Southwest posts Q2 profit of $161 million

By David Koenig, AP Airlines Writer
Updated 08/04/2011 2:56 PM

DALLAS – Southwest Airlines set records for full planes, higher fares and more revenue as the summer vacation season kicked into full gear.

But fuel costs soared, Southwest's profit fell short of expectations, and the CEO said the "pessimistic" outlook for the economy and energy prices caused the airline to reconsider its growth plans.

Southwest will keep its passenger-carrying capacity flat or even reduce it next year. That's in contrast to this year's increase of 4 to 5%, which was based on plans drawn up months ago, when an economic recovery and rising demand for travel both looked more likely.

Southwest said Thursday that its net income in the April-through-June quarter rose to $161 million, up from $112 million a year ago.

The average fare increased 8.4%, reflecting price increases earlier this year. Traffic jumped 28% and revenue spiked 31%, due largely to the May acquisition of AirTran Airways.

Even record revenue couldn't keep pace with fuel costs that soared 64%.

The company's profit, after excluding special items such as gains on fuel-hedging contracts, was 15 cents per share. Analysts, who usually exclude items, expected 21 cents per share, according to a survey by FactSet.

Revenue was $4.14 billion, a bit higher than the $4.10 billion estimate from analysts.

The addition of AirTran made it harder to measure Southwest's progress since last year. The acquisition added to both revenue and costs.

For example, when considering the amounts Southwest and AirTran paid separately for fuel last year, this year's total was 32% higher than a year ago — still significant, but in line with increases ranging from 30% to 36% at rivals United Continental Holdings Inc., American Airlines parent AMR Corp., and Delta Air Lines Inc. Those airlines reported earnings last month.

Southwest, however, did pay slightly more per gallon than its competitors. And that — plus the weak economy — forced the airline to adjust its schedule of more than 3,000 flights daily.

"Given the pessimistic near-term outlook for fuel prices and the U.S. economy, we have re-evaluated our capacity plans," said Chairman and CEO Gary C. Kelly.

Southwest trimmed its winter schedule, which was published last week. And Kelly said, "We have reduced our planned 2012 capacity to be equal to or less than our 2011 combined" capacity.

Airlines have several ways of reducing capacity. The main one is simply operating fewer flights. Ray Neidl, an analyst for Maxim Group LLC, said Southwest's decision will help the company and other airlines.

"It will be good for them in this uncertain economic and fuel price environment, and it will be good for the industry in that it will give everyone a little better pricing power on tickets," Neidl said.

Southwest has already made changes to weed out less-profitable routes and add planes where it believes it can make more money.

AirTran announced last week that it will end service to four smaller cities early next year. Meanwhile, Southwest is adding flights in Denver and Milwaukee, hubs for struggling Frontier Airlines, as it "continues to go after the weak guy on the block," Neidl said.

Southwest shares declined with the broader stock market, losing 73 cents, or 7.6%, at $8.92 in midday trading.

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