Revenue Surges at Southwest

After factoring in fuel-hedging adjustments, net income was $154 million for the latest quarter.
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Southwest Airlines

(LUV) - Get Report

said third-quarter net income was flat as demand softened due to terrorism fears and revised security procedures.

After factoring in fuel-hedging adjustments, net income was $154 million, or 19 cents a share. Revenue was $2.34 billion, up 17.7% from last year. Analysts surveyed by Thomson Financial had expected earnings of 20 cents and revenue of $2.36 billion.

Without the adjustment, net income was $48 million, or 6 cents per share, compared with $210 million, or 26 cents, the previous year.

On a conference call, CEO Gary Kelly said that early in the quarter, Southwest was sailing along with revenue per available seat mile gains above 10%. Then came the Aug. 10 announcement that authorities foiled a terrorist plot to blow up aircraft on trans-Atlantic flights. Carry-on procedures changed. The subsequent slowdown cost Southwest about $40 million in revenue.

However, the softening has not continued into October, and holiday bookings are strong, Kelly said. "We can't complain too much," he added.

Fourth-quarter bookings remain solid, with RASM growth of 4% to 5% despite difficult comparisons with the same quarter a year ago.

Capacity growth is slated at 8.8% this year and 7% to 8% in 2007. Among the cities that could get added capacity are Dallas, where changes this week in the Wright amendment resulted in 5,000 to 10,000 immediate bookings, or New Orleans. In market priority, "I put New Orleans at the very top," Kelly said.

(The Wright amendment is a federal law governing traffic at Dallas' Love Field, from which Southwest operates.)

Meanwhile, fuel hedging provided Southwest with a $200 million third-quarter benefit. "We're certainly in a much stronger position than any of our competitors on that front," Kelly said. Despite the advantage, Southwest's jet fuel costs increased more than 60% from a year ago.

For the quarter, RASM increased 8.2% to 9.85 cents, while cost per available seat mile, excluding fuel, decreased 0.6% to 6.38 cents.