Southwest fears loss as profit falls 50%

4th-quarter warning accompanies report on 3rd-quarter results

October 18, 2002|By Gus G. Sentementes | Gus G. Sentementes,SUN STAFF

Southwest Airlines Co., which flies the most passengers at Baltimore-Washington International Airport each month, said yesterday that third-quarter profit fell by more than half and warned that it might lose money for the first time in 11 years this quarter.

The company's profit was $74.9 million, or 9 cents a share, in the quarter that ended Sept. 30, down from $151 million, or 19 cents a share, in the third quarter last year. Sales were $1.39 billion, up 4.2 percent from $1.34 billion in the year-earlier period.

The Dallas company's profit was helped by a $48 million gain from government payments, part of the $15 billion bailout approved by Congress last fall for the struggling airline industry after the terrorist attacks of Sept. 11.

Excluding that gain and other special items, Southwest's net income was $50.5 million, or 6 cents a share, beating analysts' estimates by a penny.

Southwest is the only major airline to post profits after the terrorist attacks pounded the industry.

Other major airlines that reported results yesterday - including Continental Airlines Inc., Northwest Airlines Corp., and America West Holding Corp. - all had losses.

For Southwest, a weak economy, a struggling domestic airline market and a possible war with Iraq are some of the variables that could hurt it this quarter and cause its first loss since the first quarter of 1991, a company official said yesterday.

"We continue to face very significant revenue and cost pressures," Gary C. Kelly, Southwest's chief financial officer, said during a conference call with analysts. "Hopefully, we'll be profitable. We can't guarantee that we'll be profitable."

Analysts were generally upbeat about Southwest, noting the company's record of managing costs.

"It's natural trepidation," Glenn D. Engle, an airline industry analyst with Goldman Sachs, said about Southwest's cautious fourth-quarter outlook.

"I do think they expect to make money in the fourth quarter. Their margins have been better than the rest of the industry. They're clearly the healthiest airline out there."

Gary Chase, an airline analyst with Lehman Brothers, said, "Barring a sharp turnaround in the revenue environment in the next several weeks, it seems nearly impossible for any major airline - with the exception of Southwest - to earn a profit in the fourth quarter."

In August, Southwest slashed one-way fares - including tickets bought at the last minute - by 25 percent to entice leisure and business travelers.

But revenue in July and August was down 10 percent, and revenue was up last month in comparison with last year's impaired performance after Sept. 11, Kelly said.

Southwest's operating costs climbed less than expected, 4.7 percent to $1.3 billion from $1.2 billion. Revenue per available seat mile fell 5.7 percent in the quarter, a trend that doesn't seem to be improving, Kelly said. Fuel costs are expected to be higher and could go up even more if there's war with Iraq, he said.

"At this point, we have no reason to believe that fourth quarter trends will be better," he said.

Southwest also announced yesterday that it will add service between BWI and San Jose, Calif., in January, its second nonstop transcontinental flight after opening a BWI-to-Los Angeles route last month.

It will also add more flights on current routes from BWI to Orlando, Fla.; Birmingham, Ala.; Fort Lauderdale, Fla.; Manchester, N.H.; Hartford, Conn.; and Tampa, Fla.

"The [passenger] load factors have been exceptionally strong," Kelly said of the BWI-Los Angeles flights. Therefore, we're going ahead and adding another [transcontinental] route."

BWI continues to figure prominently in Southwest's growth plans, Kelly said. As part of the airport's $1.8 billion dollar expansion, Southwest could end up increasing the number of gates it uses from 17 to 31, Kelly said.

As of July, Southwest accounted for 45 percent of the airport's monthly passenger totals, a BWI spokeswoman said yesterday.

Shares of Southwest climbed $1.18, or 8.8 percent, yesterday to close at $14.48 on the New York Stock Exchange.

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