Southwest Airlines Reports Soaring Results

Southwest Airlines soared to a $159 million profit for the second quarter Thursday, speeding past last year's results of $113 million and landing ahead of Wall Street's expectations.

The Dallas-based airline, which is the nation's largest low-fare carrier, was the first airline to report quarterly earnings for the period and is likely to be the most positive.

Some analysts have forecast that Fort Worth-based AMR Corp., which owns American Airlines, and Houston-based Continental Airlines may post small profits when they report results next week.

But few predict that any major airline will do better than Southwest, which is the only large carrier that has been consistently profitable since 2000.

"Southwest will continue to grow and gain market share," Ray Neidl, an airline analyst with Calyon Securities, said in a report Thursday. That growth will come from "both traffic stimulation and taking traffic away from the major hub carriers," he said.

Gary Kelly, Southwest's chief executive, also set a lofty goal for next year. In a conference call with analysts and reporters, he declared that the airline would try to boost its earnings by 15 percent in 2006.

"It's realistic," he said, "but revenues need to improve for us to get there."

One key to achieving that level of growth, Kelly said, is repealing the Wright Amendment, a federal law that restricts flights from Dallas Love Field to Texas, four bordering states, and Mississippi, Alabama and Kansas.

Repealing the law would "allow us to grow our Dallas business in a way that improves revenues to mitigate fuel costs," Kelly said. Southwest has declined invitations to fly longer routes from Dallas/Fort Worth Airport.

Kelly said he's optimistic that the law will be repealed soon enough so that Southwest benefits financially in 2006. "But there's no way I can guarantee that," he said, adding that he was confident that the amendment would fall eventually.

Two North Texas congressmen have introduced a bill to repeal the Wright Amendment in the House of Representatives, but it has attracted strong opposition from some members of the area's delegation.

Kelly also said that D/FW Airport's recent $350,000 advertising campaign, designed to persuade Southwest to serve that airport, is a waste of time and money.

"D/FW just does not work for us," he said, citing the airport's costs and efficiency compared to Love. D/FW has offered Southwest $22 million in incentives and would even build the airline its own terminal, if it agreed to begin serving that airport.

Some analysts have forecast that Southwest's profits will drop next year as some of its fuel-hedging contracts -- which protect it from high oil prices -- begin to expire.

Next year "will witness Southwest's first annual earnings decline since 2002, with fuel the obvious culprit," Jamie Baker, an airline analyst with JPMorgan Securities, said in a note to investors Thursday.

But an earnings decline "is not acceptable to us," Kelly said. Southwest can continue to grow by cutting costs and boosting revenues, he said, even if fuel prices remain high.

"It's not a promise, it's not a guarantee," he said, "but it doesn't look impossible."

Southwest made progress on expenses during the second quarter, with unit costs down nearly 4 percent. Revenue, meanwhile, grew 13 percent.

Profits per share -- up 41 percent over the second quarter last year -- totaled 20 cents. Wall Street analysts had expected a profit of about 18 cents per share.

Because of the hedging program it started several years ago, Southwest is the only large airline that has significant protection from high fuel prices. That means Southwest pays far less for most of its jet fuel than most of its competitors.

This year, the airline has 85 percent of its fuel hedged at prices equivalent to oil at $26 per barrel. Meanwhile, most other airlines are forced to pay market prices, which hovered above $57 per barrel Thursday.

For the quarter, Southwest's hedges saved it about $196 million, Kelly said.

Next year, the hedge will cover 65 percent of fuel purchases at $32 per barrel.

"Although we remain well-hedged, our employees understand that we must be prepared for higher fuel costs," Kelly said. "They are working harder than ever to reduce our cost structure through increased productivity."

Southwest's stock (ticker: LUV) jumped 44 cents, or more than 3 percent, in trading Thursday to close at $14.42 per share.