Accounting Framework
The reclassification of this expense from an aggregated category to a specific one, Fuel and oil expense, reflects a shift in how hedging will be done in the future within Southwest. Hedging was treated as a pre-emptive financial strategy within the air carrier, often managed completely off the Income Statement and included in accrued or long-term liabilities (Carter, Rogers, Simkins, 54). Given the market-to-market impact of fuel contracts being negative ($73M in 2009 per the annual report) and the ineffectiveness of fuel hedges settling in future periods of -$97M the net effect on the company's profitability will be a -$54M reduction in asset valuation. This is compared to a $92M valuation in 2008. This significant shift in the valuation of hedging contracts led to the redefinition of the expense category as well.
Lessons Learned
References
David A Carter, Daniel A Rogers, and Betty J. Simkins. "Does Hedging Affect Firm Value? Evidence from the U.S. Airline Industry. " Financial Management 35.1 (2006): 53-86.
Duncan Wood. "Cheaper Oil Isn't…
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