Oct. 16 (Bloomberg) -- Southwest Airlines Co. posted its first quarterly net loss since 1991 on costs to adjust the value of fuel hedges, which had helped shield the largest low-fare carrier from rising prices in previous periods.

The deficit of $120 million, or 16 cents a share, compares with net income of $162 million, or 22 cents, a year earlier, the Dallas-based airline said in a statement today. Excluding the effects of the fuel hedges and other one-time items, Southwest had a profit of $69 million, or 9 cents.

The loss comes after Southwest relied on the contracts for several years to lock in fuel prices in advance to help keep it profitable. The average price of jet fuel dropped since reaching a record on July 3, forcing the carrier to reverse gains taken in earlier periods as prices rose.

``Falling energy prices are a great thing for Southwest Airlines,'' Chief Executive Officer Gary Kelly said on a call with reporters. ``We simply have to manage our hedges as a component of our overall fuel costs.''

Southwest's spending for fuel, its largest expense, rose 52 percent in the quarter. It paid an average $2.60 a gallon for jet fuel, which sold for an average $3.53 on the spot market in New York. The airline had $448 million in favorable cash settlements on its hedges in the quarter.

Revenue rose 12 percent to $2.89 billion.

Excluding one-time items, Southwest was expected to earn 8 cents-a-share, the average of 13 analyst estimates compiled by Bloomberg.

Southwest also said it tapped $400 million in additional cash through its bank revolving credit facility, leaving $200 million still available.

While Southwest will benefit as fuel recedes from a record, prices remain elevated and the carrier expects lower demand in the industry next year, Kelly said.

``Prices are coming down and that is a very good thing, but they are still very high compared with two or three years ago,'' he said in an interview on Bloomberg Television. ``Now we are in a recession, and I do not think we have seen the worst of it.''

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net

Last Updated: October 16, 2008 08:59 EDT