Southwest Airlines profit tripled in 1st quarter, exceeding forecasts

Advance purchase of fuel, travel demand are factors


DALLAS - Sheltered from jet fuel's wild price increases, Southwest Airlines Co.'s income nearly tripled in the first quarter, easily beating Wall Street expectations.

But Southwest said yesterday that its advance fuel-purchasing program will offer less protection next year, exposing the Dallas-based carrier to as much as $500 million in additional fuel costs. The company said it is focusing on lowering costs to soften that blow.

With its fuel program providing 86 percent of its jet fuel needs at prices equivalent to $26 a barrel, the airline cut fuel expenses by $155 million in the quarter. That helped it earn net income of $76 million, or 9 cents a share, compared with $26 million for first quarter 2004, or 3 cents a share.

Subtracting one-time gains, Southwest earned 6 cents a share, up from 3 cents in the year-earlier period. Analysts had predicted an average profit of 5 cents for the quarter.

The only blemish on the better-than-expected quarter was the worry about fuel prices.

"We've bought ourselves a lot of time to make a lot of adjustments because we do have our fuel hedge in place," Chief Executive Officer Gary C. Kelly said during a conference call with analysts.

The airline's revenue jumped 12.1 percent to $1.66 billion in the first quarter.

One reason was that Easter fell in March, not April, along with many schools' spring break, putting an additional $20 million into the carrier's coffers

Another was fare increases. Southwest raised nearly all of its fares between $1 and $3 each way this year, then added a second, more selective price increase in some of its markets because of rising jet fuel prices.

Booming demand also helped. Traffic is up 12.3 percent, giving Southwest more ability to manage its pricing and keep more full-fare passengers on its planes. Revenue from Southwest's cargo service was up 36 percent in the quarter to $37 million, mostly from shipping more mail.

On the cost side, Southwest remains the industry's efficiency leader. It squeezed out 10 percent more flying in the quarter with 1.7 percent fewer passengers than in the first three months of last year.

Kelly said he thinks the carrier can save several hundred million dollars more over the next three years. "None of it will be easy," he said. "It will take some great effort, I think, on our employees' part."

Future quarters will be helped by an aircraft maintenance "holiday." Most of Southwest's newer Boeing 737-700 series planes won't need much heavy maintenance.

New technology has helped Southwest's mechanics keep more of the carrier's shop work in-house, which helped lower maintenance costs 11.4 percent in the quarter.

Those savings will be needed as Southwest's fuel hedge position begins to unwind. The airline has bought 65 percent of its jet fuel for next year at prices averaging $32 a barrel. The year after, the hedge will drop to 45 percent at $31 a barrel.

Having blended winglets on all of its newer Boeing planes helped lower fuel consumption 1.4 percent in the quarter, and those benefits will increase as the average length of Southwest's flights lengthens. The winglets help planes save fuel at cruising altitudes.

Southwest's shares rose as much as 4.6 percent yesterday amid a broad sell-off of airline shares, then settled up 22 cents at $14.94.

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