Carrier’s profit increases

Thursday, Oct. 14, 2004 | 11:27 a.m.

STAFF AND WIRE REPORTS

Southwest Airlines Co., the largest low-fare carrier and the busiest airline at McCarran International Airport, said third-quarter net income rose 12 percent as the company flew more passengers and purchase contracts helped reduce the effect of record jet fuel prices.

Net income increased to $119 million, or 15 cents a share, from $106 million, or 13 cents, a year earlier, Dallas-based Southwest said. Sales rose 7.8 percent to $1.67 billion from $1.55 billion. The airline was expected to earn 12 cents a share, the average estimate in a Thomson Financial survey of analysts.

Southwest, the first major U.S. carrier to report third- quarter results, is the only carrier to remain profitable since the 2001 terrorist attacks. The airline's traffic, or miles flown by paying passengers, rose 10 percent as its average fare of $87.90 helped lure travelers. Its cost to fly a seat one mile increased 1.3 percent to 7.61 cents.

"Cost pressures are easing and Southwest is well positioned and intent on pressing its growth agenda going forward," Gary Chase, a Lehman Brothers analyst, said in a report to investors. Chase rates Southwest "overweight."

Unit costs had a "significant improvement" from the first half of this year, said Chief Executive Gary Kelly. In the first six months, costs climbed to 7.96 cents on higher fuel prices, and costs for an early-retirement offer and new labor contract.

"We are on track with our cost reduction targets and expect fourth-quarter 2004 unit costs, excluding fuel, to decline from fourth quarter 2003," Kelly said.

The company also said that revenue growth kept pace with capacity growth despite capacity increases by competitors, pricing pressures and hurricanes in Florida, a Southwest stronghold.

In a conference call this morning, Southwest executives said the net increase of 29 aircraft total in 2004 and 29 more in 2005 would result in 10 percent increases in capacity in both years.

But Kelly said the company hasn't determined yet where that growth would occur. Among the possibilities Kelly discussed are adding one or two new cities next year or beefing up its service in Philadelphia, where the airline is limited to about 41 flights with four gates. Southwest has said it is interested in up to 25 gates at Philadelphia.

The possibility of additional gate availability at Philadelphia could occur if bankrupt US Airways liquidates.

Southwest operates 38.7 percent of the commercial operations at McCarran and has increased capacity on flights to Las Vegas by 8.8 percent over the past year. McCarran says the company has 189 daily flights to 49 destinations from Las Vegas.

In the past, Las Vegas has received new nonstop service to most of the new cities Southwest has added. The company's entry into the Philadelphia market in May resulted in a daily nonstop round trip to and from Las Vegas.

Southwest beat analyst forecasts on "higher revenue and better costs," said Jamie Baker, a J.P. Morgan analyst. The airline's shares rose 38 cents to $13.95 at 10:09 a.m. in New York Stock Exchange composite trading. They have fallen 13 percent this year.

Fourth-quarter unit revenue, or revenue per seat mile flown, may decline from a year ago as competitors offer fare sales, Kelly said. Yield, or average fare per mile, "continues to fall below year-ago levels," he said. The airline will earn 10 cents a share in the fourth quarter, the average estimate of analysts surveyed by Thomson Financial.

Jet fuel at the end of the quarter cost $1.53 a gallon, a 90 percent rise from a year earlier. Southwest partially was shielded from climbing fuel costs by hedges, or financial instruments used to flatten swings in prices, on 80 percent of its consumption, holding its cost per gallon to 80.3 cents.

Fuel costs contributed to a combined $1.2 billion in expected losses for the largest U.S. airlines in the quarter, Baker said. Continental Airlines Inc., AMR Corp.'s American Airlines, Delta Air Lines Inc. and Northwest Airlines Corp. all report third- quarter results next week.

Southwest's total spending for jet fuel climbed 15 percent to $247 million. Hedges reduced what the carrier would have spent by $131 million, the company said. During the quarter, the price of crude oil, from which jet fuel is refined, averaged $43.87 a barrel. Southwest's hedges were at less than $24 a barrel.