Southwest's profits jump

Published: Thursday, January 19, 2006 at 6:01 a.m.
Last Modified: Wednesday, January 18, 2006 at 10:26 p.m.
Southwest Airlines Co. reported a 54 percent jump in fourth-quarter profits as the bets it made on fuel prices allowed it to dodge for a little longer the spiraling costs that led to a $604 million loss for the parent of American Airlines, the nation's biggest carrier.
Revenue increased at both airlines, as planes were more crowded and average fares rose.
Airline stocks rallied, led by American's parent, AMR Corp., which rose $1.53, or 8.1 percent, to close at $20.39 in trading on the New York Stock Exchange. Southwest shares added 89 cents, or 5.6 percent, to $16.76.
Ray Neidl, an analyst with Calyon Securities, said the stocks were lifted by a decline in oil prices but said AMR also may have been rewarded for the strength of American's route network and a slightly smaller-than-expected loss.
Light, sweet crude for February delivery fell 58 cents to close at $65.73 a barrel on the New York Mercantile Exchange. On Tuesday, the contract leapt $2.39 a barrel amid supply concerns spurred by possible sanctions against Iran, OPEC's second largest producer, and political unrest in Nigeria.
Southwest said it earned $86 million, or 10 cents per share, in the fourth quarter, compared with $56 million, or 7 cents per share, a year earlier. Excluding one-time items, net income was $98 million, or 12 cents per share. Analysts had expected a gain of 13 cents per share, according to a survey by Thomson Financial.
Revenue rose 20 percent, to $1.99 billion from $1.66 billion a year ago.
Southwest again cashed in on a winning bet it made several years ago on the direction of fuel prices. The carrier bought options that locked in prices on most of its fuel needs through 2009, softening the blow of higher fuel costs.
As a result of this hedging, Southwest paid about $1.20 per gallon for fuel - its second biggest cost after labor - in the fourth quarter.
But beginning this year, Southwest has less of its fuel hedged and at higher prices. For that reason, the carrier expects its average cost of fuel to rise to $1.45 a gallon in the first three months of this year. Still, Chief Executive Gary Kelly said the company has a favorable outlook on the first quarter and still expects profits to rise 15 percent this year.
American Airlines was too weak financially to buy fuel options in recent years, and it paid the price in the fourth quarter - $2.02 per gallon. Parent AMR, which also owns the American Eagle commuter line, spent about $400 million more on fuel in the quarter than it did a year ago.
That helped push Fort Worth-based AMR to its loss, which equaled $3.49 per share, after a loss of $387 million, or $2.40 per share, in the fourth quarter of 2004. Excluding $191 million in net one-time costs, AMR said it would have lost $413 million, $2.39 per share. On that basis, Thomson Financial said analysts were expecting a loss of $2.50 per share. Revenue rose 13.8 percent, to $5.17 billion from $4.54 billion a year ago, but that was below analysts' consensus forecast of $5.24 billion.
Both American and Southwest reported their planes were more full than they were the year before. American's average occupancy rate rose 3.6 points, to 77.9 percent, while Southwest's gained 4.6 points, to 69.6 percent.

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