updated 10/16/2008 8:04:53 AM ET 2008-10-16T12:04:53

Southwest Airlines Co. lost money for the first time in 17 years as it had to write down the value of its fabled fuel-hedging transactions in the third quarter.

Southwest said Thursday it lost $120 million in the three months ended Sept. 30 even as revenue jumped 11.7 percent.

The loss was because Southwest took $247 million in special charges, mostly to write down fuel-hedging contracts that are less valuable when oil prices fall, as they have in recent weeks.

Without the charges, Southwest said it earned its 70th straight operating profit — $69 million, or 9 cents per share.

Analysts, who typically exclude one-time items from their forecasts, had expected Southwest to earn 7 cents per share, according to a survey by Thomson Reuters.

A year ago, it earned $162 million, or 22 cents a share, in the third quarter.

Revenue rose to $2.89 billion from $2.59 billion, beating analysts’ forecast of $2.83 billion.

Southwest also disclosed that it decided to tap $400 million in additional cash through a bank revolving credit account — it still has $200 million available. The company said it had $2.2 billion in unrestricted cash and short-term investments as of Wednesday. About half of that cash is in deposits used as collateral against fuel-hedging contracts.

The fuel-hedging deals at the core of Southwest’s numbers include options to buy fuel in the future at below-market prices. They succeeded again in saving the airline money on its largest single expense.

Southwest’s fuel spending jumped 52 percent, to $1 billion, but the airline paid less per gallon than did other major U.S. airlines.

And while Southwest took a charge to write down the value of its hedges, it also recognized cash settlement gains of $448 million from fuel contracts, and included that money in its net income.

Southwest is extremely proud of its string of profitable quarters, which spanned a recession and the drop in travel after the 2001 terror attacks.

The company argued Thursday that it is “more meaningful” to judge its performance by including cash settlements it gets from its hedging contracts each quarter but excluding the accounting adjustments it must make for potential future gains and losses from the deals.

With that explanation, Chief Executive Gary Kelly said Southwest was proud of its latest operating profit, “given today’s unprecedented economic challenges.”

Kelly added that post-Labor Day revenue trends were “very strong.”

While other airlines have been cutting capacity, Southwest announced this month that it would add a city, Minneapolis, to its service.

But the company has also made concessions to the weakening economy by delaying delivery of a few new aircraft. It has also slowed its own capacity growth to under 2 percent for the second half of 2008, and has eliminated some less-profitable flights, shifting those planes to faster-growing markets such as Denver.

Southwest has also attempted to lure customers from other airlines by heavily promoting its lack of fees for services such as checking a first or second piece of luggage.

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