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Low-cost carriers JetBlue Airways ( JBLU) Southwest Airlines ( LUV) rode improving revenue trends to better-than-expected profits in the third quarter.

Southwest's fuel hedges, which significantly reduce the price of about 85% of its current fuel needs, shield it from a lot of the pain sky-high jet fuel prices are inflicting on airlines. Profitability allows Southwest to continue expanding even as larger rivals cap or cut back domestic capacity, and on Thursday it said it would start flights to and from Denver next year.

But fuel is catching up with JetBlue, which had hedged about 25% of its fuel needs for the second half of this year. The carrier, which has posted 19 profitable quarters in a row even as many airlines lost money, said it would record a fourth-quarter loss big enough to put it in the red for all of 2005.

That worrisome announcement prompted Calyon Securities analyst Ray Neidl to cut his investment rating on JetBlue shares to reduce from neutral.

Southwest said Thursday it earned $227 million, or 28 cents a share, in the latest quarter, compared with $119 million, or 15 cents a share, in the third quarter of 2004.

Excluding $87 million of unrealized gains associated with fuel-hedge derivative contracts, the Dallas-based airline earned $174 million, or 21 cents a share. That beat the average Wall Street EPS estimate of 18 cents, according to Thomson First Call.

After rising at the start of the session, Southwest shares sold off and were recently down 18 cents, or 1.2%, at $15.40.

Revenue increased 19% to $1.99 billion from $1.67 billion a year before. The figure was slightly ahead of the $1.96 billion analyst consensus.

"The third quarter 2005 earnings growth was driven by record passenger revenues and load factors," said Southwest CEO Gary Kelly. "We also benefited from strong performances in freight, charters, and business partner commissions."

Sturdy passenger demand and modest fare increases boosted revenue per available seat mile, a key industry metric also known as RASM, by 5.9% from last year. Load factor, which measures the average number of seats filled on airplanes, rose to a third-quarter record of 74.9%.

Southwest said load-factor trends are "favorable" this month and customer bookings for the remainder of the fourth quarter are "good."

Current high jet fuel prices caused by refinery shortages in the aftermath of Hurricanes Katrina and Rita could cause Southwest's fourth-quarter fuel cost -- after accounting for its hedges -- to rise as high as $1.25 a gallon. Although that's much less than what other carriers are paying, it would mark a significant increase from the 95 cents a gallon Southwest paid in the third quarter.

The airline's main hedges protect it against swings in crude oil prices but don't protect against a spike in the additional cost of refining jet kerosene, which has ballooned in recent months. As insurance, the airline has added an additional layer of hedging protection, using contracts on other refined products like unleaded gasoline and heating oil, to cover about 90% of its hedged fuel for next year, executives said in a conference call.

For 2006, the airline's hedges cover more than 70% of its fuel needs at a crude oil price of around $36 a barrel. Even with challenging fuel costs, Southwest still expects to meet its goal of 15% earnings growth next year, Kelly said during the conference call.

Meanwhile, JetBlue earned $2.7 million, or 2 cents a share, in the latest quarter, beating the analyst consensus for a loss of a penny a share. A year ago, it earned $8.1 million, or 7 cents a share.

New York-based JetBlue said revenue totaled $452.9 million, up 40.2% from $323.1 million a year before. On average, analysts expected $451.6 million.

Shares fell 86 cents, or 4.4%, to $18.68.

Investors were spooked by the airline's warning that its fourth quarter loss -- based on an expected negative operating margin of 5% to 7% -- would more than wipe out its profits for the first three quarters of this year.

"This quarter was a difficult one for JetBlue,'' said David Neeleman, JetBlue's CEO. "The combination of record high jet fuel costs, which were 58% above fuel costs for same period last year, hurricanes, and a competitive revenue environment has proven difficult for all airlines, and JetBlue is not immune."

During the third quarter, JetBlue said yield, which measures the average fare, rose 6% year over year as the airline increased the length of its flights. Strong demand helped lift the airline's RASM by 94% over year-ago levels. Still, including its hedges, the company paid $1.70 a gallon for its jet kerosene, up 57.9% from the third quarter of last year.

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