Summer business strong for Southwest Airlines

Monday, July 21, 2003 | 11:03 a.m.

SUN STAFF AND WIRE REPORTS

DALLAS -- Low-fare carrier Southwest Airlines Co. doubled its second-quarter earnings to log its 49th consecutive profitable quarter, exceeding Wall Street estimates.

Second-quarter net income for Southwest, the only major U.S. carrier to remain profitable the past two years, totaled $246 million, or 30 cents per share, up from $102 million, or 13 cents per share, in the same period in 2002.

In a conference call this morning, the airline also detailed plans for a fleet expansion over the next three years that could lead to further growth for the airline in Las Vegas.

Southwest, the busiest commercial carrier serving McCarran International Airport, has 166 flights to 42 destinations from Las Vegas, flying 10.8 million passengers to the city in 2002. The company announced in May that it would add nine Las Vegas flights in August, September and October.

Gary Kelly, chief financial officer for Southwest, said today that a fleet expansion already has resulted in the airline planning for new nonstop service between Las Vegas and Manchester, N.H.; Hartford, Conn.; and Detroit in September and between Las Vegas and Raleigh-Durham, N.C., beginning in October.

Now, the company, which has 44 percent of its operations in the West, will take delivery of 42 new Boeing 737 twin-engine jets next year and retire 17 older model planes to enable the company to grow even more. By 2006, Kelly said, Southwest would add 92 new planes.

In addition to fast-growing Las Vegas having potential for more flights, Kelly said Southwest is bullish on St. Louis, where American Airlines late last week announced major cuts in service. American, which acquired the assets to St. Louis-based TWA last year, said it plans to cut 210 flights from that market by November.

Kelly said Southwest is likely to move on opportunities in St. Louis quickly. In addition, he confirmed that Southwest is likely to announce a new city in its route system sometime next year -- another potential for Las Vegas growth since most cities look to Southwest for nonstop flights to the city.

"We are clearly benefitting from capacity reductions announced by our competitors," Kelly said in reference to American's planned cutback.

American hasn't announced specific cuts, but the airline currently has four daily nonstop flights between Las Vegas and St. Louis. Southwest has one.

Southwest's financial details included a $271 million cash infusion from the federal government. Excluding that and other special items, the Dallas-based carrier earned $103 million, or 13 cents per share, compared with second quarter 2002 operating income of $84 million, or 10 cents per share. Analysts surveyed by Thomson First Call had expected quarterly earnings of 12 cents per share in the latest period.

Revenue grew 3 percent to $1.52 billion from $1.47 billion a year earlier.

Results also included an additional $36 million in passenger revenue from a reduction in estimated future refunds and exchanges.

"Considering the challenges we faced in second quarter with the Iraq war and the difficult airline industry pricing environment, we are proud of our better than expected earnings performance," James F. Parker, Southwest vice chairman and chief executive officer, said in a statement accompanying the results.

Parker said softer bookings early in the quarter resulted from the war in Iraq, but traffic and revenues started improving in mid-June. High demand for vacation travel is keeping traffic and load factors this month and bookings for the rest of July and August strong, he said.

But the economic outlook remained uncertain, Parker said, with airline officials concerned about travel demand post-Labor Day.

"Based on our current revenue and cost outlook and barring any unforeseen event, we expect third-quarter 2003 earnings to exceed third-quarter 2002 earnings of $75 million, which included a federal grant of $48 million," Parker said.

Kelly said in his conference call that the airline's fuel-hedging program and the management of insurance costs significantly helped Southwest's bottom line for the quarter and that pent-up demand following the Iraq war is helping the carrier.

But he also said pressures in labor rates and airport costs are of concern in Southwest's future. Southwest has expressed concern with McCarran International Airport's rates if the airport must pay judgments to neighboring landowners who have sued over height restrictions on their developments.

On the labor front, Southwest flight attendants picketed in Las Vegas last week to call attention to pay issues that are part of 14-month-old negotiations between the company and the Transport Workers Union Local 556.

For the first six months of the year, Southwest reported a $270 million profit, equating to 33 cents per share, up from $123 million, or 15 cents per share, in the first half of 2002. Revenue rose 5 percent to $2.87 billion from $2.73 billion.