Southwest narrows third-quarter loss brought on by buyouts

By Richard N. Velotta (contact), In Business reporter

Fri, Oct 23, 2009 (3 a.m.)

Dallas-based Southwest Airlines, the market leader at McCarran International Airport, narrowed losses in a third quarter that would have been profitable had it not been for a one-time charge related to early retirement buyouts.

Southwest, which averages 215 daily flights to and from Las Vegas and has a 40 percent market share at McCarran, reported a loss of $16 million, 2 cents a share, on revenue of $2.66 billion. That compares with a loss of $120 million, 16 cents a share, on revenue of $2.89 billion in the same quarter a year earlier.

Earnings were announced Oct. 15.

“A number of revenue initiatives were planned for 2009 and because travel demand was much worse than planned, a number of audibles were called,” Southwest CEO Gary Kelly said. “To produce a profit, excluding special items, in this environment is a remarkable accomplishment. Sixty days ago, even a modest profit seemed unattainable. Despite the continuation of a depressed economy, our people fought hard and have staged an impressive revenue recovery from where we were in June.”

Excluding the special charges, Southwest posted earnings of $23 million, 3 cents a share, beating analysts’ estimates of 2 cents.

The airline took a charge of $27 million when it cut its workforce systemwide by 1,400 employees — 4 percent of its workers — who took early out offers of cash and travel benefits.

The company also had a $12 million charge associated with its fuel-hedging program. With oil running at $75 a barrel — low compared with last year, but higher than historic levels — Southwest anticipates higher costs and plans to continue fuel hedging. The airline’s fuel is 45 percent hedged for the fourth quarter in the low $70s a barrel, said Laura Wright, Southwest’s chief financial officer.

Kelly said Southwest has driven additional revenue by optimizing its schedule and adding new programs. Southwest’s computerized optimization program helps the airline shed its least profitable flights and add flights where demand is higher.

The strategy has enabled Southwest to add four cities to its route map in 2009 — Minneapolis in March, New York’s LaGuardia Airport in June, Boston’s Logan International Airport in July and, in November, Milwaukee. Nonstop flights between Las Vegas and Milwaukee begin Nov. 1.

Southwest also introduced a pet fare, an unaccompanied minor service charge and EarlyBird Check-in, which enables customer to get an assigned boarding position before general check-in occurs.

Wright said EarlyBird, which was introduced last month, produced $2 million in revenue for Southwest in September and has not hurt the company’s Business Select premium program.

But Kelly said he hasn’t seen any positive trends on business travel.

“I don’t believe the worst is behind us,” Kelly said during a conference call. “There’s no reason to believe business travel will return any time soon to bail us out.”

The airline plans no capacity growth in 2010, but Kelly hinted that new cities and routes may be on the horizon.

The airline is scheduled to accept delivery of 10 Boeing 737 jets, but it expects to retire older aircraft instead of expanding the fleet.

Kelly also said the airline has looked at modifying its order with Boeing to acquire 800 series 737s, which have greater seating capacity than the 300, 500 and 700 series planes. Kelly said the 800-series planes could be beneficial to its service at LaGuardia Airport where the airline is restricted in the number of flights it can have. But he added that the company would review the matter with pilots before making any decision.