Southwest Airlines' profit climbs even as rivals' fall away

First-quarter revenue up despite shaky economy, travel curtailed by war

April 22, 2003|By Paul Adams | Paul Adams,SUN STAFF

As its biggest competitors sank further into debt, Southwest Airlines shrugged off a slumping economy, terrorism fears and war in Iraq to post a $24 million profit for the first quarter.

The Dallas-based carrier, which handles more than a third of the passengers at Baltimore-Washington International Airport, is the only major airline to avoid layoffs and remain profitable in every quarter since the Sept. 11, 2001, terrorist attacks.

Its first-quarter profit, which amounted to 3 cents per share, was up 14 percent from $21.4 million in first-quarter 2002, the airline said yesterday. Revenue in the three months that ended March 31 climbed 7.5 percent to $1.35 billion despite a drop-off in demand resulting from the conflict with Iraq.

"The fact that they earned anything in the first quarter is a major testament to the business model and the management," said John V. Pincavage Jr., president of Pincavage & Associates, a Westport, Conn., aviation consulting firm.

Southwest's business model is characterized by frequent, short flights to high-volume destinations. Even before the terrorist attacks sent the industry into a tailspin, the nation's sixth-largest airline was able to gain on competitors as a result of its cheap fares and low operating costs.

While other airlines have been cutting flights to save money, Southwest has continued to buy new Boeing 737s and add flights. It plans to add 11 planes to its fleet this year and increase capacity by 4 percent.

The airline has stolen market share in the West, Florida and Baltimore, where Southwest took over many of the passengers who formerly flew on US Airways' defunct MetroJet unit. BWI airport, the third-busiest in Southwest's network, is in the midst of a $1.8 billion expansion program aimed at giving the airline more gates so it can expand operations on the Eastern seaboard.

Southwest plans to add flights to San Diego and another flight to Providence, R.I., beginning July 6. That will bring its Baltimore schedule to 152 daily departures.

Because it does not fly internationally, Southwest has not been hurt as much as other carriers by the conflict in Iraq or the severe acute respiratory syndrome that has hit much of the Asian market. James Parker, Southwest's chief executive officer, said the airline expects only modest, if any, revenue growth in the second quarter. That means it will be difficult for the airline to match last year's second-quarter profit of $102 million, Parker said.

But the airline expects to extend its streak of 48 consecutive quarters of profitability.

"Barring any catastrophic event, we expect to be profitable again in the second quarter," Gary C. Kelly, Southwest's chief financial officer, said yesterday in a conference call with analysts.

Despite the positive outlook, there are signs of strain on the airline. Labor costs climbed compared with the first quarter last year as a result of several new union contracts. And Southwest's flight attendants are pushing for better hours and working conditions.

"You would think the employees would be a little more moderate in this environment, but it seems like, if anything, they are getting more aggressive," said Ray Neidl, an analyst with Blaylock & Partners. Neidl has a "hold" rating on Southwest's shares.

The airline's cost per available seat mile, a standard industry measure of operating costs, grew 2.6 percent to 7.5 cents compared with the first quarter of 2002.

Had it not been for shrewd planning in advance of a recent increase in fuel prices, Southwest might not have reported a first-quarter profit, analysts said. The airline saved $77 million in first-quarter fuel costs by hedging, which involved buying financial instruments that offset price increases.

Kelly said the airline continues to look for cost savings in its maintenance and engineering operations. And it has held back some of its growth plans until there is evidence of a rebound in the economy. He said the airline will not add any cities to its schedule this year.

"They do want to get back to their normal 8 percent [annual] growth, but they're not going to risk aggressive growth until they can do it profitably," Neidl said.

Shares of Southwest lost 36 cents in trading yesterday to close at $15.16.

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