Southwest's 2Q profit rises on revenue increase

AP News
Posted: Jul 19, 2012 5:00 PM
Southwest's 2Q profit rises on revenue increase

DALLAS (AP) — Rising fares are helping Southwest Airlines Co. more than offset the high cost of jet fuel.

The airline said Thursday that second-quarter profit soared 42 percent on record revenue.

Southwest's average one-way fare topped $150, up 5 percent from last summer. Plenty of passengers were willing to pay the higher prices as the peak vacation season began — traffic measured in miles traveled also rose 5 percent.

But airlines may be worried that consumers are unwilling to go higher. After nearly a dozen broad fare increases in 2011, there have only three this year, the last in late March.

"The second quarter was the first time in a long time ... where we had no domestic fare increases as an industry that stuck," said Southwest executive vice president Robert E. Jordan. "It just gives you a little view into how the industry is thinking about pricing power."

Southwest and other airlines caught a break on fuel costs in the quarter, thanks to oil prices dropping by about one-fifth. Southwest spent a bit less per gallon of jet fuel than a year ago, but it was still high by historical standards, $3.22 per gallon.

CEO Gary Kelly gave an upbeat outlook despite admitting concern over the weak U.S. economy and the threat of destabilizing world events.

"The airline business right now has adjusted to the state of the economy and higher fuel cost," Kelly said. "We're looking for a solid third quarter."

As Kelly spoke, oil prices were rising again — crude gained 3 percent to $92.66 per barrel, the highest since mid-May. Growing tension in the Middle East has led to fear that Iran could try to block oil shipments in the Strait of Hormuz, through which one-fifth of the world's oil travels on tankers.

Airline stocks fell sharply on the news. Shares of Dallas-based Southwest fell 27 cents, or 2.9 percent, to close at $9.15, giving up earlier gains that followed the release of second-quarter results.

In the April-to-June quarter, Southwest, which also runs AirTran Airways, earned $228 million, or 30 cents per share. Excluding fuel-hedging losses and costs related to absorbing AirTran, the company said it would have earned 36 cents per share, while analysts expected 33 cents per share, according to FactSet.

Revenue rose 11.6 percent to $4.62 billion, above analysts' forecast of $4.59 billion.

Southwest added flights compared with last year, which resulted in a few more empty seats. The average flight was 81.9 percent full, compared with 82.3 percent in early summer 2011.

Southwest has scaled back more-ambitious growth plans until the economy and the company's profit margins improve. Earlier this year, the company decided to delay delivery of 30 new Boeing 737s due in 2013 and 2014 by four years. It also will lease smaller planes used by AirTran to Delta Air Lines Inc. starting next year. Kelly plans to keep the fleet size steady.

The airline's fuel spending rose 3 percent to $1.58 billion. Labor costs rose faster — nearly 9 percent — to $1.22 billion.

Standard & Poor's analyst Jim Corridore said higher labor costs were to be expected as Southwest absorbs AirTran, whose employees had been paid less than Southwest counterparts.

Corridore said Southwest was likely able to boost average fares by an airline-industry practice called yield management — holding back more seats until closer to the date of the flight. That way they hope to get higher prices for last-minute purchases.

Southwest carries more U.S. passengers than any airline, but ranks fourth among U.S. carriers by the industry's standard measure of passenger-carrying capacity because the others offer international flights. Southwest doesn't fly to foreign destinations, although AirTran does.


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