As gas-guzzling car drivers, we're all celebrating as the price at the pump continues to drop. You wouldn't believe it, but Northwest Airlines is pretty depressed and losing big money because of it.
According to Pacific Business News, cheaper fuel actually hurts Northwest Airlines.
Northwest Airlines Corp. reported a loss of $317 million in the third quarter, after recording a $410 million charge related to fuel hedging.
The Eagan, Minn.-based carrier's loss totaled $317 million, or $1.20 per share, down from a profit of $244 million, or 93 cents per share, during the same period a year ago. Excluding charges related to fuel hedging, Northwest's third-quarter profit would have been $93 million, or 35 cents per share.
Here is how hedging works:
Airlines use hedging to make fuel costs more predictable. Carriers agree to pay a fixed amount for future jet fuel purchases, and it's a good deal when prices are rising -- Northwest had long suffered as jet fuel costs skyrocketed, while companies such as Southwest Airlines used hedges to insulate themselves against increases. NWA later expanded its use of hedging.
The recent decline in fuel costs, however, has forced Northwest -- as well as other airlines that use hedging -- to pay higher rates than they would on the open market.
Sometimes when you gamble, you lose. Big time. Just ask Tom Petters.