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Southwest Pulls Out Another Profit

But the company has some cautious words about the coming year.

Make that 12 consecutive years of profitability for

Southwest Airlines

(LUV) - Get Report

.

The low-cost carrier announced first-quarter earnings of $24 million, or 3 cents a share, on Monday morning, posting its 48th consecutive quarter in the black, in an industry awash in red. Southwest's earnings were up 14.3% over the year-ago quarter, when earnings hit an eight-year low, still reeling from the Sept. 11 terrorist attacks.

Revenue came in at $1.35 billion, up 7.5%, from year-ago levels, but Southwest, while growing profits and earnings that matched Wall Street expectations, warned that a full recovery in the travel business was not yet at hand. Despite the warning, shares rose 0.5% to $15.60.

"Although our financial performance has been exceptional relative to the airline industry as a whole, Southwest, too, has been severely impacted by the lingering effects of the 2001 terrorist attacks and the war in Iraq," said Jim Parker, company CEO. "Although our revenues were showing signs of recovery during fourth quarter 2002 and into first quarter 2003, those trends were disrupted."

Parker said that bookings in the second quarter had softened even more and said the company could expect "only modest revenue growth, if any, compared with last year's second quarter revenue of $1.47 billion." The company said it would likely be profitable again, however, extending its streak to 49 straight quarters.

Southwest's warning bodes poorly for the network carriers with higher cost structures and weaker balance sheets. One reason why Southwest stayed profitable was because it hedged 100% of fuel costs in the first quarter, saving about $77 million in the process. The company is also 100% hedged for the second quarter in the $24 per barrel range.

But rivals such

AMR

(AMR)

unit American Airlines and

TST Recommends

UAL

(UAL) - Get Report

unit United Airlines lack the balance-sheet strength to hedge rising fuel costs and have been subject to the vagaries of the open market. Not only that, but network carriers face greater exposure to international travel demand, which is falling because of SARS fears, and which also has higher fixed labor costs, which are difficult to reduce.

The warning from Southwest follows last week's earnings releases from

Delta Air Lines

(DAL) - Get Report

,

Northwest Airlines

(NWAC)

and

Continental Airlines

(CAL) - Get Report

, three partners in a domestic code-sharing agreement. Combined, the third-, fourth- and fifth-largest U.S. airlines posted a $1.083 billion loss.

Because of Southwest's warning and also because American Airlines' struggle with its unions again puts the company at risk of filing for Chapter 11, airline stocks were sliding early Monday. The Amex airlines were off 3%. American led the way, dropping 21.8% to $3.91, while Delta fell 2.6% to $11.45 and Continental dropped 2.8% to $7.28.