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Southwest Airlines Co. reports impressive profit

by Katharine Lau
Jan 21, 2010

Southwest Airlines Co. reported an impressive increase in earnings as it trimmed its fleet during the fourth quarter.  The low-cost carrier benefited from lower fuel prices and lower maintenance costs. The stock rose 3 percent. 

Southwest earned $116 million, or 16 cents per diluted share, in the quarter ended Dec. 31, a turnaround from a net loss of $56 million, or 8 cents per diluted share, in the year-earlier quarter. Excluding certain credits the proft was 10 cents per share, exceeding the consensus estimate of 7 cents per share by analysts, who remain cautious of the airline industry as a whole.  

Operating revenues were flat at $2.71 billion compared with $2.73 billion a year earlier. 

“We set an all-time record in terms of quarterly revenue in a recession,” said Southwest CEO Gary Kelly in a conference call.  “We adjusted our capacity, but that doesn’t explain it because our traffic was up – we had a record level of traffic in the fourth quarter.” 

Even with the good showing, Kelly, in response to analysts’ questions, maintained that the company is not in a position to talk about expansion into international service..  He cited concerns about the continued rising energy costs and later added that the company intends to finish its technological implementations first anyway. 

“When that work is completed, we won’t be prepared to fly our own metal yet for international projects,” Kelly said in the conference call.  “It’s not 2010 or 2011, for that matter.”  

Still, he said, Southwest intends to continue the programs it implemented last year, EarlyBird Check-in and Pets are Welcome, as well as its Bags Fly Free and revamped Unaccompanied Minors programs. 

“We launched a number of revenue initiatives, though unplanned,” CFO Laura Wright said in the conference call.  “We are pleased with the revenue contributions of these initiatives.” 

These programs were helped by an increase in advertising, “by itself probably up 10 percent,” according to Wright. 

“We attribute much of [volume] growth to Southwest’s lower ticket prices and its decision to forgo checked baggage fees,” Morningstar Inc. analyst Basili Alukos stated in a report. 

Kelly said in the conference call that very little change is expected in business travel demand for 2010 as a result of the recession. 

“The strength of our revenues is in medium and longer haul markets - it has more of a leisure flavor to it,” Kelly said.  “In addition to all the things we’ve added, we are just getting more customers, and they are more leisure customers.” 

Southwest continues to see strong bookings in flights for the first quarter of 2010, a trend with which the company is pleased, said Kelly in the conference call. 

Net income was $99 million, or 13 cents per diluted share, for the full year ended Dec. 31, a 44 percent drop from $178 million, or 24 cents per diluted share, posted for the full year 2008.  Operating revenues declined to $10.4 billion from $11 billion.

The stock closed at $11.68, up 35 cents.