You might have read some confusing news about Southwest’s earnings report today. Depending on which article you read, the headline might say we posted a loss or that we posted a profit. Both are correct in their own way. From an accounting perspective, we technically posted a loss due to a one-time charge of $247 million related to our fuel hedging. In a nutshell, we have a group of contracts to buy oil at certain prices on a variety of future dates. We carry that portfolio of contracts on our books as an asset. Each quarter the value of that portfolio goes up and down with the current price of oil, and our income statement has to reflect that change. This is known as mark-to-market accounting. In the 2nd quarter, since oil rose so much, we reported a huge gain because our hedging portfolio became more valuable. In the 3rd quarter, oil dropped sharply, so we recorded a hefty charge.

From actually operating the airline, we posted a small profit thanks to the benefits of our settled fuel hedges. Unfortunately, the charge from our future hedges’ drop in value was more than the profit we made from flying customers and cargo around, so we posted a loss for the quarter. Clear as mud? The New York Times posted a helpful article on the topic that might explain it better.

I know many of you aren’t that interested in SWA’s accounting practices. But there’s a lot of confusion out there regarding our hedging program, so I wanted to clarify it a bit.