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Southwest Airlines Profit Jumps

Lower Fuel Costs Let Carrier Nearly Triple Its Bottom Line

By Mary Schlangenstein
Bloomberg News
Friday, April 15, 2005; Page E05

Southwest Airlines Co. said first-quarter profit almost tripled as the airline added flights, carried more passengers and paid less for jet fuel than rivals.

Profit increased to $76 million from $26 million a year earlier, Southwest said in a statement yesterday. The profit, aided by a gain on accounting for fuel hedges, was almost double the 5 cents forecast by 11 analysts in a Thomson First Call poll. Revenue rose 12 percent, to $1.66 billion.

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Southwest, the only major U.S. airline to remain profitable since the Sept. 11, 2001, terrorist attacks, attracts customers with low fares. That profit allows the company to buy hedges locking in prices on a portion of its fuel needs four years in advance, saving it $155 million in the quarter. Southwest paid 38 percent less than the market price for jet fuel in the quarter.

Southwest's traffic, measured in miles flown by paying passengers, climbed 12 percent, helped by the shift of Easter travel to March from April. The increase outpaced a 10 percent rise in capacity, meaning the airline sold more of its seats. The combination of Easter and spring break for schools in March added about $20 million to Southwest's revenue, Chief Financial Officer Laura H. Wright said in a conference call.

Southwest had the largest hedging position among carriers, with 86 percent of its jet-fuel needs locked in at a crude oil price of $26 a barrel for the quarter. Oil on the New York Mercantile Exchange averaged $50.03 a barrel. The airline is hedged through 2009, with 25 percent locked in at $35 that year.

Locking in prices ahead of time gives Southwest "a huge advantage over everybody else in the industry," said Jim Corridore, an equity analyst with Standard & Poor's who rates Southwest "buy" and doesn't own the shares.

The hedges also produced a $27 million gain tied to accounting methods, the company said. Gary Chase, a Lehman Brothers analyst, said that excluding the gain and a tax settlement, Southwest probably earned about 7 cents a share.

Fuel costs rose 21 percent, to $279 million. Fuel is the second-largest expense for airlines, after labor, and accounted for 18 percent of the carrier's operating costs.

© 2005 The Washington Post Company