Cheaper fuel boosts profit at Southwest Airlines

DALLAS — Average fares are rising on Southwest Airlines Co., the fuel bill is shrinking, and profit is soaring.

The airline is gearing up for the holiday travel season, and officials say that bookings for November and December are strong.

Southwest released third-quarter results Thursday and gave more evidence that the airline industry continues to rebound from the 2008 recession. Mergers have reduced the number of competitors, and the remaining airlines are boosting fares by controlling growth and limiting seats.

The results sent Southwest shares up 61 cents, or 3.7 percent, to close at $17.02.

Southwest said that third-quarter net income jumped to $259 million, or 37 cents per share, from $16 million, or 2 cents per share, a year earlier.

Excluding special items such as fuel-hedging, the company said it would have earned 34 cents per share. That matched analysts’ forecast of adjusted profit.

Revenue rose 5.5 percent to a record $4.55 billion. Analysts were expecting $4.54 billion, according to FactSet.

The average one-way fare on Southwest increased 11.3 percent, to $159.39. That reflects longer flights — the average trip was 1,000 miles, an extra 41 miles — and long-term trends in fuel prices, Southwest officials said.

The airline was forced to boost fares to offset fuel prices that rose for several years, “and finally we’re getting caught up,” Chairman and CEO Gary Kelly said on a conference call with analysts and reporters. “If fuel prices are flat next year, I would hope that we wouldn’t have to have fare increases.”

Over the past three years, Southwest’s price per gallon of fuel has risen faster than the average fare — fuel 26 percent, fares 20 percent. Over four years, fuel is up 37 percent while the average fare is up 40 percent.

In the last few months, airlines have gotten a break from rising fuel bills as oil prices have stabilized. In the third quarter, Southwest paid a few cents less per gallon and consumed 12 million fewer gallons than a year ago. The combination reduced Southwest’s biggest expense by 5.1 percent, to $1.45 billion.

That was helpful because the second-largest expense, labor, rose 6.9 percent to $1.27 billion. The company blamed contract raises for union workers and higher health insurance costs.

The third quarter includes the last two months of the busy summer travel season, so it’s a strong period for airlines. Even with higher fares than last year, Southwest was able to fill 80.8 percent of its seats, although that was down from 82.1 percent in summer 2012.

When summer vacations end, travel drops off, but Southwest is hinting at a busy holiday season. Officials said the recent partial government shutdown cost Southwest $20 million in October, but they said that bookings for November and December were strong.

Kelly called the third-quarter results “very solid,” and said that his airline — once known as a scrappy underdog to the giants, but now the fourth-biggest U.S. carrier — was transforming itself for the future.

Southwest is converting more AirTran Airways flights to its own colors and brand, and expects to fully absorb AirTran by the end of 2014. The conversion includes using Southwest planes on international flights beginning next year.

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