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Ask any gambler – on the way up its all about skill, on the way down its damned bad luck. So how should the results of Southwest Airlines be treated? On Thursday, the group reported its first quarterly loss in 17 years. The only investment-grade US airline, and one of the few actually to make an economic return, Southwest reported paper losses due to the fall in the oil price – marking-to-market the group’s fuel hedging arrangements produced a $247m charge.

If that is treated as an exceptional item, then Southwest made money. But it points to a big problem ahead for the airline. The group began hedging in the late 1990s and it has been a competitive advantage ever since as struggling peers lacked the credit quality to pursue a similar strategy. The effect on profitability has been dramatic; this year alone the group has saved $1.3bn on its fuel bill so far. In fact, were the help from fuel hedges to be excluded, the $4.8bn in operating profit Southwest has generated since 2001 would fall to just $500m.

That edge on costs is now gone. Southwest has locked in an in effect rate of $73 per barrel of oil for three quarters of its 2009 fuel needs, above current prices. Furthermore, with some hedging in place at $90 or more, a further cheapening of crude could prompt margin calls – which has caused the airline to draw down pre-emptively $400m of a revolving credit line.

Some advantages remain. The group’s point-to-point model is inherently more efficient than peers based at big airport hubs. Nor is its balance sheet weighed down by debt. But the rest of the industry has been forced on a crash diet due to bankruptcies and spiralling fuel costs As the recession bites, Southwest needs to prove that it has not just enjoyed the blessings of lady luck.

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