"Given oil's relentless ascent, investors have been dumbfounded that Southwest's hedging program wasn't universally used by other airlines, who unfailingly blame their weak financial performance in part on rising fuel costs.No it did not go "bad". Almost by definition hedges will lose money when the risk the firm is hedging moves in their favor. So airlines worry about jet fuel prices. Holding other things constant, airlines drop in value as teh fuel prices rise and vice versa. So, their hedges are designed to "lose" money when the firm can better handle the losses and make money when operations would otherwise be hurting. In doing so they allow the firm (Southwest in this case) to focus on what they do well (run an airline) and not worry about what is outside of their control (price of fuel). The hedges are not designed to make money 100% of the time.
Then came the crash. Oil is now trading at half the price it fetched just three months ago. Suddenly, Southwest's aggressive bet on the market went bad"
The AP had some more details and did come a bit closer to the story:
"The fuel-hedging deals at the core of Southwest's numbers include options to buy fuel in the future at below-market prices. They succeeded again in saving the airline money on its largest single expense.
Southwest's fuel spending jumped 52 percent, to $1 billion, but the airline paid less per gallon than did other major U.S. airlines.
And while Southwest took a charge to write down the value of its hedges, it also recognized cash settlement gains of $448 million from fuel contracts, and included that money in its net income."
So if I am reading this correctly, the loss was an accounting write-down, while the savings are cash saved.
A good deal in my book! But even if I am not reading it correctly, hedging (as opposed to speculating) is still the way to go in my opinion!