain of $45 million for the period. Delta turned in a third quarter net loss of $50 million, vs. a profit of $220 million a year ago; and Continental said it lost $236 million in the third quarter. That includes $63 million in fuel hedging losses, and a $50 million hit from the impact of Hurricane Ike shutting down its Houston hub for a couple of days in September.