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Southwest Airlines bucks airline trend with profit

Associated Press

9:36 AM EDT, July 24, 2008

Southwest Airlines, the biggest carrier at Long Island MacArthur Airport in Ronkonkoma, earned a profit in the second quarter and beat Wall Street expectations by continuing to rely on financial deals that lowered its fuel costs.

Contining to stand apart from other U.S. airlines mired in huge deficits, Southwest said Thursday morning that it earned $321 million, or 44 cents per share, up 15 percent from a year ago, when the airline earned $278 million, or 36 cents per share.

Revenue increased by 11 percent, as the discount airline raised fares.

But in a nod to high fuel costs and other problems facing the airline industry, growth-oriented Southwest said it might not grow at all next year.

Excluding special items, Southwest said it would have earned $121 million, or 16 cents per share. That beat analysts' forecast of 12 cents per share, according to a survey by Thomson Financial.

Dallas-based Southwest said it posted its 69th straight profitable quarter while many other airlines lost money, and it is mostly because of fuel hedging -- financial transactions that Southwest uses to lock in lower prices for most of its fuel.

The transactions earned $511 million in the quarter, nearly double the company's entire profit.

Despite its string of profitable quarters, Southwest is under pressure to control costs and boost sales as its fuel-hedging contracts expire over the next few years.

Chief executive Gary Kelly said, "We cannot stand still. We must continue to make the necessary adjustments to adapt to higher jet fuel prices and restore our profit margins."

Southwest has raised fares and cut service on less-productive routes while adding flights where it can take advantage of rivals' weakness, such as in Denver.

While other airlines are dropping many flights, Southwest recently announced that it starting Nov. 3, it would add an early morning nonstop flight from Long Island MacArthur Airport in Islip to Orlando Airport, bringing to six the number of nonstop flights to Orlando Monday through Saturday.

But in a concession to high fuel costs, it has also scaled back growth plans to 4 percent or less for 2008 -- other carriers are slashing U.S. capacity -- and Kelly said it might not increase capacity next year.

Revenue in the second quarter rose to $2.87 billion from $2.58 billion a year earlier. Even with fuel hedging, Southwest was hit by the rising energy costs. It paid an average $2.19 per gallon for jet fuel, but the going price on spot markets last week was nearly $4 per gallon. By comparison, American Airlines, with a much smaller fuel-hedging program, paid an average of $3.17 per gallon in the second quarter.

Southwest said it has hedged about 80 percent of its third-quarter fuel needs, down from 90 percent a year ago. The coverage falls to 70 percent next year, 40 percent in 2010 and 20 percent in 2011 and 2012 -- with steadily rising prices as well.

Newsday staff writer Emi Endo contributed to this story.