DALLAS – In an industry that’s burning money faster than jet fuel, Southwest Airlines Co. once again flew well above the bad air in the third quarter and glided by Wall Street’s expectations as well as announcing a return to a previous destination.
The Dallas-based carrier posted a profit Thursday of $227 million on the strength of a one-time accounting gain that added $87 million before taxes. That compares to net income of $119 million in the previous year’s third quarter.
Without the charge, Southwest’s profit of $174 million equaled 21 cents a share, 3 cents more than analysts had forecast. Southwest shares fell 51 cents to $15.07.
“Our revenue momentum has been strong and has been sustained,” said Gary Kelly, chief executive, in a conference call with analysts. The company’s goal of a 15 percent profit margin for 2006 remains “the right goal,” he said. The carrier’s margin was just over 11 percent in the third quarter.
A series of small fare increases – coupled with its competitors shrinking – resulted in a healthy 18.8 percent rise in revenue in the quarter to nearly $2 billion.
Bookings remain strong and “the bleeding has stopped” in Baltimore, Kelly said, where Southwest’s results were hurt by Independence Air’s fast growth at Dulles International Airport outside Washington, D.C. Independence has reduced its schedule sharply, and most analysts expect the carrier will get a lot smaller and perhaps liquidate.
Southwest is enjoying strong results in its newest cities, though its “No. 1 priority” remains to rebuild demand at hurricane-devastated New Orleans, Kelly said. The carrier, which previously offered 57 flights per day there, now has just four daily departures.
That number will grow monthly, Kelly said. In the meantime, about 15 planes were freed up by the reductions in New Orleans. Some will be used for Southwest’s new Denver service.
Southwest’s schedule won’t be readjusted to maximum efficiency until the first quarter, meaning five or six planes aren’t being flown full-time, said chief financial officer Laura Wright.
That will put pressure on Southwest’s costs in the fourth quarter, she said.
Southwest has benefited from prepurchasing much of its jet fuel at lower prices through futures markets. That’s kept its average price per gallon of jet fuel at 95 cents; other carriers without hedging in place paid twice that during the quarter.
But rising refining costs will push Southwest’s average fuel price in the current quarter closer to $1.25, despite Southwest’s industry-leading hedging program, Wright said.
Southwest’s alliance relationship with ATA Airlines Inc. provided $20 million in additional revenue in the quarter, well beyond expectations.
ATA recently said it would stop flying on three routes where it shares passengers with Southwest, reducing alliance revenue.
ATA’s long-term future is unclear as it hunts for investors to help it survive, and Kelly said his carrier is very interested in ATA’s other gates at Chicago Midway Airport.
Southwest Airlines Co.’s conquest of America’s skies took an unexpected detour Thursday as the discounter announced its return after a 20-year absence to Denver.
“It’s something we’ve looked at for quite some time,” Kelly said.
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