Southwest hikes fares but fuel hedges hurt results

AP News
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Posted: Oct 20, 2011 4:35 PM
Southwest hikes fares but fuel hedges hurt results

Southwest Airlines Co. raised fares and packed its planes over the summer, and the nation's biggest discount carrier says bookings look solid the rest of the year.

Southwest's third-quarter results and outlook for the fall suggest that air travel is holding up despite fears that consumers and companies might cut back because of the weak economy.

"There is no sense that the economy is weakening, by our business," said Chairman and CEO Gary C. Kelly.

While its airline business did well during the peak travel season, Southwest posted a $140 million third-quarter loss because its fuel-hedging bets turned sour when oil prices fell this summer. It was Southwest's first loss in two years _ the last one was also due to hedging.

Without the hedging markdown and one-time expenses, Southwest would have earned $122 million, or 15 cents per share _ a penny better than analysts expected.

Southwest and other airlines felt confident enough about demand to raise prices this week, the first broad increase in airfares since the summer.

J.P. Morgan analyst Jamie Baker said the combination of Southwest's results and the fare hike bode well for the airline industry, which is in the midst of a precarious recovery that began last year but is now threatened by high fuel prices and economic malaise.

Southwest's quarterly revenue rose 35 percent to $4.31 billion, thanks largely to the May addition of AirTran Airways. That beat the $4.17 billion forecast among analysts surveyed by FactSet.

Southwest boosted its average fare 7.4 percent, to $142.31, and still packed more people into its planes, selling 82 percent of its seats, a high average for the Dallas-based airline.

The performance beat that of American Airlines parent AMR Corp., which lost $162 million in the third quarter and suffered its fourth straight loss and 14th in the last 16 quarters.

United Continental Holdings Inc. and Delta Air Lines Inc. are scheduled to report results next week.

About the only thing not going Southwest's way was the price of fuel. Even with hedging, Southwest spent $1.59 billion on fuel, a 71 percent jump from a year earlier. The addition of AirTran inflated the figure, but the company paid more at the pump _ $3.23 a gallon, up from $2.47 a year ago.

Investors seemed to focus on travel demand and shrug off the hedging losses. Southwest's stock price rose 39 cents, or 4.5 percent, to close at $9.10.

Still, the airline seemed concerned enough about a slowdown that it and AirTran have also been running a fare sale with deeply discounted prices for the dead weeks between Thanksgiving and Christmas, and for January.

CEO Kelly said there's nothing inconsistent about offering a sale while demand is strong, including among business travelers who often book later and pay higher fares.

"We have some customers who are extremely price-sensitive and will only fly at a certain fare level, and we want to get at least some of those folks," he said, referring to the sale targeting leisure travelers.

Separately, Southwest officials said they were making progress in folding AirTran's operations into Southwest.

Kelly said the company has already saved $60 million in annual costs by renegotiating AirTran contracts and cutting overhead and expects to eventually save $400 million a year.

But Southwest has had hiccups in merging the two carriers, including opposition among union leaders at AirTran to a plan for combining pilot workforces. Pilots at both airlines are now voting on a new merger plan, and Southwest has raised the possibility of operating AirTran separately if the deal is voted down.

AirTran sells first-class seats and charges fees for checking a bag or two. Southwest has said it will eliminate those policies when it retires the AirTran name. Although some longtime AirTran customers have complained about the coming changes, Southwest executive vice president Robert E. Jordan said his airline has not lost any AirTran frequent fliers.

Southwest said by the first half of next year, customers will be able to book single itineraries that include flights on Southwest and AirTran, the next step toward completing the integration of the two.

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Follow David Koenig at http://www.twitter.com/airlinewriter