Southwest Air Earnings Up 12 Percent Despite Fuel Costs

Southwest Airlines Co. (LUV) Thursday said third-quarter earnings rose 12.3 percent on higher revenue and cost savings through oil hedging, overcoming record-high fuel prices that are likely to drive most major airlines into the red.

The company reported profit of $119 million, or 15 cents a share, compared with $106 million, or 13 cents a share, a year earlier. Analysts, on average, expected 13 cents, according to Reuters Estimates.

Operating revenue increased nearly 8 percent to $1.67 billion from $1.55 billion, as more passengers flew on the airline.

Southwest shares were up 3.2 percent, or 43 cents, at $14 on the New York Stock Exchange (search).

"Southwest shares should trade well today," Lehman Brothers airline analyst Gary Chase wrote in a research note. "Cost pressures are easing and Southwest is well positioned and intent on pressing its growth agenda going forward."

Southwest, which hedges by using the futures markets to lock in a price for fuel, will probably be the only major U.S. carrier to report a profit for the quarter, analysts said. Southwest said the hedges saved $131 million in operating expenses in the quarter, but it still felt the pinch of soaring jet fuel prices (search). Average fuel prices jumped over 10 percent, it said.

With oil at over $50 a barrel, Southwest is well positioned to pile up savings through hedging. The airline is over 80 percent hedged for the fourth quarter, with prices capped below $24 per barrel, and over 80 percent hedged in 2005 at $25 per barrel.

"Our third-quarter operating cost performance was excellent, which significantly contributed to these results," Chief Executive Gary Kelly said in a statement.

Southwest reversed a trend in the first half, when its unit costs rose due to higher wages and regularly scheduled maintenance.

Its cost per available seat mile, a measure used by most airlines, was up 1.3 percent to 7.61 cents from a year earlier, when it was 7.51 cents, but lower than 8.09 cents in the second quarter.

The company said it was on track with its cost reduction targets and expects fourth-quarter unit costs, excluding fuel, to decline from the year-earlier level of 6.5 cents.

The airline sees tougher times for the industry in the coming months, saying revenues have softened since July. Southwest expects its fourth-quarter 2004 unit revenues may decline from 8.29 cents in fourth-quarter 2003.

"Although bookings for October are fine, our passenger revenue yield per revenue passenger mile continues to fall below year ago levels," Kelly said.