Southwest airlines, one of the few profitable airlines left out there, swung to a loss for the first time in 17 years the company report on Thursday. Guess what? The loss is due to rising energy costs. Guess what? it’s because LUV overpaid for their fuel and is now a victim to “mark-to-market” accounting.
Years back Southwest Airlines started to hedge their fuel costs – paying a pre-determined price for a commodity in order to avoid large and often unpredictable shifts in pricing. This is based on the belief that prices will continue to rise at a predictable rate which allows a service provider the ability to complete energy purchases before the price increases. Problem is if the price of fuel on the open market falls below your cost paid the company needs to show a loss based on current account rules.
Hello Southwest, welcome to an accounting rule that doesn’t seem to be based in reality.
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