Updated from 9:28 a.m. EST

Southwest Airlines ( LUV) said its fourth-quarter adjusted earnings rose 19% despite higher fuel costs and the lingering impact of enhanced security measures.

Profits before special items totaled $96 million, or 12 cents a share, up from $81 million and 10 cents a share last year. Revenue was $2.3 billion, 15% above the same period a year ago.

Analysts surveyed by Thomson Financial had expected per-share earnings of 12 cents on $2.3 billion in revenue.

Net income was $57 million, or 7 cents a share, after all items were included, down from a comparable $70 million, or 9 cents a share, in the fourth quarter of 2005.

On a conference call with analysts and reporters, CEO Gary Kelly said Southwest anticipates that the Justice Department will require asset divestitures in the event of a merger between US Airways ( LCC) and Delta ( DALRQ) -- and that could mean an opportunity for his company.

"We want to be at the ready to bid or not bid," he said. "We can't get into LaGuardia today even if we want to, and we would be foolish not to give that very serious consideration."

He added that Southwest has "a tremendous amount of untapped financial capacity" if it seeks to pursue such opportunities, and could conceivably acquire airplanes, perhaps older Boeing 737s, to build up service following an asset acquisition. "We've got all kinds of dry powder," he said.

Southwest said fourth-quarter revenue per available seat mile grew 4.2%. Fuel costs rose 28%, even though the carrier had strong hedges in place. The impact of the August terrorist case in the U.K. was still being felt, partially because it appears that some marginal travelers continue to stay home. However, unit costs excluding fuel fell 3.3%.

Southwest had a record fourth-quarter load factor of 70.2%. Revenue included $11 million from the addition of new service at Love Field in Dallas following the implementation of the Wright Amendment Reform Act. Kelly said annual revenue associated with Love Field should exceed $50 million.

Looking forward, Kelly predicted that first-quarter RASM growth would continue. Southwest is benefiting from recent energy price declines and is fully hedged for the first quarter, capped at an average crude-equivalent price of $50 a barrel.

In 2007, Southwest is targeting 15% earnings growth, just as it did in 2006. The carrier plans to increase capacity by 8%, adding 37 planes. Southwest carried 84 million passengers last year, the most of any U.S airline.

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