Southwest faces $3 billion fuel bill

/ Source: The Associated Press

Southwest Airlines Co. says its 2008 fuel bill will rise more than $500 million — nearly equal to its entire profit last year.

In a regulatory filing Thursday, Southwest comments echoed recent similar forecasts of higher fuel costs from American Airlines and Continental Airlines Inc. and underscored the industry's vulnerability to rising oil prices.

Dallas-based Southwest spent $2.54 billion on fuel last year, so the forecast of a $500 million increase would push the airline's 2008 fuel bill over $3 billion.

The company said it would try to offset fuel costs by raising more revenue and controlling other costs.

For several years, Southwest has benefited from fuel hedging. Southwest has paid upfront for the right to buy fuel at certain prices. When fuel prices began rising earlier this decade, Southwest was able to lock in below-market prices for most of its fuel.

While still less than what rivals pay, Southwest's average fuel price has risen from 72 cents per gallon in 2003 to $1.70 per gallon last year.

Southwest has hedged 70 percent of its 2008 fuel needs at the equivalent of $51 per barrel for crude oil — less than half the current price of oil.

American, a unit of Fort Worth-based AMR Corp., said recently it expects to spend $9.3 billion for fuel this year, up from $6.7 billion last year.

Houston-based Continental said last month it expects its fuel bill to rise $1.5 billion in 2008. Chief financial officer Jeff Misner said the airline couldn't raise fares quickly enough to cover the cost of fuel.

United Airlines said it faced a $1.2 billion increase for fuel this year, and Delta Air Lines Inc. said it expected to pay $900 million more. Northwest was budgeting for $800 million more.

Fuel is typically an airline's second-leading cost, after labor. Airlines are trying to offset surging fuel prices by reducing flights, trying to raise fares, and adding new charges, like fees to check a second bag.