Southwest's Not Afraid to Talk Profit

First-quarter numbers beat estimates despite rising fuel costs.
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Updated from 7:02 a.m. EDT

A confident

Southwest Airlines

(LUV) - Get Report

beat analysts' first-quarter targets Thursday and said it might very well meet or exceed its own goal of 15% earnings growth this year.

On top of that forecast, the carrier said it plans to grow its fleet as well, by exercising options for 79 additional Boeing jets.

Despite a 10% rise in unit costs, driven by sky-high fuel prices, the Dallas-based carrier made $61 million, or 7 cents a share, in the quarter, compared with $59 million, or 7 cents a share, a year earlier. Excluding hedging losses and gains, earnings rose to 8 cents a share from 5 cents last year, beating the Thomson Financial estimate by a penny.

Revenue rose 21% from a year ago to $2.02 billion, topping the $1.96 billion forecast from Wall Street.

During a conference call, Southwest CEO Gary Kelly told reporters and analysts that the airline's full-year goal remains 15% earnings growth, but that analysts' higher estimates of 71 cents a share for 2006 are achievable "if we can continue at this pace during the second, third and fourth quarters."

"It's not our forecast, but we're not telling you it is wrong either," Kelly said. He noted that he wants growth to come through increased passenger counts, rather than through ticket price increases, and he expressed doubt that Southwest could continue to raise fares without impacting demand for seats.

"With the airlines reporting so far, we're all talking about strong demand and high load factors, (and) my hope is we'll continue to see year-over-year load factor gains," Kelly said. "We've used modest fare increases historically, and that's what we would like to continue to do. You can push fares only so far

before a negative effect and a backlash by customers."

The decision to exercise options for Boeing 737-700s from 2007 through 2012 means Southwest now has firm orders for 140 aircraft deliveries during the period, along with 116 options for deliveries from 2008 to 2012 and 54 purchase rights for delivery through 2014.

During the first quarter, Southwest said revenue passenger miles increased 15.4%, while available seat miles rose 9.1%, resulting in a 3.8-point increase in its load factor to 69.2%.

Yield per revenue passenger mile rose to 12.68 cents, up 5.4%. Revenue per available seat mile climbed 11.3% to 9.15 cents. Meanwhile, cost per available seat mile was 8.70 cents, up more than 11%.

CASM, excluding fuel, was down slightly from last year's 6.44 cents. Kelly said Southwest expects that its full-year CASM excluding fuel will be 6.48 cents, representing essentially no change in year-over-year costs.

CFO Laura Wright said Southwest continues to benefit from its hedging positions. For the rest of 2006, the airline has 70% of its fuel hedged at $36 a barrel. The company is 60% hedged for 2007, about 35% hedged for 2008 and 30% for 2009. She said the company is exploring a hedging strategy for 2009 and beyond.

Southwest's capital expenditures totaled $262 million for first quarter 2006. In January, the company's board authorized stock buybacks up to $300 million. As of Wednesday, the company had repurchased 15.4 million shares for $261 million. Southwest ended the quarter with $2.9 billion in cash and short-term investments.

Kelly said Southwest's plan to code-share on ATA international flights in 2009 means the company will build the capacity for international bookings into its reservation system, but he cautioned that his airline has no plans to fly overseas.

"I just don't want Southwest Airlines to be distracted," he said. "We have a lot of work to do on our domestic growth. Now is not the time to let up on our domestic route system development."