Southwest posts 2Q profit of $161 million

AP News
Posted: Aug 04, 2011 5:08 PM
Southwest posts 2Q profit of $161 million

Southwest Airlines Co. set records for full planes, and higher fares boosted revenue as the summer vacation season kicked into high gear.

But on Thursday Southwest said its fuel costs soared, its second-quarter profit fell short of analysts' expectations, and it will scale back growth plans for next year.

Southwest shares tumbled 81 cents, or 8.4 percent, to $8.84, their lowest closing price in nearly two years. The percentage decline was about twice that of the Dow Jones industrial average, which suffered its biggest drop since December 2008.

Chairman and CEO Gary Kelly said that business travel, a key market for airlines, slowed during the summer and he was not sure when it will recover.

"I'm concerned about the U.S. economy, I'm concerned about fuel prices," Kelly said.

Southwest enjoyed a windfall of $3.6 million a day from the expiration of federal airline ticket taxes in the past two weeks, but that unexpected break appeared to be short-lived.

Senate Majority Leader Harry Reid, D-Nev., said late Thursday that a bipartisan compromise will end the dispute that partially shuttered the Federal Aviation Administration and caused the ticket taxes to expire.

Speaking before Reid's announcement, Kelly said the money was helping Southwest offset higher fuel costs. But he said he hoped the dispute _ which left 4,000 FAA workers furloughed _ would end soon.

Southwest reported Thursday that its net income in the April-through-June quarter rose to $161 million, up from $112 million a year ago.

If you subtract special items such as gains on fuel-hedging contracts, the company's profit fell by nearly half, to 15 cents per share. Analysts expected adjusted profit of 21 cents per share, according to FactSet.

The average fare per mile increased 8.4 percent, reflecting price increases earlier this year. Traffic jumped 28 percent and revenue spiked 31 percent, due largely to the May acquisition of AirTran Airways.

Revenue was $4.14 billion, a bit higher than the $4.10 billion estimate from analysts.

Even record revenue couldn't keep pace with fuel costs that soared 64 percent.

The addition of AirTran made it harder to measure Southwest's progress since last year. The acquisition added to both revenue and costs.

For example, when considering the amounts Southwest and AirTran paid separately for fuel last year, this year's total was 32 percent higher than a year ago _ still significant, but in line with increases ranging from 30 percent to 36 percent at rivals United Continental Holdings Inc., American Airlines parent AMR Corp., and Delta Air Lines Inc. Those airlines reported earnings last month.

Southwest, however, did pay slightly more per gallon than its competitors. And that _ plus the weak economy _ forced the airline to adjust its schedule of more than 3,000 flights daily.

The Dallas company will keep its passenger-carrying capacity flat or even reduce it next year. That's in contrast to this year's increase of 4 to 5 percent, which was based on plans drawn up months ago, when an economic recovery and rising demand for travel both looked more likely.

Airlines have several ways of reducing capacity. The main one is simply operating fewer flights. Ray Neidl, an analyst for Maxim Group LLC, said Southwest's decision will help the company and other airlines.

"It will be good for them in this uncertain economic and fuel price environment, and it will be good for the industry in that it will give everyone a little better pricing power on tickets," Neidl said.

Southwest has already made changes to weed out less-profitable routes and add planes where it believes it can make more money.

AirTran announced last week that it will end service to four smaller cities early next year. Meanwhile, Southwest is adding flights in Denver and Milwaukee, hubs for struggling Frontier Airlines, as it "continues to go after the weak guy on the block," Neidl said.

Last month, Southwest and other airlines took advantage of the expiration of federal taxes on airline tickets by raising fares to, in effect, pocket money that the government had been collecting.

Southwest said it raised about $36 million in the first 10 days after the taxes expired July 23.

It now appears that windfall could end before the weekend. Southwest might have gained $200 million or more if the FAA were shut down until the end of the third quarter. Kelly, however, made it clear that he opposed a long shutdown.

"There are thousands of employees out on furlough from the FAA and we hate to see that," he said. "We need people at work in the U.S. and not out on furlough, and besides, we need the FAA."


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