Andrew Bary
Southwest Airlines picked the wrong time to give up its fuel hedging program.
The discount carrier ended its decades-long hedging program in early 2025, citing costs involved and limited benefits over the prior 10 to 15 years.
Southwest had been the only major U.S. airline with a hedging program, which was designed to protect the company if fuel prices surged. Delta Air Lines owns a U.S. refinery that can offer some relief from higher fuel costs.
The Southwest program likely would have provided large benefits to the company, since jet-fuel prices have doubled to about $4.25 a gallon in 2026, according to OPIS, an energy information company owned by Dow Jones, the publisher of Barron's.
Southwest, one of the top U.S. airlines, paid an average of $2.41 a gallon for fuel in 2025 and $2.66 a gallon in 2024, according to its 2025 10-K report.
Fuel is a major expense for airlines. Southwest consumes about 2.2 billion gallons of fuel annually. If current prices hold, that could cost the company close to $10 billion this year, double its expense last year of $5.2 billion, when fuel accounted for about 20% of its operating expenses.
The company was paying about $150 million a year in hedging costs -- a small amount relative to the potential savings this year. Southwest hedged close to half its fuel consumption, based on disclosures in its 2024 10-K report .
Barron's estimates, based on the company's prior disclosures, that Southwest's 2026 fuel costs would be close to $3.25 a gallon this year, assuming Brent crude prices of about $100 a barrel -- resulting in potential savings of about $2 billion in 2026 relative to current fuel prices, assuming fuel costs remain at current levels. Brent is now trading around $101 a barrel. That would be a sizable savings relative to the hedging costs of about $150 million a year.
Southwest hasn't provided updated fuel cost estimates since its first-quarter results in January, before oil prices surged.
Most airline stocks have come under pressure since the Iran war began nearly a month ago, due mostly to the negative impact of higher fuel costs impacting their profits. Since the conflict started, Southwest shares are off 20% to around $40. United Airlines is down 10% to $94, while Delta Air Lines is little changed around $66.
Airline analysts have reduced their earnings estimates for the major carriers because of higher fuel prices, which they may not be able to fully pass through to fliers via higher fares.
UBS analyst Atul Maheswari recently reduced his 2026 earnings estimate for Southwest to $3.59 a share from $5.05 a share and his price target to $59 from $73. He has a Buy rating on the stock.
Analysts anticipate that fuel prices will moderate later this year -- but if they stay at current levels, airlines' earnings would take big hits. United Airlines CEO Scott Kirby wrote recently that if fuel prices stay at then-current levels, the company's fuel costs could rise by $11 billion this year -- more than double its best year of earnings of $5 billion.
Southwest had a fuel-hedging program that dated back to the 1990s and it provided substantial benefits during periods like 2008, when oil prices spiked. The company appeared to use a mix of derivative contracts, including options, that were keyed off oil prices.
Southwest CEO Robert Jordan in March 2025 addressed the decision to end the hedging program while he attended an industry conference.
"If you look at fuel hedging and you go back over 10 to 15 years, the -- with the exception of a couple of positive years, it's not been beneficial to the company," he said. "Then on top of that, you have obviously hedge premiums. And with the volatility in the market, hedge premiums have become much more expensive. Our hedge costs were about $150 million last year."
Southwest discussed potential risks in its 2025 10-K report. "Purchasing jet fuel at prevailing market prices, which could change substantially over short periods of time, may make the Company's earnings more vulnerable to volatile fuel prices and could have a material adverse effect on the Company's results of operations and financial condition," the company said.
Write to Andrew Bary at andrew.bary@barrons.com
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(END) Dow Jones Newswires
March 24, 2026 15:00 ET (19:00 GMT)
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