Southwest Airlines Net Income Soars

With fuel hedges and Easter in March providing a tail wind, Southwest Airlines Co. nearly tripled its first-quarter earnings -- making it one of the few profitable U.S. carriers despite intense competition and high oil prices.

Southwest on Thursday reported net income of $76 million, or 9 cents a share, in the January-to-March period, up from $26 million, or 3 cents, a year earlier. Revenue rose 12% to $1.66 billion.

The results topped the expectations of analysts surveyed by Thomson First Call, which had predicted Southwest would earn 5 cents a share.

But Southwest executives said that revenue trends remained weak and that rising fuel prices might eventually force it to raise fares or make other changes.

Southwest shares rose 22 cents to $14.94 on the New York Stock Exchange, on a day when other airline stocks slid, falling as much as 11%. Southwest shares have traded in a 52-week range of $13.18 to $17.06.

Southwest was the first U.S. carrier to report January-to-March financial results, and analysts expect all other significant carriers except JetBlue Airways Corp. to post a loss. The nine largest carriers could lose $2 billion in the quarter, up from about $1.5 billion a year earlier.

The high cost of fuel is one problem. Another is fierce competition, led by low-cost carriers such as Southwest that have added seats, driving down fares.

Southwest would have lost money in the quarter except for a calculated gamble made several years ago and repeated several times since. The airline has insulated itself from rising oil costs by hedging, taking options to buy most of its jet fuel in advance at lower prices.

Southwest said those options cut its fuel bill by $155 million in the first quarter -- double the company’s eventual profit.

In the first quarter, Dallas-based Southwest bought 86% of its fuel with hedges. The airline is about 85% hedged for the rest of the year at prices capped at $26 a barrel -- about half the going rate for oil.

According to analysts, no other U.S. carrier has hedged more than 50% of its 2005 fuel purchases. Southwest also has locked in 65% of next year’s fuel at $32 per barrel.

Chief Executive Gary C. Kelly said that the hedges had bought the airline time, but that it still might need to raise fares or make other changes to offset rising fuel prices. He said last month’s fare increase of $2 to $6 per round trip would raise $150 million this year.

Other airlines also raised fares this spring, boosting some domestic round trips as much as $60.

“We’re as well prepared I think as I would have expected us to be, and certainly we’re better prepared than anybody else,” Kelly said.

Southwest also cut non-fuel costs 3.8% from a year earlier. It said that revenue trends remained weak but that first-quarter results were helped by planes flying more passengers per trip and by Easter falling in March.

Conversely, the early Easter will rob $20 million in sales from the second quarter, and April revenue per airplane seat could be flat to down 5%, Chief Financial Officer Laura Wright said.

“In this atmosphere, that’s a pretty good accomplishment -- if they can do it,” said Ray Neidl, an analyst at Calyon Securities.