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UPDATE 3-Southwest posts profit, says needs to cut costs
October 18, 2012 / 11:34 AM / in 5 years

UPDATE 3-Southwest posts profit, says needs to cut costs

* Adjusted 3rd-qtr profit 13 cents vs Street view 12 cents

* Average fares down as demand weakened at end of quarter

* Shares up 1.5 pct

Oct 18 (Reuters) - Rising costs and limited growth kept quarterly profit under pressure at Southwest Airlines, but the carrier said revenue trends looked to be improving after September weakness.

Excluding one-time items, third-quarter profit beat analysts’ average forecast but was down from a year earlier, the airline reported on Thursday.

Dallas-based Southwest said passenger revenue per available seat mile, a key measure of pricing power, was trending about 4 percent stronger in October compared with a year earlier. Still, it said it needs to control costs more aggressively in the wake of high fuel prices.

Many U.S. airlines posted weaker passenger revenue per available seat mile, or unit revenue, for September as summer travel neared an end. At Southwest, overall third-quarter revenue was flat and average ticket prices edged down.

“Based on the (Southwest) numbers so far in October, that’s a really good bounceback,” said Fred Lowrance, an airline analyst with Avondale Partners. “Maybe that September softness was just a temporary thing.”

Southwest said third-quarter net income was $16 million, or 2 cents a share, compared with a loss of $140 million, or 18 cents a share, a year earlier.

The latest quarter included one-time charges of $81 million tied to fuel contracts and other items. Excluding those charges, profit was 13 cents a share, a penny above analysts’ average forecast, according to Thomson Reuters I/B/E/S. Year-earlier adjusted profit was 15 cents a share.

In the 2011 third quarter, Southwest recorded $227 million in writedowns tied to the way it accounts for the value of its hedges, or contracts intended to blunt the impact of sharp rises in fuel prices.

Third-quarter revenue was flat at $4.3 billion, a bit softer than analysts expected. Unit revenue rose 1 percent, compared with a jump of 6 percent a year earlier.

Chief Executive Gary Kelly told CNBC-TV that while consumer spending held up, air fares bought mainly by business passengers softened in the third quarter. Southwest’s average fare in the period eased to $142.86 from $143.03.

“Business travelers were there, but it felt like we needed a little bit more of aggressive pricing to entice them,” Kelly said.

Southwest, the traditional discounter, acquired AirTran last year, gaining entry to big U.S. markets such as Atlanta. As the carrier looks to expand international flights, it faces pressure to lower expenses to maintain its dwindling cost advantage against U.S. rivals that have restructured.

“Not only are there macroeconomic challenges with the weak economy, but there’s micro-company challenges related to the integration of AirTran and re-doing their model,” said Ray Neidl, an aerospace analyst with Maxim Group.

In the third quarter, operating expenses rose 4.2 percent even as fuel and oil costs fell 3.7 percent. Costs for maintenance materials and repairs rose 10 percent, and expenses tied to salaries and wages grew nearly 4 percent.

Lowrance said Southwest’s biggest cost struggle is likely to be with salaries, and he expects the carrier to push its workers to increase efficiency. Nearly 90 percent of Southwest workers are represented by unions.

“Its pilots and flight attendants have some of, if not the highest pay rates in the industry,” Lowrance said. “Just the way they go about doing business is going to put pressure on that labor line.”

Southwest shares were up 1.5 percent to $9.08 at midday, as other major airlines moved higher. US Airways was up 2.4 percent at $11.90 and United Continental rose 0.6 percent to $20.75.

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