Southwest Airlines Posts $161 Million Profit In Q2
DALLAS (AP) – Southwest Airlines Co. set records for full planes, and higher fares boosted revenue as the summer vacation season kicked into high gear.
But on Thursday Southwest said its fuel costs soared, its second-quarter profit fell short of analysts’ expectations, and it will scale back growth plans for next year.
Southwest shares tumbled 64 cents, or 6.6 percent, to $9.01 in afternoon trading after hitting a 52-week low of $8.85 earlier. The percentage decline was more than twice that of the Dow Jones industrial average.
Chairman and CEO Gary Kelly said that business travel, a key market for airlines, slowed during the summer and he was not sure when it will recover.
“I’m concerned about the U.S. economy, I’m concerned about fuel prices,” Kelly said.
CEO Gary Kelly on 1080 KRLD’s CEO Spotlight with David Johnson:
At least temporarily, the airline is getting a break from the expiration of federal airline taxes. By raising prices to replace the taxes, Southwest took in about $36 million during the first 10 days after the taxes expired last month.
Kelly said Southwest needs the extra money to offset fuel costs, but he hopes for an end to the dispute in Congress that caused the taxes to expire and partially shut down the FAA.
Southwest reported Thursday that its net income in the April-through-June quarter rose to $161 million, up from $112 million a year ago.
If you subtract special items such as gains on fuel-hedging contracts, the company’s profit fell by nearly half, to 15 cents per share. Analysts expected adjusted profit of 21 cents per share, according to FactSet.
The average fare per mile increased 8.4 percent, reflecting price increases earlier this year. Traffic jumped 28 percent and revenue spiked 31 percent, due largely to the May acquisition of AirTran Airways.
Revenue was $4.14 billion, a bit higher than the $4.10 billion estimate from analysts.
Even record revenue couldn’t keep pace with fuel costs that soared 64 percent.
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 percent higher than a year ago — still significant, but in line with increases ranging from 30 percent to 36 percent 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.
The Dallas company 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 percent, which was based on plans drawn up months ago, when an economic recovery and rising demand for travel both looked more likely.
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.
For the third quarter, Southwest and other airlines will get a windfall from the expiration of federal taxes on airline tickets. The taxes died in July when Republicans and Democrats couldn’t agree on legislation to keep the Federal Aviation Administration running. By raising fares, airlines are keeping the tax money while passengers pay the same prices as before.
That added about $3.6 million a day to Southwest’s coffers late last month. Southwest said the benefit will diminish during the slower fall season, but even so, it’s likely to boost the company’s revenue by more than $200 million if the shutdown lasts through the third quarter.
Kelly said he was happy for the windfall — “We need every dollar we can get” — but doesn’t want to see the FAA shutdown drag on.
“There are thousands of employees out on furlough from the FAA and we hate to see that,” he said. “We need people at work in the U.S. and not out on furlough, and besides, we need the FAA.”
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