3Q net income up 12%, Southwest Airlines says

Fuel-purchase contracts, more passengers credited

October 15, 2004|By BLOOMBERG NEWS

DALLAS - Southwest Airlines Co. reported yesterday that its third-quarter net income rose 12 percent as the largest low-fare carrier flew more passengers and purchase contracts helped reduce the effect of record jet fuel prices.

The dominant carrier at Baltimore-Washington International Airport said its net income increased to $119 million, or 15 cents a share, from $106 million, or 13 cents, a year earlier. Sales rose 7.8 percent to $1.67 billion. Analysts expected the airline to earn 12 cents a share.

Southwest, the first major U.S. airline to report its quarterly results, is the only one to remain profitable since the 2001 terrorist attacks. Traffic, or miles flown by paying passengers, rose 10 percent as its average fare of $87.90 helped lure travelers.

Fourth-quarter unit revenue, or revenue per seat mile flown, may decline from a year ago as capacity additions outpace demand, Chief Executive Officer Gary C. Kelly said in a call with analysts and investors. Yield, or average fare per mile, continues below year-ago levels, he said.

US Airways Group Inc., which competes against Southwest in Philadelphia, and FLYi Inc.'s Independence Air have added flights in the eastern United States, and America West Airlines has added flights in the West, Kelly said. Demand for the lowest fares has grown in what he called a "lousy airline revenue environment."

Full-fare tickets accounted for 33 percent of revenue in the quarter, down from 36 percent a year ago, Southwest said.

Unit costs had a "significant improvement" from the first half of this year, Kelly said. 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," he said.

Southwest beat analyst forecasts on "higher revenue and better costs," said Jamie Baker, a J.P. Morgan analyst.

The airline's shares rose 57 cents, or 4.4 percent, to close at $14.14 yesterday on the New York Stock Exchange. They have fallen 12 percent this year.

The airline has remained profitable, in part, by increasing productivity. Its number of employees per aircraft, a measure of efficiency, declined to 74 this quarter, a 15-year low, Kelly said.

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.

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. Its hedges were at less than $24 a barrel.

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