Cheap fuel and rising revenue help boost Southwest Airlines

AP News
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Posted: Oct 22, 2015 3:07 PM
Cheap fuel and rising revenue help boost Southwest Airlines

DALLAS (AP) — Cheaper fuel and higher revenue boosted Southwest Airlines to a record third quarter profit of $584 million.

Passengers paid lower average fares in the third quarter than a year ago, but that could be about to change. Southwest said that a key revenue per mile figure will rise in the fourth quarter, likely indicating that it expects higher fares.

The stock rose more than 7 percent in afternoon trading Thursday.

Southwest said Thursday that net income increased by $225 million from last year's third quarter, helped by fuel-pump savings of $450 million, or 32 percent.

CEO Gary Kelly called it "a terrific quarter."

"While it is true that the majority of the 71 percent surge in our earnings per share was due to a dramatic drop in jet fuel prices, there are a lot of other good things happening," Kelly said on a call with analysts. He cited solid demand, the smallest percentage of empty seats in Southwest's history, and a new credit-card deal that brought in more cash.

Excluding non-repeating items, Southwest said it earned 94 cents per share. That topped Wall Street expectations, as nine analysts surveyed by Zacks Investment Research predicted 92 cents per share.

Revenue rose 11 percent, to $5.32 billion, which also topped the analysts' forecast. Three analysts surveyed by Zacks expected $5.1 billion.

Southwest has been growing rapidly in its hometown of Dallas since federal restrictions on flights at Love Field expired a year ago. That helped Southwest increase traffic by 9 percent and fill 85.4 percent of its seats, an increase of 1 percentage point from a year ago.

The average fare on Southwest fell 4 percent, to $154.33 for a one-way ticket.

Consumer advocates have said airlines should cut fares more deeply because they are saving so much money on fuel. Kelly said, as he has before, that fuel prices are volatile and he doesn't want to be forced to constantly raise and lower fares to match changes in energy prices.

Southwest offered promotional fares on new long-distance flights from Dallas Love Field. That reduced Southwest's average fares in 2015 and put pressure to match those prices on competitors such as American Airlines, which flies to the same places from nearby Dallas-Fort Worth International Airport.

Southwest, however, forecast that revenue for every seat flown one mile will rise 1 percent in the fourth quarter. That's a closely watched number in the airline business, and it rises when carriers charge higher average prices. Southwest also cited the benefit of a new credit card contract with Chase.

Cowen and Co. analyst Helane Becker said Southwest's revenue-per-mile forecast was better than expected — Wall Street was looking for a decline of 1 percent. She predicted that Southwest will raise fares as its new markets mature.

This month, Southwest opened a new international terminal in Houston and began flights to several destinations in Mexico and the Caribbean. Partly because of those flights, Southwest expects to increase passenger-carrying capacity next year by between 5 percent and 6 percent, slightly smaller than its 2015 growth.

Airlines have been posting record profits this year thanks to jet fuel prices, which began to plummet in summer 2014. Southwest's fuel bill dropped to $936 million, making labor costs by far the airline's biggest expense. Salaries, wages and benefits rose 25 percent to $1.7 billion due largely to more profit-sharing.

Shares of Southwest Airlines Co. rose $3.03, or 7.4 percent, to $44.07 in afternoon trading Thursday. They began the day down3 percent since the beginning of the year, while the Standard & Poor's 500 index declined almost 2 percent.

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David Koenig can be reached at http://twitter.com/airlinewriter

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Elements of this story were generated by Automated Insights (http://automatedinsights.com/ap) using data from Zacks Investment Research. Access a Zacks stock report on LUV at http://www.zacks.com/ap/LUV

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